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 Frequently
Asked Questions |
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Business Tax Return |
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Estimated quarterly income taxes for a corporation were not paid. What is the penalty amount? Is there any way to reduce the penalty? |
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If the corporation does not pay a required installment of estimated tax by its
due date, it may be subject to a penalty. The penalty is figured separately for
each installment due date. The corporation may owe a penalty for an earlier due
date, even if it paid enough tax later to make up the underpayment. This is true
even if the corporation is due a refund when its return is filed.
Use Form 2220 (PDF), http://www.irs.gov/pub/irs-pdf/f2220.pdf Underpayment of
Estimated Tax by Corporations, to determine if a corporation is subject to the
penalty for underpayment of estimated tax and, if so, the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on
the following three factors:
- The amount of the underpayment.
- The period during which the underpayment was due and unpaid.
- An interest rate that is published quarterly by the IRS in the Internal
Revenue Bulletin.
The penalty may be waived by IRS on a case-by-case basis if the failure to make
estimated payments was caused by a casualty, disaster, or other unusual circumstance.
For more information, , Corporations, and the Form 2220 Instructions. http://www.irs.gov/pub/irs-pdf/i2220.pdf
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Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
As a Domestic LLC (limited liability company), what forms do I use to file a return?
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- If your business has only one owner it will automatically be treated as
if it were a sole proprietorship (referred to as an entity to be disregarded
as separate from its owner) unless an election is made to be treated as a
corporation. A sole proprietorship files Form 1040 , U.S. Individual Income
Tax Return and will include Form 1040, Schedule C , Profit or Loss from Business,
or Form 1040, Schedule C-EZ and Form 1040, Schedule SE , if net income was
at least $400.00. If an election is made to be treated as a corporation, Form
1120 , U.S. Corporation Income Tax Return, is filed. If an election is made
to be treated Form 1120S , U.S. Income Tax Return for an S Corporation, is
filed
- If your business has two or more owners, it will automatically be considered
to be a partnership unless an election is made to be treated as a corporation.
A partnership files Form 1065 , U.S. Partnership Return of Income. If an election
is made to be treated as a corporation, Form 1120 , U.S. Corporation Income
Tax Return, is filed. If an election is made to be treated Form 1120S , is
filed.
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For IRS purposes, how do I classify a limited liability company? Is it a sole proprietorship, partnership or a corporation? |
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A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), a partnership or a corporation. If the LLC has only one owner, it will automatically be treated as if it were a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or disregarded entity (taxed as if it were a sole proprietorship) will apply. The election referred to is made using the Form 8832 , Entity Classification Election. If a taxpayer does not file Form 8832 , a default classification will apply.
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Must a partnership or corporation file a tax form even though it had no income for the year? |
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A domestic partnership must file an income tax form unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.
A domestic corporation must file an income tax form whether it has taxable income or not.
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How do I set up a company as a subchapter S corporation? |
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Once you have established your corporation or another entity classified as a corporation for federal tax purposes, according to your state's requirements, you elect S corporation status for federal tax purposes by filing Form 2553 (PDF) http://www.irs.gov/pub/irs-pdf/f2553.pdf , Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status. Form 2553 Instructions, http://www.irs.gov/pub/irs-pdf/i2553.pdf Election by a Small Business Corporation, provides the information on these requirements.
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I have a C corporation. What is the procedure to change it to an S corporation? |
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Once you have established your corporation according to your state's requirement,
to convert from a C corporation to an S corporation, you must meet the same requirements
as a newly formed corporation electing S corporation status. You must meet the
requirements of a "small business corporation" which are, in general:
Be a domestic corporation organized under the law of any state or U.S. territory;
Have only individuals, estates or certain trust as shareholders (no partnerships
or corporations as shareholders);
Have only citizens or residents of the United States as shareholders;
Have only one class of stock (differences in voting rights are OK)
The S corporation can have no more than 100 shareholders (a husband and wife generally
will be treated as 1 shareholder and all members of a family may elect to be treated
as 1 shareholder) and must make the election to be an S corporation on Form 2553
, Election by a Small Business Corporation, before the 16th day of the third month
following the close of the C corporation's tax year if the election is to be effective
for the current tax year. The C corporation must qualify as an eligible corporation
during those 2 1/2 months and all shareholders during those 2 1/2 months must
consent, even if they do not own stock at the time of the election. If the election
is filed after the 15th day of the third month of the tax year, the election will
be in effect for the next tax year and all shareholders at the time of the election
must consent. For late elections that qualify for treatment as timely filed see
Rev. Proc. 97-48, Rev. Proc. 2003-43, and Rev. Proc. 2004-48. An S-Corporation
files Form 1120S (PDF) http://www.irs.gov/pub/irs-pdf/f1120s.pdf beginning in
the tax year the election takes effect.
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What is the procedure for revoking subchapter S election for a corporation? |
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Voluntary termination of an S election is made by filing a statement with the Service Center where the original election was properly filed. A revocation may be made only with the consent of shareholders who, at the time the revocation is made, hold more than one-half of the number of issued and outstanding shares of stock (including nonvoting stock) of the corporation. There is specific information that must be included in the statement and this information is outlined in Regulations section 1.1362-6(a)(3) and in Form 1120S Instructions, http://www.irs.gov/pub/irs-pdf/i1120s.pdf U.S. Income Tax Return for an S Corporation.
The revocation may state an effective date as long as it is on or after the date the revocation is filed. If no date is specified and the revocation is filed before the 15th day of the third month of the tax year, the revocation will be effective for the current tax year. If the revocation is filed after the 15th day of the third month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 1-800-829-4933 or you may wish to consult with a tax professional to be certain you have all the necessary information to file a proper revocation.
The S corporation election terminates automatically under certain conditions. Refer to Form 1120S Instructions, U.S. Income Tax Return for an S Corporation.
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Where is a loss reported on my return and how much can I deduct? |
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The place where your loss is reported depends on how much is deductible, the type of loss, and the type of return you are filing. If your business deductions are more than your business income for the year, you may have a Net Operating Loss (NOL). You can use an NOL by deducting it from your income in another year or years. Partnerships and S Corporations generally cannot use an NOL. But partners or shareholders can use their separate shares of the partnership's of S Corporation's business deductions to their individual NOLs. For additional help, see Publication 541, http://www.irs.gov/publications/p541/index.html Partnerships, Publication 542, http://www.irs.gov/publications/p542/index.html Corporations, Publication 925, http://www.irs.gov/publications/p925/index.html Passive Activities and At-Risk Rules, and Publication 536, http://www.irs.gov/publications/p536/index.html Net Operating Losses (NOLs) for individuals, Estates, and Trusts.
If you have a Capital Loss, it is generally from the sale or loss of investment property, a business, or a capital asset used in a business. Publication 544,http://www.irs.gov/publications/p544/index.html on Sales and Other Disposition of Assets, will provide additional information on this subject.
Special Situations
S Corporations
In general, if an S corporation purchases a C Corporation at the end of the year and the C Corporation has a loss, the S Corporation does not get to claim the C Corporation loss. A C Corporation is a taxable entity in itself and gains and losses do not flow through to the shareholders.
S Corporation shareholders who hold stock at any time during the year may claim their proportionate share of corporate losses on their individual tax returns subject to certain limits. For more information about the limitations, see the instructions for Form 1120S, Schedule K-1 Instructions. http://www.irs.gov/pub/irs-pdf/i1120ssk.pdf
Partnerships
In general, a partner loss is allocated base on his/her percentage of ownership of the year. This percentage is referred to as the partner's distributive share. The partners' distributive share of items is reported to the partner on Form 1065, Schedule K-1 (PDF). http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest. A loss that is more than the partner's adjusted basis is not deductible
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How does a corporation deduct a capital loss? |
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Subchapter C Corporation
This type of corporation can deduct capital losses only up to the amount of capital
gains. If capital losses exceed capital gains, the excess is first carried back
three years prior to the loss year and used to offset capital gains. Then, any
unused loss is carried forward up to five years from the loss year to offset capital
gains in those years. If the corporation is dissolved, the loss is not carried
to any other year or return, it is simply lost.
A corporation may not carry a capital loss from or to a year in which it operates
as a Subchapter S Corporation.
Rules for Carryback and Carryforward
When carrying a capital loss from one year to another, the following rules apply:
- When figuring the current year capital loss, you cannot combine it with
a capital loss carried another year. In other words, you can carry capital
losses only to years that would otherwise have a net capital gain.
- If you carry capital losses from 2 or more years to the same year, deduct
the loss from the earliest year first.
- You cannot use a capital loss carried from another year to produce or increase
a net operating loss in the year to which you carry it back.
Corporation must include capital gain in full in gross but only to the extent
they exceed capital losses. A corporation is taxed on net capital gain at the
regular tax rate, including the additional phase-out rates for high-income corporations.
See Form 1120/1120A Instructions, U.S. Corporation Income Tax Return, and Publication
542, Corporations for additional information.
Subchapter S Corporations
An S Corporation generally passes gains and losses through to the shareholders
based on their percentage of ownership (distributive share). For more information
on how to calculate and report these losses, see Form 1120S, Schedule K-1 Instructions,
Form 4797 (PDF) http://www.irs.gov/pub/irs-pdf/f4797.pdf
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What type of entity am I? |
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you an unincorporated business by yourself, you are considered a sole proprietor.
However, if you are the sole member of a domestic limited liability company (LLC),
you are not a sole proprietor if you elect by filing Form 8832 (PDF) http://www.irs.gov/pub/irs-pdf/f8832.pdf
, Entity Classification Election, to treat the LLC as a corporation.
An husband or wife may be sole proprietor with the spouse an employee.
An unincorporated organization with two or more members is generally classified
as a partnership for federal tax purposes if it members carry on a trade, business,
financial operation or venture and divide its profits.
If a husband and wife jointly own and operate a business and share in the profits
and losses, they are partners in a partnership.
The following businesses are taxed as corporations:
- A business formed under a federal or state law that refers to it as a corporation,
body corporate, or body politic.
- A business formed under a state law that refers to it as a joint-stock company.
- Insurance Company
- Certain banks
- A business wholly owned by a state or local government.
- A business specifically required to be taxed as a corporation by the Internal
Revenue Code (for example, certain publicly traded partnerships).
- Certain foreign business
- Any other business that elects to be taxed as a corporation by filing Form
8332.
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What is the due date for business returns? |
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Some forms and entities have due dates other than the well-known April 15th due
date. The instructions for the each type of form used will have the appropriate
due date(s) noted. In general, sole proprietor's schedule of income and expenses
is attached to the 1040. Therefore, the due date is the same as the 1040.
A Corporation must generally use the calendar year, unless the entity can establish
a business purpose for having a different tax year. The due date is usually March
15th.
A partnership generally must conform its tax year of the partners unless the partnership
can establish a business purpose for having a different tax year. The tax year
is the same as one or more partners that own (in total) more than a 50-percent
interest in partnership profits and capital. If there is no majority interest
tax year, the partnership must adopt the same tax year as that of its principal
capital holder. Where neither condition is met, a partnership must use the calendar
year. A limited Liability Company reporting as a partnership has the same tax
year as a majority of its partners.
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