Form 1120-S
Form 1120-S is a tax document that U.S. corporations must file annually to report their income, gains, losses, deductions, credits and other information. This form is specific to S corporations, which pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of the S corporation report this information on their personal tax returns.
Last updated: August 30, 2023 • 4 min read
What Is Form 1120-S?
Form 1120-S is the U.S. Income Tax Return form used by S corporations. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders report this income and losses on their personal tax returns and are assessed at their individual income tax rates, helping avoid double taxation. The Form 1120-S is used to report the income, gains, losses, deductions, credits, etc., and to provide information about the S corporation's financial state.
What Is the History of Form 1120-S?
Form 1120-S, U.S. Income Tax Return for an S Corporation, came about after the IRS instituted Subchapter S of the Internal Revenue Code in 1958.
Subchapter S was introduced to help small businesses. These businesses could incorporate for legal purposes but be taxed like a partnership or sole proprietorship, thus avoiding the double taxation that is common for traditional corporations.
An S corporation files Form 1120-S to report all its income, deductions, gains, losses, etc., and to information about its financial activity to the IRS.
Over the years, the regulations concerning S corporations and therefore Form 1120-S have been modified and amended several times to meet evolving business needs and economic conditions. Despite these changes, the main purpose and function of the form remain the same.
How Do You Calculate Form 1120-S?
The process of calculating Form 1120-S involves several steps:
Income: First, you'll need to calculate your corporation's gross income. This includes gross receipts or sales, returns and allowances, cost of goods sold, and other income.
Deductions: Then, you'll need to account for various deductions. These may include compensation of officers, salaries and wages, repairs and maintenance, bad debts, rents, taxes and licenses, interest, depreciation, advertising, pension, profit-sharing plans, employee benefit programs, and other deductions.
Taxable income: Subtract total deductions from income to get the taxable income.
Tax: Calculate tax based on instructions given by the IRS for each tax year, considering any applicable credits and deductions.
Distributions: Report shareholders' pro-rata share of non-separately stated income, losses, deductions, and credits.
Remember, it's important to provide complete and accurate information on Form 1120-S, as any missing or incorrect information could cause delays in processing or possible audit by the IRS.
This is a simplified summary. Filing Form 1120-S can be a complex process, especially for companies with numerous sources of income or numerous deductions. It may be beneficial to seek the assistance of a tax professional.
What Are Some Examples of Businesses That Operate as S Corporations?
Many different types of businesses can choose to operate as S corporations, provided they meet the IRS’s criteria. Here are some examples:
Professional Service Businesses: This includes law firms, dental practices, therapy practices, accounting firms or consulting agencies. These businesses often opt for S corporation status to avoid the double taxation of C corporations.
Small to medium size Retailers and Wholesalers: Many small and medium-size businesses that operate in the retail or wholesale sector choose to be S corporations.
Real Estate Investment Companies: Some real estate companies, especially those dealing with rental properties, choose to file as an S corp to reduce their tax liabilities.
Family-owned Businesses: Family businesses often choose the S corporation structure because it allows them to pass income, losses, deductions, and credits through to their shareholders (who are usually family members), for tax purposes.
Freelance Professionals: Single-member businesses or freelancers like graphic designers, writers, programmers, who want to take advantage of the benefits of incorporation while avoiding double taxation.
These are just a few examples - any business that meets the IRS criteria can elect to become an S corporation.
What Are the Potential Drawbacks of Filing Form 1120-S for an S Corporation?
While there are many benefits to filing as an S Corporation, there can be potential drawbacks as well, which can include:
Shareholder Restrictions: S corporations have limitations on who can be a shareholder. They can only have up to 100 shareholders, and shareholders must be U.S. citizens or residents. Moreover, S corporations can't be owned by C corporations, other S corporations, LLCs, partnerships, or certain trusts.
One Type of Stock: S corporations can only have one class of stock. Though they can have voting and nonvoting shares, they won’t be able to offer preferred shares.
Tax Reporting : S Corporation tax filing is often more complex than other business entities, as profits and losses are passed through to shareholders and reported on individual income tax returns.
State Tax Rules: Some states do not recognize the S corporation status and may tax the business as a regular corporation.
Salary Requirement: If you work for your S corporation, you are required to pay yourself a "reasonable" salary, which may increase your employment tax liability.
Tax Filing Deadlines: S Corporations must file their annual tax returns by the 15th day of the third month following the end of their tax year, which for most businesses is March 15. This is earlier than the filing date for individual or LLC tax returns.
In the end, whether an S Corporation is the right choice for a business depends on the specific circumstances and goals of the business. It's always a good idea to consult with a tax professional or business attorney when making this decision.