Instructions for Form 1120-S
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2025
Instructions for Form 1120-S
U.S. Income Tax Return for an S Corporation
Section references are to the Internal Revenue Code unless
otherwise noted.
Future Developments
For the latest information about developments related to Form
1120-S and its instructions, such as legislation enacted after
they were published, go to IRS.gov/Form1120S.
What’s New
Increase in penalty for failure to file. For tax returns required
to be filed in 2026, the minimum penalty for failure to file a return
that is more than 60 days late has increased to the smaller of the
tax due or $525. See Late filing of return, later.
Electronic payments. If the corporation has access to U.S.
banking services or electronic payment systems, it should use
direct deposit for any refunds and pay electronically for any
payments, whenever possible.
Direct deposit. Direct deposit fields have been added onto
the form on lines 28c, 28d, and 28e. If there is an overpayment
on line 27, enter the amount the corporation wants refunded on
line 28b and complete the direct deposit information on lines
28c, 28d, and 28e. Instead of a direct deposit of the
corporation’s refund, it can still choose to have all or part of the
overpayment credited to next year’s estimated tax by completing
line 28a. See Line 27. Overpayment, later, for more information.
Making a payment. If there is a balance due on line 26, go to
IRS.gov/Payments for information on how to make a payment.
See Tax Payments and Line 26. Amount Owed, later, for more
details.
Due date of a section 336(e) election. An S corporation
making a section 336(e) election generally must file Form
1120-S (with the section 336(e) election statement attached) for
its tax year ending on the date of the qualified stock disposition
by the 15th day of the 3rd month after the date of the qualified
stock disposition. See When To File, later.
Domestic research or experimental expenditures. P.L.
119-21, commonly known as the One Big Beautiful Bill Act
(OBBBA), adds new section 174A to the Internal Revenue Code.
Section 174A(a) allows taxpayers to deduct amounts paid or
incurred for domestic research and experimental expenditures in
tax years beginning after 2024. Alternatively, under section
174A(c), a taxpayer may elect to charge such expenditures to a
capital account and amortize such expenditures ratably over a
period of not less than 60 months, beginning with the month in
which the taxpayer first realizes benefits from such expenditures.
In addition, section 70302(f) of P.L. 119-21 provides taxpayers
with various transition options that may be applied to recover
unamortized amounts paid or incurred in tax years beginning
after 2021, and before 2025, that were capitalized and amortized
for such tax years. See Revenue Procedure 2025-28 for
information regarding the transition options contained in section
70302(f) of P.L. 119-21, as well as the procedures to follow to
begin applying either section 174A(a) or (c) for the corporation's
first tax year beginning after 2024.
Certain qualified sound recording productions. P.L. 119-21
amends section 181 to include qualified sound recording
Jan 15, 2026
production costs as an elective expense deduction. An S
corporation can elect to deduct certain costs of qualified sound
recording productions that commence in a tax year ending after
July 4, 2025, and commence before January 1, 2026. Also,
qualified sound recording productions are eligible for the special
depreciation allowance under section 168(k) if they commence
in tax years ending after July 4, 2025. Qualified sound recording
productions acquired after January 19, 2025, are eligible for
100% special allowance depreciation under the amendments to
section 168(k) by P.L. 119-21. Qualified sound recording
productions acquired before January 20, 2025, and commence
in tax years ending after July 4, 2025, are also eligible for the
special depreciation allowance at the applicable phased down
percentage rates under section 168(k)(6) as in effect prior to
amendment by P.L. 119-21. See sections 181 and 168(k).
Gain from the sale or exchange of qualified farmland property to qualified farmers. P.L. 119-21 added section 1062,
Gain from the sale or exchange of qualified farmland property to
qualified farmers. For tax years beginning after July 4, 2025, an
S corporation must complete a separate Schedule A (Form
1062) for each sale or exchange of qualified farmland property to
qualified farmers as defined under section 1062 and attach the
form(s) to Form 1120-S and provide shareholders with a copy of
the covenant and information regarding the gain on the sale or
exchange of qualified property. See Other information (code ZZ),
later.
Interest on loans secured by rural or agricultural real property. P.L. 119-21 enacted new section 139L. For tax years
ending after July 4, 2025, section 139L allows a partial exclusion
from the gross income of interest received by qualified lenders
on loans secured by rural or agricultural real property. For more
information, see section 139L and Other information (code ZZ),
later.
Schedules K and K-1 reporting codes. The following new
reporting codes are added to line 17d.
• Code BA. Domestic research or experimental expenditures.
• Code ZZ. Gain from the sale or exchange of qualified
farmland property to qualified farmers.
• Code ZZ. Interest on loans secured by rural or agricultural real
property.
Reminders
Election by a small business corporation. Don’t file Form
1120-S unless the corporation has filed or is attaching Form
2553, Election by a Small Business Corporation. For details, see
the Instructions for Form 2553.
Form 4255 reporting. Instead of passing through to the
shareholders, certain amounts from Form 4255 are required to
be reported directly on Form 1120-S. See Line 23c, later.
Qualified conservation contribution. No federal income tax
deduction is allowed for a conservation contribution made by an
S corporation after December 29, 2022, if the amount of the
contribution exceeds 2.5 times the sum of each ultimate
member’s relevant basis. See Contributions of property, later.
Section 6418 transfer. If a portion of a section 48, 48C, or 48E
credit has been transferred under section 6418, do NOT use
Instructions for Form 1120-S (2025) Catalog Number 11515K
Department of the Treasury Internal Revenue Service www.irs.gov
line 17d, code D, to report basis information. See Section 6418
transfers of credits under section 48, 48C, or 48E, later.
Photographs of Missing Children
The Internal Revenue Service (IRS) is a proud partner with the
National Center for Missing & Exploited Children® (NCMEC).
Photographs of missing children selected by the Center may
appear in instructions on pages that would otherwise be blank.
You can help bring these children home by looking at the
photographs and calling 1-800-THE-LOST (1-800-843-5678) if
you recognize a child.
The Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent
organization within the IRS that helps taxpayers and protects
taxpayer rights. TAS strives to ensure that every taxpayer is
treated fairly and knows and understands their rights under the
Taxpayer Bill of Rights.
As a taxpayer, the corporation has rights that the IRS must
abide by in its dealings with the corporation. TAS can help the
corporation if:
• A problem is causing financial difficulty for the business;
• The business is facing an immediate threat of adverse action;
or
• The corporation has tried repeatedly to contact the IRS but no
one has responded, or the IRS hasn’t responded by the date
promised.
TAS has offices in every state, the District of Columbia, and
Puerto Rico. Local advocates’ numbers are in their local
directories and at TaxpayerAdvocate.IRS.gov. The corporation
can also call TAS at 877-777-4778.
TAS also works to resolve large-scale or systemic problems
that affect many taxpayers. If the corporation knows of one of
these broad issues, please report it to TAS through the Systemic
Advocacy Management System at IRS.gov/SAMS.
For more information, go to IRS.gov/Advocate.
How To Get Forms and Publications
Internet. Access IRS.gov website 24 hours a day, 7 days a
week, at IRS.gov to:
• Download free forms, instructions, and publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or keyword;
• View Internal Revenue Bulletins (IRBs) published in recent
years; and
• Sign up to receive local and national tax news by email.
Tax forms and publications. The corporation can view, print,
or download all of the forms and publications it may need on
IRS.gov/Forms. Or, the corporation can go to IRS.gov/
OrderForms to place an order and have forms mailed to it.
General Instructions
Purpose of Form
Use Form 1120-S to report the income, gains, losses,
deductions, credits, and other information of a domestic
corporation or other entity for any tax year covered by an election
to be an S corporation.
How To Make the Election
For details about the election, see Form 2553, Election by a
Small Business Corporation, and the Instructions for Form 2553.
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Who Must File
A corporation or other entity must file Form 1120-S if (a) it
elected to be an S corporation by filing Form 2553, (b) the IRS
accepted the election, and (c) the election remains in effect.
After filing Form 2553, you should have received confirmation
that Form 2553 was accepted. If you didn’t receive notification of
acceptance or nonacceptance of the election within 2 months of
filing Form 2553 (5 months if you checked box Q1 to ask for a
letter ruling), please follow up by calling 800-829-4933. Don’t file
Form 1120-S for any tax year before the year the election takes
effect.
Relief for late elections. If you haven’t filed Form 2553 or
didn’t file Form 2553 on time, you may be entitled to relief for a
late-filed election to be an S corporation. See the Instructions for
Form 2553 for details.
Termination of Election
Once the election is made, it stays in effect until it is terminated.
If the election is terminated, the corporation (or a successor
corporation) can make another election on Form 2553 only with
IRS consent for any tax year before the fifth tax year after the first
tax year in which the termination took effect. See Regulations
section 1.1362-5 for details.
An election terminates automatically in any of the following
cases.
1. The corporation is no longer a small business corporation
as defined in section 1361(b). This kind of termination of an
election is effective as of the day the corporation no longer
meets the definition of a small business corporation. Attach to
Form 1120-S for the final year of the S corporation a statement
notifying the IRS of the termination and the date it occurred.
2. For each of 3 consecutive tax years, the corporation (a)
has accumulated earnings and profits (AE&P) and (b) derives
more than 25% of its gross receipts from passive investment
income as defined in section 1362(d)(3)(C). The election
terminates on the first day of the first tax year beginning after the
third consecutive tax year. The corporation must pay a tax for
each year it has excess net passive income. See the line 23a
instructions for details on how to figure the tax.
3. The election is revoked. An election can be revoked only
with the consent of shareholders who, at the time the revocation
is made, hold more than 50% of the number of issued and
outstanding shares of stock (including nonvoting stock). The
revocation can specify an effective revocation date that is on or
after the day the revocation is filed. If no date is specified, the
revocation is effective at the start of the tax year if the revocation
is made on or before the 15th day of the 3rd month of that tax
year. If no date is specified and the revocation is made after the
15th day of the 3rd month of the tax year, the revocation is
effective at the start of the next tax year.
To revoke the election, the corporation must file a statement
with the appropriate service center listed under Where To File in
the Instructions for Form 2553. In the statement, the corporation
must notify the IRS that it is revoking its election to be an S
corporation. The statement must be signed by each shareholder
who consents to the revocation and contain the information
required by Regulations section 1.1362-6(a)(3).
A revocation can be rescinded before it takes effect. See
Regulations section 1.1362-6(a)(4) for details.
For rules on allocating income and deductions between an S
corporation’s short year and a C corporation’s short year and
other special rules that apply when an election is terminated, see
section 1362(e) and Regulations section 1.1362-3.
If an election was terminated under (1) or (2) above and the
corporation believes the termination was inadvertent, the
Instructions for Form 1120-S (2025)
corporation can ask for permission from the IRS to continue to
be treated as an S corporation. See Regulations section
1.1362-4 for the specific requirements that must be met to
qualify for inadvertent termination relief.
Electronic Filing
S corporations can generally electronically file (e-file) Form
1120-S, related forms, schedules, statements, and attachments;
Form 7004 (automatic extension of time to file); and Forms 940,
941, and 944 (employment tax returns). Form 1099 and other
information returns can also be electronically filed. The option to
e-file doesn’t, however, apply to certain returns.
For returns filed on or after January 1, 2024, S corporations
are required to e-file Form 1120-S if they file 10 or more returns
of any type during the calendar year (including income tax,
employment tax, excise tax, and information returns). See
Regulations section 301.6037-2. However, these corporations
can request a waiver of the electronic filing requirements.
For more information on e-filing, see E-file for Business and
Self Employed Taxpayers on IRS.gov.
Exclusions From Electronic Filing Requirement
Waivers. The IRS may waive the electronic filing rules if the S
corporation demonstrates that a hardship would result if it were
required to file its return electronically. A corporation interested in
requesting a waiver of the mandatory electronic filing
requirement must file a written request and request one in the
manner prescribed by the IRS. All written requests for waivers
should be mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1120 e-file Waiver Request
Mail Stop 1057
Ogden, UT 84201
If using a delivery service, requests for waivers should be
mailed to:
Internal Revenue Service
Ogden Submission Processing Center
Attn: Form 1120 e-file Waiver Request
Mail Stop 1057
1973 N. Rulon White Blvd.
Ogden, UT 84404
Waiver requests can also be faxed to 877-477-0575. Contact
the e-Help Desk at 866-255-0654 for questions regarding the
waiver procedures or process.
Exemptions. The IRS may provide exemptions from the
requirements to electronically file. If using the technology
required to electronically file conflicts with religious beliefs, the
corporation is exempt from the requirement. Clearly indicate the
exemption on the corporation’s return. Write “Religious
Exemption” at the top of Form 1120-S, page 1. File the return at
the applicable IRS address. See Where To File, later. For more
information, see Notice 2024-18, 2024-5 I.R.B 625, available at
IRS.gov/irb/2024-05_IRB#NOT-2024-18.
When To File
Generally, an S corporation must file Form 1120-S by the 15 day
of the 3rd month after the end of its tax year. For calendar year
corporations, the due date is March 16, 2026 (March 15th falls
on Sunday). A corporation that has dissolved must generally file
by the 15th day of the 3rd month after the date it dissolved.
Instructions for Form 1120-S (2025)
If the due date falls on a Saturday, Sunday, or legal holiday,
the corporation can file on the next day that isn’t a Saturday,
Sunday, or legal holiday.
If the S corporation election was terminated (other than by
reason of making a section 336(e) election, discussed
immediately below) during the tax year and the corporation
reverts to a C corporation, file Form 1120-S for the S
corporation’s short year by the due date (including extensions) of
the C corporation’s short year return.
Caution: If the S corporation is making a section 336(e) election
with respect to a qualified stock disposition, in most cases the S
corporation is deemed to liquidate and its tax year ends and its S
corporation election terminates on the date of the qualified stock
disposition. See Regulations section 1.336-2(b)(1)(iii)(A). The S
corporation generally must file Form 1120-S (with the section
336(e) election statement attached) for its tax year ending on the
date of the qualified stock disposition by the 15th day of the 3rd
month after the date of the qualified stock disposition. See
Regulations section 1.336-2(h)(2)(iii) for the requirements for an
S corporation to make a section 336(e) election.
Private Delivery Services
Corporations can use certain private delivery services (PDS)
designated by the IRS to meet the “timely mailing as timely filing”
rule for tax returns. Go to IRS.gov/PDS for the current list of
designated services.
The PDS can tell you how to get written proof of the mailing
date.
For the IRS mailing address to use if you are using a PDS, go
to IRS.gov/PDSStreetAddresses.
Caution: Private delivery services can’t deliver items to P.O.
boxes. You must use the U.S. Postal Service to mail any item to
an IRS P.O. box address.
Extension of Time To File
File Form 7004, Application for Automatic Extension of Time To
File Certain Business Income Tax, Information, and Other
Returns, to ask for an extension of time to file. Generally, the
corporation must file Form 7004 by the regular due date of the
return. See the Instructions for Form 7004.
Who Must Sign
The return must be signed and dated by:
• The president, vice president, treasurer, assistant treasurer,
chief accounting officer; or
• Any other corporate officer (such as tax officer) authorized to
sign.
If a return is filed on behalf of a corporation by a receiver,
trustee, or assignee, the fiduciary must sign the return instead of
the corporate officer. Returns and forms signed by a receiver or
trustee in bankruptcy on behalf of a corporation must be
accompanied by a copy of the order or instructions of the court
authorizing signing of the return or form.
If an employee of the corporation completes Form 1120-S,
the paid preparer space should remain blank. Anyone who
prepares Form 1120-S but doesn’t charge the corporation
shouldn’t complete that section. Generally, anyone who is paid to
prepare the return must sign it and fill in the “Paid Preparer Use
Only” area.
The paid preparer must complete the required preparer
information and:
• Sign the return in the space provided for the preparer’s
signature,
• Include their Preparer Tax Identification Number (PTIN), and
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Where To File
File the corporation’s return at the applicable IRS address listed below.
If the corporation’s principal business,
office, or agency is located in:
And the total assets at the end of the tax
year (Form 1120-S, page 1, item F) are:
Use the following address:
Less than $10 million and
Schedule M-3 isn’t filed
Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999-0013
$10 million or more, or
less than $10 million and
Schedule M-3 is filed
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0013
Alabama, Alaska, Arizona, Arkansas, California,
Colorado, Florida, Hawaii, Idaho, Iowa, Kansas,
Louisiana, Minnesota, Mississippi, Missouri,
Montana, Nebraska, Nevada, New Mexico,
North Dakota, Oklahoma, Oregon, South
Dakota, Texas, Utah, Washington, Wyoming
Any amount
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0013
A foreign country or U.S. territory
Any amount
Internal Revenue Service
P.O. Box 409101
Ogden, UT 84409
Connecticut, Delaware, District of Columbia,
Georgia, Illinois, Indiana, Kentucky, Maine,
Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Vermont, Virginia,
West Virginia, Wisconsin
• Give a copy of the return to the taxpayer.
Tip: A paid preparer may sign original or amended returns by
rubber stamp, mechanical device, or computer software
program.
Paid Preparer Authorization
If the corporation wants to allow the IRS to discuss its 2025 tax
return with the paid preparer who signed it, check the “Yes” box
in the signature area of the return. This authorization applies only
to the individual whose signature appears in the “Paid Preparer
Use Only” section of the return. It doesn’t apply to the firm, if any,
shown in that section.
If the “Yes” box is checked, the corporation is authorizing the
IRS to call the paid preparer to answer any questions that may
arise during the processing of its return. The corporation is also
authorizing the paid preparer to:
• Give the IRS any information that is missing from the return;
• Call the IRS for information about the processing of the return
or the status of any related refund or payment(s); and
• Respond to certain IRS notices about math errors, offsets,
and return preparation.
The corporation isn’t authorizing the paid preparer to receive
any refund check, bind the corporation to anything (including any
additional tax liability), or otherwise represent the corporation
before the IRS.
The authorization will automatically end no later than the due
date (excluding extensions) for filing the corporation’s 2026 tax
return. If the corporation wants to expand the paid preparer’s
authorization or revoke the authorization before it ends, see Pub.
947, Practice Before the IRS and Power of Attorney.
Assembling the Return
To ensure that the corporation’s tax return is correctly processed,
attach all schedules and other forms after Form 1120-S, page 5,
in the following order.
1. Form 8825, Rental Real Estate Income and Expenses of
a Partnership or an S Corporation.
2. Form 1125-A, Cost of Goods Sold.
3. Schedule D, (Form 1120-S) Capital Gains and Losses
and Built-in Gains.
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4. Form 8949, Sales and other Dispositions of Capital
Assets.
5. Form 8996, Qualified Opportunity Fund.
6. Form 4797, Sales of Business Property.
7. Schedule N (Form 1120), Foreign Operations of U.S.
Corporations.
8. Form 8941, Credit for Small Employer Health Insurance
Premiums.
9. Form 3800, General Business Credit.
10. Form 8997, Initial and Annual Statement of Qualified
Opportunity Fund (QOF) Investments.
11. Form 8283, Noncash Charitable Contribution.
12. Form 6252, Installment Sale Income.
13. Schedule A (Form 8936), Clean Vehicle Credit Amount.
14. Schedules K-1 (Form 1120-S), Shareholder’s Share of
Income, Deductions, Credits, etc.
15. Form 8938, Statement of Specified Foreign Financial
Assets.
16. Additional schedules in alphabetical order, including
Schedule K-2 (Form 1120-S), Shareholders’ Pro Rata Share
Items—International, and Schedules K-3 (Form 1120-S),
Shareholder’s Share of Income, Deductions, Credits,
etc.—International.
17. Additional forms in numerical order.
Complete every applicable entry space on Form 1120-S and
Schedule K-1. Don’t enter “See Attached” or “Available Upon
Request” instead of completing the entry spaces. If more space
is needed on the forms or schedules, attach separate sheets
using the same size and format as the printed forms.
If there are supporting statements and attachments, arrange
them in the same order as the schedules or forms they support
and attach them last. Show the totals on the printed forms. Enter
the corporation’s name and EIN on each supporting statement or
attachment.
Tax Payments
Generally, the corporation must pay any tax due in full no later
than the due date for filing its tax return (not including
Instructions for Form 1120-S (2025)
extensions). See the instructions for line 26. If the due date falls
on a Saturday, Sunday, or legal holiday, the payment is due on
the next day that isn’t a Saturday, Sunday, or legal holiday.
Electronic Deposit Requirement
Corporations must use electronic funds transfers (EFT) to make
all federal tax deposits (such as deposits of employment, excise,
and corporate income tax). An EFT can be made using the
Electronic Federal Tax Payment System (EFTPS) or the
corporation’s IRS business tax account. However, if the
corporation doesn’t want to use one of these methods, it can
arrange for its tax professional, financial institution, payroll
service, or other trusted third party to make deposits on its
behalf. Also, it may arrange for its financial institution to submit a
same-day wire payment (discussed below) on its behalf. EFTPS
is a free service provided by the Department of the Treasury.
Payments made using the corporation’s IRS business tax
account are also free. Services provided by a tax professional,
financial institution, payroll service, or other third party may have
a fee.
To get more information about EFTPS or to enroll in EFTPS,
visit www.EFTPS.gov or call 800-555-4477. To contact EFTPS
using the Telecommunications Relay Services (TRS), for people
who are deaf, hard of hearing, or have a speech disability, dial
711 and provide the TRS assistant the 800-555-4477 number
above or 800-733-4829.
For more information about making an EFT through the
corporation’s IRS business tax account, go to IRS.gov/
BusinessAccount.
Depositing on time. EFTPS accepts same day payments of $1
million or less if the payment is submitted before 3:00 p.m.
Eastern time on a business day. If the corporation’s payment is
more than $1 million, the corporation must submit the deposit by
8:00 p.m. Eastern time the day before the date the deposit is
due. If the corporation uses a third party to make deposits on its
behalf, they may have different cutoff times.
Same-day wire payment option. If the corporation fails to
submit a timely deposit transaction on EFTPS, it can still make
its deposit on time by using the Federal Tax Collection Service
(FTCS). To use the same-day wire payment method, the
corporation will need to make arrangements with its financial
institution ahead of time regarding availability, deadlines, and
costs. Financial institutions may charge a fee for payment made
this way. To learn more about the information the corporation will
need to provide to its financial institution to make a same-day
wire payment, go to IRS.gov/SameDayWire.
Estimated Tax Payments
Generally, the corporation must make installment payments of
estimated tax for the following taxes if the total of these taxes is
$500 or more. (a) The tax on built-in gains. (b) The excess net
passive income tax. (c) The investment credit recapture tax,
each discussed later.
The amount of estimated tax required to be paid annually is
the smaller of (a) the total of the above taxes shown on the return
for the tax year (or if no return is filed, the total of these taxes for
the year) or (b) the sum of (i) the investment credit recapture tax
and the built-in gains tax shown on the return for the tax year (or
if no return is filed, the total of these taxes for the tax year) and
(ii) any excess net passive income tax shown on the
corporation’s return for the preceding tax year. If the preceding
tax year was less than 12 months, the estimated tax must be
determined under (a).
The estimated tax is generally payable in four equal
installments. However, the corporation may be able to lower the
amount of one or more installments by using the annualized
Instructions for Form 1120-S (2025)
income installment method or adjusted seasonal installment
method under section 6655(e).
For a calendar year corporation, the payments are due for
2026 by April 15, June 15, September 15, and December 15. For
a fiscal year corporation, they are due by the 15th day of the 4th,
6th, 9th, and 12th months of the year. If any date falls on a
Saturday, Sunday, or legal holiday, the installment is due on the
next day that isn’t a Saturday, Sunday, or legal holiday.
The corporation must make the payments using electronic
funds transfers as described earlier.
For information on penalties that may apply if the corporation
fails to make required payments, see the Instructions for Form
2220.
Interest and Penalties
Caution: If the corporation receives a notice about penalties
after it files its return, send the IRS an explanation and we will
determine if the corporation meets reasonable-cause criteria.
Don’t attach an explanation when the corporation’s return is
filed.
Interest. Interest is charged on taxes paid late even if an
extension of time to file is granted. Interest is also charged on
penalties imposed for failure to file, negligence, fraud, substantial
valuation misstatements, substantial understatements of tax,
and reportable transaction understatements from the due date
(including extensions) to the date of payment. The interest
charge is figured at a rate determined under section 6621.
Late filing of return. A penalty may be assessed if the return is
filed after the due date (including extensions) or the return
doesn’t show all the information required, unless each failure is
due to reasonable cause. See Caution, earlier. For returns on
which no tax is due, the penalty is $255 for each month or part of
a month (up to 12 months) the return is late or doesn’t include
the required information, multiplied by the total number of
persons who were shareholders in the corporation during any
part of the corporation’s tax year for which the return is due. If tax
is due, the penalty is the amount stated above plus 5% of the
unpaid tax for each month or part of a month the return is late, up
to a maximum of 25% of the unpaid tax. The minimum penalty
for a tax return required to be filed in 2026 that is more than 60
days late is the smaller of the tax due or $525.
Late payment of tax. A corporation that doesn’t pay the tax
when due may generally be penalized 1/2 of 1% of the unpaid tax
for each month or part of a month the tax isn’t paid, up to a
maximum of 25% of the unpaid tax. The penalty won’t be
imposed if the corporation can show that the failure to pay on
time was due to reasonable cause. See Caution, earlier.
Failure to furnish information timely. For each failure to
furnish Schedule K-1 (and Schedule K-3, if applicable) to a
shareholder when due and each failure to include on
Schedule K-1 (and Schedule K-3, if applicable) all the
information required to be shown (or the inclusion of incorrect
information), a $340 penalty may be imposed with respect to
each Schedule K-1 (and Schedule K-3, if applicable) for which a
failure occurs. If the requirement to report correct information is
intentionally disregarded, each $340 penalty is increased to
$680 or, if greater, 10% of the aggregate amount of items
required to be reported. See sections 6722 and 6724 for more
information.
The penalty won’t be imposed if the corporation can show
that not furnishing information timely was due to reasonable
cause. See Caution, earlier.
Trust fund recovery penalty. This penalty may apply if certain
excise, income, social security, and Medicare taxes that must be
5
collected or withheld aren’t collected or withheld or these taxes
aren’t paid. These taxes are generally reported on:
• Form 720, Quarterly Federal Excise Tax Return;
• Form 941, Employer’s QUARTERLY Federal Tax Return;
• Form 943, Employer’s Annual Federal Tax Return for
Agricultural Employees;
• Form 944, Employer’s ANNUAL Federal Tax Return; or
• Form 945, Annual Return of Withheld Federal Income Tax.
The trust fund recovery penalty may be imposed on all
persons who are determined by the IRS to have been
responsible for collecting, accounting for, or paying over these
taxes and who acted willfully in not doing so. The penalty is
equal to the full amount of the unpaid trust fund tax. See the
Instructions for Form 720 or Pub. 15 (Circular E), Employer’s Tax
Guide, for details, including the definition of “responsible
persons.”
Other penalties. Other penalties can be imposed for
negligence, substantial understatement of tax, reportable
transaction understatements, and fraud. See sections 6662,
6662A, and 6663.
Accounting Methods
Figure income using the method of accounting regularly used in
keeping the corporation’s books and records. The method used
must clearly reflect income. Permissible methods include cash,
accrual, or any other method authorized by the Internal Revenue
Code.
The following rules apply.
• Generally, an S corporation can’t use the cash method of
accounting if it’s a tax shelter (as defined in section 448(d)(3)).
See section 448 for details.
• A corporation must use an accrual method for sales and
purchases of inventory items unless it is a small business
taxpayer (defined later). See the Form 1125-A instructions. If you
are a small business taxpayer, you can adopt or change your
accounting method to account for inventories (i) in the same
manner as materials and supplies that are non-incidental or (ii)
to conform to the taxpayer’s treatment of inventories in an
applicable financial statement (as defined in section 451(b)(3))
or, if the taxpayer doesn’t have an applicable financial statement,
the method of accounting used in the taxpayer’s books and
records prepared in accordance with the taxpayer’s accounting
procedures. Generally, IRS consent is required for changes in
accounting methods. See Revenue Procedure 2024-23, I.R.B.
1334, available at IRS.gov/irb/2024-23_IRB#RP-2024-23 for the
procedures by which a small business taxpayer may obtain
automatic consent to change its method of accounting to reflect
the statutory changes made in this area. Also, see Change in
accounting method, later.
• Special rules apply to long-term contracts. See section 460.
• Generally, dealers in securities must use the mark-to-market
accounting method. Dealers in commodities and traders in
securities and commodities can elect to use the mark-to-market
accounting method. See section 475.
Small business taxpayer. A small business taxpayer is a
taxpayer that (a) has average annual gross receipts of $31
million or less for the 3 prior tax years under the gross receipts
test of section 448(c), and (b) isn’t a tax shelter (as defined in
section 448(d)(3)).
Change in accounting method. Generally, the corporation
must get IRS consent to change either an overall method of
accounting or the accounting treatment of any material item for
income tax purposes. To obtain consent, the corporation must
generally file Form 3115, Application for Change in Accounting
Method, during the tax year for which the change is requested.
See the Instructions for Form 3115 and Pub. 538, Accounting
Periods and Methods, for more information and exceptions. Also,
6
see the Instructions for Form 3115 for procedures that may apply
for obtaining automatic consent to change certain methods of
accounting, non-automatic change procedures, and reduced
Form 3115 filing requirements.
Accounting Period
A corporation must figure its income on the basis of a tax year. A
tax year is the annual accounting period a corporation uses to
keep its records and report its income and expenses.
An S corporation must use one of the following tax years.
• A tax year ending December 31.
• A natural business year.
• An ownership tax year.
• A tax year elected under section 444.
• A 52-53-week tax year that ends with reference to a year
listed above.
• Any other tax year (including a 52-53-week tax year) for which
the corporation establishes a business purpose.
A new S corporation must use Form 2553 to elect a tax year.
To later change the corporation’s tax year, see Form 1128,
Application To Adopt, Change, or Retain a Tax Year, and its
instructions (unless the corporation is making an election under
section 444, discussed next).
Electing a tax year under section 444. Under the provisions
of section 444, an S corporation can elect to have a tax year
other than a required year, but only if the deferral period of the
tax year isn’t longer than the shorter of 3 months or the deferral
period of the tax year being changed. This election is made by
filing Form 8716, Election To Have a Tax Year Other Than a
Required Tax Year.
An S corporation may not make or continue an election under
section 444 if it is a member of a tiered structure, other than a
tiered structure that consists entirely of partnerships and S
corporations that have the same tax year. For the S corporation
to have a section 444 election in effect, it must make the
payments required by section 7519. See Form 8752, Required
Payment or Refund Under Section 7519.
A section 444 election ends if an S corporation:
• Changes its accounting period to a calendar year or some
other permitted year,
• Is penalized for willfully failing to comply with the requirements
of section 7519, or
• Terminates its S election (unless it immediately becomes a
personal service corporation).
If the termination results in a short tax year, enter at the top of
the first page of Form 1120-S for the short tax year, “SECTION
444 ELECTION TERMINATED.”
Rounding Off to Whole Dollars
The corporation may enter decimal points and cents when
completing its return. However, the corporation should round off
cents to whole dollars on its return, forms, and schedules to
make completing its return easier. The corporation must either
round off all amounts on its return to whole dollars or use cents
for all amounts. To round, drop amounts under 50 cents and
increase amounts from 50 to 99 cents to the next dollar. For
example, $8.40 rounds to $8 and $8.50 rounds to $9.
If two or more amounts must be added to figure the amount to
enter on a line, include cents when adding the amounts and
round off only the total.
Recordkeeping
Keep the corporation’s records for as long as they may be
needed for the administration of any provision of the Internal
Revenue Code. Usually, records that support an item of income,
deduction, or credit on the return must be kept for 3 years from
Instructions for Form 1120-S (2025)
the date each shareholder’s return is due or filed, whichever is
later. Keep records that verify the corporation’s basis in property
for as long as they are needed to figure the basis of the original
or replacement property.
The corporation should keep copies of all filed returns. They
help in preparing future and amended returns.
Amended Return
To correct a previously filed Form 1120-S, file an amended Form
1120-S and check box H(4) on page 1. Attach a statement that
identifies the line number of each amended item, the corrected
amount or treatment of the item, and an explanation of the
reasons for each change.
If the income, deductions, credits, or other information
provided to any shareholder on Schedule K-1 or K-3 is incorrect,
file an amended Schedule K-1 or K-3 (Form 1120-S) for that
shareholder with the amended Form 1120-S. Also give a copy of
the amended Schedule K-1 or K-3 to that shareholder. Check
the “Amended K-1” or “Amended K-3” box at the top of the
Schedule K-1 or K-3 to indicate that it is an amended
Schedule K-1 or K-3.
A change to the corporation’s federal return may affect its
state return. This includes changes made as the result of an IRS
examination. For more information, contact the state tax agency
for the state(s) in which the corporation’s return was filed.
Other Forms and Statements That
May Be Required
Reportable transaction disclosure statement. Disclose
information for each reportable transaction in which the
corporation participated. Form 8886, Reportable Transaction
Disclosure Statement, must be filed for each tax year the
corporation participated in the transaction. The corporation may
have to pay a penalty if it is required to file Form 8886 and
doesn’t do so. The following are reportable transactions.
1. Any listed transaction that is a transaction that is the same
as or substantially similar to one of the types of transactions that
the IRS has determined to be a tax avoidance transaction and
identified by notice, regulation, or other published guidance as a
listed transaction.
2. Any transaction offered under conditions of confidentiality
for which the corporation (or a related party) paid an advisor a
fee of at least $50,000.
3. Certain transactions for which the corporation (or a
related party) has contractual protection against disallowance of
the tax benefits.
4. Certain transactions resulting in a loss of at least $2
million in any single year or $4 million in any combination of
years.
5. Any transaction identified by the IRS by notice, regulation,
or other published guidance as a “transaction of interest.”
For more information, see Regulations section 1.6011-4. Also
see the Instructions for Form 8886.
Penalties. The corporation may have to pay a penalty if it is
required to disclose a reportable transaction under section 6011
and fails to properly complete and file Form 8886. Penalties may
also apply under section 6707A if the corporation fails to file
Form 8886 with its corporate return, fails to provide a copy of
Form 8886 to the Office of Tax Shelter Analysis (OTSA), or files a
form that fails to include all the information required (or includes
incorrect information). Other penalties, such as an
accuracy-related penalty under section 6662A, may also apply.
See the Instructions for Form 8886 for details on these and other
penalties.
Instructions for Form 1120-S (2025)
Reportable transactions by material advisors. Material
advisors to any reportable transaction must disclose certain
information about the reportable transaction by filing Form 8918,
Material Advisor Disclosure Statement, with the IRS. For details,
see the Instructions for Form 8918.
Transfers to a corporation controlled by the transferor.
Every significant transferor (as defined in Regulations section
1.351-3(d)) that receives stock of a corporation in exchange for
property in a nonrecognition event must include the statement
required by Regulations section 1.351-3(a) on or with the
transferor’s tax return for the tax year of the exchange. The
transferee corporation must include the statement required by
Regulations section 1.351-3(b) on or with its return for the tax
year of the exchange, unless all the required information is
included in any statement(s) provided by a significant transferor
that is attached to the same return for the same section 351
exchange.
Election to reduce basis under section 362(e)(2)(C). If
property is transferred to a corporation subject to section 362(e)
(2), the transferor and the acquiring corporation may elect, under
section 362(e)(2)(C), to reduce the transferor’s basis in the stock
received instead of reducing the acquiring corporation’s basis in
the property transferred. Once made, the election is irrevocable.
For more information, see section 362(e)(2) and Regulations
section 1.362-4. If an election is made, a statement must be filed
in accordance with Regulations section 1.362-4(d)(3).
Regulations section 1.1411-10(g) (section 1411 election
with respect to CFCs and QEFs). A corporation that directly
or indirectly owns stock of a controlled foreign corporation (CFC)
(within the meaning of section 953(c)(1)(B) or section 957(a)) or
a passive foreign investment company (within the meaning of
section 1297(a)) that the corporation treats as a qualified
electing fund (QEF) under section 1293 may make the election
provided in Regulations section 1.1411-10(g). The election must
be made no later than the first tax year beginning after 2013
during which the corporation (i) includes an amount in gross
income for chapter 1 purposes under section 951(a) or section
1293(a) for the CFC or QEF and (ii) has a direct or indirect owner
that is subject to tax under section 1411 or would have been if
the election were made. This election must be made on an
entity-by-entity basis and applies only to the particular CFCs and
QEFs for which an election is made. In general, for purposes of
section 1411, if an election is in effect for a CFC or QEF, the
amounts included in income under section 951 and section 1293
derived from the CFC or QEF are included in net investment
income, and distributions described in section 959(d) or section
1293(c) are excluded from net investment income. Additionally, if
the corporation elected to be treated as owning stock of a foreign
corporation within the meaning of section 958(a) under
Proposed Regulations section 1.958-1(e)(2), and an election
under Regulations section 1.1411-10(g) is in effect for a CFC,
the amount of global intangible low-taxed income included in
income under section 951A is included in net investment income
to the extent that it is allocated to the CFC under section 951A(f)
(2). An election that is made under Regulations section
1.1411-10(g) can’t be revoked. For more information regarding
this election, see Regulations section 1.1411-10(g).
The election must be made in a statement that is filed with the
corporation’s original or amended return for the tax year in which
the election is made. An election can be made on an amended
return only if the tax year for which the election is made and all
tax years affected by the election aren’t closed by the period of
limitations on assessments under section 6501. The statement
must include:
• The name and EIN of the corporation making the election;
• A declaration that all of its shareholders consent to each
election made in the statement;
7
• A declaration that the corporation elects under Regulations
section 1.1411-10(g) to apply the rules in Regulations section
1.1411-10(g) to the CFCs and QEFs identified in the statement;
and
• The following information for each CFC and QEF for which an
election is made (i) the name of the CFC or QEF and (ii) either
the EIN of the CFC or QEF, or if the CFC or QEF doesn’t have an
EIN, the reference ID number of the CFC or QEF.
In addition, for each CFC or QEF held by the corporation for
which an election under Regulations section 1.1411-10(g) has
already been made by the corporation, the statement should
include (i) the name of the CFC or QEF and (ii) either the EIN of
the CFC or QEF, or if the CFC or QEF doesn’t have an EIN, the
reference ID number of the CFC or QEF.
Annual information reporting by specified domestic entities under section 6038D. Certain domestic corporations that
are formed or availed of to hold specified foreign financial assets
(“specified domestic entities”) must file Form 8938, Statement of
Specified Foreign Financial Assets. Form 8938 must be filed
each year the value of the corporation’s specified foreign
financial assets meets or exceeds the reporting threshold. For
more information on domestic corporations that are specified
domestic entities and the types of foreign financial assets that
must be reported, see the Instructions for Form 8938, generally,
and in particular, Who Must File, Specified Domestic Entity,
Types of Reporting Thresholds, Specified Foreign Financial
Assets, Interests in Specified Foreign Financial Assets, Assets
Not Required To Be Reported, and Exceptions to Reporting.
In addition, a domestic corporation required to file Form 8938
with its Form 1120-S for the tax year should check “Yes” to
Schedule N (Form 1120), question 8, and also include that
schedule with its Form 1120-S.
Certification as a qualified opportunity fund. If the
corporation is organized to invest in qualified opportunity zone
property, it must attach Form 8996 to Form 1120-S to self-certify
as a QOF. In addition, the corporation files Form 8996 annually
to report that the QOF meets the investment standard of section
1400Z-2 or to figure the penalty if it fails to meet the investment
standard. The corporation must also complete Schedule B,
line 15. For more information, see the Instructions for Form 8996.
Qualified opportunity fund investment. If the corporation
deferred a capital gain in a qualified opportunity fund (QOF), the
corporation must file its return with Schedule D (Form 1120-S),
Form 8949, and Form 8997 attached. The corporation will need
to file Form 8997 annually until it disposes of the investment. See
the instructions for Form 8997 for details.
Form 8975, Country-by-Country Report. Certain U.S.
persons that are the ultimate parent entity of a U.S. multinational
enterprise group with annual revenue for the preceding reporting
period of $850 million or more are required to file Form 8975. For
more information, see the Instructions for Form 8975.
Other forms and statements. See Pub. 542, Corporations, for
a list of other forms and statements a corporation may need to
file in addition to the forms and statements discussed throughout
these instructions.
At-Risk Limitations
In general, section 465 limits the amount of deductible net losses
shareholders can claim from certain activities. The at-risk
limitations don’t apply to the corporation, but instead apply to
each shareholder’s share of net losses attributable to each
activity. Because the treatment of each shareholder’s share of
corporate net losses depends on the nature of the activity that
generated it, the corporation must report the items of income,
loss, and deduction separately for each activity. See Pub. 925,
Passive Activity and At-Risk Rules, for additional information.
8
Activities Covered by the At-Risk Rules
If the S corporation is involved in one of the following activities as
a trade or business or for the production of income, the
shareholder may be subject to the at-risk rules.
1. Holding, producing, or distributing motion picture films or
video tapes.
2. Farming.
3. Leasing section 1245 property, including personal
property and certain other tangible property that is depreciable
or amortizable.
4. Exploring for or exploiting oil and gas.
5. Exploring for or exploiting geothermal deposits (for wells
started after September 1978).
6. Any other activity not included in (1) through (5) that is
carried on as a trade or business or for the production of income.
Aggregation of Activities
Activities described in (6) under Activities Covered by the At-Risk
Rules, earlier, that constitute a trade or business are treated as
one activity if:
• You actively participate in the management of the trade or
business, or
• The trade or business is carried on by a partnership or S
corporation and 65% or more of its losses for the tax year are
allocable to persons who actively participate in the management
of the trade or business.
Similar rules apply to activities described in (1) through (5) of
that earlier discussion. For more information, see Pub. 925. If
you aggregate your activities under these rules for section 465
purposes, check the appropriate box in item J.
At-Risk Activity Reporting Requirements
If the corporate items of income, loss, or deduction reported on
Schedule K-1 are from more than one activity covered by the
at-risk rules, the corporation must report information separately
for each activity.
The following information must be provided on an attachment
to Schedule K-1 for each activity.
• A statement that the information is a breakdown of the items
of income, loss, or deduction by at-risk activity.
• The identity of the at-risk activity; the items of income, loss, or
deduction for the activity; other items of income, loss, or
deduction; and any other information that relates to the activity
(that is, distributions, shareholder loans, etc.).
Passive Activity Limitations
In general, section 469 limits the amount of losses, deductions,
and credits that shareholders can claim from “passive activities.”
The passive activity limitations don’t apply to the corporation.
Instead, they apply to each shareholder’s share of any income or
loss and credit attributable to a passive activity. Because the
treatment of each shareholder’s share of corporate income or
loss and credit depends on the nature of the activity that
generated it, the corporation must report income or loss and
credits separately for each activity.
The following instructions and the instructions for Schedules
K and K-1, later, explain the applicable passive activity limitation
rules and specify the type of information the corporation must
provide to its shareholders for each activity. If the corporation
had more than one activity, it must report information for each
activity on an attachment to Schedules K and K-1.
Generally, passive activities include (a) activities that involve
the conduct of a trade or business if the shareholder doesn’t
materially participate in the activity and (b) all rental activities
(defined later) regardless of the shareholder’s participation. For
Instructions for Form 1120-S (2025)
exceptions, see Activities That Are Not Passive Activities, later.
The level of each shareholder’s participation in an activity must
be determined by the shareholder.
The passive activity rules provide that losses and credits from
passive activities can generally be applied only against income
and tax (respectively) from passive activities. Thus, passive
losses can’t be applied against income from salaries, wages,
professional fees, or a business in which the shareholder
materially participates or against “portfolio income” (defined
later). Passive credits can’t be applied against the tax related to
any of these types of income.
Special rules require that net income from certain activities
that would otherwise be treated as passive income must be
recharacterized as nonpassive income for purposes of the
passive activity limitations. See Recharacterization of Passive
Income, later.
To allow each shareholder to correctly apply the passive
activity limitations, the corporation must report income or loss
and credits separately by activity for each of the following.
• Trade or business activities.
• Rental real estate activities.
• Rental activities other than rental real estate.
• Portfolio income.
Activities That Are Not Passive Activities
The following aren’t passive activities.
1. Trade or business activities in which the shareholder
materially participated for the tax year.
2. Any rental real estate activity in which the shareholder
materially participated if the shareholder met both of the
following conditions for the tax year.
a. More than half of the personal services the shareholder
performed in trades or businesses were performed in real
property trades or businesses in which the shareholder
materially participated.
b. The shareholder performed more than 750 hours of
services in real property trades or businesses in which the
shareholder materially participated.
For purposes of this rule, each interest in rental real estate is
a separate activity unless the shareholder elects to treat all
interests in rental real estate as one activity.
If the shareholder is married filing jointly, either the
shareholder or the shareholder’s spouse must separately meet
both of the above conditions, without taking into account
services performed by the other spouse.
A real property trade or business is any real property
development, redevelopment, construction, reconstruction,
acquisition, conversion, rental, operation, management, leasing,
or brokerage trade or business. Services the shareholder
performed as an employee aren’t treated as performed in a real
property trade or business unless the shareholder owned more
than 5% of the stock in the employer.
3. The rental of a dwelling unit used by a shareholder for
personal purposes during the year for more than the greater of
14 days or 10% of the number of days that the residence was
rented at fair rental value.
4. An activity of trading personal property for the account of
owners of interests in the activity. For purposes of this rule,
personal property means property that is actively traded, such as
stocks, bonds, and other securities. See Temporary Regulations
section 1.469-1T(e)(6).
Tip: The section 469(c)(3) exception for a working interest in oil
and gas properties doesn’t apply to an S corporation because
state law generally limits the liability of shareholders.
Instructions for Form 1120-S (2025)
Trade or Business Activities
A trade or business activity is an activity (other than a rental
activity or an activity treated as incidental to an activity of holding
property for investment) that:
1. Involves the conduct of a trade or business (within the
meaning of section 162),
2. Is conducted in anticipation of starting a trade or
business, or
3. Involves the conduct of research or experimental
activities, including software development, subject to either
section 174 (foreign research) or section 174A (domestic
research).
If the shareholder doesn’t materially participate in the activity,
a trade or business activity of the corporation is a passive activity
for the shareholder.
Each shareholder must determine if they materially
participated in an activity. As a result, while the corporation’s
ordinary business income (loss) is reported on Form 1120-S,
page 1, the specific income and deductions from each separate
trade or business activity must be reported on attachments to
Form 1120-S. Similarly, while each shareholder’s allocable share
of the corporation’s ordinary business income (loss) is reported
in box 1 of Schedule K-1, each shareholder’s allocable share of
the income and deductions from each trade or business activity
must be reported on statements attached to each Schedule K-1.
See Passive Activity Reporting Requirements, later, for more
information.
Rental Activities
Generally, except as noted below, if the gross income from an
activity consists of amounts paid principally for the use of real or
personal tangible property held by the corporation, the activity is
a rental activity.
There are several exceptions to this general rule. Under these
exceptions, an activity involving the use of real or personal
tangible property isn’t a rental activity if any of the following
apply.
• The average period of customer use (defined later) for such
property is 7 days or less.
• The average period of customer use for such property is 30
days or less and significant personal services (defined later) are
provided by or on behalf of the corporation.
• Extraordinary personal services (defined later) are provided
by or on behalf of the corporation.
• The rental of such property is treated as incidental to a
nonrental activity of the corporation under Regulations section
1.469-1(e)(3)(vi).
• The corporation customarily makes the property available
during defined business hours for nonexclusive use by various
customers.
• The corporation provides property for use in a nonrental
activity of a partnership in its capacity as an owner of an interest
in such partnership. Whether the corporation provides property
used in an activity of a partnership in the corporation’s capacity
as an owner of an interest in the partnership is determined on
the basis of all the facts and circumstances.
In addition, a guaranteed payment described in section
707(c) is never income from a rental activity.
Average period of customer use. Figure the average period
of customer use for a class of property by dividing the total
number of days in all rental periods by the number of rentals
during the tax year. If the activity involves renting more than one
class of property, multiply the average period of customer use of
each class by the ratio of the gross rental income from that class
to the activity’s total gross rental income. The activity’s average
period of customer use equals the sum of these class-by-class
9
average periods weighted by gross income. See Regulations
section 1.469-1(e)(3)(iii).
definition of rental activities for purposes of the passive activity
limitations.
Significant personal services. Personal services include only
services performed by individuals. To determine if personal
services are significant personal services, consider all the
relevant facts and circumstances. Relevant facts and
circumstances include:
• How often the services are provided,
• The type and amount of labor required to perform the
services, and
• The value of the services in relation to the amount charged for
use of the property.
The following services aren’t considered in determining
whether personal services are significant.
• Services necessary to permit the lawful use of the rental
property.
• Services performed in connection with improvements or
repairs to the rental property that extend the useful life of the
property substantially beyond the average rental period.
• Services provided in connection with the use of any improved
real property that are similar to those commonly provided in
connection with long-term rentals of high-grade commercial or
residential property. Examples include cleaning and
maintenance of common areas, routine repairs, trash collection,
elevator service, and security at entrances.
Reporting of rental activities. In reporting the corporation’s
income or losses and credits from rental activities, the
corporation must separately report rental real estate activities
and rental activities other than rental real estate activities.
Shareholders who actively participate in a rental real estate
activity may be able to deduct part or all of their rental real estate
losses (and the deduction equivalent of rental real estate credits)
against income (or tax) from nonpassive activities. Generally, the
combined amount of rental real estate losses and the deduction
equivalent of rental real estate credits from all sources (including
rental real estate activities not held through the corporation) that
may be claimed is limited to $25,000.
Report rental real estate activity income (loss) on Form 8825
and on Schedule K, line 2, and in box 2 of Schedule K-1, rather
than on Form 1120-S, page 1. Report credits related to rental
real estate activities on Schedule K, lines 13c and 13d (box 13,
codes E and F of Schedule K-1), and low-income housing
credits on Schedule K, lines 13a and 13b (box 13, codes C and
D of Schedule K-1).
Report income (loss) from rental activities other than rental
real estate on Schedule K, line 3, and credits related to rental
activities other than rental real estate on Schedule K, line 13e,
and in box 13, code G, of Schedule K-1.
Extraordinary personal services. Services provided in
connection with making rental property available for customer
use are extraordinary personal services only if the services are
performed by individuals and the customers’ use of the rental
property is incidental to their receipt of the services.
For example, a patient’s use of a hospital room is generally
incidental to the care received from the hospital’s medical staff.
Similarly, a student’s use of a dormitory room in a boarding
school is incidental to the personal services provided by the
school’s teaching staff.
Rental activity incidental to a nonrental activity. An activity
isn’t a rental activity if the rental of the property is incidental to a
nonrental activity, such as the activity of holding property for
investment, a trade or business activity, or the activity of dealing
in property.
Rental of property is incidental to an activity of holding
property for investment if both of the following apply.
• The main purpose for holding the property is to realize a gain
from the appreciation of the property.
• The gross rental income from such property for the tax year is
less than 2% of the smaller of the property’s unadjusted basis or
its fair market value (FMV).
Rental of property is incidental to a trade or business activity
if all of the following apply.
• The corporation owns an interest in the trade or business at all
times during the year.
• The rental property was mainly used in the trade or business
activity during the tax year or during at least 2 of the 5 preceding
tax years.
• The gross rental income from the property for the tax year is
less than 2% of the smaller of the property’s unadjusted basis or
its FMV.
If the corporation sells or exchanges property that is also
rented during the tax year (in which the gain or loss is
recognized), the rental is treated as incidental to the activity of
dealing in property if, at the time of the sale or exchange, the
property was held primarily for sale to customers in the ordinary
course of the corporation’s trade or business.
See Temporary Regulations section 1.469-1T(e)(3) and
Regulations section 1.469-1(e)(3) for more information on the
10
Portfolio Income
Generally, portfolio income includes all gross income, other than
income derived in the ordinary course of a trade or business,
that is attributable to interest; dividends; royalties; income from a
real estate investment trust, regulated investment company, real
estate mortgage investment conduit, common trust fund,
controlled foreign corporation, qualified electing fund, or
cooperative; income from the disposition of property that
produces income of a type defined as portfolio income; and
income from the disposition of property held for investment. See
Self-Charged Interest, later, for an exception.
Solely for purposes of the preceding paragraph, gross
income derived in the ordinary course of a trade or business
includes (and portfolio income, therefore, doesn’t include) the
following types of income.
• Interest income on loans and investments made in the
ordinary course of a trade or business of lending money.
• Interest on accounts receivable arising from the performance
of services or the sale of property in the ordinary course of a
trade or business of performing such services or selling such
property, but only if credit is customarily offered to customers of
the business.
• Income from investments made in the ordinary course of a
trade or business of furnishing insurance or annuity contracts or
reinsuring risks underwritten by insurance companies.
• Income or gain derived in the ordinary course of an activity of
trading or dealing in any property if such activity constitutes a
trade or business (unless the dealer held the property for
investment at any time before such income or gain is
recognized).
• Royalties derived by the taxpayer in the ordinary course of a
trade or business of licensing intangible property.
• Amounts included in the gross income of a patron of a
cooperative by reason of any payment or allocation to the patron
based on patronage occurring with respect to a trade or
business of the patron.
• Other income identified by the IRS as income derived by the
taxpayer in the ordinary course of a trade or business.
See Temporary Regulations section 1.469-2T(c)(3) for more
information on portfolio income.
Instructions for Form 1120-S (2025)
Report portfolio income and related deductions on
Schedule K rather than on page 1 of Form 1120-S.
Self-Charged Interest
Certain self-charged interest income and deductions may be
treated as passive activity gross income and passive activity
deductions if the loan proceeds are used in a passive activity.
Generally, self-charged interest income and deductions result
from loans between the corporation and its shareholders.
Self-charged interest also occurs in loans between the
corporation and another S corporation or partnership if each
owner in the borrowing entity has the same proportional
ownership interest in the lending entity.
The self-charged interest rules don’t apply to a shareholder’s
interest in an S corporation if the S corporation makes an
election under Regulations section 1.469-7(g) to avoid the
application of these rules. To make the election, the S
corporation must attach to its original or amended Form 1120-S
a statement that includes the name, address, EIN of the S
corporation, and a declaration that the election is being made
under Regulations section 1.469-7(g). The election will apply to
the tax year for which it was made and all subsequent tax years.
Once made, the election can only be revoked with the consent of
the IRS.
For more details on the self-charged interest rules, see
Regulations section 1.469-7.
Grouping Activities
Generally, one or more trade or business or rental activities may
be treated as a single activity if the activities make up an
appropriate economic unit for measurement of gain or loss under
the passive activity rules. Whether activities make up an
appropriate economic unit depends on all the relevant facts and
circumstances. The factors given the greatest weight in
determining whether activities make up an appropriate economic
unit are:
• Similarities and differences in types of trades or businesses,
• The extent of common control,
• The extent of common ownership,
• Geographical location, and
• Reliance between or among the activities.
Example. The corporation has a significant ownership
interest in a bakery and a movie theater in Baltimore and a
bakery and a movie theater in Philadelphia. Depending on the
relevant facts and circumstances, there may be more than one
reasonable method for grouping the corporation’s activities. For
instance, the following groupings may or may not be permissible.
• A single activity.
• A movie theater activity and a bakery activity.
• A Baltimore activity and a Philadelphia activity.
• Four separate activities.
Once the corporation chooses a grouping under these rules,
it must continue using that grouping in later tax years unless
either:
• The corporation determines that the original grouping was
clearly inappropriate, or
• A material change in the facts and circumstances makes that
grouping clearly inappropriate.
The IRS may regroup the corporation’s activities if the
corporation’s grouping isn’t an appropriate economic unit and
one of the primary purposes for the grouping (or failure to
regroup as required under Regulations section 1.469-4(e)) is to
avoid the passive activity limitations. If you group your activities
under these rules for section 469 purposes, check the
appropriate box in item J.
Limitation on grouping certain activities. The following
activities may not be grouped together.
Instructions for Form 1120-S (2025)
1. A rental activity with a trade or business activity unless
the activities being grouped together make up an appropriate
economic unit and:
a. The rental activity is insubstantial relative to the trade or
business activity or vice versa; or
b. Each owner of the trade or business activity has the same
proportionate ownership interest in the rental activity. If so, the
portion of the rental activity involving the rental of property to be
used in the trade or business activity can be grouped with the
trade or business activity.
2. An activity involving the rental of real property with an
activity involving the rental of personal property (except personal
property provided in connection with the real property or vice
versa).
3. Any activity with another activity in a different type of
business and in which the corporation holds an interest as a
limited partner or as a limited entrepreneur (as defined in section
461(k)(4)) if that other activity is holding, producing, or
distributing motion picture films or videotapes; farming; leasing
section 1245 property; or exploring for or exploiting oil and gas
resources or geothermal deposits.
Activities conducted through partnerships. Once a
partnership determines its activities under these rules, the
corporation as a partner can use these rules to group those
activities with:
• Each other,
• Activities conducted directly by the corporation, or
• Activities conducted through other partnerships.
The corporation can’t treat as separate activities those
activities grouped together by a partnership.
Recharacterization of Passive Income
Under Temporary Regulations section 1.469-2T(f) and
Regulations section 1.469-2(f), net passive income from certain
passive activities must be treated as nonpassive income. Net
passive income is the excess of an activity’s passive activity
gross income over its passive activity deductions (current year
deductions and prior year unallowed losses).
Any net passive income recharacterized as nonpassive
income is treated as investment income for purposes of figuring
investment interest expense limitations if it is from (a) an activity
of renting substantially nondepreciable property from an
equity-financed lending activity or (b) an activity related to an
interest in a pass-through entity that licenses intangible property.
The amount of income from the activities in items (1) through
(3) below that any shareholder will be required to recharacterize
as nonpassive income may be limited under Temporary
Regulations section 1.469-2T(f)(8). Because the corporation
won’t have information regarding all of a shareholder’s activities,
it must identify all corporate activities meeting the definitions in
items (2) and (3) as activities that may be subject to
recharacterization.
Income from the following six sources is subject to
recharacterization.
1. Significant participation passive activities. A
significant participation passive activity is any trade or business
activity in which the shareholder participated for more than 100
hours during the tax year but didn’t materially participate.
Because each shareholder must determine the shareholder’s
level of participation, the corporation won’t be able to identify
significant participation passive activities.
2. Certain nondepreciable rental property activities.
Net passive income from a rental activity is nonpassive income if
less than 30% of the unadjusted basis of the property used or
held for use by customers in the activity is subject to
depreciation under section 167.
11
3. Passive equity-financed lending activities. If the
corporation has net income from a passive equity-financed
lending activity, the smaller of the net passive income or the
equity-financed interest income from the activity is nonpassive
income.
4. Rental of property incidental to a development
activity. Net rental activity income is the excess of passive
activity gross income from renting or disposing of property over
passive activity deductions (current year deductions and prior
year unallowed losses) that are reasonably allocable to the
rented property. Net rental activity income is nonpassive income
for a shareholder if all of the following apply.
a. The corporation recognizes gain from the sale, exchange,
or other disposition of the rental property during the tax year.
b. The use of the item of property in the rental activity
started less than 12 months before the date of disposition. The
use of an item of rental property begins on the first day on which
(a) the corporation owns an interest in the property, (b)
substantially all of the property is either rented or held out for rent
and ready to be rented, and (c) no significant value-enhancing
services remain to be performed.
c. The shareholder materially or significantly participated for
any tax year in an activity that involved performing services to
enhance the value of the property (or any other item of property,
if the basis of the property disposed of is determined in whole or
in part by reference to the basis of that item of property).
Because the corporation can’t determine a shareholder’s
level of participation, the corporation must identify net income
from property described above (without regard to the
shareholder’s level of participation) as income that may be
subject to recharacterization.
5. Rental of property to a nonpassive activity. If a
taxpayer rents property to a trade or business activity in which
the taxpayer materially participates, the taxpayer’s net rental
activity income (defined in item (4)) from the property is
nonpassive income.
6. Acquisition of an interest in a pass-through entity
that licenses intangible property. Generally, net royalty
income from intangible property is nonpassive income if the
taxpayer acquired an interest in the pass-through entity after the
pass-through entity created the intangible property or performed
substantial services or incurred substantial costs in developing
or marketing the intangible property. Net royalty income is the
excess of passive activity gross income from licensing or
transferring any right in intangible property over passive activity
deductions (current year deductions and prior year unallowed
losses) that are reasonably allocable to the intangible property.
See Temporary Regulations section 1.469-2T(f)(7)(iii) for
exceptions to this rule.
Passive Activity Reporting Requirements
To allow shareholders to correctly apply the passive activity loss
and credit limitation rules, the corporation must do the following.
1. If the corporation carries on more than one activity,
provide an attached statement for each activity conducted
through the corporation that identifies the type of activity
conducted (trade or business, rental real estate, or rental activity
other than rental real estate). See Grouping Activities, earlier.
2. The attachment(s) must identify each group. The
attached group activity description must be sufficient for the
shareholders to determine if their other activities qualify to be
added to any groups provided by the corporation.
3. On the attached statement for each activity, provide a
statement using the same box numbers as shown on
Schedule K-1 and detailing the net income (loss), credits, and all
items required to be separately stated under section 1366(a)(1)
12
from each trade or business activity, from each rental real estate
activity, from each rental activity other than a rental real estate
activity, and from investments.
4. Identify the net income (loss) and the shareholder’s share
of corporation interest expense from each activity of renting a
dwelling unit that any shareholder uses for personal purposes
during the year for more than the greater of 14 days or 10% of
the number of days that the residence is rented at fair rental
value.
5. Identify the net income (loss) and the shareholder’s share
of interest expense from each activity of trading personal
property conducted through the corporation.
6. For any gain (loss) from the disposition of an interest in an
activity or of an interest in property used in an activity (including
dispositions before 1987 from which gain is being recognized
after 1986):
a. Identify the activity in which the property was used at the
time of disposition;
b. If the property was used in more than one activity during
the 12 months preceding the disposition, identify the activities in
which the property was used and the adjusted basis allocated to
each activity; and
c. For gains only, if the property was substantially
appreciated at the time of the disposition and the applicable
holding period specified in Regulations section 1.469-2(c)(2)(iii)
(A) wasn’t satisfied, identify the amount of the nonpassive gain
and indicate whether or not the gain is investment income under
Regulations section 1.469-2(c)(2)(iii)(F).
7. Specify the amount of gross portfolio income, the interest
expense properly allocable to portfolio income, and expenses
other than interest expense that are clearly and directly allocable
to portfolio income.
8. Identify the ratable portion of any section 481 adjustment
(whether a net positive or a net negative adjustment) allocable to
each corporate activity.
9. Identify any gross income from sources specifically
excluded from passive activity gross income, including:
a. Income from intangible property if the shareholder is an
individual whose personal efforts significantly contributed to the
creation of the property;
b. Income from state, local, or foreign income tax refunds;
and
c. Income from a covenant not to compete if the shareholder
is an individual who contributed the covenant to the corporation.
10. Identify any deductions that aren’t passive activity
deductions.
11. If the corporation makes a full or partial disposition of its
interest in another entity, identify the gain (loss) allocable to each
activity conducted through the entity and the gain allocable to a
passive activity that would have been recharacterized as
nonpassive gain had the corporation disposed of its interest in
property used in the activity (because the property was
substantially appreciated at the time of the disposition, and the
gain represented more than 10% of the shareholder’s total gain
from the disposition).
12. Identify the following items from activities that may be
subject to the recharacterization rules (see Recharacterization of
Passive Income, earlier).
a. Net income from an activity of renting substantially
nondepreciable property.
b. The smaller of equity-financed interest income or net
passive income from an equity-financed lending activity.
Instructions for Form 1120-S (2025)
c. Net rental activity income from property developed (by the
shareholder or the corporation), rented, and sold within 12
months after the rental of the property commenced.
d. Net rental activity income from the rental of property by
the corporation to a trade or business activity in which the
shareholder had an interest (either directly or indirectly).
e. Net royalty income from intangible property if the
shareholder acquired the shareholder’s interest in the
corporation after the corporation created the intangible property
or performed substantial services, or incurred substantial costs
in developing or marketing the intangible property.
13. Identify separately the credits from each activity
conducted by or through the corporation.
14. Identify the shareholder’s pro rata share of the
corporation’s self-charged interest income or expense (see
Self-Charged Interest, earlier).
a. Loans between a shareholder and the corporation.
Identify the lending or borrowing shareholder’s share of the
self-charged interest income or expense. If the shareholder
made the loan to the corporation, also identify the activity in
which the loan proceeds were used. If the proceeds were used
in more than one activity, allocate the interest to each activity
based on the amount of the proceeds used in each activity.
b. Loans between the corporation and another S
corporation or partnership. If the corporation’s shareholders
have the same proportional ownership interest in the corporation
and the other S corporation or partnership, identify each
shareholder’s share of the interest income or expense from the
loan. If the corporation was the borrower, also identify the activity
in which the loan proceeds were used. If the proceeds were
used in more than one activity, allocate the interest to each
activity based on the amount of the proceeds used in each
activity.
Net Investment Income Tax Reporting
Requirements
Tip: The information described in this section should be given
directly to the shareholder and shouldn’t be reported by the
corporation to the IRS
To allow shareholders to correctly figure the net investment
income tax where a shareholder disposes of stock in the
corporation during the tax year, the corporation may be required
to provide the shareholder with certain information. The net
investment income tax is a tax imposed on an individual’s, trust’s,
or estate’s net investment income. Net investment income
includes the net gains or losses from the sale of stock in the
corporation. A shareholder who is actively involved in one or
more of the corporation or subsidiary pass-through entities’
trades or businesses (other than trading in financial instruments
or commodities) can reduce the amount of the gain or loss
included in its net investment income. However, to figure its net
investment income, the active shareholder needs certain
information from the corporation.
Generally, the corporation must provide certain information to
the shareholder if the corporation knows or has reason to know
the following.
1. The shareholder disposed of stock in the corporation.
2. The shareholder materially participates (within the
meaning of the passive activity loss rules (section 469)) in one or
more of the trades or businesses (within the meaning of section
162) of the corporation or a subsidiary pass-through entity (other
than trading in financial instruments or commodities).
3. The shareholder doesn’t qualify for the optional simplified
reporting method for figuring its net investment income
Instructions for Form 1120-S (2025)
associated with the disposition of the stock. For more
information, see the instructions for Form 8960, line 5c.
Information to be provided to shareholder. Generally, the
corporation must provide the shareholder with its pro rata share
of the net gain and loss from the deemed sale for FMV of the
corporation’s property, other than property that relates to the
trades or businesses in which the shareholder materially
participates, as determined under the passive activity loss rules
applicable to the transfer of an interest in a pass-through entity.
For more information, see the instructions for Form 8960, line 5c.
Tip: If a shareholder who qualifies for the optional simplified
reporting method prefers to determine net gain or loss under the
general calculation the corporation may but isn’t obligated to
provide the information to the shareholder at the shareholder’s
request
Specific Instructions
Period Covered
File the 2025 return for calendar year 2025 and fiscal years that
begin in 2025 and end in 2026. For a fiscal or short tax year
return, fill in the tax year space at the top of the form.
The 2025 Form 1120-S can also be used if:
• The corporation has a tax year of less than 12 months that
begins and ends in 2026, and
• The 2026 Form 1120-S isn’t available at the time the
corporation is required to file its return.
The corporation must show its 2026 tax year on the 2025
Form 1120-S and take into account any tax law changes that are
effective for tax years beginning after December 31, 2025.
Name and Address
Enter the corporation’s true name (as set forth in the charter or
other legal document creating it) and address on the appropriate
lines. Enter the address of the corporation’s principal office or
place of business. Include the suite, room, or other unit number
after the street address. If the post office doesn’t deliver mail to
the street address and the corporation has a P.O. box, show the
box number instead.
Tip: Don’t use the address of the registered agent for the state
in which the corporation is incorporated. For example, if a
business is incorporated in Delaware or Nevada and the
corporation’s principal office is located in Little Rock, Arkansas,
the corporation should enter the Little Rock address
If the corporation receives its mail in care of a third party
(such as an accountant or an attorney), enter “C/O” on the street
address line, followed by the third party’s name and street
address or P.O. box.
If the corporation has a foreign address, include the city or
town, state or province, country, and foreign postal code. Don’t
abbreviate the country name. Follow the country’s practice for
entering the name of the state or province and postal code.
Item B. Business Code
See Principal Business Activity Codes, later. For nonstore
retailers, select the principal business activity (PBA) code by the
primary product that your establishment sells. For example,
establishments primarily selling prescription and
non-prescription drugs, select PBA code 456110 Pharmacies &
Drug Retailers.
Item C. Schedule M-3 Information
For 2025, a corporation that (a) is required to file Schedule M-3
(Form 1120-S), Net Income (Loss) Reconciliation for S
13
Corporations With Total Assets of $10 Million or More, and has
less than $50 million total assets at the end of the tax year or (b)
isn’t required to file Schedule M-3 (Form 1120-S) and voluntarily
files Schedule M-3 (Form 1120-S) must either complete
Schedule M-3 (Form 1120-S) entirely or complete Schedule M-3
(Form 1120-S) through Part I and complete Schedule M-1 (Form
1120-S), instead of completing Schedule M-3 (Form 1120-S),
Parts II and III. If a corporation chooses to complete
Schedule M-1 (Form 1120-S), instead of completing
Schedule M-3 (Form 1120-S), Parts II and III, Schedule M-1
(Form 1120-S), line 1, must equal Schedule M-3 (Form 1120-S),
Part I, line 11.
• If the corporation has changed its address since it last filed a
return (including a change to an “in care of” address), check the
“Address change” box.
• If this amends a previously filed return, check the “Amended
return” box. If Schedules K-1 are also being amended, check the
“Amended K-1” box on each Schedule K-1.
• If the corporation has terminated its S election, check the “S
election termination” box. See Termination of Election, earlier.
Any corporation that completes Parts II and III of
Schedule M-3 (Form 1120-S) must complete all columns,
without exception.
Item J. Aggregation or Grouping of
Certain Activities
If you are filing Schedule M-3, check the “Check if Sch. M-3
attached” box. See the Instructions for Schedule M-3 for more
details.
Item D. Employer Identification
Number (EIN)
Tip: If a change in address or responsible party occurs after the
return is filed, use Form 8822-B, Change of Address or
Responsible Party — Business, to notify the IRS. See the
Instructions for Form 8822-B for details.
For information about aggregating at-risk activities, see
Aggregation of Activities under At-Risk Limitations, earlier. For
information about grouping passive activities, see Grouping
Activities under Passive Activity Limitations, earlier.
Income
Enter the corporation’s EIN. If the corporation doesn’t have an
EIN, it must apply for one. An EIN can be applied for in the
following ways.
• Online—Go to IRS.gov/EIN. The EIN is issued immediately
once the application information is validated.
• By faxing or mailing Form SS-4, Application for Employer
Identification Number.
Caution: Report only trade or business activity income on lines
1a through 5. Don’t report rental activity income or portfolio
income on these lines. See Passive Activity Limitations, earlier,
for definitions of rental income and portfolio income. Rental
activity income and portfolio income are reported on Schedules
K and K-1. Rental real estate activities are also reported on Form
8825.
If the corporation hasn’t received its EIN by the time the return
is due, enter “Applied for” and the date the corporation applied in
the space for the EIN. However, if the corporation is filing its
returns electronically, an EIN is required at the time the return is
filed. For more information, see the Instructions for Form SS-4.
Tax-exempt income. Don’t include any tax-exempt income on
lines 1a through 5. A corporation that receives any tax-exempt
income other than interest or holds any property or engages in
any activity that produces tax-exempt income reports this
income on Schedule K, line 16b, and in box 16 of Schedule K-1
using code B.
Report tax-exempt interest income, including exempt-interest
dividends received as a shareholder in a mutual fund or other
regulated investment company, on Schedule K, line 16a, and in
box 16 of Schedule K-1 using code A.
See Deductions, later, for information on how to report
expenses related to tax-exempt income.
Item F. Total Assets
Enter the corporation’s total assets (as determined by the
accounting method regularly used in keeping the corporation’s
books and records) at the end of the tax year. If there were no
assets at the end of the tax year, enter -0-.
If the corporation is required to complete Schedule L, enter
total assets from Schedule L, line 15, column (d), on Form
1120S, page 1, item F. If the S election terminated during the tax
year, see the instructions for Schedule L, later, for special rules
that may apply when figuring the corporation’s year-end assets.
Item G. Electing To Be an S
Corporation
If “Yes,” attach Form 2553 if not already filed. Form 2553 must
generally be filed no more than 2 months and 15 days after the
beginning of the tax year the election is to take effect. A Form
2553 filed with Form 1120-S will generally be a late election. But
with reasonable cause you may be able to request relief for the
late election on Form 2553. See “Relief for Late Elections” in the
Instructions for Form 2553.
Item H. Final Return, Name Change,
Address Change, Amended Return, or
S Election Termination
• If this is the corporation’s final return and it will no longer exist,
check the “Final return” box. Also check the “Final K-1” box on
each Schedule K-1.
• If the corporation changed its name since it last filed a return,
check the “Name change” box. Generally, a corporation must
also have amended its articles of incorporation and filed the
amendment with the state in which it was incorporated.
14
Canceled debt exclusion. If the corporation has had debt
discharged resulting from a title 11 bankruptcy proceeding or
while insolvent, see Form 982, Reduction of Tax Attributes Due
to Discharge of Indebtedness, and Pub. 908, Bankruptcy Tax
Guide.
Line 1a. Gross Receipts or Sales
Enter on line 1a gross receipts or sales from all business
operations except for amounts that must be reported on lines 4
and 5. If a cost offset method under section 451(b) or (c) is
elected, the resulting gross income is reported on line 1a.
Special rules apply to certain income, as discussed below.
Advance payments. In general, advance payments are
reported in the year of receipt. For exceptions to this general rule
for corporations that use an accrual method of accounting, see
the following.
• To report income from long-term contracts, see section 460.
• For rules that allow a limited deferral of advance payments
beyond the current tax year, see section 451(c) and Regulations
section 1.451-8.
• For information on adopting or changing to a permissible
method for reporting advance payments for goods and services
by an accrual method corporation, see the Instructions for Form
3115.
Instructions for Form 1120-S (2025)
Installment sales. Generally, the installment method can’t be
used for dealer dispositions of property. A “dealer disposition” is
any disposition of:
• Personal property by a person who regularly sells or otherwise
disposes of personal property of the same type on the
installment plan, or
• Real property held for sale to customers in the ordinary
course of the taxpayer’s trade or business.
These restrictions on using the installment method don’t
apply to dispositions of property used or produced in a farming
business or sales of timeshares and residential lots for which the
corporation elects to pay interest under section 453(l)(3).
For sales of timeshares and residential lots reported under
the installment method, each shareholder’s income tax is
increased by the shareholder’s pro rata share of the interest
payable under section 453(l)(3).
Enter on line 1a the gross profit on collections from
installment sales for any of the following.
• Dispositions of property used or produced in the trade or
business of farming.
• Certain dispositions of timeshares and residential lots
reported under the installment method.
Attach a statement showing the following information for the
current and the 3 preceding years.
• Gross sales.
• Cost of goods sold.
• Gross profits.
• Percentage of gross profits to gross sales.
• Amount collected.
• Gross profit on the amount collected.
Line 1b. Returns and Allowances
Enter cash and credit refunds the corporation made to
customers for returned merchandise, rebates, and other
allowances made on gross receipts or sales.
Line 2. Cost of Goods Sold
Complete and attach Form 1125-A, Cost of Goods Sold, if
applicable. Enter on line 2 the amount from Form 1125-A, line 8.
See Form 1125-A and its instructions.
Line 4. Net Gain (Loss) From Form 4797
Caution: Include only ordinary gains or losses from the sale,
exchange, or involuntary conversion of assets used in a trade or
business activity. Ordinary gains or losses from the sale,
exchange, or involuntary conversion of rental activity assets are
reported separately on Form 8825, line 21, or Schedule K, line 3,
and box 3 of Schedule K-1, generally as a part of the net income
(loss) from the rental activity.
A corporation that is a partner in a partnership must include
on Form 4797, Sales of Business Property, its share of ordinary
gains (losses) from sales, exchanges, or involuntary conversions
(other than casualties or thefts) of the partnership’s trade or
business assets.
Corporations shouldn’t use Form 4797 to report the sale or
other disposition of property if a section 179 expense deduction
was previously passed through to any of its shareholders for that
property. Instead, report it in box 17 of Schedule K-1 using code
K. See Dispositions of property with section 179 deductions
(code K), later, for details.
Line 5. Other Income (Loss)
Enter any other trade or business income (loss) not included on
lines 1a through 4. List the type and amount of income on an
attached statement.
Examples of other income include the following.
Instructions for Form 1120-S (2025)
• Interest income derived in the ordinary course of the
corporation’s trade or business, such as interest charged on
receivable balances. See Temporary Regulations section
1.469-2T(c)(3).
• Recoveries of bad debts deducted in prior years under the
specific charge-off method.
• Taxable income from insurance proceeds.
• Any amount included in income from Form 6478, Biofuel
Producer Credit.
• Any amount included in income from Form 8864, Biodiesel,
Renewable Diesel, or Sustainable Aviation Fuels Credit.
• The recapture amount under section 280F if the business use
of listed property drops to 50% or less. To figure the recapture
amount, complete Form 4797, Part IV.
• The ratable portion of any positive section 481(a) adjustments
resulting from changes in accounting methods. Show the
computation of the positive section 481(a) adjustments on an
attached statement. In the statement, include, for each section
481(a) adjustment, the total section 481(a) adjustment, the
ratable portion included in current year taxable income, and a
brief description of the changes in methods of accounting to
which the section 481(a) adjustment relates. See Revenue
Procedure 2015-13, 2015-5 I.R.B. 419, available at IRS.gov/irb/
2015-5_IRB#RP-2015-13.
• Part or all of the proceeds received from certain
corporate-owned life insurance contracts issued after August 17,
2006. Corporations that own one or more employer-owned life
insurance contracts issued after this date must file Form 8925,
Report of Employer-Owned Life Insurance Contracts. See Form
8925.
Don’t include items requiring separate computations by
shareholders that must be reported on Schedules K and K-1.
See the instructions for Schedules K and K-1 later in these
instructions.
Ordinary Income (Loss) From a Partnership,
Estate, or Trust
Enter the ordinary income (loss) shown on Schedule K-1 (Form
1065) or Schedule K-1 (Form 1041) or other ordinary income
(loss) from a foreign partnership, estate, or trust. Show the
partnership’s, estate’s, or trust’s name, address, and EIN on a
separate statement attached to this return. If the amount entered
is from more than one source, identify the amount from each
source.
Don’t include portfolio income or rental activity income (loss)
from a partnership, estate, or trust on this line. Instead, report
these amounts on Schedules K and K-1 or on Form 8825,
line 22a, if the amount is from a rental real estate activity.
Ordinary income or loss from a partnership that is a publicly
traded partnership isn’t reported on this line. Instead, report the
amount separately on Schedule K, line 10, and in box 10 of
Schedule K-1 using code ZZ.
Treat shares of other items separately reported on
Schedule K-1 issued by the other entity as if the items were
realized or incurred by this corporation.
If there is a loss from a partnership, the amount of the loss
that may be claimed by the S corporation is subject to the basis
limitations.
If the tax year of the S corporation doesn’t coincide with the
tax year of the partnership, estate, or trust, include the ordinary
income (loss) from the other entity in the tax year in which the
other entity’s tax year ends.
15
Deductions
Caution: Report only trade or business activity deductions on
lines 7 through 20.
Don’t report the following expenses on lines 7 through 20.
• Rental activity expenses. Report these expenses on Form
8825 or Schedule K, line 3b.
• Deductions allocable to portfolio income. Report these
deductions on Schedule K, line 12e, and in box 12 of
Schedule K-1 using code I or L.
• Nondeductible expenses (for example, expenses connected
with the production of tax-exempt income). Report
nondeductible expenses on Schedule K, line 16c, and in box 16
of Schedule K-1 using code C.
• Qualified expenditures to which an election under section
59(e) may apply. The instructions for Schedule K, line 12d, and
for Schedule K-1, box 12, code J, explain how to report these
amounts.
• Items the corporation must state separately that require
separate computations by the shareholders. Examples include
expenses incurred for the production of income instead of in a
trade or business, charitable contributions, foreign taxes paid or
accrued, intangible drilling and development costs, soil and
water conservation expenditures, amortizable basis of
reforestation expenditures, and exploration expenditures. The
pro rata shares of these expenses are reported separately to
each shareholder on Schedule K-1.
Limitations on Deductions
Section 263A uniform capitalization rules. The uniform
capitalization rules of section 263A generally require
corporations to capitalize or include in inventory certain costs
incurred in connection with the following.
• The production of real property and tangible personal property
held in inventory or held for sale in the ordinary course of
business.
• Real property or personal property (tangible and intangible)
acquired for resale.
• The production of real property and tangible personal property
by a corporation for use in its trade or business or in an activity
engaged in for profit.
Tangible personal property produced by a corporation
includes a film, sound recording, videotape, book, or similar
property.
The costs required to be capitalized under section 263A
aren’t deductible until the property to which the costs relate is
sold, used, or otherwise disposed of by the corporation.
Exceptions. Section 263A doesn’t apply to the following.
• Inventoriable items accounted for in the same manner as
materials and supplies that aren’t incidental. See Form 1125-A
and its instructions for more details.
• A small business taxpayer (defined earlier) isn’t required to
capitalize costs under section 263A. A taxpayer that wants to
discontinue capitalizing costs under section 263A must change
its method of accounting. See section 263A(i) and the
Instructions for Form 3115.
• Timber.
• Most property produced under a long-term contract.
• Certain property produced in a farming business. See Special
rules for certain corporations engaged in farming, later.
• Geological and geophysical costs amortized under section
167(h).
• Certain plants bearing fruits and nuts depreciated under
section 168(k)(5).
The corporation must report the following costs separately to
the shareholders for purposes of determinations under section
59(e).
• Research and experimental costs under section 174 or 174A.
16
• Intangible drilling costs for oil, gas, and geothermal property.
• Mining exploration and development costs.
Indirect costs. Corporations subject to the uniform
capitalization rules are required to capitalize not only direct costs
but an allocable part of most indirect costs (including taxes) that
benefit the assets produced or acquired for resale or are
incurred because of the performance of production or resale
activities.
For inventory, indirect costs that must be capitalized include
the following.
• Administration expenses.
• Taxes.
• Depreciation.
• Insurance.
• Compensation paid to officers attributable to services.
• Rework labor.
• Contributions to pension, stock bonus, and certain
profit-sharing, annuity, or deferred compensation plans.
Regulations section 1.263A-1(e)(3) specifies other indirect
costs that relate to production or resale activities that must be
capitalized and those that may be currently deductible.
Interest expense paid or incurred during the production
period of designated property must be capitalized and is
governed by special rules. For more details, see Regulations
sections 1.263A-8 through 1.263A-15.
For more details on the uniform capitalization rules, see
Regulations sections 1.263A-1 through 1.263A-3.
Special rules for certain corporations engaged in farming.
For S corporations not required to use an accrual method of
accounting, the rules of section 263A don’t apply to expenses of
raising any:
• Animal, or
• Plant that has a preproductive period of 2 years or less.
Shareholders of S corporations not required to use an accrual
method of accounting may elect to currently deduct the
preproductive period expenses of certain plants that have a
preproductive period of more than 2 years. Because each
shareholder makes the election to deduct these expenses, the
corporation shouldn’t capitalize them. Instead, the corporation
should report the expenses separately on Schedule K, line 12e,
and report each shareholder’s pro rata share in box 12 of
Schedule K-1 using code M.
See Uniform Capitalization Rules in chapter 6 of Pub. 225,
Farmer’s Tax Guide; sections 263A(d) and (e); and Regulations
section 1.263A-4 for definitions and other details.
Transactions between related taxpayers. Generally, an
accrual basis S corporation can deduct business expenses and
interest owed to a related party (including any shareholder) only
in the tax year of the corporation that includes the day on which
the payment is includible in the income of the related party. See
section 267 for details.
Business interest. Business interest expense may be limited.
See section 163(j) and Form 8990, Limitation on Business
Interest Expense Under Section 163(j). Also see Schedule B,
questions 9 and 10, and the related instructions for question 9
and question 10, later.
Section 291 limitations. If the S corporation was a C
corporation for any of the 3 immediately preceding years, the
corporation may be required to adjust items such as deductions
for depletion of iron ore and coal and the amortizable basis of
pollution control facilities. If this applies, see section 291 to figure
the adjustment.
Business start-up and organizational costs. A corporation
can elect to deduct a limited amount of start-up and
organizational costs it paid or incurred. Any remaining costs
Instructions for Form 1120-S (2025)
must generally be amortized over a 180-month period. See
sections 195 and 248 and the related regulations.
Time for making an election. The corporation generally
elects to deduct start-up or organizational costs by claiming the
deduction on its income tax return filed by the due date
(including extensions) for the tax year in which the active trade or
business begins. For more details, see the Instructions for Form
4562.
If the corporation timely filed its return for the year without
making an election, it can still make an election by filing an
amended return within 6 months of the due date of the return
(excluding extensions). Clearly indicate the election on the
amended return and enter “Filed pursuant to section
301.9100-2” at the top of the amended return. File the amended
return at the same address the corporation filed its original
return. The election applies when figuring taxable income for the
current tax year and all subsequent years.
The corporation can choose to forgo the elections above by
clearly electing to capitalize its start-up or organizational costs
on its income tax return filed by the due date (including
extensions) for the tax year in which the active trade or business
begins.
Tip: The election to either amortize or capitalize start-up costs is
irrevocable and applies to all start-up costs that are related to the
trade or business.
Report the deductible amount of start-up and organizational
costs and any amortization on line 20. For amortization that
begins during the current tax year, complete and attach Form
4562, Depreciation and Amortization.
Reducing certain expenses for which credits are allowable.
If the corporation claims certain credits, it may need to reduce
the otherwise allowable deductions for expenses used to figure
the credit. This applies to credits such as the following.
• Work opportunity credit (Form 5884).
• Credit for increasing research activities (Form 6765).
• Orphan drug credit (Form 8820).
• Disabled access credit (Form 8826).
• Empowerment zone employment credit (Form 8844).
• Credit for employer social security and Medicare taxes paid
on certain employee tips (Form 8846).
• Credits for small employer pension plan startup costs,
contributions, auto-enrollment, and military spouse participation
(Form 8881).
• Credit for employer-provided childcare facilities and services
(Form 8882).
• Low sulfur diesel fuel production credit (Form 8896).
• Credit for employer differential wage payments (Form 8932).
• Credit for small employer health insurance premiums (Form
8941).
• Employer credit for paid family and medical leave (Form
8994).
If the corporation has any of the credits listed above, figure
the current year credit before figuring the deduction for expenses
on which the credit is based. If the corporation capitalized any
costs on which it figured the credit, it may need to reduce the
amount capitalized by the credit attributable to these costs.
See the instructions for the form used to figure the applicable
credit for more details.
Line 7. Compensation of Officers and
Line 8. Salaries and Wages
Caution: Distributions and other payments by an S corporation
to a corporate officer must be treated as wages to the extent the
amounts are reasonable compensation for services rendered to
the corporation.
Enter on line 7 the total compensation of all officers paid or
incurred in the trade or business activities of the corporation. The
Instructions for Form 1120-S (2025)
corporation determines who is an officer under the laws of the
state where it is incorporated.
Enter on line 8 the total salaries and wages paid or incurred to
employees (other than officers) during the tax year.
Caution: If the corporation claims a credit for any wages paid or
incurred, it may need to reduce the amounts on lines 7 and 8.
See Reducing certain expenses for which credits are allowable,
earlier.
Don’t include salaries and wages reported elsewhere on the
return, such as amounts included in cost of goods sold, elective
contributions to a section 401(k) cash or deferred arrangement,
or amounts contributed under a salary reduction SEP agreement
or a SIMPLE IRA plan.
If the corporation’s total receipts (page 1, line 1a, plus lines 4
and 5; income reported on Schedule K, lines 3a, 4, 5a, and 6;
income or net gain reported on Schedule K, lines 7, 8a, 9, and
10; and income or net gain reported on Form 8825, lines 2, 21,
and 22a) are $500,000 or more, complete Form 1125-E,
Compensation of Officers. Enter on Form 1120-S, line 7, the
amount from Form 1125-E, line 4.
Include fringe benefit expenditures made on behalf of officers
and employees owning more than 2% of the corporation’s stock.
Also report these fringe benefits as wages in box 1 of Form W-2.
Don’t include amounts paid or incurred for fringe benefits of
officers and employees owning 2% or less of the corporation’s
stock. These amounts are reported on line 18. See the
instructions for that line for information on the types of
expenditures that are treated as fringe benefits and for the stock
ownership rules.
Report amounts paid for health insurance coverage for a
more-than-2% shareholder (including that shareholder’s spouse,
dependents, and any children under age 27 who aren’t
dependents) as an information item in box 14 of that
shareholder’s Form W-2. A more-than-2% shareholder may be
allowed to deduct such amounts on Schedule 1 (Form 1040),
line 17.
If a shareholder or a member of the family of one or more
shareholders of the corporation renders services or furnishes
capital to the corporation for which reasonable compensation
isn’t paid, the IRS may make adjustments in the items taken into
account by such individuals to reflect the value of such services
or capital. See section 1366(e).
Line 9. Repairs and Maintenance
Enter the cost of repairs and maintenance not claimed
elsewhere on the return, such as labor and supplies, that don’t
add to the value of the property or appreciably prolong its life.
The corporation can deduct these repairs only to the extent they
relate to a trade or business activity. See Regulations section
1.162-4. The corporation may elect to capitalize certain repair
and maintenance costs consistent with its books and records.
See Regulations section 1.263(a)-3(n) for information on how to
make the election.
New buildings, machinery, or permanent improvements that
increase the value of the property aren’t deductible as repair and
maintenance expenses. These expenses must be capitalized
and depreciated or amortized. However, amounts paid for
routine maintenance on property, including buildings, may be
deductible. See Regulations section 1.263(a)-3(i).
Line 10. Bad Debts
Enter the total debts that became worthless in whole or in part
during the tax year, but only to the extent such debts relate to a
trade or business activity. Report deductible nonbusiness bad
debts as a short-term capital loss on Form 8949, Sales and
17
Other Dispositions of Capital Assets. A corporation that uses the
cash method of accounting can’t claim a bad debt deduction
unless the amount was previously included in income.
Line 11. Rents
Enter rent paid on business property used in a trade or business
activity. Don’t deduct rent for a dwelling unit occupied by any
shareholder for personal use.
If the corporation rented or leased a vehicle, enter the total
annual rent or lease expense paid or incurred in the trade or
business activities of the corporation during the tax year. Also
complete Form 4562, Part V. If the corporation leased a vehicle
for a term of 30 days or more, the deduction for vehicle lease
expense may have to be reduced by including in gross income
an amount called the “inclusion amount.” The corporation may
have an inclusion amount if:
And the vehicle’s
FMV on the first
day of the lease
exceeded:
The lease term began:
Cars (excluding trucks and vans)
After 12/31/23 but before 1/1/26 . . . . . . . . . . . .
$62,000
After 12/31/22 but before 1/1/24 . . . . . . . . . . . .
$60,000
After 12/31/21 but before 1/1/23 . . . . . . . . . . . .
$56,000
After 12/31/20 but before 1/1/22
. . . . . . . . . . .
$51,000
After 12/31/17 but before 1/1/21
. . . . . . . . . . .
$50,000
After 12/31/12 but before 1/1/18 . . . . . . . . . . . .
$19,000
Trucks and vans
After 12/31/23 but before 1/1/26 . . . . . . . . . . . .
$62,000
After 12/31/22 but before 1/1/24 . . . . . . . . . . . .
$60,000
After 12/31/21 but before 1/1/23 . . . . . . . . . . . .
$56,000
After 12/31/20 but before 1/1/22 . . . . . . . . . . . .
$51,000
After 12/31/17 but before 1/1/21 . . . . . . . . . . . .
$50,000
After 12/31/13 but before 1/1/18 . . . . . . . . . . . .
$19,500
After 12/31/09 but before 1/1/14 . . . . . . . . . . . .
$19,000
See Pub. 463, Travel, Gift, and Car Expenses, for instructions
on figuring the inclusion amount.
Note. The inclusion amount for lease terms beginning in 2026
will be published in the Internal Revenue Bulletin in early 2026.
Line 12. Taxes and Licenses
Enter taxes and licenses paid or incurred in the trade or business
activities of the corporation, unless they are reflected elsewhere
on the return. Federal import duties and federal excise and
stamp taxes are deductible only if paid or incurred in carrying on
the trade or business of the corporation.
Foreign taxes are included on line 12 only if they are
deductible and not creditable taxes under sections 901 and 903.
See Schedule K-2 (Form 1120-S), Part II, Section 2, line 45,
column (g).
Don’t deduct the following taxes on line 12.
• Federal income taxes (except for the portion of built-in gains
tax allocable to ordinary income) or taxes reported elsewhere on
the return.
• Creditable foreign taxes under sections 901 and 903. Report
these taxes on Schedule K, line 16f, and in box 16 of
Schedule K-1 using code F.
18
• Taxes allocable to a rental activity. Report taxes allocable to a
rental real estate activity on Form 8825. Report taxes allocable
to a rental activity other than a rental real estate activity on
Schedule K, line 3b.
• Taxes paid or incurred for the production or collection of
income or for the management, conservation, or maintenance of
property held to produce income. Report these taxes separately
on Schedule K, line 12e, and in box 12 of Schedule K-1 using
code ZZ.
See section 263A(a) for rules on capitalization of allocable
costs (including taxes) for any property.
• Taxes not imposed on the corporation.
• Taxes, including state or local sales taxes, that are paid or
incurred in connection with an acquisition or disposition of
property (these taxes must be treated as a part of the cost of the
acquired property or, in the case of a disposition, as a reduction
in the amount realized on the disposition).
• Taxes assessed against local benefits that increase the value
of the property assessed (such as for paving, etc.).
See section 164(d) for information on apportionment of taxes
on real property between seller and purchaser.
Line 13. Interest
Include only interest incurred in the trade or business activities of
the corporation that isn’t claimed elsewhere on the return.
Don’t include interest expense on the following.
• On debt used to purchase rental property or debt used in a
rental activity. Interest allocable to a rental real estate activity is
reported on Form 8825 and is used in arriving at net income
(loss) from rental real estate activities on Schedule K, line 2, and
in box 2 of Schedule K-1. Interest allocable to a rental activity
other than a rental real estate activity is included on Schedule K,
line 3b, and is used in arriving at net income (loss) from a rental
activity (other than a rental real estate activity). This net amount
is reported on Schedule K, line 3c, and in box 3 of Schedule K-1.
• On debt used to buy property held for investment. Interest that
is clearly and directly allocable to interest, dividend, royalty, or
annuity income not derived in the ordinary course of a trade or
business is reported on Schedule K, line 12c, and in box 12 of
Schedule K-1 using code H. See the instructions for Schedule K,
line 12c; for box 12, code H, of Schedule K-1; and Form 4952,
Investment Interest Expense Deduction, for more information on
investment property.
• On debt proceeds allocated to distributions made to
shareholders during the tax year. Instead, report such interest on
Schedule K, line 12e, and in box 12 of Schedule K-1 using code
AC. To determine the amount to allocate to distributions to
shareholders, see Notice 89-35, 1989-1 C.B. 675.
• On debt required to be allocated to the production of
designated property. Designated property includes real property,
personal property that has a class life of 20 years or more, and
other tangible property requiring more than 2 years (1 year in the
case of property with a cost of more than $1 million) to produce
or construct. Interest allocable to designated property produced
by a corporation for its own use or for sale must be capitalized. In
addition, a corporation must also capitalize any interest on debt
allocable to an asset used to produce designated property. A
shareholder may have to capitalize interest that the shareholder
incurs during the tax year for the S corporation’s production
expenditures. Similarly, interest incurred by an S corporation may
have to be capitalized by a shareholder for the shareholder’s own
production expenditures. The information required by the
shareholder to properly capitalize interest for this purpose must
be provided by the corporation on an attachment for box 17 of
Schedule K-1 using code P. See section 263A(f) and
Regulations sections 1.263A-8 through 1.263A-15.
Special rules apply to the following.
Instructions for Form 1120-S (2025)
• Allocating interest expense among activities so that the
limitations on passive activity losses, investment interest, and
personal interest can be properly figured. Generally, interest
expense is allocated in the same manner as debt is allocated.
Debt is allocated by tracing disbursements of the debt proceeds
to specific expenditures. Temporary Regulations section
1.163-8T gives rules for tracing debt proceeds to expenditures.
• Prepaid interest, which can generally only be deducted over
the term of the debt. See Regulations sections 1.163-7, 1.446-2,
and 1.1273-2(g) for details. Also see section 461(g).
• Interest that is allocable to unborrowed policy cash values of
life insurance, endowment, or annuity contracts issued after
June 8, 1997. See section 264(f). Attach a statement showing
the computation of the deduction.
• Forgone interest on below-market-rate loans (see section
7872).
Limitation on deduction. Business interest expense is
generally limited to the sum of business interest income, 30% of
adjusted taxable income, and floor plan financing interest. See
Form 8990, Limitation on Business Interest Expense Under
Section 163(j), and its instructions for more information. The
limitation applies at the S corporation level, and any excess
business interest expense is carried over at the corporate level.
Business interest expense includes any interest paid or
accrued on indebtedness properly allocable to a trade or
business. A small business taxpayer is a taxpayer that isn’t a tax
shelter (as defined in section 448(d)(3)) and has average annual
gross receipts of $31 million or less for the 3 prior tax years
under the gross receipts test of section 448(c). Gross receipts
include the aggregate gross receipts from all persons treated as
a single employer, such as a controlled group of corporations,
commonly controlled partnerships or proprietorships, and
affiliated service groups. If the corporation fails to meet the gross
receipts test, Form 8990 is generally required. Also see
Schedule B, questions 9 and 10.
Line 14. Depreciation
Line 17. Pension, Profit-Sharing, etc., Plans
Enter the deductible contributions not claimed elsewhere on the
return made by the corporation for its employees under a
qualified pension, profit-sharing, annuity, or simplified employee
pension (SEP) or SIMPLE IRA plan or any other deferred
compensation plan.
If the corporation contributes to an individual retirement
arrangement (IRA) for employees, include the contribution in
salaries and wages on page 1, line 8, or Form 1125-A, line 3,
and not on line 17.
Employers who maintain a pension, profit-sharing, or other
funded deferred compensation plan, whether or not the plan is
qualified under the Internal Revenue Code and whether or not a
deduction is claimed for the current tax year, must generally file
the applicable form listed below.
• Form 5500, Annual Return/Report of Employee Benefit Plan.
• Form 5500-SF, Short Form Annual Return/Report of Small
Employee Benefit Plan. File this form instead of Form 5500
generally if there were under 100 participants at the beginning of
the plan year.
• Form 5500-EZ, Annual Return of A One-Participant (Owners/
Partners and Their Spouses) Retirement Plan or A Foreign Plan.
File this form for a plan that only covers the owner (or the owner
and the owner’s spouse) but only if the owner (or the owner and
the owner’s spouse) owns the entire business.
Tip: Form 5500 and Form 5500-SF must be filed electronically
under the computerized ERISA Filing Acceptance System
(EFAST2). For more information, see the EFAST2 website at
www.EFAST.dol.gov.
There are penalties for not filing these forms on time and for
overstating the pension plan deduction. See sections 6652(e)
and 6662(f).
Line 18. Employee Benefit Programs
Enter the depreciation claimed on assets used in a trade or
business activity less any depreciation reported elsewhere (for
example, on Form 1125-A). See the Instructions for Form 4562,
or Pub. 946, How To Depreciate Property, to figure the amount of
depreciation to enter on this line.
Enter amounts for fringe benefits paid or incurred on behalf of
employees owning 2% or less of the corporation’s stock. These
fringe benefits include (a) employer contributions to certain
accident and health plans, (b) the cost of up to $50,000 of
group-term life insurance on an employee’s life, and (c) meals
and lodging furnished for the employer’s convenience.
Complete and attach Form 4562 only if the corporation
placed property in service during the tax year or claims
depreciation on any car or other listed property.
Don’t deduct amounts that are an incidental part of a pension,
profit-sharing, etc., plan included on line 17 or amounts reported
elsewhere on the return or on Form 1125-A.
Don’t include any section 179 expense deduction on this line.
This amount isn’t deducted by the corporation. Instead, it is
passed through to the shareholders in box 11 of Schedule K-1.
However, reduce the basis of any asset of the S corporation by
the amount of section 179 expense elected by the S corporation,
even if a portion of that amount can’t be passed through to its
shareholders this year and must be carried forward because of
limitations at the S corporation level. See Regulations section
1.179-1(f)(2).
Report amounts for fringe benefits paid on behalf of
employees owning more than 2% of the corporate stock on line 7
or 8 (or Form 1125-E), whichever applies. An employee is
considered to own more than 2% of the corporation’s stock if that
person owns on any day during the tax year more than 2% of the
outstanding stock of the corporation or stock possessing more
than 2% of the combined voting power of all stock of the
corporation. See section 318 for attribution rules.
Line 15. Depletion
If the corporation claims a deduction for timber depletion,
complete and attach Form T (Timber), Forest Activities
Schedule.
Caution: Don’t deduct depletion for oil and gas properties. Each
shareholder figures depletion on oil and gas properties. See the
instructions for Schedule K-1, box 17, code R, for the information
on oil and gas depletion that must be supplied to the
shareholders by the corporation.
Line 19. Energy Efficient Commercial Buildings
Deduction
Complete and attach Form 7205 if claiming the energy efficient
commercial building deduction. See the Instructions for Form
7205 for more information. Also, see section 179D.
Line 20. Other Deductions
Enter the total allowable trade or business deductions that aren’t
deductible elsewhere on Form 1120-S, page 1. Attach a
statement listing by type and amount each deduction included
on this line.
Examples of other deductions include the following.
Instructions for Form 1120-S (2025)
19
• Amortization. See Form 4562, Part VI.
• Certain business start-up and organizational costs (discussed
earlier).
• Insurance premiums.
• Legal and professional fees.
• Supplies used and consumed in the business.
• Travel, meal, and entertainment expenses. Special rules apply
(discussed later).
• Utilities.
• Any negative section 481(a) adjustments resulting from
changes in accounting methods. Show the computation of the
negative section 481(a) adjustments on an attached statement.
In the statement, for each section 481(a) adjustment, include the
total section 481(a) adjustment and a brief description of the
changes in methods of accounting to which the section 481(a)
adjustment relates. See Revenue Procedure 2015-13.
Don’t deduct the following on line 20.
• Amounts paid or incurred for any settlement, payout, or
attorney fees related to sexual harassment or sexual abuse if
such payments are subject to a nondisclosure agreement. See
section 162(q).
• Expenses allocable to tax-exempt income. Report these
expenses on Schedule K, line 16c.
• Fines or similar penalties paid or incurred to or at the direction
of a government or governmental entity for violating any law.
However, see exceptions (discussed later). Report these
expenses on Schedule K, line 16c.
• Items that must be reported separately on Schedules K and
K-1.
Special Rules
Travel, meals, and entertainment. Subject to limitations and
restrictions discussed below, a corporation can deduct ordinary
and necessary travel and meal expenses paid or incurred in its
trade or business. Generally, entertainment expenses,
membership dues, and facilities used in connection with these
activities can’t be deducted. Generally, no deduction is allowed
for qualified transportation fringe benefits. Also, special rules
apply to deductions for gifts, luxury water travel, and convention
expenses. See section 274 and Pub. 463 for details.
Travel. The corporation can’t deduct travel expenses of any
individual accompanying a corporate officer or employee,
including a spouse or dependent of the officer or employee,
unless:
• That individual is an employee of the corporation, and
• The travel is for a bona fide business purpose and would
otherwise be deductible by that individual.
Meals. Generally, the corporation can deduct only 50% of the
amount otherwise allowable for meal expenses paid or incurred
in its trade or business. In addition (subject to exceptions under
section 274(k)(2)):
• Meals must not be lavish or extravagant, and
• An employee of the corporation must be present at the meal.
See section 274(n)(3) for a special rule that applies to
expenses for meals consumed by individuals subject to the
hours of service limits of the Department of Transportation.
Qualified transportation fringes (QTFs). Generally, under
section 274(a)(4), there is no deduction allowed with respect to
QTFs provided by employers to their employees. QTFs are
defined in section 132(f)(1) to include:
• Transportation in a commuter highway vehicle between the
employee’s residence and place of employment,
• Any transit pass, and
• Qualified parking.
See section 274 and Pub. 15-B, Employer’s Tax Guide to
Fringe Benefits, for details.
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Membership dues. The corporation can generally deduct
amounts paid or incurred for membership dues in civic or public
service organizations, professional organizations (such as bar
and medical associations), business leagues, trade
associations, chambers of commerce, boards of trade, and real
estate boards. However, no deduction is allowed if a principal
purpose of the organization is to entertain or provide
entertainment facilities for members or their guests. In addition,
corporations can’t deduct membership dues in any club
organized for business, pleasure, recreation, or other social
purpose. This includes country clubs, golf and athletic clubs,
airline and hotel clubs, and clubs operated to provide meals
under conditions favorable to business discussion.
Entertainment facilities. The corporation can’t deduct an
expense paid or incurred for a facility (such as a yacht or hunting
lodge) used for an activity usually considered entertainment,
amusement, or recreation.
Amounts treated as compensation. The corporation may
be able to deduct otherwise nondeductible entertainment,
amusement, or recreation expenses if the amounts are treated
as compensation to the recipient and reported on Form W-2 for
an employee or on Form 1099-NEC for an independent
contractor.
However, if the recipient is an officer, director, or beneficial
owner (directly or indirectly) of more than 10% of the
corporation’s stock, the deductible expense is limited. See
section 274(e)(2) and Regulations sections 1.274-9 and
1.274-10.
Fines and similar penalties. Generally, no deduction is
allowed for fines or similar penalties paid to or at the direction of
a government or governmental entity for violating any law except:
• Amounts that constitute restitution (including remediation of
property),
• Amounts paid to come into compliance with the law,
• Amounts paid or incurred as the result of orders or
agreements in which no government or governmental entity is a
party, and
• Amounts paid or incurred for taxes due to the extent the
amount would have been allowed as a deduction if timely paid,
and the taxpayer establishes that the amount paid or incurred
was for restitution, remediation, or to come into compliance.
No deduction is allowed unless the amounts are specifically
identified in the order or agreement and the taxpayer establishes
that the amounts were paid for a purpose mentioned above.
Also, any amount paid or incurred as reimbursement to the
government for the costs of any investigation or litigation are not
eligible for the exceptions and are nondeductible. See section
162(f). Also see Regulations section 1.162-21.
Lobbying expenses. Generally, lobbying expenses aren’t
deductible. Report nondeductible expenses on Schedule K,
line 16c. These expenses include:
• Amounts paid or incurred in connection with influencing
federal, state, or local legislation; or
• Amounts paid or incurred in connection with any
communication with certain federal executive branch officials in
an attempt to influence the official actions or positions of the
officials. See Regulations section 1.162-29 for the definition of
“influencing legislation.”
Dues and other similar amounts paid to certain tax-exempt
organizations may not be deductible. If certain in-house lobbying
expenditures don’t exceed $2,000, they are deductible. For
information on contributions to charitable organizations that
conduct lobbying activities, see section 170(f)(9).
Certain corporations engaged in farming. Section 464(d)
limits the deduction for certain expenditures of S corporations
engaged in farming if they use the cash method of accounting
Instructions for Form 1120-S (2025)
and their prepaid farm supplies are more than 50% of other
deductible farming expenses.
Prepaid farm supplies include expenses for feed, seed,
fertilizer, and similar farm supplies not used or consumed during
the year. They also include the cost of poultry that would be
allowable as a deduction in a later tax year if the corporation
were to (a) capitalize the cost of poultry bought for use in its farm
business and deduct it ratably over the lesser of 12 months or
the useful life of the poultry, and (b) deduct the cost of poultry
bought for resale in the year it sells or otherwise disposes of it.
If the limit applies, the corporation can deduct prepaid farm
supplies that don’t exceed 50% of its other deductible farm
expenses in the year of payment. The excess is deductible only
in the year the corporation uses or consumes the supplies (other
than poultry, which is deductible, as explained above). For
exceptions and more details on these rules, see Pub. 225.
Reforestation expenditures. If the corporation made an
election to deduct a portion of its reforestation expenditures on
Schedule K, line 12e, it must amortize over an 84-month period
the portion of these expenditures in excess of the amount
deducted on Schedule K (see section 194). Deduct on line 20
only the amortization of these excess reforestation expenditures.
See Reforestation expense deduction (code O), later.
Line 22. Ordinary Business Income (Loss)
Enter this income or loss on Schedule K, line 1. Line 22 income
is not used in figuring the excess net passive income or built-in
gains taxes. See the instructions for line 23a for figuring taxable
income for purposes of these taxes.
Tax and Payments
Line 23a. Excess Net Passive Income and LIFO
Recapture Tax
These taxes can apply if the corporation was previously a C
corporation or if the corporation engaged in a tax-free
reorganization with a C corporation.
Excess net passive income tax. If the corporation has AE&P
at the close of its tax year and has passive investment income for
the tax year that is in excess of 25% of gross receipts, the
corporation must figure its excess net passive income and pay
tax on it. To make this determination, complete lines 1 through 3
and line 9 of the Excess Net Passive Income Tax Worksheet for
Line 23a. If line 2 is greater than line 3 and the corporation has
taxable income (see the instructions for line 9 of the worksheet),
it must pay the tax. Complete a separate statement using the
format of lines 1 through 11 of the worksheet to figure the tax.
Enter the tax on Form 1120-S, page 1, line 23a, and attach the
computation statement to Form 1120-S.
Reduce each item of passive investment income passed
through to shareholders by its portion of any excess net passive
income tax reported on line 23a. See section 1366(f)(3).
LIFO recapture tax. The corporation may be liable for the
additional tax due to LIFO recapture under Regulations section
1.1363-2 if:
• The corporation used the LIFO inventory pricing method for its
last tax year as a C corporation, or
• A C corporation transferred LIFO inventory to the corporation
in a nonrecognition transaction in which those assets were
transferred basis property.
The additional tax due to LIFO recapture is figured for the
corporation’s last tax year as a C corporation or for the tax year
of the transfer, whichever applies. See the Instructions for Form
1120 to figure the tax.
The tax is paid in four equal installments. The C corporation
must pay the first installment by the due date (not including
extensions) of Form 1120 for the corporation’s last tax year as a
C corporation or for the tax year of the transfer, whichever
applies. The S corporation must pay each of the remaining
installments by the due date (not including extensions) of Form
1120-S for the 3 succeeding tax years. Include this year’s
installment in the total amount to be entered on line 23a. To the
left of the total on line 23a, enter the installment amount and
“LIFO tax.”
Line 23b. Tax From Schedule D (Form 1120-S)
Enter the built-in gains tax from line 23 of Part III of Schedule D.
See the instructions for Part III of Schedule D to determine if the
corporation is liable for the tax.
Line 23c
Include the following in the total for line 23c.
Form 4255. The corporation is liable for any required
investment credit recapture attributable to credits allowed for tax
Excess Net Passive Income Tax Worksheet for Line 23a
Keep for Your Records
1. Enter gross receipts for the tax year (see section
1362(d)(3)(B) for gross receipts from the sale of
capital assets)* . . . . . . . . . . . . . . . . . . . . . . . . . .
6. Net passive income—Subtract line 5 from
line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2. Enter passive investment income as defined in
section 1362(d)(3)(C)* . . . . . . . . . . . . . . . . . . . . .
8. Excess net passive income—Multiply line 6 by
line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3. Multiply line 1 by 25% (0.25). (If line 2 is less than
line 3, stop here. You aren’t liable for this tax.) . . . . .
9. Enter taxable income (see instructions for taxable
income below) . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Excess passive investment income—Subtract line 3
from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10. Enter smaller of line 8 or line 9 . . . . . . . . . . . . . . . .
5. Enter deductions directly connected with the
production of the income listed on line 2 (see section
1375(b)(2))* . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11. Excess net passive income tax—Multiply line 10 by
21% (0.21). Enter here and on Form 1120-S,
line 23a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7. Divide amount on line 4 by amount on line 2 . . . . . .
%
* Income and deductions on lines 1, 2, and 5 are from total operations for the tax year. This includes applicable income and expenses from Form 1120-S, page
1, as well as those imported separately on Schedule K. See section 1375(b)(4) for an exception regarding lines 2 and 5.
Line 9 of Worksheet—Taxable Income
Taxable income, for this purpose, is defined in Regulations section 1.1374-1A(d)(1). Figure this income by completing Form 1120, U.S. Corporation Income
Tax Return, lines 1 through 28. Include the Form 1120 computation with the worksheet computation you attach to Form 1120-S. You don’t have to attach the
schedules, etc., called for on Form 1120. However, you may want to complete certain Form 1120 schedules, such as Schedule D (Form 1120), if you have
capital gains or losses.
Instructions for Form 1120-S (2025)
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If the installment agreement is accepted, the corporation will
be charged a fee and it will be subject to penalties and interest
on the amount of tax not paid by the due date of the return.
years for which the corporation wasn’t an S corporation. See
Form 4255, Certain Credit Recapture, Excessive Payments, and
Penalties, and its instructions, for more information.
In addition, certain other amounts from Form 4255 should be
reported directly on line 23c. See the Instructions for Form 4255
for more information.
To the left of the total on line 23c, enter the amount owed from
Form 4255 and “From Form 4255.” Attach Form 4255 to Form
1120-S.
If a payment relates to the Prevailing Wage and
Apprenticeship (PWA) penalty calculated on Form 7220 and
reported on Form 4255, Part I, columns (o)(1) - (o)(3), and (p)
(1) - (p)(3), the payment should be made with the 1120-S return
for the tax year that the corporation claimed the credit to which
the PWA penalty payment relates.
If there is an overpayment on line 27, enter the amount the
corporation wants refunded on line 28b. See Line 28b.
Refunded, later. The corporation can also choose to have all or
part of the overpayment credited to next year’s estimated tax by
completing line 28a. See the instructions for line 28a, next.
Interest due under the look-back method—Completed
long-term contracts. If the corporation owes this interest,
attach Form 8697, Interest Computation Under the Look-Back
Method for Completed Long-Term Contracts. To the left of the
total on line 23c, enter the amount owed and “From Form 8697.”
This election to apply some or all of the overpayment amount
to the corporation’s 2026 estimated tax cannot be changed at a
later date.
Interest due under the look-back method—Property depreciated under the income forecast method. If the corporation
owes this interest, attach Form 8866, Interest Computation
Under the Look-Back Method for Property Depreciated Under
the Income Forecast Method. To the left of the total on line 23c,
enter the amount owed and “From Form 8866.”
Line 24d. Elective Payment Election Amount
From Form 3800
Enter the total gross EPE amount from Form 3800, Part III, line 6,
column (h). See the Instructions for Form 3800 for more
information.
Line 24z
If the corporation is the beneficiary of a trust and the trust makes
a section 643(g) election to credit its estimated tax payments to
its beneficiaries, include the corporation’s share of the payment
in the total for line 24z. Enter “T” and the amount of the payment
on the dotted line to the left of the entry space.
Line 25. Estimated Tax Penalty
If Form 2220 is attached, check the box on line 25 and enter the
amount of any penalty on this line.
Line 26. Amount Owed
Generally, the corporation must pay any tax due in full no later
than the due date for filing its tax return (excluding extensions).
Payment of the tax due must be made electronically. See
Electronic Deposit Requirement, earlier, for the payment options
for the corporation. Also, go to IRS.gov/Payments for more
detailed information.
If the corporation can’t pay the full amount of tax owed, it can
apply for an installment agreement online. The corporation can
apply for an installment agreement online if:
• It can’t pay the full amount shown on line 26,
• The total amount owed is $25,000 or less, and
• The corporation can pay the liability in full in 24 months.
To apply using the Online Payment Agreement Application,
go to IRS.gov/OPA.
Under an installment agreement, the corporation can pay
what it owes in monthly installments. There are certain
conditions that must be met to enter into and maintain an
installment agreement, such as paying the liability within 24
months and making all required deposits and timely filing tax
returns during the length of the agreement.
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Line 27. Overpayment
Line 28a. Credited To Estimated Tax
The corporation can elect to apply all or part of the corporation’s
overpayment to next year’s estimated taxes.
Enter the amount of any overpayment from line 27 that should
be applied to next year’s estimated tax.
Line 28b. Refunded
Enter the amount to be refunded to the corporation on line 28b. If
the corporation has access to U.S. banking services, it should
use direct deposit for any refunds, whenever possible.
The benefits of a direct deposit include a faster refund, the
added security of a paperless payment, and the savings of tax
dollars associated with the reduced processing costs.
Direct deposit of refund. If the corporation wants its refund
directly deposited into its checking or savings account at any
U.S. bank or other financial institution, complete lines 28c
through 28e. See the instructions for lines 28c, 28d, and 28e,
later.
The corporation is not eligible to request a direct deposit if:
• The receiving financial institution is a foreign bank or a foreign
branch of a U.S. bank, or
• The corporation has applied for an EIN but is filing its tax
return before receiving one.
Line 28c. Routing Number
The routing number must be nine digits. The first two digits must
be between 01 and 12 or 21 through 32.
Ask the corporation’s financial institution for the correct
routing number to enter on line 28c if:
• The routing number on a deposit slip is different from the
routing number on the corporation’s checks,
• The deposit is to a savings account that does not allow the
corporation to write checks, or
• The corporation’s checks state they are payable through a
financial institution different from the one at which the
corporation has its checking account.
Line 28d. Type of Account
Check the appropriate box for the type of account. Don’t check
more than one box. The corporation must check the correct box
to ensure the deposit is accepted.
Line 28e. Account Number
The account number can be up to 17 characters (both numbers
and letters). Include hyphens but omit spaces and special
symbols. Enter the number from left to right and leave any
unused boxes blank. Don’t include check number.
If the direct deposit to the corporation’s account is different
from the amount it expected, the corporation will receive an
explanation in the mail about 2 weeks after the refund is
deposited.
Instructions for Form 1120-S (2025)
Conditions resulting in a refund by check. If the IRS is
unable to process the request for a direct deposit, a refund by
check will be generated instead. Reasons for not processing a
request include:
• The name of the corporation on the tax return does not match
the name on the account,
• The financial institution rejects the direct deposit because of
an incorrect routing or account number, and
• The corporation fails to indicate the type of account the
deposit is to be made to (that is, checking or saving).
Caution: The IRS isn’t responsible for a lost refund if the
corporation enters the wrong account information. Check with
the corporation’s financial institution to get the correct routing
and account numbers and to make sure the direct deposit will be
accepted.
Schedule B. Other Information
Complete all items that apply to the corporation.
Item 2
See Principal Business Activity Codes at the end of these
instructions and enter the business activity and product or
service. For nonstore retailers, select the PBA code by the
primary product that your establishment sells. For example,
establishments primarily selling prescription and
non-prescription drugs, select PBA code 456110 Pharmacies &
Drug Retailers.
Question 4. Constructive Ownership of Other
Entities
For purposes of determining the corporation’s constructive
ownership of other entities, the constructive ownership rules of
section 267(c) (excluding section 267(c)(3)) apply to ownership
of interests in partnerships and trusts as well as corporate stock.
Generally, if an entity (a corporation, partnership, or trust) is
owned, directly or indirectly, by or for another entity (corporation,
partnership, estate, or trust), the owned entity is considered to
be owned proportionately by or for the owners (shareholders,
partners, or beneficiaries) of the owning entity.
Maximum percentage owned in partnership profit, loss, or
capital. For the purposes of question 4b, the term “maximum
percentage owned” means the highest percentage of interest in
a partnership’s profit, loss, or capital as of the end of the
partnership’s tax year, as determined under the partnership
agreement, when taking into account the constructive ownership
rules discussed earlier. If the partnership agreement doesn’t
express the partner’s share of profit, loss, and capital as fixed
percentages, use a reasonable method in arriving at the
percentage items for the purposes of completing question 4b.
Such method must be consistent with the partnership
agreement. The method used to figure a percentage share of
profit, loss, and capital must be applied consistently from year to
year. Maintain records to support the determination of the share
of profits, losses, and share of capital.
Question 6
Answer “Yes” if the corporation filed or is required to file Form
8918, Material Advisor Disclosure Statement. For details, see
the Instructions for Form 8918.
Item 8
Complete item 8 if the corporation (a) was a C corporation before
it elected to be an S corporation or the corporation acquired an
asset with a basis determined by reference to its basis (or the
basis of any other property) in the hands of a C corporation and
Instructions for Form 1120-S (2025)
(b) has net unrealized built-in gain (defined below) in excess of
the net recognized built-in gain from prior years.
The corporation is liable for section 1374 tax if (a) and (b)
above apply and it has a net recognized built-in gain (defined in
section 1374(d)(2)) for its tax year.
The corporation’s net unrealized built-in gain is the amount, if
any, by which the aggregate FMV of the assets of the corporation
at the beginning of its first S corporation year (or as of the date
the assets were acquired, for any asset with a basis determined
by reference to its basis (or the basis of any other property) in the
hands of a C corporation) exceeds the aggregate adjusted basis
of such assets at that time.
Enter the corporation’s net unrealized built-in gain reduced by
the net recognized built-in gain from prior years. See sections
1374(c)(2) and (d)(1).
If the corporation has more than one pool of assets (as
defined in Regulations section 1.1374-3(b)(4)), attach a
statement showing for each pool of assets the amount of the
corporation’s net unrealized built-in gain reduced by the net
recognized built-in gain from prior years.
Question 9. Business Interest Expense Election
The limitation on business interest expense under section 163(j)
applies to every taxpayer with a trade or business, unless the
taxpayer meets certain specified exceptions. A taxpayer may
elect out of the limitation for certain businesses otherwise
subject to the business interest expense limitation. This is an
irrevocable election.
Certain real property trades or businesses and farming
businesses qualify to make an election not to limit business
interest expense. This is an irrevocable election. If you make this
election, you are required to use the alternative depreciation
system to depreciate certain property. Also, you aren’t entitled to
the special depreciation allowance for that property. For a
taxpayer with more than one qualifying business, the election is
made with respect to each business.
Check “Yes” if the taxpayer has an election in effect to
exclude a real property trade or business or a farming business
from section 163(j). For more information, see the Instructions for
Form 8990.
Question 10. Conditions for Filing Form 8990
A taxpayer that isn’t a small business taxpayer (defined below)
must generally file Form 8990. In addition, any taxpayer that
owns an interest in a partnership with current year or prior year
carryover excess business interest expense allocated from the
partnership must file Form 8990.
A taxpayer who is a U.S. shareholder of an applicable CFC
that has business interest expense, disallowed business interest
expense carryforward, or is part of a CFC group must generally
apply section 163(j) to each applicable CFC and attach a Form
8990 with each Form 5471.
Exclusions from filing. A taxpayer isn’t required to file Form
8990 if the taxpayer is a small business taxpayer and doesn’t
have excess business interest expense from a partnership. A
taxpayer is also not required to file Form 8990 if the taxpayer
only has business interest expense from these excepted trades
or businesses.
• The trade or business of providing services as an employee.
• An electing real property trade or business.
• An electing farming business.
• Certain regulated utility businesses.
Small business taxpayer. A small business taxpayer isn’t
subject to the business interest expense limitation and isn’t
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required to file Form 8990. A small business taxpayer is a
taxpayer that (a) isn’t a tax shelter (as defined in section 448(d)
(3)) and (b) meets the gross receipts test of section 448(c),
discussed next.
Gross receipts test. A taxpayer meets the gross receipts test if
the taxpayer has average annual gross receipts of $31 million or
less for the 3 prior tax years. A taxpayer’s average annual gross
receipts for the 3 prior tax years is determined by adding the
gross receipts for the 3 prior tax years and dividing the total by 3.
Gross receipts include the aggregate gross receipts from all
persons treated as a single employer, such as a controlled group
of corporations, commonly controlled partnerships, or
proprietorships, and affiliated service groups. See section 448(c)
and the Instructions for Form 8990 for additional information.
Question 11
Total receipts is the sum of the following amounts.
• Gross receipts or sales (page 1, line 1a).
• All other income (page 1, lines 4 and 5).
• Income reported on Schedule K, lines 3a, 4, 5a, and 6.
• Income or net gain reported on Schedule K, lines 7, 8a, 9, and
10.
• Income or net gain reported on Form 8825, lines 2, 21, and
22a.
Question 12
Amounts related to the forgiveness of PPP loans are disregarded
for purposes of this question.
Question 13
Answer “Yes” if, during the tax year, the corporation revoked a
qualified subchapter S subsidiary (QSub) election or a QSub
election of the corporation was terminated. If “Yes” is checked,
see Regulations section 1.1361-5 for additional information.
Questions 14a and 14b
If the corporation made any payment in 2025 that would require it
to file any Form(s) 1099, check the “Yes” box for question 14a
and answer question 14b. Otherwise, check the “No” box for
question 14a and skip question 14b. See IRS.gov/businesses/
small-businesses-self-employed/am-i-required-to-file-aform-1099-or-other-information-return, for more information
Question 15
To be certified as a qualified opportunity fund, the S corporation
must file Form 1120-S and attach Form 8996, even if the
corporation had no income or expenses to report. If the S
corporation is attaching Form 8996, check the “Yes” box and
enter the amount from Form 8996, line 15, in the entry space.
See Certification as a qualified opportunity fund, earlier.
The penalty reported on this line from Form 8996, line 15, is
not due with the filing of this form. The IRS will send you a notice
regarding the penalty reported on line 15. This notice will include
instructions on the penalty, the reasonable cause relief process,
and payment instructions.
Question 16
Digital assets are any digital representations of value that are
recorded on a cryptographically secured distributed ledger or
any similar technology without regard to whether each individual
transaction involving that digital asset is actually recorded on
that ledger. For example, digital assets include non-fungible
tokens (NFTs) and cryptocurrencies which include stablecoins. If
a particular asset has the characteristics of a digital asset, it will
be treated as a digital asset for federal income tax purposes.
Check the “Yes” box if at any time during the tax year, the S
corporation (a) received (as a reward, award, or payment for
24
property or services) or (b) sold, exchanged, or otherwise
disposed of a digital asset (or any financial interest in any digital
asset).
For example, check “Yes” if at any time during the tax year,
the S corporation:
• Received digital assets as payment for property or services
provided;
• Received digital assets as a result of a reward or award;
• Received new digital assets as a result of mining, staking, and
similar activities;
• Received digital assets as a result of a hard fork;
• Disposed of digital assets in exchange for property or
services;
• Disposed of a digital asset in exchange or trade for another
digital asset;
• Sold a digital asset; or
• Otherwise disposed of any other financial interest in a digital
asset.
The S corporation has a financial interest in a digital asset if it
is the owner of record of a digital asset or has an ownership
stake in an account that holds one or more digital assets,
including the rights and obligations to acquire a financial interest,
or owns a wallet that holds digital assets.
The following actions or transactions in the tax year, alone,
generally do not require the S corporation to check “Yes.”
• Holding a digital asset in a wallet or account.
• Transferring a digital asset from one wallet or account the S
corporation owns or controls to another wallet or account that it
owns or controls.
• Purchasing digital assets using U.S. or other real currency,
including through the use of electronic platforms such as PayPal
and Venmo.
Do not leave the question unanswered. The S corporation
must answer “Yes” or “No” by checking the appropriate box. For
more information, go to IRS.gov/virtualcurrencyfaqs.
If the S corporation disposed of any digital asset that was
held as a capital asset, through a sale, trade, exchange,
payment, or other transfer, use Form 8949 to calculate the
capital gain or loss and report that gain or loss on Schedule D
(Form 1120-S). If the S corporation received any digital asset as
compensation for services or disposed of any digital asset that
was held for sale to customers in a trade or business, it must
report the income as it would report other income of the same
type.
Schedules K and K-1 (General
Instructions)
Purpose of Schedules
The corporation is liable for taxes on lines 23a, 23b, and 23c on
Form 1120-S, page 1. Shareholders are liable for tax on their
shares of the corporation’s income (reduced by any taxes paid
by the corporation on income). Shareholders must include their
share of the income on their tax return whether or not it is
distributed to them. Unlike most partnership income, S
corporation income isn’t self-employment income and isn’t
subject to self-employment tax.
Schedule K. Schedule K is a summary schedule of all
shareholders’ shares of the corporation’s income, deductions,
credits, etc. All corporations must complete Schedule K.
Schedule K-1. Schedule K-1 shows each shareholder’s
separate share. Attach a copy of each Schedule K
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