Form 1120-S Filing Checklist and Comprehensive Requirements for Tax Year 2021
Executive Summary
Form 1120-S serves as the U.S. Income Tax Return for S Corporations, demanding meticulous attention to statutory requirements and procedural compliance. For tax year 2021, S corporations must navigate the treatment of Paycheck Protection Program loan forgiveness, newly implemented Schedules K-2 and K-3 for international transactions, depreciation selections, and shareholder basis limitations. This comprehensive checklist addresses every essential element from eligibility determination through final reporting and shareholder communication.
Foundational Requirements and Election Prerequisites
S Corporation Election Status
Before filing Form 1120-S for 2021, verify the following prerequisites:
- Form 2553, Election by a Small Business Corporation, was filed and accepted by the IRS
- The election remains in effect for the 2021 tax year
- Corporation qualifies as a small business corporation (domestic corporation, allowable shareholders only, no more than 100 shareholders, one class of stock)
- No automatic termination occurred during the tax year
If termination occurred during 2021, file Form 1120-S for the short period from the beginning of the year through the termination date. A separate Form 1120 may be required for the remainder of the year as a C corporation.
Tax Year 2021 Specific Programs
Paycheck Protection Program Loan Forgiveness
Revenue Procedure 2021-48 permits S corporations to treat tax-exempt income from PPP loan forgiveness as received or accrued in one of three ways:
- To the extent eligible expenses are paid or incurred
- When the corporation applies for loan forgiveness
- When forgiveness is granted
Critical reporting requirements:
- Tax-exempt PPP forgiveness income increases shareholder basis but does not increase the Accumulated Adjustments Account
- Report PPP forgiveness on Schedule M-2, line 3, column (d)
- Report expenses paid with forgiven PPP loans on Schedule M-2, line 5, column (d)
- This treatment prevents basis and distribution calculation errors
Schedules K-2 and K-3 for International Transactions
Beginning in 2021, Schedules K-2 and K-3 are required for S corporations with items of international tax relevance.
Domestic filing exception: S corporations are excepted from completing these schedules if all conditions are met:
- The corporation had no or limited foreign activity
- All shareholders were notified that they would not receive Schedule K-3 unless requested
- No shareholders submitted requests at least one month before filing
2021 filing note: Full electronic filing capability for these schedules was unavailable until mid-June 2022. Corporations filing electronically before that date submitted Schedules K-2 and K-3 as separate PDF attachments.
Mandatory Ten-Step Filing Checklist
Step 1: Verify Filing Deadline
File Form 1120-S by the 15th day of the third month after the tax year ends. For calendar year 2021, the deadline was March 15, 2022. Request an automatic extension using Form 7004 by the regular due date if you need additional time.
Step 2: Confirm Electronic Filing Requirements
Determine if mandatory e-filing applies. Both conditions must be met:
- Total assets of $10 million or more at tax year end
- Filed at least 250 returns of any type during the calendar year
Corporations meeting both requirements must electronically file Form 1120-S, unless they are granted a waiver.
Step 3: Gather Required Documents
Collect all supporting documentation:
- Original 2021 Form 1040 records
- All W-2s, 1099s, and K-1s received
- PPP loan forgiveness documentation (if applicable)
- International transaction records (if applicable)
- Property acquisition and disposition records
- Form 1125-A supporting documentation
- Prior year returns for comparison
Step 4: Calculate Section 179 Expense Deduction
For the 2021 tax year:
- Maximum Section 179 deduction: $1,050,000
- Phase-out threshold: $2,620,000
- Sport utility vehicle limit: $26,200
Complete Form 4562 if claiming Section 179 deductions or reporting depreciation. The Section 179 deduction is reported on Schedule K-1 and is subject to limitations at both the corporate and shareholder levels.
Step 5: Apply Business Interest Expense Limitation
If the corporation has average annual gross receipts exceeding $26 million for the three preceding tax years and carries business interest expense, complete Form 8990 to apply the Section 163(j) limitation. This provision limits deductible business interest expense and requires detailed tracking of adjusted taxable income.
Step 6: Complete Schedule M-3 if Required
S corporations with total assets equal to or exceeding $10 million at tax year's end must file Schedule M-3 instead of Schedule M-1. Schedule M-3 provides a detailed reconciliation between book-basis and tax-basis financial statements, documenting all temporary and permanent differences.
Step 7: Report PPP Loan Information
If the corporation received PPP loan forgiveness in 2021:
- Report tax-exempt income on Schedule K, line 10, and Schedule K-1, line 16(b)
- Complete Schedule M-2 adjustments in column (d), Other Adjustments Account
- Ensure expenses paid with PPP funds reduce column (d), not the Accumulated Adjustments Account
- Answer “Yes” to Schedule B, Question 12, regarding PPP loans
Step 8: Prepare Schedules K-2 and K-3 if Applicable
Determine whether international tax reporting applies:
- Complete Schedules K-2 and K-3 if the corporation has foreign operations, foreign investments, or other international tax items
- Apply the domestic filing exception if all conditions are satisfied
- Submit as PDF attachments if filing electronically before mid-June 2022
Step 9: Calculate Estimated Tax Payments
S corporations must make estimated tax payments if the total of built-in gains tax, excess net passive income tax, and investment credit recapture tax exceeds $500.
Payment schedule for calendar year corporations:
- First installment: April 18, 2022
- Second installment: June 15, 2022
- Third installment: September 15, 2022
- Fourth installment: December 15, 2022
Make payments using electronic funds transfers through EFTPS or other approved methods.
Step 10: Prepare and Distribute Schedule K-1
Complete Schedule K-1 for each shareholder showing pro-rata share of:
- Ordinary business income or loss
- Separately state income and deduction items
- Tax credits
- Basis adjustments
- International tax information (Schedule K-3 if applicable)
Furnish Schedule K-1 to shareholders by the filing deadline, including extensions. Each Schedule K-1 must include complete information; notations such as “See Attached” or “Available Upon Request” are insufficient.
Assembly and Submission Requirements
Attach all schedules and forms after page 5 of Form 1120-S in the prescribed order:
- Schedule N (Form 1120), Foreign Operations
- Schedule D (Form 1120-S), Capital Gains and Losses
- Form 4797, Sales of Business Property
- Form 8949, Sales and Other Dispositions of Capital Assets
- Supporting forms in numerical order
- Schedules K and K-1
- Schedules K-2 and K-3 (if required)
- Schedule B-1 (if applicable)
- Additional schedules in alphabetical order
- Additional forms in numerical order
Signature requirements: The return must be signed and dated by an authorized corporate officer. If a paid preparer completes the return, they must sign it, provide a copy to the corporation, and complete all required preparer information.
Penalties and Compliance
Late Filing Penalties
For returns with no tax due, the penalty is $210 per month or part of a month (up to a maximum of 12 months), multiplied by the total number of shareholders during any part of the tax year.
Schedule K-1 Penalties
- Standard penalty: $280 per Schedule K-1 for failure to furnish when due or failure to include required information
- Intentional disregard: $570 per Schedule K-1 or 10 percent of aggregate reportable amounts, whichever is greater
Payment and Deposit Requirements
All federal tax deposits must be made using electronic funds transfers. Estimated tax payments not made promptly may result in underpayment penalties, as calculated on Form 2220.
Shareholder Basis Considerations
Shareholders must track their basis annually. Basis increases for income items (including tax-exempt PPP forgiveness) and decreases for distributions and losses. Losses exceeding basis are disallowed for the current year but carry forward indefinitely. Shareholders use Form 7203 to document basis calculations, as corporations are not required to maintain shareholder basis records.
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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.
