A Short Guide to Form 1120S
Last Updated September 20, 2022
A Short Guide to Form 1120S
The IRS issues form 1120 for corporations so they can file federal income tax returns. They have further categorized into C and S forms for C-corporations and S-corporations respectively. Since most of the small businesses are registered as S-corp in the tax books, we are going to discuss Form 1120S in detail.
What Is Form 1120-S?
S Corporations must file Form 1120-S with the Internal Revenue Service to record the business’s financial activity for each tax year. The financial transactions listed on this form, for example:
Corporations may only utilize this form if they have already submitted IRS Form 2553 and their S Corp election has been accepted by the IRS.
Due to the fact that S Corps are pass-through organizations, they are not subject to federal income taxes. The profits of the firm are instead reported by stockholders on their personal income tax returns.
Form 1120-S is necessary even though S Corps are exempt from corporate taxes since it is filed with an attached Schedule K-1 that informs the IRS of the ownership percentages of each shareholder in the corporation.
The IRS can assess what taxes each business owner must pay or receive a refund of on their personal tax return using the Schedule K-1 form. The S Corporation and shareholders could not be eligible for some tax benefits without an appropriate 1120-S and Schedule K-1.
What Purpose Does Form 1120-S Serve?
The tax return for a S Corp is Form 1120-S. Although S-Corps do not pay federal income tax, the IRS must still receive reports of their profits, losses, deductions, and credits. The company tax return materials will be used by the IRS to decide how to tax each individual shareholder.
Differences in Form 1120 and Form 1120-S
S Corps must submit Form 1120-S for federal taxes, whereas C Corps must file Form 1120. Both S Corps and C Corps are types of companies, but they differ in a number of ways and have significant benefits and drawbacks for business owners.
Unlike S Corps, C Corporations are not pass-through organisations. C Corps are required to complete Form 1120, submit it to the IRS, and pay corporate-level federal income tax.
A C Corp shareholders are liable to pay personal income tax on both their salary from the company andthe any dividends they receive.
Because the C Corp is first subject to corporate taxation and later shareholders are subject to individual taxation, this tax structure is known as “double taxation.” Double taxation is frequently cited as the biggest drawback of establishing a C Corp as opposed to a S Corp.
Despite paying taxes twice, C Corps do provide stockholders with a number of benefits:
- C Corps are permitted an infinite number of stockholders.
- Shareholders need not be US citizens or citizens with permanent residency.
- C Corps may have multiple stock classes.
- C Corps pay a reduced minimum tax rate.
- C Corps find it simpler to obtain outside funding.
Filling Out Form 1120-S
S Corporations can typically electronically submit their Form 1120-S along with any necessary schedules, declarations, or attachments. These attachments could include, for example:
- Automatic extension to file Form 7004
- Forms 940, 941, and 944: Tax returns for employees
- Form 1099: Income from Other Sources
Typically, Form 1120-S must be submitted by the 15th day of the third month following the end of the tax year. Any firm that follows the conventional calendar year must submit paperwork by March 15th.
The Requirements to Fill Out a Form 1120S
There is a list of information that you should have in hand to duly file Form-1120S. If you don’t want to deal with this paperwork on your own, you can ask tax professionals to do this on your behalf. Firms dealing in accounting for small business can take care of the filling of Form 1120S.
These are the pieces of information you will need for filling out Form 1120S.
- The date of incorporation (your company getting the status of S-corp)
- The complete list of the products and services that your business offers
- The Employer Identification Number issued by the IRS
- The date of S-corp status election (usually the first day of your business’s fiscal year)
- The balance sheet
- Business activity code
- Accounting method
- Any independent contract payments
Work with any firm of accounting for small businesses to have this information ready at all times and particularly for filling out Form 1120S on time.
You also need to mention the method of accounting that you employ in managing your finances. For example, if the finances are sorted out through accrual accounting or on a cash basis. Any good firm offering accounting for small businesses can help you in setting out your accounting method in the beginning.
You also have to file every payment of $600 or more that has been made to independent contractors for the previous fiscal year. Many S-corp entities that don’t take care of bookkeeping often miss out on filling these payments. Work along with any tax preparation firm from day one. They know which financial transaction details should go into record books. While entering these payments, make sure to dispatch Form 1120S to the respective contractors.
With the financial statements furnished by the experts of any good tax preparation firm such as My Count Solutions, you can fill every box in your Form 1120S without exhausting yourself in looking out for the required information. If you don’t want to receive penalties from the IRS, fill out and dispatch your Form-1120S on time.
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Modifications to Form 1120-S
It is crucial to visit the IRS website each year to see if any new regulations have an impact on how you file your taxes due to evolving legislation and various circumstances that have an impact on businesses in the United States. You can be qualified for tax credits that you were unaware of.
S Corporation and Taxes
A corporation is designated as an S Corp once IRS Form 2553 has been submitted and authorized by the IRS. S Corporations enjoy pass-through taxation in a manner similar to that of an LLC or partnership. Unlike C Corporations, they are not required to pay company-level federal income tax. Due to the numerous tax advantages, this offers shareholders, S Corps are a highly sought-after company entity.
Investors in an S Corp must disclose their share of the business’s financial activity on their personal federal income tax returns. Then, each shareholder will pay taxes based on their personal tax rate.
Tax on Self-Employment
The fact that S Corp stockholders are exempt from self-employment tax is the one tax advantage that causes many businesses to choose this business structure. Any shareholder who works for the business is regarded as both an employee and an owner. That person is obligated to be paid fairly for the task that was done. A shareholder can now divide their income between a salary and dividends thanks to this. The correct division could result in significant tax savings for the shareholder.
As of 2018, qualified shareholders of an S Corp are also entitled to a 20% tax deduction for their net business income. Their effective income tax rate is lowered by 20% as a result.
Frequently Asked Questions for Form 1120-S
What does Form 1120-S define as regular business income?
The company’s net income or loss is its regular business income or loss. The total sales and revenues of the company are the starting point of Form 1120-S, from which all business-related expenses are subtracted. The usual business income is the last figure.
How are dividends made to S Corp reported?
Distributions made to S Corps are recorded on K-1, which is submitted along with the business’ 1120-S. The ownership percentages of each stakeholder in the corporation are detailed in Schedule K-1. This enables the IRS to decide how much each shareholder should be taxed.
Are S Corp distributions considered income?
S Corp distributions are not taxable and do not qualify as income. Amounts that have been taxed in the current year, in the past year, or not at all may be included in distributions.
What are S Corps’ financial options?
S Corp owners have several options for withdrawing funds from the business. These consist of salaries, dividends, loans, and reimbursable company expenses.
Can money be left in an S Corp?
Leaving money in an S Corp account has no tax repercussions. This is due to the fact that S Corps are not subject to corporate taxes. Any remaining funds in an S Corp become a business asset.
Get Help with Form 1120-S
Want to chat with a specialist about Form 1120-S questions? Experts at My Count Solutions are here to help you fill your forms without any stress, on time, and help you avoid any penalties by fulfilling all the requirements.