Taxation is one of the primary sources of revenue for the Government in every country. The United States’ taxation method is unique, as they have separate tax rules for individual and business taxation. When it comes to business taxation, it is a very complex topic that requires professional expertise and adequate business tax preparation skills. But first, business owners need to understand how business taxation works and what are their obligations to the IRS.
Different Business Tax Return Forms
The US tax returns for business entities are entirely different and have some sub-sections. The IRS separated business entities into different groups based on their legal status and how they conduct business and protect their assets. Let’s get into some details:
Schedule C is a business tax return that is included in the individual’s tax return. We use schedule C for small businesses, where incorporation does not make financial sense. Schedule C is subject to self-employment tax, which is an additional 7.5 percent of the tax that comes out of the pocket of an individual. Schedule C can only exist if there is one business owner, or if business owners are married to each other. Schedule C is easy to file and does not require specific business tax preparation skills.
But what happens if there are two business owners and they agreed to conduct business together? In this case, they are required to file business tax form 1065. Just like with schedule C, partners are subject to Self employment tax that they must pay out of their own pocket. Partnership taxation is pretty complicated because it involves such topics as the partner’s inside and outside basis. The most complicated forms of partnerships are real estate and foreign taxations. If you have a partnership, most likely you will need an expert in business tax preparation.
Form 1120 is usually filed by big corporations. The big difference between corporations and partnerships is that a corporation is considered its own entity. It is a corporation that is required to pay its taxes and not its owners. Business owners get paid by the corporation as dividends. After they receive their dividends, they account for them on their personal returns. Form 1120 has an issue of double taxation. First, the corporation pays tax on all earnings. After that its business owners pay tax on its earnings again when declaring their corporation dividend income on their personal tax returns. Currently, the corporation tax rate is 21% and it is very beneficial to many business owners. The good thing about the corporation is that it protects its assets. If business owners run into a problem, no one can take their assets as long as they belong to the corporation.
Form 1120-S is a mixture of Corporation and Partnership tax returns. It offers assets protection. No one can claim assets that belong to an S-Corp. But S-Corp also does not get double taxed as a Corporation. S-Corp pays wages to its business owners, and it deducts them on its own tax return. Business owners do not pay self-employment tax, because their earnings come from a company and not self-employment. In most cases, it is almost impossible to prepare Forms 1120 and 1120S without a CPA who is knowledgeable in business tax preparation.
As you can see, business taxation rules are not that easy to grasp. Business owners need someone to guide them through the different rules and guidelines. There are many CPA firms that can help you in your business tax preparation. These firms can also usually provide tax planning and bookkeeping services.