As you learned in the previous article in our tax series, 2016 Small Business Tax Law Changes, it can be tough for business owners to stay on top of all the details they’re responsible for come tax time. In this segment, we’ll clarify which forms you’ll need to file an income tax return based on your business structure. We’ll also help you file an extension if necessary, and select a tax prep and filing program to make the whole process so much easier than tallying your taxes by hand.
How to File Business Taxes
The way your business has been structured legally determines how and when to file your business taxes. While the process is generally the same across the board, there are different forms to use and different deadlines depending on whether you operate as a sole proprietorship or have another legal structure such as a corporation, partnership or LLC. (You can read more about that in our article about the Legal Structure of a Business).
1. Gather your business’s earnings and expense records.
For most businesses, this is a far less daunting process than it used to be, as most business owners today rely on computer programs to organize and track transactions throughout the year.
If you use any professional accounting software like QuickBooks, Quicken or Sage Peachtree, the information will be readily available, and in most cases, can then be exported directly into your tax preparation software (which we’ll talk about below).
If you’re not set up with accounting software, then gather your bank records, sales slips, paid bills, invoices, receipts, deposit slips, credit card statements and canceled checks—basically everything that shows your company’s income and expenses.
2. Choose the correct IRS form to file based on your business structure.·
- Sole proprietorship: You’ll report your business earnings and expenses on a Schedule C attached to your personal tax return.
- LLC: If you’re the only member of your LLC, then you would pass through your profits and losses on your personal income tax return on Schedule C, and file that alongside your 1040 tax return. An LLC with at least two members is classified as a partnership (see below) for federal income tax purposes, unless it files Form 8832 and elects to be treated as a corporation.
- Corporation: File a separate corporate tax return, which is Form 1120. If you use tax prep software, the program will generate the proper form for you after you answer questions about your business.
- S Corporation: S Corporations are generally treated as extensions of their shareholders for federal tax purposes, passing along income, losses, deductions, and credits to their owners. The S corporation provides a Schedule K-1 to its shareholders, spelling out their portion of the income and deductions for the tax year. The S corporation also has to file a tax return using Form 1120.
- Partnerships: For tax purposes, partnerships are treated very similarly to S corporations. Partnerships must also provide a Schedule K-1 to all partners, detailing their share of the income and deductions for the year. The partnership, itself, would file an informational return to the IRS, which is Form 1065.
3. Fill out the tax form.
Schedule C is very straightforward. It’s just two pages long and lists all the expenses you can claim. When you’re finished, you simply subtract your business expenses from your earnings to come up with your net profit or loss. You transfer the figure to your personal income tax form, include it with all of your other personal income tax items, and either mail it in or submit it electronically.
If you have a corporation and are using Form 1120, you would calculate your taxable business income in the same way, but the form is more detailed. It would also be filed separately from your personal income tax return.
4. File on time.
If you’re using a Schedule C, you’ll need to file by March 15. If you have a corporation and need to use Form 1120, it has to be filed by the 15th day of the third month after the close of your company’s tax year. For most businesses, the end of the tax year is the same as the end of the calendar year (December 31), which would make your tax deadline March 15. You still have until April 18 to submit your personal return.
If your corporate fiscal year is something other than the calendar year, your deadline will change accordingly, but it will always be the 15th day of the third month after it closes.
Most partnerships are also set up by the calendar year; those returns must be filed by April 18 (the 15th day of the fourth month after the close of your company’s tax year). Note that the usual due date is April 15 but this year that falls on a federal holiday, which means the date gets pushed back to the 18th.
What if You Need an Extension?
The IRS is very particular about deadlines, and there are strict penalties for not meeting them. That doesn’t mean, however, that you can’t get more time if you need it; you just have to ask for it correctly. Getting an extension doesn’t mean you don’t have to pay on time.
An extension will buy you time to get your documentation and paperwork in order, but you still have to estimate how much, if any, tax you will owe, and submit that amount when you file the extension request. If you don’t, or if you underestimate significantly, the IRS could invalidate the extension, which would make you liable for penalties and interest in addition to any taxes you owe. You can get a free estimate of how much tax you owe by using TurboTax’s TaxCaster or H&R Block's Tax Calculator.
The deadline for filing an extension is the same as the deadline for filing a tax return, so you must request the extension and pay your estimated taxes by then.
How to File An Extension
If you’re an individual or sole proprietorship, simply file Form 4868 to get an automatic six-month extension to file a completed tax return. You can e-file from your own computer or have a tax professional do it for you. You can also print the form and send it through the mail. Again,you must also pay your estimated income tax due. You can do this electronically at EFTPS.gov or use a credit or debit card. You can pay by check if you submit the form in the mail.
To request an extension for corporations and partnerships, file Form 7004, along with any estimated taxes due. A five-month extension will automatically be approved for the forms that are listed in Part I of Form 7004. A six-month extension will be approved for those listed in Part II of Form 7004.
The IRS has links on its website to all applicable forms to request extensions.
What About a State Tax Extension?
If you live in a state with an income tax, you also need to file an extension with the state. Each one has its own procedure, so find the information on your state’s website. Many states will allow you to get an automatic extension using a procedure similar to that of the federal government. If you don’t owe state taxes, usually your federal extension can be used to extend your state return as well.
Tax Preparation Programs Can Help
Most individual taxpayers will file their returns electronically this year. The figure has topped 80% in recent years, as the IRS has made it easier to do, and the use of tax preparation software has become even more widespread.
The IRS doesn’t charge for e-filing, but some firms that prepare returns for submitting electronically do. There are free and low-cost options available.
As we mentioned above, if your business uses bookkeeping or accounting software, it is very easy to export all the pertinent information into most well-known tax preparation programs. The programs will walk you through a series of questions to figure out what deductions you’re eligible for, and prepare the tax return for you. You can then e-file directly from the program.
There are several reputable software programs you can use to prepare and file your taxes. Three of the better-known programs are TurboTax, TaxACT, and H&R Block. Each has different versions of its software available, from free to “deluxe,” depending on your needs and how complicated your finances are. There are different products available from each of the major companies for sole proprietors, independent contractors, corporations, partnerships, and LLCs.
Each of these tax filing programs use a guided interview format that progresses through dozens of screens. You answer the questions, and the software does the calculations and fills them into the correct fields on the appropriate IRS forms and schedules.
Important features to look for include the ability to import W-2s, 1099s, and other income documents; guaranteed accuracy for calculations, support if you’re audited, and technical assistance.
Alternately, you can hire a professional accountant or tax preparer to put your return together. If you go this route, make sure to give yourself enough time to gather the documentation you’ll need, and make an appointment far enough in advance so you don’t get caught short. Tax season is officially underway, and will only get busier as filing deadlines approach.
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