Filing your Business Income (US) Tax Return After Fiscal Year

Writing these mini-parts of “7 Basic Things You Need To Know During Start-up Year” has been exciting for me. I hope you find the last 5 parts helpful for your new business adventure, or even for those businesses that are already in existence and still finding ways of improvement.

Again, here’s the complete list of “7 Basic Things You Need To Know During Start-up Year”:

7 Basic Things You Need To Know During Start-up Year:

(1) Types of Business Organizations
(2) Choosing Business Products or/and Services
(3) How to keep business records
Hiring Employees or/and Contractors
(5) Year-end requirements
(6) Dealing with the tax authority (IRS)
(7) Preparing for the next fiscal period
In the last issue I wrote about year-end requirements. At this time of the year, income and expenses for the tax year being reported should have been included and presented in the financial statements. Now it’s time for the company to get ready all information for Internal Revenue Services, or other governing tax agencies (for other countries).

Each country has its own policies and procedures on their filing requirements. Most of these requirements are somewhat similar and applicable to all taxpayers worldwide. Preparing your business income tax filing requirements is mainly based on the type of business organizations you have. I wrote about types of business organizations during the first issue, and again here they are: (1) sole proprietorship, (2) partnership and (3) corporation. These 3 types are taxed according to their business formation.
Seattle Sounders and Manchester United Fans (click link)
Sole Proprietorship
An owner of a sole proprietorship will be reporting his or her business activities through inclusion to their Form 1040 – Individuals tax return. A sole proprietor will use a calendar year end (December 31st) of reporting of income and expenses, using the accrual method or cash method. Accrual method of accounting is described as recording of income when earned and expenses when incurred during the 12-months business operation activities, whereas, cash method income is reported upon received of amount and record expenses when they are paid.

The company’s Income Statement accounts will be reconciled for reporting of income for tax purposes. Not all income and expenses stated in the company’s Income Statement are included as income and allowable deductions, thus reconciliation is required. A completed Schedule C for Business or loss is attached to Form 1040. Other non-business income or loss such as capital gains or loss, other taxable income or deductible losses should be included too. Check if you need other forms like, Schedule D (Capital Gains or Loss); Form 4797 (Other gains or losses); and Schedule E (Partnerships, S corporation, estates, trusts, rents, royalties, etc) for your Form 1040.

As a sole proprietor tax filer, you can deduct 50% of Self-employment Tax paid for the taxation year. Also, 100% of the Premiums for Medical Insurance paid for the tax filer, spouse, and dependents are deductible in calculating your Adjusted Gross Income (AGI).

Filing deadline for self-employed is April 15th of each year. If extension of filing of Form 1040 is required, a four-month filing extension is automatically granted upon filing of Form 4668 by the due date. Any estimated tax payable must be paid during April 15th to avoid penalties.
During Half-time, Manchester United vs. Sounders FC 2011 Game (click link)

Partnership taxable income is reported as a “flow through” self-employment income to each partner of the business. Partnership does not pay income tax on itself. However, a Partnership Information Return, Form 1065 is required, which include each partner’s share of partnership income or loss, and other related taxable/deductible items on each partner’s individual’s return (Form 1040). A Schedule K and a Schedule K-1 for each partner are included with the Form 1065 upon partnership return filing.

Like sole proprietorship, partnership’s Income Statement accounts will be reconciled for reporting of net income for tax purposes. A completed Schedule E will be attached to each partner’s Form 1040, with related information of partners’ share of income. Each partner’s share of net business income will be added onto individual taxpayer’s Form 1040 Income.

Filing deadline for reporting of partnership taxable income is the same as required for sole proprietorship, April 15th of each year. In addition, all balance amount owing must be paid on April 15th, or else penalty charges will be charged for late payment, even if Form 4668 (4 months automatic extension) is filed at due date.
During Half-time, Manchester United vs. Sounders FC 2011 Game (click link)
As previously mention, in the US, there are two types of corporation, the C corporation and the S corporation (elected as small corporation). C corporation’s taxable income is reported by the corporation itself (Form 1120), and reported by shareholders onto their Individual (Form 1040) Income tax return upon dividends received from corporation during the year. Thus, corporation taxable income is being taxed into two levels: C corporation and shareholders, and double taxation happened.
Whereas, S corporation pays no income taxes (except on built-in gain in excess or net passive income). S corporation‘s income and allowable deductions are pass-through to a tax-exempt shareholder as unrelated business income (UBI), treated like income from a partnership entity. Also, S corporation’s income/expenses and related items are adjusted to shareholders debts and equity. Thus, S corporation has the intention not to generate earnings and profits. Any distribution by S corporation to its shareholder is accounted by the S corporation and its shareholder according to sources of income. For example, S corporation net income during calendar year was distributed to shareholder during the year. This distributed income is includable income to shareholder’s Form 1040. Also, any dividends received from a C corporation and distributed to shareholder during the year is includable as dividend income to shareholder’s Form 1040. Lastly, if the distributed funds came from shareholder’s stock’s basis (equity), the funds are considered non-taxable since it’s a return of capital to S corporation’s shareholder.
Basically, besides having a limited liability obligation to shareholders, considered as a separate entity, having unlimited life of existence and easy transferability of ownership, both C corporation and S corporation have other advantages, like the payment of taxes. Depending on shareholders’ status, location, where they file their Form 1040, both corporation and shareholders can enjoy: (1) Tax Reduction (2) Tax Deferral and (3) Income Splitting privileges.

Tax reduction is enjoyed by shareholders who have higher individual tax rate. Having a corporation, shareholders can enjoy deductions only allowable for a corporation. However, allowable deductions for individuals and corporation don’t have much difference, except items related to AGI (for individuals), charitable deduction, dividends received deduction (DRD), certain types of losses, organization expenses, and other related items. Also, Alternative Minimum Tax (AMT) for small business corporations controlled by US shareholders is available for small corporation, depending on threshold gross receipts of the corporation and other related requirement.
Tax deferral is a strategy applied by corporation in minimizing tax payments, and related to the double taxation of the C corporation’s income. The earnings are left in the C corporation instead of paying shareholders right away. It depends on retained earnings that C corporation is planning in keeping, and shareholder’s individual income tax rate, tax payment is deferred on earnings in the C corporation for lower corporate tax payment. Thus, timing of the declaration of dividends to shareholders by the C corporation is implemented.

Income Splitting is commonly used for corporations owned by family members as shareholders. Earnings are spread out and paid as dividends to family members who have lower individual income tax rates, available deductions and credits for individual taxpayers.
What a game that was! (click link)
C corporation must file Form 1120 tax return. Income Statements will be reconciled for tax purposes, and some items will be added back and deducted upon reconciliation process. Schedule M-1 of Form 1120 reconciles permanent difference (non-taxable/non-deductible) and temporary differences (items reflected on different periods).  In addition, Schedule M-2 of form 1120 reconciles the Retained Earnings.
Both C corporation (Form 1120) and S corporation (Form 1120S) must be filed by the 15th of the third month upon company’s year end. An automatic 6-months extension may be available upon filing Form 7004, however, estimated taxes liability for C corporation and S corporation’s built-in gains tax in excess of net passive income tax, payable on due date (15th of third month of fiscal year end).
Depending on the complexity of your individual or/and business-related tax returns, as previously mentioned, hiring a good accountant, even once a year to go over your books, not only it will give you peace of mind, but probably even save you money for business tax payments that you shouldn’t be paying in the first place. A good accountant is trained to advise, and recommend especially on year-end preparation of financial statements. An accountant can give you advices on proper accounting of income which are taxable, or deduction which are deductible.
In addition, an accountant can help you with other business transactions like preparing your income tax returns, either your individual or/and corporate return. An accountant is trained to analyze taxable or non-taxable income, deferrable income, non-inclusion of allowable expense deduction, or deferral for lower tax payments during taxation year being reported. Thus, accountant can help you with your tax filing and even with your auditing requirement as well.
Should you decide to do your own individual or/and corporate income tax return(s), please do decide wisely. Do a little research what is best for you and your business. There are few good tax preparation tools you can use, either using paper forms or electronic filing online using tax software with the Internal Revenue Service (IRS).
Note: The continuation of this topic, “7 Basic Things You Need To Know During Start-up Year of Business?” will be continued on the next post, “Part 7 of 7: Preparing Your Business for the Next Fiscal Period".
Hope you like browsing the inserted pictures. They came from the 1000s of photos I collected. Also, make sure to "click" all the "caption/wordings" at the bottom of each picture (you'll be surprised where they are linked to!:) They are not related to the topic of this post (of course). I thought it would be nice to insert them, just to give you a break while reading this post. Until then.
Please feel free to leave comments/inquiries or you may contact me at:
Earla RiopelBSCom(USA), DipAcc(UBC)
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1 comment:

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