Deductions — Instruction 1120-S — Instructions for Form

Caution: Report only trade or business activity deductions on lines 7 through 20.

Don’t report the following expenses on lines 7 through 20.

Rental activity expenses. Report these expenses on Form 8825 or Schedule K, line 3b.
Deductions allocable to portfolio income. Report these deductions on Schedule K, line 12e, and in box 12 of Schedule K-1 using code I or L.
Nondeductible expenses (for example, expenses connected with the production of tax-exempt income). Report nondeductible expenses on Schedule K, line 16c, and in box 16 of Schedule K-1 using code C.
Qualified expenditures to which an election under section 59(e) may apply. The instructions for Schedule K, line 12d, and for Schedule K-1, box 12, code J, explain how to report these amounts.
Items the corporation must state separately that require separate computations by the shareholders. Examples include expenses incurred for the production of income instead of in a trade or business, charitable contributions, foreign taxes paid or accrued, intangible drilling and development costs, soil and water conservation expenditures, amortizable basis of reforestation expenditures, and exploration expenditures. The pro rata shares of these expenses are reported separately to each shareholder on Schedule K-1.

Limitations on Deductions

Section 263A uniform capitalization rules. The uniform capitalization rules of section 263A generally require corporations to capitalize or include in inventory certain costs incurred in connection with the following.

The production of real property and tangible personal property held in inventory or held for sale in the ordinary course of business.
Real property or personal property (tangible and intangible) acquired for resale.
The production of real property and tangible personal property by a corporation for use in its trade or business or in an activity engaged in for profit.

Tangible personal property produced by a corporation includes a film, sound recording, videotape, book, or similar property.

The costs required to be capitalized under section 263A aren’t deductible until the property to which the costs relate is sold, used, or otherwise disposed of by the corporation.

Exceptions. Section 263A doesn’t apply to the following.

Inventoriable items accounted for in the same manner as materials and supplies that aren’t incidental. See Form 1125-A and its instructions for more details.
A small business taxpayer (defined earlier) isn’t required to capitalize costs under section 263A. A taxpayer that wants to discontinue capitalizing costs under section 263A must change its method of accounting. See section 263A(i) and the Instructions for Form 3115.
Timber.
Most property produced under a long-term contract.
Certain property produced in a farming business. See Special rules for certain corporations engaged in farming, later.
Intangible drilling costs for oil, gas, and geothermal property.
Mining exploration and development costs. Indirect costs. Corporations subject to the uniform capitalization rules are required to capitalize not only direct costs but an allocable part of most indirect costs (including taxes) that benefit the assets produced or acquired for resale or are incurred because of the performance of production or resale activities.

For inventory, indirect costs that must be capitalized include the following.

Administration expenses.
Taxes.
Depreciation.
Insurance.
Compensation paid to officers attributable to services.
Rework labor.
Contributions to pension, stock bonus, and certain profit-sharing, annuity, or deferred compensation plans.

Regulations section 1.263A-1(e)(3) specifies other indirect costs that relate to production or resale activities that must be capitalized and those that may be currently deductible.

Interest expense paid or incurred during the production period of designated property must be capitalized and is governed by special rules. For more details, see Regulations sections 1.263A-8 through 1.263A-15.

For more details on the uniform capitalization rules, see Regulations sections 1.263A-1 through 1.263A-3.

Special rules for certain corporations engaged in farming. For S corporations not required to use an accrual method of accounting, the rules of section 263A don’t apply to expenses of raising any:

Animal, or
Plant that has a preproductive period of 2 years or less. Shareholders of S corporations not required to use an accrual method of accounting may elect to currently deduct the preproductive period expenses of certain plants that have a preproductive period of more than 2 years. Because each shareholder makes the election to deduct these expenses, the corporation shouldn’t capitalize them. Instead, the corporation should report the expenses separately on Schedule K, line 12e, and report each shareholder’s pro rata share in box 12 of Schedule K-1 using code M.

See Uniform Capitalization Rules in chapter 6 of Pub. 225, Farmer’s Tax Guide; sections 263A(d) and (e); and Regulations section 1.263A-4 for definitions and other details.

Transactions between related taxpayers. Generally, an accrual basis S corporation can deduct business expenses and interest owed to a related party (including any shareholder) only in the tax year of the corporation that includes the day on which the payment is includible in the income of the related party. See section 267 for details.

Business interest. Business interest expense may be limited. See section 163(j) and Form 8990, Limitation on Business Interest Expense Under Section 163(j). Also see Schedule B, questions 9 and 10, and the related instructions for question 9 and question 10, later.

Section 291 limitations. If the S corporation was a C corporation for any of the 3 immediately preceding years, the corporation may be required to adjust items such as deductions for depletion of iron ore and coal and the amortizable basis of pollution control facilities. If this applies, see section 291 to figure the adjustment.

Business start-up and organizational costs. A corporation can elect to deduct a limited amount of start-up and organizational costs it paid or incurred. Any remaining costs

• Geological and geophysical costs amortized under section 167(h).

Certain plants bearing fruits and nuts depreciated under section 168(k)(5).

The corporation must report the following costs separately to the shareholders for purposes of determinations under section 59(e).

Research and experimental costs under section 174 or 174A.

16 Instructions for Form 1120-S (2025)

must generally be amortized over a 180-month period. See sections 195 and 248 and the related regulations.

Time for making an election. The corporation generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. For more details, see the Instructions for Form 4562. If the corporation timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and enter “Filed pursuant to section 301.9100-2” at the top of the amended return. File the amended return at the same address the corporation filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.

The corporation can choose to forgo the elections above by clearly electing to capitalize its start-up or organizational costs on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.

Tip: The election to either amortize or capitalize start-up costs is irrevocable and applies to all start-up costs that are related to the trade or business.

Report the deductible amount of start-up and organizational costs and any amortization on line 20. For amortization that begins during the current tax year, complete and attach Form 4562, Depreciation and Amortization.

Reducing certain expenses for which credits are allowable. If the corporation claims certain credits, it may need to reduce the otherwise allowable deductions for expenses used to figure the credit. This applies to credits such as the following.

Work opportunity credit (Form 5884).
Credit for increasing research activities (Form 6765).
Orphan drug credit (Form 8820).
Disabled access credit (Form 8826).
Empowerment zone employment credit (Form 8844).
Credit for employer social security and Medicare taxes paid on certain employee tips (Form 8846).
Credits for small employer pension plan startup costs, contributions, auto-enrollment, and military spouse participation (Form 8881).
Credit for employer-provided childcare facilities and services (Form 8882).
Low sulfur diesel fuel production credit (Form 8896).
Credit for employer differential wage payments (Form 8932).
Credit for small employer health insurance premiums (Form 8941).
Employer credit for paid family and medical leave (Form 8994). If the corporation has any of the credits listed above, figure the current year credit before figuring the deduction for expenses on which the credit is based. If the corporation capitalized any costs on which it figured the credit, it may need to reduce the amount capitalized by the credit attributable to these costs.

See the instructions for the form used to figure the applicable credit for more details.

Line 7. Compensation of Officers and Line 8. Salaries and Wages

Caution: Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.

Enter on line 7 the total compensation of all officers paid or incurred in the trade or business activities of the corporation. The

corporation determines who is an officer under the laws of the state where it is incorporated.

Enter on line 8 the total salaries and wages paid or incurred to employees (other than officers) during the tax year.

Caution: If the corporation claims a credit for any wages paid or incurred, it may need to reduce the amounts on lines 7 and 8. See Reducing certain expenses for which credits are allowable, earlier.

Don’t include salaries and wages reported elsewhere on the return, such as amounts included in cost of goods sold, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

If the corporation’s total receipts (page 1, line 1a, plus lines 4 and 5; income reported on Schedule K, lines 3a, 4, 5a, and 6; income or net gain reported on Schedule K, lines 7, 8a, 9, and 10; and income or net gain reported on Form 8825, lines 2, 21, and 22a) are $500,000 or more, complete Form 1125-E, Compensation of Officers. Enter on Form 1120-S, line 7, the amount from Form 1125-E, line 4.

Include fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the corporation’s stock. Also report these fringe benefits as wages in box 1 of Form W-2. Don’t include amounts paid or incurred for fringe benefits of officers and employees owning 2% or less of the corporation’s stock. These amounts are reported on line 18. See the instructions for that line for information on the types of expenditures that are treated as fringe benefits and for the stock ownership rules.

Report amounts paid for health insurance coverage for a more-than-2% shareholder (including that shareholder’s spouse, dependents, and any children under age 27 who aren’t dependents) as an information item in box 14 of that shareholder’s Form W-2. A more-than-2% shareholder may be allowed to deduct such amounts on Schedule 1 (Form 1040), line 17.

If a shareholder or a member of the family of one or more shareholders of the corporation renders services or furnishes capital to the corporation for which reasonable compensation isn’t paid, the IRS may make adjustments in the items taken into account by such individuals to reflect the value of such services or capital. See section 1366(e).

Line 9. Repairs and Maintenance Enter the cost of repairs and maintenance not claimed elsewhere on the return, such as labor and supplies, that don’t add to the value of the property or appreciably prolong its life. The corporation can deduct these repairs only to the extent they relate to a trade or business activity. See Regulations section 1.162-4. The corporation may elect to capitalize certain repair and maintenance costs consistent with its books and records. See Regulations section 1.263(a)-3(n) for information on how to make the election.

New buildings, machinery, or permanent improvements that increase the value of the property aren’t deductible as repair and maintenance expenses. These expenses must be capitalized and depreciated or amortized. However, amounts paid for routine maintenance on property, including buildings, may be deductible. See Regulations section 1.263(a)-3(i).

Line 10. Bad Debts Enter the total debts that became worthless in whole or in part during the tax year, but only to the extent such debts relate to a trade or business activity. Report deductible nonbusiness bad debts as a short-term capital loss on Form 8949, Sales and

Instructions for Form 1120-S (2025) 17

Other Dispositions of Capital Assets. A corporation that uses the cash method of accounting can’t claim a bad debt deduction unless the amount was previously included in income.

Line 11. Rents Enter rent paid on business property used in a trade or business activity. Don’t deduct rent for a dwelling unit occupied by any shareholder for personal use.

If the corporation rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred in the trade or business activities of the corporation during the tax year. Also complete Form 4562, Part V. If the corporation leased a vehicle for a term of 30 days or more, the deduction for vehicle lease expense may have to be reduced by including in gross income an amount called the “inclusion amount.” The corporation may have an inclusion amount if:

The lease term began:

Cars (excluding trucks and vans)

And the vehicle’s

FMV on the first day of the lease

exceeded:

After 12/31/23 but before 1/1/26 . . . . . . . . . . . . $62,000

After 12/31/22 but before 1/1/24 . . . . . . . . . . . . $60,000

After 12/31/21 but before 1/1/23 . . . . . . . . . . . . $56,000

After 12/31/20 but before 1/1/22 . . . . . . . . . . . $51,000

After 12/31/17 but before 1/1/21 . . . . . . . . . . . $50,000

After 12/31/12 but before 1/1/18 . . . . . . . . . . . . $19,000

Trucks and vans

After 12/31/23 but before 1/1/26 . . . . . . . . . . . . $62,000

After 12/31/22 but before 1/1/24 . . . . . . . . . . . . $60,000

After 12/31/21 but before 1/1/23 . . . . . . . . . . . . $56,000

After 12/31/20 but before 1/1/22 . . . . . . . . . . . . $51,000

After 12/31/17 but before 1/1/21 . . . . . . . . . . . . $50,000

After 12/31/13 but before 1/1/18 . . . . . . . . . . . . $19,500

After 12/31/09 but before 1/1/14 . . . . . . . . . . . . $19,000

See Pub. 463, Travel, Gift, and Car Expenses, for instructions on figuring the inclusion amount.

Note. The inclusion amount for lease terms beginning in 2026 will be published in the Internal Revenue Bulletin in early 2026.

Line 12. Taxes and Licenses Enter taxes and licenses paid or incurred in the trade or business activities of the corporation, unless they are reflected elsewhere on the return. Federal import duties and federal excise and stamp taxes are deductible only if paid or incurred in carrying on the trade or business of the corporation.

Foreign taxes are included on line 12 only if they are deductible and not creditable taxes under sections 901 and 903. See Schedule K-2 (Form 1120-S), Part II, Section 2, line 45, column (g).

Don’t deduct the following taxes on line 12.

Federal income taxes (except for the portion of built-in gains tax allocable to ordinary income) or taxes reported elsewhere on the return.
Creditable foreign taxes under sections 901 and 903. Report these taxes on Schedule K, line 16f, and in box 16 of Schedule K-1 using code F.
Taxes allocable to a rental activity. Report taxes allocable to a rental real estate activity on Form 8825. Report taxes allocable to a rental activity other than a rental real estate activity on Schedule K, line 3b.
Taxes paid or incurred for the production or collection of income or for the management, conservation, or maintenance of property held to produce income. Report these taxes separately on Schedule K, line 12e, and in box 12 of Schedule K-1 using code ZZ.

See section 263A(a) for rules on capitalization of allocable costs (including taxes) for any property.

Taxes not imposed on the corporation.
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.

Line 13. Interest Include only interest incurred in the trade or business activities of the corporation that isn’t claimed elsewhere on the return.

Don’t include interest expense on the following.

On debt used to purchase rental property or debt used in a rental activity. Interest allocable to a rental real estate activity is reported on Form 8825 and is used in arriving at net income (loss) from rental real estate activities on Schedule K, line 2, and in box 2 of Schedule K-1. Interest allocable to a rental activity other than a rental real estate activity is included on Schedule K, line 3b, and is used in arriving at net income (loss) from a rental activity (other than a rental real estate activity). This net amount is reported on Schedule K, line 3c, and in box 3 of Schedule K-1.
On debt used to buy property held for investment. Interest that is clearly and directly allocable to interest, dividend, royalty, or annuity income not derived in the ordinary course of a trade or business is reported on Schedule K, line 12c, and in box 12 of Schedule K-1 using code H. See the instructions for Schedule K, line 12c; for box 12, code H, of Schedule K-1; and Form 4952, Investment Interest Expense Deduction, for more information on investment property.
On debt proceeds allocated to distributions made to shareholders during the tax year. Instead, report such interest on Schedule K, line 12e, and in box 12 of Schedule K-1 using code AC. To determine the amount to allocate to distributions to shareholders, see Notice 89-35, 1989-1 C.B. 675.
On debt required to be allocated to the production of designated property. Designated property includes real property, personal property that has a class life of 20 years or more, and other tangible property requiring more than 2 years (1 year in the case of property with a cost of more than $1 million) to produce or construct. Interest allocable to designated property produced by a corporation for its own use or for sale must be capitalized. In addition, a corporation must also capitalize any interest on debt allocable to an asset used to produce designated property. A shareholder may have to capitalize interest that the shareholder incurs during the tax year for the S corporation’s production expenditures. Similarly, interest incurred by an S corporation may have to be capitalized by a shareholder for the shareholder’s own production expenditures. The information required by the shareholder to properly capitalize interest for this purpose must be provided by the corporation on an attachment for box 17 of Schedule K-1 using code P. See section 263A(f) and Regulations sections 1.263A-8 through 1.263A-15.

Special rules apply to the following.

18 Instructions for Form 1120-S (2025)

Allocating interest expense among activities so that the limitations on passive activity losses, investment interest, and personal interest can be properly figured. Generally, interest expense is allocated in the same manner as debt is allocated. Debt is allocated by tracing disbursements of the debt proceeds to specific expenditures. Temporary Regulations section 1.163-8T gives rules for tracing debt proceeds to expenditures.
Prepaid interest, which can generally only be deducted over the term of the debt. See Regulations sections 1.163-7, 1.446-2, and 1.1273-2(g) for details. Also see section 461(g).
Interest that is allocable to unborrowed policy cash values of life insurance, endowment, or annuity contracts issued after June 8, 1997. See section 264(f). Attach a statement showing the computation of the deduction.
Forgone interest on below-market-rate loans (see section 7872).

Limitation on deduction. Business interest expense is generally limited to the sum of business interest income, 30% of adjusted taxable income, and floor plan financing interest. See Form 8990, Limitation on Business Interest Expense Under Section 163(j), and its instructions for more information. The limitation applies at the S corporation level, and any excess business interest expense is carried over at the corporate level.

Business interest expense includes any interest paid or accrued on indebtedness properly allocable to a trade or business. A small business taxpayer is a taxpayer that isn’t a tax shelter (as defined in section 448(d)(3)) and has average annual gross receipts of $31 million or less for the 3 prior tax years under the gross receipts test of section 448(c). Gross receipts include the aggregate gross receipts from all persons treated as a single employer, such as a controlled group of corporations, commonly controlled partnerships or proprietorships, and affiliated service groups. If the corporation fails to meet the gross receipts test, Form 8990 is generally required. Also see Schedule B, questions 9 and 10.

Line 14. Depreciation Enter the depreciation claimed on assets used in a trade or business activity less any depreciation reported elsewhere (for example, on Form 1125-A). See the Instructions for Form 4562, or Pub. 946, How To Depreciate Property, to figure the amount of depreciation to enter on this line.

Complete and attach Form 4562 only if the corporation placed property in service during the tax year or claims depreciation on any car or other listed property.

Don’t include any section 179 expense deduction on this line. This amount isn’t deducted by the corporation. Instead, it is passed through to the shareholders in box 11 of Schedule K-1. However, reduce the basis of any asset of the S corporation by the amount of section 179 expense elected by the S corporation, even if a portion of that amount can’t be passed through to its shareholders this year and must be carried forward because of limitations at the S corporation level. See Regulations section 1.179-1(f)(2).

Line 15. Depletion If the corporation claims a deduction for timber depletion, complete and attach Form T (Timber), Forest Activities Schedule.

Caution: Don’t deduct depletion for oil and gas properties. Each shareholder figures depletion on oil and gas properties. See the instructions for Schedule K-1, box 17, code R, for the information on oil and gas depletion that must be supplied to the shareholders by the corporation.

Line 17. Pension, Profit-Sharing, etc., Plans Enter the deductible contributions not claimed elsewhere on the return made by the corporation for its employees under a qualified pension, profit-sharing, annuity, or simplified employee pension (SEP) or SIMPLE IRA plan or any other deferred compensation plan.

If the corporation contributes to an individual retirement arrangement (IRA) for employees, include the contribution in salaries and wages on page 1, line 8, or Form 1125-A, line 3, and not on line 17.

Employers who maintain a pension, profit-sharing, or other funded deferred compensation plan, whether or not the plan is qualified under the Internal Revenue Code and whether or not a deduction is claimed for the current tax year, must generally file the applicable form listed below.

Form 5500, Annual Return/Report of Employee Benefit Plan.
Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. File this form instead of Form 5500 generally if there were under 100 participants at the beginning of the plan year.
Form 5500-EZ, Annual Return of A One-Participant (Owners/ Partners and Their Spouses) Retirement Plan or A Foreign Plan. File this form for a plan that only covers the owner (or the owner and the owner’s spouse) but only if the owner (or the owner and the owner’s spouse) owns the entire business.

Tip: Form 5500 and Form 5500-SF must be filed electronically under the computerized ERISA Filing Acceptance System (EFAST2). For more information, see the EFAST2 website at www.EFAST.dol.gov .

There are penalties for not filing these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

Line 18. Employee Benefit Programs Enter amounts for fringe benefits paid or incurred on behalf of employees owning 2% or less of the corporation’s stock. These fringe benefits include (a) employer contributions to certain accident and health plans, (b) the cost of up to $50,000 of group-term life insurance on an employee’s life, and (c) meals and lodging furnished for the employer’s convenience.

Don’t deduct amounts that are an incidental part of a pension, profit-sharing, etc., plan included on line 17 or amounts reported elsewhere on the return or on Form 1125-A.

Report amounts for fringe benefits paid on behalf of employees owning more than 2% of the corporate stock on line 7 or 8 (or Form 1125-E), whichever applies. An employee is considered to own more than 2% of the corporation’s stock if that person owns on any day during the tax year more than 2% of the outstanding stock of the corporation or stock possessing more than 2% of the combined voting power of all stock of the corporation. See section 318 for attribution rules.

Line 19. Energy Efficient Commercial Buildings Deduction Complete and attach Form 7205 if claiming the energy efficient commercial building deduction. See the Instructions for Form 7205 for more information. Also, see section 179D.

Line 20. Other Deductions Enter the total allowable trade or business deductions that aren’t deductible elsewhere on Form 1120-S, page 1. Attach a statement listing by type and amount each deduction included on this line.

Examples of other deductions include the following.

Instructions for Form 1120-S (2025) 19

Amortization. See Form 4562, Part VI.
Certain business start-up and organizational costs (discussed earlier).
Insurance premiums.
Legal and professional fees.
Supplies used and consumed in the business.
Travel, meal, and entertainment expenses. Special rules apply (discussed later).
Utilities.
Any negative section 481(a) adjustments resulting from changes in accounting methods. Show the computation of the negative section 481(a) adjustments on an attached statement. In the statement, for each section 481(a) adjustment, include the total section 481(a) adjustment and a brief description of the changes in methods of accounting to which the section 481(a) adjustment relates. See Revenue Procedure 2015-13.

Don’t deduct the following on line 20.

Amounts paid or incurred for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. See section 162(q).
Expenses allocable to tax-exempt income. Report these expenses on Schedule K, line 16c.
Fines or similar penalties paid or incurred to or at the direction of a government or governmental entity for violating any law. However, see exceptions (discussed later). Report these expenses on Schedule K, line 16c.

Membership dues. The corporation can generally deduct amounts paid or incurred for membership dues in civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards. However, no deduction is allowed if a principal purpose of the organization is to entertain or provide entertainment facilities for members or their guests. In addition, corporations can’t deduct membership dues in any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion.

Entertainment facilities. The corporation can’t deduct an expense paid or incurred for a facility (such as a yacht or hunting lodge) used for an activity usually considered entertainment, amusement, or recreation.

Amounts treated as compensation. The corporation may be able to deduct otherwise nondeductible entertainment, amusement, or recreation expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-NEC for an independent contractor.

However, if the recipient is an officer, director, or beneficial owner (directly or indirectly) of more than 10% of the corporation’s stock, the deductible expense is limited. See section 274(e)(2) and Regulations sections 1.274-9 and 1.274-10.

Items that must be reported separately on Schedules K and K-1.

Special Rules

Travel, meals, and entertainment. Subject to limitations and restrictions discussed below, a corporation can deduct ordinary and necessary travel and meal expenses paid or incurred in its trade or business. Generally, entertainment expenses, membership dues, and facilities used in connection with these activities can’t be deducted. Generally, no deduction is allowed for qualified transportation fringe benefits. Also, special rules apply to deductions for gifts, luxury water travel, and convention expenses. See section 274 and Pub. 463 for details.

Travel. The corporation can’t deduct travel expenses of any individual accompanying a corporate officer or employee, including a spouse or dependent of the officer or employee, unless:

That individual is an employee of the corporation, and
The travel is for a bona fide business purpose and would otherwise be deductible by that individual.

Meals. Generally, the corporation can deduct only 50% of the amount otherwise allowable for meal expenses paid or incurred in its trade or business. In addition (subject to exceptions under section 274(k)(2)):

Fines and similar penalties. Generally, no deduction is allowed for fines or similar penalties paid to or at the direction of a government or governmental entity for violating any law except:

Amounts that constitute restitution (including remediation of property),
Amounts paid to come into compliance with the law,
Amounts paid or incurred as the result of orders or agreements in which no government or governmental entity is a party, and
Amounts paid or incurred for taxes due to the extent the amount would have been allowed as a deduction if timely paid, and the taxpayer establishes that the amount paid or incurred was for restitution, remediation, or to come into compliance.

No deduction is allowed unless the amounts are specifically identified in the order or agreement and the taxpayer establishes that the amounts were paid for a purpose mentioned above. Also, any amount paid or incurred as reimbursement to the government for the costs of any investigation or litigation are not eligible for the exceptions and are nondeductible. See section 162(f). Also see Regulations section 1.162-21.

Amounts paid or incurred in connection with influencing federal, state, or local legislation; or
Meals must not be lavish or extravagant, and
An employee of the corporation must be present at the meal. See section 274(n)(3) for a special rule that applies to expenses for meals consumed by individuals subject to the hours of service limits of the Department of Transportation.

Qualified transportation fringes (QTFs). Generally, under section 274(a)(4), there is no deduction allowed with respect to QTFs provided by employers to their employees. QTFs are defined in section 132(f)(1) to include:

Lobbying expenses. Generally, lobbying expenses aren’t deductible. Report nondeductible expenses on Schedule K, line 16c. These expenses include:

Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. If certain in-house lobbying expenditures don’t exceed $2,000, they are deductible. For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9).

Certain corporations engaged in farming. Section 464(d) limits the deduction for certain expenditures of S corporations engaged in farming if they use the cash method of accounting

Amounts paid or incurred in connection with any communication with certain federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.”
Transportation in a commuter highway vehicle between the employee’s residence and place of employment,
Any transit pass, and
Qualified parking. See section 274 and Pub. 15-B, Employer’s Tax Guide to Fringe Benefits, for details.

20 Instructions for Form 1120-S (2025)

and their prepaid farm supplies are more than 50% of other deductible farming expenses.

Prepaid farm supplies include expenses for feed, seed, fertilizer, and similar farm supplies not used or consumed during the year. They also include the cost of poultry that would be allowable as a deduction in a later tax year if the corporation were to (a) capitalize the cost of poultry bought for use in its farm business and deduct it ratably over the lesser of 12 months or the useful life of the poultry, and (b) deduct the cost of poultry bought for resale in the year it sells or otherwise disposes of it.

If the limit applies, the corporation can deduct prepaid farm supplies that don’t exceed 50% of its other deductible farm expenses in the year of payment. The excess is deductible only in the year the corporation uses or consumes the supplies (other than poultry, which is deductible, as explained above). For exceptions and more details on these rules, see Pub. 225.

Reforestation expenditures. If the corporation made an election to deduct a portion of its reforestation expenditures on Schedule K, line 12e, it must amortize over an 84-month period the portion of these expenditures in excess of the amount deducted on Schedule K (see section 194). Deduct on line 20 only the amortization of these excess reforestation expenditures. See Reforestation expense deduction (code O), later.

Line 22. Ordinary Business Income (Loss) Enter this income or loss on Schedule K, line 1. Line 22 income is not used in figuring the excess net passive income or built-in gains taxes. See the instructions for line 23a for figuring taxable income for purposes of these taxes.