A Must Read for Small Business Owners: Understanding Your Tax Filing Obligations

A Must Read for Small Business Owners: Understanding Your Tax Filing Obligations

By: Moshe Klein, The AFFORDABLE Accounting Firm

www.mkabusiness.com

I have been working with small business owners for decades and I am as passionate about small business ownership and entrepreneurship today as I was back in 1982 when I got my opportunity to try my hand at becoming a businessman. I enjoy watching people start businesses and grow them successfully over many years. It’s rewarding to own a small business in so many ways.

It's also VERY confusing when it comes to taxes. It’s not easy to know if a new business should be set up as a sole proprietor, an LLC, an S Corp, C Corp, etc. A knowledgeable tax advisor should be consulted in almost every case, no matter how small the business is. There are tax filing obligations and requirements for EVERY business and failure to understand those obligations and to comply with Federal & State filing guidelines can result in stiff penalties and years of difficulty trying to straighten everything out.

So, as we press forward with yet another tax season and as we approach yet another set of filing deadlines, I thought that I might offer some guidance to help small business owners understand what tax filing obligations they might have, depending on the type of small business that they set up. Please keep in mind that this information is meant to serve as thought provoking guidance and is not meant to be considered tax or legal advice. Every small business owner should consult their own tax and legal advisor regarding their unique situation.

• A Sole Proprietor needs to file two forms to pay federal income tax for the year. Firstly, there's Form 1040, which is the individual tax return. Secondly, there's Schedule C, which reports business profit and loss. Form 1040 reports your personal income, while Schedule C is where you'll record business income.
• A Single Member LLC is considered a “disregarded entity” for U.S. tax purposes, and accordingly its operations are reported on the member's individual tax return (as a sole proprietor entity). You are required to file Schedule C along with your personal returns to account for the business profit/loss. If you want your business to be taxed as an S corporation, you must fill out IRS Form 2553, have all shareholders sign it, and file it with the IRS. The deadline for filing the form is 2 months and 15 days after the beginning of the tax year.
• A Multi-Member LLC must file its own tax return. The IRS treats this type of LLC as a partnership. This means that the LLC's profit or losses are distributed to the members using a Form K-1. A multi-member (a partnership) files an informational partnership tax return using tax Form 1065.
• An S - Corporation is a "pass-through" entity, meaning profit passes through the corporate structure directly to individual shareholders. As such, losses pass directly to shareholders as well. That means shareholders can use losses in an S corporation to offset their personal income, thus reducing their tax liability. Form 1120S is required to be filed for an S Corporation entity.
• A C - Corporation is a separate tax-paying entity unless it makes an election to be taxed as an S corporation. This means a C Corporation pays corporate income tax on its income, after offsetting income with losses, deductions, and credits. C Corporations use Form 1120 to calculate its taxes due. 

Since 1982, Moshe Klein & Associates, Ltd has been providing AFFORDABLE tax and bookkeeping services to small business owners and individuals in all 50 states. For a FREE & CONFIDENTIAL consultation, call 888-432-8187 or visit our website at any time. MKA is open evenings and Sundays during tax season for your convenience.