Form 1120-S Tax Year 2020: IRS-Accurate Filing Checklist
Form 1120-S for 2020 requires reporting of Families First Coronavirus Response Act payroll tax credits for qualified sick and family leave wages, CARES Act employee retention credit eligibility, and introduces Schedule K-1 Items G (shareholder share count) and H (shareholder loans) for enhanced IRS tracking of basis and allocations. Pass-through loss deduction limitations under Section 465 at-risk rules and Section 469 passive activity limitations remain in effect, determining loss deductibility for shareholders.
Year-Specific Tax Programs Affecting 2020
Eligible S corporations with fewer than 500 employees may claim the FFCRA payroll credit for qualified sick leave or family leave wages, with amounts reportable as income on Form 1120-S, line 5, provided expenses were incurred during the allowable period beginning in 2020 and ending March 31, 2021. S corporations that retained employees despite economic hardship related to COVID-19 may claim the CARES Act employee retention credit for qualified wages, with such amounts reducing the deduction for wages on lines 7 and 8, provided such wages are not claimed for any other credit.
For tax years ending after December 31, 2019, S corporations that made specific cash charitable contributions in 2020 or 2021 must use Code G of Schedule K-1, box 12, to report such contributions, subject to certain percentage limitations as outlined in IRS Publication 526.
Comprehensive Ten-Step Filing Process
Step 1: Verify S Corporation Election Status
Do not file Form 1120-S unless the corporation has filed Form 2553 (Election by a Small Business Corporation) and the IRS has accepted the election. If making the S election for the first time in 2020 or for tax year 2020, beginning in an earlier year, Form 2553 must be filed promptly, in accordance with the election deadline rule, or relief under Rev. Proc. 2013-30 must be sought. If filing an amended return, check box H(4) on page 1 of Form 1120-S and attach a statement identifying the line number, corrected amount, and explanation for each change.
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.
Step 2: Gather and Organize Income Documentation
Collect all Forms W-2 issued to officers and employees, Forms 1099-NEC and 1099-MISC for contractor payments, Forms 1099-INT for interest income, Forms 1099-DIV for dividend income, Forms 1099-R for retirement distributions, Forms K-1 from partnerships or other S corporations in which the corporation holds a pass-through interest, and Forms 1098-T related to qualified education expenses if applicable. Retain documentation for all FFCRA payroll credits claimed on line 5 and all CARES Act employee retention credits that reduced wage deductions on lines 7 and 8, including Form 941-X or Form 943-X if credits were initially claimed on employment tax returns.
Step 3: Complete Schedule B (Other Information)
Enter the S election effective date in item A. Enter the business activity code and product or service description in item B. Indicate whether an S election is being made beginning with the current tax year in item G (answer only if applicable). Enter the total assets at the end of the year in item F. Answer all applicable yes/no questions regarding restricted stock, outstanding options, related-party interests, disregarded entities, trusts, estates, or nominees held as shareholders, and any Forms 8918 or 8371 required. If the corporation answers yes to question 3 regarding disregarded entities, trusts, estates, or nominees, attach Schedule B-1 (Information on Certain Shareholders of an S Corporation).
Step 4: Calculate Gross Income and Ordinary Business Income
On line 1a, enter total gross receipts or sales. On line 1b, enter returns and allowances. On line 1c, enter the balance (line 1a minus line 1b). On line 2, enter the cost of goods sold and attach Form 1125-A if receipts are $500,000 or more and the corporation carries inventory. On line 3, subtract line 2 from line 1c to calculate gross profit. On line 4, enter the net gain or loss from Form 4797 and attach Form 4797 if applicable. On line 5, enter other income or loss, including FFCRA payroll credits for qualified sick leave or family leave, reported as income with no double tax benefit allowed.
Do not report employee retention credit on line 5, as this credit reduces wage deductions on lines 7 and 8. On line 6, add lines 3 through 5 to determine total income. On line 21, subtract total deductions (line 20) from total income (line 6) to calculate ordinary business income or loss. This amount is reported on Schedule K, line 1.
Step 5: Deduct Reasonable Officer Compensation
On line 7, enter the total compensation of all officers determined to be reasonable for services rendered to the corporation. Distributions and other payments to corporate officers in excess of reasonable compensation must be treated as wages subject to employment taxes. If total receipts for the tax year are $500,000 or more (determined as gross receipts plus other income), complete Form 1125-E (Compensation of Officers) and attach it to Form 1120-S, then enter the amount from Form 1125-E, line 4, on Form 1120-S, line 7. On line 8, enter total salaries and wages paid to employees other than officers, reduced by any employment credits claimed and by the nonrefundable and refundable portions of the employee retention credit from the CARES Act.
Step 6: Report Itemized Business Deductions
On line 9, enter repairs and maintenance. On line 10, enter undesirable debts using the reserve method or specific write-off as applicable. On line 11, enter business rent or lease expenses. If operating from home with a dedicated, exclusive business space, you can claim a home office deduction of up to $5 per square foot, limited to 300 square feet, or $1,500 per year using the simplified method. On line 13, enter interest expense (not investment interest). On line 14, enter depreciation claimed neither on Form 1125-A nor Form 4562, and attach Form 4562 if depreciation applies.
On line 15, enter “depletion” other than “oil and gas depletion.” On line 18, enter employee benefit programs, including health insurance for shareholders owning more than 2 percent of stock. On line 19, include other deductions and attach the statement if necessary. On line 20, sum lines 7 through 19 to calculate total deductions.
Step 7: Report Capital Gains and Losses
On Schedule D (Form 1120-S), Part I, report short-term capital gains and losses. On Part II, report long-term capital gains and losses, collectibles gain (28%), and unrecaptured Section 1250 gain. Complete Schedule D and Form 8949 as applicable. Capital gains are reported on Schedule K and passed through to shareholders on Schedule K-1. If the corporation was a C corporation before electing S status or acquired assets with basis determined by reference to a C corporation asset, and the corporation has net unrealized built-in gain exceeding net recognized built-in gain from prior years, enter that amount on Schedule B, line 8, and attach Form 8949 and supporting statements showing the calculation.
Step 8: Complete Schedule K and Prepare Schedule K-1 for Each Shareholder
On Schedule K, line 1, enter ordinary business income or loss from line 21 of Form 1120-S. On line 2, enter net rental real estate income or loss. On lines 3 through 10, enter all separately stated items of income, gain, loss, and deduction, including interest income, dividends, royalties, capital gains, Section 1231 gains, and other income. On Schedule K, line 11, enter the Section 179 deduction. On line 12a, enter cash charitable contributions with separate codes A through G per type, including Code G for specific 2020 cash contributions. On line 18, reconcile the total from lines 1 through 10 with Schedule M-1, line 8.
For each shareholder, prepare Schedule K-1 (Form 1120-S) that allocates the shareholder’s pro rata share of income and deductions according to their ownership percentage and stock ownership period. New for 2020: In Schedule K-1, Item G, report the shareholder’s number of shares at the beginning and end of the tax year. In Item H, report the number of shares held by shareholders at the beginning and end of the year (reconcile to Schedule L, line 19, total).
Step 9: Complete Schedule L and Schedule M Reconciliations
If total receipts for the tax year and total assets at the end of the year are less than $250,000, Schedules L and M-1 are not required. If the threshold is met or exceeded, complete Schedule L by reporting asset, liability, and equity accounts at the beginning and end of the year in columns (a) and (b).
On Schedule M-1, reconcile book income to tax income by adding back nondeductible expenses—such as inevitable depreciation, travel and entertainment, and tax-exempt income—and subtracting income recorded on the books but not reported on the return.
On Schedule M-2, if the corporation does not distribute all taxable income to shareholders, track the Accumulated Adjustments Account (AAA), shareholders’ undistributed taxable income previously taxed, accumulated earnings and profits, and the other adjustments account for basis calculations. Distributions cannot reduce AAA below zero unless AAA already has a negative balance; in that case, distributions are limited to the beginning balance if it is positive.
Step 10: Sign, Date, and File with Required Attachments
The return must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or other authorized corporate officer. Attach schedules and forms in this order: Schedule N (if applicable), Schedule D, Form 8949 (if applicable), Form 4797, Form 4562, Form 1125-A, Form 1125-E, Form 8825 (if applicable), Form 6252 (if applicable), Form 3468, Form 8941, Form 4136, Form 8996, all other schedules in alphabetical order, and all other forms in numerical order.
For calendar year 2020 corporations, the filing deadline is March 15, 2021. If an extension is needed, file Form 7004 by the regular due date to obtain an automatic six-month extension to September 15, 2021. See the IRS Where to File page for Form 1120-S to determine the correct mailing address based on principal business location and total assets.
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.
Form-Specific Limitations and Restrictions
S corporations must pay reasonable compensation to shareholder-employees in return for services they renderd. Amounts in excess of reasonable compensation may be reclassified by the IRS as wages subject to employment taxes under Section 1366(e).
An S corporation generally cannot use the cash method of accounting if it qualifies as a tax shelter under Section 448(d)(3). Permissible methods are cash, accrual, or any method authorized by the Internal Revenue Code that clearly reflects income.
Nonresident alien shareholders are not eligible as S corporation shareholders (unlike grantor trusts and qualified subchapter S trusts, which may include nonresident alien beneficiaries effective with the Tax Cuts and Jobs Act). Distributions reported on Schedule K, line 16d, and Schedule K-1, line 16, code D, must not exceed the amount of the beginning Accumulated Adjustments: account balance plus the current year’s ordinary income and other additions. Excess distributions may result in capital gains for shareholders.
Notable 2020 Changes from Prior Years
Schedule K-1, Item G introduces the report of the number of shares held by shareholders. Guidance did not explicitly require disclosure of the shareholder share count on the K-1. Current 2020 instructions require reporting the shareholder’s number of shares or equivalent ownership units at the beginning and end of the S corporation’s tax year, allowing the IRS to verify per-share allocations and identify dispositions.
Schedule K-1, Item H, introduces the reporting of loans from shareholders. Prior guidance addressed shareholder loans in basis calculations but did not require line-by-line reporting of loan balances on each K-1. Current 2020 instructions require reporting the amount of debt owed directly by the corporation to each shareholder at the beginning and end of the year, reconcilable to Schedule L, line 19, to enable IRS verification of the shareholder basis limitation under Sections 1366–1367.
Schedule K-1, Line 12, Code G adds reporting for specific cash contributions made in 2020. Before 2020, charitable contributions were reported without distinguishing between donations eligible for the temporary 100% AGI limitation. Current 2020 instructions use Code G to separately report specific philanthropic contributions made in calendar year 2020 or 2021 that are eligible for the temporary increase to 100% of adjusted gross income, allowing shareholders to claim the enhanced deduction on their individual returns per Section 170(b)(1)(B) as amended by the CARES Act.
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.
Conclusion
Completing the 2020 Form 1120-S requires careful attention to COVID-19-related tax provisions, including FFCRA payroll credits and CARES Act employee retention credits, enhanced shareholder reporting requirements introduced in Items G and H of Schedule K-1, and proper allocation of income, deductions, and credits to shareholders through accurately prepared Schedules K and K-1. Understanding these year-specific requirements ensures compliance with all 2020 filing obligations and proper communication of tax attributes to shareholders.
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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.
