What is the Late Filing Penalty for Form 1120?

Question: I have not filed my S-Corp Form 1120s for two years since inception. Will I have to pay a penalty even though the business had a loss.

— Noney in Florida

Jacob Dayan, CEO of Community Tax, responds…

This is an excellent question. Unfortunately, unlike form 1040 personal income tax returns, form 1120S S-Corp returns carry a late file penalty — even if the business recorded a loss and has no tax balance due.

Form 1120S Corporate returns are different in many ways than a personal 1040 return. On a personal 1040 return, any late file penalty is calculated based on a percentage of the tax due, so there’s no late file penalty as long as you don’t owe.

But an 1120S Corporate return has different rules.

Rules for S Corporation tax form 1120S

Form 1120S Corporate returns have a late file penalty equal to $195 per shareholder per month for up to a maximum of 12 months — regardless of whether there is tax due or if the business recorded any loss. If an 1120S Corporate return is 12 months late with one shareholder, the late file penalty is $2,340. If there are two shareholders, the penalty is $4,680, and so on. So the maximum late file penalty per shareholder is $2,340 for each unfiled return.

As you can see, these penalties can add up if you have multiple shareholders and multiple years of unfiled returns. The IRS understands that sometimes businesses have hardships and might owe a balance. However, it’s critical that you stay on top of your return filings each and every year.

If you’re looking for the best way to tackle these returns, I strongly recommend you file at least the most recent return as fast as possible. If you file quickly, you may be able to avoid the maximum late file penalty if you file it less than 12 months late. After you file both 1120S returns, you may also want to try filing a penalty abatement on IRS form 843.

You may qualify for the “one-time” abatement of the late file penalty for the first late filed tax year. You may also be able to argue that you had “reasonable cause” to be late with filing because the business was brand new and you weren’t yet up-to-speed with all the requirements to be in full compliance. There are different options for seeking relief in situations such as yours. Exploring them would require a more thorough investigation.

What you should do

For a situation like yours, I would strongly recommend having an accounting and bookkeeping solution in place. That way, come tax time, filing your S-Corp returns is a simple process for any accountant that you have. While you have seen firsthand, one drawback of an S-Corp, it’s also important to note that S-Corps can provide many useful tax benefits such as planning opportunities for self-employment tax and “pass through” treatment for business income/losses.

I believe you could benefit from working with a seasoned professional to assist you with both your personal and business tax needs. If you have any additional questions, please reach out, and we are happy to help!

Still curious about filing taxes? Learn more about filing taxes from start to finish. You can read more about filing taxes late here.