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Frequently Asked Tax Questions And Answers
Keyword: Corporation
9.1 Estimated Tax: Businesses
Estimated quarterly income taxes for a corporation were not paid. What is
the penalty amount? Is there any way to reduce the penalty?
If the corporation does not pay a required installment of estimated tax by its
due date, it may be subject to a penalty. The penalty is figured separately for each
installment due date. The corporation may owe a penalty for an earlier due date, even
if it paid enough tax later to make up the underpayment. This is true even if the
corporation is due a refund when its return is filed.
Use Form 2220 (PDF), Underpayment of Estimated Tax
by Corporations, to determine if a corporation is subject to the penalty for
underpayment of estimated tax and, if so, the amount of the penalty.
If the corporation is charged a penalty, the amount of the penalty depends on the
following three factors:
The amount of the underpayment.
The period during which the underpayment was due and unpaid.
An interest rate that is published quarterly by the IRS in the Internal Revenue
Bulletin.
The penalty may be waived by IRS on a case-by-case basis if the failure to make
estimated payments was caused by a casualty, disaster, or other unusual circumstance.
For more information, refer to Publication 542 , Corporations and
the
Instructions for Form 2220
References:
12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
As a Domestic LLC (limited liability company), what forms do I use to file
a return?
The form you use will depend on what kind of entity your business is for Federal
tax purposes. Following are some general guidelines and the forms which go with each
entity:
If your business has only one owner, it will automatically be considered to be
a sole proprietorship (referred to as an entity to be disregarded as separate from
its owner) unless an election is made to be treated as a corporation. A sole proprietorship
files Form 1040 (PDF), U.S. Individual Income Tax
Return and will include Form 1040, Schedule C (PDF), Profit
or Loss from Business, or Form 1040, Schedule C-EZ (PDF) and Form 1040, Schedule SE (PDF) , if net income $400.00. If an election
is made to be treated as a corporation, Form 1120 (PDF), U.S.
Corporation Income Tax Return, is filed.
If your business has two or more owners, it will automatically be considered to
be a partnership unless an election is made to be treated as a corporation. A partnership
files Form 1065 (PDF), U.S. Partnership Return of
Income. If an election is made to be treated as a corporation, Form 1120 (PDF), U.S. Corporation Income Tax Return, is filed.
The election referred to is made by filing Form 8832 (PDF), Entity
Classification Election.
References:
For IRS purposes, how do I classify a limited liability company? Is it a
sole proprietorship, partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by filing
articles of organization as an LLC. Unlike a partnership, none of the members of an
LLC are personally liable for its debts. An LLC may be classified for Federal income
tax purposes as a sole proprietorship (referred to as an entity to be disregarded
as separate from its owner), partnership or a corporation. If the LLC has only one
owner, it will automatically be considered to be a sole proprietorship (referred to
as an entity to be disregarded as separate from its owner), unless an election is
made to be treated as a corporation. If the LLC has two or more owners, it will automatically
be considered to be a partnership unless an election is made to be treated as a corporation.
If the LLC does not elect its classification, a default classification of partnership
(multi-member LLC) or sole proprietorship (single member LLC) will apply. The election
referred to is made using the Form 8832 (PDF), Entity
Classification ElectionIf a taxpayer does not file Form 8832 (PDF) , a default classification will apply.
References:
Must a partnership or corporation file a tax form even though it had no
income for the year?
A domestic partnership must file an income tax form unless it neither receives
gross income nor pays or incurs any amount treated as a deduction or credit for federal
tax purposes.
A domestic corporation must file an income tax form whether it has taxable income
or not.
References:
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your state's requirements,
you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements
must be met before you can elect S corporation status.
Instructions for Form 2553, Election by a Small Business Corporation, provides the information
on these requirements.
References:
I have a C corporation. What is the procedure to change it to an S corporation?
Once you have established your corporation according to your state's requirement,
to convert from a C corporation to an S corporation, you must meet the same requirements
as a newly formed corporation electing S corporation status. You must meet the requirements
of a "small business corporation" which are, in general:
Be a domestic corporation organized under the law of any state or U.S. territory;
Have only individuals, estates or certain trust as shareholders (no partnerships
or corporations as shareholders;
Have only citizens or residents of the United States as shareholders;
Have only one class of stock (differences in voting rights are OK)
The S corporation can have no more than 75 shareholders and must make the election
to be an S corporation on Form 2553 (PDF), Election
by a Small Business Corporation, before the 16th day of the third month following
the close of the C corporation's tax year if the election is to be effective for the
current tax year. The C corporation must qualify as an eligible corporation during
those 2 1/2 months and all shareholders during those 2 1/2 months must consent, even
if they do not own stock at the time of the election. If the election is filed after
the 15th day of the third month of the tax year, the election will be in effect for
the next tax year and all shareholders at the time of the election must consent. For
late elections that qualify for treatment as timely filed see Rev. Prov. 98-55. S-Corporation
file Form 1120S for the tax year the election takes effect.
References:
What is the procedure for revoking subchapter S election for a corporation?
Voluntary termination of an S election is made by filing a statement with the Service
Center where the original election was properly filed. A revocation may be made only
with the consent of shareholders who, at the time the revocation is made, hold more
than one-half of the number of issued and outstanding shares of stock (including nonvoting
stock) of the corporation. There is specific information that must be included in
the statement and this information is outlined in Regulations section 1.1362-6(a)(3)
and in
Instructions for Form 1120S, U.S. Income Tax Return
for an S Corporation.
The revocation may state an effective date as long as it is on or after the date
the revocation is filed. If no date is specified and the revocation is filed before
the 15th day of the third month of the tax year, the revocation will be effective
for the current tax year. If the revocation is filed after the 15th day of the third
month of the tax year, the revocation will be effective for the next tax year.
You may want to consult the IRS Customer Service phone line at 1-800-829-4933 or
you may wish to consult with a tax professional to be certain you have all the necessary
information to file a proper revocation.
The S corporation election terminates automatically under certain conditions. Refer
to
Instructions for Form 1120S, U.S. Income Tax Return for an
S Corporation.
References:
-
Instructions for Form 1120S, U.S. Income Tax
Return for an S Corporation
- Treas. Reg. section 1.1362-6(a)(3)
- Treas. Reg. section 1.1362-2(a)
Can you give me plain English definitions for the following: (1) a closely
held corporation, (2) a personal holding corporation, and (3) a personal service corporation?
Generally, a closely held corporation is a corporation that, in the last half of
the tax year, has more than 50% of the value of its outstanding stock owned (directly
or indirectly) by 5 or fewer individuals. The definitions for the terms "directly
or indirectly" and "individual" are in Publication 542, Corporations.
Generally, closely held corporations are subject to additional limitations in the
tax treatment of items such as passive activity losses, at-risk rules, and compensation
paid to a corporate officers.
A personal holding company is defined in Internal Revenue Code section 542. Basically,
a corporation is a personal holding company if both of the following requirements
are met:
Personal Holding Company Income Test. At least 60% of the corporation's adjusted
ordinary gross income for the tax year is from dividends, interest, rent, and royalties.
Stock Ownership Requirement. At any time during the last half of the tax year,
more than 50% in value of the corporation's outstanding stock is owned, directly or
indirectly, by 5 or fewer individuals.
Refer to the
Instructions for Form 1120, Schedule PH for
more information and a list of exceptions.
A personal service corporation is a corporation where the main work of the company
is to perform services in the fields of health, law, engineering, architecture, accounting,
actuarial science, the performing arts, or consulting. Examples may be law firms and
medical clinics. Also, substantially all of the stock is owned by employees, retired
employees, or their estates.
References:
12.9 Small Business/Self-Employed/Other Business : Starting or Ending a Business
I invested personal funds to start a new corporation last year. How can
I get credit for this on my personal income tax return?
If you invest your personal funds to start a corporation, this is your basis in
the stock of the corporation. Your stock basis will show on the balance sheet of the
corporation's Form 1120 (PDF), U.S. Corporation Income
Tax Return. Your investment will not show up on your personal income tax return
until you sell the stock or until the corporation goes out of business.
References:
Which form do I use to file my business income tax return?
To determine which form you should file for your business entity, select one of
the following links:
. Publication 541, Partnerships
. Publication 542, Corporations
. Publication 3402 (PDF), Tax Issues for LLCs
. Publication 334, Tax Guide for Small Business
. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
References:
How do I terminate or close down a corporation (S or C)?
The process for closing a corporation consists of many steps that need to be followed
in a specific order and within specified time frames. See Small Business/Self
Employed - Closing a Business for information to properly terminate your business
entity with the Internal Revenue Service.
References:
What do I need to do to become a Corporation?
Corporation are formed at the state level first. For additional information on
requirements at the federal level, please see Publication 542, on Corporation .
References:
Where is a loss reported on my return and how much can I deduct?
The place where your loss is reported depends on how much is deductible, the type
of loss, and the type of return you are filing. If your business deductions are more
than your business income for the year, you may have a Net Operating
Loss (NOL). You can use an NOL by deducting it from your income in another year
or years. Partnerships and S Corporations generally cannot use an NOL. But partners
or shareholders can use their separate shares of the partnership's of S Corporation's
business deductions to their individual NOLs. For additional help, see Publication 541, Partnership, Publication 542, Corporation, Publication 925, Passive Activities and At-Risk Rules, and Publication 536, Net Operating Losses (NOLs) for individuals, Estates,
and Trusts.
If you have a Capital Loss, it is generally from the sale
or loss of investment property, a business, or a capital asset used in a business. Publication 544, on Sales and Other Disposition of Assets, will provide
additional information on this subject.
Special Situations
S Corporations
In general, if an S corporation purchases a C Corporation at the end of the year
and the C Corporation has a loss, the S Corporation does not get to claim the C Corporation
loss. A C Corporation is a taxable entity in itself and gains and losses do not flow
through to the shareholders.
S Corporation shareholder who hold stock at any time during the year may claim
their proportionate share of corporate losses on their individual tax returns subject
to certain limits. For more information about the limitations, see the instruction
for
Instructions for Form 1120S, Schedule K-1.
Partnerships
In general, a partner loss is allocated base on his/her percentage of ownership
of the year. This percentage is referred to as the partner's distributive share. The
partners' distributive share of items is reported to the partner on Schedule K-1 (Form
1065). A partner's distributive share of partnership loss is allowed only to the extent
of the adjusted basis of the partner's partnership interest. A loss that is more than
the partner's adjusted basis is not deductible. For additional deductibility of partnership
losses, see Publication 541, Partnership, and Publication 925, Passive Activities and At-Risk Rules
References:
How does a corporation deduct a capital loss?
Subchapter C Corporation
This type of corporation can deduct capital losses only up to the amount of capital
gains. If capital losses exceed capital gains, the excess is first carried back three
years prior to the loss year and used to offset capital gains. Then, any unused loss
is carried forward up to five years from the loss year to offset capital gains in
those years. If the corporation is dissolved, the loss is not carried to any other
year or return, it is simply lost.
A corporation may not carry a capital loss from or to a year
in which it operates as a Subchapter S Corporation.
Rules for Carryback and Carryforward
When carrying a capital loss from one year to another, the following rules apply:
1. When figuring the current year capital loss, you cannot combine it with a capital
loss carried another year. In other words, you can carry capital losses only to years
that would otherwise have a net capital gain.
2. If you carry capital losses from 2 or more years to the same year, deduct the
loss from the earliest year first.
3. You cannot use a capital loss carried from another year to produce or increase
a net operating loss in the year to which you carry it back.
Corporation must include capital gain in full in gross but only to the extent they
exceed capital losses. A corporation is taxed on net capital gain at the regular tax
rate, including the additional phase-out rates for high-income corporations. See
Instructions for Form 1120/1120A, U.S. Corporation Income Tax Return,
and Publication 542, Corporations for additional information.
Subschapter S Corporations
An S Corporation generally passes gains and losses through to the shareholders
based on their percentage of ownership (distributive share). For more information
on how to calculate and report these losses, see
Instructions for Form 1120S, Schedule K-1, Form 4797 (PDF), Sales
of a Business, Form 1120S (PDF), U.S. Income
Tax Return for an S Corporation, Entities: Sole Proprietorship, Limited
Liability Company/Partnership (LLC/LLP, Corporation, Subchapter S Corporation.
References:
What type of entity am I?
If you an unincorporated business by yourself, you are considered a sole proprietor.
However, if you are the sole member of a domestic limited liability company (LLC),
you are not a sole proprietor if you elect by filing Form 8832 (PDF) , Entity Classification Election, to treat the LLC as a corporation.
An husband or wife may be sole proprietor with the spouse an employee.
An unincorporated organization with two or more members is generally classified
as a partnership for federal tax purposes if it members carry on a trade, business,
financial operation or venture and divide its profits.
If a husband and wife jointly own and operate a business and share in the profits
and losses, they are partners in a partnership.
The following businesses are taxed as corporations:
A business formed under a federal or state law that refers to it as a corporation,
body corporate, or body politic.
A business formed under a state law that refers to it as a joint-stock company
or joint-stock Company.
Insurance Company
Certain banks
A business wholly owned by a state or local government.
A business specifically required to be taxed as a corporation by the Internal
Revenue Code (for example, certain publicly traded partnerships).
Certain foreign business
Any other business that elects to be taxed as a corporation by filing Form 8332.
References:
- Publication 541, Partnerships
- Publication 542, Corporations
- Publication 3402 (PDF), Tax Issues
For LLCs
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation Form 8332 (PDF) , Release for Claimed to Exemption for Child or Divorced or Separated
Parents
What is the due date for business returns?
Some forms and entities have due dates other than the well-known April 15th due
date. The instructions for the each type of form used will have the appropriate due
date(s) noted. In general, sole proprietor's schedule of income and expenses is attached
to the 1040. Therefore, the due date is the same as the 1040.
A Corporation must generally use the calendar year, unless the entity can establish
a business purpose for having a different tax year. The due date is usually March
15th.
A partnership generally must conform its tax year of the partners unless the partnership
can establish a business purpose for having a different tax year. The tax year is
the same as one or more partners that own (in total) more than a 50-percent interest
in partnership profits and capital. If there is no majority interest tax year, the
partnership must adopt the same tax year as that of its principal capital holder.
Where neither condition is met, a partnership must use the calendar year. A limited
Liability Company reporting as a partnership has the same tax year as a majority of
its partners.
References:
- Publication 541, Partnerships
- Publication 542, Corporation
- Publication 334, Tax Guide for Small Business
- Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
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