Tax Form 1120-S,U.S. Income Tax Return for an S Corporation

Tax season is here, and if you’re an S Corporation owner, it’s time to file your annual income tax return. Filing Form 1120-S can be complicated, but with the right guidance and knowledge as the owner of an S corporation, you are required to file Form 1120-S for your business. This form is used to report the income, losses, and dividends of your S corporation.

The Tax Form 1120-S is a special form type which is used for the tax return for businesses registered as ‘S’ corporations. These are the types of corporations that avoid double taxation at both the personal and corporate levels. In this case, such corporations use this specific form to report any losses or profits and also deductions for that fiscal year. Also, since the S corps usually pass through the tax entities, which also refers to the income ‘passing through’ to the owners, the business income needs to be reported to the personal income tax returns of the Shareholder. This implies the fact that the S Corps do not necessarily pay corporate taxes, instead of this, this is taxed against the owner’s income tax rate.

The Tax Form 1120-S: Why is it Important?

This form is essential for the S corps because along with reporting income, this form also informs the IRS about the percentage of the company that is owned by the individual shareholders. This helps analyze the tax payments, if any, or the refunds that are due to the shareholders against their personal income tax returns. For an organization, to be elected as an S corp, the passing tax liability on to a business’s owner is the main aspect. Hence it is important to make sure that the information is precisely reported to the IRS to ensure that the business can secure its benefit.

Read More-: Tax Form 8938 Reporting Requirements Explained 2023

The Information with in

As mentioned earlier, this form is used by the S corporation to be able to report the gains, income, losses, deductions and credits. Also reported is some other vital information to the IRS every year. Following are the details and the information included within:

• The Mailing address
• The Corporate Name
• The Employer Identification Number-EIN
• Total Assets
• The Date of incorporation
• The effective date of the S corporation election
• The business activity code
• The details regarding profits, assets, deductions and losses.
• The Stocks owned by the business
• Number of shareholders
• S corp start date
• The accounting methods used

The other part of the form includes various other important details like:

The Penalties: Tax Form 1120-S

The penalties are quite steep for S corps and failing to complete the tax forms on or before the due date can lead to penalties. Here, the individual will be fined $195 for every shareholder for every month of delay. There are also chances that one can have to face penalties if one submits an incomplete form. The penalty amounts can keep increasing with every shareholder, hence it is advised to get your ‘accounts in place’ before the due date.

Likewise, if the corporation files Form 941 after the due date, and also has an unpaid tax balance, then a 5 per cent penalty can be assessed on the balance of each month or the partial month the tax is late, with up to a maximum of 25%

Note: Despite not owning any taxes, it is still a great idea to file the tax form 1120-S to avoid penalties anyways.

The other important part of the form is the schedules, these include:

• Schedule M-2: Analysis of Accumulated Adjustments Account, Shareholders’ Undistributed Taxable Income Previously Taxed, Accumulated profits and earnings, and Other Adjustments
• Schedule L: Balance Sheet per Books
• Schedule K: Shareholders’ Pro Rata Share Items
• Schedule B: Other Information
• Schedule M-1: Reconciliation of Income (Loss) per Books with Income (Loss) per Return

The tax form 1120-S needs to be accompanied by Schedule K-1. This is the schedule that needs to be prepared for every shareholder. As for Schedule K-1, here, each shareholder is identified of the S corporations along with the reports about the portion of income, losses, profits, credits, and deductions that are allotted to each shareholder. Here the information included also comprises the tax returns of each shareholder.

How to File the Form Tax 1120-S

The form can be filed electronically as well every year. Here the small business owners need to complete the form by themselves using the special taxation software. Most times, these programs do not cost much, and are quite inexpensive, compared to hiring a professional.

There are some S corps, special those with more complex situations might have to select their annual tax returns completed by professionals, like a tax preparer or accountant. It is recommended that hiring a professional tax expert for your needs is a good idea, as it helps in the elimination of errors.

Note: While the traditional methods of tax filing are regularly used, nevertheless, it is recommended to go for e-Filing methods, as advised by the IRS themselves. This is to reduce delays in acquiring the right results in record time.

Who needs to File the Tax for 1120-S

As mentioned earlier, this tax form is usually filed by S corporations. This needs to be done, only after the election of an S corporation filed by businesses that comprise less than 100 shareholders and is thus after it is accepted by the IRS. This form can be filed either by a professional or a member of the corporation.

When is the Tax form 1120-S due?

This is an annual tax return for the S corporations and needs to be filed by the IRS by the 15th of the third month following the end of the corporation’s tax year. For instance, if the tax year is from January 1 to December 31st, then the due date for the tax is March 15th. Likewise, if the tax year of the company runs between July 1 and June 30, hence one must complete the form 1120-S by 15th September.

In case the S corporation fails to file the taxes by the due date, then one can apply for an extension of the time to file by filling out the IRS tax form 7004.

What is Meant by 1120S returns?

There are a few returns that need to be reported in Form 1120-S:

• Income
• Gains
• Losses
• Credits
• Deductions
• Payments

The Withdrawal to Shareholders

The Schedule K-1 of Form 1120-S is part of Form 1120-S where the distribution amount for each shareholder for the fiscal year of the corporation is reported. Here the Shareholder’s share of income, credits, Deductions, and others are required to be filed on Line 16 with a ‘D’ as a reference code. After the IRS shareholders’ instruction for Schedule K-1 of Form 1120-S is followed accordingly, the amount does not flow through to his income tax returns as ordinary taxable income. It is recommended for the shareholder to reduce their basis in the stock of the S corporation unless the shareholder’s basis in stock does not exceed the distributions. This ‘excess’ in case, is reported on Schedule D of Tax Return Form 1040. Likewise, the losses and capital gains and the Form 8979 sales and other disposition of the capital assets of the individual income tax return of the individual is also reported.

Also, the salaries paid to the S corporation shareholders are reported on Form W-2 Wage and Tax Statement, salaries, and wages. The same information is also reported in lines 7 or 8 of Form 1120-S of the US income tax return for an S corporation. 

The Dividend distribution that needs to be paid to the shareholder of an S corporation needs to be reported on Form 1099-DiV, Dividends and Distributions and also on LIne 17 c and Schedule K. 

In case of payments to the shareholder for reimbursement of expenses needs to be reported within the appropriate expense lines. 

The Equity section of the balance sheet is meant to record the financial reporting and S corporation distribution to the shareholders. This is reported as a reduction of undistributed accumulated earnings.

Also Read : Tax Form 5471 Information Return for Foreign Corporation 2023

Conclusion

Keeping your taxes in order is not only a good practice but also a beneficial one. It is recommended that all the applicable entities must report the tax liabilities through the routine filing of tax returns every year with the IRS. This is inclusive of the business and individuals of all sizes. One can state that Tax Form 1120-S is a return that is dedicated to the S corporations. Usually, the business in question consists of 100 or fewer shareholders, that can pass their losses or income over to each shareholder.

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