Business Tax Information
Below are business tax information for different business forms. Whether a business is a small business or a large business, the tax treatment of the business depends on its legal structure or form. You need to be familiar with business tax information for the business structure your business is.
The most common type of small business is a sole proprietorship. A sole proprietorship is taxed on the individual basis. The owner of the sole proprietorship (most home based small businesses) reports all business income and expenses that are collectively over $400 on Schedule C of the tax form 1040. This is used to calculate the taxable income of the business owner. The sole proprietor may also owe self employment tax.
A business can be a partnership. Partnerships are not subject to income tax. Each partner is taxed separately. Each partner needs to file the IRS tax form 1065, US Return of Partnership Income. Each partner should receive K-1 schedule from the partnership detailing net profit or loss allocated to that partner according to the partnership agreement.
If a business is a corporation then it is either a C corporation or an S corporation. Corporations are governed by Subchapter C corporations or Subchapter S corporations of the IRS code. In general, C corporations are larger in size than S corporations. C corporations are also called regular corporations and they are the most complicated business legal structure for tax filing and reporting purposes.
S corporations do not pay federal income tax but C corporations do. S corporations act like partnerships because the net profit or loss of the S corporations pass through to individual shareholders and are reported on each shareholder's individual tax return.
Unlike S corporations, C corporations pay corporation taxes. A C corporation reports its income and expenses on the tax Form 1120, US Corporation Income Tax Return, or 1120-A form. When a corporation distribute income to shareholders as dividends, each shareholder is responsible for reporting dividend income to the IRS.
Limited Liability Companies (LLC)
The Limited Liability Companies (LLC) has become the most popular business structure over the years. The Limited Liability Companies (LLC) has many advantages over other business structures. The Limited Liability Companies (LLC) is taxed by the IRS as partnerships while enjoying the limited liability property. Basically, the Limited Liability Companies (LLC) is the easiest way to have limited liability and few complications that corporations have in terms of tax filing and reporting.