What Are the Filing Instructions for Form 1120?

Form 1120, the U.S. Corporation Income Tax Return, is the document domestic C corporations use to report their financial activity to the Internal Revenue Service (IRS). Its primary purpose is to detail the corporation’s income, gains, losses, deductions, and credits to calculate its income tax liability. All domestic corporations are required to file this form, regardless of whether they have taxable income for the year.

Who Files Form 1120 and When

The requirement to file Form 1120 is specific to businesses structured as C corporations, as other business entities use different forms. For instance, S corporations file Form 1120-S, partnerships file Form 1065, and sole proprietorships report business income on Schedule C with their personal Form 1040. A Limited Liability Company (LLC) files Form 1120 only if it has elected to be taxed as a corporation by filing Form 8832.

The deadline for filing Form 1120 is determined by the corporation’s tax year. For corporations that operate on a calendar year ending December 31, the tax return is due by April 15. If the due date falls on a weekend or a legal holiday, the filing deadline is moved to the next business day.

Corporations needing more time can obtain an automatic six-month extension by filing Form 7004 on or before the original due date of the tax return. For a calendar-year corporation, this extends the filing deadline to October 15. This is only an extension of the time to file the return; it is not an extension of the time to pay any taxes owed. Corporations must still estimate their tax liability and pay the amount due by the original April 15 deadline to avoid potential penalties and interest.

Information and Schedules Needed for Preparation

Before completing Form 1120, a corporation must gather its Employer Identification Number (EIN), the date of incorporation, and the total assets held by the corporation at the end of the tax year. Complete financial statements are also necessary, specifically an income statement and a balance sheet. Several schedules must be completed and attached to Form 1120, each serving a distinct purpose. These schedules are not optional and require careful preparation using the company’s internal accounting records.

Schedule L (Balance Sheets per Books)

Schedule L is a comparative balance sheet that presents the corporation’s financial position at both the beginning and the end of the tax year. The information for this schedule is taken from the corporation’s books, reflecting the assets, liabilities, and equity. This schedule provides a snapshot of the company’s growth or contraction over the year and verifies the total assets figure reported on the main form. The IRS uses this schedule to analyze the financial health and consistency of the corporation’s reporting.

Schedule M-1 (Reconciliation of Income (Loss) per Books With Income per Return)

Schedule M-1 reconciles the net income (or loss) reported on the company’s financial statements with the taxable income reported on the tax return. This reconciliation is necessary because certain items are treated differently for accounting purposes than for tax purposes. For example, federal income tax expense is deducted on the books but is not a deductible expense for tax purposes. Other common reconciling items include meals and entertainment expenses, which are often only partially deductible, and tax-exempt interest from municipal bonds.

Corporations with total assets of $10 million or more are required to file Schedule M-3 instead of Schedule M-1, which is a more detailed reconciliation.

Schedule M-2 (Analysis of Unappropriated Retained Earnings per Books)

This schedule tracks the changes in a corporation’s unappropriated retained earnings throughout the tax year. It begins with the retained earnings balance at the start of the year, adds the net income for the year, and subtracts any distributions, such as dividends, paid to shareholders. The result is the ending retained earnings balance, which must match the amount shown on the ending balance sheet in Schedule L.

Calculating Corporate Taxable Income

The calculation of a corporation’s taxable income begins on the first page of Form 1120. The first step is to report the company’s gross receipts or sales, then subtract any returns and allowances to arrive at net receipts. The next line item is the Cost of Goods Sold (COGS), which is calculated on Form 1125-A. Subtracting COGS from net receipts yields the gross profit.

From the gross profit, the corporation subtracts its various business deductions to arrive at its taxable income. These deductions represent the ordinary and necessary expenses incurred in carrying on the business. Common deductions include:

• Compensation of officers
• Salaries and wages paid to employees
• Expenses for repairs and maintenance
• Rent paid for business property
• State and local taxes paid or accrued
• Interest expense on business loans
• Depreciation

The deduction for depreciation requires the completion of Form 4562, Depreciation and Amortization, which provides detailed information about the assets being depreciated. After totaling all allowable deductions and subtracting them from the gross income figure, the result is the corporation’s taxable income before special deductions, such as Net Operating Losses (NOLs).

Filing the Return and Making Payments

The IRS requires most corporations to file their returns electronically. Corporations that file 10 or more returns of any type during the calendar year are mandated to e-file. For corporations not required to e-file, a paper return can be mailed to the IRS address specified in the Form 1120 instructions, which varies depending on the location of the corporation’s principal business office.

Payment of corporate income tax must also be made electronically, with the primary method being the Electronic Federal Tax Payment System (EFTPS). Corporations must enroll in EFTPS to make their income tax payments, including balance due payments, estimated tax payments, and payments made with a tax extension.

Corporations must also pay estimated taxes throughout the year. If a corporation expects to owe $500 or more in tax for the year, it must make quarterly estimated tax payments. These payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the corporation’s tax year. Form 1120-W is a worksheet to help companies calculate these quarterly payments.