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Incorporating your small business will affect how you file your federal income taxes, how much you’ll pay and which forms you’ll need for the task.
Corporations (also referred to as C corporations) and LLCs that elect to be taxed as C-corps use Form 1120 to report their business profits and losses.
It’s a complicated form with six pages of dense text, numbered boxes and columns. Even the IRS Instructions for Form 1120 can be intimidating, with nearly 30 pages of technical tax jargon. Don’t let the legalese deter you.
And, if you need to file Form 1120, you won’t be able to use Credit Karma Tax® to do so (though you may still be able to use the free online tax-preparation and filing service to do your personal tax returns). You may have to work with a tax professional to file the form and any others you need for your business taxes. But it also pays to have a basic understanding of what’s on the form and what the IRS expects from business owners.
Let’s take a look at Form 1120 and the type of information that gets reported to the IRS on this corporate income tax form.
- Who must file Form 1120?
- What information goes on Form 1120?
- What are some other forms I might need to file?
- When is Form 1120 due?
Unless exempt, all corporations must file a federal income tax return annually, whether or not they have taxable income. C corporations and limited liability companies that elect to be taxed as C-corps file their federal income tax returns using Form 1120, the U.S. corporation income tax return.
Other types of businesses use different forms when filing their federal income taxes. Here are some common ones.
- Nonprofit corporations that have been granted tax-exempt status use Form 990-T.
- LLCs that are treated as partnerships for federal income tax purposes use Form 1065.
- S corporations use Form 1120S.
The IRS Instructions for Form 1120 include a list of forms used by other types of organizations.
The Small Business Administration reports that as of 2014 the majority of small businesses operate as sole proprietorships, while a very small percentage (just 1.6% in 2014) operate as a C corporation or other business entity.
Form 1120 consists of seven major sections, though not every corporation that must fill out Form 1120 is required to complete all seven sections.
Page 1 asks for basic information about the corporation and a list of types of income and deductions. For example, line 1a is for gross receipts or sales, such as online sales.
Schedule C is for reporting dividend income received, information from sales of controlled foreign corporations and other unique items. If you have a corporation that receives dividend income or owns stock in a foreign corporation, consider consulting a tax advisor or review the Instructions for Form 1120.
Schedule J is where you’ll calculate the corporation’s tax liability. You’ll start by multiplying the taxable income calculated on Page 1 by the corporate tax rate. For 2019, the corporate tax rate is 21%. There’s also space for listing other items that might or might not apply to your small businesses. Review the lines of Schedule J. If any of these items apply to your corporation, consider discussing them with a tax professional or review the Instructions for Form 1120.
In Part III of Schedule J, you’ll add up items that could reduce the amount of tax due, such as any prior-year overpayments of federal tax, estimated tax payments and certain tax credits. This amount carries to Page 1 to determine whether the corporation owes additional tax or is due a refund.
Schedule K asks for additional information about the business’s accounting method, activities and ownership. You can find a list of Principal Business Activity Codes in the Instructions for Form 1120. There are also several yes or no questions. Many of the activities mentioned in these questions pertain to large corporations.
But pay close attention to Question 13. It asks whether the corporation’s total receipts for the tax year and total assets at the end of the tax year are less than $250,000. If the answer to Question 13 is yes, then you don’t need to complete the final sections of the form, Schedules L, M-1 and M-2. If the answer is no, you’ll need to complete those sections of the form.
Where do I report business income on my personal tax return?
If your business isn’t incorporated, or you operate it as a single-member LLC, you’ll report income from the business on IRS Schedule C and Schedule 1 of your personal Form 1040.
Schedule L is a balance sheet. If you use accounting software, you should be able to run a balance sheet report from your accounting software and enter assets, liabilities and equity items here.
Schedule M-1 reconciles the corporation’s book income with its taxable income reported on the return. Several situations can cause book income to differ from income per the tax return. Here are a few.
- The corporation has nondeductible entertainment expenses or meal expenses that are only 50% deductible.
- The corporation uses a different depreciation method for books than it does for tax purposes.
- The corporation uses the accrual basis for its book accounting but prepares its tax return on the cash basis.
Schedule M-2 is used to analyze a corporation’s unappropriated retained earnings per its books. Company boards can set aside company earnings for a specific purpose. Retained earnings that aren’t allocated for a specific purpose — unappropriated retained earnings — can be paid out to shareholders as dividends. Schedule M-2 starts with retained earnings at the beginning of the year, adds net income and subtracts distributions.
Some small corporations with straightforward tax situations may be able to file Form 1120 alone, but others may have to attach additional forms and schedules and file them with Form 1120. Here are some common attachments.
- Form 1125-A: A business that carries inventory may be required to calculate Cost of Goods Sold on Form 1125-A.
- Schedule D: Corporations with capital gains and losses must attach Schedule D.
- Form 4797: A company that sells business property or lost property due to casualty or theft must file Form 4797 to report those gains and losses.
- Form 1125-E: If the corporation had total receipts of $500,000 or more, it must attach Form 1125-E to report compensation paid to officers of the corporation.
- Form 4562: A business that claims depreciation or amortization expense on new property placed in service during the year must include Form 4562 with its return.
Corporate tax returns are due by the 15th day of the fourth month after the end of the tax year. If your corporation’s year ends on Dec. 31, that means Form 1120 is due on April 15. But corporations with a fiscal year ending June 30 must file by the 15th day of the third month following the end of its fiscal year — in other words, Sept. 15.
If that deadline falls on a Saturday, Sunday or legal holiday, the return is due the next business day. If you need more time to file, you can request an extension by filing Form 7004 by the original due date of the return. For most corporations, filing Form 7004 grants an automatic six-month extension. But if the corporation’s fiscal year ends on June 30, the corporation is eligible for a seven-month extension.
Corporations of all sizes may use Form 1120 — from those with a single shareholder and very simple tax filing obligations to some of the largest publicly traded corporations. For that reason, Form 1120 includes questions about some very complicated tax subjects.
But don’t let the fine print and hefty instruction booklet intimidate you. If your corporation’s tax situation is fairly straightforward, several sections of Form 1120 won’t apply to you. If you’re not sure about anything, get help from your tax preparer to make sure you follow the rules and avoid costly penalties.
Christina Taylor is senior manager of tax operations for Credit Karma Tax®. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She codeveloped an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent and the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s degree in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.