A Delaware C corporation files a federal income tax return every year it exists, even in years with no revenue and large losses. For most startups the return produces no tax. It still matters: it records the losses that will shelter future profits, carries credits like the research credit, and is one of the first documents a buyer or later-stage investor asks for.
Deadlines
| Item | Calendar-year corporation |
|---|---|
| Form 1120 due | April 15 (the 15th day of the 4th month after year end) |
| Extension | Form 7004, filed by the original due date, extends the filing deadline six months to October 15 |
| Tax payment | Due by the original due date; the extension does not extend time to pay |
If a due date falls on a weekend or legal holiday, it moves to the next business day.
The parts that matter for startups
| Schedule or form | What it does | Common issue |
|---|---|---|
| Page 1 income and deductions | Taxable income or loss | Revenue on the return does not match GAAP revenue; it needs a reconciliation |
| Schedule L | Balance sheet per books | Must tie to the year-end balance sheet |
| Schedule M-1 (or M-3 for larger companies) | Reconciles book income to taxable income | Deferred revenue, stock compensation and Section 174 differences left out |
| Schedule M-2 | Analysis of retained earnings | Rarely tied out |
| Form 6765 | Research credit, including the payroll tax election for qualified small businesses | Election missed on the original, timely filed return |
| Form 5472 | Required for 25% foreign-owned corporations with reportable transactions | Missed for companies with foreign founders or parents |
| Form 1125-A | Cost of goods sold | Usually not applicable to pure SaaS |
Net operating losses
For losses arising in tax years beginning after 2017, net operating losses carry forward indefinitely and can offset up to 80% of taxable income in a future year. A company that loses $2,000,000 in each of its first three years carries $6,000,000 into its first profitable year.
Section 382 limits how much of those losses can be used each year after an ownership change, generally a shift of more than 50 percentage points in ownership by 5% shareholders over a three-year testing period. Several priced rounds can trigger it. A Section 382 study before a large financing or sale shows whether the losses will be usable.
A worked reconciliation
| Amount | |
|---|---|
| GAAP net loss | −$3,200,000 |
| Add: stock compensation expense (deducted later, at exercise or vesting) | +$450,000 |
| Add: increase in deferred revenue taxed on receipt (if not deferred for tax) | +$300,000 |
| Add: foreign research costs amortized under Section 174 | +$180,000 |
| Taxable loss | −$2,270,000 |
Each line has support in the year-end workpapers.
State returns
Most states with a corporate income tax require their own return, often with a minimum tax even at a loss. California's minimum franchise tax applies to corporations doing business there. Delaware's franchise tax and annual report are separate from any income tax.
We prepare Form 1120, the state returns and the supporting workpapers from books we close ourselves, so the return ties to the financial statements line by line.
Sources
- IRS, About Form 1120, U.S. Corporation Income Tax Return
- IRS, Instructions for Form 1120
- IRS, About Form 7004
- IRS, Publication 542, Corporations
- IRS, Instructions for Form 6765
Questions founders ask
Does a startup with no revenue still have to file Form 1120?
Yes. A domestic corporation generally must file Form 1120 every year it exists, whether or not it has income or owes tax.
Should a loss-making startup bother tracking NOLs carefully?
Yes. Net operating losses are an asset that offsets future taxable income, and their use can be limited after ownership changes. Clean NOL records are part of diligence.
