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Caution: DRAFT—NOT FOR FILING
This is an early release draft of an IRS tax form, instructions, or publication,
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collection through the Federal Register process; for more info, click here.2020 Department of the Treasury
Internal Revenue Service
Instructions for Form 1120-S
U.S. Income Tax Return for an S Corporation
DRAFT AS OF
Section references are to the Internal Revenue Contents Page Security Act (CARES Act) allows a new
Code unless otherwise noted. employee retention credit for qualified
Item J. Aggregation or
Contents Page Grouping of Certain wages. Any qualified wages for which an
Activities . . . . . . . . . . . . . . 13 eligible employer claims against payroll
Future Developments . . . . . . . ..... 1 taxes for the employee retention credit
What’s New . . . . . . . . . . . . . ..... 1 Income . . . . . . . . . . . . . . . . . 13
Deductions . . . . . . . . . . . . . . 14 may not be taken into account for
Photographs of Missing Children .... 1 purposes of determining certain other
February 4, 2021
The Taxpayer Advocate Service ..... 2 Tax and Payments . . . . . . . . . . 20
credits.
Direct Deposit of Refund . . . . . ..... 2 Schedule B. Other Information . . . . . 21
Schedules K and K-1 (General New items G and H added to Sched-
How To Get Forms and ule K-1. Item G is added for the
Publications . . . . . . . . . . . . . . . 2 Instructions) . . . . . . . . . . . . . . 22
Specific Instructions shareholder's number of shares and item
General Instructions . . . . . . . . . . . . . 2 H is added for loans from the shareholder.
(Schedule K-1 Only) . . . . . . . . 23
Purpose of Form . . . . . . . . . . . . 2 See Item G and Item H under Specific
Specific Instructions (Schedules K
How To Make the Election . . . . . . 2 and K-1, Part III) . . . . . . . . . . . 24 Instructions (Schedule K-1 Only), later.
Who Must File . . . . . . . . . . . . . 2 Schedule L. Balance Sheets per Election for section 951A reporting.
Termination of Election . . . . . . . . 2 Books . . . . . . . . . . . . . . . . . . 44 Notice 2020-69 provides an election to be
Electronic Filing . . . . . . . . . . . . 2 Schedule M-1. Reconciliation of treated as an entity for purposes of section
When To File . . . . . . . . . . . . . . 3 Income (Loss) per Books With 951A. See Other Forms and Statements
Where To File . . . . . . . . . . . . . . 3 Income (Loss) per Return . . . . . 44
That May Be Required and Statements
Who Must Sign . . . . . . . . . . . . . 3 Schedule M-2. Analysis of AAA, and forms required of S corporations
PTEP, Accumulated E&P, and
Paid Preparer Authorization . . . . . 3 OAA . . . . . . . . . . . . . . . . . . 45 electing to be treated as an entity under
Assembling the Return . . . . . . . . 4 Notice 2020-69, later. Also see reporting
Principal Business Activity Codes . . . 48
Tax Payments . . . . . . . . . . . . . 4 codes for Section 951A income (code E)
Index . . . . . . . . . . . . . . . . . . . . . 51 under Line 10. Other Income (Loss),
Electronic Deposit
Requirement . . . . . . . . . . . . 4 Section 951A category (code D) and
Estimated Tax Payments . . . . . . 4
Future Developments Section 951A category foreign source
For the latest information about income (code K) under Line 14r. Other
Interest and Penalties . . . . . . . . . 4
developments related to Form 1120-S and Foreign Tax Information.
Accounting Methods . . . . . . . . . 5 its instructions, such as legislation
Accounting Period . . . . . . . . . . . 5 enacted after they were published, go to Temporary allowance of 100% for
Rounding Off to Whole IRS.gov/Form1120S. business meals. A corporation is
Dollars . . . . . . . . . . . ..... 5 allowed a 100% deduction for certain
business meals paid or incurred in 2021
Recordkeeping . . . . . . . . ..... 6 What’s New and 2022. See Travel, meals, and
Amended Return . . . . . . . ..... 6
Other Forms and New payroll credit for paid sick leave entertainment.
Statements That May Be or family leave. Under the Families First
Required . . . . . . . . . . ..... 6 Coronavirus Response Act (FFCRA), as Reminders
At-Risk Limitations . . . . . . ..... 7 amended, an eligible employer can take a
credit against payroll taxes owed for Election by a small business corpora-
Passive Activity Limitations ..... 7 tion. Don't file Form 1120-S unless the
Net Investment Income Tax amounts paid for qualified sick leave or
family leave if incurred during the allowed corporation has filed or is attaching Form
Reporting Requirements . . . . 12 2553, Election by a Small Business
Extraterritorial Income period, which starts in 2020 and ends
March 31, 2021. The requirement that Corporation. For details, see the
Exclusion . . . . . . . . . . . . . 12 Instructions for Form 2553.
Specific Instructions . . . . . . . . . . . . 12 employers provide the leave expired on
December 31, 2020, but the credit is still
Period Covered . . . . . . . . . . . 12
available through March 31, 2021. There Photographs of
Name and Address . . . . . . . . . 12
Item B. Business Code . . . . . . . 13
is no double tax benefit allowed and the Missing Children
amounts claimed are reportable as The Internal Revenue Service is a proud
Item C. Schedule M-3 income on line 5. See Line 5. Other
Information . . . . . . . . . . . . 13 partner with the National Center for
Income (Loss). Missing & Exploited Children® (NCMEC).
Item D. Employer
Identification Number Certain cash contributions made in Photographs of missing children selected
(EIN) . . . . . . . . . . . . . . . . 13 2020 or 2021. Code G of Schedule K-1 by the Center may appear in these
Item F. Total Assets . . . . . . . . . 13 (Form 1120-S), box 12, is now used to instructions on pages that would otherwise
Item H. Final Return, Name report certain cash contributions made in be blank. You can help bring these
Change, Address calendar year 2020 or 2021. See children home by looking at the
Change, Amended Line 12a. Charitable Contributions under photographs and calling 1-800-THE-LOST
Return, or S Election Specific Instructions for Schedules K and (1-800-843-5678) if you recognize a child.
Termination or K-1.
Revocation . . . . . . . . . . . . 13
New employee retention credit. The
Coronavirus Aid, Relief, and Economic
Feb 03, 2021 Cat. No. 11515KThe Taxpayer Advocate forms mailed to it. The corporation should receipts from passive investment income
receive its order within 10 business days. as defined in section 1362(d)(3)(C). The
Service election terminates on the first day of the
The Taxpayer Advocate Service (TAS) is
an independent organization within the General Instructions first tax year beginning after the third
consecutive tax year. The corporation
IRS that helps taxpayers and protects must pay a tax for each year it has excess
taxpayer rights. TAS's job is to ensure that Purpose of Form net passive income. See the line 22a
every taxpayer is treated fairly and knows Use Form 1120-S to report the income, instructions for details on how to figure the
and understands their rights under the gains, losses, deductions, credits, and tax.
DRAFT AS OF
Taxpayer Bill of Rights. other information of a domestic 3. The election is revoked. An election
corporation or other entity for any tax year can be revoked only with the consent of
As a taxpayer, the corporation has
covered by an election to be an S shareholders who, at the time the
rights that the IRS must abide by in its
corporation. revocation is made, hold more than 50%
dealings with the corporation. TAS can
help the corporation if: of the number of issued and outstanding
• A problem is causing financial difficulty How To Make the Election shares of stock (including nonvoting
February 4, 2021
for the business; For details about the election, see Form stock). The revocation can specify an
• The business is facing an immediate 2553, Election by a Small Business effective revocation date that is on or after
threat of adverse action; or Corporation, and the Instructions for Form the day the revocation is filed. If no date is
• The corporation has tried repeatedly to 2553. specified, the revocation is effective at the
contact the IRS but no one has start of the tax year if the revocation is
responded, or the IRS hasn't responded Who Must File made on or before the 15th day of the 3rd
by the date promised. month of that tax year. If no date is
A corporation or other entity must file Form
specified and the revocation is made after
TAS has offices in every state, the 1120-S if (a) it elected to be an S
the 15th day of the 3rd month of the tax
District of Columbia, and Puerto Rico. corporation by filing Form 2553, (b) the
year, the revocation is effective at the start
Local advocates' numbers are in their IRS accepted the election, and (c) the
of the next tax year.
local directories and at election remains in effect. After filing Form
TaxpayerAdvocate.IRS.gov. The 2553, you should have received To revoke the election, the corporation
corporation can also call TAS at confirmation that Form 2553 was must file a statement with the appropriate
1-877-777-4778. accepted. If you didn't receive notification service center listed under Where To File
of acceptance or nonacceptance of the in the Instructions for Form 2553. In the
TAS also works to resolve large-scale election within 2 months of filing Form statement, the corporation must notify the
or systemic problems that affect many 2553 (5 months if you checked box Q1 to IRS that it is revoking its election to be an
taxpayers. If the corporation knows of one ask for a letter ruling), please follow up by S corporation. The statement must be
of these broad issues, please report it to calling 1-800-829-4933. Don't file Form signed by each shareholder who consents
TAS through the Systemic Advocacy 1120-S for any tax year before the year to the revocation and contain the
Management System at IRS.gov/SAMS. the election takes effect. information required by Regulations
Relief for late elections. If you haven't section 1.1362-6(a)(3).
For more information, go to IRS.gov/
Advocate. filed Form 2553, or didn't file Form 2553 A revocation can be rescinded before it
on time, you may be entitled to relief for a takes effect. See Regulations section
1.1362-6(a)(4) for details.
Direct Deposit of Refund late-filed election to be an S corporation.
See the Instructions for Form 2553 for
To request a direct deposit of the For rules on allocating income and
details. deductions between an S corporation's
corporation's income tax refund into an
account at a U.S. bank or other financial short year and a C corporation's short year
institution, attach Form 8050, Direct Termination of Election and other special rules that apply when an
Deposit of Corporate Tax Refund. See the Once the election is made, it stays in election is terminated, see section 1362(e)
instructions for line 27. effect until it is terminated. If the election is and Regulations section 1.1362-3.
terminated, the corporation (or a If an election was terminated under (1)
How To Get Forms successor corporation) can make another
election on Form 2553 only with IRS
or (2) above and the corporation believes
the termination was inadvertent, the
and Publications consent for any tax year before the fifth tax corporation can ask for permission from
Internet. You can access the IRS website year after the first tax year in which the the IRS to continue to be treated as an S
24 hours a day, 7 days a week, at IRS.gov termination took effect. See Regulations corporation. See Regulations section
to: section 1.1362-5 for details. 1.1362-4 for the specific requirements that
• Download forms, instructions, and An election terminates automatically in must be met to qualify for inadvertent
publications; any of the following cases. termination relief.
• Order IRS products online;
• Research your tax questions online; 1. The corporation is no longer a small
business corporation as defined in section
Electronic Filing
• Search publications online by topic or 1361(b). This kind of termination of an S Corporations can generally
keyword; electronically file (e-file) Form 1120-S,
election is effective as of the day the
• View Internal Revenue Bulletins (IRBs) corporation no longer meets the definition related forms, schedules, statements, and
published in recent years; and attachments; Form 7004 (automatic
of a small business corporation. Attach to
• Sign up to receive local and national tax Form 1120-S for the final year of the S extension of time to file); and Forms 940,
news by email. 941, and 944 (employment tax returns).
corporation a statement notifying the IRS
Tax forms and publications. The of the termination and the date it occurred. Form 1099 and other information returns
corporation can download or print all of the can also be electronically filed. The option
2. For each of 3 consecutive tax to e-file doesn't, however, apply to certain
forms and publications it may need on years, the corporation (a) has
IRS.gov/FormsPubs. Otherwise, the returns.
accumulated earnings and profits (AE&P),
corporation can go to IRS.gov/ and (b) derives more than 25% of its gross Certain corporations with total assets of
OrderForms to place an order and have $10 million or more that file at least 250
-2- Instructions for Form 1120-S (2020)• Any other corporate officer (such as tax
Where To File officer) authorized to sign.
File the corporation's return at the applicable IRS address listed below. If a return is filed on behalf of a
corporation by a receiver, trustee, or
And the total assets at assignee, the fiduciary must sign the
If the corporation's the end of the tax year return, instead of the corporate officer.
principal business, office, (Form 1120-S, page 1, Returns and forms signed by a receiver or
or agency is located in: item F) are: Use the following address: trustee in bankruptcy on behalf of a
DRAFT AS OF
corporation must be accompanied by a
Connecticut, Delaware, Department of the Treasury copy of the order or instructions of the
Less than $10 million and
District of Columbia, Georgia, Internal Revenue Service Center court authorizing signing of the return or
Schedule M-3 isn't filed
Illinois, Indiana, Kentucky, Kansas City, MO 64999-0013 form.
Maine, Maryland,
Massachusetts, Michigan, If an employee of the corporation
New Hampshire, New Jersey, completes Form 1120-S, the paid preparer
February 4, 2021
New York, North Carolina, $10 million or more, or Department of the Treasury space should remain blank. Anyone who
Ohio, Pennsylvania, Rhode less than $10 million and Internal Revenue Service Center prepares Form 1120-S but doesn't charge
Island, South Carolina, Schedule M-3 is filed Ogden, UT 84201-0013 the corporation shouldn't complete that
Tennessee, Vermont, Virginia, section. Generally, anyone who is paid to
West Virginia, Wisconsin prepare the return must sign it and fill in
Alabama, Alaska, Arizona,
the “Paid Preparer Use Only” area.
Arkansas, California, The paid preparer must complete the
Colorado, Florida, Hawaii, required preparer information and:
Idaho, Iowa, Kansas, • Sign the return in the space provided
Louisiana, Minnesota, Department of the Treasury for the preparer's signature, and
Mississippi, Missouri, Any amount Internal Revenue Service Center • Give a copy of the return to the
Montana, Nebraska, Nevada, Ogden, UT 84201-0013 taxpayer.
New Mexico, North Dakota,
Oklahoma, Oregon, South A paid preparer may sign original
Dakota, Texas, Utah, TIP or amended returns by rubber
Washington, Wyoming stamp, mechanical device, or
computer software program.
A foreign country or U.S. Internal Revenue Service Center
possession Any amount P.O. Box 409101
Ogden, UT 84409 Paid Preparer
Authorization
If the corporation wants to allow the IRS to
returns a year are required to e-file Form IRS to meet the “timely mailing as timely discuss its 2020 tax return with the paid
1120-S. See Regulations section filing” rule for tax returns. Go to preparer who signed it, check the “Yes”
301.6037-2. However, these corporations IRS.gov/PDS for the current list of box in the signature area of the return.
can ask for a waiver of the electronic filing designated services. This authorization applies only to the
requirements. See Notice 2010-13, individual whose signature appears in the
2010-4 I.R.B. 327. The PDS can tell you how to get written “Paid Preparer Use Only” section of the
proof of the mailing date. return. It doesn't apply to the firm, if any,
For more information, visit IRS.gov/
shown in that section.
Businesses. For the IRS mailing address to use if
you are using PDS, go to IRS.gov/ If the “Yes” box is checked, the
When To File PDSStreetAddresses. corporation is authorizing the IRS to call
Generally, an S corporation must file Form the paid preparer to answer any questions
Private delivery services can't that may arise during the processing of its
1120-S by the 15th day of the 3rd month deliver items to P.O. boxes. You
after the end of its tax year. For calendar !
CAUTION must use the U.S. Postal Service
return. The corporation is also authorizing
year corporations, the due date is March the paid preparer to:
to mail any item to an IRS P.O. box • Give the IRS any information that is
15, 2021. A corporation that has dissolved address.
must generally file by the 15th day of the missing from the return;
3rd month after the date it dissolved. • Call the IRS for information about the
Extension of Time To File processing of the return or the status of
If the due date falls on a Saturday, File Form 7004, Application for Automatic any related refund or payment(s); and
Sunday, or legal holiday, the corporation Extension of Time To File Certain • Respond to certain IRS notices about
can file on the next day that isn’t a Business Income Tax, Information, and math errors, offsets, and return
Saturday, Sunday, or legal holiday. Other Returns, to ask for an extension of preparation.
If the S corporation election was time to file. Generally, the corporation
must file Form 7004 by the regular due The corporation isn't authorizing the
terminated during the tax year and the paid preparer to receive any refund check,
corporation reverts to a C corporation, file date of the return. See the Instructions for
Form 7004. bind the corporation to anything (including
Form 1120-S for the S corporation's short any additional tax liability), or otherwise
year by the due date (including represent the corporation before the IRS.
extensions) of the C corporation's short
year return. Who Must Sign The authorization will automatically end
The return must be signed and dated by: no later than the due date (excluding
Private Delivery Services • The president, vice president, treasurer, extensions) for filing the corporation's
Corporations can use certain private assistant treasurer, chief accounting 2021 tax return. If the corporation wants to
delivery services (PDS) designated by the officer; or expand the paid preparer's authorization
Instructions for Form 1120-S (2020) -3-or revoke the authorization before it ends, the Electronic Federal Tax Payment corporation may be able to lower the
see Pub. 947, Practice Before the IRS and System (EFTPS). However, if the amount of one or more installments by
Power of Attorney. corporation doesn't want to use EFTPS, it using the annualized income installment
can arrange for its tax professional, method or adjusted seasonal installment
Assembling the Return financial institution, payroll service, or method under section 6655(e).
To ensure that the corporation's tax return other trusted third party to make deposits
on its behalf. Also, it may arrange for its For a calendar year corporation, the
is correctly processed, attach all payments are due for 2021 by April 15,
schedules and other forms after page 5 of financial institution to submit a same-day
wire payment (discussed below) on its June 15, September 15, and December
Form 1120-S in the following order.
DRAFT AS OF
behalf. EFTPS is a free service provided 15. For a fiscal year corporation, they are
1. Schedule N (Form 1120), Foreign by the Department of the Treasury. due by the 15th day of the 4th, 6th, 9th,
Operations of U.S. Corporations. Services provided by a tax professional, and 12th months of the year. If any date
2. Schedule D (Form 1120-S), Capital financial institution, payroll service, or falls on a Saturday, Sunday, or legal
Gains and Losses and Built-in Gains. other third party may have a fee. holiday, the installment is due on the next
day that isn't a Saturday, Sunday, or legal
3. Form 8949, Sales and Other To get more information about EFTPS holiday.
February 4, 2021
Dispositions of Capital Assets. or to enroll in EFTPS, visit
4. Form 8996, Qualified Opportunity www.EFTPS.gov or call 1-800-555-4477 The corporation must make the
Fund. (TTY/TDD 1-800-733-4829). payments using electronic funds transfers
as described earlier.
5. Form 8825, Rental Real Estate Depositing on time. For any deposit
Income and Expenses of a Partnership or made by EFTPS to be on time, the For information on penalties that may
an S Corporation. corporation must submit the deposit by 8 apply if the corporation fails to make
6. Form 1125-A, Cost of Goods Sold. p.m. Eastern time the day before the date required payments, see the Instructions
the deposit is due. If the corporation uses for Form 2220.
7. Form 8050, Direct Deposit of a third party to make deposits on its
Corporate Tax Refund. behalf, they may have different cutoff Interest and Penalties
8. Form 4136, Credit for Federal Tax times.
Paid on Fuels. If the corporation receives a notice
Same-day wire payment option. If the about penalties after it files its
9. Form 8941, Credit for Small corporation fails to submit a deposit
!
CAUTION return, send the IRS an
Employer Health Insurance Premiums. transaction on EFTPS by 8 p.m. Eastern explanation and we will determine if the
10. Form 6252, Installment Sale time the day before the date a deposit is corporation meets reasonable-cause
Income. due, it can still make its deposit on time by criteria. Don't attach an explanation when
11. Additional schedules in using the Federal Tax Collection Service the corporation's return is filed.
alphabetical order. (FTCS). To use the same-day wire
payment method, the corporation will need Interest. Interest is charged on taxes
12. Additional forms in numerical order. to make arrangements with its financial paid late even if an extension of time to file
Complete every applicable entry space institution ahead of time regarding is granted. Interest is also charged on
on Form 1120-S and Schedule K-1. Don't availability, deadlines, and costs. penalties imposed for failure to file,
enter “See Attached” or “Available Upon Financial institutions may charge a fee for negligence, fraud, substantial valuation
Request” instead of completing the entry payment made this way. To learn more misstatements, substantial
spaces. If more space is needed on the about the information the corporation will understatements of tax, and reportable
forms or schedules, attach separate need to provide to its financial institution to transaction understatements from the due
sheets using the same size and format as make a same-day wire payment, go to date (including extensions) to the date of
the printed forms. IRS.gov/SameDayWire. payment. The interest charge is figured at
a rate determined under section 6621.
If there are supporting statements and Estimated Tax Payments Late filing of return. A penalty may be
attachments, arrange them in the same Generally, the corporation must make
order as the schedules or forms they assessed if the return is filed after the due
installment payments of estimated tax for date (including extensions) or the return
support and attach them last. Show the the following taxes if the total of these
totals on the printed forms. Enter the doesn't show all the information required,
taxes is $500 or more: (a) the tax on unless each failure is due to reasonable
corporation's name and EIN on each built-in gains, (b) the excess net passive
supporting statement or attachment. cause. See Caution, earlier. For returns on
income tax, and (c) the investment credit which no tax is due, the penalty is $210 for
recapture tax, each discussed later. each month or part of a month (up to 12
Tax Payments The amount of estimated tax required months) the return is late or doesn't
Generally, the corporation must pay any to be paid annually is the smaller of: (a) include the required information, multiplied
tax due in full no later than the due date for the total of the above taxes shown on the by the total number of persons who were
filing its tax return (not including return for the tax year (or if no return is shareholders in the corporation during any
extensions). See the instructions for filed, the total of these taxes for the year), part of the corporation's tax year for which
line 25. If the due date falls on a Saturday, or (b) the sum of (i) the investment credit the return is due. If tax is due, the penalty
Sunday, or legal holiday, the payment is recapture tax and the built-in gains tax is the amount stated above plus 5% of the
due on the next day that isn't a Saturday, shown on the return for the tax year (or if unpaid tax for each month or part of a
Sunday, or legal holiday. no return is filed, the total of these taxes month the return is late, up to a maximum
for the tax year), and (ii) any excess net of 25% of the unpaid tax. The minimum
Electronic Deposit passive income tax shown on the penalty for a return that is more than 60
Requirement corporation's return for the preceding tax days late is the smaller of the tax due or
year. If the preceding tax year was less $435.
Corporations must use electronic funds
transfers to make all federal tax deposits than 12 months, the estimated tax must be Late payment of tax. A corporation that
(such as deposits of employment, excise, determined under (a). doesn't pay the tax when due generally
and corporate income tax). Generally, The estimated tax is generally payable may be penalized 1/2 of 1% of the unpaid
electronic funds transfers are made using in four equal installments. However, the tax for each month or part of a month the
-4- Instructions for Form 1120-S (2020)tax isn't paid, up to a maximum of 25% of The following rules apply. • An ownership tax year.
the unpaid tax. The penalty won't be • Generally, an S corporation can't use • A tax year elected under section 444.
imposed if the corporation can show that the cash method of accounting if it’s a tax • A 52-53-week tax year that ends with
the failure to pay on time was due to shelter (as defined in section 448(d)(3)). reference to a year listed above.
reasonable cause. See Caution, earlier. See section 448 for details. • Any other tax year (including a
Failure to furnish information timely.
• A corporation must use an accrual 52-53-week tax year) for which the
method for sales and purchases of corporation establishes a business
For each failure to furnish Schedule K-1 to
inventory items unless it is a small purpose.
a shareholder when due and each failure
business taxpayer (defined later). See the
DRAFT AS OF
to include on Schedule K-1 all the A new S corporation must use Form
Form 1125-A instructions. If you are a
information required to be shown (or the 2553 to elect a tax year. To later change
small business taxpayer, you can adopt or
inclusion of incorrect information), a $280 the corporation's tax year, see Form 1128,
change your accounting method to
penalty may be imposed with respect to Application To Adopt, Change, or Retain a
account for inventories (i) in the same
each Schedule K-1 for which a failure Tax Year, and its instructions (unless the
manner as materials and supplies that are
occurs. If the requirement to report correct corporation is making an election under
non-incidental, or (ii) to conform to the
information is intentionally disregarded, section 444, discussed next).
February 4, 2021
taxpayer’s treatment of inventories in an
each $280 penalty is increased to $560 or,
applicable financial statement (as defined Electing a tax year under section 444.
if greater, 10% of the aggregate amount of
in section 451(b)(3)), or if the taxpayer Under the provisions of section 444, an S
items required to be reported. See
doesn’t have an applicable financial corporation can elect to have a tax year
sections 6722 and 6724 for more
statement, the method of accounting used other than a required year, but only if the
information.
in the taxpayer’s books and records deferral period of the tax year isn't longer
The penalty won't be imposed if the prepared in accordance with the than the shorter of 3 months or the deferral
corporation can show that not furnishing taxpayer’s accounting procedures. period of the tax year being changed. This
information timely was due to reasonable Generally, IRS consent is required for election is made by filing Form 8716,
cause. See Caution, earlier. changes in accounting methods. See Rev. Election To Have a Tax Year Other Than a
Trust fund recovery penalty. This Proc. 2018-40 for the procedures by which Required Tax Year.
penalty may apply if certain excise, a small business taxpayer may obtain
An S corporation may not make or
income, social security, and Medicare automatic consent to change its method of
continue an election under section 444 if it
taxes that must be collected or withheld accounting to reflect the statutory changes
is a member of a tiered structure, other
aren't collected or withheld, or these taxes made in this area. Also, see Change in
than a tiered structure that consists
aren't paid. These taxes are generally accounting method, later.
entirely of partnerships and S corporations
reported on: • Special rules apply to long-term that have the same tax year. For the S
• Form 720, Quarterly Federal Excise contracts. See section 460.
corporation to have a section 444 election
Tax Return; • Generally, dealers in securities must in effect, it must make the payments
• Form 941, Employer's QUARTERLY use the mark-to-market accounting
required by section 7519. See Form 8752,
Federal Tax Return; method. Dealers in commodities and
Required Payment or Refund Under
• Form 943, Employer's Annual Federal traders in securities and commodities can
Section 7519.
Tax Return for Agricultural Employees; elect to use the mark-to-market
accounting method. See section 475. A section 444 election ends if an S
• Form 944, Employer's ANNUAL corporation:
Federal Tax Return; or Small business taxpayer. A small
• Form 945, Annual Return of Withheld • Changes its accounting period to a
business taxpayer is a taxpayer that (a) calendar year or some other permitted
Federal Income Tax. has average annual gross receipts of $26 year,
The trust fund recovery penalty may be million or less for the 3 prior tax years, and • Is penalized for willfully failing to comply
imposed on all persons who are (b) isn’t a tax shelter (as defined in section with the requirements of section 7519, or
determined by the IRS to have been 448(d)(3)). • Terminates its S election (unless it
responsible for collecting, accounting for, Change in accounting method. immediately becomes a personal service
or paying over these taxes, and who acted Generally, the corporation must get IRS corporation).
willfully in not doing so. The penalty is consent to change either an overall If the termination results in a short tax
equal to the full amount of the unpaid trust method of accounting or the accounting year, enter at the top of the first page of
fund tax. See the Instructions for Form treatment of any material item for income Form 1120-S for the short tax year,
720, Pub. 15 (Circular E), Employer's Tax tax purposes. To obtain consent, the “SECTION 444 ELECTION
Guide, or Pub. 51 (Circular A), Agricultural corporation must generally file Form 3115, TERMINATED.”
Employer's Tax Guide, for details, Application for Change in Accounting
including the definition of responsible
persons.
Method, during the tax year for which the Rounding Off to
change is requested. See the Instructions
Other penalties. Other penalties can be for Form 3115 and Pub. 538, Accounting Whole Dollars
imposed for negligence, substantial Periods and Methods, for more The corporation may enter decimal points
understatement of tax, reportable information and exceptions. and cents when completing its return.
transaction understatements, and fraud. However, the corporation should round off
See sections 6662, 6662A, and 6663. Accounting Period cents to whole dollars on its return, forms,
and schedules to make completing its
A corporation must figure its income on
Accounting Methods the basis of a tax year. A tax year is the
return easier. The corporation must either
round off all amounts on its return to whole
Figure income using the method of annual accounting period a corporation
dollars, or use cents for all amounts. To
accounting regularly used in keeping the uses to keep its records and report its
round, drop amounts under 50 cents and
corporation's books and records. The income and expenses.
increase amounts from 50 to 99 cents to
method used must clearly reflect income. the next dollar. For example, $8.40 rounds
Permissible methods include cash, An S corporation must use one of the
following tax years. to $8 and $8.50 rounds to $9.
accrual, or any other method authorized
by the Internal Revenue Code. • A tax year ending December 31. If two or more amounts must be added
• A natural business year. to figure the amount to enter on a line,
Instructions for Form 1120-S (2020) -5-include cents when adding the amounts published guidance as a listed basis in the stock received instead of
and round off only the total. transaction. reducing the acquiring corporation's basis
2. Any transaction offered under in the property transferred. Once made,
Recordkeeping conditions of confidentiality for which the the election is irrevocable. For more
Keep the corporation's records for as long corporation (or a related party) paid an information, see section 362(e)(2) and
as they may be needed for the advisor a fee of at least $50,000. Regulations section 1.362-4. If an election
administration of any provision of the is made, a statement must be filed in
3. Certain transactions for which the accordance with Regulations section
Internal Revenue Code. Usually, records corporation (or a related party) has
that support an item of income, deduction, 1.362-4(d)(3).
DRAFT AS OF
contractual protection against
or credit on the return must be kept for 3 disallowance of the tax benefits. Regulations section 1.1411-10(g) (sec-
years from the date each shareholder's tion 1411 election with respect to
4. Certain transactions resulting in a
return is due or filed, whichever is later. CFCs and QEFs). A corporation that
loss of at least $2 million in any single year
Keep records that verify the corporation's directly or indirectly owns stock of a
or $4 million in any combination of years.
basis in property for as long as they are controlled foreign corporation (CFC)
needed to figure the basis of the original or 5. Any transaction identified by the (within the meaning of section 953(c)(1)
February 4, 2021
replacement property. IRS by notice, regulation, or other (B) or section 957(a)) or a passive foreign
published guidance as a “transaction of investment company (within the meaning
The corporation should keep copies of interest.” of section 1297(a)) that the corporation
all filed returns. They help in preparing
For more information, see Regulations treats as a qualified electing fund (QEF)
future and amended returns.
section 1.6011-4. Also see the Instructions under section 1293 may make the election
provided in Regulations section
Amended Return for Form 8886.
1.1411-10(g). The election must be made
To correct a previously filed Form 1120-S, Penalties. The corporation may have no later than the first tax year beginning
file an amended Form 1120-S and check to pay a penalty if it is required to disclose after 2013 during which the corporation: (i)
box H(4) on page 1. Attach a statement a reportable transaction under section includes an amount in gross income for
that identifies the line number of each 6011 and fails to properly complete and chapter 1 purposes under section 951(a)
amended item, the corrected amount or file Form 8886. Penalties may also apply or section 1293(a) for the CFC or QEF,
treatment of the item, and an explanation under section 6707A if the corporation and (ii) has a direct or indirect owner that
of the reasons for each change. fails to file Form 8886 with its corporate is subject to tax under section 1411 or
return, fails to provide a copy of Form would have been if the election were
If the income, deductions, credits, or 8886 to the Office of Tax Shelter Analysis made. This election must be made on an
other information provided to any (OTSA), or files a form that fails to include entity-by-entity basis, and applies only to
shareholder on Schedule K-1 is incorrect, all the information required (or includes the particular CFCs and QEFs for which
file an amended Schedule K-1 (Form incorrect information). Other penalties, an election is made. In general, for
1120-S) for that shareholder with the such as an accuracy-related penalty under purposes of section 1411, if an election is
amended Form 1120-S. Also give a copy section 6662A, may also apply. See the in effect for a CFC or QEF, the amounts
of the amended Schedule K-1 to that Instructions for Form 8886 for details on included in income under section 951 and
shareholder. Check the “Amended K-1” these and other penalties. section 1293 derived from the CFC or
box at the top of the Schedule K-1 to QEF are included in net investment
indicate that it is an amended Reportable transactions by material
advisors. Material advisors to any income, and distributions described in
Schedule K-1. section 959(d) or section 1293(c) are
reportable transaction must disclose
A change to the corporation's federal certain information about the reportable excluded from net investment income. An
return may affect its state return. This transaction by filing Form 8918, Material election that is made under Regulations
includes changes made as the result of an Advisor Disclosure Statement, with the section 1.1411-10(g) can't be revoked. For
IRS examination. For more information, IRS. For details, see the Instructions for more information regarding this election,
contact the state tax agency for the Form 8918. see Regulations section 1.1411-10(g).
state(s) in which the corporation's return The election must be made in a
was filed. Transfers to a corporation controlled statement that is filed with the
by the transferor. Every significant corporation's original or amended return
transferor (as defined in Regulations
Other Forms and section 1.351-3(d)) that receives stock of
for the tax year in which the election is
Statements That May Be a corporation in exchange for property in a
made. An election can be made on an
amended return only if the tax year for
Required nonrecognition event must include the which the election is made, and all tax
statement required by Regulations section years affected by the election, aren't
Reportable transaction disclosure 1.351-3(a) on or with the transferor's tax
statement. Disclose information for each closed by the period of limitations on
return for the tax year of the exchange. assessments under section 6501. The
reportable transaction in which the The transferee corporation must include
corporation participated. Form 8886, statement must include:
the statement required by Regulations • The name and EIN of the corporation
Reportable Transaction Disclosure section 1.351-3(b) on or with its return for
Statement, must be filed for each tax year making the election;
the tax year of the exchange, unless all the • A declaration that all of its shareholders
the corporation participated in the required information is included in any
transaction. The corporation may have to consent to each election made in the
statement(s) provided by a significant statement;
pay a penalty if it is required to file Form transferor that is attached to the same
8886 and doesn't do so. The following are • A declaration that the corporation elects
return for the same section 351 exchange. under Regulations section 1.1411-10(g) to
reportable transactions.
Election to reduce basis under section apply the rules in Regulations section
1. Any listed transaction that is, a 362(e)(2)(C). If property is transferred to 1.1411-10(g) to the CFCs and QEFs
transaction that is the same as or a corporation subject to section 362(e)(2), identified in the statement; and
substantially similar to one of the types of the transferor and the acquiring • The following information for each CFC
transactions that the IRS has determined corporation may elect, under section and QEF for which an election is made: (i)
to be a tax avoidance transaction and 362(e)(2)(C), to reduce the transferor's the name of the CFC or QEF; and (ii)
identified by notice, regulation, or other
-6- Instructions for Form 1120-S (2020)either the EIN of the CFC or QEF, or, if the For more information, see the Instructions 3. Leasing section 1245 property,
CFC or QEF doesn't have an EIN, the for Form 8975. including personal property and certain
reference ID number of the CFC or QEF. other tangible property that is depreciable
Statements and forms required of S
In addition, for each CFC or QEF held or amortizable.
corporations electing to be treated as
by the corporation for which an election an entity under Notice 2020-69. If the 4. Exploring for, or exploiting, oil and
under Regulations section 1.1411-10(g) corporation is electing entity treatment for gas.
has already been made by the purposes of section 951A under Notice 5. Exploring for, or exploiting,
corporation, the statement should include: 2020-69 for the first tax year ending on or geothermal deposits (for wells started
(i) the name of the CFC or QEF, and (ii)
DRAFT AS OF
after September 1, 2020, the corporation after September 1978).
either the EIN of the CFC or QEF, or, if the must attach a statement to its timely filed
CFC or QEF doesn't have an EIN, the 6. Any other activity not included in (1)
(including extensions) original return for through (5) that is carried on as a trade or
reference ID number of the CFC or QEF. that year. For tax years of the corporation business or for the production of income.
Annual information reporting by speci- ending before September 1, 2020, and
fied domestic entities under section after June 21, 2019, the corporation and Aggregation of Activities
all of its shareholders may elect for the
February 4, 2021
6038D. Certain domestic corporations Activities described in (6) under Activities
that are formed or availed of to hold corporation to be treated as an entity for
Covered by the At-Risk Rules, earlier, that
specified foreign financial assets purposes of section 951A by attaching a
constitute a trade or business are treated
(“specified domestic entities”) must file statement to their timely filed (including
as one activity if:
Form 8938, Statement of Specified extensions) original returns or on
amended returns filed by March 15, 2021.
• You actively participate in the
Foreign Financial Assets. Form 8938 must management of the trade or business, or
be filed each year the value of the In either case, the election statement
must: (i) identify the election for the
• The trade or business is carried on by a
corporation's specified foreign financial partnership or S corporation and 65% or
assets meets or exceeds the reporting corporation to be treated as an entity for
more of its losses for the tax year are
threshold. For more information on purposes of section 951A pursuant to the
allocable to persons who actively
domestic corporations that are specified Notice; (ii) include the amount of the
participate in the management of the trade
domestic entities and the types of foreign corporation's transition AE&P (as
or business.
financial assets that must be reported, see described in section 3.02(3) of the Notice);
the Instructions for Form 8938, generally, and (iii) be signed by a person authorized Similar rules apply to activities
and in particular, Who Must File, Specified to sign the return required to be filed under described in (1) through (5) of that earlier
Domestic Entity, Reporting Thresholds, section 6037. The corporation must also discussion. For more information, see
Specified Foreign Financial Assets, prepare Form 1120-S, Schedules K-1 Pub. 925. If you aggregate your activities
Interests in Specified Foreign Financial (Form 1120-S), and Form 8892, U.S. under these rules for section 465
Assets, Assets Not Required To Be Shareholder Calculation of Global purposes, check the appropriate box in
Reported, and Exceptions to Reporting. Intangible Low-Taxed Income (GILTI) item J.
consistent with the corporation's election
In addition, a domestic corporation for shareholders to comply with section At-Risk Activity Reporting
required to file Form 8938 with its Form
1120-S for the tax year should check
6037(c). Requirements
“Yes” to Schedule N (Form 1120), Other forms and statements. See Pub. If the corporate items of income, loss, or
question 8, and also include that schedule 542, Corporations, for a list of other forms deduction reported on Schedule K-1 are
with its Form 1120-S. and statements a corporation may need to from more than one activity covered by the
file in addition to the forms and statements at-risk rules, the corporation must report
Certification as a qualified opportunity discussed throughout these instructions. information separately for each activity.
fund. If the corporation is organized to
invest in qualified opportunity zone
property, it must attach Form 8996 to At-Risk Limitations The following information must be
provided on an attachment to
Form 1120-S to self-certify as a QOF. In In general, section 465 limits the amount Schedule K-1 for each activity.
addition, the corporation files Form 8996 of deductible net losses shareholders can
• A statement that the information is a
annually to report that the QOF meets the claim from certain activities. The at-risk breakdown of the items of income, loss, or
investment standard of section 1400Z-2 or limitations don't apply to the corporation, deduction by at-risk activity.
to figure the penalty if it fails to meet the but instead apply to each shareholder's
• The identity of the at-risk activity; the
investment standard. The corporation share of net losses attributable to each items of income, loss, or deduction for the
must also complete line 15 of Schedule B. activity. Because the treatment of each activity; other items of income, loss, or
For more information, see the Instructions shareholder's share of corporate net deduction; and any other information that
for Form 8996. losses depends on the nature of the relates to the activity (that is, distributions,
activity that generated it, the corporation shareholder loans, etc.).
Qualified opportunity fund investment. must report the items of income, loss, and
If the corporation deferred a capital gain in deduction separately for each activity. See
a qualified opportunity fund (QOF), the Pub. 925, Passive Activity and At-Risk Passive Activity
corporation must file its return with Rules, for additional information. Limitations
Schedule D (Form 1120-S), Form 8949, In general, section 469 limits the amount
and Form 8997 attached. The corporation Activities Covered by the of losses, deductions, and credits that
will need to file Form 8997 annually until it At-Risk Rules shareholders can claim from “passive
disposes of the investment. See the activities.” The passive activity limitations
If the S corporation is involved in one of
instructions for Form 8997 for details. don't apply to the corporation. Instead,
the following activities as a trade or
Form 8975. Certain U.S. persons that business or for the production of income, they apply to each shareholder's share of
are the ultimate parent entity of a U.S. the shareholder may be subject to the any income or loss and credit attributable
multinational enterprise group with annual at-risk rules. to a passive activity. Because the
revenue for the preceding reporting period 1. Holding, producing, or distributing treatment of each shareholder's share of
of $850 million or more are required to file motion picture films or video tapes. corporate income or loss and credit
Form 8975, Country-by-Country Report. depends on the nature of the activity that
2. Farming. generated it, the corporation must report
Instructions for Form 1120-S (2020) -7-income or loss and credits separately for b. The shareholder performed more ordinary business income (loss) is
each activity. than 750 hours of services in real property reported on page 1 of Form 1120-S, the
trades or businesses in which he or she specific income and deductions from each
The following instructions and the
materially participated. separate trade or business activity must
instructions for Schedules K and K-1,
For purposes of this rule, each interest be reported on attachments to Form
later, explain the applicable passive
in rental real estate is a separate activity 1120-S. Similarly, while each
activity limitation rules and specify the type
unless the shareholder elects to treat all shareholder's allocable share of the
of information the corporation must
interests in rental real estate as one corporation's ordinary business income
provide to its shareholders for each
activity. (loss) is reported in box 1 of Schedule K-1,
DRAFT AS OF
activity. If the corporation had more than
each shareholder's allocable share of the
one activity, it must report information for If the shareholder is married filing income and deductions from each trade or
each activity on an attachment to jointly, either the shareholder or his or her business activity must be reported on
Schedules K and K-1. spouse must separately meet both of the statements attached to each
Generally, passive activities include (a) above conditions, without taking into Schedule K-1. See Passive Activity
activities that involve the conduct of a account services performed by the other Reporting Requirements, later, for more
spouse.
February 4, 2021
trade or business if the shareholder information.
doesn't materially participate in the A real property trade or business is any
activity, and (b) all rental activities (defined real property development, Rental Activities
later) regardless of the shareholder's redevelopment, construction, Generally, except as noted below, if the
participation. For exceptions, see reconstruction, acquisition, conversion, gross income from an activity consists of
Activities That Are Not Passive Activities, rental, operation, management, leasing, or amounts paid principally for the use of real
later. The level of each shareholder's brokerage trade or business. Services the or personal tangible property held by the
participation in an activity must be shareholder performed as an employee corporation, the activity is a rental activity.
determined by the shareholder. aren't treated as performed in a real
property trade or business unless he or There are several exceptions to this
The passive activity rules provide that she owned more than 5% of the stock in general rule. Under these exceptions, an
losses and credits from passive activities the employer. activity involving the use of real or
can generally be applied only against personal tangible property isn't a rental
income and tax (respectively) from 3. The rental of a dwelling unit used activity if any of the following apply.
passive activities. Thus, passive losses by a shareholder for personal purposes • The average period of customer use
can't be applied against income from during the year for more than the greater (defined later) for such property is 7 days
salaries, wages, professional fees, or a of 14 days or 10% of the number of days or less.
business in which the shareholder that the residence was rented at fair rental • The average period of customer use for
materially participates or against “portfolio value. such property is 30 days or less and
income” (defined later). Passive credits 4. An activity of trading personal significant personal services (defined
can't be applied against the tax related to property for the account of owners of later) are provided by or on behalf of the
any of these types of income. interests in the activity. For purposes of corporation.
Special rules require that net income this rule, personal property means • Extraordinary personal services
property that is actively traded, such as (defined later) are provided by or on behalf
from certain activities that would otherwise
stocks, bonds, and other securities. See of the corporation.
be treated as passive income must be
recharacterized as nonpassive income for Temporary Regulations section • The rental of such property is treated as
1.469-1T(e)(6). incidental to a nonrental activity of the
purposes of the passive activity
corporation under Regulations section
limitations. See Recharacterization of The section 469(c)(3) exception 1.469-1(e)(3)(vi).
Passive Income, later. TIP for a working interest in oil and gas • The corporation customarily makes the
To allow each shareholder to correctly properties doesn't apply to an S property available during defined business
apply the passive activity limitations, the corporation because state law generally hours for nonexclusive use by various
corporation must report income or loss limits the liability of shareholders. customers.
and credits separately by activity for each • The corporation provides property for
of the following. Trade or Business Activities use in a nonrental activity of a partnership
• Trade or business activities. A trade or business activity is an activity in its capacity as an owner of an interest in
• Rental real estate activities. (other than a rental activity or an activity such partnership. Whether the corporation
• Rental activities other than rental real treated as incidental to an activity of provides property used in an activity of a
estate. holding property for investment) that: partnership in the corporation's capacity
• Portfolio income. 1. Involves the conduct of a trade or as an owner of an interest in the
business (within the meaning of section partnership is determined on the basis of
Activities That Are Not Passive all the facts and circumstances.
162),
Activities
2. Is conducted in anticipation of In addition, a guaranteed payment
The following aren't passive activities. starting a trade or business, or described in section 707(c) is never
1. Trade or business activities in 3. Involves research or experimental income from a rental activity.
which the shareholder materially expenditures deductible under section
participated for the tax year. Average period of customer use.
174 (or that would be if you chose to Figure the average period of customer use
2. Any rental real estate activity in deduct rather than capitalize them). for a class of property by dividing the total
which the shareholder materially number of days in all rental periods by the
participated if the shareholder met both of If the shareholder doesn't materially
participate in the activity, a trade or number of rentals during the tax year. If
the following conditions for the tax year. the activity involves renting more than one
business activity of the corporation is a
a. More than half of the personal passive activity for the shareholder. class of property, multiply the average
services the shareholder performed in period of customer use of each class by
trades or businesses were performed in Each shareholder must determine if he the ratio of the gross rental income from
real property trades or businesses in or she materially participated in an activity. that class to the activity's total gross rental
which he or she materially participated. As a result, while the corporation's income. The activity's average period of
-8- Instructions for Form 1120-S (2020)You can also read
