Understanding Form 1120S and Building an Efficient Workflow for Tax Professionals

Tax season can be a hectic time for any accounting professional, especially when handling S-corporations and their complex tax reporting needs. Among the most critical filings for S corps is IRS Form 1120S, the U.S. Income Tax Return for an S Corporation. To maintain compliance and maximize efficiency, tax professionals need a thorough understanding of this form and a well-structured workflow to handle multiple clients accurately and swiftly. 

In this blog, we’ll explore what Form 1120S entails, its key components, common challenges, and outline a streamlined workflow that tax professionals can implement to stay ahead during the busy tax season. 

What Is Form 1120S? 

Form 1120S is an annual tax return filed by S corporations to report their income, deductions, credits, and other financial activity to the IRS. Unlike C corporations, S corporations are pass-through entities, meaning they generally do not pay income taxes at the corporate level. Instead, income and losses “pass through” to shareholders, who report them on their individual tax returns using Schedule K-1 (Form 1120S). 

Filing Form 1120S is mandatory for all corporations that elect to be treated as an S-Corp under Subchapter S of the Internal Revenue Code. 

Who Must File? 

Any domestic corporation that has elected S corporation status by filing Form 2553 and has received IRS approval must file Form 1120S annually. This includes: 

• S corporations with active operations 

• Dormant S corps (even if there’s no income or activity) 

• S corps with foreign income or shareholders (if qualified) 

Key Parts of Form 1120S 

Understanding the structure of Form 1120S is crucial for accurate preparation: 

1. Income Section (Lines 1-6)

Reports gross receipts/sales, cost of goods sold (if applicable), and other types of income like rental or investment income. 

2. Deductions Section (Lines 7-21)

Captures business expenses such as salaries, rent, depreciation, taxes, and interest. 

3. Tax and Payments (Line 22)

Generally, this is zero for S corporations, but some taxes like Built-In Gains (BIG) tax or excess net passive income tax may apply. 

4. Schedule B (Other Information)

Includes 13 questions about the corporation’s operations and ownership. It’s essential to answer accurately, especially regarding accounting methods and ownership percentages. 

5. Schedule K (Shareholder Distributive Items)

Summarizes the corporation’s income, deductions, and credits, which are then divided among shareholders on Schedule K-1. 

6. Schedule K-1 (for each shareholder)

Each shareholder receives a K-1 detailing their share of the corporation’s income, losses, and other tax items. 

Common Challenges When Preparing Form 1120S 

1. Incomplete or Incorrect Records: Many clients lack organized financial data, leading to time-consuming reconciliation. 
2. Basis Calculations: Tracking shareholder stock and debt basis is essential and often neglected, risking IRS scrutiny.
3. Late S Corp Elections: Some corporations mistakenly assume they’re S corps without filing Form 2553 properly. 
4. Misclassification of Income and Expenses: Misreporting income types (e.g., separating ordinary vs. passive income) can affect taxation and compliance. 
5. State Filing Requirements: Each state may have different requirements for S corps, such as franchise taxes or separate state forms. 

Efficient Workflow for Preparing Form 1120S 

A solid workflow can turn chaotic tax seasons into smooth operations. Here’s a practical step-by-step framework tailored for tax professionals: 

1. Client Intake and Data Gathering

Start with a standardized checklist and intake form for S-Corp clients that includes: 

• Prior year 1120S return 

• Trial balance and general ledger 

• Bank and credit card statements 

• Payroll reports 

• Loan documents 

• Asset purchase/sale documentation 

• Shareholder information (ownership %, contributions, loans) 

2. Preparer Review and Reconciliation

• Reconcile the trial balance to prior year ending balances 

• Ensure bank and credit card statements match accounting records 

• Reconcile retained earnings and confirm any distributions are properly recorded 

3. Tax Return Preparation

Using professional tax software such as Drake Tax, ProSeries, or UltraTax, begin completing Form 1120S by: 

• Entering income and deductions from financials 

• Calculating depreciation using Form 4562 

• Applying business use of home or vehicle deductions, if applicable 

• Entering accurate shareholder data for Schedule K-1s 

4. Shareholder Basis Tracking

Use worksheets or dedicated software to: 

• Track stock and loan basis annually 

• Allocate losses based on basis limitations 

• Inform shareholders of limitations on deductibility 

5. Review and Quality Control

Have a second preparer or reviewer: 

• Cross-check income and deductions 

• Verify Schedule K and K-1 consistency 

• Double-check state apportionment and filing requirements 

• Ensure electronic filing authorization (Form 8879-S) is signed 

6. Client Delivery and Education

Once the return is finalized: 

• Deliver the full 1120S package, including K-1s, securely to the client 

• Provide a summary letter outlining key figures and next steps 

• Explain how to use K-1s for personal returns or share with their 1040 preparers 

Value-add: Offer a brief post-filing meeting to discuss tax planning for the upcoming year. 

7. Archiving and Engagement Wrap-Up

Store copies of all documents and correspondence in your document management system (e.g., TaxDome). Update your CRM or practice management system to reflect: 

• Return filed 

• K-1s delivered 

• Payments made or refunds issued 

• Next year’s engagement letter reminder 

Tools and Resources for Efficiency 

• Tax Software: UltraTax, Drake, Lacerte, Proconnect 

• Document Management: SmartVault, TaxDome 

• E-signature: DocuSign, TaxDome (built-in) 

• Communication: Slack, Liscio, Teams 

Final Thoughts 

Form 1120S may seem routine, but it holds many nuances that require attention to detail, accurate bookkeeping, and proactive planning. For tax professionals, creating a repeatable, streamlined workflow can dramatically reduce stress, increase client satisfaction, and improve compliance outcomes. 

How KMK Ventures Can Help 

At KMK, we specialize in helping S-Corps navigate the complexities of Form 1120S with confidence and efficiency. Our team of seasoned tax professionals combines deep technical expertise with a streamlined digital workflow that minimizes errors, reduces turnaround time, and ensures full IRS compliance. Whether you’re a small business owner preparing your first S-Corp return or a multi-shareholder company facing basis tracking or multi-state filings, KMK provides tailored tax solutions, proactive planning, and responsive support. From onboarding to K-1 delivery, we handle each step with precision—so you can focus on running your business. 

To explore how KMK Ventures can support your S-Corp with accurate, efficient, and compliant Form 1120-S filing, contact us at info@kmkventures.com to schedule a free consultation. Let our team help streamline your tax process and position your business for long-term financial clarity and success.