How to Prepare Your S Corp Tax Return (Form 1120-S)

Form 1120-S is the U.S. Income Tax Return for an S Corporation, used by businesses that have elected S corporation tax status with the IRS. This form reports the company’s income, gains, losses, deductions, credits, and other financial information annually. Unlike C corporations, S corporations are pass-through entities for federal income tax purposes; the business itself generally does not pay federal income tax. Instead, profits and losses pass through to individual shareholders, who report these amounts on their personal tax returns, avoiding double taxation. Preparing Form 1120-S ensures compliance and accurate financial reporting for S corporation owners.

Required Information for S-Corp Returns

Preparing an S corporation tax return requires a comprehensive collection of financial and operational data. Gathering all necessary information is an important first step to ensure accuracy and efficiency in reporting.

Accurate financial records are foundational for tax preparation. An income statement, also known as a profit and loss statement, details the company’s revenues, expenses, and net income over a specific period. A balance sheet provides a snapshot of the company’s assets, liabilities, and equity at a particular point in time. These documents provide the gross receipts, cost of goods sold, and various operating expenses needed for the tax return.

Detailed information for each shareholder is also necessary. This includes their names, addresses, Social Security Numbers or Employer Identification Numbers (EINs), and ownership percentages. Documentation of capital contributions and distributions received during the tax year is also essential for accurately allocating income and loss items to each shareholder.

Payroll records are important for officer compensation. S corporation shareholder-employees are required to pay themselves “reasonable compensation” for services provided to the corporation. This compensation is subject to payroll taxes, including Social Security and Medicare taxes (FICA).

The IRS defines reasonable compensation as what would typically be paid for similar work in a similar business under similar conditions, considering factors like duties, experience, and time spent. Payroll records help differentiate between wages and distributions, as only wages are subject to employment taxes.

Information regarding business assets acquired or disposed of during the year is also needed. This includes details necessary for calculating depreciation deductions, as well as any capital gains or losses from asset sales. Maintaining records of asset purchases, dates in service, and disposal information is important for these calculations for tax purposes.

Referencing the prior year’s tax return and financial statements is beneficial. This allows for comparative analysis and helps identify any carryovers, such as net operating losses or credit carryforwards, that may impact the current year’s return.

Preparing Federal Form 1120-S

Form 1120-S is the primary document for reporting an S corporation’s financial activity to the IRS. The initial sections require basic identifying information: the corporation’s legal name, mailing address, Employer Identification Number (EIN), date of incorporation, effective date of S corporation election, and the business activity code.

The income section details the corporation’s revenue streams. This section begins with gross receipts or sales from all business operations. The cost of goods sold (COGS), which includes direct costs like raw materials and labor, is reported. Other income sources, such as interest, dividends, royalties, and net gains or losses from the sale of business property (reported on Form 4797), are also included.

The deductions section allows the S corporation to subtract eligible expenses from its gross income. Common deductions include compensation of officers, salaries and wages paid to employees, rent, utilities, and advertising expenses. Depreciation on business assets is also reported, calculated based on the asset information gathered previously. Other deductible items may include repairs and maintenance, bad debts, taxes and licenses, and contributions to pension or profit-sharing plans. These deductions help determine the ordinary business income or loss, which is then passed through to shareholders.

The final sections of Form 1120-S pertain to the calculation of ordinary business income or loss, and any taxes and payments. While S corporations generally do not pay federal income tax at the entity level, they might owe taxes in specific situations, such as for excess net passive income or built-in gains. This section also accounts for any estimated tax payments made throughout the year.

Understanding Key S-Corp Schedules

Several schedules support the Form 1120-S filing, providing detailed breakdowns and reconciliations. These schedules are integral to the comprehensive reporting of an S corporation’s financial activities.

Schedule K-1

Schedule K-1 (Form 1120-S), “Shareholder’s Share of Income, Deductions, Credits, etc.,” reports each shareholder’s specific share of the corporation’s income, deductions, credits, and other items. The S corporation prepares a separate Schedule K-1 for each shareholder, detailing their pro rata share of ordinary business income, rental income, interest, dividends, and capital gains or losses. The corporation must furnish a copy of Schedule K-1 to each shareholder.

Schedule M-1

Schedule M-1, “Reconciliation of Income (Loss) per Books With Income (Loss) per Return,” reconciles the net income or loss shown on the corporation’s books with the income or loss reported on Form 1120-S for tax purposes. This schedule addresses differences between financial accounting (book) income and taxable income. Common reconciling items include expenses deductible for book purposes but not for tax purposes, or vice versa, and income recognized at different times for book and tax reporting.

Schedule M-2

Schedule M-2, “Analysis of Accumulated Adjustments Account (AAA), Other Adjustments Account (OAA), and Shareholder’s Undistributed Taxable Income Previously Taxed (PTI),” tracks the equity accounts of the S corporation for managing shareholder basis. The AAA is a corporate-level account that tracks cumulative taxable income and losses flowed through to shareholders, excluding tax-exempt income and certain non-deductible expenses. Distributions to shareholders typically reduce the AAA. The OAA tracks tax-exempt income and related expenses. PTI represents income taxed to shareholders in prior years but not yet distributed. This schedule helps determine the taxability of distributions to shareholders.

These schedules are submitted as part of the complete Form 1120-S package. Copies of all issued Schedule K-1s must be attached to the S corporation’s tax return.

Submitting Your S-Corp Tax Return

Once Form 1120-S and all necessary schedules are completed, the return is submitted to the IRS. There are two primary methods for filing: electronically (e-file) or by mail. The IRS generally recommends electronic filing due to its accuracy and efficiency.

Electronic filing is the preferred method for submitting Form 1120-S. Many tax preparation software providers offer e-file services for business returns. The IRS also mandates e-filing for S corporations that file 10 or more returns of any type during the calendar year, including income tax, employment tax, and information returns. This method typically provides a confirmation of receipt. Alternatively, a paper return can be mailed to the IRS.

The filing deadline for Form 1120-S is the 15th day of the third month following the end of the corporation’s tax year. For most calendar-year S corporations, this means the return is due by March 15.

If more time is needed, an automatic six-month extension can be requested by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.” This form must be filed by the original due date of Form 1120-S. Filing Form 7004 automatically grants the extension, typically pushing the deadline to September 15 for calendar-year filers. An extension to file does not extend the time to pay any taxes due; any estimated tax liability should still be paid by the original due date to avoid potential penalties and interest.

While S corporations generally do not pay federal income tax, they may be responsible for certain entity-level taxes, such as those related to passive investment income or built-in gains. Any such taxes owed, along with estimated tax payments, should be paid by the due date. Payments can be made electronically through the IRS’s Electronic Federal Tax Payment System (EFTPS) or other approved methods.