Section references are to the Internal Revenue Code unless otherwise noted.
For the latest information about developments related to Form 1120-S and its instructions, such as legislation enacted after they were published, go to IRS.gov/Form1120S.
Electronically filed returns.
The electronic filing threshold for corporate returns required to be filed on or after January 1, 2024, has decreased to 10 or more returns. See Electronic Filing , later.
Increase in penalty for failure to file.
For tax returns required to be filed in 2024, the minimum penalty for failure to file a return that is more than 60 days late has increased to the smaller of the tax due or $485. See Late filing of return , later.
Deduction for certain energy efficient commercial building property.
For tax years beginning in 2023, corporations filing Form 1120-S and claiming the energy efficient commercial buildings deduction should report the deduction on line 19. See the instructions for line 19.
Expiration of 100% business meal expense deduction.
The temporary 100% business meal expense deduction for food and beverages provided by a restaurant does not apply to amounts paid or incurred after 2022.
Elective payment election.
Applicable entities and electing taxpayers can elect to treat certain credits as elective payments. See the instructions for line 24d and the Instructions for Form 3800.
Digital assets.
Digital assets are required to be reported. See new question 16 on Schedule B, later.
Schedules K and K-1 reporting codes.
Separate reporting codes are assigned to items grouped under code H for Other income (loss) , code S for Other deductions , code P for Other credits , and code AD for Other information in prior years. See the List of Codes in the Shareholder's Instructions for Schedule K-1 (Form 1120-S).
The following new reporting credit codes are added to line 13g.
Election by a small business corporation.
Don't file Form 1120-S unless the corporation has filed or is attaching Form 2553, Election by a Small Business Corporation. For details, see the Instructions for Form 2553.
The Internal Revenue Service is a proud partner with the National Center for Missing & Exploited Children® (NCMEC). Photographs of missing children selected by the Center may appear in instructions on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. TAS strives to ensure that every taxpayer is treated fairly and knows and understands their rights under the Taxpayer Bill of Rights.
As a taxpayer, the corporation has rights that the IRS must abide by in its dealings with the corporation. TAS can help the corporation if:
TAS has offices in every state, the District of Columbia, and Puerto Rico. Local advocates' numbers are in their local directories and at TaxpayerAdvocate.IRS.gov. The corporation can also call TAS at 877-777-4778.
TAS also works to resolve large-scale or systemic problems that affect many taxpayers. If the corporation knows of one of these broad issues, please report it to TAS through the Systemic Advocacy Management System at IRS.gov/SAMS.
For more information, go to IRS.gov/Advocate.
To request a direct deposit of the corporation's income tax refund into an account at a U.S. bank or other financial institution, attach Form 8050, Direct Deposit of Corporate Tax Refund. See the instructions for line 28.
Internet.
You can access the IRS website 24 hours a day, 7 days a week, at IRS.gov to:
Tax forms and publications.
The corporation can view, print, or download all of the forms and publications it may need on IRS.gov/FormsPubs. Otherwise, the corporation can go to IRS.gov/OrderForms to place an order and have forms mailed to it.
Use Form 1120-S 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.
For details about the election, see Form 2553, Election by a Small Business Corporation, and the Instructions for Form 2553.
A corporation or other entity must file Form 1120-S 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. After filing Form 2553, you should have received confirmation that Form 2553 was accepted. If you didn't receive notification of acceptance or nonacceptance of the election within 2 months of filing Form 2553 (5 months if you checked box Q1 to ask for a letter ruling), please follow up by calling 800-829-4933. Don't file Form 1120-S for any tax year before the year the election takes effect.
Relief for late elections.
If you haven't filed Form 2553, or didn't file Form 2553 on time, you may be entitled to relief for a late-filed election to be an S corporation. See the Instructions for Form 2553 for details.
Once the election is made, it stays in effect until it is terminated. If the election is terminated, the corporation (or a successor corporation) can make another election on Form 2553 only with IRS consent for any tax year before the fifth tax year after the first tax year in which the termination took effect. See Regulations section 1.1362-5 for details.
An election terminates automatically in any of the following cases.
To revoke the election, the corporation must file a statement with the appropriate service center listed under Where To File in the Instructions for Form 2553. In the statement, the corporation must notify the IRS that it is revoking its election to be an S corporation. The statement must be signed by each shareholder who consents to the revocation and contain the information required by Regulations section 1.1362-6(a)(3).
A revocation can be rescinded before it takes effect. See Regulations section 1.1362-6(a)(4) for details.
For rules on allocating income and deductions between an S corporation's short year and a C corporation's short year and other special rules that apply when an election is terminated, see section 1362(e) and Regulations section 1.1362-3.
If an election was terminated under (1) or (2) above and the corporation believes the termination was inadvertent, the corporation can ask for permission from the IRS to continue to be treated as an S corporation. See Regulations section 1.1362-4 for the specific requirements that must be met to qualify for inadvertent termination relief.
S corporations can generally electronically file (e-file) Form 1120-S, related forms, schedules, statements, and attachments; Form 7004 (automatic extension of time to file); and Forms 940, 941, and 944 (employment tax returns). Form 1099 and other information returns can also be electronically filed. The option to e-file doesn't, however, apply to certain returns.
For returns filed on or after January 1, 2024, S corporations that file 10 or more returns are required to e-file Form 1120-S. See Regulations section 301.6037-2. However, these corporations can request a waiver of the electronic filing requirements.
For more information on e-filing, see E-file for Business and Self Employed Taxpayers on IRS.gov.
Waivers.
The IRS may waive the electronic filing rules if the S corporation demonstrates that a hardship would result if it were required to file its return electronically. A corporation interested in requesting a waiver of the mandatory electronic filing requirement must file a written request, and request one in the manner prescribed by the IRS. All written requests for waivers should be mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1120 e-file Waiver Request
Mail Stop 1057
Ogden, UT 84201
If using a delivery service, requests for waivers should be mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1120 e-file Waiver Request
Mail Stop 1057
1973 N. Rulon White Blvd.
Ogden, UT 84404
Waiver requests can also be faxed to 877-477-0575. Contact the e-Help Desk at 866-255-0654 for questions regarding the waiver procedures or process.
Exemptions.
The IRS may provide exemptions from the requirements to electronically file. If using the technology required to electronically file conflicts with religious beliefs, the corporation is exempt from the requirement. Clearly indicate the exemption on the corporation’s return. Write “Religious Exemption” at the top of the Form 1120-S. File the return at the applicable IRS address. See Where To File , later. For more information, see Notice 2024-18.
Generally, an S corporation must file Form 1120-S by the 15th day of the 3rd month after the end of its tax year. For calendar year corporations, the due date is March 15, 2024. A corporation that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.
If the due date falls on a Saturday, Sunday, or legal holiday, the corporation can file on the next day that isn’t a Saturday, Sunday, or legal holiday.
If the S corporation election was terminated during the tax year and the corporation reverts to a C corporation, file Form 1120-S for the S corporation's short year by the due date (including extensions) of the C corporation's short year return.
Corporations can use certain private delivery services (PDS) designated by the IRS to meet the “timely mailing as timely filing” rule for tax returns. Go to IRS.gov/PDS for the current list of designated services.
The PDS can tell you how to get written proof of the mailing date.
For the IRS mailing address to use if you are using a PDS, go to IRS.gov/PDSStreetAddresses.
Private delivery services can't deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.
File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, to ask for an extension of time to file. Generally, the corporation must file Form 7004 by the regular due date of the return. See the Instructions for Form 7004.
File the corporation's return at the applicable IRS address listed below.
| If the corporation's principal business, office, or agency is located in: | And the total assets at the end of the tax year (Form 1120-S, page 1, item F) are: | Use the following address: |
| Connecticut, Delaware, District of Columbia, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin | Less than $10 million and Schedule M-3 isn't filed | Department of the Treasury Internal Revenue Service Center Kansas City, MO 64999-0013 |
| $10 million or more, or less than $10 million and Schedule M-3 is filed | Department of the Treasury Internal Revenue Service Center Ogden, UT 84201-0013 | |
| Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming | Any amount | Department of the Treasury Internal Revenue Service Center Ogden, UT 84201-0013 |
| A foreign country or U.S. territory | Any amount | Internal Revenue Service Center P.O. Box 409101 Ogden, UT 84409 |
The return must be signed and dated by:
If a return is filed on behalf of a corporation by a receiver, trustee, or assignee, the fiduciary must sign the return instead of the corporate officer. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a corporation must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.
If an employee of the corporation completes Form 1120-S, the paid preparer space should remain blank. Anyone who prepares Form 1120-S but doesn't charge the corporation shouldn't complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer Use Only” area.
The paid preparer must complete the required preparer information and:
A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.
If the corporation wants to allow the IRS to discuss its 2023 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer Use Only” section of the return. It doesn't apply to the firm, if any, shown in that section.
If the “Yes” box is checked, the corporation is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The corporation is also authorizing the paid preparer to:
The corporation isn't authorizing the paid preparer to receive any refund check, bind the corporation to anything (including any additional tax liability), or otherwise represent the corporation before the IRS.
The authorization will automatically end no later than the due date (excluding extensions) for filing the corporation's 2024 tax return. If the corporation wants to expand the paid preparer's authorization or revoke the authorization before it ends, see Pub. 947, Practice Before the IRS and Power of Attorney.
To ensure that the corporation's tax return is correctly processed, attach all schedules and other forms after page 5 of Form 1120-S in the following order.
Complete every applicable entry space on Form 1120-S and Schedule K-1. Don't enter “See Attached” or “Available Upon Request” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms.
If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the corporation's name and EIN on each supporting statement or attachment.
Generally, the corporation must pay any tax due in full no later than the due date for filing its tax return (not including extensions). See the instructions for line 26. If the due date falls on a Saturday, Sunday, or legal holiday, the payment is due on the next day that isn't a Saturday, Sunday, or legal holiday.
Corporations must use electronic funds transfers to make all federal tax deposits (such as deposits of employment, excise, and corporate income tax). Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). However, if the corporation doesn't want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make deposits on its behalf. Also, it may arrange for its financial institution to submit a same-day wire payment (discussed below) on its behalf. EFTPS is a free service provided by the Department of the Treasury. Services provided by a tax professional, financial institution, payroll service, or other third party may have a fee.
To get more information about EFTPS or to enroll in EFTPS, visit www.EFTPS.gov or call 800-555-4477. To contact EFTPS using the Telecommunications Relay Services (TRS), for people who are deaf, hard of hearing, or have a speech disability, dial 711 and provide the TRS assistant the 800-555-4477 number above or 800-733-4829.
Depositing on time.
For any deposit made by EFTPS to be on time, the corporation must submit the deposit by 8 p.m. Eastern time the day before the date the deposit is due. If the corporation uses a third party to make deposits on its behalf, they may have different cutoff times.
Same-day wire payment option.
If the corporation fails to submit a deposit transaction on EFTPS by 8 p.m. Eastern time the day before the date a deposit is due, it can still make its deposit on time by using the Federal Tax Collection Service (FTCS). To use the same-day wire payment method, the corporation will need to make arrangements with its financial institution ahead of time regarding availability, deadlines, and costs. Financial institutions may charge a fee for payment made this way. To learn more about the information the corporation will need to provide to its financial institution to make a same-day wire payment, go to IRS.gov/SameDayWire.
Generally, the corporation must make installment payments of estimated tax for the following taxes if the total of these taxes is $500 or more: (a) the tax on built-in gains, (b) the excess net passive income tax, and (c) the investment credit recapture tax, each discussed later.
The amount of estimated tax required to be paid annually is the smaller of (a) the total of the above taxes shown on the return for the tax year (or if no return is filed, the total of these taxes for the year), or (b) the sum of (i) the investment credit recapture tax and the built-in gains tax shown on the return for the tax year (or if no return is filed, the total of these taxes for the tax year), and (ii) any excess net passive income tax shown on the corporation's return for the preceding tax year. If the preceding tax year was less than 12 months, the estimated tax must be determined under (a).
The estimated tax is generally payable in four equal installments. However, the corporation may be able to lower the amount of one or more installments by using the annualized income installment method or adjusted seasonal installment method under section 6655(e).
For a calendar year corporation, the payments are due for 2024 by April 15, June 15, September 15, and December 15. For a fiscal year corporation, they are due by the 15th day of the 4th, 6th, 9th, and 12th months of the year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next day that isn't a Saturday, Sunday, or legal holiday.
The corporation must make the payments using electronic funds transfers as described earlier.
For information on penalties that may apply if the corporation fails to make required payments, see the Instructions for Form 2220.
If the corporation receives a notice about penalties after it files its return, send the IRS an explanation and we will determine if the corporation meets reasonable-cause criteria. Don't attach an explanation when the corporation's return is filed.
Interest.
Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.
Late filing of return.
A penalty may be assessed if the return is filed after the due date (including extensions) or the return doesn't show all the information required, unless each failure is due to reasonable cause. See Caution , earlier. For returns on which no tax is due, the penalty is $235 for each month or part of a month (up to 12 months) the return is late or doesn't include the required information, multiplied by the total number of persons who were shareholders in the corporation during any part of the corporation's tax year for which the return is due. If tax is due, the penalty is the amount stated above plus 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a tax return required to be filed in 2024 that is more than 60 days late is the smaller of the tax due or $485.
Late payment of tax.
A corporation that doesn't pay the tax when due may generally be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax isn't paid, up to a maximum of 25% of the unpaid tax. The penalty won't be imposed if the corporation can show that the failure to pay on time was due to reasonable cause. See Caution , earlier.
Failure to furnish information timely.
For each failure to furnish Schedule K-1 (and Schedule K-3, if applicable) to a shareholder when due and each failure to include on Schedule K-1 (and Schedule K-3, if applicable) all the information required to be shown (or the inclusion of incorrect information), a $310 penalty may be imposed with respect to each Schedule K-1 (and Schedule K-3, if applicable) for which a failure occurs. If the requirement to report correct information is intentionally disregarded, each $310 penalty is increased to $630 or, if greater, 10% of the aggregate amount of items required to be reported. See sections 6722 and 6724 for more information.
The penalty won't be imposed if the corporation can show that not furnishing information timely was due to reasonable cause. See Caution , earlier.
Trust fund recovery penalty.
This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld aren't collected or withheld, or these taxes aren't paid. These taxes are generally reported on:
The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, or paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the full amount of the unpaid trust fund tax. See the Instructions for Form 720, Pub. 15 (Circular E), Employer's Tax Guide, or Pub. 51 (Circular A), Agricultural Employer's Tax Guide, for details, including the definition of “responsible persons.”
Other penalties.
Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.
Figure income using the method of accounting regularly used in keeping the corporation's books and records. The method used must clearly reflect income. Permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Code.
The following rules apply.
Small business taxpayer.
A small business taxpayer is a taxpayer that (a) has average annual gross receipts of $29 million or less for the 3 prior tax years, and (b) isn’t a tax shelter (as defined in section 448(d)(3)).
Change in accounting method.
Generally, the corporation must get IRS consent to change either an overall method of accounting or the accounting treatment of any material item for income tax purposes. To obtain consent, the corporation must generally file Form 3115, Application for Change in Accounting Method, during the tax year for which the change is requested. See the Instructions for Form 3115 and Pub. 538, Accounting Periods and Methods, for more information and exceptions. See also the Instructions for Form 3115 for procedures that may apply for obtaining automatic consent to change certain methods of accounting, non-automatic change procedures, and reduced Form 3115 filing requirements.
A corporation must figure its income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses.
An S corporation must use one of the following tax years.
A new S corporation must use Form 2553 to elect a tax year. To later change the corporation's tax year, see Form 1128, Application To Adopt, Change, or Retain a Tax Year, and its instructions (unless the corporation is making an election under section 444, discussed next).
Electing a tax year under section 444.
Under the provisions of section 444, an S corporation can elect to have a tax year other than a required year, but only if the deferral period of the tax year isn't longer than the shorter of 3 months or the deferral period of the tax year being changed. This election is made by filing Form 8716, Election To Have a Tax Year Other Than a Required Tax Year.
An S corporation may not make or continue an election under section 444 if it is a member of a tiered structure, other than a tiered structure that consists entirely of partnerships and S corporations that have the same tax year. For the S corporation to have a section 444 election in effect, it must make the payments required by section 7519. See Form 8752, Required Payment or Refund Under Section 7519.
A section 444 election ends if an S corporation:
If the termination results in a short tax year, enter at the top of the first page of Form 1120-S for the short tax year, “SECTION 444 ELECTION TERMINATED.”
The corporation may enter decimal points and cents when completing its return. However, the corporation should round off cents to whole dollars on its return, forms, and schedules to make completing its return easier. The corporation must either round off all amounts on its return to whole dollars, or use cents for all amounts. To round, drop amounts under 50 cents and increase amounts from 50 to 99 cents to the next dollar. For example, $8.40 rounds to $8 and $8.50 rounds to $9.
If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.
Keep the corporation's records for as long as they may be needed for the administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date each shareholder's return is due or filed, whichever is later. Keep records that verify the corporation's basis in property for as long as they are needed to figure the basis of the original or replacement property.
The corporation should keep copies of all filed returns. They help in preparing future and amended returns.
To correct a previously filed Form 1120-S, file an amended Form 1120-S and check box H(4) on page 1. Attach a statement that identifies the line number of each amended item, the corrected amount or treatment of the item, and an explanation of the reasons for each change.
If the income, deductions, credits, or other information provided to any shareholder on Schedule K-1 or K-3 is incorrect, file an amended Schedule K-1 or K-3 (Form 1120-S) for that shareholder with the amended Form 1120-S. Also give a copy of the amended Schedule K-1 or K-3 to that shareholder. Check the “Amended K-1” or “Amended K-3” box at the top of the Schedule K-1 or K-3 to indicate that it is an amended Schedule K-1 or K-3.
A change to the corporation's federal return may affect its state return. This includes changes made as the result of an IRS examination. For more information, contact the state tax agency for the state(s) in which the corporation's return was filed.
Reportable transaction disclosure statement.
Disclose information for each reportable transaction in which the corporation participated. Form 8886, Reportable Transaction Disclosure Statement, must be filed for each tax year the corporation participated in the transaction. The corporation may have to pay a penalty if it is required to file Form 8886 and doesn't do so. The following are reportable transactions.
For more information, see Regulations section 1.6011-4. Also see the Instructions for Form 8886.
The corporation may have to pay a penalty if it is required to disclose a reportable transaction under section 6011 and fails to properly complete and file Form 8886. Penalties may also apply under section 6707A if the corporation fails to file Form 8886 with its corporate return, fails to provide a copy of Form 8886 to the Office of Tax Shelter Analysis (OTSA), or files a form that fails to include all the information required (or includes incorrect information). Other penalties, such as an accuracy-related penalty under section 6662A, may also apply. See the Instructions for Form 8886 for details on these and other penalties.
Reportable transactions by material advisors.
Material advisors to any reportable transaction must disclose certain information about the reportable transaction by filing Form 8918, Material Advisor Disclosure Statement, with the IRS. For details, see the Instructions for Form 8918.
Transfers to a corporation controlled by the transferor.
Every significant transferor (as defined in Regulations section 1.351-3(d)) that receives stock of a corporation in exchange for property in a nonrecognition event must include the statement required by Regulations section 1.351-3(a) on or with the transferor's tax return for the tax year of the exchange. The transferee corporation must include the statement required by Regulations section 1.351-3(b) on or with its return for the tax year of the exchange, unless all the required information is included in any statement(s) provided by a significant transferor that is attached to the same return for the same section 351 exchange.
Election to reduce basis under section 362(e)(2)(C).
If property is transferred to a corporation subject to section 362(e)(2), the transferor and the acquiring corporation may elect, under section 362(e)(2)(C), to reduce the transferor's basis in the stock received instead of reducing the acquiring corporation's basis in the property transferred. Once made, the election is irrevocable. For more information, see section 362(e)(2) and Regulations section 1.362-4. If an election is made, a statement must be filed in accordance with Regulations section 1.362-4(d)(3).
Regulations section 1.1411-10(g) (section 1411 election with respect to CFCs and QEFs).
A corporation that directly or indirectly owns stock of a controlled foreign corporation (CFC) (within the meaning of section 953(c)(1)(B) or section 957(a)) or a passive foreign investment company (within the meaning of section 1297(a)) that the corporation treats as a qualified electing fund (QEF) under section 1293 may make the election provided in Regulations section 1.1411-10(g). The election must be made no later than the first tax year beginning after 2013 during which the corporation (i) includes an amount in gross income for chapter 1 purposes under section 951(a) or section 1293(a) for the CFC or QEF, and (ii) has a direct or indirect owner that is subject to tax under section 1411 or would have been if the election were made. This election must be made on an entity-by-entity basis, and applies only to the particular CFCs and QEFs for which an election is made. In general, for purposes of section 1411, if an election is in effect for a CFC or QEF, the amounts included in income under section 951 and section 1293 derived from the CFC or QEF are included in net investment income, and distributions described in section 959(d) or section 1293(c) are excluded from net investment income. Additionally, if the corporation elected to be treated as owning stock of a foreign corporation within the meaning of section 958(a) under Proposed Regulations section 1.958-1(e)(2), and an election under Regulations section 1.1411-10(g) is in effect for a CFC, the amount of global intangible low-taxed income included in income under section 951A is included in net investment income to the extent that it is allocated to the CFC under section 951A(f)(2). An election that is made under Regulations section 1.1411-10(g) can't be revoked. For more information regarding this election, see Regulations section 1.1411-10(g).
The election must be made in a statement that is filed with the corporation's original or amended return for the tax year in which the election is made. An election can be made on an amended return only if the tax year for which the election is made, and all tax years affected by the election, aren't closed by the period of limitations on assessments under section 6501. The statement must include:
In addition, for each CFC or QEF held by the corporation for which an election under Regulations section 1.1411-10(g) has already been made by the corporation, the statement should include (i) the name of the CFC or QEF; and (ii) either the EIN of the CFC or QEF, or, if the CFC or QEF doesn't have an EIN, the reference ID number of the CFC or QEF.
Annual information reporting by specified domestic entities under section 6038D.
Certain domestic corporations that are formed or availed of to hold specified foreign financial assets (“specified domestic entities”) must file Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 must be filed each year the value of the corporation's specified foreign financial assets meets or exceeds the reporting threshold. For more information on domestic corporations that are specified domestic entities and the types of foreign financial assets that must be reported, see the Instructions for Form 8938, generally, and in particular, Who Must File , Specified Domestic Entity , Types of Reporting Thresholds , Specified Foreign Financial Assets , Interests in Specified Foreign Financial Assets , Assets Not Required To Be Reported , and Exceptions to Reporting .
In addition, a domestic corporation required to file Form 8938 with its Form 1120-S for the tax year should check “Yes” to Schedule N (Form 1120), question 8, and also include that schedule with its Form 1120-S.
Certification as a qualified opportunity fund.
If the corporation is organized to invest in qualified opportunity zone property, it must attach Form 8996 to Form 1120-S to self-certify as a QOF. In addition, the corporation files Form 8996 annually to report that the QOF meets the investment standard of section 1400Z-2 or to figure the penalty if it fails to meet the investment standard. The corporation must also complete line 15 of Schedule B. For more information, see the Instructions for Form 8996.
Qualified opportunity fund investment.
If the corporation deferred a capital gain in a qualified opportunity fund (QOF), the corporation must file its return with Schedule D (Form 1120-S), Form 8949, and Form 8997 attached. The corporation will need to file Form 8997 annually until it disposes of the investment. See the instructions for Form 8997 for details.
Form 8975, Country-by-Country Report.
Certain U.S. persons that are the ultimate parent entity of a U.S. multinational enterprise group with annual revenue for the preceding reporting period of $850 million or more are required to file Form 8975. For more information, see the Instructions for Form 8975.
Other forms and statements.
See Pub. 542, Corporations, for a list of other forms and statements a corporation may need to file in addition to the forms and statements discussed throughout these instructions.
In general, section 465 limits the amount of deductible net losses shareholders can claim from certain activities. The at-risk limitations don't apply to the corporation, but instead apply to each shareholder's share of net losses attributable to each activity. Because the treatment of each shareholder's share of corporate net losses depends on the nature of the activity that generated it, the corporation must report the items of income, loss, and deduction separately for each activity. See Pub. 925, Passive Activity and At-Risk Rules, for additional information.
If the S corporation is involved in one of the following activities as a trade or business or for the production of income, the shareholder may be subject to the at-risk rules.
Activities described in (6) under Activities Covered by the At-Risk Rules , earlier, that constitute a trade or business are treated as one activity if:
Similar rules apply to activities described in (1) through (5) of that earlier discussion. For more information, see Pub. 925. If you aggregate your activities under these rules for section 465 purposes, check the appropriate box in item J.
If the corporate items of income, loss, or deduction reported on Schedule K-1 are from more than one activity covered by the at-risk rules, the corporation must report information separately for each activity.
The following information must be provided on an attachment to Schedule K-1 for each activity.
In general, section 469 limits the amount of losses, deductions, and credits that shareholders can claim from “passive activities.” The passive activity limitations don't apply to the corporation. Instead, they apply to each shareholder's share of any income or loss and credit attributable to a passive activity. Because the treatment of each shareholder's share of corporate income or loss and credit depends on the nature of the activity that generated it, the corporation must report income or loss and credits separately for each activity.
The following instructions and the instructions for Schedules K and K-1, later, explain the applicable passive activity limitation rules and specify the type of information the corporation must provide to its shareholders for each activity. If the corporation had more than one activity, it must report information for each activity on an attachment to Schedules K and K-1.
Generally, passive activities include (a) activities that involve the conduct of a trade or business if the shareholder doesn't materially participate in the activity, and (b) all rental activities (defined later) regardless of the shareholder's participation. For exceptions, see Activities That Are Not Passive Activities , later. The level of each shareholder's participation in an activity must be determined by the shareholder.
The passive activity rules provide that losses and credits from passive activities can generally be applied only against income and tax (respectively) from passive activities. Thus, passive losses can't be applied against income from salaries, wages, professional fees, or a business in which the shareholder materially participates or against “portfolio income” (defined later). Passive credits can't be applied against the tax related to any of these types of income.
Special rules require that net income from certain activities that would otherwise be treated as passive income must be recharacterized as nonpassive income for purposes of the passive activity limitations. See Recharacterization of Passive Income , later.
To allow each shareholder to correctly apply the passive activity limitations, the corporation must report income or loss and credits separately by activity for each of the following.
The following aren't passive activities.
The section 469(c)(3) exception for a working interest in oil and gas properties doesn't apply to an S corporation because state law generally limits the liability of shareholders.
A trade or business activity is an activity (other than a rental activity or an activity treated as incidental to an activity of holding property for investment) that:
If the shareholder doesn't materially participate in the activity, a trade or business activity of the corporation is a passive activity for the shareholder.
Each shareholder must determine if he or she materially participated in an activity. As a result, while the corporation's ordinary business income (loss) is reported on page 1 of Form 1120-S, the specific income and deductions from each separate trade or business activity must be reported on attachments to Form 1120-S. Similarly, while each shareholder's allocable share of the corporation's ordinary business income (loss) is reported in box 1 of Schedule K-1, each shareholder's allocable share of the income and deductions from each trade or business activity must be reported on statements attached to each Schedule K-1. See Passive Activity Reporting Requirements , later, for more information.
Generally, except as noted below, if the gross income from an activity consists of amounts paid principally for the use of real or personal tangible property held by the corporation, the activity is a rental activity.
There are several exceptions to this general rule. Under these exceptions, an activity involving the use of real or personal tangible property isn't a rental activity if any of the following apply.
In addition, a guaranteed payment described in section 707(c) is never income from a rental activity.
Average period of customer use.
Figure the average period of customer use for a class of property by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by the ratio of the gross rental income from that class to the activity's total gross rental income. The activity's average period of customer use equals the sum of these class-by-class average periods weighted by gross income. See Regulations section 1.469-1(e)(3)(iii).
Significant personal services.
Personal services include only services performed by individuals. To determine if personal services are significant personal services, consider all the relevant facts and circumstances. Relevant facts and circumstances include:
The following services aren't considered in determining whether personal services are significant.
Extraordinary personal services.
Services provided in connection with making rental property available for customer use are extraordinary personal services only if the services are performed by individuals and the customers' use of the rental property is incidental to their receipt of the services.
For example, a patient's use of a hospital room is generally incidental to the care received from the hospital's medical staff. Similarly, a student's use of a dormitory room in a boarding school is incidental to the personal services provided by the school's teaching staff.
Rental activity incidental to a nonrental activity.
An activity isn't a rental activity if the rental of the property is incidental to a nonrental activity, such as the activity of holding property for investment, a trade or business activity, or the activity of dealing in property.
Rental of property is incidental to an activity of holding property for investment if both of the following apply.
Rental of property is incidental to a trade or business activity if all of the following apply.
If the corporation sells or exchanges property that is also rented during the tax year (in which the gain or loss is recognized), the rental is treated as incidental to the activity of dealing in property if, at the time of the sale or exchange, the property was held primarily for sale to customers in the ordinary course of the corporation's trade or business.
See Temporary Regulations section 1.469-1T(e)(3) and Regulations section 1.469-1(e)(3) for more information on the definition of rental activities for purposes of the passive activity limitations.
Reporting of rental activities.
In reporting the corporation's income or losses and credits from rental activities, the corporation must separately report rental real estate activities and rental activities other than rental real estate activities.
Shareholders who actively participate in a rental real estate activity may be able to deduct part or all of their rental real estate losses (and the deduction equivalent of rental real estate credits) against income (or tax) from nonpassive activities. Generally, the combined amount of rental real estate losses and the deduction equivalent of rental real estate credits from all sources (including rental real estate activities not held through the corporation) that may be claimed is limited to $25,000.
Report rental real estate activity income (loss) on Form 8825 and line 2 of Schedule K and box 2 of Schedule K-1, rather than on page 1 of Form 1120-S. Report credits related to rental real estate activities on lines 13c and 13d of Schedule K (box 13, codes E and F, of Schedule K-1) and low-income housing credits on lines 13a and 13b of Schedule K (box 13, codes C and D of Schedule K-1).
Report income (loss) from rental activities other than rental real estate on line 3 of Schedule K and credits related to rental activities other than rental real estate on line 13e of Schedule K and in box 13, code G, of Schedule K-1.
Generally, portfolio income includes all gross income, other than income derived in the ordinary course of a trade or business, that is attributable to interest; dividends; royalties; income from a real estate investment trust, a regulated investment company, a real estate mortgage investment conduit, a common trust fund, a controlled foreign corporation, a qualified electing fund, or a cooperative; income from the disposition of property that produces income of a type defined as portfolio income; and income from the disposition of property held for investment. See Self-Charged Interest , later, for an exception.
Solely for purposes of the preceding paragraph, gross income derived in the ordinary course of a trade or business includes (and portfolio income, therefore, doesn't include) the following types of income.
See Temporary Regulations section 1.469-2T(c)(3) for more information on portfolio income.
Report portfolio income and related deductions on Schedule K rather than on page 1 of Form 1120-S.
Certain self-charged interest income and deductions may be treated as passive activity gross income and passive activity deductions if the loan proceeds are used in a passive activity. Generally, self-charged interest income and deductions result from loans between the corporation and its shareholders. Self-charged interest also occurs in loans between the corporation and another S corporation or partnership if each owner in the borrowing entity has the same proportional ownership interest in the lending entity.
The self-charged interest rules don't apply to a shareholder's interest in an S corporation if the S corporation makes an election under Regulations section 1.469-7(g) to avoid the application of these rules. To make the election, the S corporation must attach to its original or amended Form 1120-S a statement that includes the name, address, EIN of the S corporation, and a declaration that the election is being made under Regulations section 1.469-7(g). The election will apply to the tax year for which it was made and all subsequent tax years. Once made, the election can only be revoked with the consent of the IRS.
For more details on the self-charged interest rules, see Regulations section 1.469-7.
Generally, one or more trade or business or rental activities may be treated as a single activity if the activities make up an appropriate economic unit for measurement of gain or loss under the passive activity rules. Whether activities make up an appropriate economic unit depends on all the relevant facts and circumstances. The factors given the greatest weight in determining whether activities make up an appropriate economic unit are:
Example.
The corporation has a significant ownership interest in a bakery and a movie theater in Baltimore and a bakery and a movie theater in Philadelphia. Depending on the relevant facts and circumstances, there may be more than one reasonable method for grouping the corporation's activities. For instance, the following groupings may or may not be permissible.
Once the corporation chooses a grouping under these rules, it must continue using that grouping in later tax years unless either:
The IRS may regroup the corporation's activities if the corporation's grouping isn't an appropriate economic unit and one of the primary purposes for the grouping (or failure to regroup as required under Regulations section 1.469-4(e)) is to avoid the passive activity limitations. If you group your activities under these rules for section 469 purposes, check the appropriate box in item J.
Limitation on grouping certain activities.
The following activities may not be grouped together.
Activities conducted through partnerships.
Once a partnership determines its activities under these rules, the corporation as a partner can use these rules to group those activities with:
The corporation can't treat as separate activities those activities grouped together by a partnership.
Under Temporary Regulations section 1.469-2T(f) and Regulations section 1.469-2(f), net passive income from certain passive activities must be treated as nonpassive income. Net passive income is the excess of an activity's passive activity gross income over its passive activity deductions (current year deductions and prior year unallowed losses).
Any net passive income recharacterized as nonpassive income is treated as investment income for purposes of figuring investment interest expense limitations if it is from (a) an activity of renting substantially nondepreciable property from an equity-financed lending activity, or (b) an activity related to an interest in a pass-through entity that licenses intangible property.
The amount of income from the activities in items (1) through (3) below that any shareholder will be required to recharacterize as nonpassive income may be limited under Temporary Regulations section 1.469-2T(f)(8). Because the corporation won't have information regarding all of a shareholder's activities, it must identify all corporate activities meeting the definitions in items (2) and (3) as activities that may be subject to recharacterization.
Income from the following six sources is subject to recharacterization.
Because the corporation can't determine a shareholder's level of participation, the corporation must identify net income from property described above (without regard to the shareholder's level of participation) as income that may be subject to recharacterization.
To allow shareholders to correctly apply the passive activity loss and credit limitation rules, the corporation must do the following.
The information described in this section should be given directly to the shareholder and shouldn't be reported by the corporation to the IRS.
To allow shareholders to correctly figure the net investment income tax where a shareholder disposes of stock in the corporation during the tax year, the corporation may be required to provide the shareholder with certain information. The net investment income tax is a tax imposed on an individual's, trust's, or estate's net investment income. Net investment income includes the net gains or losses from the sale of stock in the corporation. A shareholder who is actively involved in one or more of the corporation or subsidiary pass-through entities' trades or businesses (other than trading in financial instruments or commodities) can reduce the amount of the gain or loss included in its net investment income. However, to figure its net investment income, the active shareholder needs certain information from the corporation.
Generally, the corporation must provide certain information to the shareholder if the corporation knows, or has reason to know, the following.
Information to be provided to shareholder.
Generally, the corporation must provide the shareholder with its pro rata share of the net gain and loss from the deemed sale for fair market value of the corporation's property, other than property that relates to the trades or businesses in which the shareholder materially participates, as determined under the passive activity loss rules applicable to the transfer of an interest in a pass-through entity. For more information, see the instructions for Form 8960, line 5c.
If a shareholder, who qualifies for the optional simplified reporting method, prefers to determine net gain or loss under the general calculation, the corporation may, but isn't obligated to, provide the information to the shareholder at the shareholder's request.
File the 2023 return for calendar year 2023 and fiscal years that begin in 2023 and end in 2024. For a fiscal or short tax year return, fill in the tax year space at the top of the form.
The 2023 Form 1120-S can also be used if:
The corporation must show its 2024 tax year on the 2023 Form 1120-S and take into account any tax law changes that are effective for tax years beginning after December 31, 2023.
Enter the corporation's true name (as set forth in the charter or other legal document creating it) and address on the appropriate lines. Enter the address of the corporation's principal office or place of business. Include the suite, room, or other unit number after the street address. If the post office doesn't deliver mail to the street address and the corporation has a P.O. box, show the box number instead.
Don't use the address of the registered agent for the state in which the corporation is incorporated. For example, if a business is incorporated in Delaware or Nevada and the corporation's principal office is located in Little Rock, Arkansas, the corporation should enter the Little Rock address.
If the corporation receives its mail in care of a third party (such as an accountant or an attorney), enter “C/O” on the street address line, followed by the third party's name and street address or P.O. box.
If the corporation has a foreign address, include the city or town, state or province, country, and foreign postal code. Don't abbreviate the country name. Follow the country's practice for entering the name of the state or province and postal code.
See Principal Business Activity Codes , later. For nonstore retailers, select the principal business activity (PBA) code by the primary product that your establishment sells. For example, establishments primarily selling prescription and non-prescription drugs, select PBA code 456110 Pharmacies & Drug Retailers.
For 2023, a corporation that (a) is required to file Schedule M-3 (Form 1120-S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More, and has less than $50 million total assets at the end of the tax year, or (b) isn't required to file Schedule M-3 (Form 1120-S) and voluntarily files Schedule M-3 (Form 1120-S), must either complete Schedule M-3 (Form 1120-S) entirely or complete Schedule M-3 (Form 1120-S) through Part I and complete Form 1120-S, Schedule M-1, instead of completing Parts II and III of Schedule M-3 (Form 1120-S). If a corporation chooses to complete Form 1120-S, Schedule M-1, instead of completing Parts II and III of Schedule M-3 (Form 1120-S), line 1, of Form 1120-S, Schedule M-1, must equal line 11 of Part I of Schedule M-3 (Form 1120-S).
Any corporation that completes Parts II and III of Schedule M-3 (Form 1120-S) must complete all columns, without exception.
If you are filing Schedule M-3, check the “Check if Sch. M-3 attached” box. See the Instructions for Schedule M-3 for more details.
Enter the corporation's EIN. If the corporation doesn't have an EIN, it must apply for one. An EIN can be applied for in the following ways.
If the corporation hasn't received its EIN by the time the return is due, enter “Applied for” and the date the corporation applied in the space for the EIN. However, if the corporation is filing its returns electronically, an EIN is required at the time the return is filed. For more information, see the Instructions for Form SS-4.
Enter the corporation's total assets (as determined by the accounting method regularly used in keeping the corporation's books and records) at the end of the tax year. If there were no assets at the end of the tax year, enter -0-.
If the corporation is required to complete Schedule L, enter total assets from Schedule L, line 15, column (d), on page 1, item F. If the S election terminated during the tax year, see the instructions for Schedule L, later, for special rules that may apply when figuring the corporation's year-end assets.
If “Yes,” attach Form 2553 if not already filed. Form 2553 must generally be filed no more than 2 months and 15 days after the beginning of the tax year the election is to take effect. A Form 2553 filed with Form 1120-S will generally be a late election. But with reasonable cause you may be able to request relief for the late election on Form 2553. See “Relief for Late Elections” in the Instructions for Form 2553.
If a change in address or responsible party occurs after the return is filed, use Form 8822-B, Change of Address or Responsible Party — Business, to notify the IRS. See the Instructions for Form 8822-B for details.
For information about aggregating at-risk activities, see Aggregation of Activities under At-Risk Limitations , earlier. For information about grouping passive activities, see Grouping Activities under Passive Activity Limitations , earlier.
Report only trade or business activity income on lines 1a through 5. Don't report rental activity income or portfolio income on these lines. See Passive Activity Limitations, earlier, for definitions of rental income and portfolio income. Rental activity income and portfolio income are reported on Schedules K and K-1. Rental real estate activities are also reported on Form 8825.
Tax-exempt income.
Don't include any tax-exempt income on lines 1a through 5. A corporation that receives any tax-exempt income other than interest, or holds any property or engages in any activity that produces tax-exempt income, reports this income on line 16b of Schedule K and in box 16 of Schedule K-1 using code B.
Report tax-exempt interest income, including exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company, on line 16a of Schedule K and in box 16 of Schedule K-1 using code A.
See Deductions , later, for information on how to report expenses related to tax-exempt income.
Canceled debt exclusion.
If the corporation has had debt discharged resulting from a title 11 bankruptcy proceeding or while insolvent, see Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and Pub. 908, Bankruptcy Tax Guide.
Enter on line 1a gross receipts or sales from all business operations except for amounts that must be reported on lines 4 and 5. If a cost offset method under section 451(b) or (c) is elected, the resulting gross income is reported on line 1a.
Special rules apply to certain income, as discussed below.
Advance payments.
In general, advance payments are reported in the year of receipt. For exceptions to this general rule for corporations that use an accrual method of accounting, see the following.
Installment sales.
Generally, the installment method can't be used for dealer dispositions of property. A “dealer disposition” is any disposition of:
These restrictions on using the installment method don't apply to dispositions of property used or produced in a farming business or sales of timeshares and residential lots for which the corporation elects to pay interest under section 453(l)(3).
For sales of timeshares and residential lots reported under the installment method, each shareholder's income tax is increased by the shareholder's pro rata share of the interest payable under section 453(l)(3).
Enter on line 1a the gross profit on collections from installment sales for any of the following.
Attach a statement showing the following information for the current and the 3 preceding years.
Enter cash and credit refunds the corporation made to customers for returned merchandise, rebates, and other allowances made on gross receipts or sales.
Complete and attach Form 1125-A, Cost of Goods Sold, if applicable. Enter on line 2 the amount from Form 1125-A, line 8. See Form 1125-A and its instructions.
Include only ordinary gains or losses from the sale, exchange, or involuntary conversion of assets used in a trade or business activity. Ordinary gains or losses from the sale, exchange, or involuntary conversion of rental activity assets are reported separately on line 19 of Form 8825, or line 3 of Schedule K, and box 3 of Schedule K-1, generally as a part of the net income (loss) from the rental activity.
A corporation that is a partner in a partnership must include on Form 4797, Sales of Business Property, its share of ordinary gains (losses) from sales, exchanges, or involuntary conversions (other than casualties or thefts) of the partnership's trade or business assets.
Corporations shouldn't use Form 4797 to report the sale or other disposition of property if a section 179 expense deduction was previously passed through to any of its shareholders for that property. Instead, report it in box 17 of Schedule K-1 using code K. See Dispositions of property with section 179 deductions (code K) , later, for details.
Enter any other trade or business income (loss) not included on lines 1a through 4. List the type and amount of income on an attached statement.
Examples of other income include the following.
A credit is available only if the leave was taken after March 31, 2020, and before October 1, 2021, and only after the qualified leave wages were paid, which might, under certain circumstances, not occur until a quarter after September 30, 2021, including quarters in 2023.
Don't include items requiring separate computations by shareholders that must be reported on Schedules K and K-1. See the instructions for Schedules K and K-1 later in these instructions.
Enter the ordinary income (loss) shown on Schedule K-1 (Form 1065) or Schedule K-1 (Form 1041), or other ordinary income (loss) from a foreign partnership, estate, or trust. Show the partnership's, estate's, or trust's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one source, identify the amount from each source.
Don't include portfolio income or rental activity income (loss) from a partnership, estate, or trust on this line. Instead, report these amounts on Schedules K and K-1, or on line 20a of Form 8825 if the amount is from a rental real estate activity.
Ordinary income or loss from a partnership that is a publicly traded partnership isn't reported on this line. Instead, report the amount separately on line 10 of Schedule K and in box 10 of Schedule K-1 using code ZZ.
Treat shares of other items separately reported on Schedule K-1 issued by the other entity as if the items were realized or incurred by this corporation.
If there is a loss from a partnership, the amount of the loss that may be claimed by the S corporation is subject to the basis limitations.
If the tax year of the S corporation doesn't coincide with the tax year of the partnership, estate, or trust, include the ordinary income (loss) from the other entity in the tax year in which the other entity's tax year ends.
Report only trade or business activity deductions on lines 7 through 20.
Don't report the following expenses on lines 7 through 20.
Section 263A uniform capitalization rules.
The uniform capitalization rules of section 263A generally require corporations to capitalize, or include in inventory, certain costs incurred in connection with the following.
Tangible personal property produced by a corporation includes a film, sound recording, videotape, book, or similar property.
The costs required to be capitalized under section 263A aren't deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the corporation.
Section 263A doesn't apply to the following.
The corporation must report the following costs separately to the shareholders for purposes of determinations under section 59(e).
Corporations subject to the uniform capitalization rules are required to capitalize not only direct costs but an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale, or are incurred because of the performance of production or resale activities.
For inventory, indirect costs that must be capitalized include the following.
Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.
Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.
For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.
Special rules for certain corporations engaged in farming.
For S corporations not required to use an accrual method of accounting, the rules of section 263A don't apply to expenses of raising any:
Shareholders of S corporations not required to use an accrual method of accounting may elect to currently deduct the preproductive period expenses of certain plants that have a preproductive period of more than 2 years. Because each shareholder makes the election to deduct these expenses, the corporation shouldn't capitalize them. Instead, the corporation should report the expenses separately on line 12d of Schedule K and report each shareholder's pro rata share in box 12 of Schedule K-1 using code M.
See Uniform Capitalization Rules in chapter 6 of Pub. 225, Farmer's Tax Guide, sections 263A(d) and (e), and Regulations section 1.263A-4 for definitions and other details.
Transactions between related taxpayers.
Generally, an accrual basis S corporation can deduct business expenses and interest owed to a related party (including any shareholder) only in the tax year of the corporation that includes the day on which the payment is includible in the income of the related party. See section 267 for details.
Business interest.
Business interest expense may be limited. See section 163(j) and Form 8990. Also see Schedule B, questions 9 and 10, and the related instructions for question 9 and question 10, later.
Section 291 limitations.
If the S corporation was a C corporation for any of the 3 immediately preceding years, the corporation may be required to adjust items such as deductions for depletion of iron ore and coal, and the amortizable basis of pollution control facilities. If this applies, see section 291 to figure the adjustment.
Business start-up and organizational costs.
A corporation can elect to deduct a limited amount of start-up and organizational costs it paid or incurred. Any remaining costs must generally be amortized over a 180-month period. See sections 195 and 248 and the related regulations.
The corporation generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. For more details, see the Instructions for Form 4562.
If the corporation timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and enter “Filed pursuant to section 301.9100-2” at the top of the amended return. File the amended return at the same address the corporation filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.
The corporation can choose to forgo the elections above by clearly electing to capitalize its start-up or organizational costs on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.
The election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to the trade or business.
Report the deductible amount of start-up and organizational costs and any amortization on line 20. For amortization that begins during the current tax year, complete and attach Form 4562, Depreciation and Amortization.
Reducing certain expenses for which credits are allowable.
If the corporation claims certain credits, it may need to reduce the otherwise allowable deductions for expenses used to figure the credit. This applies to credits such as the following.
If the corporation has any of the credits listed above, figure the current year credit before figuring the deduction for expenses on which the credit is based. If the corporation capitalized any costs on which it figured the credit, it may need to reduce the amount capitalized by the credit attributable to these costs.
See the instructions for the form used to figure the applicable credit for more details.
Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.
Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation. The corporation determines who is an officer under the laws of the state where it is incorporated.
Enter on line 8 the total salaries and wages paid or incurred to employees (other than officers) during the tax year.
If the corporation claims a credit for any wages paid or incurred, it may need to reduce the amounts on lines 7 and 8. See Reducing certain expenses for which credits are allowable , earlier.
Don't include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
If the corporation's total receipts (page 1, line 1a, plus lines 4 and 5; income reported on Schedule K, lines 3a, 4, 5a, and 6; income or net gain reported on Schedule K, lines 7, 8a, 9, and 10; and income or net gain reported on Form 8825, lines 2, 19, and 20a) are $500,000 or more, complete Form 1125-E, Compensation of Officers. Enter on Form 1120-S, line 7, the amount from Form 1125-E, line 4.
Include fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the corporation's stock. Also report these fringe benefits as wages in box 1 of Form W-2. Don't include amounts paid or incurred for fringe benefits of officers and employees owning 2% or less of the corporation's stock. These amounts are reported on line 18. See the instructions for that line for information on the types of expenditures that are treated as fringe benefits and for the stock ownership rules.
Report amounts paid for health insurance coverage for a more-than-2% shareholder (including that shareholder's spouse, dependents, and any children under age 27 who aren't dependents) as an information item in box 14 of that shareholder's Form W-2. A more-than-2% shareholder may be allowed to deduct such amounts on Schedule 1 (Form 1040), line 17.
If a shareholder or a member of the family of one or more shareholders of the corporation renders services or furnishes capital to the corporation for which reasonable compensation isn’t paid, the IRS may make adjustments in the items taken into account by such individuals to reflect the value of such services or capital. See section 1366(e).
Enter the cost of repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that don't add to the value of the property or appreciably prolong its life. The corporation can deduct these repairs only to the extent they relate to a trade or business activity. See Regulations section 1.162-4. The corporation may elect to capitalize certain repair and maintenance costs consistent with its books and records. See Regulations section 1.263(a)-3(n) for information on how to make the election.
New buildings, machinery, or permanent improvements that increase the value of the property aren't deductible as repair and maintenance expenses. These expenses must be capitalized and depreciated or amortized. However, amounts paid for routine maintenance on property, including buildings, may be deductible. See Regulations section 1.263(a)-3(i).
Enter the total debts that became worthless in whole or in part during the tax year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets. A corporation that uses the cash method of accounting can't claim a bad debt deduction unless the amount was previously included in income.
Enter rent paid on business property used in a trade or business activity. Don't deduct rent for a dwelling unit occupied by any shareholder for personal use.
If the corporation rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred in the trade or business activities of the corporation during the tax year. Also complete Part V of Form 4562. If the corporation leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by including in gross income an amount called the “inclusion amount.” The corporation may have an inclusion amount if:
| The lease term began: | And the vehicle's FMV on the first day of the lease exceeded: |
| Cars (excluding trucks and vans) | |
| After 12/31/22 but before 1/1/24 | $60,000 |
| After 12/31/21 but before 1/1/23 | $56,000 |
| After 12/31/20 but before 1/1/22 | $51,000 |
| After 12/31/17 but before 1/1/21 | $50,000 |
| After 12/31/12 but before 1/1/18 | $19,000 |
| Trucks and vans | |
| After 12/31/22 but before 1/1/24 | $60,000 |
| After 12/31/21 but before 1/1/23 | $56,000 |
| After 12/31/20 but before 1/1/22 | $51,000 |
| After 12/31/17 but before 1/1/21 | $50,000 |
| After 12/31/13 but before 1/1/18 | $19,500 |
| After 12/31/09 but before 1/1/14 | $19,000 |
See Pub. 463, Travel, Gift, and Car Expenses, for instructions on figuring the inclusion amount.
The inclusion amount for lease terms beginning in 2024 will be published in the Internal Revenue Bulletin in early 2024.
Enter taxes and licenses paid or incurred in the trade or business activities of the corporation, unless they are reflected elsewhere on the return. Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the corporation.
Foreign taxes are included on line 12 only if they are deductible and not creditable taxes under sections 901 and 903. See Schedule K-2 (Form 1120-S), Part II, Section 2, line 45, column (g).
Do not reduce the corporation’s deduction for social security and Medicare taxes by the nonrefundable and refundable portions of any FFCRA and ARP credits for qualified sick and family leave wages claimed on its employment tax returns. Instead, report this amount as income on line 5.
Don't deduct the following taxes on line 12.
See section 263A(a) for rules on capitalization of allocable costs (including taxes) for any property.
See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.
Include only interest incurred in the trade or business activities of the corporation that isn't claimed elsewhere on the return.
Don't include interest expense on the following.
Special rules apply to the following.
Limitation on deduction.
Business interest expense is generally limited to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. See Form 8990, Limitation on Business Interest Expense Under Section 163(j), and its instructions for more information. The limitation applies at the S corporation level, and any excess business interest expense is carried over at the corporate level.
Business interest expense includes any interest paid or accrued on indebtedness properly allocable to a trade or business. A small business taxpayer is a taxpayer that isn’t a tax shelter (as defined in section 448(d)(3)) and has average annual gross receipts of $29 million or less for the 3 prior tax years under the gross receipts test of section 448(c). Gross receipts include the aggregate gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships or proprietorships, and affiliated service groups. If the corporation fails to meet the gross receipts test, Form 8990 is generally required. Also see Schedule B, questions 9 and 10.
Enter the depreciation claimed on assets used in a trade or business activity less any depreciation reported elsewhere (for example, on Form 1125-A). See the Instructions for Form 4562, or Pub. 946, How To Depreciate Property, to figure the amount of depreciation to enter on this line.
Complete and attach Form 4562 only if the corporation placed property in service during the tax year or claims depreciation on any car or other listed property.
Don't include any section 179 expense deduction on this line. This amount isn't deducted by the corporation. Instead, it is passed through to the shareholders in box 11 of Schedule K-1. However, reduce the basis of any asset of the S corporation by the amount of section 179 expense elected by the S corporation, even if a portion of that amount can't be passed through to its shareholders this year and must be carried forward because of limitations at the S corporation level. See Regulations section 1.179-1(f)(2).
If the corporation claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule.
Don't deduct depletion for oil and gas properties. Each shareholder figures depletion on oil and gas properties. See the instructions for Schedule K-1, box 17, code R, for the information on oil and gas depletion that must be supplied to the shareholders by the corporation.
Enter the deductible contributions not claimed elsewhere on the return made by the corporation for its employees under a qualified pension, profit-sharing, annuity, or simplified employee pension (SEP) or SIMPLE IRA plan, or any other deferred compensation plan.
If the corporation contributes to an individual retirement arrangement (IRA) for employees, include the contribution in salaries and wages on page 1, line 8, or Form 1125-A, line 3, and not on line 17.
Employers who maintain a pension, profit-sharing, or other funded deferred compensation plan, whether or not the plan is qualified under the Internal Revenue Code and whether or not a deduction is claimed for the current tax year, must generally file the applicable form listed below.
Form 5500 and Form 5500-SF must be filed electronically under the computerized ERISA Filing Acceptance System (EFAST2). For more information, see the EFAST2 website at www.EFAST.dol.gov.
There are penalties for not filing these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).
Enter amounts for fringe benefits paid or incurred on behalf of employees owning 2% or less of the corporation's stock. These fringe benefits include (a) employer contributions to certain accident and health plans, (b) the cost of up to $50,000 of group-term life insurance on an employee's life, and (c) meals and lodging furnished for the employer's convenience.
Don't deduct amounts that are an incidental part of a pension, profit-sharing, etc., plan included on line 17 or amounts reported elsewhere on the return or on Form 1125-A.
Report amounts for fringe benefits paid on behalf of employees owning more than 2% of the corporate stock on line 7 or 8 (or Form 1125-E), whichever applies. An employee is considered to own more than 2% of the corporation's stock if that person owns on any day during the tax year more than 2% of the outstanding stock of the corporation or stock possessing more than 2% of the combined voting power of all stock of the corporation. See section 318 for attribution rules.
Complete and attach Form 7205 if claiming the energy efficient commercial building deduction. See the Instructions for Form 7205 for more information. Also, see section 179D.
Enter the total allowable trade or business deductions that aren't deductible elsewhere on page 1 of Form 1120-S. Attach a statement listing by type and amount each deduction included on this line.
Examples of other deductions include the following.
Don't deduct the following on line 20.
Travel, meals, and entertainment.
Subject to limitations and restrictions discussed below, a corporation can deduct ordinary and necessary travel and meal expenses paid or incurred in its trade or business. Generally, entertainment expenses, membership dues, and facilities used in connection with these activities can't be deducted. Generally, no deduction is allowed for qualified transportation fringe benefits. Also, special rules apply to deductions for gifts, luxury water travel, and convention expenses. See section 274 and Pub. 463 for details.
The corporation can't deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless:
Generally, the corporation can deduct only 50% of the amount otherwise allowable for meal expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):
See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.
Generally, under section 274(a)(4), there is no deduction allowed with respect to QTFs provided by employers to their employees. QTFs are defined in section 132(f)(1) to include:
See section 274 and Pub. 15-B, Employer’s Tax Guide to Fringe Benefits, for details.
The corporation can generally deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain or provide entertainment facilities for members or their guests. In addition, corporations can't deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.
The corporation can't deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.
The corporation may be able to deduct otherwise nondeductible entertainment, amusement, or recreation expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-NEC for an independent contractor.
However, if the recipient is an officer, director, or beneficial owner (directly or indirectly) of more than 10% of the corporation's stock, the deductible expense is limited. See section 274(e)(2) and Regulations sections 1.274-9 and 1.274-10.
Fines and similar penalties.
Generally, no deduction is allowed for fines or similar penalties paid to or at the direction of a government or governmental entity for violating any law except:
No deduction is allowed unless the amounts are specifically identified in the order or agreement and the taxpayer establishes that the amounts were paid for a purpose mentioned above. Also, any amount paid or incurred as reimbursement to the government for the costs of any investigation or litigation are not eligible for the exceptions and are nondeductible. See section 162(f). Also see Regulations section 1.162-21.
Lobbying expenses.
Generally, lobbying expenses aren't deductible. Report nondeductible expenses on Schedule K, line 16c. These expenses include:
Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. If certain in-house lobbying expenditures don't exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9).
Certain corporations engaged in farming.
Section 464(d) limits the deduction for certain expenditures of S corporations engaged in farming if they use the cash method of accounting, and their prepaid farm supplies are more than 50% of other deductible farming expenses.
Prepaid farm supplies include expenses for feed, seed, fertilizer, and similar farm supplies not used or consumed during the year. They also include the cost of poultry that would be allowable as a deduction in a later tax year if the corporation were to (a) capitalize the cost of poultry bought for use in its farm business and deduct it ratably over the lesser of 12 months or the useful life of the poultry, and (b) deduct the cost of poultry bought for resale in the year it sells or otherwise disposes of it.
If the limit applies, the corporation can deduct prepaid farm supplies that don't exceed 50% of its other deductible farm expenses in the year of payment. The excess is deductible only in the year the corporation uses or consumes the supplies (other than poultry, which is deductible, as explained above). For exceptions and more details on these rules, see Pub. 225.
If the corporation made an election to deduct a portion of its reforestation expenditures on line 12d of Schedule K, it must amortize over an 84-month period the portion of these expenditures in excess of the amount deducted on Schedule K (see section 194). Deduct on line 20 only the amortization of these excess reforestation expenditures. See Reforestation expense deduction (code O) , later.
Enter this income or loss on line 1 of Schedule K. Line 22 income is not used in figuring the excess net passive income or built-in gains taxes. See the instructions for line 23a for figuring taxable income for purposes of these taxes.
These taxes can apply if the corporation was previously a C corporation or if the corporation engaged in a tax-free reorganization with a C corporation.
Excess net passive income tax.
If the corporation has AE&P at the close of its tax year and has passive investment income for the tax year that is in excess of 25% of gross receipts, the corporation must figure its excess net passive income and pay tax on it. To make this determination, complete lines 1 through 3 and line 9 of the Excess Net Passive Income Tax Worksheet for Line 23a. If line 2 is greater than line 3 and the corporation has taxable income (see the instructions for line 9 of the worksheet), it must pay the tax. Complete a separate statement using the format of lines 1 through 11 of the worksheet to figure the tax. Enter the tax on line 23a, page 1, Form 1120-S, and attach the computation statement to Form 1120-S.
Reduce each item of passive investment income passed through to shareholders by its portion of any excess net passive income tax reported on line 23a. See section 1366(f)(3).
| 1. | Enter gross receipts for the tax year (see section 1362(d)(3)(B) for gross receipts from the sale of capital assets)* | _____ | 6. | Net passive income—Subtract line 5 from line 2 | _____ |
| 7. | Divide amount on line 4 by amount on line 2 | % | |||
| 2. | Enter passive investment income as defined in section 1362(d)(3)(C)* | _____ | 8. | Excess net passive income—Multiply line 6 by line 7 | _____ |
| 3. | Multiply line 1 by 25% (0.25). (If line 2 is less than line 3, stop here. You aren't liable for this tax.) | _____ | 9. | Enter taxable income (see instructions for taxable income below) | _____ |
| 4. | Excess passive investment income—Subtract line 3 from line 2 | _____ | 10. | Enter smaller of line 8 or line 9 | _____ |
| 5. | Enter deductions directly connected with the production of the income listed on line 2 (see section 1375(b)(2))* | _____ | 11. | Excess net passive income tax—Multiply line 10 by 21% (0.21). Enter here and on Form 1120-S, line 23a | _____ |
| *Income and deductions on lines 1, 2, and 5 are from total operations for the tax year. This includes applicable income and expenses from page 1, Form 1120-S, as well as those imported separately on Schedule K. See section 1375(b)(4) for an exception regarding lines 2 and 5. | |||||
| Line 9 of Worksheet—Taxable Income | |||||
| Taxable income, for this purpose, is defined in Regulations section 1.1374-1A(d)(1). Figure this income by completing lines 1 through 28 of Form 1120 , U.S. Corporation Income Tax Return. Include the Form 1120 computation with the worksheet computation you attach to Form 1120-S. You don't have to attach the schedules, etc., called for on Form 1120. However, you may want to complete certain Form 1120 schedules, such as Schedule D (Form 1120), if you have capital gains or losses. | |||||
LIFO recapture tax.
The corporation may be liable for the additional tax due to LIFO recapture under Regulations section 1.1363-2 if:
The additional tax due to LIFO recapture is figured for the corporation's last tax year as a C corporation or for the tax year of the transfer, whichever applies. See the Instructions for Form 1120 to figure the tax.
The tax is paid in four equal installments. The C corporation must pay the first installment by the due date (not including extensions) of Form 1120 for the corporation's last tax year as a C corporation or for the tax year of the transfer, whichever applies. The S corporation must pay each of the remaining installments by the due date (not including extensions) of Form 1120-S for the 3 succeeding tax years. Include this year's installment in the total amount to be entered on line 23a. To the left of the total on line 23a, enter the installment amount and “LIFO tax.”
Enter the built-in gains tax from line 23 of Part III of Schedule D. See the instructions for Part III of Schedule D to determine if the corporation is liable for the tax.
Include the following in the total for line 23c.
Investment credit recapture tax.
The corporation is liable for any required investment credit recapture attributable to credits allowed for tax years for which the corporation wasn't an S corporation. The corporation is also liable for any required qualifying therapeutic discovery project grant recapture. Figure the corporation's investment credit recapture tax and qualifying therapeutic discovery project grant recapture tax by completing Form 4255, Recapture of Investment Credit. See the Instructions for Form 4255.
To the left of the line 23c total, enter the amount of recapture tax and “Tax From Form 4255.” Attach Form 4255 to Form 1120-S.
Interest due under the look-back method—Completed long-term contracts.
If the corporation owes this interest, attach Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. To the left of the total on line 23c, enter the amount owed and “From Form 8697.”
Interest due under the look-back method—Property depreciated under the income forecast method.
If the corporation owes this interest, attach Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method. To the left of the total on line 23c, enter the amount owed and “From Form 8866.”
Enter the total gross elective payment election amount from Form 3800, Part III, line 6, column (h). See the Instructions for Form 3800 for more information.
If the corporation is the beneficiary of a trust, and the trust makes a section 643(g) election to credit its estimated tax payments to its beneficiaries, include the corporation's share of the payment in the total for line 24z. Enter “T” and the amount of the payment on the dotted line to the left of the entry space.
If Form 2220 is attached, check the box on line 25 and enter the amount of any penalty on this line.
If the corporation can't pay the full amount of tax owed, it can apply for an installment agreement online. The corporation can apply for an installment agreement online if:
To apply using the Online Payment Agreement Application, go to IRS.gov/OPA.
Under an installment agreement, the corporation can pay what it owes in monthly installments. There are certain conditions that must be met to enter into and maintain an installment agreement, such as paying the liability within 24 months and making all required deposits and timely filing tax returns during the length of the agreement.
If the installment agreement is accepted, the corporation will be charged a fee and it will be subject to penalties and interest on the amount of tax not paid by the due date of the return.
Direct deposit of refund.
If the corporation wants its refund directly deposited into its checking or savings account at any U.S. bank or other financial institution instead of having a check sent to the corporation, complete Form 8050 and attach it to the corporation's return.
Complete all items that apply to the corporation.
See Principal Business Activity Codes at the end of these instructions and enter the business activity and product or service. For nonstore retailers, select the PBA code by the primary product that your establishment sells. For example, establishments primarily selling prescription and non-prescription drugs, select PBA code 456110 Pharmacies & Drug Retailers.
For purposes of determining the corporation's constructive ownership of other entities, the constructive ownership rules of section 267(c) (excluding section 267(c)(3)) apply to ownership of interests in partnerships and trusts as well as corporate stock. Generally, if an entity (a corporation, partnership, or trust) is owned, directly or indirectly, by or for another entity (corporation, partnership, estate, or trust), the owned entity is considered to be owned proportionately by or for the owners (shareholders, partners, or beneficiaries) of the owning entity.
Maximum percentage owned in partnership profit, loss, or capital.
For the purposes of question 4b, the term “maximum percentage owned” means the highest percentage of interest in a partnership's profit, loss, or capital as of the end of the partnership's tax year, as determined under the partnership agreement, when taking into account the constructive ownership rules discussed earlier. If the partnership agreement doesn't express the partner's share of profit, loss, and capital as fixed percentages, use a reasonable method in arriving at the percentage items for the purposes of completing question 4b. Such method must be consistent with the partnership agreement. The method used to figure a percentage share of profit, loss, and capital must be applied consistently from year to year. Maintain records to support the determination of the share of profits, losses, and share of capital.
Answer “Yes” if the corporation filed, or is required to file, Form 8918, Material Advisor Disclosure Statement. For details, see the Instructions for Form 8918.
Complete item 8 if the corporation (a) was a C corporation before it elected to be an S corporation or the corporation acquired an asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation, and (b) has net unrealized built-in gain (defined below) in excess of the net recognized built-in gain from prior years.
The corporation is liable for section 1374 tax if (a) and (b) above apply and it has a net recognized built-in gain (defined in section 1374(d)(2)) for its tax year.
The corporation's net unrealized built-in gain is the amount, if any, by which the aggregate fair market value of the assets of the corporation at the beginning of its first S corporation year (or as of the date the assets were acquired, for any asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation) exceeds the aggregate adjusted basis of such assets at that time.
Enter the corporation's net unrealized built-in gain reduced by the net recognized built-in gain from prior years. See sections 1374(c)(2) and (d)(1).
If the corporation has more than one pool of assets (as defined in Regulations section 1.1374-3(b)(4)), attach a statement showing for each pool of assets the amount of the corporation's net unrealized built-in gain reduced by the net recognized built-in gain from prior years.
The limitation on business interest expense under section 163(j) applies to every taxpayer with a trade or business, unless the taxpayer meets certain specified exceptions. A taxpayer may elect out of the limitation for certain businesses otherwise subject to the business interest expense limitation. This is an irrevocable election.
Certain real property trades or businesses and farming businesses qualify to make an election not to limit business interest expense. This is an irrevocable election. If you make this election, you are required to use the alternative depreciation system to depreciate certain property. Also, you aren’t entitled to the special depreciation allowance for that property. For a taxpayer with more than one qualifying business, the election is made with respect to each business.
Check “Yes” if the taxpayer has an election in effect to exclude a real property trade or business or a farming business from section 163(j). For more information, see the Instructions for Form 8990.
A taxpayer that isn’t a small business taxpayer (defined below) must generally file Form 8990. In addition, any taxpayer that owns an interest in a partnership with current year, or prior year carryover, excess business interest expense allocated from the partnership must file Form 8990.
A taxpayer who is a U.S. shareholder of an applicable CFC that has business interest expense, disallowed business interest expense carryforward, or is part of a CFC group must generally apply section 163(j) to each applicable CFC and attach a Form 8990 with each Form 5471.
Exclusions from filing.
A taxpayer isn’t required to file Form 8990 if the taxpayer is a small business taxpayer and doesn’t have excess business interest expense from a partnership. A taxpayer is also not required to file Form 8990 if the taxpayer only has business interest expense from these excepted trades or businesses:
Small business taxpayer.
A small business taxpayer isn’t subject to the business interest expense limitation and isn’t required to file Form 8990. A small business taxpayer is a taxpayer that (a) isn’t a tax shelter (as defined in section 448(d)(3)), and (b) meets the gross receipts test of section 448(c), discussed next.
Gross receipts test.
A taxpayer meets the gross receipts test if the taxpayer has average annual gross receipts of $29 million or less for the 3 prior tax years. A taxpayer's average annual gross receipts for the 3 prior tax years is determined by adding the gross receipts for the 3 prior tax years and dividing the total by 3. Gross receipts include the aggregate gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships, or proprietorships, and affiliated service groups. See section 448(c) and the Instructions for Form 8990 for additional information.
Total receipts is the sum of the following amounts.
Amounts related to the forgiveness of PPP loans are disregarded for purposes of this question.
Answer “Yes” if, during the tax year, the corporation revoked a qualified subchapter S subsidiary (QSub) election or a QSub election of the corporation was terminated. If “Yes,” see Regulations section 1.1361-5 for additional information.
If the corporation made any payment in 2023 that would require it to file any Form(s) 1099, check the “Yes” box for question 14a and answer question 14b. Otherwise, check the “No” box for question 14a and skip question 14b. See Am I Required to File a Form 1099 or Other Information Return on IRS.gov.
To be certified as a qualified opportunity fund, the S corporation must file Form 1120-S and attach Form 8996, even if the corporation had no income or expenses to report. If the S corporation is attaching Form 8996, check the “Yes” box and enter the amount from Form 8996, line 15, in the entry space. See Certification as a qualified opportunity fund , earlier.
The penalty reported on this line from Form 8996, line 15, is not due with the filing of this form. The IRS will separately send you a notice setting forth the due date for the penalty payment and where that payment should be sent.
Digital assets are any digital representations of value that are recorded on a cryptographically secured distributed ledger or any similar technology. For example, digital assets include non-fungible tokens (NFTs) and virtual currencies, such as cryptocurrencies and stablecoins. If a particular asset has the characteristics of a digital asset, it will be treated as a digital asset for federal income tax purposes.
Check the “Yes” box if at any time during the tax year, the S corporation (a) received (as a reward, award, or payment for property or services); or (b) sold, exchanged, or otherwise disposed of a digital asset (or any financial interest in any digital asset).
For example, check “Yes” if at any time during the tax year, the S corporation:
The S corporation has a financial interest in a digital asset if it is the owner of record of a digital asset, or has an ownership stake in an account that holds one or more digital assets, including the rights and obligations to acquire a financial interest, or owns a wallet that holds digital assets.
The following actions or transactions in the tax year, alone, generally do not require the S corporation to check “Yes.”
Do not leave the question unanswered. The S corporation must answer “Yes” or “No” by checking the appropriate box. For more information, go to IRS.gov/virtualcurrencyfaqs.
If the S corporation disposed of any digital asset that was held as a capital asset, through a sale, trade, exchange, payment, or other transfer, use Form 8949 to calculate the capital gain or loss and report that gain or loss on Schedule D (Form 1120-S). If the S corporation received any digital asset as compensation for services or disposed of any digital asset that was held for sale to customers in a trade or business, it must report the income as it would report other income of the same type.
The corporation is liable for taxes on lines 23a, 23b, and 23c on page 1 of Form 1120-S. Shareholders are liable for tax on their shares of the corporation's income (reduced by any taxes paid by the corporation on income). Shareholders must include their share of the income on their tax return whether or not it is distributed to them. Unlike most partnership income, S corporation income isn't self-employment income and isn't subject to self-employment tax.
Schedule K.
Schedule K is a summary schedule of all shareholders' shares of the corporation's income, deductions, credits, etc. All corporations must complete Schedule K.
Schedule K-1.
Schedule K-1 shows each shareholder's separate share. Attach a copy of each Schedule K-1 to the Form 1120-S filed with the IRS. Keep a copy for the corporation's records and give each shareholder a copy.
Give each shareholder a copy of the Shareholder's Instructions for Schedule K-1 (Form 1120-S) or specific instructions for each item reported on the shareholder's Schedule K-1.
The corporation doesn't need IRS approval to use a substitute Schedule K-1 if it is an exact copy of the IRS schedule. The boxes must use the same numbers and titles and must be in the same order and format as on the comparable IRS Schedule K-1. The substitute schedule must include the OMB number. The corporation must provide each shareholder with the Shareholder's Instructions for Schedule K-1 (Form 1120-S) or instructions that apply to the specific items reported on the shareholder's Schedule K-1.
The corporation must ask for IRS approval to use other substitute Schedules K-1.
Each shareholder's information must be on a separate sheet of paper. Therefore, separate all continuously printed substitutes before you file them with the IRS.
The corporation may be subject to a penalty if it files a substitute Schedule K-1 that doesn't conform to the specifications discussed in Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules.
For more information, see Pub. 1167.