Form 1120S is the form that S Corps and LLCs taxed as S Corps must complete to report net earnings for the business to the IRS. Similar to a partnership, net earnings pass through to the shareholders of the S corp and are reported on each shareholder’s personal federal tax return. An S Corp must report all income, deductions and credits of the S Corp for the tax year on Form 1120S.
In this article, we will cover what documents are required to complete Form 1120S. In addition, we will discuss what information is required to complete each section of Form 1120S. You can find additional info on how to file income tax for an S Corp here.
The best way to make sure you’re in good standing come tax time is by using an accounting software like QuickBooks Online, where you can run profit and loss statements, balance sheet reports, and much more in just minutes. Click here for a free 30 day trial.
Documents You Will Need to Complete Form 1120S
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 information and documentation handy in order to complete Form 1120S. Click here to download this list as a PDF.
- 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 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.
- 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 here.
Form 1120S – Overview of Primary Sections & How to Fill Out
There are 8 primary sections of Form 1120S. You will find a snapshot of each section and below that a brief overview of the information required to complete that section.
Form 1120S – General Information Section
In this section, you will provide general information about your business. In addition to the name and address, you will need to include the following info:
- S election effective date
- Business activity code
- Tax ID Number
- Date of incorporation
Form 1120S – Income and 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.
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. Refer here for detailed instructions on what to include in this section.
Form 1120S – Schedule B (Other Information)
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 filing of Form 1099 that was previously discussed.
Form 1120S – Schedule B – Questions 10 A and B
NOTE: Question 10 does not pertain to foreign/domestic interests. There are two parts to this question and if you can answer “Yes” to both questions, then you are not required to complete Schedule L and Schedule M-1 of Form 1120S.
Form 1120S – Shareholders’ Pro Rata Share Items Section (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.
Form 1120S – Schedule L (Balance Sheet per Books)
NOTE: if you answered Yes to questions 10 A & B, then you are not required to complete 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.
Form 1120S -Reconciliation of Income (Loss) per Books with Income (Loss) per Return (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.
Form 1120S – Schedule M-2 (Accumulated Adjustments Account, Other Adjustments Account, and Shareholders’ Undistributed Taxable Income Previously Taxed)
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 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 that you need to complete Form 1120S.