An entity filing a Form 1120 U.S Corporation Income Tax Return is a domestic corporation (or association electing to be taxable as a corporation). Such an entity must file a tax return (Form 1120) each year whether they have taxable income or do not have taxable income. Such an entity is commonly referred to as a C Corporation and it is recognized as a separate taxpaying entity.
Creating a basic return for a U.S. Corporation is done in the Business Program of the TaxSlayer Pro by following the steps below. To assist your preparation of an 1120 return review the Instructions for Form 1120 – U.S. Corporation Income Tax Return. This publication contains line by line instructions detailing the transactions that you may need to enter on the 1120 return.
If an entity is a Limited Liability Companies (LLC) formed under state law, it can only file a Form 1120 if the LLC has previously filed a Form 8832 - Entity Classification Election to elect to be treated as an association taxable as a corporation. Generally, such an election specifying an entity’s classification as a C Corporation filing Form 1120 cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. However, an entity may be eligible for late election relief in certain circumstances. See: Publication 3402 - Taxation of Limited Liability Companies, and Form 8832 - Entity Classification Election.
A 1120 return has three basic areas that need to be completed, each of which will be covered below. Specifically, the preparer needs to address each of the following areas:
(1) Enter basic information about the corporation and the return (Steps 1- 7);
(2) Enter the various income, deductions, credits and other items necessary to determine the tax liability of the Corporation (Steps 8-14); and
(3) When applicable enter the Balance Sheet and reconcile Book Income (Loss) to the tax return (Steps 19-22).
Step 1 – Select 'Business' from the Main Menu of TaxSlayer Pro. Then select 1120 – Corporation Return.
Step 2 – Enter the EIN of the Corporation and press the Enter key. A question will appear asking if you want to create a new return, select 'Yes”.
Step 3 – Form 1120 – Company Information Menu - Enter the corporation's Name, Address and the Date of Incorporation (which is the date the Articles of Incorporation were filed in the state of incorporation) and then select 'OK'.
Step 4 – Name & Address Menu - The corporation information that you have entered will be displayed in this menu. Enter the Name, Title and Contact Phone Number for the Officer of the corporation that is responsible for the filing of the tax return. This information is required and must be entered in order to electronically file the return. From this menu you may also enter an optional e-mail address for correspondence from the IRS to the corporation. If the corporation receives mail through a third party such as an attorney or accountant, enter that individual's Name and Address in the menu, 'In Care Of'. Exit the menu to be taken to the Heading Information Menu. When making entries into TaxSlayer Pro you should be mindful that the Menu Number listed in the program may not be the same as the corresponding entry on the Tax Form. For example, on an entry menu in the program the item may be Number 3 on the Menu while on the actual Tax Form that item may correspond to Line 1c on the Form.
Step 5 – Heading Information Menu - Total Assets - If the entity is not required to complete a Schedule L, enter the Total Assets of the corporation as determined by the accounting method regularly used in keeping the corporation's books and records. If the corporation has assets and gross receipts of at least $250,000, you are required to complete Schedule L and you will not enter the Total Assets on this menu. Instead, the Total Assets will be pulled into the return when you complete Schedule L in Step 16 below. If the corporation has no assets at the end of the year, enter '0'. Also on this Menu is a section, Fiscal Year. Enter the Fiscal Year dates only for a corporation that operates on a fiscal year. Many corporations operate on a calendar year, so no entry should be made in this field for any calendar year reporting companies.
Step 6 – Other Categories - From the Heading Information Menu, one of the options is "Other Categories." In this menu, there is a series of questions to be answered if applicable. If this is the Initial Return for this Corporation, that question should be answered YES. Once you have entered all questions, exit the Other Categories Menu and return to the main menu of the tax return (Form 1120).
Step 7 – Schedule K - From the main menu of the tax return (Form 1120), select Schedule K – Other Information. You should review and answer each of the items found on Schedule K. In order to electronically file the return, you must enter a valid Business Code for the Corporation on this menu. The answers to questions in this section will control what sections of the return will ultimately need to be completed. You must the answer the questions regarding the Method of Accounting (Cash, Accrual or Other), Business Activity and Product or Service. The remaining items will be answered if applicable since the program has a default answer of 'NO” for most questions. Pay special attention to Receipts and Assets at year end less than 250,000, which defaults to 'NO”. If the corporation's asset and receipts are less than $250,000 at the end of the tax year, you should change this to 'YES' and you will not have to complete Schedule L (Balance Sheet); Schedule M-1 (Reconciliation of Income) and Schedule M-2 (Unappropriated Retained Earnings). If you answer Yes to the question "Receipts and Assets at year end less than 250,000," you will be required to enter any distributions that were made by the corporation to the shareholder(s). Once you have completed this section and if everything is correct, exit the Schedule K - Other Information Menu.
Note: In the following Steps 8-14, you will enter the Income, Deductions and Credits. You should skip any item in this section that is not applicable and only complete the items that are necessary for the return.
Step 8 – Income Menu - From the Main Menu of the return (Form 1120) select Income. Enter the appropriate trade or business activity gross receipts or sales from all business operations as Gross Income or Sales. Do not report rental income, portfolio income or other passive income items on this line. Next, enter any cash or credit refunds or rebates that the corporation made to their customers as Returns & Allowances. Once you have entered all activity income and any refunds, allowances or rebates, the net amount or Balance will automatically flow to Line 1c, Form 1120.
Step 9 – Income Menu - Cost of Goods Sold - If the corporation has gross receipts or sales from business activities that involves the production, purchase or sale of merchandise or products, it may need to include Form 1125-A Cost of Goods Sold with the return. The Form 1125-A is accessed from the Income Menu and requires the user to enter the direct costs of labor and materials associated with the sale of any merchandise or products being sold by the corporation. See: Form 1125-A Cost of Goods Sold and its Instructions. Once the Cost of Goods Sold has been entered, if necessary, the program will calculate the Gross Profit on Line 3, Form 1120. If no Form 1125-A is entered the Corporation's Gross Profit will be the same amount as reflected on Line 1c, Form 1120.
Step 10– Income Menu - Remaining Income Items - The remaining income items of the corporation such as Dividends, Interest, Capital Gains and Royalties should be entered on the Income Menu. In addition, the gross amount that the corporation received for any rental of property should be entered as Gross Rents (this amount will flow to Line 6, Form 1120). Any expenses associated with rental property such as repairs, interest, taxes and depreciation should be entered on the appropriate lines for that deduction as discussed in Step 11. Once you have entered all income items, exit the 'Income (Loss)' Menu to return to the Main Menu of the return (Form 1120) and you are ready to enter the Deductions.
Step 11 – Deductions Menu - The deductions for a Corporation filing Form 1120 are subject to various limitations which are outlined in the Instructions for Form 1120 – U.S. Corporation Income Tax Return. These limitations should be considered by the user when completing this section of the Form 1120. From the Main Menu of the tax return (Form 1120) select Deductions. All expenses of the Corporation that are deductible are then entered in this section. If the Corporation has depreciable property, including rental property, it should be entered in the Depreciation Module which is accessed through the Depreciation (Form 4562) entry menu in this section.
Step 12 - Deductions Menu - Compensation of Officers – A major consideration when entering the deductions for a Corporation is the Compensation of Officers of the Corporation. If the Corporation has gross receipts of less than $500,000, the compensation paid to the officers of the corporation should be entered in this field and the user will be given a notice that "Form 1125-E is not required". However, if the Corporation has gross receipts of $500,000 or more (which is defined as the income items on Line 1a plus Lines 4 through 9 of the Form 1120), the Corporation will have to file Form 1125-E - Compensation of Officers. If the gross receipts entered in the Income Menu are $500,000 or more, the user will have access to an 1125-E Menu when entering the Compensation of Officers entry field. If Form 1125-E is required, the user will have to enter the Name, Social Security Number, Percent of Time Devoted to the Business, Percent of Stock Ownership and the Amount of Compensation that the Officer received. This information will have to be entered for each officer of the Corporation. Once you have entered all deduction items, exit the Deduction Menu to return to the main menu of the tax return (Form 1120).
Step 13 – Tax and Payments Menu - At this point in the return, the user has reported the Taxable Income for the Corporation (which is the Income less Deductions). The next step in the tax return (Form 1120) is to determine the Tax Computation and then apply any Credits and Payments to the tax return. From the main menu of the tax return (Form 1120), select Tax and Payments, and then select Total Tax - Schedule J.
On Schedule J the tax computation for the Corporation is made. Most Corporations are taxed pursuant to a Tax Rate Schedule and the program will automatically make this computation. However, if the Corporation is considered a Member of a Controlled Group (Schedule O) or a Personal Service Corporation a different tax computation is required.
A Controlled Group occurs when there is direct or common ownership of more than one Corporation such as Parent-Subsidiary, Brother-Sister, Combined Group or certain Life Insurance Companies. A Controlled Group is required to file a Schedule O in order to determine its tax calculation. See: Instructions for Schedule O (Form 1120) - Consent Plan and Apportionment Schedule for a Controlled Group. By answering the question on this Menu that the Corporation is a Member of a Controlled Group, the user will have access to Schedule O and can make the correct tax computation.
A Qualified Personal Services Corporation is basically an entity whose revenue primarily is derived by providing certain professional services (health, law, engineering, architecture, accounting, actuarial service, performing arts or consulting), and prior to the passage of the Tax Cuts and Jobs Act was taxed at a flat rate of 35% on taxable income. Starting in 2018, Personal Service Corporations are taxed at a flat rate of 21%, which is the same as other corporations.
Step 14 – Tax and Payments Menu -– Once the tax computation is made in Step 13, the user should return to the Tax and Payment Menu and select Total Payments and Refundable Credits. On this menu the user can enter any Payments that have been made by the Corporation (Carryover Overpayments, Estimated Payments, Payments submitted with any Extension or any Withholding). It is on this menu where the user can also access any Credits (both Non-Refundable and Refundable) that may be applied towards the Tax. Once these items have been complete, you should exit back to the Main Menu of the tax return (Form 1120).
Step 15 – At this stage of the return all of the income, deductions and credits for the corporation should have been entered in the return.
If in Schedule K at Step 7 you answered YES to the inquiry ‘Receipts and Assets at year end less than 250,000’, you are NOT required to complete Schedule L. Skip Steps 16-19 and proceed directly to Step 20. You do not have to complete Schedule L, Schedule M-1 and Schedule M-2, and you do not need to open any of these Menus. When these menus are opened, the program will automatically generate certain sections of the Schedules.
If in Schedule B at Step 7 you answered NO to the inquiry ‘Receipts and Assets at year end less than 250,000’, you are required to complete Schedule L – Balance Sheet, and should proceed to Step 16.
Step 16 – Schedule L - Balance Sheets - From the main menu of the 1120 Menu, select Schedule L – Balance Sheets. Select each asset corresponding to corporation's accounting records and enter the appropriate balances in each asset classification. These asset classifications match what the IRS is seeking on the Schedule L. For any assets that are classified as ‘Other Current’, ‘Other Investment’ or ‘Other Assets’ on the balance sheet, you will create a Supplemental Statement. The program will prompt you to create the Supplemental Statement when you make entries in these fields. The program will also automatically pull certain assets to the balance sheet if the assets have been entered in the Depreciation Module.
Step 17 – After you enter the assets for the corporation, enter the liabilities into the balance sheet. Select Total Liabilities & Capital from the Schedule L Assets Menu. For any liabilities that are classified as ‘Other Current’ or ‘Other Liabilities’ on the balance sheet, you will create a Supplemental Statement. The program will prompt you to create the Supplemental Statement when you make entries in these fields. The program will also automatically pull certain adjustment to retained earnings that have been generated as a result of the income entries on the return. Any adjusting entries to the Shareholder's Equity that is not shareholder specific such as Treasury Stock changes will be entered on this screen.
While working in the balance sheet, the program will provide a balance at the bottom of the menu. The ‘Total Liability & Equity’, ‘Total Assets’ and the ‘Difference’ will be displayed to assist in getting the Balance Sheet to balance. If you have a beginning balance in retained earnings, the balance sheet may be out of balance until you complete Step 19 and reconcile the items that affect retained earnings. Once you have completed this Menu, you should have a balance sheet that is in Balance. Select Exit to return to the Main Menu of the tax return (Form 1120).
Step 18 – Schedule M-1 - Reconciliation of Income - You must reconcile any differences between the book income (loss) of the corporation to the income (loss) being reported on the tax return. From the main menu of the tax return (Form 1120) select Schedule M-1 – Reconciliation. You should enter this menu to generate the Schedule M-1 even if no adjustments will be made. Adjust any items that are different from book income (loss) to the income (loss) on the tax return. The program will pull some of these items from other areas of the return, but many of these items are not otherwise reported on the tax return. The most common item that may need adjustment is depreciation which may be different on the company’s books than on the tax return. This is primarily due to the practice of taking bonus depreciation on a tax return but using more conservative practices on the books of the company. A depreciation adjustment can either increase book income (loss) or decrease book income (loss). Other items to consider are the non-deductible portion of meals and entertainment which will pull from the return but may need to be adjusted, tax exempt interest and the actual federal income taxes paid by the C Corporation which were deducted on the company's books but are not deductible on the tax return. Once all of these entries have been completed, select Exit to return to the Main Menu of the tax return (Form 1120).
Step 19 – Schedule M-2 - The final schedule that needs to be included on the tax return is Schedule M-2 - Analysis of Unappropriated Retained Earnings Per Books (Line 25, Schedule L). From the Main Menu of the tax return (Form 1120), select Schedule M-2. You should enter this menu to generate the Schedule even if no adjustments will be made. If any Other Additions or Reductions entries are made, the program will prompt you to complete a supplemental statement describing the adjustment.
Step 20 – Mark Return Electronic - When all entries have been complete on the tax return, from the Main Menu of the tax return (Form 1120), select Mark Return Electronic if you want to e-file the return. If you have failed to enter certain required information the program will prompt you to correct the items before proceeding. Once you have successfully marked the return for e-file, you will be able to transmit the return from the Electronic Filing Menu which is accessed from the Business Main Menu after exiting the return. To exit the return press enter or select the Exit button.
Step 21 – Receipt Menu - Select Exit from the main menu of the tax return. The Receipt Menu displays an overview of the calculated fees. You have the option to view and edit the invoice or enter a payment. When you exit the receipt menu you will be asked “Are You Ready to Mark the Return Complete?” Answer ‘NO” if the return is not complete. Answer ‘YES” to mark the return complete and exit back to the TaxSlayer Pro Main Menu.
NOTE: This is a guide on entering Form 1120 - US Income Tax Return for an 1120 Corporation into the TaxSlayer Pro program. This is not intended as tax advice.