Corporate entities are owned by their shareholders and are run by a Board of Directors. Officers elected by the board manage these corporations and the day to day activities. Unlike in sole proprietorships, corporate owners are protected by limited liability, meaning their personal assets are protected from corporate debts and losses as the corporation is seen as a completely separate entity. However, there are two types of corporations and each has distinct tax liabilities.
Here we discuss S corporations and C corporations and the forms and tax returns needed to file your corporation taxes.
1. Choose S Corp. or C Corp Taxation.
Domestic corporations that have 100 shareholders or less and one class of stock are considered small business corporations or S corporations. These entities pass corporate income and losses, and credit and deductions to their shareholders, who report their gains and losses on personal income tax returns. These shareholders are taxed at personal income tax rates.
Any corporation that does not elect S status is a C corporation. C corporations are taxed on their profits when earned and shareholders are taxed when profits are distributed. C corporations can file for S corporation status at any time, however it can be a difficult endeavor to move from a C corporation to an S corporation because of different accounting requirements.
2. File an S Corporation Election.
Corporations use IRS Form 2553 to file an S Corporation Election within two months and 15 days after the tax year begin to be considered for that same year, or they can file at any time during the year for S corporation status for the following year. Form 2553 must be signed by all shareholders prior to submitting to the IRS.
3. Learn About Tax Deductions for Corporations.
To reduce corporate taxable profits, corporations can deduct much of the money that is spent on business expenses. Some of the deductions that corporations need to be aware of include:
- Start-up costs
- Operating expenses
- Employee salaries
- Employee bonuses
- Employee medical plans
- Employee retirement plans
4. Pay Estimated Taxes.
The IRS requires C corporations to pay estimated taxes if they owe $500 or more. S corporations pay estimated taxes if they expect to owe federal taxes of more than $1,000.
The IRS divides the year into four payment periods for corporate estimated taxes. Each of these periods have a specific due date, and if your business fails to pay, or fails to pay enough, by each due date, you may be hit with a penalty. Estimated tax payments can be made through the Electronic Federal Tax Payment System (EFTPS) or through the mail.
S corporations and C corporations both report estimated taxes on Form 1120-W
5. File Federal Tax Return.
C corporations file their federal taxes on Form 1120, U.S. Corporation Income Tax Return. S corporations use Form 1120S or Form 1120S Sch. K-1 to file income tax returns. Employment taxes for both S and C corporations are paid through Forms:
- 940 – Employer’s Annual Federal Unemployment Tax (FUTA) return
- 941 – Employer’s Quarterly Federal Tax Return (for Social Security and Medicare taxes and income tax withholding) or
- 943 – Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees).
Because it is important that corporations are able to keep some profits for future growth, the IRS will allow some corporations to keep a sum total of $250,000 in profits in the corporation without penalty.
6. File State Tax Return.
State tax rules vary widely across the country, however, much like federal regulations, businesses are taxed according to their structure. Corporations will file state income tax forms as well as state worker’s compensation insurance taxes and unemployment insurance taxes. Some states also require corporations to pay temporary disability insurance.
Some corporations will also have to file excise tax returns, depending on the type of business they operate. Some credits may be available to corporations, however these credits are subject to change. A professional tax planner will be able to advise you on what excise tax returns must be filed by your corporation, as well as what credits may be available to you.
Be aware that the federal government requires corporations with assets of $10 million or more and those that file at least 250 returns each year to electronically file U.S. Corporate Income Tax Return Form 1120 and 1120S for all tax years after 2007.
More information about filing corporation taxes, and the excise tax credits that may be available to you can be found on the IRS website, or your favorite tax professional can help guide you through the whole process.