When Does an S Corp Need to File Form 8990?

When Does an S Corp Need to File Form 8990?
Written by
Uploaded on
Share

If you’re an S corp owner and your business pays interest on loans or receives interest items from a partnership, you may need to file Form 8990. The problem is, the rules aren’t simple, and the filing triggers depend on income size and thresholds. Business owners often learn about this only when the IRS interrogates, and by then, it’s too late.

In this blog, we’ll discuss details about an S Corp, when an S Corp needs to file Form 8990, and what every shareholder needs to know before filing.

What Is an S Corporation?

Many small businesses opt for S corporation status. If your business qualifies, you get the best of both worlds, such as limited liability and pass-through taxation. This means profits go right to the owners, and there’s no double hit from the IRS. 

Only one hundred or fewer owners can invest, and everyone must be a U.S. citizen or resident. You can’t offer more than one type of stock to shareholders, which keeps things simple but limits flexibility. Certain rules and S Corp ownership restrictions apply here. If an S corp breaks these, its status is gone, and it turns into a C corp automatically.

Explore: Key Changes Affecting Small Business Employers

Advantages and Disadvantages

Every business form has strong points and weak points. Knowing both helps owners make better choices.

S-Corp Advantages S-Corp Disadvantages
  • No corporate-level income tax. Profits pass straight to owners.
  • Losses also pass through. Owners may use them to reduce personal taxable income.
  • Owners can pay themselves a salary and also take distributions. This can reduce the overall tax burden.
  • S corp status avoids the double tax problem that C corps face.
  • Strict ownership limits: no more than 100 shareholders.
  • Shareholders must be U.S. citizens, residents, or qualified trusts.
  • Only one class of stock is allowed. This restricts investment options.
  • Extra IRS rules apply to fringe benefits for owners who hold more than 2% of shares.

Tax Implications for S Corps

S corporations are pass-through entities, meaning the corporation itself doesn’t pay federal income tax. Instead, income or loss is passed to shareholders, who report it on their personal tax returns.
To qualify, an S corporation must meet IRS requirements, such as being a domestic corporation with no more than 100 shareholders and one class of stock. This structure offers tax benefits while retaining limited liability.

When Does an S Corp Need to File Form 8990?

S corporations file Form 8990 when they want to deduct business interest expense, and only if the expense is over the limit set by the IRS. The rule falls under Section 163(j) business interest limitation.

  • You must file Form 8990 if the S corporation had business interest expenses in the year.
  • If any interest expense from previous years is still waiting to be deducted (called business interest expense carryforward), Form 8990 is required.
  • Earnings or expenses shared with the S corp from partnerships, or if you’re part of a tax shelter, trigger the need to file.

However, small businesses are an exception. For example, if your total receipts were less than $25 million ($31 million for the 2025 tax year) over the last three years, and you aren’t flagged as a tax shelter, you usually skip Form 8990. This is the small business exception Form 8990.

Key IRS Thresholds & Limitations

  • Gross Receipts Test: If an S corp’s average receipts are below the IRS limit for the past three years, it qualifies for the small business exception.
  • Interest Deduction Rule: For larger businesses, deductible interest is capped at 30% of the business interest income plus the adjusted taxable income.
  • Excess Interest: Any amount above the cap becomes a business interest expense carryforward.
  • Pass-Through Interest: If an S corp gets “excess interest” from a partnership K-1, it must also file Form 8990.

Example Filing Situations

Example 1: S Corp Alpha made $38 million over three years and paid $3 million in business interest. Alpha’s expense is over the allowable limit. Filing Form 8990 is mandatory.

Example 2: S Corp Beta made $19 million and paid $500,000 in interest. With receipts below the new IRS test, Beta usually skips Form 8990, unless a partnership allocation applies.

What Qualifies as an S Corp Shareholder?

Not everyone can own shares in an S corporation. The IRS places limits, called S corporation ownership restrictions.

  • Shareholders must be U.S. citizens, residents, or certain qualifying trusts.
  • Partnerships, corporations, and nonresident aliens cannot be owners.
  • The total number of shareholders cannot exceed 100.

These rules help keep S corporations small and controlled. Breaking them can cause the IRS to end the S corp election.

Can an LLC Elect to Be Treated as an S or C Corp?

Yes. An LLC can choose how it is taxed. By default, an LLC with more than one member is taxed as a partnership. But it may elect to be treated as an S corp by filing Form 2553, or as a C corp by filing Form 8832.

This flexibility lets business owners compare LLC vs. S Corp vs. C Corp tax differences and pick the best option. Once the election is made, the LLC follows the tax rules of the chosen form.

Can S-Corp Status Be Revoked?

Yes. S status can be lost in two ways:

  • By choice: Shareholders holding more than 50% of the stock can revoke the S election.
  • By mistake: If the company breaks the IRS rules (for example, has too many shareholders or an ineligible owner), the IRS can end its S status.

Losing S status means the company becomes a C corporation for tax purposes. This can lead to double taxation. Business owners should understand the revoked S corporation status consequences before making changes.

Are Fringe Benefits Deductible?

For S corp shareholders who own more than 2% of the company, many fringe benefits, like health insurance, are taxable to them personally. They can still deduct the cost on their personal tax return, but it is not treated the same as with regular employees.

For non-owner employees, the most common benefits remain deductible by the S corporation. Understanding the deductibility of fringe benefits in S corporations is key when planning compensation.

Act Now With Hopkins CPA Firm

IRS rules keep changing, so smart business owners must know when an S Corp needs to file Form 8990. 

Hopkins CPA Firm guides you through every filing and tax law twist, so you never miss out on deductions or face IRS penalties. We break down S corp rules, handle new IRS forms, and keep your records clean. From interest limitations to gross receipts tests and beyond, our CPAs deliver real results.

Get clear, one-on-one advice, just direct help on the hard stuff. Grow your business and keep more money. Hopkins CPA Firm makes it happen. Contact us today. We are ready to take the next step for you.

FAQ

When does an S corporation need to file Form 8990?

  • An S corporation must file Form 8990 when the business interest expenses are over the limits set by the IRS. Typically, this applies if your gross receipts exceed the annual threshold or if you have a business interest carryforward from prior years. Small businesses under the cutoff may qualify for an exemption.

Does every S corp have to file Form 8990?

  • Not every S corporation is required to file Form 8990. Most small businesses below the gross receipts test are exempt. However, companies in partnerships or tax shelters will likely need to file, even if their receipts are lower.

What is the gross receipts test for Form 8990?

  • This test lets the IRS spot small businesses that don’t need Form 8990. If your average receipts for the past three years are under $31 million, you skip the form unless special exceptions apply. Always check your totals before deciding.

Do C corporations file Form 8990, too?

  • Yes. C corporations are held to the same standards regarding business interest expense limitations. If they meet or exceed the thresholds, filing Form 8990 is a must, just like for S corporations.

Can filing Form 8990 affect shareholder distributions in an S corp?

  • Yes. When less interest is deductible, taxable income climbs, which can cut into shareholder payouts. Form 8990 helps make these adjustments clear for both the IRS and company owners
Author

Joe has 30+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases. 

At Hopkins CPA Firm, we adhere to a stringent editorial policy emphasizing factual accuracy, impartiality and relevance. Our content, curated by experienced industry professionals. A team of experienced editors reviews this content to ensure it meets the highest standards in reporting and publishing.

More Similar Posts
Author

Joe has 30+ years as a Certified Public Accountant licensed in the State of Texas and solving IRS problems. Current member with the American Institute of Certified Public Accountants (AICPA), Texas Society of CPA’s (TSCPA), National Society of Accountants (NSA), Bachelor’s degree in accounting (BBA), Master’s degree in Business Administration (MBA) at Texas A&M Corpus Christi. Experience in a variety of industries as Controller, CFO and tax resolution issues for both business and personal tax cases.