Form 1120S – Everything you need to know!

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‘Tis the season of tax filing and any & all information about it is valuable. There is a lot that’s said about individual tax forms. So, let’s take a look at the business side of things. Form 1120S is an essential business tax form and here’s a handy guide to tell you all about it:  

 

What is Form 1120S?

Essentially, an S corporation’s tax return, Form 1120S reports the income, losses, and dividends of S corporation shareholders. Once the corporation has filed Form 1120S, they provide each shareholder with a Schedule K-1. This document identifies a shareholder’s share of income, deductions, credits and other items that they will need to report on their individual tax return (Form 1040).

 

What is an S Corporation?

An ‘S corporation’ refers to a ‘small business corporation’. These are closely held corporations which elect to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Unlike C corporations, tax filers in this category are taxed on the individual shareholders’ tax forms. You can check the IRS’s eligibility criteria for an S corporation here.

 

How does Form 1120S serve an S corporation?

A C corporation is essentially taxed twice as it pays a tax on its net income followed by each shareholder paying individual taxes. However, an S corporation is taxed once as its net earnings pass through to its shareholders. These are then reflected and taxed in each shareholder’s personal tax return. Each shareholder’s ownership percentage is instrumental to the IRS as it decides how much profit and loss is to be allocated to an individual. All income, deductions, and credits are reported on Form 1120S.

 

What does Form 1120S look like?

The form can broadly be divided in the following parts:

Part I – Information about the Corporation
Contains basic information on the corporation such as its Name, Address and EIN.

Part II – Information about the Shareholder
Conveys the shareholder’s percentage of stock ownership for the tax year.

Part III – Shareholder’s Share of Current Year
Report the shareholder’s share of any of the corporation’s Income, Deductions, Credits, etc.

What do I need to complete Form 1120S?

Here’s a list of some basic prerequisite pieces of information/documents you must have to fill Form 1120S:

Selection effective date
To be treated as an S corp, the election must be made no later than 2 months and 15 days prior to the effective date.

Business activity code
The business code selected reflects the industry your business falls into.

Product/service
Convey the product or service that generates the majority of your revenue.

Number of shareholders
Total number of shareholders (owners) in the business.

Employer Identification Number
This Tax ID is mandatory to file Form 1120S.

Form 2553
This is only required if this is the first year that you are filing as an S Corp.

Profit and Loss statement
A summary of your income and expenses for the tax year., including your net profit/loss.

Balance Sheet report
A summary of all assets, liabilities, and owner’s equity as of the end of the tax year.

 

Is your small business avoiding double taxation by using the correct ‘S Corp’ status instead of ‘C Corp’? Are you unsure about how to obtain an S corporation status? Don’t worry we can answer all your questions and provide you with the best tax filing services in Irving & Plano. Email us at tax@mytaxfiler.com today.

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