C Corp 1120, S Corp 1120S, and Partnership 1065.
Small business is our primary focus and most of our studies are focused on how to help our small business clients optimize their tax savings, with being fully compliant with state and federal laws. Bonus depreciation, section 179 deductions, section 199A QBID, and section 1031 like-kind exchange are some of the critical areas in the tax law that can help you save on business taxes.
Part of our value services is that we are available all year round to answer our clients questions. It’s the peace of mind for having your personal tax expert when you need him!
Corporation
Also known as a C corporation. It’s a separate entity owned by shareholders. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to shareholders. C Corp report its income on Form 1120, U.S. Corporation Income Tax Return.
The profit of a corporation is taxed to the corporation income when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double taxation. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders can not deduct any loss of the corporation. C Corp now pay a flat federal tax rate of 21%.
Depends on the state, some businesses, such as insurance and investment companies, must operate as a Corporation.
S Corporation
An S Corp is a business entity that elects to pass corporate income, losses, deductions, and credits through to the shareholders. Business entities can elect to be taxed as S Corp. There is a misconception that S Corp is an entity, but that is not true! S Corp is not an entity, It is a taxation election for any of the following entities:
- Limited Liability Company (LLC), single-member or multi-member
- Limited Liability Partnership (LLP) or General Partnership (GP)
- C Corporation
Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S Corp report its income on Form 1120S, U.S. Income Tax Return for an S Corporation and Issue Schedule K-1 to its shareholders.
A K-1 generated from a Form 1120S (an underlying entity with the S Corp election) is different that the K-1 generated from partnership (Form 1065). K-1 generated from a Form 1120S is reported on the shareholder’s personal tax return on Schedule E and is not subjected to self-employment taxes (Yay!). Schedule E is the form used for rental properties, royalties and other investment income including business income from an S corporation.
There are special rules for any business in order to qualify for the S Corp election. An election must be made with the IRS and the business accounting and books must follow special due diligent. In general, if your business earn over $30,000 after expenses, an S Corp election maybe the right choice for you.
We can help you make the right election at the right time to optimize your tax savings!
Can business owners avoid self-employment tax?
Self-employment taxes are Social Security and Medicare taxes. From a sole proprietor perspective, they are self-employment taxes. From an employee perspective, they are Social Security and Medicare taxes (FICA). Both are the same. If you operate your business as a “Sole proprietor” or single member LLC, your business income will be reported on your personal tax return under Schedule C and is subject to self-employment tax (currently 15.3%).
If you own an LLC and have elected to be treated as an S corporation under IRC (Sub-chapter S) for taxation, the business now files a corporate tax return on Form 1120S. So after paying a reasonable salary to yourself (via a payroll that we will manage for you) all the remaining net income from business will be distributed to you as “Shareholder distribution” – not subject to Self employment (SE) tax.
There is a cost to become an S Corp, between setting up a payroll and filing form 1120S, however, your savings will be around 7% to 9% of taxes which are mostly under SE taxes.
Late S Corp Election
Form 2553 (the S Corp election form) must be filed with the IRS within 2.5 months of forming your business entity, other wise your election will be effective the following tax year (either calendar or fiscal). Did you miss the deadline to make the election? If yes, no worries! We can help you with the S Corp late election as far as last year.
Partnership
Partnership is an unincorporated business with ownership shared between two or more people. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return, Form 1065, U.S. Return of Partnership Income, to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners.
Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
Some of the main issues we see day to day, that is missed by the seasonal tax prepares, are the partners Adjusted Basis (AB) and Capital Accounts (CA) proper records and allocations along with reporting the separately stated items in the partner(s) K-1 form. This has a significant impact on the taxation to the partners.
Limited Liability Company (LLC)
A Limited Liability Company is a business structure allowed by state statute. Owners of an LLC are called members. Generally, LLC members may include individuals, corporations, other LLCs and foreign entities.
If you are in Insurance or Banking business, bad news! You cannot elect to be an LLC. Other business also may not qualify.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). For instance;
An LLC with only one member is treated as an entity disregarded as separate from its owner, unless it elects to be treated as a corporation (specifically S Corp).
A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation (specifically S Corp). However, some states, such as Tennessee, California, Washington, Texas, New York, and others might still impose a state tax or a state franchise tax on single-member LLCs even if they are considered disregarded by the IRS and federal government.
We can help you elect the best tax structure for your business!
Tax Planning for Business
Tax planning for your business can help reduce the taxes that your business owe. Business tax structure, business deductions, and general business credits are key areas when looking into tax planning. This means thoughtfully considering the business deductions and credits that your business can take throughout the year to help lower the amount of taxes you pay.
Business Tax Deductions – Almost anything that is ordinary and necessary for your business is tax deductible. The key points here are the good record keeping and isolating your business and personal financial accounts. For all business tax deductions, you should always be able to prove that the cost was for a business expense. Simply providing a copy of the check that paid for an expense or a credit card statement that shows the purchase is not enough!
Some examples of common business tax deductions are; business Interest, business meals (50% deductible – entertainment is no longer deductible), travel expenses, Insurance expenses, bad debts, depreciation, start up and organization cost, and business gifts (limited to $25 per recipient).
General Business Credits (GBC) – General Business Credits are mostly non-refundable. GBC is taken on form 3800 and includes:
- Credits for investments & Research
- Work opportunity
- Disabled access
- Pension plan start-up
- Childcare facility
The GBC cannot lower a taxpayer’s tax below his or her alternative minimum tax for the tax year. A credit cannot lower a taxpayer’s liability below zero.
By optimizing your Business Tax Deductions and Credits, we will make sure you Keep More of What You Earn!
Estimated Tax Payments
IRS is structured to obtain at least 90% of final income tax through withholding’s and estimated tax payments. Individuals earning income not subject to withholding are due to pay estimated tax on quarterly installments.
IRS will impose penalty if total estimated tax and income tax withheld is less than 25% of required min tax. Penalty determined per each quarter.
We can help you calculate the pay your estimated tax on time.
Estimated Tax Payments Deadlines
- Qrt 1 (Jan – March) – April 15
- Qrt 2 (April – May) – June 15
- Qrt 3 (June – August) – September 15
- Qrt 4 (September – December) – January 15 of the following year