Many tax professionals grow their practices by serving both individual and business clients. Doing so requires a solid understanding of Form 1120, the U.S. Corporation Income Tax Return.
To prepare Form 1120 accurately, you need to understand its purpose, who must file it, the different versions available, and how to report tax-exempt income.
Recent changes introduced by the One Big Beautiful Bill Act (OBBBA) significantly affect how Form 1120 is completed. These updates are discussed below.
Domestic corporations use Form 1120 to report their income, gains, losses, deductions, and credits, and to compute the federal income tax liability. Corporations file the return each year.
Businesses may earn income from sales, dividends, interest, rents, and royalties. Deductions include salaries, taxes, charitable contributions, and advertising. The return may require additional schedules.
Form 1120 documents these business activities and calculates the company’s tax liability:
Companies remain compliant with the IRS when they file Form 1120 and all supporting schedules on time.
Several types of entities must complete Form 1120:
Companies can elect to be taxed as corporations using Form 8832. Unless exempt under Section 501, all domestic corporations (including corporations in bankruptcy) must file an income tax return, whether or not they have taxable income.
An LLC can file a Form 1120 only if it has filed Form 8832 to elect to be treated as an association taxable as a corporation.
A corporation that engages in farming should use Form 1120 to report the income (loss) from such activities.
The IRS provides different versions of the 1120 tax forms, based on the type of reporting entity. Entities have different rules for reporting income and expenses, and the IRS provides 1120 forms that meet the reporting requirements.
Here are some common examples:
Confirm the client’s type of business entity each year.
Both individual taxpayers and business entities report tax-exempt income on their tax returns. Disclosure allows the IRS to confirm if the income is tax-exempt.
For example, corporations file Form 1118 to compute their foreign tax credit for certain taxes paid or accrued to foreign countries or US possessions.
A foreign tax credit may not be claimed for taxes on income that you exclude from US gross income. As a result, 1120 filers report tax-exempt income on Schedule K.
The One Big Beautiful Bill Act (OBBBA), passed in July 2025, made significant changes to Form 1120.
Bonus depreciation allows businesses to write off a large percentage of an eligible asset’s cost in the first year it is placed in service.
The OBBBA permanently reinstated 100% bonus depreciation, as initially created by the Tax Cuts and Jobs Act (TCJA), for qualified property acquired and placed in service after January 19, 2025.
The OBBBA enacted new Section 174A, which permanently allows taxpayers to fully expense domestic research or experimental (R&E) expenditures paid or incurred in taxable years beginning after Dec. 31, 2024.
While the OBBBA reinstates full expensing for domestic R&E expenditures, foreign R&E expenditures must still be capitalized and amortized over 15 years, consistent with TCJA Section 174.
Taxpayers with average annual gross receipts of $31 million or less (the Section 448(c) gross receipts test) computed for the first taxable year beginning after Dec. 31, 2024, can elect to retroactively apply Section 174A to domestic R&E expenditures paid or incurred in taxable years beginning after Dec. 31, 2021.
The OBBBA made permanent the more generous earnings before interest, taxes, depreciation and amortization (EBITDA) computation of the business interest expense limitation under Section 163(j), which had previously expired for tax years beginning after 2021.
Effective for stock issued after July 4, 2025, OBBBA introduces these changes:
These changes present a good opportunity to explain the benefits of the tax law with clients.
Tax clients should have a general understanding of how the 1120 is used to calculate the tax liability.
This section calculates gross profit as receipts or sales (net of returns and allowances) less cost of goods sold. Dividends, interest, rents, and royalties are also reported in the income section.
Companies deduct common expenses that many businesses incur, such as wages, rent, taxes, interest, and charitable contributions. This section also includes deductions for pension, profit-sharing, and employee benefit plans.
Taxable income is used to compute the total tax. Tax payments and credits are subtracted from the tax liability to determine the amount owed or the refund due.
Completing the 1120 form requires multiple supporting schedules, and the complexity makes tax preparation more difficult.
Schedules J, L, and M-1 discussed below are required to complete the 1120 form. If the company has dividend income, Schedule C may be needed. Finally, Schedule K may be necessary if the company owns stock in other businesses.
Here are some frequently needed schedules:
This schedule calculates deductions for certain types of dividends.
Dividends are separated into companies that are less than 20% owned by the 1120 filer, and greater than 20% owned. The 1120 return may also separately report certain types of preferred stock.
Schedule J is a detailed calculation of the tax liability. The schedule includes tax adjustments, tax credits, and deferred taxes, if applicable.
This report reconciles the income (or loss) per the books to income or loss on the tax return. The taxpayer needs to know the differences between book and tax for the year, such as depreciation differences.
Finally, Schedule L requires a balance sheet for both the prior year and current year.
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