Corporate tax filing
Starting a business is not as simple as growing and earning money. There are a lot of things that you need to take care of as soon as your company gets into the working space. One such important thing is corporate income tax and the corporate tax filing. And each business type has its own advantages and disadvantages when it comes to taxes and the filing methods.
Regardless of the type of business entity, it is always a challenge to understand all about the filings that you would need. Keeping this in mind, we have put together some details that would help you with your corporate tax filings. This is to not miss out and to be sure about what to file.
For those who are about to start their companies, you can use this to help you make the right decision regarding the type of entity you choose for your business. Keep reading to understand more about the tax filings in details.
Business Types & Their Tax Advantages
To begin with, let us talk about the three main business entities. Each has its own perks and disadvantages. The following would give a detailed explanation on all of them along with their tax advantages:
An S-corp or a small business corporation, is a special class of corporation that is recognized by the federal tax code. There are two main characteristics of an S-Corporation and they are:
- It offers limited liability to the shareholders/owners; and
- It enjoys the flow-through tax treatment that is similar to, but not identical to LLCs and partnerships.
S corporations provide a few tax advantages in the employment sphere. One advantage is that owners can pay a lesser amount of self-employment taxes. Plus, the owners can act as the W2 employees who don’t have to file quarterly estimated taxes.
An S Corporation create some challenges for those businesses that are searching for or have investors. This is because by law, an S Corporation cannot have more than 100 shareholders/owners, all of them have to be individuals, and they cannot be another business entity, LLC or corporation.
S corporations are created by initially filling the company papers and fee with the Secretary of State. Once the company is filled as an S-Corporation, you would need to file an election to be taxed as an S-Corporation with the IRS. Just to be clear, the company does not pay its own income taxes. Instead, the shareholders or owners pay from their salaries and dividends that they get from the company, which is also called the flow-through taxes.
Tax Advantages of an S-Corporation
Since we are talking about the filing of income tax, you should know about the many tax advantages that come with an S-Corporation. Each has been shared and explained below:
- Independent Entity – In terms of federal tax payments, S Corporations are considered as a normal corporation in many ways. This means that an S Corporation is its own entity, and is separate from its shareholders. Basically, if the shareholders leave, the company would not cease to exist. Another shareholder can take over and continue the business.
- Tax Savings – Only the shareholders who are employees in the company are subjected to employment tax. The rest of the income “flows through” the business and is paid to the owners. This amount is then taxed at a personal level. Every state has their own tax rates, check with your attorney about your state’s rates.
- Avoid Double Taxation – S Corporations offer the benefit of avoiding the double taxation issue. This means that unlike C Corporations, the shareholders and corporation is not taxed in an S Corporation. The corporate income taxes are only paid by the shareholders after they get their pay from the company.
- Tax Credits for Business Expenses – A few of the business expenses that the shareholders have can be deducted from the corporate income tax return. But you would need to talk to your lawyer or accountant to know more and make the right choice.
The next business entity is a C Corporation, and is one of the most common types of company. A C Corporation is a corporation that does not elect to be treated as an S Corporation for federal tax purposes. The two main traits of this business entity is:
- Offers limited liability to the shareholders or owners; and
- Unlike S-Corporation, it is not a flow through entity. It is taxed at both the corporate and shareholder level. This causes double taxation which is usually a disadvantage of using a C Corporation.
C-Corporations are usually publicly-traded companies where private companies tend not to choose being a C-Corporation. But in all this, there are some tax advantages that C-Corporations offer.
Tax Advantages of a C-Corporation
As mentioned above, there are some great tax advantages that come with a C-Corporation. Each has been shared and explained below:
- Lower Tax Rates – For the first $75,000 that a C Corporation makes, they are taxed at a lower rate than other corporation types.
- Greater Financial Control – C Corps can use fiscal years for their accounting, only if they are not a personal service corporation. A fiscal year can be split into two different calendar years. This means that some tax deductions can be delayed to the next calendar year by declaring them at the end of the fiscal year. With this, the deductions that would lower the taxes can be claimed earlier in the fiscal year to reduce the taxes owed in the current calendar year.
- Reduced Audit Potential – Profit and losses does not pass through a C corporation like in an S Corporation. So, any irregularities in reporting the pass-through income and losses for the IRS can be avoided. This means that the chance to have an audit by the IRS is lower in this respect for C Corporations.
- Fringe Benefits – Fringe benefits can be tax deductible only if the shareholder who gets them is also an employee in the company.
- Split Profits – The profits earned by a corporation can be split between the owners and the corporation. This would reduce the income claimed on the corporation tax filing, and also increase the amount reported on the taxes of the owner. You just need to be careful with this and take the help of a lawyer or your accountant.
A partnership is when two or more people come together to work as co-owners and share the profit. There are many different kinds of partnerships in the business world. One type is the general partnership where all partners have unlimited liability. In this case, it means that the partners of the company are separately and jointly responsible for the obligations of the company
The other kind is called a limited partnership, where the liability of each partner is limited to their investment. But this is only possible when they are not actively involved in the management of the company. On the other hand, in a limited liability company (LLC), every partner has limited liability. And even though limitations on liability can create some differences in the legal and tax obligations of the individual partners, all the partnership taxation is taken care by Subchapter K of the Internal Revenue Code.
Tax Advantages of a Partnership
Just like for every other business entity, partnerships have many tax advantages as well. Each has been explained below:
- Pass-Through Entity – Deductions, income, and credits flow through to the partners. This means that there aren’t any taxation at the partnership level. In short, the tax is only assessed at the individual level.
- Tax-Free Property Transfers – The distributions from and contributions to a partnership can normally be made without any income tax consequences.
- Special Allocations – Partnerships have a great structural flexibility where the partners can easily split their income, voting and ownership rights as they wish as per Section 704(a) of the IRC, unlike a corporation. But for this, there has to be a partnership agreement on which it is distributed. Moreover, Section 704(a) requires that the allocation of the profit and loss should have substantial economic effect, which means that the splitting should not only be for reducing the tax liabilities of the individual partner.
- Family Limited Partnerships – One main kind of partnership is the Family Limited Partnerships (FLP). It is one of the most popular structures and is used to reduce gift and estate tax obligations associated with transferring a business.
With all three main business types and their tax advantages covered, let us now move ahead and talk about the corporation tax filing and the corporate income taxes.
As mentioned above, C corporations are regarded as a separate entity from their owners. This means that the owners don’t include the income tax of the corporation as a part of their personal income tax return. And there are a lot of tax forms that you will need to take care of and use for the C corporation taxes. Below are the forms that are needed for filing the corporate tax return of your C corporation:
The first kind of form that any C corporation will have to complete is the income tax form 1120. Basically, as C corporations are considered separate entities from their owners, the corporate income taxes are paid for separately from the owner’s income tax. And as per the IRS , every C corporation pays for their corporate income tax return using Form 1120.
There are three main parts of the form and the person preparing the form would have to know about:
- Add in the basic details of the corporation income tax return and the C corporation.
- Put in information of various credits, deductions, income, and other details that will determine the tax liability of the corporation.
- Enter the complete balance sheet and if required, reconcile any losses.
Here are the different sections of Form 1120 that you will need to fill in for the C corporation taxes and filing explained in details:
Section 1 – Basic Information
This section will hold all the basic information of the corporation which includes, and is not limited to:
- Total assets
- Incorporation Date
Section 2 – Information About Corporation Income
Under this section when filing the C corporation taxes, you will need to add the information of the income of the corporation that includes:
- Capital gains
- Dividends and Interests earned
- Cost of goods sold
- Gross receipts
Section 3 – Deductions – Tax-Deductible Expenses
In this part of Form 1120 of corporate tax filing, you will have to access the financial information for the tax-deductible expenses that includes, but not limited to:
- Depreciation of property, including any rental properties
- Contributions to charity
- Interest paid
- Taxes paid and/or licensing fees
- Compensation paid to officers
For this part, it is important that you take the help of your accountant or lawyer. Also, you should know that you do not need to share the proof of these expenditures. However, it is advised to keep them with you in case there is an audit by the IRS.
Section 4 – Tax, Refundable Credits, and Payments
This is another section that you will need your accountant and financial officer to complete, as they will have the needed details for this section. Also, there are some important details that you will have to add in this part including the balance sheet, which is important. Other than that, you will have to add in the information of those things that have been listed in the tax return form.
The following parts are the ones filled under this section for the corporate income tax return. Just note that not all the schedules might be required for the tax return of your corporation:
- Schedule A: Cost of Goods Sold. (This should be filled only if the corporation sells good and not services.)
- Schedule C: Dividends & Special Deductions. (It should be noted that this section is different from the Schedule C sole proprietors)
- Compensation of officers
- Schedule J – Information on tax rate computation.
- Schedule K – Information about the method of accounting used by the corporation, the stock ownership, business type and shareholder information.
- Schedule L – Balance Sheet Per Books for the tax year.
- Schedule M-1 – Reconciliation of Income (Loss) Per Books with Income (Loss) Per Return.
- Schedule M-2 – Analysis Unappropriated Retained Earning Per Books.
These are the parts of Form 1120 that you will have to take care of, and it is important that you take the help of a lawyer and your accountant. Once you have filled the form, remember to submit it before the deadline.
The form has to be filed before the 15th day of the 3rd month following the close of your corporate tax year. This means that if the close of the tax year of your corporation is December 31st, you have to complete the form and submit it latest by March 15th to the IRS. If the date falls on a public holiday or weekend, the deadline will be moved to the following business day.
Also, regardless of if the C corporation has taxable income or not, it has to file the form 1120 every year.
S Corporation Taxes
The next kind of corporation is a small business corporation, also called the “S Corporation.” It is the special class of a corporation that is recognized under the federal tax code. And since this is a different kind of corporation, the forms needed for this corporate tax filing is different. Each has been explained below in detail for you to understand them better.
#1 Form 1120-S
Unlike Form 1120 that is used for C corporations, this form is called form 1120-S and is used only for reporting the net earnings of an S Corporation to the IRS. In short, every S corporation has to file form 1220-S and submit it to the IRS. Moreover, LLCs also need to submit the form in case they have elected to be taxed as an S Corporation.
To be clear, you will have to report all of the following on form 1120S:
Basically, the form 1120S will be used to report the dividends, income and losses of the shareholders in the company. In addition to this, the shareholders would also need to file the Schedule K-1 form for them to report their portion of the corporate income and losses (it will be discussed after this form).
Sections of the Form 1120-S
Moving ahead, form 1120S has eight primary sections, as shared below:
General Section: Under this section, you will have to give the information of the corporation that includes:
- Business Activity Code
- Its effective date
- Tax ID Number
- Date of Incorporation
Gross Income & Expenses: This section helps in calculating the profit or loss of the company during the tax year. This information should be filled by your lawyer and accountant as they will be the ones who have your company’s profit and loss report.
Tax & Payments: Under this section, you will need to calculate the taxes that are applicable to your corporation if the corporation did a free-tax reorganization with a C corporation, or in case it was a C corporation.
Schedule B – General Information: Under this section, you have to answer 13 questions with a “Yes” or “No” answer. The questions here are to identify entities that might have an interest in the corporation.
Schedule B – Questions 10 A and B: If the answers to these two questions are “Yes” then the corporation needs to complete the Schedule L and Schedule M-1.
Schedule K: Under this section, you need to summarize the deductions, income and credits for the corporation.
Schedule M-1: This section is to be completed only if you answered any of the questions “No” in section B. This section is important as the IRS uses it to determine the differences between the reported taxable profits and the financial statements.
Section M-2: This section is used for the reconciliation of the net income of the corporation.
These are the details that you will need to file under this form for S corporation taxes. And once you are done with it, you will have to submit it before the deadline.
The deadline for form 1120S is on the 15th day of the 4th month after the close of a tax year. So, if the close date is the 31st December, the deadline will be 15th April.
#2 Form 1099
The second form that you will need for your S corporation is Form 1099. This is used when contracting some outside help for your company. Form 1099 is an “information filing form” that is used to report any non-salary income to the IRS for tax purposes.
There are about 20 variants of this form, but the most popular one is form 1099-MISC. This is because, if you had a contractor and paid them more than $600 in a financial year, you will have to complete form 1099-MISC.
What is Form 1099-MISC?
Put simply, the 1099-MISC is one of the versions of form 1099 to let the IRS know when you have paid a contractor $600 or more (in a financial year) in the form of awards, prizes, rents, compensation, fees, or any other kind of income.
How to file a 1099-MISC form?
You need two copies of the form, say copy A and copy B. You will need to fill in the details of how much you paid the contractor in Copy A and submit it to the IRS. And you need to fill in the same information in copy B and send it to the contractor. This form is used by the contractor to then report the income in their personal income tax return.
To explain the process better:
Gather the required information: You will need the following details from the contractor before you fill the form:
- Legal Name
- Amount your paid them in the tax year
- Tax Identification Number (mostly the person’s Social Security Number if they are a US resident)
To be able to get these details, you will need the contractor to fill the form W-9. In fact, you should have a Form W-9 for each contractor. Using this form and the bookkeeping records, confirm the amount you paid them. And then use these details in the Form 1099-MISC.
Submit Copy A to the IRS: You need to send the first copy of the form to the IRS by January 31st by mail or electronically, if you are reporting the payments in box 7. On the other hand, the deadline is February 28th if you file on paper and April 1st if you file electronically.
Submit copy B to the independent contractor: The second copy should be sent to the desired contractor for whom you filled the form and shared with the IRS. It should be submitted by January 31st. The due date is extended to February 15th, in case you are reporting payments in box 8 or 14 of 1099-MISC.
Submit Form 1096: If you file the physical form 1099-MISC and submit to the IRS, you need to file the form 1096 as well. This will help you track the form. The deadline of this form is the same as the form 1099-MISC, which is January 31st.
You should also check if you need to file the form with your state. And in case you decide to file the form online, do remember to take the help of a corporate tax filing professional just like you need for the physical filing of the form.
Penalties to miss Deadlines
If you miss a deadline, don’t panic too much. But this means that you will have to pay the IRS with a penalty fee of:
- $50 if you file within 30 days
- $100 if you file more than 30 days late, but before August 1st
- $260 if you file on or after August 1st
But if you intentionally fail to file, you will have to pay a minimum of $530 per statement. The amount depends on when you file the correct form. Also, in case you are not able to file on time, it is better to file for an extension using the form 8809. Just note that this does not extend the deadline for submitting the copy to the contractors, it is just for the IRS.
#3 Schedule K-1
The last form that you need to file for your S corporation taxes is Schedule K-1. As an S corporation has the rights to pass through the income to the owners, Schedule K-1 needs to be filled. It is a form that reports the amount that is passed through to each person who owns an interest in the company.
After the company reports their annual tax return on Form 1120S, the S corporation offers Schedule K-1s that reports the share credits, deductions, losses and income of each shareholder. The shareholders then use the details on the K-1 to report the same on their personal tax return.
In short, the K-1 form reports each shareholder’s income for the company. The K-1 information here is completely based on the shareholder’s share of the relevant income/loss items from the s corporation tax return (Form 1120-S).
And these are the three forms that you will need when filing for your s corporation taxes.
The last business entity and taxes we will cover is for a partnership. Partnerships are when two or more people come together to start a business and share the profits and losses among themselves. And since it is about earning, it is important for this kind of entity to also report the corporate income taxes to the IRS.
But before we can talk about the forms, it is important to note that the partnership is a pass through entity. This means that the income is passed through to the partners who then pay the tax on it through their person income tax return. There are two main parts of reporting taxes as a partnership:
- First, the partnership reports total net income and all other relevant financial information for the partnership using Form 1065.
- Second, each individual partner then prepares their own personal Schedule K-1. This form identifies the allocated profits and losses for each partner. And then, each partner’s Schedule K-1 becomes part of their personal tax return.
Let us talk about each form below:
#1 Form 1065
The very first form that you will need in a partnership is form 1065. This form is for filling the information return to the IRS as a partnership itself doesn’t file for an income tax return. This is what the form includes:
- The first part reports the income of the partnership. This includes the calculation of cost of goods sold, only if the partnership sells products.
- The second part lists deductions for business expenses.
- Line 22 shows ordinary income for the partnership (that is the net income minus deductions).
- The last part calculates taxes due.
Also known as the “Partnership Tax Return.” the tax form 1065 is how business partnerships report their financial information to the IRS. Just to be clear again, no taxes are paid through the Form 1065. All it does it report the total income and loss that the company has. Once this form has been filed for the partnership taxes, the partners have to fill Schedule K-1. It has been explained in the next part.
#2 Schedule K-1
Schedule K-1 is used to assign the capital gains, dividends, losses, and income of the partners. This is the reason why each partner has to file the Schedule K-1 separately. And each item that is reported on it is assigned to the individual partner’s personal income tax return. To explain better, a K-1 form is used to report individual partner’s income for a partnership.
Filling the form is easy since most of the information that you will need for your Schedule K-1 will come from the Income and Expenses section of Form 1065. Other than the normal profit and losses, Schedule K-1 also captures real estate income, foreign transactions, capital gains, royalties and dividends, bond interest, and any other guaranteed payments that you might have received as part of your involvement in the partnership.
With all this clear, you can now move ahead and begin your tax filings for your corporation. Using the information shared here, you know what filings you would have to take care of. And if you have not yet registered your company and need some help with it, you can connect with IncParadise today. We will help you in registering and incorporating your company in all U.S. States.