Form 1120-S and Shareholder Basis Checklist

An S corporation return is only as right as the election behind it and the basis records around it. This checklist covers the return itself and the shareholder basis questions that follow it onto every Form 1040.

Dates and penalties

• Form 1120-S is due on the 15th day of the third month after the tax year ends: 15 March for a calendar year corporation, moved to the next business day when it falls on a weekend or legal holiday.
• Form 7004 gives an automatic six month extension, to 15 September for a calendar year corporation.
• Schedules K-1 must be furnished to shareholders by the due date of the return, including extensions.
• The penalty for a late or incomplete S corporation return is a dollar amount per shareholder for each month or part of a month, for up to 12 months. For returns required to be filed in 2027 that amount is $260 (Rev. Proc. 2025-32).

The election and eligibility

• Confirm Form 2553 was filed and accepted, and keep the acceptance letter in the file. An election for a tax year is due no more than two months and 15 days after that year begins.
• Confirm the corporation still qualifies: no more than 100 shareholders, only eligible shareholders, and one class of stock.
• Check for an event that could end the election, such as a transfer of shares to an ineligible shareholder.

Preparation

• Review shareholder employee wages against the reasonable compensation the IRS expects for the services performed.
• Include health insurance paid for shareholders owning more than 2 percent in their wages.
• Maintain the accumulated adjustments account on Schedule M-2, and track accumulated earnings and profits if the corporation was once a C corporation.
• For a former C corporation, consider the built in gains tax on assets sold within the recognition period, and the passive investment income rules.
• Complete Schedule M-3 instead of Schedule M-1 when total assets at the end of the year are $10 million or more.
• Separate items that pass through to shareholders from ordinary business income on Schedule K.
• Prepare state returns, including any pass through entity tax election the firm has made and nonresident withholding.

Shareholder basis and Form 7203

Shareholders attach Form 7203 to their own return when they:

• claim a deduction for their share of an aggregate loss, including a loss disallowed last year because of basis limits,
• receive a non dividend distribution,
• dispose of stock, whether or not gain is recognized, or
• receive a loan repayment from the corporation.

Keeping the stock and debt basis schedule every year, even when Form 7203 is not required, avoids reconstructing a decade of basis when a shareholder finally sells.

Filing

• A corporation required to file 10 or more returns of any type during the calendar year must file electronically.

Review questions

1. Do distributions follow ownership percentages, as a single class of stock requires?
2. Does the accumulated adjustments account roll forward from last year?
3. Is every shareholder's basis schedule current, and does it support the losses and distributions reported?
4. Are officer wages reasonable for the work performed?

Sources

• Instructions for Form 1120-S
• About Form 7203, S Corporation Shareholder Stock and Debt Basis Limitations
• Rev. Proc. 2025-32, section .56

General information for accounting professionals, not legal or tax advice. Confirm requirements against current law and IRS guidance.