If you own a corporation or have formed an LLC, you’re required to file a corporate tax return every year. Understanding your business structure and determining the necessary documents can help you prepare your corporate tax return more easily and efficiently. This article will walk you through the most practical steps for stress-free corporate tax preparation.
Determine if your business is an S Corporation or a C Corporation
If you establish a corporation, your business will be automatically classified as a C corporation for federal income tax purposes. A C-corporation is a traditional corporation that pays corporate income tax on its profits and pays tax on its shareholders’ salaries and dividends.
This taxation on both the corporate and individual sides is sometimes known as “double taxation.”
Small businesses can avoid double taxation by requesting to be classified as S-corps because S corporations don’t have to pay any corporate tax. S corporations’ profits and losses are passed through to their shareholders’ individual tax returns, and those profits are taxed at their individual income tax rates.
To be qualified as an S-corp, a corporation must meet specific requirements, including:
- Having fewer than 100 shareholders
- Having only one type of stock
- Not having corporations, partnerships, or non-resident aliens as stockholders
- Being a domestic corporation
Prepare essential information
The necessary information for corporate tax preparation includes the company name, address, employer’s ID number, date of incorporation, and total assets. The corporate financial officer will also need to provide detailed information about the corporation’s income, including:
- Gross revenue
- Cost of goods sold
- Rental costs
- Capital gains
Claim tax-deductible expenses
Corporations are able to claim many tax-deductible expenses against income, including employee salaries, bonuses, the cost of employee health insurance, and retirement programs.
Understanding and making the best use of these deductions will help you maximize your tax savings. To claim these expenses, the corporation’s financial officers should track these details throughout the year and be able to provide complete documentation in the event of an audit. The most common tax-deductible expenses are the following:
- Employees’ compensation, allowance, bonuses, and other salaries
- Employees’ benefit packages
- Repairs and maintenance fees
- Taxes and licenses
- Contributions to charity
- Depreciation costs
- Advertising costs
- Pensions and profit-sharing plans
- Domestic production activities
Submit essential forms for corporate tax preparation
If you formed an LLC or hired yourself as an employee of your corporation and gave yourself a salary, you must list that personal income on your Form 1040. Some corporations can be considered “pass-through” entities, which means a legal business entity that passes any income it makes straight to its owners, shareholders, or investors. The company’s members or owners must then list the income, profit, and losses on their individual income tax returns.
Form 1120 is the tax form that C corporations (and LLCs filing as corporations) use to file their income taxes. This form also includes Schedule C. This form requires basic information about the corporation, including your employer identification number, the date you incorporated, total income, a list of deductions, and employees’ compensation. Form 1120 also includes other schedules that may or may not apply to your business, such as Schedule A (containing the cost of goods sold,) and Schedule K (listing your corporation’s information, e.g., your business type).
Schedule C records deductions, dividends, and any profit or losses that your business incurred. On this form, you can also record essential expenses to run your business (e.g., the mileage to and from business meetings or business meal expenses). Schedule C is not a stand-alone document and is usually supported by your Form 1040 or Form 1120.
If you have income through a partnership, such as a limited liability partnership, you may need to file Form 1065. According to the IRS, partnerships do not pay taxes on their income. On the other hand, their profit and loss are passed on to the partners’ individual tax returns.
Other tax forms
If you hire employees or independent contractors, you need to submit other necessary forms as well. For example, if you withhold Social Security and Medicare from your employees, you must send W-2s and W-3s to the Social Security Administration. You must also file Form 944 electronically for federal unemployment taxes. If you paid more than $600 for each independent contractor for their work or services, you must submit Form 1099-MISC. You may also need to issue Form 1099-MISC if you paid more than $10 in royalties or broker compensation.
File your federal tax return
The type of federal tax return you file for your corporation depends on whether you’re an S-corp or a C-corp.
S-corp owners need to file the following forms:
- Form 1120-S: This form contains your corporation’s income, expenses, and losses.
- Form K-1: This form lists your corporation’s shareholders and their share of the corporation’s income, deductions, and credits. You must also provide your shareholders with copies of their K-1 forms so they can report their share of the corporate income or loss on their individual income tax returns.
If your business is a C corporation, you’ll file a corporate tax return on Form 1120. The corporation’s dividends are then filed on the shareholder’s individual tax returns.
File your state tax returns
You’ll also have to file a state corporate income tax return based on your tax status and the state where your corporation was formed. The corporate tax rate is commonly a fixed percentage that varies by state. If your corporation and/or its owners are registered to run business in other states, they may also need to file other state tax returns.
Pay estimated corporate taxes
While C-corps must pay estimated corporate income tax, S-corps must make estimated tax payments for certain S corporation taxes. You need to submit these estimated tax payments on a quarterly basis throughout the year.
Corporations that fail to pay their estimated tax payments on time may face interest and underpayment penalties.
Corporate tax preparation can be confusing, so it would be a good idea to consult with a tax professional or a certified accountant. By that, you can understand the consequences of C-corps or S-corps taxation, identify the deadlines for paying different corporate taxes, maximize your business tax deductions, and file your tax return easily.
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