Business Taxes
- Sonia Lee
- Aug 26
- 5 min read
Date: August 26, 2024
By: Sonia Lee Ng, CPA
Depending on how your business entity is structured to operate determines how it is taxed. The five general business taxes are: Income tax, Estimated Taxes, Self-Employment Taxes and Excise Tax.
Business Structures: Sole proprietorships, partnerships, corporations, S corporations, and Limited Liability Company (LLC)
I. Sole Proprietors
A person who owns an unincorporated business. Single Member LLCs are treated as an entity disregarded from its owners for income tax purposes and its operations are reflected on its owner's personal income tax returns.
If the single member LLC is owned by a corporation or partnership, the LLC's business should be reflected on its owner's federal tax return as a subdivision of the corporation or partnership.
Sole proprietors may need to file:
Form 1040 U.S. Individual Income Tax Return or 1040-SR U.S. Tax Return for Seniors
Schedule C (1040 or 1040-SR) Profit or Loss from Business
Schedule SE (Form 1040 or 1040-SR) Self-Employment Tax
1040-ES Estimated Tax for Individuals
Payroll Taxes (if applicable)
Excise Tax (if applicable)
II. Partnerships
A partnership is the relationship between two or more persons to engage in trade or business. Each partner contributes money, property, labor or skills, and shares in the profits and losses of the business.
An LLC may be classified for federal income tax purposes as a partnership.
Spouses carrying out business together and sharing profits and losses, may be partners whether or not they have a formal partnership agreement.
Unincorporated businesses owned jointly by married couples may elect not to be treated as a partnership for federal tax purposes and instead they elect to be treated as a Qualified Joint Venture. To make the election, both need to file a joint Form 1040 or Form 1040-SR, and separate Schedules C or F, Schedules SE, if required with division of income, gain loss, deductions, credits, etc. according to each spouse's respective interest in the joint venture.
Joint ownership of an LLC by spouses in community property states:
If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:
a. disregarded entity for federal tax purposes, the IRS will accept the position that the entity is disregarded for federal tax purposes.
b. Partnership for federal purposes, the IRS will accept the position that the entity is a partnership for federal tax purposes.
A qualified joint venture, whose only members are spouses filing a joint return, may elect not to be treated as a partnership for federal tax purposes.
A partnership may need to file:
Form 1065 U.S. Return of Partnership Income to report the income, deductions, gains, losses, etc., from its operations, although it does not have to pay income taxes. An annual information return. The partnership "passes through" the profits and losses to its partners. Therefore, each partner reports their share of the partnership's income or loss on their personal tax returns.
Payroll and Employment taxes: Form 941, Form 943, Form 940, Form 945, Forms W-2 and Form W-3, Etc.
Excise taxes: Form 965-A, Form 8990
Partners in a Partnership may need to file:
Form 1040 U.S. Individual Income Tax Return or 1040-SR, U.S. Tax Return for Seniors.
Form 965-A
Schedule E
Schedule SE (Form 1040) for Self-Employment Tax
Form 1040-ES Estimated Tax for Individuals
III. Corporations
A corporation is a legal entity created by individuals or shareholders to operate for profit.
Types of corporations
C Corporation This is the most common form of corporations. Owners receive profits and pay taxes on their personal level. The corporation itself also pay taxes at the entity level. Double Taxation.Corporations need to file:
a. Form 1120 U.S. Corporation Income Tax Return
b. Payroll and Employment Taxes (as applicable): Form 941, Form 943, Form 940, Form 945, Forms W-2 and Form W-3, Etc.
c. Excise Taxes (as applicable)
S Corporation A regular corporation may elect to pass corporate income and losses, deductions and credits through their shareholders for federal tax purposes. To be come an S corporation, a corporation must submit Form 2553 Election by a Small Business Corporation Requirements: a. be a domestic corporationb. have allowable shareholders:
1) individuals, certain trusts and estates.
2) may not be partnerships, corporations or non-resident alien shareholders.c. have up to 100 owners (shareholders) d. have only one class of stock. Not be an ineligible corporation (some financial institutions, insurance companies, and domestic international sales corporations)
S Corp may need to file:
Form 1120-S U.S. Income Tax Return for an S Corporation
Form 1120-S (Schedule K-1) Shareholder's Share of Income, Deductions, Credits, etc.
Payroll and Employment taxes: Form 941, Form 943, Form 940, Form 945, Forms W-2 and Form W-3, Etc.
S Corporation shareholders may need to file:
a. 1040 or 1040-SR Income Tax Return
b. Estimated Tax 1040-ES
Non-Profit Corporation
To be tax exempt, non-profit organizations must apply for recognition of exemption from the Internal Revenue Service to obtain a ruling or determination letter recognizing tax exemption.
Exemption under IRC section 501(c)(3) is generally considered the most favorable status, because donations to such organizations are tax deductible. Although certain types of organizations are not required to apply for recognition of exemption, many do so to clarify their tax status.
Once the entity has obtained the tax exemption from the IRS, the entity does not pay income taxes. There are various exempt organization types: Charitable Organizations, Churches and Religious Organizations, Private Foundations, Political Organizations and Other Nonprofits.
Tax-exempt organizations must file:
a. Annual informational return (Form 990) or
b. Form 990-EZ
Most small tax-exempt organizations whose annual gross receipts are normally $50,000 or less can satisfy their annual reporting requirement by electronically submitting Form 990-N if they choose not to file Form 990 or Form 990-EZ.
Churches and some organizations affiliated to church and other types of organizations are excepted from filing.
IV. State Considerations
Depending on the state where your entity operates, it may need to comply with state requirements such as:
A. Sales and Use Taxes
B. Income Tax Withholding
C. Individual and Business Income Tax: sole proprietor, corporation, s corporation, etc.)
D. Miscellaneous Taxes
E. Personal Property Return
F. Other Taxes: Franchise Tax, Tobacco Tax, Motor Fuels Tax, Motor Carrier Tax, etc.
Business owners should research with the corresponding state to be familiar with the compliance requirements.
Disclaimer:
The content on this post is provided for informational purposes only and does not constitute legal, tax, or financial advice. While we strive to provide accurate and up-to-date information, tax laws and regulations are subject to change, and individual circumstances vary. You should consult a qualified tax professional or accountant for advice specific to your situation.
Comments