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Whether you’re a “solopreneur,” a small-business owner with a handful of employees or an owner of a big company, you have multiple ways to structure your business. Your business structure will affect how you should file your federal income taxes.
An S corporation is one way to structure your business, if it qualifies for the status — and not all small businesses will. If your business operates as an S-corp, your corporate income, losses, deductions and credits pass from the business to your personal return (and the returns of any other shareholders) for tax purposes. That’s why S-corps are also called “pass-through businesses.”
You, along with any other shareholders in the S-corp, will report this passed-along information on your personal tax return. But you’ll also need to file a business tax return for your S-corp — and that’s Form 1120S.
Let’s look at the form and some things you should know about filing federal income taxes for your S-corp.
- What is an S-corp?
- What is Form 1120S?
- What information is on tax form 1120S?
- How do I fill out tax form 1120S?
An S-corp is more of a tax status than a business structure. S-corps are pass-through entities for corporations, which means that certain income and losses from the business “pass through” onto the shareholders’ personal tax returns. But the S-corp is still responsible for some other taxes, such as tax on passive income.
Because the business income is reported on the shareholders’ personal tax returns, it’s subject to tax at their personal income tax rates. This is one of the main advantages of an S-corp — avoiding double taxation. Your business income typically isn’t subject to tax at both the personal income and corporate level.
S-corps have other tax advantages, too. Because of the 2017 tax reforms, if you have an S-corp and are below a certain income threshold, you may qualify for a 20% tax deduction on qualified business income on your federal income tax return. In 2018, the income threshold was $157,500 for single filers and $315,000 for married couples who file jointly.
But not all types of business qualify to be S-corps. If you’re unsure about which business structure to choose for your business, the Small Business Administration offers information that could help.
What are some advantages of S corporations?
Business income is reported on each shareholder’s personal tax return. So if you’re a shareholder, it’s subject to tax at your personal income tax rate. As an S-corp, your business typically won’t have to pay taxes at both the personal income and corporate levels.
If you have an S-corp and are below a certain income threshold, you may qualify for up to a 20% tax deduction on qualified business income.
These tax advantages can reduce the amount of taxes you owe overall. But keep in mind: Once you file form 1120S and your personal tax return, any tax payment or refund due will be through your individual income tax return and in proportion to your share of ownership in the S-corp.
What are other types of business structures?
Here are some of the business structures that the IRS recognizes.
- Sole proprietorships: Sole proprietorships are unincorporated businesses owned by one individual.
- Partnerships: A partnership is a business owned by two or more people who contribute money, property, labor or skill. They expect to share in profits and losses.
- Corporations: Also called C corporations, these businesses are incorporated and recognized as a separate tax-paying entity for federal income tax purposes.
- S corporations: These corporations pass the company’s income, losses, deductions and credits to their shareholders, who report income and losses on their personal tax returns.
- Limited liability companies: States set laws and regulations for establishing LLCs, which can have owners who are individuals, corporations, other LLCs or even foreign entities. For federal tax purposes, LLCs may elect to be treated as corporations, partnerships or as part of the owner’s tax return.
Just as many individual taxpayers must file a federal tax return every year, so must companies.
If your business has an S-corp tax classification status, you must file form 1120S, which is essentially the annual tax return for your business. Use this form to report deductions, gains, income and losses from the business during the current tax year.
The information on Form 1120S falls into three general categories: income, deductions, and taxes and payments.
Here’s an overview of some of the main information the IRS requires you to provide.
- Your business’ gross receipts and gross profits
- Compensation of officers and salaries and wages
- Returns and allowances (cash or credit refunds issued to customers)
- Cost of goods sold (cost to manufacture the products or services your business sells)
- Estimated tax payments
- Any refundable tax credits carried over from previous years
Form 1120S also has multiple schedules that you may need to include when you file.
- Schedule B: Schedule B includes any canceled or forgiven non-shareholder business debt, whether a qualifying subsidiary’s S-corp status was terminated or revoked, and any 1099 payments to independent contractors that worked for your business during the year.
- Schedule K: Schedule K lists each shareholder’s share of income, deductions, credits and other items from the business. This form will also detail the amount of pass-through income that will be reflected on your personal tax return.
- Schedule L: Schedule L provides an overview of your business’ balance sheets, including cash, inventory, loans to shareholders, liabilities, mortgages and capital stock.
- Schedules M-1 and M-2: Schedule M-1 reconciles the business income (or loss) shown in its accounting records with information that’s been reported on Schedule K. Schedule M-2 details any adjustments, including reductions, distributions, accumulated earnings or profits, that are part of your business’ financials.
To complete Form 1120S, you’ll need, among other things, information on your business’ gross sales and profits, business expenses and any estimated taxes you owe. This is why good recordkeeping throughout the year is so important. Whether you use accounting software or keep all this information in an Excel file, gather all of the relevant documents on your business financials to complete Form 1120S.
For 2019, S-corps must file Form 1120S by the 15th day of the third month at the end of their tax year. So if you operate on a calendar year basis, the deadline is March 15, 2020.
If your business operates as an S-corp, the income you gain from it as a shareholder will pass through to your personal federal income tax return. But you’ll still need to file a separate tax return for your business — Form 1120S.
You may not be able to file your business tax return for free through an online tax filing service, but you may still be able to file your personal federal income tax return for free. Credit Karma Tax® can’t help you with Form 1120-S. But you may still be able to use it to do your personal income taxes and claim a pass-through deduction if you’re eligible for one.
Troy Grimes is a tax product specialist with Credit Karma Tax®. He’s worked in tax, accounting and educational software development for nearly 30 years. He has a bachelor’s degree in business administration with an emphasis in business analysis from Texas A&M University. You can find him on LinkedIn.