Business Tax Returns

One of the first surprises many business owners face when incorporating their business is discovering a listing of the individual due dates associated with the filing of their incorporated entities and the requisite attendant returns. Although the IRS does allow for the proper extension of returns, there is little “wiggle room” for the prompt payment of all taxes. For nearly a century the IRS and states have been a pay as you go system requiring all legally incorporated entities and their respective members/owners/shareholders to pay their appropriate taxes thereon. Depending on your entity type as detailed below you will have listed the appropriate responsibilities thereon.

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S Corporations, Partnership Returns, LLC’s, and LLP’s

Tax law treats partnerships/LLC’s/LLP’s and partnerships as disregarded entities. In layman’s terms this means that the entities income flows down through the entities owners and each individual shareholder/partner is then responsible for the payment of respective taxes. Thus, it becomes imperative to not only consider the overall taxable income of the entity to which you belong but also the taxes which will be due on the tax items flowing down to the individual owners.

As each owner’s situation varies dramatically, great care should be afforded in closely held business to ensure that taxes have been appropriately considered for all. When there is more than one partner, it may be wise to consider assisting in making shareholder/member distributions at the highest partners marginal tax rate to ensure that everyone gets at least enough to cover their respective tax obligation. Each of these entities will issue a K-1 to each individual shareholder to reflect their corresponding share of entity profits.

Although S Corporations have to issue K-1’s and make distributions based upon stock ownership percentages, partnerships, LLC’s, and LLP’s are allowed by law to issue K-1’s and member distributions based on any method that all owners agree upon. This is a distinct advantage partnerships, LLC’s and LLP’s have as agreeing members have the ability to do what they will with the profits whereas S corporations are required to issue distributions and K-1’s based upon each shareholder’s ownership percentage.

Entity Forms Required and Dates

S corporations are required to file a Form 1120-S by two and one half months after the close of a business tax year unless they have filed a timely extension. Single member LLC’s can file, as a part of their personal return, a Schedule C and attendant schedules for self-employment tax, depreciation, etc. Multiple member LLC’s, LLP’s, and Partnerships are required to file a Form 1065 to report the entity’s profits and is due by three and one half months after the close of their tax year, unless a timely extension has been filed.

Great care should be given in all of these cases to ensure that all of the attendant taxes due on a business’s earnings have already been paid in accordance with IRS and state guidelines as taxes, per IRS code, are almost all, if not all, due by the end of a tax year or evenly throughout the year. Working closely with your CPA on at least a quarterly basis is a critical component of ensuring that you pay your taxes as you go, thereby avoiding unnecessary headaches, penalties, and interest.

Shareholder/Member Distributions vs. a K-1

Shareholder and member distributions are one of the most frequently confusing issues facing business owners. All too often I have seen this pitfall result in a business owner failing to have paid enough in taxes for their year-end liability. A shareholder, partner, or member of all flow through entities described above are required to report, as part of their taxable income calculations, the respective K-1’s issued to them. Frequently however, owners inadvertently believe that they are to pay taxes solely on their distributions rather than their K-1. Many times owners have discovered much to their dismay that their corresponding tax obligation is much higher than anticipated. Working with close contact and collaboration with your CPA is one of the best ways to mitigate any undue surprises.

C Corporations

C corporations are required to file a Form 1120 which is due two and one half months after the end of a business’s tax year. C Corporations, unlike the flow through entities above, are required to make estimated tax payments. A C corporation is therefore subject to the “double taxation” referred to so often when one hears of a corporation first paying taxes at the entity level and then taxes are paid again at the personal level when salaries and dividends are paid/declared.

HIS CPA believes that the best defense is a good understanding of tax law and having a CPA who anticipates your needs and works for your best advantage. Let’s get started today on planning your wise entity choices.

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