S Corporations Income Tax Return
- Sonia Lee
- Sep 1
- 4 min read
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
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.
If you need assistance in preparing your taxes. Please contact us using the link below
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