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What Is Form 1120-S?
Form 1120-S is an Internal Revenue Service form that S Corporations use to report the company’s financial activity for each tax year. Some of the financial activity reported on this form include:
- Gains
- Losses
- Deductions
- Credits
Corporations only use this form if the company has already filed IRS Form 2553 and the IRS has approved S Corp election for the company.
S Corps are pass-through entities , so they are exempt from paying federal income taxes. Instead, shareholders report the corporation’s profits on their personal income tax return.
Even though S Corps aren’t subjected to corporate taxes, Form 1120-S is still essential because it is filed with an attached Schedule K-1 which reports what percentage of the corporation is owned by each shareholder to the IRS.
The Schedule K-1 form allows the IRS to determine what taxes each business owner must pay or be refunded on their personal tax return. Without an accurate 1120-S and Schedule K-1, the S Corporation and shareholders may not receive certain tax benefits.
Click here to read more about Form 1120-S, access a PDF copy of the form, and read instructions about filling it out.
What is Form 1120-S Used For?
Form 1120-S is the S Corp’s tax return. Even though S-Corps do not pay federal income tax, their profits, losses, deductions, and credits still need to be reported to the IRS. The IRS will use the corporate tax return documents to determine how to tax each individual shareholder.
For more information about Form 1120-S and what it is used for, read this article.
Differences Between Form 1120 and 1120-S
Form 1120-S is filed by S Corps for federal taxes, while Form 1120 is filed by C Corps for taxes. S Corps and C Corps are both classified as corporations; however, they have several differences and offer different advantages and disadvantages to business owners.
C Corporations are not pass-through entities like S Corps. C Corps must fill out and File Form 1120 with the IRS and pay federal income tax at the corporate level.
Shareholders in a C Corp are required to pay personal income tax on both their salary from the corporation and dividends received from the corporation.
This tax structure is called “double taxation” because the C Corp is taxed first at the corporate level, then shareholders are taxed again as individuals. Double taxation is often seen as the most significant disadvantage for forming a C Corp rather than an S Corp.
Despite double taxation, C Corps do offer shareholders multiple advantages:
- C Corps can have an unlimited amount of shareholders
- Shareholders do not have to be US citizens or legal residents
- C Corps can have more than one class of stock
- There is a lower minimum tax rate for C Corps
- C Corps have an easier time securing outside financing
How To Fill Out Form 1120-S
In most cases, S Corporations can electronically file their Form 1120-S with all related forms, schedules, statements, and attachments. Some of these attachments may include:
- Form 7004- Automatic extension of time to file
- Forms 940, 941, and 944- Employment tax returns
- Form 1099- Miscellaneous income
Form 1120-S is usually required to be filed by the 15 th day of the third month after the end of the tax year. Any corporation that uses the regular calendar year would need to file before March 15 th .
You will need the following information to fill out Form 1120-S accurately:
- The date of incorporation
- A list of products and services
- Business activity code
- EIN
- Date of elected S Corp status
- Profit and loss statement with a balance sheet
- Accounting method
- Any independent contract payments
For the IRS to accept Form 1120-S, it must be signed and dated by either the president or another corporate officer authorized to sign tax returns.
IRS Form 1120-S can be very complicated to fill out depending on the size of the corporation and the nature of the business. It is best to consult with a tax lawyer or licensed accountant before submitting tax documents to the IRS.
Changes that Affect Form 1120-S
Due to changing legislation and different circumstances that affect businesses in the United States, it is always important to check with the IRS website every year to see if any new laws affect how you file your taxes. You may be eligible for tax credits you didn’t even know about.
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S Corporations and Taxes
Once IRS Form 2553 is filed and approved by the IRS, a corporation is classified as an S Corp. S Corporations benefit from pass-through taxation much like an LLC or partnership. They are not required to pay federal income tax at the corporate level like C Corporations. This provides a variety of tax benefits to shareholders and makes S Corps a very desirable business entity.
Shareholders in an S Corp are required to report their percentage of the company’s financial activity on their individual federal income tax return. Each shareholder will then be taxed at their individual tax rate.
Self-Employment Tax
The one tax benefit that attracts many companies to elect S Corp status is that S Corp shareholders are not required to pay self-employment tax. Any shareholder who also does work for the company is considered both an owner and an employee. That individual is required to collect a reasonable salary for the work performed. This allows a shareholder to divide their income between salary and dividends. When divided correctly, the shareholder could save a lot of money on taxes.
As of 2018, qualifying Shareholders in an S Corp are also eligible to deduct up to 20% of their net business income from their income taxes. This reduces their effective income tax rate by 20%.
Form 1120-S Frequently Asked Questions
What is ordinary business income on Form 1120-S?
Ordinary business income or loss is the net income or loss for the company. Form 1120-S starts with the company’s total sales and revenues and then subtracts all the business-related expenses. This final number is called the ordinary business income.
How are S Corp distributions reported?
S Corp distributions are reported on for K-1, which is filed with the company’s 1120-S. Schedule K-1 will break down what percentage of the company each shareholder owns. This allows the IRS to determine how to tax each shareholder.
Do S Corp distributions count as income?
S Corp distributions do not count as income and are exempt from taxation. Distributions can include amounts taxed in a prior year, amounts taxed in the current year, and amounts that haven’t been taxed.
What do S Corps do with extra money?
S Corp owners can take money out of the company in various ways. These include wages, distributions, loans, and reimbursement for business expenses.
Can you leave money in an S Corp?
There are no tax implications with leaving money in an S Corp account. This is because S Corps are not taxed at the corporate level. Any money left in an S Corp becomes an asset of the company.
Get Help With Form 1120-S
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I am a California-barred attorney specializing in business contracting needs. My areas of expertise include contract law, corporate formation, employment law, including independent contractor compliance, regulatory compliance and licensing, and general corporate law. I truly enjoy getting to know my clients, whether they are big businesses, small start-ups looking to launch, or individuals needing legal guidance. Some of my recent projects include: -drafting business purchase and sale agreements -drafting independent contractor agreements -creating influencer agreements -creating compliance policies and procedures for businesses in highly regulated industries -drafting service contracts -advising on CA legality of hiring gig workers including effects of Prop 22 and AB5 -forming LLCs -drafting terms of service and privacy policies -reviewing employment contracts I received my JD from UCLA School of Law and have been practicing for over five years in this area. I’m an avid reader and writer and believe those skills have served me well in my practice. I also complete continuing education courses regularly to ensure I am up-to-date on best practices for my clients. I pride myself on providing useful and accurate legal advice without complex and confusing jargon. I look forward to learning about your specific needs and helping you to accomplish your goals. Please reach out to learn more about my process and see if we are a good fit!
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I absolutely love helping my clients buy their first home, sell their starters, upgrade to their next big adventure, or transition to their next phase of life. The confidence my clients have going into a transaction and through the whole process is one of the most rewarding aspects of practicing this type of law. My very first class in law school was property law, and let me tell you, this was like nothing I’d ever experienced. I remember vividly cracking open that big red book and staring at the pages not having the faintest idea what I was actually reading. Despite those initial scary moments, I grew to love property law. My obsession with real estate law was solidified when I was working in Virginia at a law firm outside DC. I ran the settlement (escrow) department and learned the ins and outs of transactions and the unique needs of the parties. My husband and I bought our first home in Virginia in 2012 and despite being an attorney, there was so much we didn’t know, especially when it came to our HOA and our mortgage. Our real estate agent was a wonderful resource for finding our home and negotiating some of the key terms, but there was something missing in the process. I’ve spent the last 10 years helping those who were in the same situation we were in better understand the process.
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