Form 1120S is the annual tax form used by S corporations (S-corps) and limited liability companies (LLCs) taxed as S-corps to report their deductions, gains, losses, and income from the business during the current tax year. You can download Form 1120S and prepare the return manually, or prepare it and file it electronically with TaxAct, our pick for best overall small business tax software. Either way, this article will help you understand the information required to complete your return.
In addition to the general information, income and deductions, and tax and payments section, Form 1120S has six schedules. Three of them (Schedules B, D, and K), must be completed by all S-corps. The other three―Schedules L, M-1, and M-2―are conditional on whether the corporation has more than $250,000 in both revenue and assets.
Completing Form 1120S
We have created a sample profit and loss (P&L) statement and balance sheet that are shown below. We’ll be using these numbers to complete our Form 1120S. Follow along to ensure that you understand each section:
Below you’ll find more detail about the 11 steps needed to complete Form 1120S.
1. Gather the Necessary Information for Form 1120S
Whether you hire a tax professional to prepare your taxes or you use tax software, you’ll need information and documentation to complete 1120S. The information includes financial statements and details about your shareholders.
The eight things you need to complete Form 1120S include:
- Details about your S-corp or LLC: The name of the business, the date the S-corp incorporated, the date of your S-corp election, employer identification number (EIN), and mailing address.
- Tax year: State whether you’re filing on a calendar year or fiscal year. This must match your prior-year return unless you ask the IRS permission to change. Most S-corps are required to use the calendar year.
- Business activity: Briefly describe the business activity of the S-corp, the main product or service you offer, and the business activity code that reflects your industry. A complete list of business activity codes is found in the Instructions for Form 1120S.
- Shareholder information: This includes the names, addresses, tax identification numbers (TINs), and percentage of ownership for every shareholder. Ask shareholders to provide you with Form W-9 as well.
- Accounting method: The two accounting methods are cash and accrual. Most S-corps use the cash basis method of accounting. To learn more about the accounting methods, check out our guide on the cash vs accrual method. You’re required to use the same accounting method as in the prior year unless you obtain permission from the IRS to change.
- P&L statement: Also known as an income statement, this financial report summarizes the income and expenses of the S-corp for the year. You can generate a P&L report in QuickBooks quickly and easily.
- Balance sheet report: This financial statement summarizes all assets, liabilities, and owner’s equity as of the end of the tax year. If you use QuickBooks, running a balance sheet report takes just a couple of minutes.
- Fixed asset purchases report: Print out a report showing the details of every purchase of equipment, machinery, buildings, vehicles, and other fixed assets. This detail is very useful when figuring out the S-corp’s depreciation deductions for the year. You’ll need to know the date of purchase, the date the equipment was first used for business purposes, the purchase price, any installation costs or substantial improvements, and the type of equipment or asset.
- Payroll expense report: Print out a report showing compensation paid to each employee of the S-corp for the tax year. Highlight which employees are officers of the S-corp. This detail will be useful because compensation for officers is reported on a separate line item from salaries and wages paid to other employees.
- Capital accounts: Make a detailed list of all transactions related to the capital accounts of the shareholders, such as capital contributions, distributions, dividends, and buyouts.
- Loans: Make a detailed list of all transactions involving loans from or loans to shareholders, such as loans advanced, loan repayments, interest paid, or interest received.
- Forms 1099: Did your S-corp need to file any Forms 1099, such as for independent contractors? Form 1120S asks this question, so it’s best if you double-check. Our article on Form 1099 reporting can help you figure out if you’re required to issue any 1099s.
As you can see, you’ll need several reports summarizing the financial activity of your S-corp during the year. If you need a better way to keep track of all this data, consider using QuickBooks.
2. Fill Out Form 1120S General Information Section
The first few line items of 1120S are very straightforward. You’ll provide the name, mailing address, EIN, incorporation date, S-corp election date, and business activity code for your company:
Some tips for filling out this topmost section on this first page of Form 1120S include:
- Fiscal year: If the S-corp has adopted a fiscal year, indicate the dates for the beginning and end of the fiscal year in the line above the name. This must match your prior-year return unless you have IRS permission to change.
- S-corp election date: If this is your initial return, and you’re filing the S-corp election (Form 2553) with 1120S, you may need to write or type special words in the blank space in the top margin. See the Instructions for Form 2553 for details.
- Business activity code: This is a six-digit code representing your industry. Business activity codes are found in the Instructions for Form 1120S.
- Item C: Small and mid-sized businesses (SMBs) with total assets less than $50 million at the end of the tax year don’t need to file Schedule M-3 and thus don’t need to check the box on Item C.
- Item F: You may want to fill out Item F (total assets at the end of the year) after preparing Schedule L (the Balance Sheet).
- Item H checkboxes: Check any boxes that apply. If the S-corp dissolved and this is the last year the S-corp is filing a return, check the Final return box. If the S-corp is filing another return to revise or correct a previously filed return, check the Amended return box.
3. Fill Out Form 1120S Income & Deductions Section
On the first page of Form 1120S, the S-corp reports its operating income and deductions for the year. Non-operating items, such as interest income, capital gains and losses, and charitable contributions, are reported on Schedule K instead of page 1 of the 1120S. Refer to the S-corp’s sample P&L statement above when filling out Lines 1a through 21. Some line items require supplementary forms or statements to provide additional detail, such as Line 19 for Other Deductions:
Tips for preparing the income and deductions section of Form 1120S include:
- Income: Show ordinary business income on Line 1a and gains or losses from the sale of business assets on Line 4. Rental income, interest, and investment income are reported on Schedule K on page 4 instead of page 1.
- Compensation of officers, salaries, and wages: You’ll need to separate out how much was paid to officers of the S-corp (Line 7) and how much was paid to all other employees (Line 8). The S-corp may need to detail officers’ compensation on Form 1125-E if the S-corp’s total receipts for the year were at least $500,000.
- Taxes and licenses: Line 12 includes state income taxes, state franchise taxes, business property tax, county and city taxes, payroll taxes, city business licenses, and business registration fees.
- Interest expenses: The amount S-corps can deduct for interest paid on loans may be limited. Use Form 8990 to calculate how much interest paid you can deduct.
- Depreciation: Use Form 4562 to work out how much the S-corp’s depreciation deduction should be on Line 14. You’ll need to refer to the S-corp’s fixed asset purchases report to calculate depreciation. Any section 179 expense from Form 4562 should be reported on Schedule K instead of page 1 of the 1120S.
- Pension, profit-sharing, etc., plans: Show on Line 17 contributions to 401(k) plans, SEP-IRAs, and similar group retirement savings plans.
- Employee benefit programs: Line 18 indicates the S-corp’s deduction costs for health insurance benefits, group term life insurance benefits, and meals and lodging provided for the convenience of the employer. Refer to the IRS Instructions for Form 1120S for the special rules on how to handle health insurance benefits for shareholder-employees.
- Other deductions: Detail on a separate statement any deductions that don’t fit into any of the categories shown on Line 2 or Lines 7 through 18. Examples of other deductions include travel, telephone service, or postage.
4. Fill Out Form 1120S Tax & Payments Section
The purpose of this section is to calculate federal taxes that apply if the corporation was previously a C corporation (C-corp) or engaged in a tax-free reorganization with a C-corp. In this section, you’ll list the estimated taxes paid during the year and overpayments applied from the previous year. You can leave this section blank if your S-corporation has never previously filed a tax return as a C-corp. We highly recommend that you seek the help of a tax professional to calculate these potential taxes if you’ve converted a C-corp to an S-corp:
S-corps might have a federal tax liability on Lines 22a through 27 of Form 1120S due to:
- Excess net passive investment income tax: This tax applies when an S-corp has undistributed Earnings and Profits from years in which the S-Corp filed as a C-Corp, and the S-corp’s net passive income is more than 25% of its gross receipts for the year.
- Built-in gains tax: This tax applies when an S-corp used to be a C-corp, the C-corp acquired an asset, the S-corp sold the asset, and the asset increased in value.
5. Fill Out Form 1120S Schedule K
Schedule K is a summary of the S-corp’s operating income (from page 1), investment income, deductions, and credits for the year:
Schedule K (IRS Form 1120S)
Schedule K is split into four sections:
- Income (Loss): Lines 1 through 10 report business income from page 1 on the first line, and then detail any nonbusiness income and loss not included on page 1. It’s very important that all items of income and loss be reported on either page 1 or Schedule K (lines 1 through 10), but not both.
Some common items reported on Lines 1 through 10 are:
- Business income: The business income or loss from Line 21 of page 1 must be entered on Line 1 of Schedule K.
- Rental real estate income: If your company earns money by renting real estate to a third party, that activity must be reported on Form 8825 and the net income reported on line 2 of Schedule K. Rental income and expenses shouldn’t be included on page 1 of Form 1120S.
- Investment income: Interest, dividend, and royalties income must be reported on lines 4 through 6.
- Capital gains/loss: Capital gains and losses must be reported on lines 8a through 8c
- Deductions: Lines 11 and 12 report non-business deductions such as charitable contributions and Section 179 expense. It’s important that all deductions on your P&L report be reported on either page 1 or Schedule K, lines 11 and 12.
- Other information: Lines 13 through 17 are informational lines that might be needed to calculate the shareholder’s tax liability but don’t go directly into the calculation of net income on Form 1120S. Common items reported include nondeductible expenses on line 16c and distributions to shareholders on line 16d.
- Reconciliation: Line 18 is a summary of all taxable income and deductions on Form 1120S and is calculated by adding lines 1 through 10 and then subtracting lines 11 and 12. Also enter this amount on Line 8 of Schedule M-1, which is discussed next.
6. Fill Out Form 1120S Schedule M-1
Schedule M-1 reports any differences between the S-corp’s P&L reported on Line 18 of Schedule K and its net income from the P&L statement. Corporations with less than $250,000 in both gross receipts and assets aren’t required to complete Schedule M-1. However, we encourage you to complete the M-1, as it confirms all the income and deduction information has been entered on your return:
Common differences between book accounting and tax returns reported on Schedule M-1 include:
- Depreciation: The amount you deduct for depreciation on your P&L statement might be different from the amount of depreciation you claim on your tax return. You might use straight-line depreciation for your books but modified accelerated cost recovery system (MACRS) or the section 179 deduction on the S-corp tax return.
- Nondeductible expenses: These are any expenses deducted on your P&L statement that aren’t tax-deductible.
- Tax-exempt interest: This is interest from municipal bonds included in your P&L statement that’s exempt from federal income tax.
Tip: For your tax return to be in balance, line 4 minus line 7 must equal the amount on line 8, which also agrees with line 18 from your Schedule K.
7. Fill Out Form 1120S Schedule M-2
The purpose of Schedule M-2 is to show changes in the S-corp’s accumulated adjustments account (AAA) during the tax year, which is essentially your retained earnings in the company. The beginning balances on line 1 must match the ending balances from the prior-year return:
Tips for preparing IRS 1120S Schedule M-2 include:
- Income increases AAA: All items of income increase AAA other than tax-exempt income.
- Expenses decrease AAA: Expenses (other than expenses related to tax-exempt income) decrease AAA.
- Distributions to shareholders: Both in-kind property distributions and cash distributions decrease AAA.
- Negative balance: AAA can have a negative balance, which can happen if an S-corp has been operating at a deficit.
- Accumulated earnings and profits: The amount in column C refers to earnings and profits if the S-corp used to be a C-corp.
- When in doubt: The Form 1120S instructions outline specific rules to follow when calculating AAA.
Tip: The total of line 8 across all columns should equal your retained earnings reported on Line 24 of your Schedule L, discussed next.
8. Fill Out Form 1120S Schedule L
The purpose of Schedule L of Form 1120S is to provide the IRS with details of the assets, liabilities, and equity of the S-corp. The information for Schedule L comes from the S-corp’s Balance Sheet report, which can be quickly printed if you use a software program like QuickBooks.
You’ll need one balance sheet report for the current year (end of tax year columns) and another balance sheet report for the prior year (beginning of tax year columns). You don’t have to file out Schedule L if you answered “yes” to questions 11A and 11B in Schedule B:
Tips for preparing Schedule L include:
- Assets equals Liabilities and Shareholders’ Equity: Line 15 must equal line 27 for both the beginning and end of the tax year.
- Schedule L should agree to Schedule M-2: Schedule L, line 24 at the beginning of the year must agree to line 1 of Schedule M-2. Schedule L, line 24 at the end of the year must agree to line 8 of Schedule M-2.
- Balance Sheet Same as Books: Schedule L should agree with the S-corp’s balance sheet for financial accounting purposes.
9. Fill Out Form 1120S Schedule B Other Information
Schedule B of 1120S consists of 11 questions that require a yes or no response. The questions cover a wide variety of topics, such as whether the S-corp owns stock in other corporations or partnerships, or whether the S-corp has issued restricted stock. The Form 1120s instructions discuss the issues involved. We highly recommend that you seek professional tax advice if you’re not sure how to answer a question after reading the form instructions:
10. Fill Out Form 1120S Schedule D Capital Gains & Losses
S-corps report any capital gains or losses on its investment portfolio on Schedule D. This specifically relates to the gains and losses you incurred from the sale of stocks, bonds, mutual funds, and other securities. The net amount of capital gains is reported on Schedule K and then allocated to each shareholder’s Schedule K-1:
Tips for completing Schedule D include:
- Built-in Gains Tax: If the S-corp used to be a C-corp, the capital gains can be subject to the built-in gains tax or the tax on excess net passive income. See our guide to S-corps for details.
- Information needed for Schedule D: You’ll need to know details for each investment trade, including the date and cost to purchase an investment and the date and amount of the sales proceeds.
- Use Form 8849: Use this form to report the details of each specific investment trade.
- Use Schedule D: Use this form to summarize the gains or losses by short-term and long-term holding periods, and to summarize the overall gains for the year.
- Short-Term Holding Period: This refers to an investment that was owned by the S-corp for one year or less.
- Long-Term Holding Period: This means the S-corp owned the investment for more than one year.
- Where to Find the Instructions: The IRS provides the Schedule D instructions separately from the main 1120S instructions.
11. Fill Out Form 1120S Schedule K-1 for Each Shareholder
Amounts from Schedule K are allocated to each shareholder based on percentage of ownership. Prepare one Schedule K-1 for each shareholder. The amount reported on each shareholder’s K-1 is the amount from Schedule K multiplied by the shareholder’s percentage of stock ownership for the year:
- Once Schedule K is completed, Schedule K-1 is pretty simple. The line numbers on the K correspond to the line numbers on the schedule K-1. Therefore, the amount to report on the line for Schedule K-1 is the amount for that line on Schedule K times the shareholder’s ownership percentage. In our example, there’s only one shareholder. When there are multiple shareholders, the totals across all K-1s for each line should equal the Schedule K total for that line.
Here are some other tips for Schedule K-1:
- Furnish Schedule K-1 by due date: The S-corp needs to give a Schedule K-1 to each shareholder by the filing deadline (March 15th, or September 15th with an extension).
- Amounts flow from Schedule K-1 to Form 1040: Shareholders take the amounts shown on their Schedule K-1 and report them on their personal tax return.
- Pass-through nature: This allocation process is how S-corp income, deductions, and credits pass through to the shareholders’ personal tax returns.
You should now have a pretty good idea of how to file Form 1120S and where that information is found in the S-corp’s financial reports. Work through the 1120S tax return carefully and keep copies of your work. If you have questions, ask for help from a qualified tax expert.