An Expert Guide To Understanding The 1120-S Tax Form Mission Driven Business

It’s tax season crunch time. In this episode, Brian will walk you through the S-Corporation income tax return to help you better understand what you’re filing and hopefully catch mistakes before it’s too late. He provides a section-by-section analysis of Form 1120-S and highlights key areas that business owners and tax professionals make mistakes.
Episode Highlights
Part 1: Heading, Income, Deductions, Tax and Payments
Most of this information is drawn from your business’s Profit and Loss Statement. Here’s a breakdown of what’s on the first page:
Calendar year: The very top of the form asks for the calendar year. If the corporation has a calendar year-end, leave this blank. If a fiscal year or short year put in the appropriate dates.
Address: Underneath the calendar year, the form asks for a name and address. Use the name set forth in the charter or other legal documents, such as your Employer Identification Number (EIN) letter.
Item A: Located to the left of the address, Item A asks for your S election effective date. You should have a letter from the IRS (CP 261) with your S-Corp starting date. This date should stay the same every year.
Item B: Your business activity code. This code shows the IRS exactly what you do.
Item C: Item C only applies if you have assets of $10 million or more. Most of the time, Item C will not be checked.
Item D: Put your EIN in Item D. Make sure to verify it’s correct before you file your form.
Item E: Your date of incorporation should match the articles of incorporation. This date may or may not be the same date as your S-election. Like the S-election date, the date of incorporation won’t change.
Item F: Total assets at the end of the year.
Item G: If the corporation is electing to be an S-Corp beginning with the current filing tax year, check the appropriate box. If the S-Corp did not already file the S-Election, attach Form 2553 with the return.
Item H: These boxes should be self-explanatory. Check the boxes that apply.
Item I: Enter the number of shareholders in the firm (e.g. yourself and your partners).
Item J: Most of the time, Item J will not be checked. If you believe that one of the Item J items applies, follow up with your tax accountant.
Income: Report gross revenue your business has earned for the year and any additional income or interest income that you may have incurred. Only report trade or business income. Do not list rental income, portfolio income, or tax exempt income (those go on your Schedule K).
Expenses: Report all deductions on your Profit and Loss statement. Pay special attention to the following lines:
Line 7: Compensation of officers should have something on it. S-Corporations must pay shareholder/employee reasonable compensation for services rendered, and failing to put reasonable compensation could lead to an IRS audit. Also included on this line are fringe benefits, including employer contributions to health plans and group term life insurance, for shareholders/employees owning more than 2% of the corporation stock. If your S-Corp has total receipts of $500,000 or more, you’ll need to attach Form 1125-E to explain what was paid to each officer.
Line 8: Salary and wages paid to employees (other than officers) of the corporation.
Line 17: An S-Corporation can deduct contributions made for its employees under a qualified pension, profit sharing, annuity, SEP plan, Simple plan, or any other retirement deferred compensation plan. This includes shareholders/employees owning more than 2% of the corporation stock.
Line 18: Employee fringe benefits provided to officers and employees owning less than 2% go on this line, such as health insurance, disability insurance, and educational assistance.
Line 19: Line 19 includes any other deductions. There should be an attached statement, and it should match your profit and loss. The numbers should be close to your Profit and Loss statement.
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