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Tax Information for Small Businesses
incorporate.com is pleased to provide some useful tax information for entrepreneurs and small business owners. The answers to these common tax questions have been provided by Glen Ross, CPA, CVA. Mr. Ross is a Certified Public Accountant (CPA) and Certified Valuation Analyst (CVA) and has been practicing in public accounting for over 20 years. Besides running a local CPA firm in New York, he is also the CEO of a new website that connects tax preparers to customers at a price they can afford, www.prosado.com.
Q: How do I register to pay taxes to the Federal Government?
A: You apply to obtain a Federal tax identification number (Tax ID) from the Internal Revenue Service ("IRS"). Then you must complete annual tax returns. How these forms are completed is dependent upon how your business entity is set up. You should consult with your tax accountant or financial advisors to understand the tax elections that affect your business and personal needs.
Q: What do I have to register for? I.e. Payroll, withholding, etc?
A: The IRS does not require a registration form for many types of taxes. Some states, however, do require you to register for withholding and unemployment taxes. Some states also require a separate business registration with their department of tax and finance. It's important to check with your individual state to understand what is required for your specific type of business. Most state websites explain this process fairly well.
Q: Which tax forms do I file?
A: CSC/TCC cannot give legal, tax, or financial advice. You can find helpful information at www.irs.gov, or call the IRS Assistance for Businesses at 1-800-829-4933. If you still have questions, we recommend that you consult with a financial advisor or accountant.
Below are the general types of forms you may need. Keep in mind that your specific business type may require forms other than those listed below.
- If you form a corporation, the default form you will file is Form 1120.
- If you elect to be an "S" corporation, you will file Form 1120S.
- If you form an LLC with 2 or more members, the default form your you will file is Form 1065.
- If you form an LLC with only 1 member, you do not file a separate tax return and instead file a Schedule C with your personal tax return.
- If you form a general partnership, you will file Form 1065.
Q: What's the difference between a regular ("C") corporation and an "S" corporation?
A: "C" and "S" corporations are tax elections with the IRS, not entity types. Generally, a "S" corporation is an entity that has elected to pass-through its profits/losses to the shareholders and pay any taxes due on the shareholder level, and a "C" Corporation is an entity that has elected to be taxed separately from its owners. For more information on these different tax elections, please check out the IRS website at www.irs.gov/Businesses/Corporations or call the IRS Assistance for Businesses at 1-800-829-4933.
Q: When are these tax returns due?
A: These are general guidelines, be advised that these timelines may not apply to your situation.
- Forms 1120 and 1120S are due 2 ½ months after the end of your fiscal year. For calendar year companies, this would be March 15th and a 6 month extension is available.
- Form 1065 is due 3 ½ months after the end of your fiscal year, or April For calendar year companies, this would be 15th and a 5 month extension is available.
- Form 1040 is due April 15th and a 6 month extension is available.
To understand the timelines applicable to you and your business, please check with a tax professional, search the IRS website at www.irs.gov, or call the IRS Assistance for Businesses at 1-800-829-4933.
Q: Do I pay quarterly taxes or yearly? If quarterly, how do I know how much to pay?
A: The answer depends upon the type of tax and the amount. It is advisable to check with a tax professional to see what the requirements are and/or the best method for you.
Q: What are some common start-up tax deductions?
A: Generally, business start-up and organizational costs are capital expenditures that are required to be amortized over time. However, there are exceptions. Start-up costs can include amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of incorporating your business. For specific information on what business related costs can be deducted and what special tax incentives may apply to your business, you should consult with a tax professional.
Ongoing business expenses: Generally, to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Some examples are: rent, utilities, telephone, computer, office supplies, automobile, cost of acquiring products for resale. For specific information on what business related costs can be deducted and what special tax incentives may apply to your business, you should consult with a tax professional.
Q: Are there any specific tax advantages to forming a corporation/LLC vs. staying as a sole proprietor/partnership?
A: The answer to this question depends on the type of business you operate. Generally, LLCs, partnerships and sole proprietorships are subject to Social Security taxes on 100% of the net income because they are pass-through entities. Although an S Corporation is also a pass-through entity, the net profit is not subject to Social Security taxes. However, you should consult with your tax advisor since there are many situations to consider.
Q: If an S corporation is a pass-through entity do I still need to be on payroll?
A: Yes, it is advisable. Because S corporation profits are not subject to Social Security taxes, the IRS requires owners to take a reasonable salary and be treated like any other employee.
Q: Why would an LLC be taxed as an S corporation?
A: For the social security reasons discussed above, many LLCs will make an election to be treated as a corporation (Form 8832) and then file a further election to be an S corporation. (Form 2553) Don't forget that most states require a separate S election to be filed. However, you should consult with your tax advisor since there are many situations to consider.
Q: Does my company need its own bank account?
A: It is recommended that all business receipts be deposited into a separate business bank account and all business expenses be paid from a business bank account. This will help keep your accounting clean for reporting purposes and ease of your business operation.
Q: Should I choose one entity type over another?
A: This is not an easy question to answer. It depends on many factors. It is advisable to consult with a professional in your area who is familiar with BOTH entity types AND tax ramifications.
incorporate.com (TCC) is a service company and does not provide legal or financial advice. TCC is not affiliated with Mr. Ross or Prosado.com, and does not receive any pecuniary benefit from Mr. Ross or Prosado.com. This information is provided for your convenience. Should you have any questions about the guidance provided on this web page, please contact Mr. Ross directly at firstname.lastname@example.org or 631-979-3141.