Do You Need to File an Initial Return for an S Corporation That Had No Activity?

An S corporation may not have any activity during its first year for a variety of reasons. The owners may have formed the corporation and elected S corporation status in preparation for some future event including quitting a job or finalizing development of a product. The S corporation may serve as an acquisition vehicle for another company. However, despite the lack of activity, the IRS requires a new S corporation to file its initial tax return.

The IRS requires companies to file tax returns to determine how much tax revenue, if any, the company owes and to ensure it receives all tax revenues due. As an S corporation, you must file Form 1120S to report to the IRS any income, losses or deductions your business had. Hiring companies file 1099s for service providers that alert the IRS that a particular company generated income but companies generally do not have to file 1099s for corporations.

Unless your filed tax return shows no income, the IRS has no way of knowing that your S corporation generated no taxable income. When you complete Form 1120S for your corporation's first year, you must indicate that this is your company's initial tax return. Failure to file an initial tax return could result in the IRS making assumptions about what your S corporation owes and sending you a bill for that estimated amount. When your S corporation fails to file, the IRS generally assumes you forgot to file. It does not assume you had zero income.

A corporation becomes an S corporation by filing Fom 2553 to intentionally elect S corporation status. S corporations are the most popular corporate form for small businesses. The S Corp Association estimates that there were 4.5 million S corporations in the United States in 2007, up from 2.7 million in 1997, and nearly double the number of C corporations in the United States. The popularity of S corporations typically arise from the liability shielding benefits they provide while avoiding the double taxation of C corporations.

If your corporation formed or filed for S corporation status in the second, third or fourth quarter of the year, you may consider utilizing a non-calendar year fiscal year. For example, if you formed your corporation and immediately elected S Corporation status in July 2011 but the company sat idle until April of the following year, you could file an initial tax return that includes the first 18 months. Your fiscal year would run from April 1 through March 31. However, your initial tax return would cover July 1, 2011 through March 31, 2013.