S Corp Tax Return Preparation

By Jason Watson, CPA
Posted Friday, November 3, 2023

An S Corp must file a corporate tax return (Form 1120S) by March 15 and there are additional financial reporting requirements. Since an S corporation is a pass-through entity whereby the tax consequences are passed through to the shareholders, the individual tax returns (Form 1040) of the shareholders cannot be completed until the S Corp tax return is completed (both can be filed simultaneously). However, if you use WCG CPAs & Advisors to prepare your tax returns, we’ll make it seamless and pain free. Ok, taxes and pain free don’t really go together, but you get the idea.

Balance Sheet (Schedule L)

S corporations file a Form 1120S and this in turn creates K-1s for all the shareholders. Unlike many other tax professionals, we always create a balance sheet, and we always reconcile equity accounts (capital stock, additional paid in capital, retained earnings, shareholder distributions and basis). This can be challenging for us, but we feel it is important for you, the client, and for long-term reporting accuracy.

Creating a balance sheet is also just good accounting practice, and it contributes to the overall tracking of your business’s worth. Lenders and investors will also want to see this information if you need leveraged financial assistance for business growth. Recently, a business owner was gifting away chunks of her business to her sons, and her basis needed to be calculated and transferred for gift tax filings. Her balance sheet information was a mess and needed fixing. We are retained frequently to put humpty dumpty back together and build historical balance sheet information.

Business succession, exit strategies, asset sales, business valuation, buy-sell agreements, etc. are topics rarely considered by most small business owners, and that is okay. But as accountants and business consultants, it is our job to keep you out of future trouble by putting things on the right track today. That starts with your corporate tax returns being comprehensively and accurately prepared, which includes Schedule L (the balance sheet). While we don’t look for ways to complicate the heck out of things, demand that your tax professional prepare a balance sheet with your tax returns.

Shareholder Basis

When you own an S corporation, you are both employee and investor. If you invested $100 into Google, you could only lose $100. Nothing more. The same with your S Corp as an investor. For example, if you invested $10,000 into your business, but your business lost $20,000, your K-1 will show a $20,000 loss but you are only allowed to deduct the loss to the limit of your basis which is $10,000. Without tracking this information, you could be incorrectly deducting losses in the current year instead of carrying them forward to future years.

More importantly, without shareholder basis information, there is no way to determine the gain on your future business sale. Just like stock sales, when you sell your business for a zillion dollars the IRS will consider all that to be capital gain unless you can prove otherwise.

We’ll dig a little deeper into shareholder distributions in excess of basis, and the problems that occur next.