Business Income Tax: Everything You Need to Know
At small businesses, all tax returns are filed at the same time. Business and personal tax returns are filed by April 15. 8 min read
Business Income Tax
Business income tax varies from business to business. Small business owners include their company’s profit/loss margins on their personal tax returns
Small Business Tax Return Due Dates
At small businesses, all tax returns are filed at the same time. Business and personal tax returns are filed by April 15. Whenever the 15th falls on a weekend or holiday, taxes are filed the following business day.
Do I Need a Tax Preparer for My Small Business Tax Return?
Hiring a tax preparer for your small business is a good idea. However, you may be able to get away with doing your taxes on your own if your assets haven’t depreciated or if there are no cost of goods sold.
Types of Small Businesses and Income Tax Forms
Sole proprietorships are considered a default business structure. In these organizations, income taxes are paid on the business via the owner.
Profit or loss margins for a business is classified as schedule C. The business owner fills out a 1040 form and schedule C is used to calculate all forms of income associated with the business’ profit margins.
Another type of entity, a partnership is an organization registered in the state of incorporation. Typically, partnerships have multiple members that act as managers and/or investors in the company. They can be involved with the day-to-day operations of the business.
The partners use Form 1065 to file the company’s tax returns. Each partner also receives a schedule K-1 where they provide information about their personal income from the company’s profit/loss statements.
Business Financial Documents Needed to Prepare Small Business Tax Returns
Before you file your income taxes, you must gather some documents. You will need, the yearly profit/loss statement, balance sheets for the beginning and end of the fiscal year, and data to help calculate the cost of goods sold.
Don't Forget Self-Employment Taxes
By law, all self-employed business owners are required to pay employment taxes. These taxes cover Medicare and Social Security benefits. The self-employment tax rate is 15.3 percent of earnings.
For a short time, there was a rate reduction, but in 2013 the reduction was raised back to the original figure of 15.3 percent.
Where and How to File Small Business Income Taxes
Technology enables small business owners to file their taxes online or the traditional way: by mail. The IRS provides the addresses applicants must send their information to. Look on Form 1040 to find the IRS mailing addresses.
Filing an Application for an Extension on Your Taxes
If extenuating circumstances have prevented you from filing your tax returns on time, you can request an extension. The IRS grants non-corporate tax payers six additional months to file. The extension allows you to submit your tax returns on Oct. 15.
Filing an Amended Tax Return
If a taxpayer has made a mistake on their taxes, they must submit an amendment return to gain access to the tax forms. The form is 1040X.
Organizational partnerships requesting an amendment form must file the 1065 form. In addition to filling out the form, the tax payer must also provide a detailed statement stating the line number and reasons for revision.
For organizational partnership taxpayers, they must request an amended Schedule K-1 form. The 1065 form provides the revised information but is does not take the place of the original form. The tax payer still has to revise the original form.
Paying Estimated Taxes
Estimated taxes are tricky. Estimated taxes are the presumed amount of taxes a person must pay if no taxes are taken out of their salary. Small business owners are self-employed so they do not receive an official “salary” per se, although they can take one out of their profit shares.
The Qualified Joint Venture: A Special Filing Case
A qualified joint venture is a tax code for a couple that owns a business together. If the couple are involved in a partnership, they will file two separate Schedule C-forms. The forms will outline their individual profit shares of the business.
C corporations are offered a unique opportunity regarding taxes. These entities pay taxes based on a system of graduated rates. Net losses can be documented in past or future years to counterbalance earnings.
However, there are some restrictions. Most small businesses do not qualify as c-corps. Businesses that operate as multiple corporations under one umbrella will not be able to benefit from the tax breaks. Moreover, corporations with one owner will receive just one tax break.
Self-Employment and Other Taxes
In sole proprietorships, partnerships, limited liability companies, and s corps, income is passed directly to the owner because taxes are not taken out. The owner must ow pay taxes as an individual on that income. These corporations also pay FICA (Social Security) and Medicare taxes which average out to 7.65 percent of gross income.
To tax extra income, states can impose personal property taxes, surtaxes, gross receipts taxes, etc.
Collect your records
Organization is key to preparing taxes. You should keep physical and electronic records of your financial dealings. Create spreadsheets that document data all throughput the fiscal year.
Find the right form
The IRS has special forms for every type of business entity. For example, retail stores at the mall are considered sole proprietorships. During tax season, these businesses file schedule C forms to report business and personal income. Schedule C forms are two pages long. Information is provided on the form that tells the preparer the expenses that can be claimed. Net profit loss is calculated by subtracting expenses from business earnings.
Limited liability Companies are also able to file Schedule C attachments if one person owns them.
Likewise, if the individual owns a corporation or operates their LLC as such, then they must file a separate business tax return using Form 1120.These forms are always filed separately from a private tax return.
Pay attention to deadlines
When it comes to taxes, deadlines are important S-Corps must file their taxes by March 15, which is considered the end of their fiscal year. C-corps file their taxes by April 15, signifying the end of their tax year. C-corp tax preparers use Form 1120. S-Corp preparers use the Form 1120S.
LLC’s and other companies that use the Schedule C form must file taxes by April 15.
Planning your taxes and selecting your business form
Tax planning is an important part of the business process. As a business owner, you must decide how to operate the company to generate the lowest tax liability. Various methods are at your disposal, but it’s up to you to educate yourself and choose the designation that offers the lowest liability.
Defining your trade or business
The definition for trade or business is simple. It’s the product or service you provide as a business owner. The IRS believes an entity must generate a profit in order to classify itself as a business.
The only way you can deduct business expenses and file taxes is if your organization turns a profit.
Choosing tax year and accounting methods
Cash and accrual are key terms for business owners. Any income that has accrued over the tax year must be recorded on the tax forms. This counts as accrual. The expenses accrued over the tax year, (cash) must also be recorded.
Determining business income and deductions
Business income or deduction is calculated using a special system. Companies will look at all of their receipts to calculate the total amount of sales for the year. Next, they must subtract the cost of goods sold from the total amount of sales to equal the gross profit.
Once the profit has been calculated, business expenses must be subtracted. The system sounds complicated, but it isn’t that difficult to follow once each component has been identified.
Income collected through business operations is defined as gross income sale. Cost of goods sold must be calculated if your business collects or stores inventory.
If you are trying to limit the amount of taxable income you have, then use legitimate deductions.
Capital assets and depreciation
Assets depreciate, and that depreciation is figured right into the operation of the business. Analysts deduct the cost of the asset over the amount of years it will be in use. Taxpayers calculate the book value of an asset from its deprecation calculations.
Once the asset has completed its duty, the un-depreciated amount is calculated as the salvage value. Accountants use two methods to determine depreciation. The straight-line method means the asset depreciates at the same rate each year it’s in use. The declining balance method assumes an asset goes through the majority of its depreciation within the first few years of usage. The IRS has created rules to limit the amount of depreciation tax payers can claim.
Claiming tax credits
Tax deductions are calculated based on the income claimed on the tax form. To minimize income tax, many preparers take advantage of tax breaks, or credits, as they are called. Tax credit are applied to the tax bill before the deductions take place.
Dealing with the IRS
The IRS has created a list of rules and regulations small business owners, and tax preparers must follow. It is important to familiarize yourself with the regulations for your entity. As discussed earlier, entities such as LLC’s have special forms that must be filled out. These forms are different from the ones used for other types of corporations. There are different deadlines that must also be recognized. Extensions and amendments require special authorization requested through a form. Asset depreciation has a limit.
You must be aware of all of this as you gather documents to complete your taxes and discuss filing with your preparer. You must be aware of the inventory at your company, cost of goods, gross sales, profits, and expenses.
Range of State Corporate Income Tax Rates
Corporate income tax rates vary by state. Some states have lower income tax rates to attract businesses, create jobs, and stimulate the economy. A graduated corporate income tax is attractive to many business owners, but less than 15 states offer this incentive. Other states keep corporate income tax at a flat rate. Still, other states use the gross sales of the companies to determine income tax.
State Apportionment of Corporate Income Formulas for Tax Year 2013
Many states are actively involved with the local business proceedings. They understand that attracting businesses provides economic opportunities for its residents. So, these companies offer incentives to companies such as tax breaks. Credits and deductions for corporations are widely popular.
States also try to help in other ways. They do this through investment. They may invest in company machinery by helping a company obtain special equipment. They can also invest in research and development to assist these companies with breakthroughs. Pharmaceutical and other medical companies benefit greatly from research and development investment. States can even invest in the workforce by offering training programs or free/reduced education to employees.
Larger corporations that operate in more than one state must pay taxes according to each state’s tax guidelines. In the 1950s, a system was created that would later be adopted by most states. This system weighs sales, payroll, and property taxes equally.
Nonetheless, many states are also increasing the amount of sales percentages that can be taxed. They realize that companies with immense sales figures also have larger production rates. They have a larger workforce, more equipment, plants, etc.
This means their profit margins are much greater than a smaller company’s. Small businesses don’t have to worry about this. At least while they are growing. Business owners should be vigilant when it comes to state tax laws, breaks, credits, etc.
As you perform research, you may discover that it is more expensive to conduct a business in one state compared to another. Once you file your articles of incorporation in one state, it may be difficult or burdensome to move it to another state. Working within different jurisdictions is inevitable if you have a business that transports goods across state lines. You will pay taxes in each state that you operate in.
If you need help with your business income tax, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.