Business Taxation

Business TaxationTax Planning and Preparation for Small Businesses

All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized.

The federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. An employee usually has income tax withheld from his or her pay. If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. If you are not required to make estimated tax payments, you may pay any tax due when you file your return.

Estimated tax

Generally, you must pay taxes on income, including self-employment tax (discussed next), by making regular payments of estimated tax during the year.

Employment Taxes

When you have employees, you as the employer have certain employment tax responsibilities that you must pay and forms you must file. Employment taxes include the following:

  • Social security and Medicare taxes
  • Federal income tax withholding
  • Federal unemployment (FUTA) tax

What Is Form 1065: U.S. Return of Partnership Income?

Form 1065: U.S. Return of Partnership Income is a tax document issued by the Internal Revenue Service (IRS) used to declare the profits, losses, deductions, and credits of a business partnership.1 In addition to Form 1065, partnerships must also submit Schedule K-1, a document prepared for each partner.

Form 1065 gives the IRS a snapshot of the company’s financial status for the year. The partners must report and pay taxes on their shares of income from the partnership on their tax returns. Partners must pay income tax on their earnings regardless of whether the earnings were distributed.

KEY TAKEAWAYS

  • IRS Form 1065 is used to declare profits, losses, deductions, and credits of a business partnership for tax filing purposes.
  • This form is filed by LLCs, foreign partnerships with income in the U.S., and nonprofit religious organizations.
  • Partnerships must also submit a completed Schedule K-1.

What Is Form 1120-S: U.S. Income Tax Return?

Form 1120-S: U.S. Income Tax Return for an S Corporation is a tax document that is used to report the income, losses, and dividends of S corporation shareholders. Essentially, Form 1120-S is an S corporation’s tax return.

The Schedule K-1 is a form that can be attached to Form 1120-S or Form 1065. The Schedule K-1 form identifies the percentage of company shares owned by each individual shareholder for the tax year and must be prepared for every shareholder.

KEY TAKEAWAYS

  • Form 1120-S reports the income, losses, and dividends of each S corporation shareholder.2
  • The form serves as the corporation’s annual income tax return as long as the S corporation remains in effect.
  • Corporations with few shareholders use the S corporation status to avoid double taxation on a corporation and its shareholders.

Who Needs to File IRS Tax Form 1120-S: U.S. Income Tax Return for an S Corporation?

A corporation must file Form 1120-S if it elected to be an S corporation by filing Form 2553, and the Internal Revenue Service (IRS) accepted the election.5 The IRS uses the ownership percentage detailed in Form 1120-S to allocate how much profit and loss should be assigned to an individual shareholder.

If the shareholder does not see a change in this percentage during the year, profit and loss are relatively easy to calculate. However, if the individual purchases additional shares, or sells or transfers any holdings during the course of the year, then profit and loss must be pro-rated on a per-share basis.

Special Considerations When Filing Form 1120-S

Why File Form 1120-S

Corporations with fewer than 100 shareholders may choose to form an S corporation for the purposes of avoiding double federal taxation. That is, the corporation passes its income along to the shareholders for the purposes of taxation. The shareholders are taxed but not the corporation.4

In addition, if the corporation does not have significant inventory, it is able to use the cash method of accounting under S corporation terms. This can be far simpler than the accrual method.

While S corporations have significant advantages, some downsides include being subject to many of the same rules that corporations (C corporations) must follow, including high legal and tax service fees.

Form 1120 – U.S. Corporate Income Tax Return

An entity filing a Form 1120 U.S Corporation Income Tax Return is a domestic corporation (or association electing to be taxed as a corporation). Such an entity must file a tax return (Form 1120) each year whether or not they have taxable income. Such an entity is commonly referred to as a C Corporation and it is recognized as a separate taxpaying entity.

Creating a basic return for a U.S. Corporation is done in the Business Program of TaxSlayer Pro by following the steps below. To assist your preparation of an 1120 return review the Instructions for Form 1120 – U.S. Corporation Income Tax Return. This publication contains line by line instructions detailing the transactions that you may need to enter on the 1120 return.

How C and S Corporations Are Similar

Both S corporations and C corporations must also file articles of incorporation and hold regular meetings for directors and shareholders with detailed minutes. These meetings must be forums that allow shareholders to vote on major corporate decisions such as management restructuring, mergers and acquisitions, and new investments.

Finally, S corporations and C corporations have similar legal and accounting costs of set-up.

While C corporations may issue several classes of stock, S corporations can only issue one class.4 It can be argued that this hampers a company’s ability to raise capital.