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Business Tax

IRS Releases final 2020 Form 1120-S and Draft Instructions

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The IRS has issued the final Form 1120-S, U.S. Income Tax Return for an S Corporation, for use in tax years beginning in 2020, as well as draft instructions for the form and for Schedule K-1 (Form 1120-S) (Shareholder’s Share of Income, Deductions, Credits, etc.).

Background.

A domestic corporation or other entity must use Form 1120-S to report income, gains, losses, deductions, credits, etc., for any year covered by an election to be an S corporation. (Instructions for Form 1120-S) Schedule K-1 is used to report income, deductions, and credits allocated to S corporation shareholders. (Shareholder’s Instructions for Schedule K-1)

The final 2020 Form 1120-S was released on December 15, 2020. The final Schedule K-1 was released on November 18, 2020. (IRS Forms and Publication finder)

What’s new.

The draft instructions point out the following new aspects of the 2020 Form 1120-S and the 2020 Schedule K-1:

Payroll tax credit for qualified sick and family leave wages. The Families First Coronavirus Response Act (the FFCRA, PL 116-127) provides paid sick leave and expanded family and medical leave for COVID-19 related reasons and creates the refundable paid sick leave credit and the family leave credit for eligible employers. Eligible employers are businesses and tax-exempt organizations with fewer than 500 employees that are required to provide emergency paid sick leave and emergency paid family and medical leave under the FFCRA. A portion of the credit may be refundable. (FFCRA Sec. 7001 and Sec. 7003)

The draft instructions note that the corporation must include the full amount (both the nonrefundable and refundable portions) of the credit for qualified sick and family leave wages in its gross income for the tax year that includes the last day of any calendar quarter in which a credit is allowed. This amount is reported on Form 1120-S on line 5 (Other Income (Loss)).

Certain charitable cash contributions made in 2020. Code G of Schedule K-1 (Form 1120-S), box 12, is used to report certain cash contributions made in calendar year 2020 or 2021. The draft instructions note that for tax years ending after 2019, individual taxpayers may elect to deduct certain cash contributions in amounts up to 100% of adjusted gross income. The draft instructions direct the taxpayer to Publication 526, Charitable Contributions, for details.

Employee retention credit. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136), provides certain employers that operate a business during 2020 and retain employees (despite experiencing economic hardship related to the COVID-19 crisis) with an employee retention credit.

The draft instructions note that any qualified wages for which an eligible employer claims against payroll taxes for the employee retention credit may not be taken into account for purposes of determining certain other credits.

The employee retention credit is reported on Form 1120-S on line 13g (Other Credits), using code P.

New Items G and H added to Schedule K-1. New Item G is for the shareholder’s number of shares, and item H is for loans from the shareholder.

Election for section 951A reportingNotice 2020-69, 2020-39 IRB, provides an election for an S corporation to be treated as an entity for purposes of the Code Sec. 951A global intangible low-taxed income (GILTI) rules. See IRS intends to issue regs on applying GILTI to S corporations (09/03/2020).

The draft instructions say that an S corporation that makes such an election should report its Code Sec. 951A income on line 10 of Form 1120-S (Other Income (Loss)) using code E. On line 14r (Other Foreign Tax Information), the S corporation making such an election will use code D to report any amount included in gross income under Code Sec. 951A (other than passive category income), and code K to report foreign source income.

To continue your research on S corporation returns, see FTC 2d/FIN ¶S-1905.

 

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