Tax — Instruction 1120-S — Instructions for Form

Line 23a. Excess Net Passive Income and LIFO Recapture Tax These taxes can apply if the corporation was previously a C corporation or if the corporation engaged in a tax-free reorganization with a C corporation.

Excess net passive income tax. If the corporation has AE&P at the close of its tax year and has passive investment income for the tax year that is in excess of 25% of gross receipts, the corporation must figure its excess net passive income and pay tax on it. To make this determination, complete lines 1 through 3

and line 9 of the Excess Net Passive Income Tax Worksheet for Line 23a. If line 2 is greater than line 3 and the corporation has taxable income (see the instructions for line 9 of the worksheet), it must pay the tax. Complete a separate statement using the format of lines 1 through 11 of the worksheet to figure the tax. Enter the tax on Form 1120-S, page 1, line 23a, and attach the computation statement to Form 1120-S.

Reduce each item of passive investment income passed through to shareholders by its portion of any excess net passive income tax reported on line 23a. See section 1366(f)(3).

LIFO recapture tax. The corporation may be liable for the additional tax due to LIFO recapture under Regulations section 1.1363-2 if:

The corporation used the LIFO inventory pricing method for its last tax year as a C corporation, or
A C corporation transferred LIFO inventory to the corporation in a nonrecognition transaction in which those assets were transferred basis property.

The additional tax due to LIFO recapture is figured for the corporation’s last tax year as a C corporation or for the tax year of the transfer, whichever applies. See the Instructions for Form 1120 to figure the tax. The tax is paid in four equal installments. The C corporation must pay the first installment by the due date (not including extensions) of Form 1120 for the corporation’s last tax year as a C corporation or for the tax year of the transfer, whichever applies. The S corporation must pay each of the remaining installments by the due date (not including extensions) of Form 1120-S for the 3 succeeding tax years. Include this year’s installment in the total amount to be entered on line 23a. To the left of the total on line 23a, enter the installment amount and “LIFO tax.”

Line 23b. Tax From Schedule D (Form 1120-S) Enter the built-in gains tax from line 23 of Part III of Schedule D. See the instructions for Part III of Schedule D to determine if the corporation is liable for the tax.

Line 23c Include the following in the total for line 23c.

Form 4255. The corporation is liable for any required investment credit recapture attributable to credits allowed for tax

Excess Net Passive Income Tax Worksheet for Line 23a Keep for Your Records

1. Enter gross receipts for the tax year (see section 1362(d)(3)(B) for gross receipts from the sale of capital assets)* . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Enter passive investment income as defined in section 1362(d)(3)(C)* . . . . . . . . . . . . . . . . . . . . .

3. Multiply line 1 by 25% (0.25). (If line 2 is less than line 3, stop here. You aren’t liable for this tax.) . . . . .

4. Excess passive investment income—Subtract line 3 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Enter deductions directly connected with the production of the income listed on line 2 (see section 1375(b)(2))* . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6. Net passive income—Subtract line 5 from line 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7. Divide amount on line 4 by amount on line 2 . . . . . . %

8. Excess net passive income—Multiply line 6 by line 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9. Enter taxable income (see instructions for taxable income below) . . . . . . . . . . . . . . . . . . . . . . . . . .

10. Enter smaller of line 8 or line 9 . . . . . . . . . . . . . . . .

11. Excess net passive income tax—Multiply line 10 by 21% (0.21). Enter here and on Form 1120-S, line 23a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income and deductions on lines 1, 2, and 5 are from total operations for the tax year. This includes applicable income and expenses from Form 1120-S, page 1, as well as those imported separately on Schedule K. See section 1375(b)(4) for an exception regarding lines 2 and 5.

Line 9 of Worksheet—Taxable Income

Taxable income, for this purpose, is defined in Regulations section 1.1374-1A(d)(1). Figure this income by completing Form 1120, U.S. Corporation Income Tax Return, lines 1 through 28. Include the Form 1120 computation with the worksheet computation you attach to Form 1120-S. You don’t have to attach the schedules, etc., called for on Form 1120. However, you may want to complete certain Form 1120 schedules, such as Schedule D (Form 1120), if you have capital gains or losses.

Instructions for Form 1120-S (2025) 21

years for which the corporation wasn’t an S corporation. See Form 4255, Certain Credit Recapture, Excessive Payments, and Penalties, and its instructions, for more information.

In addition, certain other amounts from Form 4255 should be reported directly on line 23c. See the Instructions for Form 4255 for more information.

To the left of the total on line 23c, enter the amount owed from Form 4255 and “From Form 4255.” Attach Form 4255 to Form 1120-S. If a payment relates to the Prevailing Wage and Apprenticeship (PWA) penalty calculated on Form 7220 and reported on Form 4255, Part I, columns (o)(1) - (o)(3), and (p) (1) - (p)(3), the payment should be made with the 1120-S return for the tax year that the corporation claimed the credit to which the PWA penalty payment relates.

Interest due under the look-back method—Completed long-term contracts. If the corporation owes this interest, attach Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts. To the left of the total on line 23c, enter the amount owed and “From Form 8697.”

Interest due under the look-back method—Property depre- ciated under the income forecast method. If the corporation owes this interest, attach Form 8866, Interest Computation Under the Look-Back Method for Property Depreciated Under the Income Forecast Method. To the left of the total on line 23c, enter the amount owed and “From Form 8866.”

Line 24d. Elective Payment Election Amount From Form 3800 Enter the total gross EPE amount from Form 3800, Part III, line 6, column (h). See the Instructions for Form 3800 for more information.

Line 24z If the corporation is the beneficiary of a trust and the trust makes a section 643(g) election to credit its estimated tax payments to its beneficiaries, include the corporation’s share of the payment in the total for line 24z. Enter “T” and the amount of the payment on the dotted line to the left of the entry space.

Line 25. Estimated Tax Penalty If Form 2220 is attached, check the box on line 25 and enter the amount of any penalty on this line.

Line 26. Amount Owed Generally, the corporation must pay any tax due in full no later than the due date for filing its tax return (excluding extensions). Payment of the tax due must be made electronically. See Electronic Deposit Requirement , earlier, for the payment options for the corporation. Also, go to IRS.gov/Payments for more detailed information.

If the corporation can’t pay the full amount of tax owed, it can apply for an installment agreement online. The corporation can apply for an installment agreement online if:

It can’t pay the full amount shown on line 26,
The total amount owed is $25,000 or less, and
The corporation can pay the liability in full in 24 months.

To apply using the Online Payment Agreement Application, go to IRS.gov/OPA .

Under an installment agreement, the corporation can pay what it owes in monthly installments. There are certain conditions that must be met to enter into and maintain an installment agreement, such as paying the liability within 24 months and making all required deposits and timely filing tax returns during the length of the agreement.

If the installment agreement is accepted, the corporation will be charged a fee and it will be subject to penalties and interest on the amount of tax not paid by the due date of the return.

Line 27. Overpayment If there is an overpayment on line 27, enter the amount the corporation wants refunded on line 28b. See Line 28b. Refunded, later. The corporation can also choose to have all or part of the overpayment credited to next year’s estimated tax by completing line 28a. See the instructions for line 28a, next.

Line 28a. Credited To Estimated Tax The corporation can elect to apply all or part of the corporation’s overpayment to next year’s estimated taxes.

Enter the amount of any overpayment from line 27 that should be applied to next year’s estimated tax.

This election to apply some or all of the overpayment amount to the corporation’s 2026 estimated tax cannot be changed at a later date.

Line 28b. Refunded Enter the amount to be refunded to the corporation on line 28b. If the corporation has access to U.S. banking services, it should use direct deposit for any refunds, whenever possible.

The benefits of a direct deposit include a faster refund, the added security of a paperless payment, and the savings of tax dollars associated with the reduced processing costs.

Direct deposit of refund. If the corporation wants its refund directly deposited into its checking or savings account at any U.S. bank or other financial institution, complete lines 28c through 28e. See the instructions for lines 28c, 28d, and 28e, later.

The corporation is not eligible to request a direct deposit if:

The receiving financial institution is a foreign bank or a foreign branch of a U.S. bank, or
The corporation has applied for an EIN but is filing its tax return before receiving one.

Line 28c. Routing Number The routing number must be nine digits. The first two digits must be between 01 and 12 or 21 through 32.

Line 28d. Type of Account Check the appropriate box for the type of account. Don’t check more than one box. The corporation must check the correct box to ensure the deposit is accepted.

Line 28e. Account Number The account number can be up to 17 characters (both numbers and letters). Include hyphens but omit spaces and special symbols. Enter the number from left to right and leave any unused boxes blank. Don’t include check number.

If the direct deposit to the corporation’s account is different from the amount it expected, the corporation will receive an explanation in the mail about 2 weeks after the refund is deposited.

Ask the corporation’s financial institution for the correct routing number to enter on line 28c if:

The routing number on a deposit slip is different from the routing number on the corporation’s checks,
The deposit is to a savings account that does not allow the corporation to write checks, or
The corporation’s checks state they are payable through a financial institution different from the one at which the corporation has its checking account.

22 Instructions for Form 1120-S (2025)

Conditions resulting in a refund by check. If the IRS is unable to process the request for a direct deposit, a refund by check will be generated instead. Reasons for not processing a request include:

The name of the corporation on the tax return does not match the name on the account,
The financial institution rejects the direct deposit because of an incorrect routing or account number, and
The corporation fails to indicate the type of account the deposit is to be made to (that is, checking or saving).

Caution: The IRS isn’t responsible for a lost refund if the corporation enters the wrong account information. Check with the corporation’s financial institution to get the correct routing and account numbers and to make sure the direct deposit will be accepted.