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One of the most confusing aspects of tax time for business owners is knowing which tax forms they need to file. Even if you engage an accountant to prepare your tax return—and we strongly recommend you do—as a business owner and taxpayer you still need to know which forms are required. You also need to have a basic understanding of how these forms are prepared.
Chances are, you started your business as a sole proprietorship or an LLC taxed as a sole proprietorship (what the IRS considers a disregarded entity). As such, you are familiar with the relatively straightforward Schedule C tax form and how it is used to report your business’s taxable profits.
As your business grows, though, your accountant might encourage you to make an S-Corp election status in order to leverage certain tax benefits. If this is the case, you will have a different form to file: Form 1120S.
The five-page Form 1120S is essentially your business’s tax return. When a business is taxed as a sole proprietorship, its profit and loss is reported on Schedule C. In an S-Corp, Form 1120S replaces Schedule C as the way the business’s profit or loss is reported to the IRS. Unlike Schedule C, though, Form 1120S is not filed with your personal tax return. It is submitted to the IRS as a separate filing and is typically due on March 15 each year.
As is the case with Schedule C, the profit or loss on Form 1120S will flow through to your personal tax return and impact your personal tax liability. This is because—like sole proprietorships and partnerships—S-Corps are pass-through tax entities, meaning the tax liability belongs to the shareholders of the corporation rather than to the business itself.
If your business is an S-Corp or an LLC that has completed Form 2553 to make an S-Corp tax election, you will need to file Form 1120S no later than March 15 each year (or September 15 if you file an extension).
You will provide Schedule K-1 to each shareholder when you file Form 1120S. Schedule K-1 reflects the portion of the profit or loss in the business that belongs to each shareholder. The shareholders will then use this information to complete their individual tax returns. Even if you are the only shareholder in the business, you will prepare a Schedule K-1 for yourself.
If you choose to file your tax return yourself, using a tax software that will walk you through the process of completing Form 1120S is your best bet. Many tax software programs will guide you through the process of completing Form 1120S by asking a series of questions, meaning you won’t even see the form until you download it from the software.
Whether you use tax preparation software to complete Form 1120S or engage an accountant to file it for you, you will need to be able to review the form for accuracy. The following step-by-step Form 1120S instructions will help you understand how the form is put together, which will in turn assist you in this review process.
Form 1120S has six parts. Each part of Form 1120S provides specific information.
The first part of the form, which takes up the entire first page, is where you will provide the profit and loss information for your business. Items A through I on this page ask for identifying information about your business, including the date the business was incorporated and the date of S election status (E and A, respectively).
Once the top part of this page has been completed, you will move on to the income and expenses portion of the form. Most of this information will come from your profit and loss statement, but chances are your business’s P&L is more detailed than the first page of Form 1120S. There are special lines—Line 7 and Line 19—for income and deductions that don’t fall into the main categories listed. Additional statements must be attached to Form 1120S to detail these amounts.
If the business has never been a C-corporation, you can disregard the Tax and Payments section of this page. Refer to page 16 of the instructions issued by the IRS if this section applies to you.
If you plan to file Form 1120S on paper, don’t forget to sign the bottom of this first page. If you paid a preparer to complete the form for you, he or she needs to sign and provide their information, as well.
Yes, Form 1120S contains its own schedules right inside the form itself. The first one is Schedule B. This is where you provide “other information” about your business. Schedule B looks intimidating, but chances are you won’t have to complete everything on it.
Line 1 is where you provide your accounting method. Unless your accountant instructs you otherwise, or unless you have checked something different on previous years’ Form 1120S, check the box for “Cash.” Most small businesses are cash basis tax filers.
On Line 2, you are asked for your business activity and whether you provide products or services. After you have completed this line, most of the remainder of the information on this form is provided by checking either the Yes or No column for each question, and only questions with “Yes” answers require you to provide additional information.
Don’t forget to complete Lines 13a and 13b, though. If you made payments totaling $600 or more for services to one or more non-incorporated entities during the year, your answer to these two questions is Yes.
Schedule K on Form 1120S summarizes the income, deductions, and credits for all shareholders for the year. Don’t confuse Schedule K on Form 1120S with the Schedule K-1 you must provide to each shareholder in the corporation. Schedule K is a summary. Schedule K-1 is a detail per shareholder.
If you answered “Yes” to questions 10a and 10b on Schedule B, you do not have to complete Schedule L. If you answered “No” to either of these questions, you must complete the Balance Sheet, which is part of Schedule L.
As with the first part of Form 1120S, you can pull most of the information needed to complete Schedule L straight from the balance sheet in your accounting software. Your balance sheet will likely have more detail than Schedule L requires, so you will consolidate some of the information and attach an additional statement to your tax return.
If you are required to complete Schedule L, you must also complete Schedule M-1. Schedule M-1 reconciles your books to your tax return.
Most businesses have income and expenses from business-related activity that is not included in the taxable profit calculation. Meals and travel expenses are typically only partially deductible for tax purposes, and the business might use a different depreciation method for assets than the method approved for tax purposes.
Your financial statements are used for management purposes and to help you make business decisions 365 days a year. They are used for filing a tax return one day a year. Your end goal for your financial statements shouldn’t be for them to match your tax return exactly, but rather to help you run your business profitably.
Schedule M-1 takes these two different purposes for your financial statements into consideration. Line 8 of Schedule M-1 should match Line 18 of Schedule K when you have finished reconciling your books to your tax return.
Schedule M-2 is the final section of Form 1120S. Line 8 of this schedule tells you how much money is left in the corporation that hasn’t been distributed or allocated for a specific use. Although it is one of the shorter schedules on Form 1120S, it is also one of the most confusing. Follow the instructions carefully.
Form 1120S can be overwhelming when you first see it. As you start breaking it down page by page and schedule by schedule, it seems to diminish in complexity. It’s important to feel confident about your understanding of Form 1120S, but it’s equally important not to disregard how tricky this form can be.
The IRS’s instruction document for Form 1120S is 40 pages long, with multiple references to other resources for additional instruction. Not all of the instructions apply to every business, but there is a level of complexity to Form 1120S which this article does not convey. Before you attempt to file Form 1120S yourself, make sure you thoroughly review the IRS’s instructions for each section to ensure you understand how to complete the form for your business.
You don’t have to complete Form 1120S yourself to benefit from the knowledge of what this form is and how it ties in to your overall tax filing obligations. Engage a tax professional to file Form 1120S for you, and then review the completed form with her for accuracy and understanding. This will help both you and your accountant feel confident that your return has been filed properly.