A corporation or LLC that has elected S corporation status files Form 1120-S, U.S. Income Tax Return for an S Corporation. The return reports the company's income and deductions, but in most cases the company does not pay federal income tax. Instead, each shareholder's share of income, deductions and credits passes through on a Schedule K-1 to their personal return.

Due date

Form 1120-S is generally due on the 15th day of the third month after the end of the tax year, which is March 15 for calendar-year corporations. An automatic six-month extension is available by filing Form 7004. Shareholders need their K-1s to file their own returns, so a late 1120-S delays everyone.

What the return draws from the books

  • Income and deductions on page 1, from the profit and loss
  • Schedule K, the totals of pass-through items such as ordinary income, rental income, interest, charitable contributions and section 179 deductions
  • Schedule L, the balance sheet, which should match the books at year end
  • Schedule M-1 or M-3, reconciling book income to taxable income
  • Schedule M-2, tracking the accumulated adjustments account and distributions

If the books are not reconciled, Schedule L will not balance, and the return will raise questions.

Shareholder wages and distributions

The IRS expects shareholder-employees who perform services to receive reasonable compensation through payroll before taking distributions, as described on its page about S corporation employees, shareholders and corporate officers. See our guide to S corporation reasonable compensation.

Shareholder basis

Each shareholder's basis in stock and loans determines whether losses can be deducted and whether distributions are taxable. Basis increases with income and contributions and decreases with losses and distributions. Shareholders are responsible for tracking it, and the IRS may require a basis computation with the personal return in some situations. We keep a running basis schedule from the books.

Health insurance for more-than-2% shareholders

Health insurance premiums paid by the S corporation for a more-than-2% shareholder are included in the shareholder's W-2 wages, with special rules for Social Security and Medicare. Getting this into payroll before year end avoids corrected W-2s.

Becoming an S corporation

The election is made on Form 2553. Our tax services team can review whether it suits your business.

Tracking shareholder basis

Shareholders generally need to know their stock and debt basis to determine whether losses are deductible and whether distributions are taxable. The corporation's books provide much of the data: contributions, loans from shareholders, income and loss allocations and distributions. Keep these in separate equity and liability accounts so basis can be updated each year. Form 7203 is used by many shareholders to report basis.

Key terms

Definitions for terms used in this guide, from our small business glossary:

  • Debits and Credits: Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
  • Schedule K-1: Schedule K-1 reports each owner's share of a partnership's or S corporation's income, deductions and credits.
  • Ordinary and Necessary Expenses: Ordinary and necessary is the basic test a business expense must meet to be deductible.
  • Balance Sheet: A balance sheet shows what a business owns, what it owes and the owners' equity at a specific date.