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According to the US Chamber of Commerce, 1.4 million small businesses need to file Form 1120 every year. That’s because most C-Corporations use it to report their income, gains, losses, deductions, and credits in order to figure out their annual income tax liability (and make sure Uncle Sam gets his due). If you decide to incorporate your business as a C-corporation, getting familiar with tax Form 1120 should be at the top of your task list when tax time comes around.
But if you are newly incorporated or need a refresher to make sure you complete your tax return correctly, we have you covered. This guide explains how to complete Form 1120, who needs to do so, and tips to make this a simple process so there’s no second guessing.
What is the 1120 form used for?
Simply put, Form 1120 is the US federal income tax return that C-Corporations are required to file with the IRS every year. C-Corporations report income and pay tax directly, unlike pass-through entities—such as partnerships and S-Corporations—which pass their income or loss to owners, who are then responsible for paying any taxes due. This is called paying tax “at the corporate level,” and it’s a unique element of C-Corps. The IRS makes a copy of Form 1120 available on its website so C-Corps can file their taxes.
What type of business uses Form 1120?
C-Corporations are the only type of business that must file Form 1120. C-Corps are corporations with multiple shareholders, each of which own a portion of the business. Using this structure, the shareholders vote on what will happen to the company in terms of ownership, high-level business strategies, and more, and they elect a CEO to run the company for them. It’s also common for one of the shareholders to fill the role of CEO.
C-Corps are the only business entities that are taxed twice: first at the corporate level, when they file Form 1120, and then at the individual level, when shareholders receive dividends, interest, and capital gains income. Uncle Sam loves his tax revenue, after all!
Before we move on, let’s take a brief look at what happens when businesses forgo filing this tax form.
What happens if you don’t file Form 1120?
The IRS requires C-Corps to file Form 1120 by April 15th of each year, and neglecting to file Form 1120 on time can result in late filing penalties, late payment penalties, interest charges, or sometimes all three.
- According to the IRS, the penalty for not filing Form 1120 by the due date (including extensions) is 5% of the tax due for each full or partial month that the return is late, up to a maximum of 25%. The minimum penalty for a return that is more than 60 days late is the smaller of $450 or the 100% of the unpaid tax due.
- Similarly, the IRS’s penalty for late payment of taxes is 0.5% of the tax due for each full or partial month the payment is late, up to a maximum of 25%.
Who needs to file Form 1120?
In a nutshell, all C-Corporations must file Form 1120 unless they make a valid election or are required to file a different type of tax return. Not sure if it applies to you? The IRS instructions for form 1120 has a list of organizations that need to file a different type of return.
For example, many corporations choose to file Form 8832 to elect S-Corporation tax treatment. If they are approved, they would file Form 1120-S instead of Form 1120.
On the other hand, partnerships and LLCs can also file Form 8832 to elect C Corporation tax treatment, which means they file Form 1120 instead of their normal tax form (Form 1065).
- Corporations must file Form 1120 unless they elect to or must file a different tax return, such as Form 1120-S.
- Partnerships and LLCs only file Form 1120 if they make a valid election to do so on Form 8832.
Moving on, let’s get into the nuts and bolts of how to complete this form.
How to complete Form 1120
Even though Form 1120 spans only six pages, it often requires additional sub-forms called schedules. The first page gathers basic information about your corporation as well as relevant tax totals.
Before you start filling it out, you’ll want to have some information ready, per instructions from the IRS.
|Information to have on hand
Now that you have that information ready to go, let’s go through each section of the the form.
Lines 1 through 11 summarize income, lines 12 through 29 cover expenses and deductions, and lines 30 through 37 show tax, credits, and payments.
What information do you need to complete Form 1120 accurately?
It can be a good idea to go through Form 1120 line-by-line, adding any relevant data. Some lines will tell you to attach a schedule—the tax equivalent of showing your work.
We talked through the first page above, and the other five pages of Form 1120 include the following schedules that all corporations must include unless otherwise specified:
- Schedule C. Covers dividends and related items. If your corporation makes a dividend payment to a shareholder, it usually goes here. The results go on page 1 of Form 1120.
- Schedule J. Calculates and shows the details of total tax, payments, and refundable credits. Again, the results go on page 1 of Form 1120.
- Schedule K. Gathers additional information about your corporation, usually in the form of yes/no questions. This includes the corporation’s accounting method, line of business, and related corporations. Note that Schedule K is two pages long.
Below is the second part of schedule K.
Last, but not least, are the following:
- Schedule L. Lists your corporation’s balance sheet based on book values. Tax and accounting rules vary for many items, especially depreciation. This schedule shows the corporation’s assets, liabilities, and equity based on its accounting method. Corporations with total receipts and total assets under $250,000 can skip this schedule.
- Schedule M-1. Explains any discrepancies between net income based on your corporation’s accounting records and the income it reports on the tax return. Differences arise because tax and accounting rules differ. This schedule also doesn’t apply to corporations with less than $250,000 of total receipts and assets.
- Schedule M-2. Shows how retained earnings changed from the beginning of the year to the end of the year based on your corporation’s accounting records. These numbers should match Schedule L. Corporations with less than $250,000 of total receipts and assets can ignore this section.
Other common schedules and forms required by some, but not all, corporations include:
- Schedule D. Calculates capital gain and loss. This occurs when your corporation sells certain types of investment property such as stocks, bonds, land, and others.
- Form 4797. Accounts for the sale of business property. Usually required to complete Schedule D.
- Form 4562. Shows depreciation (the loss of value over time) of most long-lived assets.
- Form 1125-A. Calculates cost of goods sold. Only relevant if your corporation has inventory.
Filing Form 1120 potentially requires dozens of other forms depending on the specific corporation. Small corporations usually don’t need to use nearly as many forms as large, complex corporations. Because Form 1120 can be complicated and difficult to fill out, it might be worth using a reputable tax preparation software to help automate the process and ensure all of the forms are filled out properly.
Now that we know what needs to be included on the form and information we need to have ready to go, it’s time to figure out how to actually file it once completed.
How to file Form 1120
Corporations must file Form 1120 annually by the 15th day of the 4th month after the end of their tax year. Unless your corporation elects otherwise, its tax year ends when the calendar year does. Therefore, most small corporations have until April 15th to file. When April 15th falls on a weekend or holiday, corporations can file on the next business day.
One key exception exists. Corporations with tax years ending on June 30th must file by the 15th day of the 3rd month after the end of their tax year—September 15th. This applies to most large corporations as well as some smaller ones.
Corporations can get an automatic six-month extension by filing Form 7004. This results in an extended due date of October 15th for corporations using a calendar year. This only extends the time to file, not the time to pay. Your corporation must pay an estimate based on certain rules when you file Form 7004, and failure to do so can result in significant penalties.
How do I submit Form 1120?
Your corporation can mail Form 1120 to the address indicated on the IRS Form 1120 mailing address chart. Only corporations with over $10 million of assets and more than 250 returns filed can — and must — e-file directly with the IRS. Smaller corporations can file online using tax software or through a qualified professional such as a Certified Public Accountant (CPA).
By contrast, corporations must make tax payments online using a system called EFTPS—they can’t mail the IRS a check. However, tax return preparers can make payments on a corporation’s behalf.
More things to keep in mind about Form 1120
Because there are so many documents to keep track of as a business owner, we just wanted to point out a few more things to remember regarding this tax form, as well as some frequently asked questions that come up during conversations.
What is the difference between Form 1065 and Form 1120?
The biggest difference between Form 1120 and Form 1065 is that Form 1120 is filed by C-Corporations, while Form 1065 is filed by partnerships. Because C-Corp income is taxed at the corporate level, they need to pay any taxes due when they file Form 1120.
Partnership income, on the other hand, is not taxed when the partnership receives the income. Instead, it’s “passed through” to the partners, who receive their portion of the income, and then pay any taxes due on their individual Form 1040 tax returns (specifically on Schedule E).
Do LLCs file Form 1120?
Filing taxes for an LLC can be somewhat complicated because LLCs can take the form of a C-Corp, S-Corp, partnership, or single-member LLC, all of which have different tax rules. Here are the general rules for filing LLC tax returns:
- An LLC that is organized as a C-Corp will file taxes using Form 1120.
- An LLC that is organized as an S-Corp will file taxes using Form 1120-S.
- An LLC that is organized as a partnership will file taxes using Form 1065.
- If the LLC is a single-member LLC, then it is basically a sole proprietor/a contractor. In this case, the LLC’s income and expenses would generally be reported on Schedule C of the business owner’s individual Form 1040.
If you are wondering if you need to pay attention to Form 1120 as a nonprofit organization, foundation, church, or other 503(c)3 organization, here are some things to remember. Nonprofit organizations avoid paying taxes to the IRS because they are created and run not to earn a profit, but to have a positive financial impact on the world. As a result, they file taxes a little differently than a C-Corporation would.
Do nonprofits file Form 1120?
Instead of filing Form 1120, nonprofit 501(c)3 organizations are required to file Form 990 every year. Form 990 reports the organization’s revenue from contributions, programs, investment income, and more, and the organization’s expenses, such as grants paid, event expenses, salaries, and more. Because 501(c)3 organizations are exempt from paying federal income tax, Form 990 is basically an informational tax return – it just lets the IRS know about your activities for the year.
Depending on the size and activities of your organization, Form 990 can get pretty complicated. It might be worth using a tax professional such as a CPA to help prepare and file the return. Similarly, using both income & expense tracking software and nonprofit payroll software can streamline the tax and payroll filing processes, making them super easy and stress-free.
Do churches have to file Form 1120?
Similarly, if you’re managing a church and are growing membership in your ministry, you’ll need to file Form 990 each year. Churches have special tax filing considerations that you should be aware of, such as tax deductions for non-clergy employees, and social and medicare (FICA) tax exemptions for organization’s clergy members. As before, using a reputable church payroll software can take tons of the guesswork out of preparing and filing your payroll and Form 990 taxes.
C-corporations should be familiar with Form 1120
Understanding Form 1120 is a “must-do” for the 1.4 million C-Corporations dotting the business landscape. That’s because learning the basics of this tax form help C-Corps collect all their relevant tax information, develop a tax filing strategy, and making sure its filed properly and on time each year — all while avoiding any unwanted surprises. It’s important to track relevant income and expense items throughout the year, such as revenue, cost of goods sold (COGS), payroll expenses, rent, advertising, office expenses, and more. This will allow you to prepare Form 1120 quickly and stress-free, as well as stay ahead of the curve when it comes to reducing your taxable income as much as Uncle Sam will allow.
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.