Taxes

How to Read an S Corporation Tax Return for Your Therapy Practice

Headshot of Bryce Warnes
January 3, 2023
December 6, 2022
Bryce Warnes
Content Writer

If your therapy practice is an S corporation, there are benefits to knowing how to read your S corporation tax return—even if someone else is filing it for you.

Once you have a grasp on the different parts of an S corporation tax return and what they do, it’s easier to communicate with your accountant (or the team at Heard) when you meet with them during tax season.

It also gives you insight into how your business is taxed, and may help you make smart business decisions in the future.

What type of therapy practice is this article for?

This article is a general guide to understanding a single member S corporation tax return for a typical therapy practice, providing instructions as though you were filing the tax return yourself.

It does not cover elements of the tax form relevant to more complex S corporations with multiple shareholders.

As always, the best way to make sure your tax return is accurate and reflects your particular circumstances is to hire an accountant or sign up for Heard.

Who needs to file Form 1120-S?

If you are registered in your state as a limited liability company (LLC) or another eligible entity, and you’re electing S corporation status by filing Form 2553, you’ll need to file your taxes as an S corporation.

S corporations file taxes using Form 1120-S. Depending on your business, you may need to file additional tax forms accompanying Form 1120-S, including:

Part of what differentiates filing as an S corporation from filing as a sole proprietor is the way you get paid. As an officer of your S corporation, you’re most likely paid as an employee, but may also be paid distributions based on the shares you own. To learn more, see our guide to S corporations for therapy practices.

How is filing as an S corporation different if you’re a therapist?

If Form 1120-S looks intimidating, there’s some good news: it’s unlikely all of it applies to your business. And if you’re the only owner of your company—that is, if you have a single-member S corporation—it’s even simpler.

The following sections of Form 1120-S, plus additional forms, are not typically relevant to therapy practices:

  • Schedule B of Form 1120-S, which has to do with stock in other corporations that your own corporation owns. (You may have to fill out a few lines if you hired contractors during the year, however—see the line-by-line breakdown below.)
  • Schedule K of Form 1120-S, which has to do with capital gains, real estate credits, foreign transactions, and other matters that don’t concern most therapy practices
  • Form 1125-A, Cost of Goods Sold, which you shouldn’t need unless your therapy practice has inventory items it sells to customers

Finally, Form 1125-E, Compensation of Officers, is only necessary if your company has revenue of $500,000 during the course of the year. Form 1125-E is not covered by this guide.

Keep in mind that, while some of the sections listed above can be left mostly empty by most therapy practices, that doesn’t mean you can ignore them completely. You and your accountant should still read through each section just in case some of the lines apply to you.

Form 1120-S for therapists, line by line

Form 1120-S

The first section of Form 1120-S is where you provide basic information about your business. In the outlined area, that includes your corporation’s name and address.

Box A. This is the election date you provided on Form 2553.

Box B. Enter your business activity code. For most therapists, it’s 621330 (“Offices of mental health practitioners (except physicians.)”)

Box C. You can skip this.

Box D. Enter your employer identification number (EIN). Learn more about getting an EIN.

Box E. Provide the date when you first incorporated. 

Box F. Enter your total assets at the end of the year. Typically, this is the amount entered on Schedule L of Form 1120S (“Balance Sheet”).

Box G. If it’s your first year electing S corporation status, check “Yes.” You’ll need to include a filled-in copy of Form 2553 when you file.

Box H. If you’re making changes to your S corporation—changing its name, shutting down the business, changing your address, making an amendment to a prior return, or ending your S corporation status—you can indicate so here.

Box I. Since you have a single-member S corporation—meaning, you’re the only one who owns any stock—you can indicate so here.

Box J. This section is not relevant to most therapy practices, and you can skip it unless your accountant tells you otherwise.

Form 1120-S

The rest of the first part of Form 1120-S is where you provide information on your income and expenses for the year, as well as tax payments you’ve made during the course of the year.

If you use Heard, this is where you’ll enter your business’s Profit & Loss.

Be sure to consult with an accountant or tax advisor before claiming any deductions you’re unsure of. 

Lines 1a, 1b, and 1c. On Line 1a you enter everything you’ve earned during the year. You only need to worry about Lines 1b and 1c if you paid out refunds to clients during the year—in which case, you subtract the refunds from the amount in 1a.

Line 2. This line is not relevant to most therapy practices. It’s where you report the cost of goods sold (COGS), the money you spent manufacturing products or stocking your inventory.

Line 3. For the majority of practices, the value on Line 3 will be the same as 1a., since you aren’t subtracting anything on Line 2.

Line 4. If you sold Section 179 property during the course of the year and earned income, you’ll enter the information here. This can get complicated, since it may involve dispensations (See Form 4797), and is best handled with help from an accountant.

Line 5. This is where you enter miscellaneous income coming from certain miscellaneous sources, most of which are not relevant to therapy practices. (You can find a complete list in the IRS instructions for Form 1120-S.)

Line 6. You list your total income here. For the majority of therapy practices, this will be the same value entered on Line 1a and Line 3.

Line 7. Here, you enter the total amount you paid officers of the company. Since you are the only officer, this is the total amount you paid yourself.

Line 8. If you have payroll staff, this is where you enter the total amount you paid them, minus any employment credits for which you are eligible.

Line 9. The total cost of any repairs or maintenance done on your office during the course of the year.

Line 10. The total of any Accounts Receivable you were unable to collect over the course of the year should be listed here. 

Line 11. The total cost of renting your office should be listed here. (If you are taking the home office deduction, leave this line blank.)

Line 12. Taxes you paid at the state or municipal level over the course of the year, as well as the cost of any licenses (such as business licenses) you had to purchase in order to operate, are deducted here.

Line 13. If you paid interest on money you borrowed to make a purchase relevant to your business, you report it here. Some interest can’t be deducted, such as interest on purchases or rental or investment properties. For more details, see the instructions for Form 1120-S.

Line 14. If you’re claiming depreciation on an expense that doesn’t qualify as COGS, list it here. You’ll need to include more information about the expense and how it’s being depreciated by attaching Form 4562.

Line 15. This line is only relevant to businesses in resource extraction industries.

Line 16. The total cost of advertising your business may include business cards or flyers, online ads, and other marketing efforts.

Line 17. One this line, you can deduct the cost of any pension plans you provide employees.

Line 18. The cost of employee benefits plans—including health insurance, health spending accounts, etc.—can be deducted here.

Line 19. Here, you list the total value of all deductions that don’t fall into the categories covered in this section. Examples include the cost of utilities, business travel, office supplies, and insurance premiums. (See our complete guide to tax deductions for therapy practices.) Include details on each deduction on a separate form submitted along with Form 1120-S.

Line 20. Add up all the deductions you are reporting in this section to get your total deductions for the year.

Line 21. Subtract your total deductions from your income (as reported on Line 6) to determine your taxable income.

Line 22. This line deals with companies that were formerly C corporations, and is not relevant to most therapy practices.

Lines 24 – 27. These lines deal with tax extensions, underpayment of taxes, and underpayment of taxes, and how they affect the current year’s filing and the amount you owe the IRS. Generally, S corporations aren’t expected to owe federal taxes (even if there is a place to report them on this form.)

Schedule B for therapists (Form 1120-S)

Schedule B

Schedule B begins on page 2 of Form 1120-S, continuing to the beginning of page 3.

For most therapy practices, the majority of Schedule B is not relevant. Lines 3 – 10 have to do with corporations that either own other corporations (entirely; or partially, in the form of shares) or are themselves owned by other corporations (ie. if one of your S corporation members is a business or trust).

Here are the lines every therapy practice needs to fill out:

Line 1. Indicate whether you use accrual accounting or the cash basis method. If you’re not sure, check with your bookkeeper. Our article on cash vs. accrual for therapists may help as well.

Line 2. Here, you list what your business does, based on IRS categories. For most therapists, the business activity is either “Offices of Mental Health Practitioners (except Physicians)” or “Offices of Physicians, Mental Health Specialists.” For services, you may specify what type of therapy you provide (eg. private counseling, group counseling). 

Line 11. If your practice meets the two criteria listed here (earning less than $250,000 in revenue during the course of the year and holding less than $250,000 in assets), check “Yes.” If it doesn’t (and you check “No”) you’ll need to file Schedule L and Schedule M-1 (covered below.)

Schedule B

Line 12. If you had any debt canceled or forgiven during the course of the year, or if the terms of any debt you owed changed so that you owed less, mark it here.

Lines 14a and 14b. This is commonly the only “yes” checked off on Schedule B. If you paid a contractor during the course of the year, these lines are relevant. This is where you confirm that your payment qualifies for Form 1099-NEC, and where you confirm to the IRS that you’ll be submitting them Copy A of each Form 1099-NEC you’re filing. If this is new territory for you, check out our guide to hiring independent contractors for your therapy practice.

Schedule K for therapists (Form 1120-S)

Schedule K
Schedule K

Single member S corporations can skip most of Schedule K. 

The only exceptions are the lines listed below. These will be the same amounts you list on Schedule K-1 for your single-member S corporation.

Line 1. Enter your practice’s ordinary income business as it is listed on page 1, line 21.

Line 16c. Pay attention to this line if you are planning to deduct the cost of business meals. For most tax years, you are only able to deduct 50% of the cost of business meals. The 50% you are unable to deduct, you list here. (For the 2021 and 2022 tax years, businesses can take advantage of the enhanced business meal deduction, and deduct 100%.)

Schedule L for therapists (Form 1120-S)

Schedule L

If your business

  1. Earned less than $250,000 in revenue during the course of the year, AND
  2. Holds less than $250,000 in assets,

you can skip Schedule L.

Otherwise, you fill out Schedule L with information from your annual balance sheet. The information you provide won’t affect your deductions or any other part of your tax bill. It’s entered for informational purposes only.

Schedule M-1 and Schedule M-2 for therapists (Form 1120-S)

Schedule M-1

Filling out Schedule M-1 of Form 1120S, you reconcile the difference between your income (and losses) as reported in your books and your income (and losses) as reported on your tax return.

A few ways S corporation income on the books often differs from what’s reported on a tax return:

  • Federal tax expense. You report the cost of federal taxes as an expense on the books. You do not report it on your tax return itself.
  • Tax exempt income. Some types of income are non-taxable—PPP loans for COVID business relief is one common example. While that income shows up on the books, it won’t show up on the part of your tax return where you calculate your total taxable income; Schedule M-1 is where you reconcile this difference.
  • Travel and entertainment expenses. While 100% of the cost of business travel may be entered as an expense on the books, you may not be able to deduct 100% of it on your tax return.
  • Depreciation deductions. The way you depreciate assets on the books may differ from the way you depreciate them on your tax return.

Once you understand Schedule M-1’s purpose, completing each line item is fairly straightforward. But, if you run up against a wall, get help from your accountant or the team at Heard.

Schedule M-2

Filling out Schedule M-2 of Form 1120S allows you to calculate how much of your practice’s retained earnings you may pay yourself in the form of dividends. This process can be a bit tricky; if it’s your first time tackling it, get help from a qualified accountant.

If your S corporation therapy practice has more than one shareholder, it’s time to get help from an accountant. Learn more about how to hire an accountant for your therapy practice.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post.

Bryce Warnes is a West Coast writer specializing in small business finances.

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