Tax Reporting for an S corporation

  • An S corporation files Form 1120S annually.
  • Form 1120S is due on the 15th day of the third month following the end of its tax year.
    • For a calendar year, Form 1120S is due March 15th (or the next business day if the 15th falls on a Saturday, Sunday, or holiday).
  • Form 7004 is used to file for an automatic 6-month extension.
  • An S corporation reports income, deductions, credits, gains, and losses to each shareholder annually on Schedule K-1.
  • Each shareholder is responsible for the taxes on his share of income.

Don't file your copy of Schedule K-1 with the IRS. Keep it for your own records. Attach it to your copy of Form 1040.

When an S corporation May Be Taxed

There are three instances when an S corporation itself (the corporate entity) will be liable for taxes. These instances may occur as a result of operating as a regular C corporation for a period of time before electing S status. S corporation shareholders are not directly liable for these taxes.

The following three items may result in tax for an S corporation (not directly to the shareholders):

  1. Built-in gains: Property held by a C corporation that has appreciated in value upon conversion to S status, will include a so-called, built-in-gain to the date of conversion.
    • The gain is the excess of the market value over the adjusted basis of the property at the date of conversion.
    • This gain is reported as a built-in-gain if the property is sold or disposed of within 10 years of the conversion.
  2. LIFO (Last-In, First-Out) recapture:
    • LIFO is an inventory cost-flow assumption. FIFO (First-In, First-Out) is another inventory cost-flow assumption.
      • LIFO results in a lower ending inventory, and generally lower taxes (during times of inflation). FIFO generally results in a higher ending inventory and higher taxes.
      • LIFO recapture is the excess of FIFO ending inventory over LIFO ending inventory. This excess amount is the amount by which net income was understated as a result of using LIFO instead of FIFO. This excess amount is recaptured as income and taxed to the S corporation.
  3. Passive investment income: An S corporation must pay tax on excessive passive investment income earned during a tax year when it operated as a C corporation. A tax results when passive investment income exceeds 25% of gross receipts.
    • Passive investment income includes: rents, royalties, dividends, interest, annuities, and proceeds from the sales or exchange of stock or other securities.
    • If all accumulated earnings and profits are distributed to shareholders before year-end, the corporation can avoid paying the tax. However, the shareholders will have a taxable dividend.

If S status is elected and approved immediately after initially incorporation, none of these items will not apply to your new S corporation. In other words, these exceptions will only apply to older C corporations that subsequently converted to S status.

State Taxes and S corporations

Although an S corporation generally doesn't pay federal taxes, some states may assess a minimum tax on an S corporation.

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