Form 1120, or U.S. Corporation Income Tax Return, is the main document C corps use to report income, gains, losses, deductions, and credits for the year to the IRS. The information reported on the form determines the corporation’s federal tax liability and tax compliance. All businesses, whether domestic corporations or foreign entities trading or doing business in the U.S., must ensure the proper filing of Form 1120 for IRS accountability.
Who Must File Form 1120
- Most incorporated businesses in the United States must file Form 1120 each year.
- All domestic C corporations must submit this form each year even if they do not earn income or profit.
- Foreign corporations that conduct trade or a business in the United States or earn income that is effectively connected are also obligated to file Form 1120.
The IRS allows any foreign business or entity that earns income classified to be doing business within the United States to be subject to United States taxes, even if the business or entity is registered in a foreign country.
- Also, LLCs that have chosen C corporation taxation must also submit Form 1120.
All corporations, regardless of their size or revenue, have filing obligations, meaning small startups and large corporations must both comply with their yearly filing requirements.
Flat 21% Corporate Tax Rate
C corporations that file Form 1120 pay a federal corporate income tax rate of 21%. This was a result of the Tax Cuts and Jobs Act (TCJA), which replaced the former graduated corporate income tax brackets. Instead of using different rates based on the income level (brackets), the income tax calculation uses a 21% flat rate, simplifying tax processing streamlined for every corporation.
The 21% flat tax rate system definitely benefits corporations earning a higher income. Other corporations may feel the pain of moving through different tax brackets. Losing the pain of moving through different tax brackets means corporations will no longer need to lose sleep over a 21% flat tax system on cash available for distributions to hoarding shareholders. Instead of feeling the pain of bracket-moving, corporations will need to pay attention to the taxable income calculation to pay just the right amount of tax instead of the pain of underpayment or overpayment.
Required Documentation
Corporations must have accurate, complete, and well-organized records on hand before preparing Form 1120. The IRS needs records that back up every number claimed on the return. At a minimum, this involves an income statement for the year and a balance sheet that shows assets, liabilities, and shareholders’ equity at the end of the year.
Also, corporations have to prepare any necessary schedules and supporting records, especially details for deductions, credits, and cost of goods sold. Depending on the activities of the corporation, certain schedules are commonly attached to Form 1120, which include the following:
- Schedule C, which deals with dividends and special deductions
- Schedule J, which calculates the tax liability of the corporation
- Schedule K, which offers more detail about the corporation’s organization and activities
- Schedule L, which shows the balance sheets according to the corporation’s books
Also, corporations have to keep supporting papers on any claimed depreciation, amortization, and tax credits. Losing the complete and accurate records required can trigger an IRS audit. For this reason, thorough documentation is fundamental to recordkeeping.
Deductible Business Expenses
One of the best benefits of filing Form 1120 is claiming deductions that will lower your taxable income. The IRS allows all corporations to deduct business expenses that are necessary and ordinary. These may be rent, utilities, insurance, employee salaries, office supplies, advertising, and professional services, and any other expenses necessary for the day to day running of the business.
You may also recover the cost of long-term assets like machinery, vehicles, and buildings over time under depreciation expense according to the allowed depreciation schedule. The interest on business loans may be deductible and charitable contributions also deductible depending on IRS guidelines. Deductions must be reasonable and documented as necessary for running the business. Deductions that are unreasonable or documented poorly will result in penalties and interest. The IRS will adjust the corporation’s tax liability which triggers the penalties.
Treatment of Net Operating Losses (NOLs)
A corporation has a Net Operating Loss (NOL) when its deductions are more than its taxable income for a year. NOLs are good for tax planning because NOLs let a business reduce future taxable income, which minimizes future tax liabilities. This has the effect of smoothing a company’s financial results over the long term.
NOLs are the only tax attributes that a corporation has which the IRS still allows to be carried forward indefinitely in time. NOLs only reduce future taxable income by 80%. The Tax Cuts and Jobs Act (TCJA) eliminated most NOL carryback provisions, which means that businesses will most likely NOT be able to use losses to offset income in the prior year. During profitable years, the corporation will use its tax-paying months to maintain cash flow.
Form 5472 for Foreign-Owned Corporations
Foreign-owned corporations need to pay attention to extra responsibilities concerning additional reporting. If a foreign person or entity holds 25% or more of a U.S. corporation’s stock or if the corporation has reportable transactions with foreign related parties, then in addition to Form 1120, Form 5472 must be filed.
Form 5472 reports related-party transactions between the U.S. corporation and foreign parents and affiliates such as loans, sales, management fees, and royalties. This requirement is for transparency of the cross-border transactions so the IRS can ensure that the entity complies with transfer pricing regulations. Not filing Form 5472, or filing it late, or incorrect will be subject to a $25,000 penalty and additional penalties for continued noncompliance after it has been pointed out.
Penalties for Late Filing and Underpayment
To prevent penalties from the IRS, filings must be done as timely as possible, with the greatest care taken to report all information. Missing the deadline to submit Form 1120 will earn you a 5% penalty of the unpaid tax which will be multiplied by each month past the deadline, though this will not exceed 25%. In addition to this, if taxes are paid late, there will be a 0.5% penalty each month until the tax is paid off.
Likewise, corporations have to pay estimated taxes every quarter, along with any taxes due. If these installments are not accurate or do not meet the balance due, more penalties and interest will be added. In addition to everything stated above, if the taxes due are underpaid due to neglect or substantial understatement, the IRS will impose more severe penalties. Working corporations will need to pay close attention to and revise their payment due cash flow forecasts to ensure these payments are made in the appropriate time.
Deadlines and Filing Extensions
For corporations that follow the calendar year period, the due date for filing Form 1120 is April 15. For corporations that follow the fiscal year period, the due date is the 15th day of the 4th month following the end of the fiscal year.
Corporations that need more time can file Form 7004 and receive an additional six months, extending calendar year corp. due dates to October 15. An important note is that even filing extensions do not extend payment due dates. All payments due in April must be paid to avoid penalties, after which estimated tax for the 1120 must be paid on the original due date.
Need help filing Form 1120? Contact Dimov Tax & CPA Services today to ensure accurate reporting, timely filing, and peace of mind during tax season.