S Corporations Income Tax Return

By: Sonia Lee Ng, CPA

Date: September 1, 2025

An S Corporation is an entity electing to pass corporate income, losses, deductions, and credits through their shareholders for federal tax purposes.

This approach allows S Corporations to avoid double taxation on the corporate infome.

Corporations can become an S Corporation by filing form 2553 Election by a Small Business Corporation.

S Corporations Filing Requirements

Form 1120-S U.S. Income Tax Return for an S Corporation

Due Date: the 15th day of the 3rd month after the end of its tax year.

Example: Calendar year taxpayer is 12/31/2024, due date is March 17, 2025.

If the due date falls on a weekend or legal holiday, the due date is the next business day.

Structure and Important Schedules of Form 1120-S

Page 1: Income, Deductions and Tax Payments, Signatures

Pages 2-3: Schedule B - Other Information

Pages 3-4: Schedule K - Shareholders' Pro Rata Share Items

Page 4: Schedule L - Balance Sheets per Books

Page 5: Balance Sheet

Important Schedules from Form 1120-S

Schedule B: Other Information

Section with Yes/No questions about accounting method, ownership, foreign accounts, stock ownership, loans to shareholders, and corporate structure.

Schedule K: Shareholders' Pro Rata Share Items

Reports the corporation's total income, deductions, credits, and other items before allocation to shareholders. Includes:

• Ordinary business income

• Rental real estate income

• Interest, dividends, capital gains

• Deductions (Section 179, charitable contributions, etc.)

• Foreign transactions

• AMT (Alternative Minimum Tax) items

• Other information

Schedule K-1

This form is issued separately to each shareholder. It reports their specific share of income, deductions, and credits (from Schedule K)

Part I: Information about the Corporation

• Name, EIN, address, IRS filing location

Part II: Information about the Shareholder

• Name, address, ownership percentage, type of shareholder

  
  

Part III: Shareholder's Share of Current Year Income, Deductions, Credits, and Other Items

• Ordinary business income (loss)

• Net rental real estate income (loss)

• Other rental income (loss)

• Interest, dividends, capital gains

• Section 179 deduction

• Foreign transactions

• AMT items

• Other deductions/credits

Schedule L: Balance Sheet (Page 5)

• Beginning and end of year balance sheet (assets, liabilities, equity)

• Must agree with the corporation's books

Schedule M-1: Reconciliation of Income (Loss) per Books With Income (Loss) per Return

• Reconciles book income (financial accounting) to tax income (IRS rules)

• Adjusts for permanent and temporary differences

Schedule M-2: Analysis of Accumulated Adjustments Account (AAA), PTEP, Accumulated E&P, Other Adjustments Account (OAA)

• Tracks undistributed income of the S corporation

• Shows how retained earnings and tax adjustments flow to shareholders

Schedule M-3: (filed with Form 1120-S for large S Corp only)

• This form is required for large S corporations (total assets of $10 million or more)

• This form provides a detailed reconciliation between corporations financial accounting income (book income) and its taxable income reported on the tax return. This helps keep track of the permanent and temporary differences (e.g., depreciation, nondeductible expenses, tax-exempt income)

Temporary Differences

Examples of Temporary Differences

Temporary differences are differences that reverse in future years - timing differences between book and tax return. When an item hits taxable income.

a. Depreciation:

• Books: Straight-line depreciation

• Tax:Accelerated (MACRS/bonus)

• Difference reverses as the asset ages

b. Bad Debt Expense

• Books: Allowance method (estimate)

• Tax: Direct write-off when debt becomes worthless

c. Warranty Costs

• Books: Accrued as liability when sales are made

• Tax: Deductible only when actually paid

d. Accrued Vacation Pay

• Books: Expensed when earned

• Tax: Deductible only when paid (unless paid within 2 1/2 months of year-end)

e. Unearned Revenue/Advance Payments

• Books: Recognized as liability until earned.

• Tax: Sometimes recognized earlier under IRS rules

f. Rent/Lease Income

• Books: Straight-line recognition

• Tax: May follow cash received

Permanent Differences

Examples of Permanent Differences

These difference never reverse. They affect only books or only tax, but not noth. Affect whether it ever hits taxable income.

a. Tax-Exempt Interest Income

• Books: Included in income

• Tax: Not taxable

b. Nondeductible Expenses

• 50% of meals, 100% of entertainment (post-2017 rules)

• Fines, penalties, lobbying costs

• Certain life insurance premiums (if corporation is the beneficiary)

c. Federal Income Tax Expense

• Books: Expensed

• Tax: Not deductible on 1120-S

d. Key-Man Life Insurance Proceeds

• Books: Included in income

• Tax: Excluded from taxable income

e. Goodwill Amortization (pre-20098 rules vs. tax rules)

Summary of Books vs. Tax Differences in Schedule M

Category	Books Treatment	Tax Treatment	Type of Difference
Depreciation	Straight-line over useful life	Accelerated (MACRS, bonus depreciation)	Temporary
Bad Debt Expense	Allowance method (estimate future write-offs)	Direct write-off when debt is worthless	Temporary
Warranty Costs	Expense accrued when sales are made	Deductible only when paid	Temporary
Accrued Vacation Pay	Expensed when earned	Deductible only when paid (or within 2 1/2 months after year-end	Temporary
Unearned Revenue/Advance Payments	Recorded as liability until earned	Sometimes recognized earlier under IRS rules	Temporary
Rent/Lease Income	Straight-line recognition	May follow actual cash received	Temporary
Tax-Exempt Interest	Included in book income	Excluded from taxable income	Permanent
Federal Income Tax Expense	Deducted as expense	Not deductible for tax purposes	Permanent
Meals & Entertainment	100% recorded as expense	Only 50% of meals deductible; entertainment nondeductible	Permanent
Fines & Penalties	Expensed if incurred	Not deductible	Permanent
Life Insurance Premiums (Corp Beneficiary)	Expensed	Not deductible	Permanent
Life Insurance Proceeds (Corp Beneficiary)	Recorded as income	Excluded from taxable income	Permanent

Disclaimer

The information provided in this material is for general informational purposes only and should not be considered tax, legal, or accounting advice. Every taxpayer’s situation is unique, and laws or regulations may change over time. You should consult with a qualified tax professional, attorney, or accountant before making any tax decision.

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