Form 1120S

Definition

Form 1120S is the U.S. tax return specifically used by S corporations to report income, deductions, gains, losses, and other tax-related information to the Internal Revenue Service (IRS). This form is crucial as it outlines how the corporation’s income and losses are allocated to shareholders, helping them report their share of the S corporation's income on their personal tax returns. The form also plays a key role in understanding the taxation of built-in gains and passive income limitations for S corporations.

5 Must Know Facts For Your Next Test

1. Form 1120S is typically due on the 15th day of the third month after the end of the corporation's tax year, with extensions available.
2. The form allows S corporations to report their total income and deductions, and it includes a separate section for reporting items that are passed through to shareholders.
3. Shareholders receive a Schedule K-1 from Form 1120S, which provides them with details about their share of the income or loss, helping them accurately report this information on their personal tax returns.
4. Failure to file Form 1120S can result in penalties for the corporation and can also affect shareholders' ability to claim losses or deductions.
5. S corporations must comply with specific rules related to built-in gains and passive income to avoid additional taxes, which can be reported on Form 1120S.

Review Questions

• How does Form 1120S facilitate the allocation of income and losses to shareholders?
  • Form 1120S provides a comprehensive overview of an S corporation's financial performance over the tax year. By reporting total income, deductions, gains, and losses, the form allows for clear calculations of each shareholder's share through Schedule K-1. This mechanism ensures that shareholders can accurately report their portion of the S corporation's income or loss on their individual tax returns, aligning with pass-through taxation principles.
• What implications does the built-in gains tax have on an S corporation when completing Form 1120S?
  • The built-in gains tax is crucial for S corporations that were previously C corporations and still hold appreciated assets. When filing Form 1120S, these corporations must carefully report any gains realized from selling such assets within five years of converting to S status. If applicable, the built-in gains tax can create additional tax liability for the corporation, which must be considered alongside regular income reporting on Form 1120S.
• Evaluate how compliance with passive income restrictions on Form 1120S impacts shareholder distributions from an S corporation.
  • Compliance with passive income restrictions is vital for S corporations because exceeding certain thresholds can lead to the loss of S corporation status or trigger taxes on excess passive income. When filling out Form 1120S, S corporations must report any passive income accurately to determine if they are within acceptable limits. This has direct implications for shareholder distributions; if an S corporation generates excessive passive income, it may not only face penalties but also affect the distributions shareholders receive due to potential tax liabilities being deducted first from corporate earnings.

Related terms

S Corporation:

A type of corporation that meets specific IRS requirements, allowing it to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.

Shareholder Basis: The amount of a shareholder's investment in an S corporation, which is used to determine the tax implications of distributions and losses.

Built-in Gains Tax: A tax imposed on S corporations that have appreciated assets at the time of conversion from a C corporation, applicable if those assets are sold within a specified period.