IRS Form 1120-S Instructions: Complete Guide for S Corporations

If you run an S Corporation, IRS Form 1120-S is your most important annual tax filing. Unlike a traditional C Corporation (which files Form 1120 and pays corporate income taxes), an S Corporation operates as a pass-through entity. This means the corporation itself doesn’t pay federal income tax - instead, the income, deductions, and credits “flow through” to shareholders, who report them on their personal tax returns.

That’s why filing IRS Form 1120-S is critical. It doesn’t just satisfy IRS compliance; it ensures your shareholders can file their personal returns accurately using Schedule K-1.

What Is Form 1120-S and Why It Matters

Form 1120-S, U.S. Income Tax Return for an S Corporation, is the IRS form used to report:

• The corporation’s income and losses
• Deductions and credits
• Balance sheet details
• Shareholder distributions
• Supporting schedules (K, K-1, L, M-1, and M-2)

Why it matters:

• Compliance – Failure to file can result in penalties.
• Transparency – Shareholders rely on timely K-1s.
• Accuracy – Mistakes can cause delays in both corporate and personal filings.

Who Must File Form 1120-S?

You must file Form 1120-S if your business:

1. Has elected to be treated as an S Corporation by filing Form 2553 (Election by a Small Business Corporation).
2. Operates as a domestic corporation with 100 or fewer shareholders.
3. Meets shareholder eligibility rules (only U.S. citizens, residents, and certain trusts/estates can hold shares).
4. Has issued Schedule K-1 to shareholders.

Filing Deadlines and Penalties

Filing Deadline

• Calendar-year S Corporations (most common): File by March 15, 2025 for the 2024 tax year.
• Fiscal-year S Corporations: File by the 15th day of the 3rd month after your fiscal year ends.

Extensions

• You can file Form 7004 to request a 6-month extension.
• Example: For a calendar-year S Corp, the extended deadline is September 15, 2025.

Penalties

Comparison Table (1120-S vs. 1120 vs. 1065)

Instead of repeating what’s in your Resource Center, make it instruction-focused:

Key Documents You Need Before Filing

Before filling out Form 1120-S, gather:

• Year-end financial statements (Profit & Loss, Balance Sheet)
• Shareholder ownership records (percentages, contributions, distributions)
• Supporting schedules (depreciation schedules, COGS details, credit documentation)
• Last year’s 1120-S (for consistency and carryovers)
• Payroll records (if you pay shareholder-employees)

Key Schedules for IRS Form 1120-S

Filing Form 1120-S involves several required schedules and supporting attachments. Here’s a breakdown of every major schedule, what it records, and when you need it:

Each schedule should be prepared and attached in the precise order recommended by the IRS to avoid processing delays and audit risk.

How These Schedules Fit

• Schedules B, K, L, M-1, and M-2 are integral parts of the main Form 1120-S and assembled at the end.
• Schedules K-1 are distributed to shareholders for personal filings.
• Attach other forms (D, 1125-A, 4562, 4797, K-2/K-3, etc.) if specific business activity applies.

Line-by-Line Instructions – Page 1

Now let’s dive into Page 1 of Form 1120-S. This is the core summary of your corporation’s financials.

Basic Information Section (Top of the Form)

• Name and Address – Enter the exact legal name of your corporation as it appears on incorporation documents. Include full mailing address.
• Employer Identification Number (EIN) – This is your corporate tax ID, not a personal SSN.
• Date Incorporated – Enter the month, day, and year of incorporation.
• Total Assets – Enter the corporation’s total assets at year-end (from your balance sheet, Schedule L).
• Final Return / Name Change / Address Change – Check these boxes if applicable.

Example: If your S Corp closed in 2024, check “Final Return.”

Income Section (Lines 1a–6)

This section reports your gross receipts and income sources.

• Line 1a – Gross Receipts or Sales
  Enter your total sales/revenue before deductions.
• Example: $500,000 in gross sales.
• Line 1b – Returns and Allowances
  Report refunds, rebates, or returned goods.
• Example: $5,000 in product returns.
• Line 1c – Balance
  Subtract line 1b from line 1a. ($500,000 – $5,000 = $495,000).
• Line 2 – Cost of Goods Sold (COGS)
  If you sell products, calculate COGS (details go on Form 1125-A).
• Example: $200,000 in materials and inventory costs.
• Line 3 – Gross Profit
  Line 1c minus Line 2. ($495,000 – $200,000 = $295,000).
• Line 4 – Net Gain (Loss) from Form 4797
  If you sold business property, report gains/losses here.
• Line 5 – Other Income
  Include rental income, interest, tax credits, etc.
• Line 6 – Total Income
  Add Lines 3–5.

Deductions Section (Lines 7–21)

This section reduces taxable income by listing allowable deductions.

• Line 7 – Compensation of Officers
  Report salaries paid to shareholder-officers. Must be “reasonable compensation.”
• Example: CEO salary = $80,000.
• Line 8 – Salaries and Wages
  Non-officer employee wages.
• Line 9 – Repairs and Maintenance
  Expenses to keep property in working condition (not capital improvements).
• Line 10 – Bad Debts
  Deduct accounts receivable that became uncollectible.
• Line 11 – Rents
  Business property rental payments.
• Line 12 – Taxes and Licenses
  Payroll taxes, property taxes, business licenses (not federal income tax).
• Line 13 – Interest
  Interest on business loans or mortgages.
• Line 14 – Depreciation
  Report depreciation from Form 4562.
• Line 15 – Depletion
  For businesses extracting natural resources.
• Line 16 – Advertising
  Marketing and advertising expenses.
• Line 17 – Pension, Profit-Sharing, etc.
  Contributions to employee retirement plans.
• Line 18 – Employee Benefit Programs
  Health insurance, group term life insurance, etc.
• Line 19 – Other Deductions
  List on attached statement (legal fees, supplies, etc.).
• Line 20 – Total Deductions
  Add Lines 7–19.
• Line 21 – Ordinary Business Income (Loss)
  Line 6 minus Line 20. This flows into Schedule K.

Example Summary:

• Total Income (Line 6): $295,000
• Total Deductions (Line 20): $260,000
• Ordinary Business Income (Line 21): $35,000

Tax and Payments Section

Unlike C Corps, S Corps typically don’t pay federal income tax. However:

• Some taxes (e.g., built-in gains tax, excess net passive income tax) may apply.
• Report them here if applicable.

Schedule B – Other Information (Overview)

This section asks about accounting methods, ownership, stock, and other disclosures. We’ll dive deeper into Schedule B in Part 2.

Pro Tips for Accuracy

• Keep personal and business expenses separate.
• Always double-check shareholder ownership percentages.
• Provide K-1s promptly to avoid penalties.
• Use e-file with TaxZerone to reduce errors and speed up IRS acceptance.

Schedule K – Shareholders’ Pro Rata Share Items

Schedule K summarizes the S Corporation’s total income, deductions, and credits that will later be distributed to shareholders on their Schedule K-1.

Key Sections of Schedule K

• Line 1 – Ordinary Business Income (Loss):From Page 1, Line 21.
• Lines 2–3 – Rental Real Estate and Other Net Rental Income: Report rental activities separately.
• Line 4 – Interest Income: Any interest earned on bank accounts or investments.
• Line 5 – Dividends: Report dividends received from other investments.
• Line 6 – Royalties: For businesses with intellectual property.
• Line 7 – Net Short-Term Capital Gain (Loss): From Schedule D.
• Line 8 – Net Long-Term Capital Gain (Loss).
• Line 9 – Net Section 1231 Gain (Loss): Sale of business property.
• Lines 10–12 – Other Income, Deductions, Credits.

Example:

• Ordinary Business Income: $35,000
• Interest Income: $1,500
• Section 179 Deduction: $10,000
  Schedule K would show totals, which are then allocated across shareholders.

Schedule K-1 – Shareholder Information

Each shareholder receives a Schedule K-1 reporting their share of income, losses, deductions, and credits.

What K-1 Includes

• Shareholder’s identifying info (name, SSN, address).
• Ownership percentage (beginning and end of year).
• Allocated share of Schedule K items.
• Foreign transactions, AMT items, and other credits.

Example:

• 2 shareholders, each with 50% ownership.
• Ordinary Business Income = $35,000.
• Each K-1 shows $17,500 for Line 1.

Schedule L – Balance Sheets per Books

Schedule L reports the corporation’s balance sheet at beginning and end of year.

• Assets: Cash, accounts receivable, inventory, buildings, equipment.
• Liabilities: Cash, Accounts payable, loans, mortgages.
• Equity: Cash, Common stock, retained earnings, shareholder loans.

Example:

• Beginning of year assets: $100,000; liabilities: $40,000; equity: $60,000.
• End of year assets: $150,000; liabilities: $70,000; equity: $80,000.

Make sure your balance sheet reconciles with income statement totals.

Schedule M-1 – Reconciliation of Income (Loss)

Schedule M-1 explains the differences between book income (financial accounting) and tax income (IRS).

Common Adjustments

• Tax-exempt interest income (book income > tax income).
• Nondeductible expenses (book expenses > tax deductions).
• Depreciation differences (book vs. tax depreciation).

Example:

• Net income per books: $60,000
• Add: Nondeductible penalties = $2,000
• Subtract: Tax depreciation greater than book = $5,000
• Taxable income = $57,000

Schedule M-2 – Analysis of Accumulated Adjustments Account

Schedule M-2 tracks retained earnings and shareholder distributions.

• AAA (Accumulated Adjustments Account): Income that has been taxed to shareholders but not yet distributed.
• Other Adjustments Account (OAA): Non-taxable income adjustments.
• Distributions: Reduce AAA balance.

Example:

• Beginning AAA: $25,000
• Add ordinary income: $35,000
• Less distributions: $20,000
• Ending AAA: $40,000

Step-by-Step Example – Filing Form 1120-S

Let’s look at a simplified example S Corp with 2 shareholders.

Business Data

• Gross Sales: $500,000
• Returns: $5,000
• COGS: $200,000
• Officer Salary: $80,000
• Employee Wages: $50,000
• Rent: $24,000
• Other Expenses: $106,000
• Interest Income: $1,500

Page 1

• Total Income: $295,000 (Gross Profit) + $1,500 (Interest) = $296,500
• Deductions: $260,000
• Ordinary Business Income: $36,500

Schedule K

• Ordinary Business Income: $36,500
• Interest Income: $1,500

Schedule K-1

• Each shareholder (50/50) gets:
• $18,250 ordinary income
• $750 interest income

Balance Sheet

• Assets grew from $100,000 → $150,000
• Liabilities from $40,000 → $70,000

This example shows how income flows from 1120-S → Schedule K → K-1 → shareholder returns.

Common Mistakes to Avoid

1. Incorrect Ownership Percentages
• Always update shareholder changes immediately.
2. Mixing Business & Personal Expenses
• Deduct only legitimate business expenses.
3. Late K-1 Distribution
• Leads to $310 per-K-1 penalty.
4. Not Filing Extensions
• Missing deadlines costs $235/shareholder/month.
5. Inconsistent Records
• Schedule L must match corporate financials.

Lesser-Known S Corp Filing Add-Ons

Many S Corps miss filing related forms alongside 1120-S, which can result in IRS follow-ups:

• Form 1125-A – Cost of Goods Sold (for product businesses)
• Form 4562 – Depreciation and Amortization
• Form 4797 – Sale of Business Property
• Form 8949 - Reports sales of capital assets in detail.
• Form 3800 - General Business Credit to claim various credits.
• Form 8825 - Rental real estate income and expenses.
• Form 8938 - Discloses specified foreign financial assets.
• Form 8996 - Qualified Opportunity Fund elections and reporting.
• Form 8941 - Small Employer Health Insurance Premiums Credit.

Common Filing Traps - And How to Avoid Them

• Mixing Personal and Business Expenses: Maintain separate accounts.
• Wrong Ownership Percentages: Double-check corporate records.
• Ignoring State Requirements: Some states require their own S Corp returns.

Digital Document Management with ZeroneVault

With ZeroneVault, TaxZerone’s secure cloud portal, you can store:

• Past tax returns
• Schedule K-1s
• Supporting schedules and receipts

This not only simplifies annual filing but also protects you during audits.

Why File Form 1120-S Online with TaxZerone

Filing manually can be stressful and error-prone. That’s where TaxZerone, an IRS-authorized e-file provider, simplifies the process.

Benefits of E-Filing with TaxZerone

• Real-time error checks – Reduce IRS rejections.
• Instant Schedule K-1 generation – Deliver to shareholders immediately.
• Secure cloud storage (ZeroneVault) – Keep returns and K-1s safe.
• Faster IRS acceptance – No mailing delays.
• Affordable pricing – Ideal for small businesses.

Part I: Income Section (Lines 1a – 6)

This section reports your corporation’s total revenue and any adjustments. Accuracy here sets the foundation for everything else

Line 1a – Gross Receipts or Sales

• What it is: The total sales revenue your business earned during the tax year, before deducting returns or allowances.
• Where to find it: From your bookkeeping records or accounting software.
• Example:
  If your S Corp sold $500,000 worth of products, enter $500,000 on Line 1a.

Line 1b – Returns and Allowances

• What it is: The value of products returned by customers or discounts/allowances granted.
• Example:
  If you issued $10,000 in refunds, report $10,000 here. 1a.

Line 1c – Balance (Line 1a minus Line 1b)

• Calculation: $500,000 (gross receipts) – $10,000 (returns) = $490,000.
• This is your adjusted sales revenue.

Line 2 – Cost of Goods Sold (COGS)

• What it is: The cost of producing or purchasing the goods you sold.
• Details: The You’ll also complete Form 1125-A to calculate this.
• Example:
  If your manufacturing costs were $200,000, enter that here.

Line 3 – Gross Profit

• Calculation: Line 1c – Line 2.
• Example: $490,000 – $200,000 = $290,000 .

Line 4 – Net Gain (Loss) from Form 4797

• Purpose: Reports gains/losses from selling business property.
• Example: If you sold machinery at a gain of $15,000, enter that here.

Line 5 – Other Income

• Includes: Rental income, interest, credits, or refunds related to business.
• Example: Your S Corp received $3,000 in interest income.

Line 6 – Total Income

• Calculation: Line 3 + Line 4 + Line 5.
• Example: $290,000 + $15,000 + $3,000 = $308,000.

Part II: Deductions Section (Lines 7 – 21)

This section reduces taxable income by reporting business expenses. Every deduction must be ordinary, necessary, and documented.

Line 7 – Compensation of Officers

• Definition: Salaries paid to shareholder-officers who actively work in the S Corp.
• IRS Warning: Shareholder-officers must receive “reasonable compensation.”
• Example: If the President/CEO (who’s also a shareholder) earns $80,000, report it here.

Line 8 – Salaries and Wages

• Excludes: Officer salaries and amounts claimed as COGS.
• Example: If your staff payroll (non-shareholders) was $150,000, report that here.

Line 9 – Repairs and Maintenance

• Allowed: Routine business repairs (fixing equipment, office maintenance).
• Not allowed: Capital improvements (must be depreciated).
• Example: Repainting office = deductible. Building expansion = depreciable.

Line 10 – Bad Debts

• Report debts previously included as income but now determined uncollectible.
• Example: A client owed $5,000 but went bankrupt—you may deduct it.

Line 11 – Rents

• Report rent paid for property or equipment.
• Example: $24,000 paid annually for office space.

Line 12 – Taxes and Licenses

• Includes state/local taxes, payroll taxes, and business licenses.
• Excludes federal income tax.
• Example: $10,000 in state franchise tax.

Line 13 – Interest

• Deductible interest on business loans or mortgages.
• Example: $8,000 paid in interest on business loan.

Line 14 – Depreciation (Attach Form 4562)

• Deduct depreciation of business property.
• Example: Equipment valued at $50,000 depreciated $5,000 in the year.

Line 15 – Depletion

• Rare, applies mainly to natural resources industries (mining, oil, gas).

Line 16a – Advertising

• Deduct marketing and advertising costs.
• Example: $20,000 spent on Google Ads, billboards, and brochures.

Line 16b – Pension, Profit-Sharing, etc.

• Deduct contributions to employee retirement plans.
• Example: $12,000 contributed to SEP IRA.

Line 17 – Employee Benefit Programs

• Excludes pension costs. Includes health insurance, dental, vision.
• Example: $18,000 paid in employee health insurance.

Line 18 – Other Deductions (Attach Statement)

• Examples: Office supplies, travel, meals (50%), utilities.
• Must itemize in a separate attachment (Statement 1).
• Example: $5,000 travel expenses, $2,000 meals, $3,000 supplies.

Line 19 – Total Deductions

• Add Lines 7–18.

Line 20 – Ordinary Business Income (Loss)

• Calculation: Total income (Line 6) – Total deductions (Line 19).
• Example: $308,000 – $310,000 = –$2,000 loss.

Line 21 – Tax Credits

• Most credits pass through to shareholders via K-1. (S Corps themselves don’t generally pay tax).

Part III: Tax and Payments (Lines 22–29)

S Corporations don’t typically pay federal income tax, but there are exceptions.

Line 22a – Tax from Schedule D

• If your S Corp had capital gains, you may need to pay tax.

Line 22b – Built-in Gains Tax

• Applies if your corporation converted from C Corp to S Corp and sold assets.

Line 23 – Other Taxes

• Such as excess net passive income tax.

Line 24–29 – Payments and Refunds

• Include any overpayments or prepayments made during the year.

Part IV: Schedule K (Shareholders’ Distributive Share)

This is the heart of Form 1120-S. Schedule K summarizes all items of income, deductions, credits, and other tax-related info that flow through to shareholders.

What it includes:

• Ordinary business income/loss
• Rental real estate income
• Portfolio income (interest, dividends, capital gains)
• Deductions and credits
• AMT items
• Foreign transactions (if applicable)

Why it matters:

Each shareholder’s Schedule K-1 pulls directly from Schedule K. Accuracy here ensures their personal tax returns are correct.

Example Walkthrough

Let’s assume:

• Gross receipts = $500,000
• Returns = $10,000
• COGS = $200,000
• Officer salaries = $80,000
• Employee wages = $150,000
• Rent = $24,000
• Advertising = $20,000
• Utilities, travel, supplies = $10,000

Calculation:

• Gross Profit = $290,000
• Other income = $18,000 (property sale + interest)
• Total Income = $308,000
• Total Deductions = $310,000
• Ordinary Business Loss = –$2,000

This loss passes to shareholders on their K-1s.

Part V: Schedule L – Balance Sheets per Books

Schedule L provides the IRS with a snapshot of your corporation’s financial position at the beginning and end of the year.

Who must file Schedule L?

• All S Corporations must file it unless:
• Total receipts for the year are less than $250,000, and
• Total assets at the end of the year are less than $250,000.

Line Items in Schedule L

Assets Section:

• Cash: Checking, savings, petty cash.
• Accounts Receivable: Money customers owe you.
• Inventories: Goods held for sale.
• Investments: Stocks, bonds, or other corporate investments.
• Buildings and Equipment (net of depreciation): Assets used in business operations.

Liabilities and Equity Section:

• Accounts Payable: Money you owe vendors.
• Mortgages, Loans, Notes Payable: Both short- and long-term obligations.
• Shareholders’ Equity: Includes stock, additional paid-in capital, and retained earnings.

Example:

At year-end, your S Corp has:

• Cash: $50,000
• Accounts Receivable: $30,000
• Inventory: $70,000
• Equipment: $100,000 (net of depreciation)
• Liabilities: $60,000
• Shareholder Equity: $190,000

Both sides must balance at $250,000.

Part VI: Schedule M-1 – Reconciliation of Income

Schedule M-1 reconciles book income (financial statements) with tax income (IRS rules).

Common Adjustments:

• Add back nondeductible expenses (like fines or penalties).
• Subtract income excluded from taxes (like tax-exempt interest).
• Adjust for timing differences (depreciation methods may differ for books vs. tax).

Example:

• Net Income per Books: $60,000
• Add: $2,000 nondeductible fines
• Subtract: $5,000 municipal bond interest (tax-free)
• IRS Taxable Income = $57,000

Part VII: Schedule M-2 – Analysis of Accumulated Adjustments Account (AAA)

The AAA tracks undistributed profits of the S Corporation that have already been taxed at the shareholder level.

What goes into AAA:

• Additions: Ordinary income from operations.
• Subtractions: Distributions to shareholders, nondeductible expenses.

Example:

• Beginning AAA: $40,000
• Add: $60,000 ordinary income
• Subtract: $30,000 shareholder distributions
• Ending AAA: $70,000

This ensures distributions are not taxed again.

Frequently Asked Questions (FAQs)

Here’s a collection of unique, detailed FAQs for the instruction page (different from landing page FAQs).

1. Do all S Corps need to file Form 1120-S every year?

Yes. Even if your S Corp had no income or activity, the IRS requires annual filing to maintain S Corporation status.

2. Can an S Corp have a loss on Form 1120-S?

Yes. Losses pass through to shareholders and may offset other personal income, subject to basis and at-risk rules.

3. What happens if I miss the March 15 deadline?

• A late filing penalty of $245 per shareholder, per monthapplies (up to 12 months).
• File Form 7004 to request a 6-month extension.

4. How do shareholder K-1s connect to Form 1120-S?

Schedule K summarizes total results, while each shareholder’s K-1 breaks down their share. Errors in 1120-S flow directly into K-1s and personal tax returns.

5. Can single-member LLCs file Form 1120-S?

No. A single-member LLC is typically a disregarded entity. To file 1120-S, it must elect S Corporation status with Form 2553.

6. Do states accept IRS Form 1120-S?

Some states do, but others require separate state S Corp returns. Always check your state’s rules.

7. Is e-filing mandatory for Form 1120-S?

Yes, for most corporations with 250+ returns, but the IRS encourages e-filing for all filers. Platforms like TaxZerone make it easier and faster.

Comparisons: Form 1120-S vs. Other Forms

1120-S vs. 1120 (C Corporations)

• 1120-S: Pass-through taxation. No corporate-level tax.
• 1120: Double taxation (corporate tax + shareholder dividends).

1120-S vs. 1065 (Partnerships)

• Both are pass-throughs, but 1120-S is for corporations with elected S Corp status, while 1065 is for partnerships/LLCs.

1120-S vs. Schedule C (Sole Proprietors)

• Schedule C: For individuals and single-member LLCs.
• 1120-S: For formal S Corporations with multiple shareholders.