Form 1120S (U.S. Income Tax Return for an S Corporation)—2018 Tax Year Checklist
Form 1120S reports income, gains, losses, deductions, credits, and other information of a domestic S corporation operating as a pass-through entity. The 2018 form applies uniquely due to Tax Cuts and Jobs Act provisions affecting pass-through entities, including the qualified business income deduction under Section 199A allowing shareholders to deduct up to 20 percent of qualified business income, new business interest limitation rules under Section 163(j) requiring mandatory Form 8990 filing for certain corporations, elimination of the domestic production activities deduction previously available through 2017, and increased Section 179 expensing limits to $1,000,000 with phaseout beginning at $2,500,000 of property placed in service.
Year-Specific Programs and Tax Law Changes
For tax years beginning after December 31, 2017, individual, estate, and trust shareholders of S corporations may claim a deduction of up to 20 percent of qualified business income, subject to limitations based on W-2 wages paid and unadjusted basis of qualified property, with information reported through Schedule K-1. Eligible employers with written policies providing paid family and medical leave may claim an IRC Section 45S credit equal to 12.5 percent to 25 percent of wages paid to qualifying employees earning less than the annual threshold for leave taken after December 31, 2017. The domestic production activities deduction, which provided a 9 percent deduction through 2017, is repealed for tax years beginning after December 31, 2017, and does not apply to 2018 returns filed in 2018.
Comprehensive Ten-Step Preparation Process
Step 1: Verify S Corporation Election Status
Confirm that Form 2553 (Election by a Small Business Corporation) has been filed and accepted by the IRS before filing Form 1120S. The election must be filed by the 15th day of the 3rd month after the beginning of the tax year, or during the preceding tax year, to be effective for the current tax year. Attach a copy of the IRS acceptance letter to your documentation file. Do not file Form 1120S for any tax year before the election year takes effect, as corporations without valid S elections must file Form 1120 as C corporations.
Step 2: Gather and Organize Required Documents
Collect comprehensive documentation for tax year 2018 including the Employer Identification Number, articles of incorporation or bylaws with all amendments, IRS acceptance letter of S election, all Forms W-2 issued to officers and employees, all Forms 1099 received including 1099-B, 1099-DIV, 1099-INT, 1099-K, and 1099-MISC, Schedule K-1 forms received from any lower-tier pass-through entities, bank and credit card statements, payroll records documenting federal unemployment and Social Security taxes, prior year Form 1120S return, and all Forms 1099 and W-2 issued by the S corporation to shareholders and vendors.
Step 3: Calculate Three-Year Average Gross Receipts Under Section 448©
Determine the corporation’s aggregate average annual gross receipts for the three consecutive tax years preceding 2018 using the Section 448© definition. Suppose the average does not exceed $25 million. In that case, the corporation qualifies as a small business taxpayer. It may use the cash method of accounting, be exempt from uniform capitalization rules under Section 263A, use simplified inventory methods, and avoid the business interest limitation. Document this calculation as it determines eligibility for multiple 2018 provisions.
Step 4: File Form 8990 if Business Interest Limitation Applies
For tax years beginning in 2018, every taxpayer who deducts business interest must file Form 8990 unless an exception applies. The corporation qualifies for an exception if average annual gross receipts for the three preceding years do not exceed $25 million. The corporation is not a tax shelter, OR the corporation only has business interest expense from an electing real property trade or business, an electing farming business, or certain utility businesses under Section 163(j)(7). If neither exception applies, calculate the limitation on business interest expense, complete Form 8990, and attach it to Form 1120S.
Step 5: Determine Schedule L and Schedule M-1 Filing Requirements
Review Schedule B, question 11 of Form 1120S. If total receipts for the tax year were less than $250,000 AND total assets at the end of the tax year were less than $250,000, the corporation is NOT required to complete Schedule L (Balance Sheet per Books) and Schedule M-1 (Reconciliation of Income/Loss per Books). If either threshold is exceeded, complete and attach Schedule L and Schedule M-1, ensuring the balance sheet reflects the corporation’s books and records as of the first and last day of 2018. If total receipts or total assets exceed $250,000, enter “No” to Schedule B, question 11.
Step 6: File Schedule M-3 if Total Assets Exceed $10 Million
If total assets reported on Schedule L, line 15, column (d), equal or exceed $10 million, the corporation must complete and file Schedule M-3 (Net Income Reconciliation for S Corporations With Total Assets of $10 Million or More) instead of Schedule M-1. Schedule M-3 Parts I, II, and III reconcile book income to taxable income and explain all adjustments. If Schedule M-3 is filed, do not complete or attach Schedule M-1.
Step 7: Calculate and Report Section 199A Qualified Business Income
Report the S corporation’s ordinary business income or loss on Schedule K, line 1a. Shareholders will use this information to calculate their individual Section 199A deduction on their personal returns. Separately state on each shareholder’s Schedule K-1 the corporation’s Section 199A W-2 wages paid in box 13, code V, and the unadjusted basis of qualified property in box 13, code W, as these limit the QBI deduction for certain higher-income shareholders. Ensure all required codes are used correctly so shareholders can properly apply Section 199A limitations.
Step 8: Report Section 179 Expense Deduction
For property placed in service in 2018, the maximum Section 179 expense deduction is $1,000,000, reduced by the amount by which the cost of Section 179 property exceeds $2,500,000. Attach Form 4562 (Depreciation and Amortization) to report the Section 179 deduction. Enter the deduction amount on Schedule K, line 11, and allocate to each shareholder’s Schedule K-1, box 12, with the appropriate code. Do not deduct oil and gas depletion on line 15 or claim double depreciation on assets for which Section 179 was elected.
Step 9: Report Paid Family and Medical Leave Wages for IRC 45S Credit
If the corporation provided written paid family and medical leave to qualifying employees in 2018 and meets all IRC Section 45S requirements, calculate the credit as 12.5 percent to 25 percent of wages paid to employees earning less than the annual threshold who took qualifying leave. Report on Form 8994 (Employer Credit for Paid Family and Medical Leave), attach to Form 1120S, and enter the credit amount on Schedule K, line 13g for other credits.
Step 10: Identify Non-Deductible Entertainment and Membership Expenses
For amounts incurred or paid after December 31, 2017, no deduction is allowed for entertainment expenses, membership dues, or facilities used in connection with entertainment. Review all business expenses claimed on lines 7 through 19. If any entertainment, club, or facility expenses are included for 2018, reclassify them as non-deductible and remove them from deduction totals. Report non-deductible expenses on Schedule K, line 16c, and allocate to each shareholder’s Schedule K-1, box 16c. Ensure Schedule M-1, line 5, reconciles any book income recorded but not included on the tax return due to non-deductible entertainment costs.
Schedule and Attachment Requirements
Attach schedules and forms to Form 1120S in prescribed order: Schedule N if foreign operations are reported, Form 8825 for rental real estate income, Form 8050 for direct deposit election, Form 1125-A for cost of goods sold, Form 4136 for fuel credit, Form 8941 for small employer health insurance credit, additional schedules alphabetically, additional forms numerically, Form 8990 if business interest limitation applies, and all other required forms including Form 4562 for depreciation, Form 8994 for IRC 45S credit, and Form 8949 for capital gains.
Complete Schedule K-1 for each shareholder who owned stock at any time during the tax year, providing each shareholder a copy by March 15, 2019, or the extended due date. Do not enter “See Attached” or “Available Upon Request” instead of completing required entry spaces. If additional space is needed, attach separate sheets using the same size and format as printed forms.
Form-Specific Limitations and Restrictions
An S corporation may not claim any deduction for tax credits, as all credits pass through to shareholders on Schedule K-1 for individual determination of allowability. The corporation itself does not pay federal income tax; instead, all ordinary business income or loss, capital gains or losses, and other separately stated items are passed through to shareholders pro rata based on their stock ownership.
An S corporation does not permit nonresident aliens to be its shareholders. If any person becomes a nonresident shareholder during the tax year, the S election terminates on the date of the violation. The corporation may not have more than 100 shareholders, and all shareholders must be U.S. citizens, U.S. residents, estates, certain trusts, or tax-exempt organizations. Violation of these requirements terminates the S election.
Estimated tax payment requirements apply if the corporation has built-in gains tax, excess net passive income tax, or investment credit recapture tax totaling $500 or more. For tax year 2018, estimated tax payments were due April 15, 2018, June 17, 2018, September 16, 2018, and December 16, 2018. Electronic funds transfer is required for all federal tax deposits via IRS e-pay, online banking, or same-day wire transfer.
Notable 2018 Changes from Prior Years
Schedule B, question 9, introduces new requirements for business interest limitation. Prior years did not apply the Section 163(j) limitation. The 2018 form adds questions determining whether Form 8990 must be filed based on the $25 million small business taxpayer exception and whether the corporation owns a pass-through entity with excess business interest expense.
Schedule K, line 1a, adds language regarding Section 199A pass-through information. In previous years, they simply reported ordinary business income or loss. The 2018 form specifies that shareholders use this amount to compute the Section 199A qualified business income deduction, with separate reporting of W-2 wages and qualified property basis, allowing owners to apply QBI limitations.
Schedule K, line 13g, expands to include IRC Section 45S paid family and medical leave credit available for tax years beginning after December 31, 2017, requiring Form 8994 attachment.
Line 19 for other deductions receives expanded clarification. The 2018 instructions specify that entertainment expenses, membership dues, and facility expenses incurred or paid after December 31, 2017, are not deductible under TCJA restrictions.
Conclusion
The 2018 Form 1120S shows essential updates from the Tax Cuts and Jobs Act, such as the Section 199A qualified business income deduction, a limit on business interest that requires Form 8990 for corporations making over $25 million, the removal of the domestic production activities deduction, and the IRC Section 45S credit for paid family and medical leave. Corporations must verify S election status, calculate three-year average gross receipts, complete appropriate schedules based on thresholds, and report all separately stated items accurately on Schedule K and Schedule K-1 to ensure shareholders receive correct information for Section 199A calculations and other pass-through items.
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This checklist is for educational purposes only and does not constitute tax or legal advice. Always review official IRS instructions and consult a qualified professional for guidance.
