01
Part I — Form 1040: individual income tax
1Gross income
- Wages
- Interest
- Dividends
- Capital gains
- Business income
- Rental income
- Farm income
- Partnership and S corporation income
- Pensions
- IRA distributions
- Taxable Social Security
- Other taxable income
2Less: Above-the-line adjustments
- Traditional IRA contributions
- HSA contributions
- Educator expenses
- Student loan interest
- One-half of self-employment tax
- Self-employed health insurance
- Self-employed retirement contributions
- Alimony under pre-2019 instruments
- Early savings withdrawal penalties
- Eligible moving expenses
- Reservist expenses
- Performing artist expenses
- Fee-basis government official expenses
- Archer MSA contributions
- Other Schedule 1 adjustments
3= Adjusted gross income (AGI)
4Less: Standard OR itemized deductions
- Standard: Single/MFS $16,100; HOH $24,150; MFJ $32,200
- State/local income OR sales taxes
- Real property taxes
- Personal property taxes
- Qualified mortgage interest
- Mortgage insurance premiums
- Investment interest
- Cash charitable contributions
- Noncash charitable contributions
- Medical and dental expenses above 7.5% of AGI
- Qualifying casualty and theft losses
- Gambling losses (subject to 2026 limits)
- Other allowable Schedule A deductions
5Less: Additional deductions
- Qualified business income (QBI)
- Qualified tips
- Qualified overtime
- Qualified vehicle loan interest
- Enhanced senior deduction (65+)
- Qualified cash charitable gifts for non-itemizers
6= Taxable income
7Compute income tax
- Ordinary income tax tables/rate schedules
- Qualified dividend tax rates
- Capital gain tax rates
- Alternative minimum tax (AMT), if applicable
8= Income tax before credits
9Less: Nonrefundable tax credits
- Child Tax Credit (nonrefundable portion)
- Credit for Other Dependents
- Child and Dependent Care Credit
- Education credits (nonrefundable portions)
- Saver’s Credit
- Adoption Credit (nonrefundable portion)
- Foreign Tax Credit
- General Business Credit
- Other eligible nonrefundable credits
10= Income tax after credits
11Add: Other taxes
- Self-employment tax
- Net investment income tax (NIIT)
- Additional Medicare tax
- Early distribution additional taxes
- Household employment taxes
- Other Schedule 2 taxes
12= Total tax
13Less: Payments and refundable credits
- Federal income tax withholding
- Estimated tax payments
- Prior-year overpayment applied
- Earned Income Tax Credit (EITC)
- Refundable Child Tax Credit
- Refundable education credit
- Refundable Adoption Credit (if eligible)
- Premium Tax Credit
- Other refundable credits
- Result: amount owed or refund
02
Part II — Form 1120-S: S corporation
1Gross receipts and sales
- Gross receipts or sales
- Less: returns and allowances
- Net receipts
2Less: Cost of goods sold (Form 1125-A)
- Beginning inventory
- Purchases and direct labor
- Other production costs
- Less: ending inventory
3= Gross profit
- Net receipts less COGS
4Add: Other trade or business income
- Form 4797 ordinary gains/losses
- Other operating income
5= Total business income
- Gross profit plus other business income
6Less: Ordinary business deductions
- Officer compensation
- Salaries and wages
- Repairs and maintenance
- Bad debts
- Rents
- Taxes and licenses
- Interest expense (business)
- Depreciation / §179 (as applicable)
- Advertising
- Employee benefits and retirement plans
- Insurance, supplies, utilities
- Other ordinary business expenses
7= Ordinary business income (loss)
- Form 1120-S, page 1, line 22
- Flows to Schedule K, line 1
8Separately stated items — Schedule K
- Interest and dividend income
- Capital gains and losses
- Rental real estate and other rental activity
- §1231 gains and losses
- Charitable contributions
- §179 deduction
- Investment interest expense
- Tax-exempt income / nondeductible expenses
- Credits and foreign tax items
- Other separately stated items
9= Schedule K total / allocations
- Allocate items by ownership per share, per day
- Reconcile income and deductions
10Shareholder reporting — Schedule K-1
- Ordinary business income (loss)
- Separately stated income, deductions, credits
- Distributions and other information
- Basis / at-risk / passive limits applied by shareholder
11Entity-level taxes (if applicable)
- Built-in gains tax
- Excess net passive income tax
- LIFO recapture / recapture taxes
- Other applicable Schedule J taxes
12Less: Credits and payments
- Applicable entity-level credits
- Estimated tax payments / prior-year overpayment
- Refundable credits, if applicable
13= Balance due or overpayment
- Entity tax due or refund
- Distributions are not business deductions
- Schedule L / M-1 / M-2 and basis reconciliation
03
Part III — What Form 1120-S is designed to do
- Convert book income to tax income (depreciation, meals, nondeductible expenses and other book–tax differences).
- Separately state items whose tax character must pass through to shareholders (capital gains, charitable contributions, §179, credits).
- Allocate tax items among shareholders and report them on Schedule K-1.
- Report distributions and information relevant to stock/debt basis; shareholder basis is generally computed at shareholder level.
- Reconcile financial statements and tax accounts through Schedules L, M-1 and M-2.
04
Part IV — Shareholder loss limitations
- Basis: losses are limited to stock basis plus qualifying direct shareholder debt basis; excess losses are suspended.
- At-risk: losses are further limited to amounts economically at risk.
- Passive activity (§469): generally, losses from activities without material participation offset passive income, not wages or portfolio income.
- Material participation: more than 500 hours is one of seven tests.
- Suspended passive losses carry forward; qualifying full taxable disposition can release them, subject to other limitations.
- Portfolio interest, dividends and most stock gains are not passive activity income.
- Rental activity is generally passive, subject to statutory exceptions and the limited rental real estate allowance.
05
Part V — When an S corporation pays entity-level tax
- Federal built-in gains tax for qualifying former C corporations during the recognition period.
- Federal excess net passive income tax when C corporation earnings and profits remain and statutory tests are met.
- LIFO recapture upon qualifying C-to-S conversion; certain credit recaptures and other specialized taxes.
- California generally imposes a 1.5% S corporation franchise/income tax and an $800 minimum franchise tax, subject to exceptions.
06
Part VI — 2026 rule changes / 2027 filing season
- 2026 standard deduction: Single/MFS $16,100; Head of Household $24,150; Married Filing Jointly $32,200.
- 2026 SALT cap: $40,400, with an income-based phase-down; itemizing required.
- 2026 charitable gifts: itemizers generally face a 0.5%-of-AGI floor; eligible nonitemizers may deduct up to $1,000 ($2,000 MFJ) in cash gifts.
- 2026 qualified tips, overtime, eligible car-loan interest and senior deductions: subject to eligibility and income limits.
- 100% bonus depreciation restored for qualifying property acquired after January 19, 2025, subject to statutory rules.
- 2026 mortgage interest generally remains itemized; acquisition-debt and home-equity use limitations apply.
07
Part VII — Tax year 2027: upcoming provisions
- Saver’s Match begins in 2027: eligible retirement savers may receive a federal matching contribution deposited into a retirement account (up to $1,000 per eligible individual).
- Saver’s Match is designed to supplement retirement savings, not replace Social Security; a reduction in reliance on Social Security is not an explicitly established statutory purpose.
- Scholarship contribution credit: up to $1,700 for qualifying contributions in participating states.
- New Opportunity Zone designation framework begins in 2027.
- Certain information-return reporting thresholds are indexed for inflation beginning in 2027. Reference overview; consult current IRS forms, instructions, and statutory eligibility limits when preparing returns.