Filing taxes for an S corporation can be complicated and confusing.
This guide will walk through step-by-step instructions for filling out Form 1120S, with key strategies to file accurately and avoid common mistakes.
You'll learn requirements for S corp eligibility, find tips for gathering documentation, get a breakdown of each part of Form 1120S, and discover resources for assistance filing your S corporation tax return.
Introduction to S Corporation Tax Return Filing
Form 1120S is the annual tax return that S corporations must file with the IRS. It reports the company's income, gains, losses, deductions, credits, and other tax items to calculate the total tax owed. Filing Form 1120S accurately and on time is critical to avoid penalties and ensure proper treatment of the S corporation by the IRS.
Here are some key strategies for Form 1120S filing:
Understanding Form 1120S for S Corporation Tax Returns
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Form 1120S is specifically for S corporations, which are corporations that elect pass-through taxation under subchapter S of the tax code. This allows income/losses to pass through to shareholders' personal tax returns.
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It calculates all tax items that ultimately get reported on owners' Form 1040 returns via Schedule K-1. So accurate 1120S reporting is essential.
Eligibility and Filing Requirements for S Corporations
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To qualify for S corp status, file Form 2553 to elect it. This sets up the S corporation with the IRS.
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Then you must file Form 1120S every year thereafter to report income and deductions. Even if no tax is owed, 1120S must be submitted.
Critical Deadlines for Form 1120S Submission
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The filing deadline for S corps is generally March 15th for calendar year entities. A 6-month extension can be obtained with Form 7004.
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Missing the deadline can lead to late-filing penalties, so make sure to file on time or request an extension if more time is needed.
Accurate, complete, and timely filing of Form 1120S is critical for proper taxation of an S corporation. Consult a tax professional to ensure correct preparation and submission.
How do I prepare my S corp tax return?
Preparing an S corporation tax return involves several key steps:
1. Prepare Financial Statements
Your tax professional will need financial statements like an income statement and balance sheet to accurately calculate your tax liability. Using accounting software can make pulling these reports easier.
Be sure to use the accrual method of accounting, which matches revenue with expenses, rather than the cash method. The accrual method gives a more accurate picture of the company's profitability.
2. Issue W-2 Forms
Any shareholders who work for the S corp need to receive IRS Form W-2 reporting their wages and withholdings. Issue W-2s by January 31st.
3. File Form 1120S
This S Corporation income tax return reports income, deductions, gains, losses, and credits. It must be filed by March 15th. Form 1120S also determines how income flows through to shareholders' personal returns.
4. Distribute K-1s
Schedule K-1 passes through net income or loss to each shareholder based on ownership percentage. Distribute K-1s to shareholders by March 15th so they can complete personal returns.
5. Shareholders File Form 1040
Finally, S corp shareholders use info from their K-1s to report S corp income on Form 1040 personal tax returns, which are due April 15th. Filing for a 6-month extension using Form 7004 may be wise to avoid rushing.
Following these steps and working closely with an accountant can help ensure your S corp files taxes accurately and punctually. Let me know if you have any other questions!
Can I file 1120S myself?
Yes, you can file Form 1120S yourself through the IRS e-file system or using tax preparation software. Here are some key things to know about filing 1120S:
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IRS e-file system: You can file Form 1120S electronically through the IRS e-file system. This allows direct transmission of the return to the IRS and faster processing. You would need tax prep software that supports e-filing Form 1120S.
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Tax prep software: Most popular tax software like TurboTax and TaxAct support filing Form 1120S. The software will guide you through the process of entering the required information and filling out the forms. It does the calculations and checks for errors automatically. You can then e-file directly or print and mail the forms.
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Paper filing: You can also fill out Form 1120S by hand or typewriter and mail it to the IRS. However, this takes longer to process and has a higher chance of errors. Make sure to double check your calculations if filing by paper.
The key benefit of filing 1120S yourself through e-file or software vs. using an accountant is it saves on accounting fees. However, an accountant can provide advice on more complex tax situations. Consider both options to determine what works best for your S-corporation.
Can I use TurboTax to file 1120S?
Yes, you can use TurboTax Business to file Form 1120S for S corporations. Here are some key points about using TurboTax for 1120S filing:
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TurboTax Business has a dedicated S corporation section that walks you through filing Form 1120S and related schedules like Schedule K-1.
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When starting a new tax return in TurboTax Business, simply select "Business Return" then "S corporation" to access the 1120S filing screens.
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TurboTax Business handles calculations for income, deductions, credits, income allocation to shareholders, built-in error checking, e-file support, and more to simplify your 1120S filing.
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You can import relevant data from accounting software, payroll providers, bank transactions, and carryover data from prior years' TurboTax returns. This reduces data entry and ensures accuracy.
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TurboTax Business stays up-to-date if there are any form changes, tax law changes, or filing deadline changes from the IRS that impact 1120S filing each year.
So in summary, TurboTax Business provides complete support for preparing, calculating, checking, and filing Form 1120S for S corporations based on the latest IRS rules and forms. This makes it a reliable solution for DIY or professional tax preparation.
What line is taxable income on 1120S?
The taxable income for an S corporation is reported on line 18 of Schedule K on Form 1120S. Specifically, this is the line for "Income/loss reconciliation" which calculates the S corporation's taxable income that passes through to shareholders.
To arrive at this taxable income figure, the S corporation must make book-to-tax adjustments. This involves starting with net income per the S corporation's books on Schedule M-1, line 1, and making adjustments for tax-exempt income, nondeductible expenses, and other book-tax differences.
The end result of these Schedule M-1 adjustments is the income/loss reconciliation amount on Schedule K, line 18. This final number represents the flow-through taxable income that will be reported by the S corporation's shareholders on their individual tax returns.
So in summary:
- Schedule M-1, line 1 shows net income/loss per the S corporation's books
- Schedule M-1 adjustments convert book income to taxable income
- The final taxable income number is reported on Schedule K, line 18
- Shareholders then report this number from Schedule K-1 on their 1040 returns
Knowing where to find this key taxable income amount can help S corporations complete Form 1120S accurately and allow shareholders to report their proper share of S corporation income.
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Gathering Documentation for Form 1120S
Filing an accurate Form 1120S requires compiling essential financial records and documents for the S corporation. This includes:
Compiling an Accurate Income Statement
An income statement summarizes the company's revenues and expenses over a period of time. It is critical for determining the S corporation's taxable income to report on Form 1120S. Key details needed from an income statement include:
- Total gross receipts or sales
- Returns and allowances
- Other income
- Total income
- Cost of goods sold
- Total deductions (expenses)
- Net income
Having an accurate and up-to-date income statement is vital for filing Form 1120S correctly.
Preparing a Detailed Balance Sheet
A balance sheet outlines the company's assets, liabilities, and shareholder equity at a specific point in time. It provides insight into the financial position of the S corporation for tax purposes. Information required from a balance sheet includes:
- Current assets like cash, accounts receivable, inventory
- Total assets
- Current liabilities
- Long-term liabilities
- Loans from shareholders
- Paid-in or capital surplus
- Retained earnings
- Total liabilities and shareholder equity
Keeping an updated balance sheet helps determine asset values and ownership equity needed to file Form 1120S.
Understanding the Profit and Loss Statement Role
A profit and loss (P&L) statement shows the revenue, costs, and expenses incurred over a period of time to detail the company's operating performance. It complements the income statement to provide earnings information required for Form 1120S:
- Gross profit margin percentage
- Net profit margin percentage
- Net income before taxes
- Net income after taxes
Reviewing the P&L statement ensures accurate reporting of the S corporation's earnings.
Collecting Form 1099 Reporting and Form W-9 Information
If the S corporation paid over $600 in rents, services, or other income to a non-employee contractor, it must issue them a Form 1099-NEC. Having complete and organized records of all Form 1099 reporting provides supporting information for deductions claimed on Form 1120S.
In addition, obtaining a completed Form W-9 from all contractors allows the S corporation to verify contractor names, addresses, TINs, and entity types to meet 1099 reporting requirements.
Verifying Employer Identification Number (EIN) Accuracy
The EIN uniquely identifies the business entity to the IRS. It is essential to confirm the accuracy of the S corporation's EIN before filing Form 1120S to avoid rejections or delays in processing.
Collecting and reviewing these key financial statements and tax documents allows the S corporation to gather the details needed to accurately fill out Form 1120S. Maintaining proper documentation also supports deductions and expenses reported to the IRS, reducing the likelihood of an audit.
Filling Out Form 1120S Step by Step
Navigating Parts I-V of Form 1120S
Form 1120S has 5 main parts that must be completed:
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Part I - Tax and Payment Information: Includes basic information like the tax year, business name and address, date business started, business activity code, EIN number, etc.
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Part II - Income and Deductions: Reports income, deductions, credits, tax liability, payments and refundable credits. Key lines include:
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Line 1a - Gross receipts or sales
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Line 2 - Cost of goods sold
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Lines 5-6 - Total income/deductions
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Line 19 - Other deductions
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Part III - Shareholders' Pro Rata Share Items: Lists shareholder information and breakdown of various income/deduction/credit amounts allocated to each.
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Part IV - Alternative Minimum Tax (AMT): Computes AMT liability, if any.
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Part V - Other Information: Answers additional questions to determine proper form reporting.
The key difference between 1120 vs 1120S is that Form 1120 is used by C corporations, while Form 1120S is specifically for S corporations.
Understanding and Completing Schedules K-1 and D
In addition to Form 1120S, S corporations may need to file:
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Schedule K-1 - Reports each shareholder's allocated share of income, deductions, credits, etc. A separate Schedule K-1 must be completed for each shareholder.
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Schedule D - Reports total capital gains/losses from sale of assets. If the S corporation sold business assets at a gain or loss, this must be computed and reported on Schedule D.
Addressing State Tax Return Obligations
Along with submitting Form 1120S federally, S corporations may need to file state corporate tax returns. Common state tax forms include:
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Form CT-3-S - New York S Corporation Franchise Tax Return
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Form 100S - California S Corporation Franchise or Income Tax Return
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Form IL-1120-ST - Illinois Small Business Corporation Replacement Tax Return
Consult a tax professional to determine state filing requirements.
Detailing Deductions on 1120s Line 19 - Other Deductions Worksheet
Line 19 is where less common tax deductions are totaled, such as:
- Amortization
- Casualty losses
- Legal/professional fees
The 1120S instructions include a worksheet to list each type of deduction and amount. Some tips:
- Maintain detailed records to substantiate deductions
- Review limitations on certain deduction types
- Consider if items should instead be capitalized or depreciated
Accurately detailing deductions can reduce 1120S tax liability.
Strategies for Filing Form 1120S
E-filing Form 1120S with the IRS E-file system can help streamline the filing process. Some benefits include faster processing times, fewer errors thanks to built-in checks, and automatic calculation features. To e-file, you'll need approved tax software or use the services of a tax professional. Make sure to have all supporting documents on hand before beginning.
To paper file Form 1120S, first download the latest forms and instructions from IRS.gov. Complete the return, schedules, and other required forms thoroughly and accurately. Attach all supporting documents. Double check to ensure everything is signed and dated properly before mailing the full package to the IRS service center for your location. Processing paper returns takes 4-6 weeks.
Distributing Schedule K-1s to shareholders early allows them time to file their own tax returns. Electronic delivery by March 15th is recommended, with paper copies as needed. Provide all relevant information like ownership percentages, profit/loss allocations, dividend amounts, and contact your office with any questions.
Choosing between the cash and accrual methods impacts how income and expenses are recorded and reported. Cash basis is simpler but accrual more accurately matches revenue and expenditures. Review the qualifications and reporting differences to determine the best option for your business. Changing methods requires IRS approval via Form 3115.
Proper filing procedures and strategic decisions allow S-corps to efficiently handle their tax obligations while keeping shareholders informed. Following best practices can streamline the process each year.
Avoiding Common Mistakes on Form 1120S
Ensuring Correct Accounting Method Selection
When filing Form 1120S, it is crucial to select the proper accounting method. The two main options are cash basis and accrual basis. Cash basis means income is reported when received and expenses when paid. Accrual means income is reported when earned and expenses when incurred. Using the incorrect method can lead to errors calculating net income and deductions. It is best to consult an accountant to determine the appropriate method based on your S corporation's operations.
Calculating Deductions and Tax Deductible Expenses Accurately
One frequent mistake is taking improper or excessive deductions, which may trigger an audit. You must maintain thorough documentation proving all expenses claimed as deductions are ordinary, necessary, and reasonable for your business. Additionally, you must correctly categorize expenses between business and personal. Claiming personal expenses as business deductions is illegal. Use accounting software to accurately track deductible business expenditures and keep all receipts. This helps avoid errors calculating allowable deductions.
Proper Classification of Income and Expenses
On Form 1120S, you must accurately categorize your various income types and business expenses across multiple supporting schedules and forms. For example, you need to appropriately split income as non-passive or passive on Schedule K-1 and classify expenses on Form 1125-A between cost of goods sold versus operating expenses. Incorrect classification can impact your tax liability. So carefully review instructions for each relevant form and schedule when categorizing income and expenses. Record them properly in your books.
Assistance and Resources for Filing Form 1120S
Hiring a Certified Public Accountant (CPA)
Hiring a qualified CPA can help ensure your S corporation's Form 1120S is accurately prepared and filed on time. Benefits of using a CPA include:
- Expertise in tax codes, forms, and filing procedures related to 1120S
- Knowledge of available tax deductions and strategies to minimize your S corp's tax liability
- Management of bookkeeping, financial statements, and required IRS reporting
- Guidance on business entity structure, changes, and tax implications
- Review of prior year tax returns to uncover potential errors or missed deductions
When hiring a CPA, look for specialization in S corp taxes and experience successfully filing Form 1120S for businesses in your industry.
Utilizing Accounting Software for Form 1120S
Using small business accounting software can make organizing financial data and filing Form 1120S much easier. Top software options like QuickBooks Online and Xero allow you to:
- Track income, expenses, account balances, and other financial metrics
- Generate IRS-ready reports like profit and loss statements and balance sheets
- Import bank transactions to save data entry time
- Set up automated reminders for tax deadlines and estimated payments
- Securely store financial records and supporting tax documents
Choose user-friendly accounting software that seamlessly handles Form 1120S requirements for an efficient filing process.
Leveraging IRS Resources and Form 1120S Instructions
The IRS provides many free tools and guides to assist with Form 1120S filing, including:
- Step-by-step instructions for completing every line of the 1120S form
- Publication 542 on corporations' tax responsibilities
- "S Corporations" page detailing qualifications, reporting, deductions, and more
- Form 1120S schedules, worksheets, and checklists
- Filing tips, common errors to avoid, and e-file options
- Phone, email, and live chat support for tax questions
Carefully reviewing Form 1120S instructions each year and referencing IRS.gov for filing resources helps minimize mistakes and ensures you claim all eligible tax deductions.
Conclusion: Recap and Final Thoughts on S Corporation Tax Return Filing
Review of Essential Filings and Schedules
Filing Form 1120S accurately and on time requires gathering information from several additional IRS forms and schedules that support the S corporation's tax return. Key filings include:
- Form 1125-E: Used to report income and deductions for the S corporation across categories like gross receipts or sales, returns and allowances, and other income. Provides supporting detail for entries on Form 1120S.
- Form 8990: Captures information on any passive investment income, which may trigger an additional net investment income tax.
- Form 4562: Reports depreciation and amortization, which can directly reduce S corporation income if claimed as deductions.
Other potential schedules like Schedule D (for capital gains/losses) and Schedule K-1 (for shareholder basis reporting) may also feed into the overall Form 1120S filing process. Maintaining organized records will help compile all required forms efficiently.
The Importance of Meeting Filing Deadlines
To avoid penalties and interest charges, S corporations must file Form 1120S and pay any owed taxes by the standard due date of March 15. An automatic 6-month extension to September 15 can be obtained by filing Form 7004, but any taxes owed must still be paid by March 15.
Late filing or failure to pay penalties can be steep, with additional failure to file penalties kicking in after 5 months. Staying on top of deadlines is crucial.
Options for Professional Filing Assistance
Given the intricacies of S corporation tax rules and filings like Form 1120S, many S corps enlist the help of a tax professional or accountant for filing accurately and on time. They can provide guidance on correctly preparing supporting schedules, claiming appropriate deductions, and meeting all IRS requirements across the range of forms. This expert assistance may warrant the expense for busy S corporation owners focused on running day-to-day business operations.
