Business Tax Preparation Depends On Business Entity (Type)

There is a lot to consider when filing a proper Schedule E (Supplemental Income and Loss)  within your personal Form 1040 income tax return.

Business Tax Preparation Options

When a new business client comes in, we will always ask what type of entity are you? More times than not, they don’t know the answer. There are a variety of reasons why someone might choose a partnership, a Sub-Chapter S Corp, a C Corporation or an LLC. Each of these would require a specific tax form to be filed, with the exception of an LLC which can elect any of the options, or it can default to an individual’s 1040 return.

Partnerships (Form 1065) Business Tax Preparation

Ok, let’s think about the easy one first. If you are a partnership, you would file an IRS tax form 1065 for a partnership. No Federal income tax is paid for this entity type. A K-1 will be created which allocates the partnership’s net income (or loss) to its respective partners. If there is income, then the tax will be paid on the partners’ individual income tax return. Just remember, you must have more than one partner in order to be a partnership.

Sub-Chapter S (Form 1120S, K1) Business Tax Preparation

Next, the very popular Sub-Chapter S Corporation offers many advantages and flexibility. This type of entity files an 1120S return, also with a K-1 which passes-through the income to its respective shareholders. Again, no Federal income tax is paid when filing an 1120S. The tax is paid in the shareholders individual income tax returns. On word of caution, be aware of the Reasonable Compensation rules that are consistently challenged by the IRS.

C Corporation (Form 1120) Business Tax Preparation

Third, a not-so-popular C Corporation is also an option. Due to the double taxation issues of this type of entity, these are selected less and less. Filing an 1120 return and paying 15% tax on the first $50,000 earnings and 25% on the next $25,000 of net income also adds to its unpopularity.

LLC (Limited Liability Corporation) Business Tax Preparation

Last, an LLC has grown to be a very viable option for many small and medium sized businesses. Many don’t know, however, that an LLC by itself is a disregarded entity in the eyes of the IRS, so a special election must be made to choose how you want to be taxed – a Partnership, a Sub-Chapter S Corp, A Ce Corp or even in the situation of a sole member, it can default to an individual’s 1040.

I hope this summary helps you navigate the tax preparation and entity selection. Thanks for visiting.

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