Introducing Business Tax Forms
For every business entity, there's a separate income tax form. Even those entities that don't have to pay any income taxes on their own still have tax returns to fill out; these are referred to as informational returns. Plus, no matter what type of business structure you've chosen for your company, some form of income from that company will show up on your personal tax return.
Most of the forms look pretty complicated, and the tax law behind them can be even more so. This is not a task for amateurs; get a professional involved. However, you still need to know the basics of how your company gets taxed so you can understand what the accountant is talking about, and to make sure the way he handles things makes sense. Don't be afraid to ask questions when something seems off to you; even the most qualified tax preparer can make a mistake or overlook an uncommon deduction.
Sole Proprietorships Use Schedule C
In the eyes of the IRS, a sole proprietorship is the same tax entity as its sole proprietor. There's no separate tax return to be filed for these companies. Instead, you simply add an extra form, called Schedule C, into your personal tax return. Very small businesses can use a simplified version of the form called Schedule C-EZ. Both versions of Schedule C look like statements of profit and loss, with the EZ containing only summary information and the regular Schedule C including expense breakdown details.
Single-member LLCs are treated like sole proprietorships for tax purposes, unless they opt to be taxed like C corporations. If you are the only owner of an LLC, you'll report your company's income on Schedule C, just like a regular sole proprietorship.
In addition, as you will learn later in this chapter, sole proprietorships use Form SE to calculate self-employment taxes.
Partnerships Use Form 1065
Even though partnerships don't pay any income taxes as an entity, they still must file an annual tax return on IRS Form 1065. On this form, you report all the profits and losses of the company and spell out the share that goes to each individual partner. Each partner's share of profit and loss goes on a separate form called a Schedule K-1, and those schedules are sent to the partners at tax time so they can prepare their own tax returns.
In addition to the year's financial data, Form 1065 asks for a lot of information about the partnership, including things such as:
Its tax ID number
Name and address of the business
The type of business
The names and contact information for all partners
The name and contact information for the Tax Matters Partner (TMP)
The TMP is chosen by the partners to represent the company to the IRS. This is really only so the IRS has a single person to deal with all the time, rather than just whoever is around. The TMP doesn't have to be a tax specialist, but it helps if he knows his way around Form 1065 and has a basic understanding of the company finances. Should the IRS ever call for something the TMP can't handle, he can bring the partnership's tax accountant into the conversation.
S Corporations Use Form 1120S
Although S corporations themselves don't have to pay any federal income taxes, they still have to file an informational tax return annually. The company's profits and losses for the year are reported on IRS Form 1120S. The form looks like a specialized statement of profit and loss, basically because you have to report all the details of the company's revenues, costs, and expenses to get down to the taxable bottom line. Some S corporations also have to include balance sheet information on a separate schedule in the return.
Since the S corporation is a pass-through entity, Schedule K-1 forms have to be prepared to let each shareholder know how much of the income (or loss) he has to report on his own tax return. These forms are included in the corporation's 1120S as well as sent out to each shareholder.
C Corporations Use Form 1120
C corporations are the only business entities that always have to pay income taxes on their own income. That income is reported annually on Form 1120. The first page of the form is essentially a statement of profit and loss, though it may not look very much like the one you're copying the numbers from. Unlike the other business tax forms, Form 1120 includes lines for the total corporate income tax, estimated tax payments made throughout the year, and any balance of tax due.
Corporations come with their own graduated tax rate schedule, similar in nature but different from the rates for individuals. Sometimes the corporate rates are higher, and sometimes the personal rates are higher; it really depends on that year's tax tables. It can also differ for different income levels. For example, in 2005 corporations paid a 15 percent rate on income from $29,701 to $50,000, while single individuals paid 25 percent on that same income level. The rates switched places when income hit between $100,001 and $150,150; corporations paid 39 percent versus 28 percent for single individuals.
Some types of corporations, called personal service or professional corporations, are taxed at a single rate of 35 percent on all of their profits. Certain professionals (architects and consultants, for instance) have to use professional corporations if they want to incorporate, and they are stuck with that flat tax.
Since C corporations have to pay taxes on their profits, they also have to make quarterly estimated tax payments throughout the year. If you underpay the tax, meaning your estimates fall short of the eventual actual tax bill, your corporation could be subject to tax penalties. You can avoid this issue by making sure your payments each equal at least 25 percent of last year's final tax bill.