By Dr. James M. Dahle, WCI Founder
Some people think I'm a glutton for punishment. They're probably right. You see, I've been doing my corporate income taxes without the assistance of a professional tax preparer. To make matters worse, I've been doing it by hand. To be honest, it is much easier than doing my very complicated personal tax return. Although our new COO tells me this will be my last year doing it. Something about my time being too valuable to spend doing that stuff.
I probably inherited this affliction from my parents who refer to themselves as “Scottish” (they can't possibly be more than about 25% Scottish). My dad is still doing his own C Corp return and he hasn't even been earning any money in that corporation for the last decade. He just formed it to minimize Super Cub related liability. Like any tax return, once you do it the first time, you're mostly just copying what you did each year.
At any rate, doing your own taxes, and especially doing them by hand, might not be a good use of your time, but it is a great way to really understand how taxes work. If you, like me, have a relatively simple corporation and need to file the 1120S, you might try filling one of these suckers out yourself. This post will walk you through the steps. Remember I'm not a CPA, I screw up my tax returns all the time, and if you need serious help, find an accountant, not a blogger. This is not something I recommend most attempt to do.
How to File S Corp Taxes
The first thing to know about the 1120S is that it is the form for a corporation that has made an S election or, in my case, an LLC that has first elected to file taxes as a corporation rather than a sole proprietor or partnership and then made an S election. If you are filing as a sole proprietorship, file Schedule C on your personal tax return. If you are filing as a partnership, file Form 1065. If you are filing as a C Corporation, file form 1120. The 1120S is only for S Corps. This tax form is due to be postmarked by March 15th, but you can file an extension on Form 7004. It's literally one page, 8 lines, and will take about 30 seconds. You see, with an S Corp being a pass-through entity, you pretty much put $0 on every line. Extending has no cost and pushes the due date on your return back to September 15th. In fact, I might file it just for fun in case I discover an error on my corporate return while doing my personal return later this summer (which I will certainly need to file an extension for, as well.)
Okay, let's get into it. There are five pages on the 1120S, but most of the interesting stuff is on Page 1. I'll divide that up into several sections.
Form 1120-S Page 1
The first section has lots of identifying information.
As you can see, these lines/boxes are lettered rather than numbered.
First, fill out the corporation (or LLC) name and address. If you use a different tax year than a calendar year, fill that out. (I just use the calendar year to keep things simple.)
Line A is when you became an S Corp.
Line B is your type of business. There's a big long list at the end of the 1120S instructions, but my business is code 519100 – “Other Information Services (including news syndicates, libraries, Internet publishing, & broadcasting)”.
If you have to attach schedule M-3 (I don't), check box C. Basically if you have business assets over $10M, you have to check that box.
Line D is your EIN.
Line E is the date you incorporated, for me, it's the same as Box A.
Line F is your total business assets. Remember this is the return for your business, not for you personally. If you're not sure what this is, check the balance sheet in your books like Quickbooks.
Check Yes on G if this is your first time filing this form.
Line H is for changes to the business.
Line I is for the number of “shareholders.” Don't get confused if you're an LLC like me, it's just the number of members. Two, in our case.
The boxes under J are for companies making films, farming, or searching for oil and gas, i.e. “section 465 activities.” I leave it blank.
Now we're into the meat of the return. The truth about a corporate (or really any business return) is that the hard part is doing your books, not filling out the return. Once the books are done, you're simply transcribing numbers from your books to your return. So learn to do your books right and the tax return is a piece of cake. I simply go to Quickbooks, pull up the profit and loss statement for the year, and start transcribing numbers. Here's the first part of my income statement:
So lines 1A and 1C are the amount under “Total Income” on the profit and loss statement. We leave 1B blank. Line 2 comes from the “Cost of Goods Sole” line on the profit and loss statement. And line 3 (and line 6) comes from “Gross Profit” line on the profit and loss statement. We don't have anything on lines 4 and 5. Line 4 is all about selling business assets (which we didn't do) and line 5 is for some unique kinds of income a business may have had such as interest on accounts receivable. Super easy, right? As you'll see, you have to fill out a separate form for line 2, called Form 1125-A. It's super easy. It looks like this:
Basically, you put what you put on line 2 of the 1120S (Cost of goods sold) on lines 2, 6, and 8. That's it for us because we don't carry inventory around. If you do, then your form will be a little more complicated, but not too bad. Alright, let's get back to the 1120S.
This is also a very important part of the return, but super easy to fill out using your profit and loss statement. Again, here is our profit and loss statement:
The interesting thing about the deductions section on the 1120S is that there are business expenses you want to keep track of in your books that the IRS doesn't care about. I mean, they care, but they don't have a separate line for them. So you have to separate out the ones they care about, put them on the appropriate lines, then take all the other ones and put them onto a separate statement and put the total onto Line 19. Most of our business expenses are on that line and listed out separately on an attached statement. In fact, we only have totals on a handful of the other lines. If you want to simplify your life, use the same categories in your books that the IRS actually cares about.
Line 7 is where you put the “compensation of officers.” This is where Katie and I put our salaries. Remember the whole point of being taxed as an S corp is to only take some of the money the business makes as wages and take the rest as ordinary business income or profits. There is even more incentive now to take money as profits instead of wages due to the 199A deduction, which is 20% of the ordinary business income (line 21) subject to certain restrictions (most importantly in our case, the 50% of wages limitation.) Last year the only wages we paid were officer compensation, which was almost precisely 28.6% of business profit, the total that maximizes the 199A deduction.
This year we have employees, so we'll be able to pay ourselves even less as officer compensation (as long as it is a reasonable amount according to the IRS for the work done) on our 2020 taxes and thus save some payroll taxes. You actually have to break this all out on Form 1125-E. No big deal. We simply list our names, social security numbers, our percentage ownership (50/50 in our case) and the amount we were paid as W-2 income during the year and total it up at the bottom. Remember that the percentages of ownership do not have to reflect how much you were paid as W-2 income. We saved a lot of money in Social Security taxes this year by paying Katie a lot less than I was paid. We paid her just enough to max out her Mega Backdoor Roth IRA contributions.
An interesting point about Line 7 is that despite the instructions saying you put “total compensation” on that line, the next paragraph says this:
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.
So both employee and employer contributions to the 401(k) go on line 17, NOT lines 7/8.
Line 8 is where you put the wages for all your employees.
Line 9 is for repairs and 10 is for bad debts. Those were all blank for us.
Line 11 is one of my favorite lines on this tax form and one of my favorite deductions. This is where you put rent for your business. Well, as you know, we operate our business out of our home. If you have dedicated space that is used exclusively and regularly for your business, you can take a home office deduction, the simplified version of which is $5/square foot up to 300 square feet, or $1500/year. However, you are allowed to rent your home out up to 14 days a year to anyone you like without reporting the income to the IRS on your personal return. That includes renting it to your business. Well, we certainly have at least that many business meetings at our home each year, so we decided to rent it to the business. How much do you rent it for? Well, it's pretty easy to find comparable homes on AirBNB. Be sure to include the cleaning fee. Needless to say, it's a far bigger deduction than the home office deduction (which we also take, but for different space in the home.)
Line 12 is for taxes and licenses. This is where all the payroll taxes you paid on your salaries and any other business taxes or licenses go.
Line 13 is for interest paid.
If you're depreciating or depleting something, those go on Lines 14 and 15. We're not.
Line 16 is advertising. We put all our marketing expenses here, primarily the WCI scholarship.
Line 17 is for pensions. This is where you put matching or profit-sharing dollars that went into your i401(k). We didn't have any this year as we did Mega Backdoor Roth IRA contributions instead, but we've definitely used that line in past years.
Line 18 is for employee benefit programs. Put your health insurance here.
Line 20 is the total of your deductions and line 21 is Line 6 minus Line 20. This is the amount your Section 199A deduction is calculated from.
This is the rest of the first page. We don't put anything on any of these lines. I just sign at the bottom as the “President.” Note that the IRS considers you an S Corporation, not an LLC, once you file as a corporation. Corporations have presidents, not managing members. Remember that when you call the IRS and they ask who you are. Since S Corps are pass-thru entities, I'm not even really sure why this section is on the form at all. All the money we make from our business comes to us on W-2 forms (compensation of officers) or K-1 forms (ordinary business income) and we make estimated tax payments on our personal return. In fact, the instructions skip right over Line 23. Maybe it's just a carryover from the regular Form 1120, which looks just like it. Okay, let's move on to Page 2.
Page 2 (Schedule B)
Schedule B is spread over page 2 and the first part of Page 3. There is not a lot of interesting stuff for a simple corporation like ours on this page.
On line 1, check your accounting method. We use cash basis because it is very straightforward. If we paid it in the tax year, it's an expense, if we received it in the tax year, it's income. Super easy. There is a little trick there at year-end. If you send the check on 12/29 and they cash it on 1/3, it's a deduction for your business for the first year but isn't income for the second business until the second year.
Line 2 is the business activity again (see the codes at the end of the instructions.) Basically, you're just copying and pasting from page 1. We check the “no” box on every other line of this page. Read through it and make sure you can answer all the questions no too. If you can answer yes to Line 11, it'll save you some hassle later in the return. We can't. First world problem.
Page 3
Page 3 is the rest of Schedule B and the first part of Schedule K.
Read carefully here at the end of Schedule B. We do have a couple of “yes” answers here as we pay contractors on 1099s. Our Schedule K is super duper simple. We fill out line 1 (comes from line 21 on page 1) and walk away. The rest of it is $0 for our simple corporation. Well, that's not entirely true as we'll see on page 4.
Page 4
Page 4 is the end of Schedule K and the entirely of Schedule L.
Be careful here at the end of Schedule K. If you're like us, you'll have something on 16c. Remember when you deduct business meals, you don't get to deduct the whole thing. You only get to deduct 50%. So while it is truly a business expense, it isn't a deductible one, and this is where that shows up. So the difference between Line 1 and Line 18, is what's on line 16c, or half of what we spent on business meals.
Schedule L is your balance sheet. You can skip this if the business made less than $250K and had assets less than $250K. But even if not, if you have done your books well, this becomes very simple to fill out. First, go to last year's Schedule L and take what was in columns c and d and put them in this year's columns a and b. Now go to this year's balance sheet to get the numbers for columns c and d. One of my big beefs with Form 1120-S is that the instructions for Schedule L are very skimpy. It's really hard to know if you are filling it out right. The good news is that I don't get the impression that the IRS cares all that much about what you put on here. It doesn't involve taxable income or deductions so it doesn't affect your tax bill at all. It's just for their information as near as I can tell.
At any rate, we only have something on six lines of this form. Line 1 is the amount of cash in the business checking account on December 31st. I've never really been able to figure out what to put on Line 14. I've been including a value for the URL and the trademarks of the business there and listing them on an attached statement. I should probably stop doing that or else add that value back into Quickbooks so the balance sheet in Quickbooks and the balance sheet on Schedule L match. If you're a CPA experienced with this return, I'd love your opinion on that question.
Line 16 is simply the business credit card balance on 12/31. That's our only liability as we run our business debt-free.
Line 22 is super confusing. The idea behind a balance sheet is that things have to balance. So your line 15 (total assets) should match your line 27 (total liabilities and shareholder's equity.) So I set the capital stock amount to ensure they match. Basically, it's total assets minus the credit card balance. Then line 27 matches line 15. Again, if there's a CPA Schedule L genius who wants to tell me what I'm going wrong here, if anything, I'm more than open to your input. But as near as I can tell, if I'm screwing it up the IRS doesn't care very much.
Page 5 (Schedules M-1 and M-2)
On page 5, you find two more short schedules.
If you thought Schedule L was wonky, Schedule M-1 can be really confusing. The only reason this is interesting at all for us is those business meals again. So we're basically just reconciling the books with the tax return since we have non-deductible business expenses. So line 1 is our ordinary business income. Line 3b is the non-deductible portion of those meals and the total goes on lines 4 and 8. Just include all your other income and deductions on the books and you can skip the rest of this form. Schedule M-2 is for corporations that don't distribute all their taxable income. Just distribute it (i.e. pay it to yourself personally) and you get to skip this form. The form basically makes sure you don't pay taxes twice on that money. The IRS says this about the form:
An S corporation without accumulated Earnings & Profits (E&P) doesn't need to maintain the Accumulated Adjustments Account (AAA) in order to determine the tax effect of distributions. Nevertheless, if an S corporation without accumulated E&P engages in certain transactions to which section 381(a) applies, such as a merger into an S corporation with accumulated E&P, the S corporation must be able to calculate its AAA at the time of the merger for purposes of determining the tax effect of post-merger distributions. Therefore, it is recommended that the AAA be maintained by all S corporations.
So I think it's optional for me, but if a CPA out there wants to write up a guest post about how to fill out Form M-2, I'll run it.
Schedule K-1s
When you do your business tax return, you also need to fill out a K-1 to give to each of the shareholders (or if it is a partnership return, each of the partners.) This is one of the more complicated parts of the return in my opinion and the IRS certainly does care about this as it affects how much the shareholders owe in taxes. We have to do one for me and one for Katie. If you thought it was bad having to figure out what to do with K-1s you receive, imagine having to create them in the first place. Make sure you're filling the right one out. There is a K-1 for the partnership return (1065) and a totally different one for an S Corp return (1120-S).
Section I and Section II are pretty self-explanatory. F is 50% in our case. Section III is where the meat is. You use the Schedule K to fill out the K-1s. So we take Line 1 of Schedule K, multiply it by that 50%, and put that amount on Line 1 of each of our Schedule K-1s. Because our Schedule K is so simple, so are our Schedule K-1s. The rest of ours is blank until we get to line 16. That's where our 50% share of the non-deductible meals go under code C. We put an asterisk there and attach a brief statement saying that's what the amount is for. On line 17, I put code “V*” and attach another statement (the codes are all found on page 2 of the K-1.) Code V is section 199A information and since this is our largest deduction, I pay a lot of attention to this part of the return. The instructions for this section this year are pretty clear about what that statement needs to look like. You can find a sample statement on page 40 of the 1120S instructions. Here is what it is supposed to look like:
There are lots of instructions here on page 39. If you expect to get the 199A deduction, be sure to read them carefully. If you have no idea what the 199A deduction is, how it is calculated, or whether you will qualify for it, you have no business doing your own corporate tax return. Do yourself a favor and go hire help. I'm not even sure I should be doing this honestly and this is probably my last year doing it.
Now repeat the process for any other shareholders (luckily since we're 50/50, this is very easy to do for us) and compile your return. It should look like this:
- Form 1120S pages 1-5
- Form 1125-A
- Form 1125-E
- Statement of Explanation for 2019 Form 1120S Line 19 Other Deductions
- Statement of Explanation for 2019 Form 1120S Schedule L Line 14 Other Assets
- K-1 for me
- Statement for 2019 Form 1120S Schedule K-1 Line 16 for me
- Statement A (QBI Pass-through Entity Reporting) for Form 1120S Schedule K-1 Line 17 for me
- K-1 for Katie
- Statement for 2019 Form 1120S Schedule K-1 Line 16 for Katie
- Statement A (QBI Pass-through Entity Reporting) for Form 1120S Schedule K-1 Line 17 for Katie
That's it. Send it to the IRS and you're done. Be sure you make a copy and enter those K-1s into your personal return. All together this probably takes me 1/2 to 3/4 of a day once the books are done. My COO is probably right. That's not a great use of my time. I can tell you this though–as a result of doing this return for a couple of years, I know exactly how to maximize my largest tax deduction and I'll bet I've more than paid for my time up to this point through a better understanding of just what is deductible and what isn't. If you want to try it, I hope these instructions help.
What do you think? Have you ever done a corporate tax return? Did you regret it? Did you find it easier than your personal return? What other advice would you give to people trying this on their own? Comment below!
[This updated post originally published in 2020.]
Most of this pertains to Schedule L of the 1120s:
So we are required to contribute capital to our partnership that stays with the partnership until we get fired or leave the partnership. I’m assuming that capital goes to Line 9 of Schedule L and is included in the S corp’s assets (line 15) year after year?
Also, since 4th quarter payroll taxes are usually paid around the 1st week of January, shouldn’t that be included in line 18 of Schedule L?
Lastly, I’ve been under the impression that essentially the difference between total assets (line 15) and all liabilities in Schedule L goes to retained earnings (line 24 ).
I think so.
I have to pay mine within 48 hours of paying employees, so I don’t carry any into the new year.
I’d love to find an expert on Schedule L. You may be right.
If that’s easier than your personal return (which is easy enough to believe!), Bless you! Just that form is longer than when I had to do British and US taxes.
I see.
One more question (which might sound stupid to you): If I’m leasing my own car to the S-corp, I get to deduct car expenses (oil, gas, lease payments etc.) from the S corp, but since the car is mine personally, the depreciation is reported on my 1040 and not with the 1120s, did I get this right?
The S Corp can reimburse you for expenses in so much as the car was used for work travel (not commuting). As far as a lease, I guess it comes down to what the lease says, but if it isn’t reasonable the IRS could have a problem with it. But no, an S Corp certainly can’t deduct depreciation for a car it is leasing.
https://bizfluent.com/how-11401518-deduct-lease-payments-car-scorp.html
Thanks!
Good morning!
1) Is there a Turbo Tax Edition to do these S corp returns?
2) My S corp income is mainly from doing pharmaceutical speaker’s bureau, and some from reviewing sleep studies….may I take the 199A deduction?
1. Yes, but I haven’t used it. It’s in Turbotax Business.
2. Sounds like a specified service business to me, but I don’t know enough details about your finances to say whether you can take it or not.
1)Does Turbotax Business include Personal as well? Or do you buy them separately?
2) Why don’t you use Turbotax Business? I believe you do use it for your Personal Taxes because I remember reading a post called “Why I love TurboTax”
3) Do “Specified Service Businesses” qualify for the 199A deduction?
On Line B my accountant is putting 621111 which is “Offices of Physicians” which would preclude me from taking 199A deduction. Perhaps I can persuade him to change it.
THanks again
Just want to confirm….the EMPLOYER part of the solo 401K contribution goes on Line 17?
Also, the calculation for the EMPLOYER portion is 20% of net earnings minus self employment tax?
Thanks!
Yes. I’m also told that tax-deferred employEE contributions go there too.
20% of net earning. Which means you subtract out the employer portion of payroll tax.
Ok, so just to be crystal clear, it is 20% of net earnings which assumes you have already deducted payroll tax.
On the other post about this topic, some of the commenters have indicated various different formulas to calculate the employER portion, so I just want to clarify.
Thanks!
Hi WCI ,
I used to deduct my home office expense on Schedule C, however, I have started my S-corp in 2019 so income is now on S-corp form 1120S (using Turbotax). If I try to put home office deduction on Schedule C, the form will give me a tiny bit of home office deduction. Do you use accountable plan to get the full amount of home office deduction on 1120S? What about home office depreciation? For me this would be meaningful.
I am using Turbotax Business and the vehicle depreciation it gives me $18100 if I select first year for the S-corp but the correct amount should be $16000 for second year depreciation. Seems that it is no other choice unless I want to to say year two but it gives me roughly only $3700 worth of depreciation, which is too low. It is purchased in 2018 brand new; we own outright. How to adjust this?
And the pre-tax employer retirement distribution is on line 17 and it will be 25% of line 17, correct? And with self-directed post tax calculate, there is nothing to report to IRS but we need to calculate the post-tax number net of payroll tax (social security, medicare), income tax (federal and state), correct? Total of elective $19000, pre-tax contribution (employer), and post-tax (employees) is capped at $56000.
Your blog is my favorite blog! Always great to read. Thanks a lot!
1. I’ve just been taking it the regular old “standard” way. You might have a bigger deduction just renting your house to your business 14 days a year.
2. You’ll have to call Turbotax to ask about that.
3. Not sure why it would be 25% of line 17. It can be as high as 25% of net salary. Employer half of payroll, but not employee or income tax. And it’s $57K this year, $56K for 2019.
Sorry in the above comment I meant line 17 (pension, profit sharing, etc. plans) of form 1120S is 25% of line 17 (compensation of officers).
With regards to the balance sheets, I’ve been told by my CPA that disability insurance premiums paid for the year is considered an asset for that year, then somehow the amount becomes a liability the following year, essentially zeroing out I guess for documentation purposes. This never made sense to me. Do you understand this concept WCI? Or anybody?
No. But I don’t have my corporation buy my DI. Actually, I don’t have DI anymore at all.
Oh of course, coz you’re already rich! Wow, I hope I can ditch my disability insurance someday before I reach 65!
I’d probably ditch it before then. Remember most policies only pay the larger of to 65 (or 67) OR 2 years. So by the time you’re 60+, you’ve got to start wondering if those premiums are worth it.
Sorry to ask this again….back to how to calculate the employER part on an S corp or even Schedule C for that matter.
So just to be crystal clear, it is 20% of net earnings which assumes you have already deducted payroll tax.
My S corp made $18,385 last year, but net earnings were only about $4500 after all the deductions. I already did the full employee contribution to my job’s 401K.
The accountant I met with yesterday said I cannot do the employER contribution because I did not give myself a salary or W2 for 2019. Is that true? How does one give oneself a salary on such little 1099 revenue?
Thanks!
You mean employer portion of 401(k) contributions? Yes, 20% (counting the contribution) or 25% (not counting the contribution) of net earnings for a sole proprietorship or partnership. Net of all business expenses including the employer half of payroll taxes.
For an S Corp, it’s 25% of wages. If you don’t pay yourself a salary, you can’t contribute to a 401(k).
May I go back and pay myself a salary for 2019 or is it too late?
If I had taken this 1099 income on Schedule C instead of an S corp, would i have been able to do the Employer portion of the individual 401K without having to take a salary?
Too late. Sorry.
You don’t “take income on Schedule C instead of an S Corp.” If your business was a sole proprietorship in 2019, you report its income on Schedule C. If it was an S Corp in 2019, then it reports its own income on 1120S.
But if you were a sole proprietorship then yes, you could have made employer i401(k) contributions without a salary (since you can’t pay yourself a salary anyway.) In essence, all of your sole proprietorship income is like a salary in that you pay payroll taxes on all of it.
Thanks so much for responding during these chaotic and trying times.
So basically it seems like it would have been better for me to just have done Schedule C than to use an S corp?
Well, you saved a lot in payroll taxes.
My total 1099 income for 2019 was $18,385 which was put on the S corp.
How does one determine if it’s better to use Schedule C or to use an S corp?
The accountant could not really explain which is better and was unaware of the individual 401k
It depends on your goal. Is your goal to minimize payroll taxes? If so, an S corp is better. But if you’re trying to max out a retirement account I see little reason for an S Corp for an income of $18K.
Hi WCI,
I am filing 1120S using Turbotax Business with a portion of my income as distribution (vs salary). It seems that even with a distribution and wages, neither is giving me a 199A deduction on Turbotax Home & Business (on personal tax return) but I know I qualify as a real estate agent. Do you know what step I am missing? Would both distribution and wage from S-corp qualify for the 199A deduction? Thanks!
Only distribution income counts toward the 199A deduction, but it is limited to 50% of wages paid. There is also the specified service issue and taxable income limits to consider. But if you’re not a specified service business and you have ordinary business income and wages, you should get something as a 199A deduction. Remember you take it on your personal return, not the 1120S though. Put your K-1 into the personal return and see what you get.
Hi WCI,
I did put in my K-1 into my personal return but did not see the 199A deduction for my business although I see some for my rental property. We do exceed the income threshold, however, since I am a real estate agent, we should still get the QBI I think. I am unsure why it did not work. Are all Schedule C profit eligible for 199A deduction?
Thanks a lot!
I don’t know either.
Any schedule C profit can be eligible but there are other factors. For instance, if you have no employees/salary and are above the $421K (married) taxable income you don’t get any deduction.
A few questions:
1) You said health insurance is deducted on line 18 of 1120S. But I heard for health insurance, I deduct it from my W2 box 3 and 5, reducing my payroll taxes? And then deduct it from my 1040? I’m just a bit confused which route is right.
2) Line 12 Taxes and Licenses, do I deduct the employer and employee part of FICA or just the employee part?
1) I think you’re right. Probably the most important thing is to not deduct it in both places!
2) Just the employer part as I recall. The employee part is certainly on the W-2.
My understanding for S-corp health insurance is that:
1) The corporation must pay for the insurance
2) You report the payment as an expense/deduction on line 18 of the 1120S.
3) The amount that was entered on line 18 gets reported in box 1 of your W-2 as a taxable expense and also is annotated in box 14 of the W-2.
4) You deduct this amount on Schedule 1, Line 16 of your 1040. This is an above-the-line deduction. So it’s not completely tax-free, but you do get some favorable tax treatment of the expense.
Great tutorial. I decided to fire my accountant this year and do my own S-Corp taxes. Seems pretty straightforward, but I’m not sure if I’ve accounted for my forgiven PPP loan correctly.
I did not include it as income anywhere in the first 5 boxes of the return, but I did enter the forgiven amount on Line 12 of schedule B. I don’t think this will affect my taxes, but it seemed like the right thing to do.
My main concern is with Schedule M-2. Since the forgiven amount wasn’t factored in to Line 21 of the return (ordinary income), my owner’s distributions will exceed that income leaving a large negative balance on Line 8 of schedule M-2. Does this sound correct, and does having a large negative balance matter?
Alternatively, I was also wondering if I should include the forgiven amount on Line 3 (other income additions) of M-2, which would eliminate the negative balance issue.
Thank you for all your help!
Great questions. Not sure. I can see where mine got reported when I get my taxes back from my accountant but this has been something we’ve all been wondering about and discussing all year.
Thanks!
I use Turbo tax for Business. My PPP Loan was forgiven in 2020. I entered the PPP amount and checked yes on Line 12 of Schedule B on Form 1120-S as a debt that was forgiven. It appears to be an information line only, and does not affect any other amounts. I also entered the PPP Loan amount on line 16, code B of the Shareholder K-1 as non taxable income that affects shareholder basis. When I entered the PPP Forgiven Loan amount as Other timing Income item on the Schedule M-1, TT balanced out my income tax/book differences and also moved it to Schedule M-2 as an addition from the M-1 and as a negative Distribution to balance out the M-2 with my books. Everything appears to be in balance.
Thanks so much for your website, it’s a great resource!
I wanted to ask about schedule K of form 1120s, line 16d.
Am I supposed to enter the amount of distributions I personally took out of the corporation during the calendar year here?
That’s what my accountant did last year (and what I’m doing this year).
Distributions go on line 16d of Schedule K on Form 1120S. They’re subject to income tax but not payroll tax.
Thoughts on the new K-1 item G ? For LLCs they say to use a unit instead of stock. How do we determine that? Pick a number out of the air?
Thank you for taking so much time to share your knowledge and experience with the rest of us.
I have a question about how to fill out the Statement A – QBI Pass-through Entity Reporting. I’m doing the 1120-S for the business owned by my husband and his “partner” (S-corp with two 50% shareholders). Everything is pretty simple. Their K-1s sound similar to yours – basically just Line 1 for Ordinary Business Income, Line 16c for non-deductible customer gifts, Line 16d to show shareholder distributions, and Line 17, code V, for the QBI deduction.
Where I’m having trouble is filling out the Statement A for that. His business has no PTP, Aggregated, or SSTB income as listed in the tops of each of the 3 columns with check boxes. So, where do I enter their share of QBI (which for each of them is the same as their Line 1, Ordinary Business Income)? Do I just put that in the first column on the line for Ordinary Business Income, without checking any of the boxes in the column heading? If so, then I guess their wages would go in the same column?
And what am I supposed to write in the big box that says “Shareholder’s share of:”?
Thanks in advance for any help you can give me!
There is nothing on that statement to put QBI. So yes, first column first line you put OBI. Don’t check the boxes. Wages go lower in the first column.
Nothing goes in that box. It’s just a big box with “shareholder’s share of:”
This statement just shows that particular shareholder’s share of all the types of QBI like OBI. It helps you know what to put on the K-1s.
You know what’s interesting as I look back at my business and personal returns from last year (prepared by a professional) is they didn’t put anything in line 17 of our K-1s and there was no Statement A. Still got the 199A deduction as it went onto Form 8995-A of the personal return just fine. Interesting. Not sure what to make of that.
Wow! That was very helpful and and super quick. Thank you so much.
A heads up though for anyone using Turbo Tax for their 1040. I’ve been working on the 1120-S manually, and at the same time working on our 1040 on TurboTax. I did not want to finalize the 1120-S until I entered our K-1 into the 1040 on TurboTax to make sure I didn’t miss anything. I originally missed that box 17, Code V thing when prepping the 1120-S K-1s, so when entering the K-1 in TurboTax, and they asked me to check other boxes that had info in them, I did not check the last box for “Box 17 Info.”
Luckily, from my research I did last year about the s-corp benefits, I knew we should be getting that pass-through deduction. But I wasn’t seeing it reflected on the Turbo Tax 1040. So, after finding out that I needed to do something on Box 17 on the K-1s, and putting that into Turbo Tax for the 1040, they picked it up, did the form 8995, and we got the pass through deduction. That would have been an expensive mistake. TurboTax should recognize that something is missing in a situation like that.
But anyway…… thank you so much! You perfectly understood my questions about the Statement A, and your response was very helpful!
Just a huge thank you for taking the time to put such clear information on your website. Just having the checklist at the end was fabulous. It was not too complicated in my case following your instructions, but I do believe this is the last year I will be doing my own taxes :-).
Excellent blog!
As an SCorp, did you do any Accountable Plans for your home office deduction? If so, could you give me an example how you record in 1120S?
2021 SCorp was my first year doing 1120S. Doing Schedule C was so much easier because the calculations are done within TurboTax.
I had expensed all of my home expenses (utilities, HOA, property tax, etc) from my business account for both LLC and SCorp. So naturally, my book P&L and Balance Sheet are completely off for my SCorp because I was not suppose to pay from my business checking account. I was supposed to reimburse myself these home office expenses from my SCorp instead of paying directly from my business account. Live and learn!
Anyhow, long story short, I still have 3 more days before the deadline to properly record my home deduction. How to do it properly in 1120S? Add it to line 19 (other deduction) and attach my prorated home expenses? Can you tell us how you did it (summarized)? Thank you 🙏
No. I took the home office deduction against some Schedule C income. You can’t take it as an S Corp. You have to pay yourself rent.
https://markjkohler.com/truth-about-the-home-office-deduction/#:~:text=For%20those%20of%20you%20operating,deduction%20for%20the%20S%2DCorp.
Yes, that’s how you have to do it with an S Corp.
Hi Dr. – There shouldn’t be anything on Line 17c of your Schedule K. You implied you were subtracting the nondeductible meals expense from your Line 1 Ordinary Income and putting the result in 17c. That’s an error. 17c is for dividend distributions, and if you check the instructions they say that if you put anything on that line the IRS will expect a 1099-DIV for it…
Line 1 doesn’t get passed on to anything in that section. It has nothing to do with that section. The term “distribution(s)” in the context of S-Corp taxes confuses lots of people, including me. It doesn’t mean the mundane act of distributing the ordinary profits of the business to yourself and other shareholders as they come in, the act of transferring money from the business account to your personal bank account. It’s a formal act separate from the ordinary income or profits of the corporation, and it affects basis (which affects capital gains in any subsequent sale of the corporation). You’re not paying any distributions here, not to yourself or to your wife – you’d just pass on the ordinary income.
Further up you implied that Line 13 of the 1120S was interest income, like from your checking deposits. It’s interest expense, like from a loan.
Thanks for the corrections/clarifications.
Hello,
Just ran across your blog. Great job! I have been doing our 1120S for about 10 years, after paying a CPA for the first 8. Our businesses are restaurants, a little more complicated w/ depreciation schedules. Anyway, the IRS has never called me on any of the returns, but…I have never understood Scheule K, Line 16(d). I usually pull a number from the air somewhere and make everything balance. Like you, the IRS doesn’t seem to care since our returns are generally consistent year to year and we pay all of our taxes religiously. And yes, the instructions are useless to me. I do not have an accounting degree. It just irks me, we Americans have to pay people,( CPAs) to know how much we have pay to someone else,i.e., the IRS. Any help with particular line would be very much appreciated.
Keep up the good work.
I haven’t done this myself now for a couple of years, but isn’t 16d- distributions just the distributions (not salary) you paid yourself out of the business last year?