IRS Form 1120-S (2016): S Corporation Tax Return

What IRS Form 1120-S (2016) Is For

IRS Form 1120-S (2016) is the official income tax return used by a domestic corporation that has elected to be treated as an S corporation. This form reports the corporation's income, deductions, credits, and taxable income for the tax year. It allows the IRS to verify compliance with federal income tax requirements while documenting corporate tax reporting and pass-through taxation.

An S corporation passes its income, losses, deductions, and tax credits directly to its corporation shareholders through Schedule K-1. This helps avoid double taxation, as the corporation’s income is reported on each shareholder’s personal income tax return. The corporation must file Form 2553 to elect S corporation status and follow IRS requirements to maintain eligibility, such as having only one class of stock and qualifying shareholders.

Corporations with missing or prior-year compliance issues should review any unfiled 1120-S S corporation returns to avoid penalties or IRS notices.

When You’d Use Form 1120-S for 2016 (Late or Amended Filing)

You would file a 2016 Form 1120-S if your corporation failed to submit its annual tax return by the original March 15, 2017, deadline or the extended deadline. Late or amended filings are common when corporations receive IRS notices about missing forms, unreported income, or tax discrepancies. An amended return may be required when errors in deductions, capital gains, or net income calculations are discovered.

For 2016, the penalty was $89 per shareholder per month, with a cap of 12 months. These penalties applied even if the corporation had zero taxable income. Late filing can also impact the accuracy of financial reporting and retained earnings, particularly when corrections to Schedule K or Schedule L are required. If you are unsure which forms or corrections apply when amending older filings, the IRS Form Help Center provides guidance on using the proper schedules and tax-year forms.

Key Rules Specific to 2016

• Reasonable Compensation Requirement: S corporations with shareholder-employees were required to pay reasonable compensation, subject to payroll and income tax withholding.
  
  
• Accumulated Adjustments Account (AAA): This tracked the corporation’s retained earnings and unappropriated retained earnings available for shareholder distributions.
  
  
• Passive Activity Rules: These applied at the shareholder level to determine allowable losses.
  
  
• Penalty Amount: Under Section 6699, penalties were $89 per shareholder per month, higher than prior years but lower than today’s rates.

Businesses struggling with penalties or payroll-related compliance issues may find value in exploring business tax relief programs that support corporations dealing with IRS requirements.

Step-by-Step (High Level)

• Gather Transcripts: Obtain IRS account transcripts to confirm what income items, payments, or penalties are recorded under your corporation’s file.
  
  
• Use the Correct Form: File the exact 2016 IRS Form 1120-S version. Not every corporation can use newer forms for prior tax years.
  
  
• Prepare Schedules: Complete Schedule K, Schedule L, Schedule M-1, and Schedule M-2 for book income, deductions, and reconciliation process details.
  
  
• Attach Forms: Include necessary attachments such as Form 1125-A for cost of goods sold or Schedule O for corporate tax reporting adjustments.
  
  
• File and Distribute: Send the return to the appropriate IRS center and distribute the K-1s to the corporation's shareholders for their personal reporting.
  
  
• Keep Records: Maintain copies of financial statements, accounting workpapers, and proof of filing for at least three years for audit and tax purposes.

If your corporation owes a balance after completing the return, you may apply for an IRS payment plan to manage the amount over time while avoiding enforced collection actions:

Common Mistakes and How to Avoid Them

• Unpaid Compensation: Pay shareholder-employees a reasonable salary that reflects the fair market value of their work to prevent the IRS from reclassifying distributions as wages.
• AAA Miscalculations: Reconcile the Accumulated Adjustments Account annually and maintain detailed records of all income, losses, and distributions to ensure accuracy.
• Incorrect or Missing K-1s: Verify ownership percentages and confirm that each shareholder receives a complete and accurate Schedule K-1 to prevent delays or IRS notices.
• Form Errors: Use the correct tax form and confirm the filing year before submission to avoid processing delays or rejected returns.
• Poor Documentation: Maintain organized, detailed financial records and supporting documents for all related-party transactions to ensure accurate income reconciliation.

Late or incorrect filings may lead to notices or enforcement activity, so reviewing the IRS collection process can help you understand potential next steps and how the IRS may respond.

What Happens After You File

The IRS generally processes 1120-S filings within six to eight weeks, depending on the tax year and volume of returns. Late or amended submissions may take longer to process. Expect correspondence from the IRS regarding penalties, adjustments, or missing tax schedules. Payments for any tax due can be made online, by mail, or through financial institutions. If unable to pay in full, use Form 9465 to request a payment plan. Filing a complete and accurate tax return helps avoid double taxation issues and protects shareholders’ income tax positions.

FAQs

What is IRS Form 1120-S (2016) used for?

IRS Form 1120-S (2016) reports an S corporation’s income, deductions, and tax credits for the tax year. It documents business income and tax reporting for domestic corporations that elect to be taxed as pass-through entities. The corporation files this income tax return annually to ensure compliance with IRS requirements and to fulfill its shareholder reporting obligations.

How does net income affect shareholders of an S corporation?

Net income flows through to each shareholder’s individual return via Schedule K-1. The S corp itself generally does not pay tax; instead, shareholders pay tax on their allocated income, deductions, and capital gains. This structure helps avoid double taxation while maintaining accurate accounting of corporate income and retained earnings.

What income tax rules apply to S corporations?

S corporations must report all taxable income and deductions on Form 1120-S and provide K-1s to shareholders. Certain entities, such as disregarded entities or partnerships, are not eligible to elect S corporation status. The IRS requires accurate reconciliation of income items and adjustments between book income and tax income on Schedule M-1.

How is Schedule K used in corporate tax reporting?

Schedule K summarizes the corporation’s income, deductions, and tax credits for the year. It ensures shareholders receive accurate information for their income tax return. It also helps reconcile book income with tax income, ensuring transparency in financial reporting and alignment with federal income tax regulations.

What role does retained earnings play in a corporation’s financial reporting?

Retained earnings reflect accumulated profits after deductions, expenses, and dividends are paid. For an S corporation, retained earnings are tracked through the Accumulated Adjustments Account. Proper accounting of unappropriated retained earnings ensures accurate corporate tax reporting, fair shareholder distributions, and compliance with IRS and financial reporting standards.

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