Form 1120-S: U.S. Income Tax Return for an S Corporation (2014)
A Layman's Guide to Understanding and Filing
What Form 1120-S Is For
Form 1120-S is the annual tax return that S corporations must file with the Internal Revenue Service. Unlike traditional C corporations that pay taxes at the corporate level, S corporations are "pass-through" entities—meaning the business itself doesn't pay federal income tax. Instead, income, losses, deductions, and credits "pass through" to shareholders, who then report these items on their personal tax returns.
Think of Form 1120-S as a comprehensive financial report card that tells the IRS how the S corporation performed during the year. The form captures all income sources, business expenses, deductions, and other financial activities. While the corporation reports this information to the IRS, the actual tax liability falls on individual shareholders based on their ownership percentage.
The form serves two critical purposes: first, it reports the corporation's overall financial picture to the IRS, and second, it provides the foundation for creating Schedule K-1 forms. Each shareholder receives a Schedule K-1 showing their proportionate share of income, deductions, and credits, which they use to complete their personal tax returns. This dual reporting ensures transparency and proper tax collection while maintaining the favorable pass-through tax treatment that makes S corporations attractive to small business owners.
When You’d Use Form 1120-S (Including Late and Amended Returns)
For the 2014 tax year, Form 1120-S was due by March 16, 2015 (March 15 fell on a Sunday). Calendar year S corporations must file by the 15th day of the third month after year-end, while fiscal year corporations follow the same three-month rule based on their fiscal year-end.
Late Filing: If you missed the original deadline, you could have filed Form 7004 to request an automatic six-month extension, pushing the deadline to September 15, 2015. However, an extension to file is not an extension to pay—any taxes owed were still due by the original March deadline to avoid penalties and interest.
Amended Returns: You must file an amended Form 1120-S if you discover errors after filing your original return. Common reasons include miscalculated income, forgotten deductions, incorrect shareholder allocations on Schedule K-1 forms, or errors discovered during an IRS audit. To amend, complete a new Form 1120-S, check box H(4) at the top labeled "Amended Return," and attach a detailed statement explaining each change, the corrected amounts, and reasons for the amendments. If shareholder Schedule K-1 forms contained errors, you must issue amended K-1s to affected shareholders and check the "Amended K-1" box.
Penalties for Late Filing: For 2014, late filing penalties were significant. If no tax was due, the penalty was $195 per month (up to 12 months) multiplied by the total number of shareholders. For example, an S corporation with three shareholders filing four months late faced penalties of $2,340 ($195 × 3 × 4). If taxes were due, additional penalties of 5% of unpaid tax per month (up to 25%) applied, plus interest charges calculated at rates determined by the IRS.
Key Rules or Details for 2014
Several important rules governed Form 1120-S filing for the 2014 tax year. Understanding these requirements helped ensure compliance and avoid costly penalties.
Eligibility Requirements: To file Form 1120-S, your corporation must have timely filed Form 2553 (Election by a Small Business Corporation) and received IRS acceptance. S corporations could have no more than 100 shareholders, only one class of stock, and shareholders had to be U.S. citizens, residents, certain trusts, or estates—not partnerships or corporations.
Accounting Methods: Most S corporations used either cash or accrual accounting methods. However, tax shelters as defined in section 448(d)(3) could not use the cash method. Corporations with inventory generally needed to use the accrual method for sales and purchases unless they qualified as small business taxpayers. Any change in accounting method required IRS consent via Form 3115.
Tax Year Limitations: S corporations generally had to use a calendar year (ending December 31) unless they established a business purpose for a different tax year or elected a fiscal year under section 444. The section 444 election allowed a tax year with a deferral period of three months or less but required making payments under section 7519 using Form 8752.
Estimated Tax Payments: S corporations had to make quarterly estimated tax payments if they expected to owe $500 or more in built-in gains tax, excess net passive income tax, or investment credit recapture tax. For calendar year 2014, these payments were due April 15, June 15, September 15, and December 15, 2014.
Electronic Filing and Deposits: Corporations with $10 million or more in total assets that filed at least 250 returns annually were required to e-file Form 1120-S. All federal tax deposits had to be made electronically through the Electronic Federal Tax Payment System (EFTPS) or via same-day wire through financial institutions.
Schedule K-1 Requirements: Every shareholder had to receive a Schedule K-1 showing their share of income, deductions, and credits. Failure to provide accurate, timely K-1 forms resulted in $100 penalties per form, increasing to $250 (or 10% of aggregate amounts) for intentional disregard.
Step-by-Step (High Level)
Overview
Filing Form 1120-S requires systematic completion of multiple sections. Here's a simplified walkthrough of the major steps:
Step 1: Complete Identification Information
Fill in the corporation's legal name, address, Employer Identification Number (EIN), date of incorporation, and business activity code. Check applicable boxes indicating whether this is a final return, name/address change, amended return, or S election termination.
Step 2: Report Income (Lines 1-6)
Enter gross receipts or sales (line 1a), cost of goods sold (line 2), and calculate gross profit (line 3). Add other income sources including net gain from Form 4797 (line 4), interest income (line 5), and other income (line 6) to determine total income (line 6).
Step 3: Calculate Deductions (Lines 7-19)
Report all ordinary and necessary business expenses: compensation of officers (line 7), salaries and wages (line 8), repairs and maintenance (line 9), bad debts (line 10), rents (line 11), taxes and licenses (line 12), interest (line 13), depreciation (line 14), depletion (line 15), advertising (line 16), pension/profit-sharing plans (line 17), employee benefit programs (line 18), and other deductions (line 19). Calculate total deductions (line 20).
Step 4: Calculate Ordinary Income (Line 21)
Subtract total deductions (line 20) from total income (line 6) to determine ordinary business income or loss.
Step 5: Calculate Taxes and Credits (Lines 22-24)
Report any taxes owed including excess net passive income tax (line 22a), built-in gains tax (line 22b), and investment credit recapture (line 22c). Enter estimated tax payments and calculate tax due or overpayment.
Step 6: Complete Schedule B
Answer required questions about accounting methods, business activities, foreign accounts, ownership changes, and other compliance matters.
Step 7: Prepare Schedules K and K-1
Schedule K summarizes all items that pass through to shareholders. Complete a separate Schedule K-1 for each shareholder showing their proportionate share of income, deductions, credits, and other items. These must be provided to shareholders and filed with the IRS.
Step 8: Complete Balance Sheets and Reconciliations
Fill out Schedule L (Balance Sheets), Schedule M-1 (Reconciliation of Income), and Schedule M-2 (Analysis of Accumulated Adjustments Account).
Step 9: Assemble and Sign
Arrange attachments in the proper order, ensure an authorized officer signs and dates the return, and file by the due date at the appropriate IRS service center based on location and total assets.
Common Mistakes and How to Avoid Them
Missing Deadlines – Many filers forget that the due date is the 15th of the third month after year-end (March 15/16 for calendar year corporations). Set calendar reminders for both the original due date and the extended deadline if filing Form 7004. Remember that extensions to file don't extend time to pay taxes owed.
Incorrect Schedule K-1 Allocations – Shareholders must receive income, deductions, and credits based on their exact ownership percentage throughout the year. Failing to adjust for mid-year stock transfers or inconsistent allocations triggers IRS scrutiny. Maintain detailed shareholder records showing ownership changes and calculate daily allocations when ownership changes occur.
Missing or Incomplete Schedule K-1 Forms – Every shareholder must receive an accurate, complete Schedule K-1. Forgetting to issue K-1s or omitting required information results in $100+ penalties per form. Create a shareholder checklist and verify all K-1s before filing the corporate return.
Incomplete or Inconsistent Schedule M-1 and M-2 – These schedules reconcile book income with tax income and track the Accumulated Adjustments Account. Errors here create discrepancies that invite audits. Use accounting software that automatically tracks AAA balances and book-to-tax adjustments, or hire a qualified tax professional.
Mixing Personal and Business Expenses – Deducting personal expenses like family meals, personal vehicle use, or home office expenses without proper documentation and allocation invites audits. Maintain separate business credit cards, detailed mileage logs, and proper documentation for all claimed deductions.
Improper Classification of Activities – Failing to correctly identify passive versus non-passive activities affects shareholder tax treatment. Review passive activity rules annually and properly classify rental activities, material participation activities, and portfolio income on Schedule K.
Not Making Required Estimated Tax Payments – S corporations owing built-in gains tax, excess net passive income tax, or investment credit recapture tax must make quarterly estimated payments. Calculate these obligations early and use EFTPS to make timely electronic deposits.
Forgetting State Filing Requirements – Many states require separate S corporation returns even though the federal return has been filed. Check your state's requirements and file state returns by applicable deadlines to avoid additional penalties.
What Happens After You File
IRS Processing – The IRS processes your return, typically within several weeks for e-filed returns or several months for paper returns. The IRS matches reported information against records from Forms W-2, 1099, and other information returns. Any discrepancies may trigger automated notices or examination.
Shareholder Reporting – Shareholders receive their Schedule K-1 forms and use this information to complete their personal tax returns (Form 1040). They report their share of S corporation income, deductions, and credits on various schedules including Schedule E (Supplemental Income and Loss) and Schedule D (Capital Gains and Losses). Shareholders must file their personal returns even if the S corporation had a loss.
Refunds or Additional Payments – If the corporation overpaid estimated taxes, it receives a refund or can elect to apply the overpayment to the next year's estimated tax. Refunds requested via direct deposit (Form 8050) arrive faster than paper checks. If additional tax is owed, interest and penalties accrue from the original due date until paid.
Audit Selection – The IRS may select returns for examination based on various factors including unusual deductions, income inconsistencies, or random selection. S corporation audits often examine officer compensation reasonableness, shareholder loan treatment, passive activity classifications, and basis calculations. If selected, respond promptly and consider engaging a tax professional.
Recordkeeping Period – Keep all supporting documentation for at least three years from the date the return was filed or due, whichever is later. Records supporting basis calculations should be retained indefinitely as they affect current and future tax years.
State Tax Obligations – Many states piggyback on federal S corporation elections but require separate state returns, franchise taxes, or information filings. Check your state's website or consult a local tax advisor to ensure full compliance with state obligations.
FAQs
1. Can I file Form 1120-S even if my corporation hasn't elected S status?
No. You must first file Form 2553 (Election by a Small Business Corporation) and receive IRS acceptance before filing Form 1120-S. If you haven't elected S status, your corporation must file Form 1120 (U.S. Corporation Income Tax Return) instead. Processing Form 2553 can take several months, so plan accordingly.
2. What if my S corporation had no income or activity during 2014?
You still must file Form 1120-S. Even with zero income, the IRS requires S corporations to file annual returns to maintain their S election and comply with federal law. Failure to file can result in termination of your S election and significant penalties. Mark "zero" or "0" in appropriate income and expense fields.
3. How do I calculate my share of S corporation income as a shareholder?
Your Schedule K-1 (received from the S corporation) shows your proportionate share of income, deductions, and credits based on your ownership percentage. You don't calculate this yourself—the corporation does. You simply report the K-1 amounts on your personal Form 1040 on appropriate schedules.
4. Can I extend the filing deadline for Form 1120-S?
Yes, by filing Form 7004 by the original due date, you receive an automatic six-month extension to file Form 1120-S. However, this extends the filing deadline only—not the payment deadline. Any taxes owed must still be paid by the original due date to avoid penalties and interest charges.
5. What's the difference between Schedule K and Schedule K-1?
Schedule K (attached to Form 1120-S) shows the total of all items passed through to shareholders as a group. Schedule K-1 is an individual form showing each shareholder's specific share. Think of Schedule K as the "total pie" and each K-1 as an individual "slice" proportionate to ownership.
6. Do S corporations pay federal income tax?
Generally, no. S corporations are pass-through entities, so income passes to shareholders who pay tax on their personal returns. However, S corporations may owe corporate-level taxes in limited situations: built-in gains tax (when converting from C corporation), excess net passive income tax (when the S corporation has C corporation earnings and profits), and investment credit recapture tax.
7. What happens if I discover errors after filing?
File an amended Form 1120-S by completing a new form, checking box H(4) for "Amended Return," and attaching a detailed explanation of all changes. If errors affected shareholder K-1 forms, issue amended K-1s to those shareholders with the "Amended K-1" box checked. Shareholders may then need to amend their personal returns using Form 1040-X.
Sources:
This summary provides general guidance for educational purposes. For specific tax advice regarding your situation, consult a qualified tax professional or CPA.
