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At Padgett, we have more than 50 years of experience providing reliable tax and accounting services to American small businesses. Our team is committed to empowering entrepreneurs and business owners with the knowledge, tools, and resources that they need to succeed. In this article, you will find an overview of Form 1120-S for S corporation tax returns.
S corporations are a unique type of small business corporation that offers certain tax benefits to their shareholders. Unlike C corporations, which are subject to double taxation because they are taxed as a separate entity, S corps are generally not subject to direct federal income tax at the corporate level. Instead, the income, deductions, and credits of the S corporation flow through to the shareholders, who report their share of these items on their individual tax returns. In other words, they are pass-through entities. To facilitate this process, S corporations must file Form 1120-S.
One of the main tax advantages of an S corp over other pass-through entities such as partnerships is that distributions to shareholder-employees generally aren’t subject to self-employment tax—provided the shareholder-employee is also paid a “reasonable” salary for their role in the company. Depending on the circumstances, the S corp structure could help reduce the overall tax burden for shareholders.
It is essential for S corporations and shareholders to maintain accurate financial records and track corporate expenses throughout the year. By understanding the basics of S corporation taxation and staying well-organized, you will be in the best position to navigate tax obligations for both yourself and your business.
The Bottom Line: An S corporation is a pass-through entity. The S corporation still needs to file its own tax return using Form 1120-S. The information provided through 1120-S is used to generate a Schedule K-1 for each of the shareholders. The shareholders use their Schedule K-1 to account for their share of the S corp’s income and expenses on their individual income tax returns.
Form 1120-S is the most important federal tax form for S corporations. Because this type of business structure allows for pass-through taxation, Form 1120-S is used to report information to the IRS to help ensure that the shareholders properly account for tax liability on their individual tax returns. Form 1120-S consists of several parts and schedules that require detailed information about the S corporation’s financial activities. Here are some key aspects to be aware of:
Income (or loss): Here, the S corporation reports its gross receipts and other trade or business income. The cost of goods sold is subtracted here, and certain net gains and other income are also reported to determine total income (or loss).
Deductions: This is where the S corp lists its deductible expenses, such as salaries, rent, taxes, interest, and depreciation. These deductions are subtracted from total income (loss) to calculate the S corporation’s ordinary business income (loss). This amount will then be used to determine each shareholder’s distributive share.
Tax and payments: For a number of reasons, S corps may make relevant tax payments throughout the year. This could impact tax liability.
Schedule B, Other information: Various other information about the S corp and its operations are reported here. Depending on the specific nature of the S corporation, Schedule B may be highly important in determining the total tax liability for the shareholders.
Schedule K: Schedule K summarizes the S corporation’s income, deductions, and credits that flow through to the shareholders. This information is crucial because shareholders will use these amounts to complete their individual tax returns.
After the S corporation completes Form 1120-S, it should issue a Schedule K-1 to each shareholder. In this context, the Schedule K-1 is used to allow each individual shareholder to report their share of the income, deductions, and credits. Shareholders must include the information from Schedule K-1 on their individual tax returns.
At Padgett, we have deep experience advising S corporations on a wide range of tax matters. If you have any specific questions or concerns about Form 1120-S or S corporation tax returns, we are more than ready to help. Contact us today to arrange your confidential initial appointment. We work with S corporations nationwide.
