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Draft Instructions for Form 1120-S for S corporation released by IRS

IRS has released draft Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation. The instructions include information on what’s new on the 2014 Form 1120S and other new requirements for S corporations.

Background. A domestic corporation or other entity must use Form 1120S to report income, gains, losses, deductions, credits, etc., for any year covered by an election to be an S corporation.

What’s new. The draft Instructions indicate that the following items are new for 2014:

(1) Information reporting requirements for health insurance offers and coverage. Under the Affordable Care Act, employers that offer (or fail to offer) and others that provide “minimum essential coverage” (as defined in Code Sec. 5000A(f)) to individuals are required under Code Sec. 6055 and Code Sec. 6056 to provide certain information to IRS and to the individuals. The information is required for calendar years beginning after Dec. 31, 2014 but may voluntarily be filed with IRS and provided to individuals for 2014.

RIA observation: Code Sec. 6055 and Code Sec. 6056 were both to be effective in 2014, but transition relief was provided in conjunction with the Administration’s delayed implementation of the employer mandate (to 2015 or 2016, depending on the size of the employer). See Weekly Alert ¶  1  03/13/2014 and Weekly Alert ¶  27  03/13/2014 for more details.

Specifically, Code Sec. 6055(a) requires every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs, and other entity that provides minimum essential coverage to file annual returns reporting information for each individual for whom minimum essential coverage is provided. An entity filing an information return reporting minimum essential coverage must furnish a written statement to each individual listed on the return that shows the information that must be reported to IRS for that individual. (Code Sec. 6055(c)(1)) The purpose of this reporting is to allow taxpayers to establish, and IRS to verify, that the taxpayers were covered by minimum essential coverage and their months of enrollment during a calendar year.

Separate reporting requirements under Code Sec. 6056 apply to applicable large employers (generally, employers with at least 50 full-time employees, including full-time equivalent employees) subject to the employer mandate. Code Sec. 6056 requires annual information reporting by applicable large employers relating to the health insurance that the employer offers (or does not offer) to its full-time employees. Code Sec. 6056 also requires those employers to furnish related statements to their employees. The information that the employers report allows IRS to administer the Code Sec. 4980H employer shared responsibility provisions and allows their employees to determine whether, for each month of the calendar year, they may claim on their individual tax returns a Code Sec. 36B premium tax credit.

(2) Schedule M-3 (Form 1120S). For tax years ending on or after Dec. 31, 2014, IRS indicates that requirements have changed for some filers of Form 1120S that file Schedule M-3 (Form 1120S), Net Income (Loss) Reconciliation for S Corporations With Total Assets of $10 Million or More.

For tax years ending Dec. 31, 2014, and later, a corporation that (a) is required to file Schedule M-3 (Form 1120S) and has less than $50 million total assets at the end of the tax year; or (b) is not required to file Schedule M-3 and voluntarily files it, must either complete Schedule M-3 in its entirety or—instead of completing Schedule M-3’s Parts II and III—complete the Schedule M-3 through Part I and then complete Schedule M-1 (Form 1120S), Reconciliation of Income (Loss) per Books with Income per Return.

For tax years ending on or after Dec. 31, 2014, a corporation isn’t required to file Form 8916-A, Supplemental Attachment to Schedule M-3. If a corporation chooses to complete Form 1120S, Schedule M-1 instead of completing Parts II and III of Schedule M-3, then line 1 of Form 1120S, Schedule M-1 must equal line 11 of Part I of Schedule M-3. Any corporation that completes Parts II and III of Schedule M-3 must complete all columns, without exception.

(3) Online payment agreement. Generally, a corporation must pay any tax due in full no later than the 15th day of the 3rd month after the end of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the payment is due on the next day that is not a Saturday, Sunday, or legal holiday. In the Instructions, IRS advises that a corporation may be able to apply for an installment agreement online if it has a balance due when the corporation’s return is filed.

The corporation can apply for an installment agreement online if: (i) it cannot pay the full amount owed (as shown on line 25); (ii) the total amount owed is $25,000 or less; and (iii) the corporation can pay the liability in full in 24 months. An S corporation can apply for the Online Payment Agreement Application, by going to irs.gov, and clicking on “Tools” and then clicking on “Online Payment Agreement.” Under an installment agreement, the corporation can pay what it owes in monthly installments. There are certain conditions that must be met to enter into and maintain an installment agreement, such as paying the liability within the specified time period and making all required deposits and timely filing tax returns during the length of the agreement. If the installment agreement is accepted, the corporation will be charged a fee and it will be subject to penalties and interest on the amount of tax not paid by the due date of the return.

Activity-based reporting. The instructions for “Passive Activity Reporting Requirements” and “Specific Instructions (Schedules K and K-1, Part III)” have been clarified for activity-based reporting. For example, where the 2013 Schedules K and K-1 Specific Instructions directed that if the corporation had more than one trade or business activity, it needed to identify the amount from each activity, the new draft Instructions advise the corporation to identify on statements attached to Schedule K-1 any additional information the shareholder needs to correctly apply the passive activity limitations and lists as an example of such, where the corporation has more than one trade or business activity.

RIA observation: In the draft Instructions, IRS noted that Congress has yet to act on a host of important provisions that expired at the end of 2013. These “extender” provisions are a number of “temporary” tax rules that have a termination date specified in the Code. In the past, these provisions have been routinely extended for one or two years, but this year their fate is uncertain. Some or all of these expired provisions may or may not be retroactively reinstated in the lame duck Congressional session in November or December.

Reminders. IRS cautions that corporations shouldn’t file Form 1120S unless the corporation has filed or is attaching Form 2553, Election by a Small Business Corporation, to their return.

IRS also reminds taxpayers that Box 17, code U, on Schedule K-1 (Form 1120S) is used to report information related to the net investment income tax. IRS notes that a corporation can elect under Reg. § 1.1411-10(g) to include Code Sec. 951 inclusions (from a controlled foreign corporation (CFC)) and Code Sec. 1293 inclusions (from a qualified electing fund (QEF)) in net investment income for purposes of the Code Sec. 1411 3.8% net investment income surtax. If a Reg. § 1 .1411-10(g) election is in effect with respect to a taxpayer’s stock in a CFC or QEF, then the amounts included in income for regular tax purposes under Code Sec. 951 and Code Sec. 1293 from the stock of the CFC or QEF are included in net investment income, and distributions from the stock of the CFC or QEF described in Code Sec. 959(d) or Code Sec. 1293(c) are excluded from net investment income.

References: For S corporation returns, see FTC 2d/FIN ¶  S-1905  ; United States Tax Reporter ¶  60,374  ; TaxDesk ¶  609,806  ; TG ¶  5810  .

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