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INCOME TAX PREPARATION FOR INDIVIDUALS AND BUSINESSES:
A Sole Proprietorship is a business entity that is operated by a single individual who owns all of the assets of the business. Since the finances of a sole proprietorship are not separate from the owner’s personal finances, the IRS treats a sole proprietorship as a single pass through entity. The income of a sole proprietorship is reported on the owner’s personal tax return using Form 1040 and Schedule C. The owner is held personally liable for any debts or losses of the business and must pay self employment taxes on the proprietorship income.
An S Corporation is a business entity that functions as a corporation but is not taxed as an individual entity. S Corporations are able to avoid double taxation because they are not required to pay corporate federal income taxes on their profits. Instead, much like a sole proprietorship or a partnership, each shareholder reports the profits or losses of the business on their personal income tax return.
An S Corporation must pay the standard employment taxes that are required of other business entities. These include withholding and reporting state and federal income tax, workers’ compensation tax, Social Security and Medicare tax and unemployment tax. The S Corporation is also responsible for paying sales taxes and excise taxes on its products and services wherever applicable.
Although an S corporation does not pay income tax as an entity, it is required to file a corporate tax return using IRS Form 1120S as well as state tax return. The state tax requirements for S Corporations vary from state to state.
A Corporation is a business entity that has legal privileges and liabilities independent of its owners. Unlike limited liability companies, sole proprietorships and partnerships, the profits of a corporation are taxed directly through the filing of a corporate tax return. The profits of the other business entities, on the other hand, are allowed to pass through to the owners who then claim them on their personal returns. The specifics of corporation tax: a corporation must file a corporate tax return with IRS Form1120. A corporation pays taxes at the corporate tax rate which varies depending on the income of the business. The taxable profits of a business generally include retained earnings together with dividends that are distributed to the shareholders. To reduce profits, a corporation is allowed to deduct business expenses which include start-up costs, operating expenses, salaries and bonuses and costs related to medical and retirement plans for its employees, among other things. C corporations required to file and pay applicable state income tax, vary form state to state.
A Partnership is a specific business entity created by two or more individuals. Each partner invests or contributes some asset such as money, property or a skill and, in return, agrees to share in the profits or losses of the business. A partnership does not pay income taxes as a business entity. Rather, each individual partner is considered to be self-employed and must pay self-employment taxes on any income gained from the partnership. The specifics of partnership tax: Each partner is taxed on their share of the profits or losses of the business and must file a personal tax return to report these amounts. The partnership must file an information return on Form 1065 to report any gains, losses, income credits or deductions from the operation of the partnership. The partnership must file a K-1 for each partner. Outside of these differences, partnership taxes are much like those of any other business entity. If the partnership has employees, employment taxes must be paid. These include federal and state withholding taxes, workers’ compensation taxes, Social Security and Medicare taxes and unemployment taxes. In addition, a partnership is responsible for paying sales and excise taxes just like any other business entity.
Limited Liability Companies
A Limited Liability Company (LLC) is a business entity that provides the company owners with limited liability protection. The tax requirements of an LLC are based on the number of members. While a single member LLC is taxed like a sole proprietorship, the tax requirements of a multiple member LLC are similar to those of a partnership. The owner of a single member LLC must report the income of the business on their personal tax return. Each member of a multiple member LLC is required to report their portion of the business income on a personal return while the business entity itself must comply with certain other tax requirements.
The specifics of limited liability company tax: Members of an LLC are considered to be self-employed and must therefore pay self-employment taxes which are calculated using schedule SE.
The income of a single member LLC is reported on the owner’s personal tax return using Form 1040 and Schedule C.
Each member of a multiple member LLC must report their share of the profits or losses of the business on their personal tax return.
A multiple member LLC must file a K-1 for each LLC member and must submit an information return for the business on Form 1065.
If an LLC has employees, the entity must pay employment taxes, including federal and state withholding taxes, unemployment taxes, Medicare and Social Security taxes and workers’ compensation taxes. Like all other business entities, a limited liability company must also pay sales and excise taxes wherever applicable.
A Non-Profit Organization is a business entity that operates primarily for the purpose benefitting the general public through charitable, educational, religious or scientific endeavors. The specifics of non-profit organization tax: a non-profit organization will only be granted federal tax exempt status if it meets specific requirements identified by the IRS. An incorporated non-profit organization will generally be granted tax exempt status if it is organized and operated exclusively for charitable purposes and turns over the entire amount of its proceeds to the charitable purpose for which it was organized.
If a non-profit organization engages in any activities that are outside of the charitable purposes for which it was organized, it may be required to pay income taxes on any proceeds resulting from those activities.
Although a non-profit organization may be exempt from paying federal income taxes, the exemption from paying state income taxes varies according to the state. When a non-profit organization is granted tax-exempt status, it may also be exempt from paying state and local sales taxes, property taxes and taxes on other assets. If the organization has paid volunteers, it is required to pay employment taxes for those workers just like any for-profit company. These taxes include federal and state income taxes, Social Security and Medicare taxes, workers’ compensation taxes and unemployment taxes.
Effective tax planning for a business involves accurately determining and projecting business income together with making maximum use of the available provisions of the tax to reduce the total amount of taxes owed. Since taxes are one of the major expenses of any business, effective tax planning is generally a necessary prerequisite for long term success.
Important Tax Planning Strategies:
Taking advantage of available tax credits and tax deductions
The effective use of available tax credits and tax deductions can significantly reduce the taxable income of a business.
Correctly classifying a business to obtain the lowest possible tax rate
Because each type of business entity is subject to different tax liabilities and tax rates, entity selection is an important element of effective tax planning.
Planning ahead to meet income, payroll and excise tax filing deadlines
All tax payments must be filed appropriately and according to filing deadlines set by the collecting tax agencies.
Delaying or accelerating certain business activities
A business may want to delay or accelerate certain business activities such as collection of payments, real estate acquisitions and equipment purchases in order take maximum advantage of the provisions of the tax code.
Negotiating a payment plan when necessary
When sufficient funds are not available to cover impending tax payments, it is often beneficial for a business to negotiate a payment plan with the collecting tax agency before the payment is due.
Failing to make use of available tax planning strategies will often result in tax payments that are more than a business would otherwise need to pay. In addition, penalties and fines are frequently imposed by collecting tax agencies when a lack of tax planning causes a business to miss a filing deadline or have insufficient funds to pay the full amount of a tax bill. Because of the complexity of the tax code, effective tax planning for a business may involve enlisting the services of a qualified tax professional.
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