IRS Form 1120S Corporation Analysis
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal Form 1040 tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. However, the income still belongs to the corporation in the credit analysis. Income is only passed on the individual if there is a disbursement from the company indicated on the Schedule K-1. The Schedule K-1 will also provide information regarding if the owner(s) had to make a capital contribution into the company. This amount is usually deducted against the personal cash flow of the individual owner.
Form 1120S, U.S. Corporation Income Tax Return for an S Corporation
- Related Forms & Schedules:
- Schedule K
- Schedule L
- Schedule M1 – Companies w/ Assets Below $10 Million
- Schedule M-3 – Companies w/ Assets $10 Million and Above
- Schedule F – Farm
- Form 8825 – Investment Real Estate. Real estate owned by a partnership is on Form 8825
- Form 4562
Schedule B, Line 1 determine if the company's accounting method is either Cash or Accrual.
Schedule B, Line 2 a & 2b will provide a very brief indication of what business activity the company is engaged in.
Schedule K, Line 1 is where the amount of net income (loss) earned by the activities of the corporation is entered (the actual income statement is Form 1120S, Page 1, Line 21)
Schedule K, Line 2 is where the amount of net income (loss) earned by real estate owned by the corporation is entered (the actual income statement is IRS Form 8825, Line 17, which is attached to the Form 1120S)
If the corporation’s total receipts for the tax year were less than $250,000, and the corporation’s total assets at the end of the tax year were less than $250,000, then the coporation does not have to file a Schedule M-1.
- The M-1 Schedule is used to reconcile any differences between the company’s book or accounting pre-tax income (from the company's financial statements) and the taxable income shown on the tax return. Adjustments within the left column increase taxable net income for tax purposes; adjustments in the right column decrease net income for tax purposes. Adjustments may include:
- Line 2 - Income included on Schedule K, not recorded on books this year (example: income subject to tax such as items paid in advance)
- Line 3 - Expenses recorded on books this year not included on Schedule K (example: IRS will not allow all travel & entertainment expenses or contributions).
- Line 5 - Income recorded on books this year not included on Schedule K (example: return of principal, tax exmpt interest not subject to tax).
- Line 6 - Deductions included on Schedule K (example: excess tax depreciation, contributions carried over from prior year).
Schedule K-1 (Form 1120S)
Schedule K-1 (Form 1120S) http://www.irs.gov/pub/irs-pdf/f1120ssk.pdf
Shareholder's Instructions for Schedule K-1 (Form 1120S) http://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
Schedule K-1 (Form 1120S) is used to indicate cash flows between the business and the owner(s). The amounts indicated in Part III, is not the personal income of the owner, and used to prepare the individual's cash flow. Rather, these are the pro rata share of income and expenses incurred by the business, which are taxed at the owner's tax rate regardless if they are distributed or not to the owner(s).
Schedule K-1 (Form 1120S), Line 11 Section 179 Deduction is an IRS deduction that allows a company to deduct against income the full or partial purchase price of equipment and / or software either purchased or financed, and placed into service during the tax year (business-use vehicles have restrictions). There is a dollar limit on the total amount of the deduction. In addition, the equipment, vehicle(s), and/or software purchased by the company must be used for business purposes a minimum of 50% of the time in order to qualify for the Section 179 Deduction.
Schedule K-1 (Form 1120S), Line 12 Other Deductions, are deductions against the company's income, which may be passed on to the owner(s) but may be subject to limitations. An amount coded 12R is the portion of Form W-2 wages reported to the taxpayer by the corporation.
Schedule K-1 (Form 1120S), Line 16 Items affecting shareholder basis, an entry coded 16D is a distribution of cash to the shareholder. This amount is usually added to the cash flow of the individual, however it is not not reported on the individual's IRS Form 1040 as taxable personal income (the owner has already paid the tax on the income of the buisness, if it was reported again as personal income it would be double taxation, which the 1120S Corp. was designed to eliminate). This is why it is so important to obtain the schedule K-1, the Schedule K-1 Line 16D indicate the actual personal income that the owner took from the company either than, or in addition to, W2 earnings. In addition, the owner's share of S corporation income is not self-employment income and it is not subject to self-employment tax. Amounts coded 16E are the repayment of loans from shareholders.