Form 1120S is the annual tax form S Corps and LLCs taxed as S Corps must complete to report net earnings to the IRS. Similar to partnerships, net earnings pass through to shareholders of an S corp and are reported on each shareholder’s personal tax return. All income, deductions, and credits are reported on Form 1120S.
You can download Form 1120S and complete it manually. However, we recommend that you use a tax software like TurboTax instead. By using TurboTax, you can be sure that you will get all of the tax deductions that you qualify for and the software will complete Form 1120S for you. Click here for a free 30-day trial.
Below you will find the 9 steps needed to complete Form 1120S:
1. Gather the Necessary Information
Regardless of if you hire a CPA to do your taxes or if you use a tax software like TurboTax, you will need to have the following 10 pieces of information and documentation handy in order to complete Form 1120S. The information includes such things as basic business info, shareholder info, and financial statements. Click here to download this list as a PDF.
Here are the 11 things you need to complete Form 1120S:
Selection effective date – To be treated as an S corp, the election must be made no later than 2 months and 15 days prior to the effective date. For example, if you want to be treated as an S corp for the 2017 tax year (Jan 1), then you must file Form 2553 with the IRS no later than March 15, 2017.
If your tax year is the same as the calendar year, then your effective date will always be January 1 of the year S corp status is to take effect. If you are on a fiscal year, then S corp status will take effect on the first day of your fiscal year. For example, if your fiscal year runs July 1 through June 30 then S corp status will take effect on July 1.
Business activity code – This should be the industry that your business falls into based on the business code selected. (i.e. real estate, manufacturing, food).
Product/service – Indicate the product or service that you generate most of your revenue from. (i.e. bookkeeping services, selling homes).
Number of shareholders – Total number of shareholders (owners) in the business.
Employer Identification Number – This is also known as a Tax ID. You need to have a Tax ID to file Form 1120S. You can find additional info on how to apply for your Tax ID with our article on employer identification numbers here.
Date Incorporated – This is the date that your business was incorporated.
Indicate if this is the first year filing as an S corp – If this is the first year that you are filing as an S Corp, you will need to indicate yes to this question and attach Form 2553. This is the form you filed with the IRS to make the S corp election.
Profit and Loss statement – A financial report that summarizes income and expenses for the tax year., including your net profit/loss. If you use an accounting program like QuickBooks to keep track of your income and expenses then you can run a profit and loss report in just a few clicks.
Balance Sheet report – This financial report 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.
Accounting method – The two accounting methods are cash and accrual. Most small businesses are on the cash basis of accounting. To learn more about the accounting methods, check out our guide on the cash vs accrual method.
1099 Reporting – If you hired an independent contractor during the year and paid them $600 or more, you must report this on Form 1120S. For more info on 1099 reporting, you can check out our guide on Form 1099.
2. Fill Out Form 1120S General Information Section
In this section, you provide general information about your business. In addition to the name and address, you will need to include the following info mentioned in step one:
- S election effective date
- Business activity code
- Tax ID Number
- Date of incorporation
3. Complete Form 1120S Income & Expense Section
The goal of this section is to calculate the business income/loss for the tax year. Most of the information will come directly from your profit and loss report that we discussed in the previous section. You can easily run this report if you use QuickBooks to complete this section.
4. Fill Out Form 1120S Tax and Payments Section
The purpose of this section is to calculate taxes that are applicable if the corporation was previously a C corporation or if the corporation engaged in a tax-free reorganization with a C corporation. It’s here that you’ll list the estimated taxes you paid during the current year, as well as credits in overpayments from the previous tax year.
Refer to page 16 of the IRS Form 1120S instructions for detailed instructions on what to include in this section.
5. Complete Form 1120S Schedule B
Schedule B of the form consists of 13 questions that require a yes/no response. The questions are primarily centered around the type of entities that have a direct or indirect interest in the S Corp and whether or not payments were made to contractors that would require the filing of IRS Form 1099 that was previously discussed.
IRS Form 1120S Schedule B, Questions 10A and 10B
Question 10 does not pertain to foreign/domestic interests in your S Corp. Instead, it asks if your business had less than $250,000 in both receipts and assets at the end of the tax year. Receipts typically refer to cash sales and other influxes of cash, like loans, lines of credit, or investments.
There are two parts to this question. If you can answer “Yes” to both questions, then you are not required to complete Schedule L and Schedule M-1 of Form 1120S.
6. Fill Out Form 1120S Schedule K
Schedule K is a summary of all shareholders’ income, credits and deductions generated by the S Corp for the tax year. Each shareholder of the S Corp will receive a Schedule K-1 so that they can report their share of net earnings on their personal tax return. The majority of the info needed to complete Schedule K-1 will come from the Income and Expenses section of Form 1120S that we covered earlier in this article.
7. Complete IRS Form 1120S Schedule L
The purpose of Schedule L of Form 1120S, is to provide the IRS with all assets, liabilities and equity of the S Corp as of the end of the tax year. If you use QuickBooks, run the Balance sheet report and use this report to complete this section. If you answered “Yes” to questions 10 A & B, then you are not required to complete Schedule L.
8. Fill Out Form 1120S Schedule M-1
As discussed previously, do not complete Schedule M-1 if you answered yes to both parts of question 10 in Schedule B. The purpose of Schedule M-1 is to inform the IRS of differences between what is reported on the financial statements of a business vs. how much of the profit is taxable. You report these type of differences by reconciling them here.
These differences are caused by income and expense items that may be reportable for bookkeeping purposes but not necessarily deductible for tax purposes and vice versa. For example, you may record depreciation on your books using the units of production method of depreciation. However, the units of production method is not acceptable for tax purposes.
Therefore, you use the MACRS method of depreciation (which is acceptable for tax purposes) to calculate your tax deduction. You can learn more about depreciation by checking out our general depreciation guide.
9. Complete IRS Form 1120S Schedule M-2
The purpose of Schedule M-2 is to reconcile undistributed net income of the S corp. Adjustments are made in this section for income and distributions that took place during the tax year. The balance at the end of the tax year is how much money you have in the business that can be reinvested in the business or distributed to shareholders.
The Bottom Line
You should now have a pretty good idea of what information you will need to complete IRS Form 1120S. If you’re in the market for accounting software, you should head on over to our free QuickBooks Course. QuickBooks will help you to keep track of all of your income and expenses so that you can have the financial statements you need to complete Form 1120S.
What’s more, to make tax time a breeze, check out TurboTax. You don’t have to be a tax whiz to use TurboTax because it will fill out Form 1120S for you. Get started on your tax return by signing up for a free trial.