To fill out Form 1120-S, work through the return in this order: enter the corporation’s identifying information and income on page 1, complete the deductions section to arrive at ordinary business income on line 21, answer the Schedule B questions, allocate every income and deduction item on Schedule K, and then issue a Schedule K-1 to each shareholder showing their share. Calendar-year S corporations must file the completed return and furnish the K-1s by March 15.
What to Gather Before You Open the Form
The return moves quickly if the underlying records are already closed out. Pull together:
- A finalized profit and loss statement for the full tax year, showing gross receipts, cost of goods sold, and operating expenses.
- A year-end balance sheet with beginning and ending figures for assets, liabilities, and equity.
- The corporation’s EIN, date of incorporation, and the date the S election took effect.
- For each shareholder: name, Social Security number or taxpayer ID, ownership percentage, and the number of days they held stock during the year.
- Depreciation and amortization records, since claiming either requires Form 4562 attached to the return.1Internal Revenue Service. About Form 4562, Depreciation and Amortization (Including Information on Listed Property)
- W-2s and payroll records for every shareholder-employee, which drive the officer compensation figure on line 7.
Download the current-year Form 1120-S and its instructions from IRS.gov. The instructions run past 40 pages but include line-by-line guidance and the current K-1 income codes.2Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
Page 1: Income and Deductions
The header captures the corporation’s legal name, EIN, address, date incorporated, date of S election, and business activity code.
Lines 1 through 6 build to total income. Put gross receipts or sales on line 1a, returns and allowances on line 1b, and the net on line 1c. Cost of goods sold, calculated on the worksheet inside the form, goes on line 2. Line 3 is gross profit. Add any other income items on lines 4 and 5, and total everything on line 6.
Lines 7 through 19 are deductions. Officer compensation goes on line 7. Salaries and wages for non-officer employees go on line 8. Repairs, bad debts, rent, taxes and licenses, interest, depreciation, depletion, advertising, pension and profit-sharing contributions, and employee benefit programs each have their own lines. Total the deductions on line 20 and subtract that from line 6 to get ordinary business income or loss on line 21. Line 21 is the number that carries into Schedule K and, from there, to each shareholder’s K-1.
Schedule B: Other Information
Schedule B is a series of yes-or-no questions about the corporation’s accounting method, business activity, and shareholders. Question 11 does the most work for the average filer: it asks whether the corporation is a small business taxpayer with average annual gross receipts of $31 million or less over the three prior tax years. A “Yes” answer exempts the corporation from Schedule L (the balance sheet) and Schedule M-1 (book-to-tax reconciliation).3Internal Revenue Service. Instructions for Form 1120-S Most S corporations qualify.
Schedule K and the K-1s
Schedule K breaks the corporation’s total income, deductions, and credits into categories that shareholders will report on their personal returns. Ordinary business income from line 21 goes on Schedule K, line 1. Net rental real estate income, interest, dividends, royalties, capital gains, and Section 1231 gains each get their own line because they receive different tax treatment when they land on the shareholder’s 1040. Charitable contributions, Section 179 deductions, and credits are also reported here.
Then the corporation prepares a separate Schedule K-1 for every person who held stock at any point during the year. Each K-1 shows that shareholder’s allocated share of every Schedule K item, based on their ownership percentage and the days they held shares.4Internal Revenue Service. Shareholder’s Instructions for Schedule K-1 (Form 1120-S) Each K-1 must be furnished to the shareholder by the return’s due date, or by the extended due date if an extension was filed.5Internal Revenue Service. Instructions for Form 1120-S
Get the allocations right. A wrong ownership percentage or a miscoded income type creates a mismatch between the corporate return and a shareholder’s personal return, and that is one of the fastest ways to draw an IRS inquiry letter.
Schedules L, M-1, and M-2
If the corporation does not qualify as a small business taxpayer under the $31 million gross receipts test, complete Schedule L (a comparative balance sheet with beginning and end-of-year assets, liabilities, and equity) and Schedule M-1 (which reconciles book income with the income reported on the return). Corporations with total assets of $10 million or more file Schedule M-3 in place of M-1.3Internal Revenue Service. Instructions for Form 1120-S Schedule M-2 tracks the accumulated adjustments account and matters most for corporations carrying accumulated earnings and profits from prior C-corp years.
Reasonable Compensation for Shareholder-Employees
Before an S corporation distributes profits to a shareholder who works in the business, it must first pay that person a reasonable salary subject to payroll taxes. Distributions are not subject to Social Security and Medicare taxes; wages are. If the salary looks artificially low, the IRS can reclassify distributions as wages and assess back employment taxes plus penalties.6Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
There is no fixed formula. The IRS weighs the shareholder’s training and experience, time devoted to the business, what comparable businesses pay for similar work, the corporation’s dividend history, and how non-shareholder employees are paid. A one-person consulting firm paying its owner-employee $20,000 while distributing $180,000 in profits is the kind of pattern that draws scrutiny. Officer compensation on line 7 must reconcile with the W-2s issued.
Health Insurance for More-Than-2 Percent Shareholders
Premiums the corporation pays for a shareholder-employee who owns more than 2 percent of the stock are deductible by the corporation but must be added to the shareholder’s W-2 wages. The premiums go in Box 1 of the W-2 but are not subject to Social Security or Medicare tax, so they are not in Boxes 3 or 5. The shareholder can then take an above-the-line deduction for the premiums on their personal return, provided they were not eligible for subsidized coverage through a spouse’s plan.6Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
Corporate-Level Taxes an S Corp May Still Owe
Most S corporations pay no federal income tax at the entity level. Two exceptions apply to former C corporations.
Built-in gains tax. When a C corporation converts to S status, appreciation baked into its assets at the conversion date is subject to the built-in gains tax if those assets are sold within five years. The tax hits the net recognized built-in gain during the five-year recognition period at the highest corporate rate, currently 21 percent. Report it on Schedule D.
Excess net passive income tax. If the corporation still carries accumulated earnings and profits from its C-corp years and more than 25 percent of its gross receipts for the year come from passive investment income (rents, royalties, dividends, interest, annuities, and gains from stock or securities sales), the excess net passive income is taxed at 21 percent.7Office of the Law Revision Counsel. 26 USC 1375 – Tax Imposed When Passive Investment Income of Corporation Having Accumulated Earnings and Profits Exceeds 25 Percent of Gross Receipts Three consecutive years of that pattern automatically terminates the S election, so corporations in this situation often distribute the accumulated earnings and profits to clear the account. Compute the tax on the worksheet in the Form 1120-S instructions.
Either corporate-level tax must be paid by the original filing deadline, even when the return itself is on extension.
Deadline, Extension, and Late Penalty
Form 1120-S is due by the 15th day of the third month after the tax year ends. For calendar-year corporations that means March 15.8Internal Revenue Service. Starting or Ending a Business 3 If March 15 falls on a weekend or holiday, the deadline shifts to the next business day.
Filing Form 7004 before the original deadline gets an automatic six-month extension, pushing calendar-year filers to September 15.9Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns The extension covers only the paperwork. Any built-in gains or excess net passive income tax owed must still be paid by March 15 to avoid interest.
A late or incomplete return runs $255 per shareholder for each month or partial month the return is overdue, for up to 12 months.10Internal Revenue Service. Failure to File Penalty A five-shareholder S corporation that files three months late owes $3,825. The penalty can be waived on a showing of reasonable cause.
Where and How to File
An S corporation that is required to file 10 or more returns of any type during the calendar year must e-file Form 1120-S.11Internal Revenue Service. S Corporations The count includes W-2s, 1099s, payroll returns, and the 1120-S itself, so most corporations with even a handful of employees are over the threshold. Eligible filers use IRS-approved e-file software or a tax professional with e-file credentials. The IRS usually confirms receipt within 24 hours.
Paper filers use the address that matches their state and asset size:12Internal Revenue Service. Where to File Your Taxes for Form 1120-S
- Eastern and midwestern states (Connecticut through Wisconsin, plus DC) with total assets under $10 million: Department of the Treasury, Internal Revenue Service, Kansas City, MO 64999-0013.
- Eastern and midwestern states with $10 million or more in assets, or filing Schedule M-3: Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0013.
- Southern and western states (Alabama through Wyoming), regardless of asset size: Department of the Treasury, Internal Revenue Service, Ogden, UT 84201-0013.
- Foreign country or U.S. possession: Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409.
Send paper returns by certified mail with a return receipt to create proof of the filing date. Without that proof, a return that arrives after the deadline is treated as late no matter when it was mailed.