Before you start making decisions and preparing your taxes, you should familiarize yourself with the basics of filing corporate income taxes. Here are six steps to getting your taxes filed:
1. Decide whether to be taxed as an S corp or a C corp
When you form a corporation, your business is automatically treated as a C corporation for federal income tax purposes.
A C corporation is a traditional corporation that pays corporate income tax on its profits, with its shareholders paying tax on the salary and dividends they receive.
This taxation of dividends at both the corporate and individual levels is sometimes referred to as “double taxation.”
Some small businesses are able to avoid double taxation by choosing to be taxed as S corporations. S corporations don’t pay any federal tax. Taxation at the state level may apply.
The corporation’s profits and losses pass through to its shareholders’ personal tax returns, and the shareholders pay taxes on those profits at their personal income tax rates.
To be eligible for S corporation status, a corporation must meet certain requirements, including:
- Having 100 or fewer shareholders
- Having only one class of stock
- Not having corporations, partnerships, or nonresident aliens as shareholders
- Being a domestic corporation
2. File an S corporation election
If you want your business to be taxed as an S corporation, you must fill out Internal Revenue Service Form 2553, have all shareholders sign it, and file it with the IRS.
The deadline for filing the form is 2 months and 15 days after the beginning of the tax year. If you are a newly formed corporation, your tax year begins when your corporation is formed.
The IRS instructions for Form 2553 include a full explanation of these deadlines. The IRS must approve your S corporation election. Once you’ve elected S corporation status and it’s been approved, the election stays in effect until it is terminated or revoked.
3. Learn about tax deductions for corporations
In addition to the ordinary business expenses that all small businesses can deduct, corporations can deduct employee salaries and bonuses and the cost of employee health insurance and retirement plans.
Understanding these deductions will help you make choices that will maximize your tax savings.
4. Pay estimated taxes
C corporations must pay estimated corporate income tax, and S corporations must make estimated tax payments for certain S corporation taxes. Estimated tax payments must be made quarterly throughout the year.
Corporations that do not pay their estimated tax payments on time can be subject to interest and penalties for underpayment.
5. File your federal tax return
The type of tax return you file for your corporation will depend on whether you’re an S corporation or a C corporation.
If your business is an S corporation, you’ll file Form 1120S, a tax return that shows your corporation’s income, expenses, and losses.
You’ll also file a Form K-1 for each of your corporation’s shareholders, showing their share of the corporation’s income, deductions and credits. You must provide your shareholders with copies of their K-1 forms so they can report their share of the corporate income or loss on their personal income tax returns.
C corporations file a corporate tax return on Form 1120. Shareholders then report any dividends they received from the corporation on their personal tax returns.
6. File your state tax returns
Depending on your tax status and the state where your corporation was formed, you may also have to file a state income tax return for your corporation.
The corporate tax rate is usually a flat percentage that varies from state to state. If you are registered to do business in additional states, those states may also require state tax returns for your corporation and/or its shareholders.
Corporate taxes can be confusing, so it pays to get advice from a tax professional before choosing your corporation's tax status or preparing your taxes.
An accountant can explain the consequences of C corporation or S corporation taxation, advise you on maximizing your business tax deductions, and prepare your return.
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