Form 1120-S, otherwise known as the U.S. Income Tax Return for an S Corporation, is a tax form used to report the income, deductions, gains, losses, credits, etc., of shareholders of a registered S corporation. They do so to avoid double taxation on the corporate and personal levels.
S corporations are essentially pass-through entities, meaning they pass the income to the owners. Therefore, the business incomes are recorded in the shareholders' personal income tax returns to dodge corporate taxes by paying them at the owners’ tax rates.
What’s the Importance of This Form?
A corporation comprising less than a hundred shareholders may choose not to file corporate and personal taxes, which means a lot to pay in tax returns. Such a corporation can apply to become an S corporation, passing the income to the shareholders. The shareholders will pay the taxes calculated as their personal tax returns, letting the corporation avoid facing corporate tax returns entirely.
Another advantage is that if the company doesn’t have significant inventory at any time, it can follow the cash method for its accounting instead of accrual accounting. This will be much simpler, as the accrual method involves maintaining balance sheets with detailed assets and liabilities.
Who Should File 1120-S?
If a corporation gets elected to be an S corporation after filing Form 2553, then it must file the 1120-S form to show the sales, returns, gross profit or loss, net gain or loss, compensations, debts, etc. The IRS will allocate profit and loss to each shareholder based on the ownership percentage mentioned in the form.
Along with the 1120-S form, the corporation must attach Schedule K-1 to report each shareholder's contribution to the company, facilitating IRS to determine and assess each shareholder’s taxable income.
How are Profits and Losses Allocated Among Shareholders?
Usually, shareholders won’t notice that many changes in profit and loss calculations if this percentage persists. The shareholding percentage will reflect if any shareholder purchases or sells shares or transfers holdings. This will simultaneously affect the distribution of profits and losses by calculating them on a pro-rata basis.
Requirements To File the Form
Before you file 1120-S, you must prepare the following information and documents:
The date of incorporation as a company;
A list of the products and services you sell;
Your business activity code;
The date on which your company was elected an S corporation, which can be following a fiscal year;
A balance sheet and your profit and loss statements;
The method you follow for accounting;
Payments made to independent contractors, if you have any.
Filing the 1120-S form can be complicated because several components require concrete details, such as the costs of goods you sold, net profit and loss, the sales you made and the returns you received, etc.
You’ll also need to record your business income, including deductions, bad debts, rent, salaries and wages, interests, pensions, etc. To fill out the form properly, and seek guidance from a professional income tax lawyer to avoid making mistakes.
When is the Deadline for Filing the Tax Form?
S corporations must file their federal tax form by the 15th of the third month following the end of the tax year, which generally makes it March 15 if you file your incorporation date as January 1. If you need an extension, you can file for it using Form 7004, pushing the tax returns pointing back by six months.