As an S-corporation you’ll have different tax forms to file than other business structures, such as Form 1120-S. It is essential you file the correct forms to the IRS. These forms will determine how the business and shareholders are taxed and how much tax they owe.
Form 1120-S
S-corporations are pass-through entities. One of the advantages of choosing an S-corporation is that business income is not taxed at the entity level. Instead, the individual shareholders pay business income taxes for an S-corp on their individual tax returns.
This means once the entity files Form 2553 (S-Corporation election) and the IRS accepts it, the company itself pays no taxes.
Form 1120-S (S-Corporation Tax Return) is prepared along with the K1 forms for the shareholders once the books are closed for the year. The K1 form reflects the pass-through items of income, deductions, credits and other relevant information that the respective shareholders are required to report on their individual returns.
Differences Between Form 1120 and 1120-S
What’s the difference between the two forms?
Quite simply, Form 1120 is the tax return form for C-corporations, showing business gains, losses, deductions, and credits.
C-corps pay federal income tax at the entity level, which leads to double taxation (sometimes seen as the biggest disadvantage of operating as a C-corp). In addition to the business paying income tax, shareholders pay personal income tax on dividends.
1120-S is essentially the same, but for S-corporations the business income gets taxed on the shareholder’s individual returns and the distributions are not taxed to the shareholders as long as the amount does not exceed their basis in the S-Corporation’s stock.
Properly Filling Out the Form
Normally, tax returns like the 1120-S can be filled out and filed electronically, including necessary attachments, statements, schedules, and other forms.
The filing deadline is typically the 15th day of the third month after the end of the business’s tax year. For corporations operating on the regular calendar year, the deadline for filing is March 15th.
It’s important to note that these forms can be incredibly complicated depending on the factors surrounding your business. In many cases, it will be helpful, or even necessary, to seek advice from an experienced CPA, like the startup experts at Founder’s CPA.
To correctly fill out the forms, you’ll need basic info about the business, as well as financial statements and previous year’s returns.
For example:
- A list of products and services
- Your business activity code (the six-digit code best describing the business’s primary income-generating activity)
- Date of incorporation
- Employer Identification Number (EIN)
- Financial statements, including your Profit and Loss (P&L) statement and Balance Sheet
- Accounting method (accrual or cash-based)
- Records of payment to any independent contractors
Before filing, forms must also be signed and dated by the corporation’s president (or any other corporate officer with signature authorization for tax forms).
Potential S-Corp Tax Changes
The tax code is constantly evolving. New legislation can affect how you file your taxes and how much you owe (or are owed).
To ensure you’re paying the right amount and haven’t missed any deductions or credits, you’re best off involving your CPA or a tax expert. For example, after 2018, qualifying S-corp shareholders are eligible to deduct up to 20% of their net business income from their income taxes.
Common Problems and Questions
On average, fewer than 0.25% of returns filed by S-corporations are audited each year.
While this saves businesses immense effort on audit preparation, the pendulum could easily swing back the other way. The IRS could bring a stronger focus and greater oversight to S-Corps and how they pay their executives. This highlights the importance of making sure shareholders working in the company are paid a reasonable salary.
What is ordinary business income?
Ordinary business income refers to the net loss or net income for the company. Business expenses are deducted from the total sales, resulting in ordinary business income.
What types of distributions count as income?
Typically, S-corp distributions are exempt from taxation and do not count as income. Your schedule K-1 (filed with Form 1120-s) shows this information.
What can an S-corp do with extra funds?
Excess funds left in the S-corp’s accounts become assets of the company. There are usually no tax implications of holding funds in the company because S-corps are not taxed at the corporate level.
Handling Your S-Corps 1120-s Forms
Filing corporate taxes can be a difficult and complex process. Depending on the complexity of your organization and its business model, tax preparation can be time-consuming, and attempting to DIY can lead to costly errors.
If you have questions about how your S-corp should handle filing its tax returns, the experts at Founder’s CPA can help. Set up a free consultation with our startup accounting experts to ensure your 1120-S forms are filed on time and correctly.
