# Instructions for Form 1120-S > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Airs%3A535318100f2aac70 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text 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. 2 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 3 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. 4 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 ye [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A535318100f2aac70. Public record. Not legal advice.