What Form 1120-S Is For

Form 1120-S is the annual tax return that S corporations must file with the IRS to report their income, gains, losses, deductions, and credits for the tax year. Unlike regular corporations (C corporations) that pay corporate income tax, S corporations are "pass-through" entities—meaning the corporation itself typically doesn't pay federal income tax. Instead, the company's profits and losses pass through to the shareholders, who report their share on their personal tax returns.

Think of Form 1120-S as an information return that tells the IRS what happened financially in your S corporation during the year. The form itself has five pages and includes several schedules. The most important component for shareholders is Schedule K-1, which the corporation must prepare for each shareholder showing their individual share of income, deductions, and credits. Each shareholder uses their Schedule K-1 to complete their personal tax return (Form 1040).

You must file Form 1120-S only if your corporation has filed Form 2553 (Election by a Small Business Corporation) and the IRS has accepted this election. If you haven't received confirmation of your S corporation election within two months of filing Form 2553, you should call the IRS at 1-800-829-4933 to verify the status. IRS.gov

When You’d Use Form 1120-S (Including Late and Amended Filings)

Regular Filing Deadline

For calendar year S corporations (those operating January 1 through December 31), Form 1120-S for tax year 2013 was due on March 17, 2014 (since March 15, 2014, fell on a Saturday). Generally, the return is due by the 15th day of the 3rd month after the end of the corporation's tax year. For fiscal year corporations, the deadline follows the same 3rd-month-15th-day rule from your year-end date.

Extensions

If you need more time, you can file Form 7004 (Application for Automatic Extension of Time to File) by the original due date to get an automatic 6-month extension. This extends your time to file the return but does not extend the time to pay any taxes due. IRS.gov

Late Filing

Filing late can be costly. If your return is late and the corporation owes no tax, the penalty is $195 per month (or part of a month, up to 12 months) multiplied by the total number of shareholders during the tax year. If tax is due, the penalty is $195 per month per shareholder plus 5% of the unpaid tax for each month late, up to 25% of the unpaid tax. The IRS may waive penalties if you can demonstrate reasonable cause for the delay.

Amended Returns

To correct a previously filed Form 1120-S, file an amended return by checking box H(4) on page 1 and attaching a statement explaining each change. If Schedule K-1 information was incorrect for any shareholder, you must also file amended Schedule K-1s for those shareholders and provide them with corrected copies. Check the "Amended K-1" box at the top of each corrected schedule. IRS.gov

Key Rules and Requirements for 2013

Several important rules applied to Form 1120-S in 2013:

• Who Must File: Your corporation must file if it elected S corporation status by filing Form 2553 and the IRS accepted that election. The S corporation election stays in effect until it terminates (either voluntarily through revocation or involuntarily through disqualification).
• New Form Requirement: For 2013, the IRS introduced Form 1125-E (Compensation of Officers), which S corporations with total receipts of $500,000 or more must complete if they deduct compensation for officers. This was a new requirement starting with tax years beginning after 2012. IRS.gov
• Schedule B-1: If you check "Yes" to question 3 on Schedule B (regarding certain types of shareholders), you must complete the new Schedule B-1 (Information on Certain Shareholders of an S Corporation), which provides additional detail about shareholder ownership.
• Schedule K-1 Changes: For 2013, a new code "U" was added to box 17 of Schedule K-1 to report information related to the net investment income tax (a 3.8% tax on investment income for high-income taxpayers introduced under the Affordable Care Act). The previous code U (Other information) became code V.
• Electronic Filing: Corporations with total assets of $10 million or more that file at least 250 returns annually were required to e-file Form 1120-S in 2013, though waivers were available. IRS.gov
• Estimated Tax Payments: If your S corporation expects to owe $500 or more in built-in gains tax, excess net passive income tax, or investment credit recapture tax, you must make quarterly estimated tax payments using EFTPS (Electronic Federal Tax Payment System). IRS.gov

Step-by-Step (High Level)

Step 1: Gather Your Records

Collect all financial records including income statements, balance sheets, bank statements, receipts for deductible expenses, depreciation schedules, and records of shareholder basis and distributions.

Step 2: Complete the Income Section (Lines 1-6)

Report gross receipts or sales, returns and allowances, cost of goods sold (using Form 1125-A if you sell inventory), and other income sources like interest, dividends, and capital gains.

Step 3: Report Deductions (Lines 7-19)

List ordinary business expenses including compensation of officers (Form 1125-E if required), salaries and wages, repairs, rent, taxes, interest, depreciation, and other deductions. Calculate ordinary business income (loss).

Step 4: Calculate Any Corporate-Level Taxes (Lines 22a-22c)

Most S corporations don't pay tax at the corporate level, but some may owe excess net passive income tax, built-in gains tax, or investment credit recapture tax.

Step 5: Complete Schedule B

Answer questions about accounting methods, business activities, ownership changes, and various compliance questions. Complete Schedule B-1 if applicable.

Step 6: Complete Schedule K

This summarizes all income, deductions, credits, and other items that pass through to shareholders. This is the master schedule that aggregates what all shareholders will receive.

Step 7: Prepare Schedule K-1 for Each Shareholder

Every shareholder must receive a Schedule K-1 showing their proportionate share of the items from Schedule K. This is what shareholders use on their personal returns.

Step 8: Complete Balance Sheet and Reconciliation Schedules

Fill out Schedule L (balance sheet), Schedule M-1 (reconciliation of income per books with income per return), and Schedule M-2 (analysis of accumulated adjustments account). These schedules reconcile book income with tax income. IRS.gov

Step 9: Sign, Assemble, and File

An authorized corporate officer must sign the return. Attach all schedules in order, make copies for your records, and file by the deadline.

Common Mistakes and How to Avoid Them

Mistake #1: Missing the Filing Deadline

Even if no tax is due, late filing triggers substantial per-shareholder, per-month penalties. Solution: Mark your calendar for the filing deadline, and file Form 7004 for an extension if you need more time. Consider setting a reminder for one month before the deadline.

Mistake #2: Incorrect or Missing Schedule K-1s

Failing to provide accurate Schedule K-1s to shareholders or missing the deadline costs $100 per K-1 (or $250 if intentionally disregarded). Solution: Prepare K-1s simultaneously with Form 1120-S, double-check all calculations, and distribute them to shareholders by the filing deadline. IRS.gov

Mistake #3: Mismatching Schedule K and Schedule K-1 Totals

The sum of all shareholders' Schedule K-1s must equal Schedule K totals. Solution: Use tax software or spreadsheets to ensure allocations match ownership percentages, and review totals before filing.

Mistake #4: Forgetting Basis Calculations

Shareholders must track their stock basis to determine if distributions are taxable and if losses are deductible. The corporation should help shareholders understand their basis. Solution: Maintain detailed records of capital contributions, loans to the corporation, income allocations, distributions, and losses for each shareholder throughout the year.

Mistake #5: Improper Officer Compensation Reporting

For 2013, corporations with receipts of $500,000+ must file Form 1125-E. Solution: Review your gross receipts early in tax prep to determine if Form 1125-E is required, and maintain detailed officer compensation records.

Mistake #6: Not Maintaining S Corporation Eligibility

Having more than 100 shareholders, wrong types of shareholders (like partnerships or non-resident aliens), or more than one class of stock terminates S status automatically. Solution: Review S corporation eligibility requirements annually, especially before issuing new stock or adding shareholders. IRS.gov

Mistake #7: Incomplete Reconciliation Schedules

Leaving Schedule M-1 or Schedule M-2 blank or incomplete raises red flags. Solution: Work with a bookkeeper or accountant to ensure your books reconcile properly with your tax return, and complete all required schedules.

What Happens After You File

Processing Timeline

The IRS processes Form 1120-S returns and matches the information with shareholders' personal returns. Processing typically takes several weeks to a few months. The IRS may contact you if they identify discrepancies, mathematical errors, or missing information.

Shareholder Responsibilities

Once you provide shareholders with their Schedule K-1s, they must report their share of income, deductions, and credits on their personal tax returns (Form 1040). Shareholders report pass-through items according to the K-1 instructions—ordinary business income goes on Schedule E, while other items may go on various schedules and forms.

IRS Notices

You may receive notices if there are issues with your return. Common notices include requests for additional information, notices of mathematical errors, or notifications about missing forms or schedules. Respond promptly to any IRS correspondence—most notices have specific timeframes for response (typically 30-60 days).

Audit Risk

While S corporations face lower audit rates than C corporations, certain factors increase audit risk: large losses year after year, substantial compensation or distribution discrepancies, passive activity issues, or unreported income. Keep all supporting documentation for at least three years (longer for certain items like basis calculations). IRS.gov

State Filing Requirements

Filing a federal Form 1120-S doesn't fulfill state requirements. Most states require separate S corporation returns or information filings. Check with your state tax authority about deadlines and requirements, which may differ from federal rules.

Record Retention

Maintain copies of filed returns, supporting schedules, financial statements, and all documentation supporting income, deductions, and credits. The IRS recommends keeping records for at least three years from the return due date or filing date (whichever is later), but longer retention periods apply for certain situations.

FAQs

Q1: Does the S corporation itself pay income tax?

Generally, no. S corporations are pass-through entities, meaning profits and losses pass through to shareholders who report them on their personal returns. However, some S corporations may owe corporate-level taxes including built-in gains tax (if converting from a C corporation), excess net passive income tax (if the corporation has accumulated earnings and profits from C corporation years and excessive passive income), or investment credit recapture tax. IRS.gov

Q2: What if I didn't receive my Schedule K-1 or believe it contains errors?

Contact the S corporation immediately and request a corrected K-1. Don't file your personal tax return with estimated numbers. If the corporation filed an error, it must file an amended Form 1120-S and provide corrected K-1s to affected shareholders. If the corporation is unresponsive and you're approaching the tax deadline, consider filing a personal extension (Form 4868) while you resolve the issue. IRS.gov

Q3: Can I file Form 1120-S if my S corporation election is still pending?

No. You must wait until the IRS accepts your Form 2553 election before filing Form 1120-S. If you filed Form 2553 but haven't received confirmation within 2 months (5 months if requesting a letter ruling), call the IRS at 1-800-829-4933. Until your S election is approved, file Form 1120 (regular corporation return) instead. IRS.gov

Q4: What happens if I miss the filing deadline?

File as soon as possible to minimize penalties. The late-filing penalty is $195 per month per shareholder (up to 12 months) if no tax is due. If tax is due, add 5% of unpaid tax per month (up to 25%) to the per-shareholder penalty. You may request penalty abatement by demonstrating reasonable cause for the delay. Attach a written explanation when you file the late return. IRS.gov

Q5: Do I need to complete Schedule M-1 and M-2?

Yes, if your corporation meets certain thresholds. Schedule M-1 reconciles book income with tax income and is typically required. Schedule M-2 shows the accumulated adjustments account (AAA) and is crucial for tracking tax-free distribution capacity. Even if not legally required, completing these schedules helps maintain proper records and can prevent IRS questions about distributions and retained earnings.

Q6: Can S corporation losses offset my other income?

Maybe. Shareholders can generally deduct their share of S corporation losses on their personal returns, but three major limitations apply: (1) Basis limitation—you can only deduct losses up to your stock and debt basis in the corporation; (2) At-risk limitation—losses are limited to amounts you have "at risk" in the activity; and (3) Passive activity limitation—if you don't materially participate in the business, losses may only offset passive income. Consult Schedule K-1 shareholder instructions and consider professional tax advice for complex loss situations. IRS.gov

Q7: How long does my S corporation election last?

Once approved, your S election remains in effect indefinitely unless: (1) shareholders holding more than 50% of shares voluntarily revoke it; (2) the corporation no longer meets S corporation requirements (wrong number or type of shareholders, multiple classes of stock); or (3) the corporation has accumulated earnings from C corporation years and derives more than 25% of gross receipts from passive investment income for three consecutive years. IRS.gov

Additional Resources

Form 1120-S and Instructions: IRS.gov/Form1120S
Shareholder's Instructions for Schedule K-1: IRS.gov/instructions/i1120ssk
S Corporation Information: IRS.gov/S-Corporations

This guide provides general information about Form 1120-S for tax year 2013 based on official IRS sources. Tax situations vary, and you should consult with a qualified tax professional for advice specific to your circumstances.