Filing Taxes for S Corp With No Income (2024)

Filing taxes for S corp with no income involves completing and submitting Internal Revenue Service (IRS) Form 1120S to report income, losses, and deductions realized by the business. While an individual who has no income might not have to file a tax return, a corporation seeking to make a profit must file a return regardless of whether or not it saw a profit.

Why File if the S Corporation Had No Income?

This requirement applies to traditional corporations as well as Subchapter S companies. Ignoring this directive can result in penalties for not filing a return, even if the company had no transactions. The reason the return is required is to determine how much tax is owed and to make sure the IRS gets all of the tax dollars due. In the first year of operation, the S corp files the Form 1120S and indicates that it will serve as the company's initial return.

When a company contracts with someone to complete a task or provide a service, the company files a Form 1099 to tell the IRS that the provider received income. However, companies usually don't have to provide a Form 1099 to a corporation.

If the S corp doesn't file a tax return that shows it received zero income for a given year, the IRS has no way of finding out that information. Therefore, when an S corp doesn't file, the IRS makes assumptions about taxes owed and sends a bill for that amount. The IRS does not assume that the business has no income.

Even though an S corp does not pay income taxes, it still must file the Form 1120S to create a record of profits and losses. While filing a tax return in a year with no income may seem pointless, it may still be in your company's best interest, even if the law didn't require it.

• It establishes a consistent paper trail with the IRS, which is especially important for a new company.
• It avoids extra scrutiny and audits, which are more likely if your filing pattern is inconsistent.
• It creates a record of profits and losses. Shareholders are responsible as individuals for the taxes on the profits they receive, but they can also write off any losses.

The Process of Filing

When a corporation is initially formed, it is assumed by default to be a C corporation, which falls under Subchapter C of the Internal Revenue Code. A C corp must file a tax return using Form 1120 and pay taxes on its profits. This is true whether or not the company earned any money for shareholders during that year. If there are no transactions to include on the return, the Form 1120 just contains zeros and the identifying information of the business, including the name and employer identification number (EIN).

Partnerships and limited liability companies (LLCs) who choose to be taxed as corporations must also file Form 1120. The only exceptions to the rule are exempt organizations under Section 501 of the Internal Revenue Code. These are typically charities and other forms of nonprofits. Even those companies must file a return if they have certain types of income.

When a C corp chooses to change to an S corp, it files Form 2553 to elect the new status and is subject to the requirement to file an annual tax return. S corps are often small businesses who want to take advantage of the limited liability of an S corp while avoiding double taxation of a C corp. In the United States in 2007, approximately 4.5 million businesses were operating under this corporate form, up from 2.7 million 10 years earlier. That's more than double the number of C corps for the same period of time.

If the corporation is established or if it changes to the S corp form of operation in the second, third, or fourth quarter of the year, using a fiscal year not based on the standard calendar year may be an option. For example, let's say you set up your company in July and immediately move to be treated as an S corp. However, due to other commitments, you don't start operating until April 1 of the next year.

You could file an initial return that includes the period from formation in July to the start of operations in April plus the 12 months following the beginning of operations. Going forward, your fiscal year would be April 1 through March 31, but your initial return would cover the entire period of the company's existence.

If you need help with filing taxes for an S corp with no income, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.