What Is Form 1120S: U.S. Income Tax Return for an S Corporation?

Form 1120S: U.S. Income Tax Return for an S Corporation is a tax document used to report the income, losses, and dividends of S corporation shareholders. Essentially, Form 1120S is an S corporation's tax return. Form 1120S is part of the Schedule K-1 document. The form identifies the percentage of company shares owned by each individual shareholder for the tax year and must be prepared for all individuals.

For a partnership, Form 1065 is submitted instead of Form 1120S.

Who Can File Form 1120S: U.S. Income Tax Return for an S Corporation?

A corporation or other entity must file Form 1120S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. The Internal Revenue Service, or IRS, uses the ownership percentage detailed in Form 1120S to allocate how much profit and loss should be assigned to an individual shareholder. If the shareholder does not see a change in this percentage during the year, profit and loss is relatively easy to calculate. However, if the individual purchases additional shares, or sells or transfers any holdings during the course of the year, then profit and loss must be pro-rated on a per-share basis.

Form 1120S must be filed by S corporations, which are corporate structures that allow businesses to pass corporate income, losses, deductions, and credit through to shareholders for federal tax purposes.

How to File Form 1120 S

Use Form 1120S to report the income, gains, losses, deductions, credits, and other information of a domestic corporation or other entity for any tax year covered by an election to be an S corporation.

Form 1120S and S Corporations

Small teams (less than 100 shareholders) may choose to form an S corporation for the purposes of avoiding one level of federal taxation. In addition, if the team does not have significant inventory, they are able to use the cash method of accounting under S corporation terms. This can be far simpler than the accrual method.

While S corporations have significant advantages, some downsides include being subject to many of the same rules that corporations (C corporations) must follow, including high legal and tax service fees. Both S corporations and C corporations must also file articles of incorporation and hold regular meetings for directors and shareholders with detailed minutes. These meetings must be forums that allow shareholders to vote on major corporate decisions, such as management restructuring, mergers and acquisitions, and new investments. Finally, S corporations and C corporations have similar legal and accounting costs of set-up.

While C corporations may issue several classes of stock (for example, Berkshire Hathaway offers BRK.A and BRK.B, and Google has both GOOG and GOOGL), S corporations can only issue one class, which some believe can hamper a company's ability to raise capital.

Download Form 1120S: U.S. Income Tax Return for an S Corporation

Here is a link to a downloadable Form 1120S.

Key Takeaways

  • Form 1120S is a tax document used to report the income, losses, and dividends of S corporation shareholders.
  • A corporation or other entity must file Form 1120S if (a) it elected to be an S corporation by filing Form 2553, (b) the IRS accepted the election, and (c) the election remains in effect. 
  • The Internal Revenue Service uses the ownership percentage detailed in Form 1120S to allocate how much profit and loss should be assigned to an individual shareholder.