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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:
I am starting a small business. What assistance can IRS give me?
If you are starting or already have a small business and need information on taxes,
recordkeeping, accounting practices, completing Federal business and employment tax
returns, and meeting other Federal tax obligations, there is help available. Much
of the assistance is free. The service is called Small Business Tax Education Program,
or STEP. Go to Around the Nation for
seminars in your area or check out Tax
Info For Business on the IRS web site. You can find out more about this program
for small business by referring to Publication 1066 (PDF), Small Business
Tax Workshop, or Tax Topic 103 , Small Business Tax Education Program
(STEP).
References:
I want to start my own business. Do I need a business license?
The IRS does not require or issue business licenses. Whether or not the particular
type of business or service you provide is regulated by licensing requirements is
a question for your state, city, or local government agencies. To access the state
you need to direct your question to, please go to our Alphabetical
State Index.
How do I find out about whether or not my business needs to collect sales
tax?
Your question is a state tax question. Your state revenue department should provide
information regarding sales tax to you. To access the state you need to direct your
question to, please go to our Alphabetical
State Index.
What forms do you use when you have a small business?
The annual income tax forms that you would use to report you business activity
to the IRS would depend on the type of entity you operate your business under.
Sole Proprietorships use Form 1040, Schedule C (PDF), Profit
and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business and Form 1040, Schedule SE (PDF), Self-employment Tax.
Partnerships use Form 1065 (PDF), U.S. Partnership
Return of Income and Schedule K-1.
Corporations use Form 1120 (PDF), U.S. Corporation
Income Tax Return.
S Corporations use Form 1120S (PDF), U.S. Income
Tax Return for an S Corporation.
Limited Liability Companies use one of the choices above according to their structure.
If you hired employees to work in your business, if you are liable for excise
tax, or heavy highway vehicle use tax, other forms and publications would come into
play.
References:
If you start your own business and send in your quarterly estimated income
taxes, must you also file a personal income tax return at the end of the year?
If you have $400 or more of net profit from your business, you will have to file
a Form 1040 with a Form 1040, Schedule C (PDF), Profit
and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit form Business and Form 1040, Schedule SE (PDF), Self-employment Tax .
References:
I just started a small business and want to know if I have to file my income
taxes quarterly or at the end of the year?
The Federal Income Tax return is filed annually. As a self-employed individual,
if after deducting withholding and credits you expect to owe $1,000.00 at the end
of the year, you should make estimated tax payments on a quarterly basis. Form 1040-ES (PDF) , Estimated Tax for Individuals , will
assist you in determining if estimated tax payment are due and how they are paid.
When you file the income tax return at the end of the year, you include the income
from the business on the return. The forms to be filed are Form 1040 (PDF), U.S. Individual Income Tax Return , Form 1040, Schedule C (PDF), Profit or Loss from Business Form 1040, Schedule SE (PDF), Self-Employment Tax . If estimated tax payments
where made during the year, they will be claimed on the individual income tax return
as payments. See the Form 1040, Line 62.
References:
How do I report the closing of a sole proprietorship business?
When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business
does not require notation as a final return because the business is not a separate
entity from the sole proprietor. You simply quit filing a Schedule C with your income
tax return.
References:
I went out of business this year and still have inventory on hand. Can I
take a deduction for inventory that I cannot sell?
Generally inventory losses and gains must be run through the business (shown as
sold on Form 1040, Schedule C (PDF), Profit or Loss
from Business) when sold even after the business closes. If you cannot sell inventory
because it has become obsolete or you have formed the intent to give up possession
of the inventory without passing it on to someone else and suffer a loss, you may
deduct such losses. If you use any remaining inventory for personal use after you
go out of business, you cannot take a deduction for that inventory. If you give the
remaining inventory away to a nonprofit organization, claim your deduction on Form 1040, Schedule A (PDF), Itemized Deductions. When
you have business related expenses after your business has closed, you still may deduct
these expenses.
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:
Can you help me fill out my forms
Unfortunately, the Internal Revenue Service can only provide general information
and instructions for preparing tax returns. Many entries on tax rely upon entries
from several schedules or forms. In addition, a clear picture of a business entity
is needed to adequately prepare a return. If the publications or instructions for
a form are unclear and you need help completing several sections and/or lines on the
return, it may be best to seek the advice of a tax professional.
I need help with Form K-1. How do I report this on my income return.
If you are a partner in a partnership and have received a 1065 K-1, Please see
Instructions for Form 1065, Schedule K-1 for help in preparing your form.
If you are a shareholder in an S-Corporation and have received a 1120S K-1, please
see
Instructions for Form 1120S, Schedule K-1 for help in preparing
your form.
References:
- Publication 542, Partnership
- 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
What deductions can I take on my partnership or S Corporation return
In general, ordinary and necessary business expenses are deductible on business
return. However, there are some items that partnership and S Corporation do not deduct
at the business entity level but rather at the partner or shareholder level. These
are referred to as separately stated items. For a more complete explanation of business
in general, see Publication 535 , Business Expenses Publication 541, Partnerships, and
Instructions for Form 1120S.
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:
I am waiting for K-1s to file my return. What is due date for sending a
K-1 to the partners/shareholders?
The due date for a K-1 is the same as the due date of a Partnership or S Corporation
return that created the K-1. For example, if you are a partner in a partnership and
the partnership return has a due date of April 15, 2004, then the due date for the
K-1 is also April 15, 2004. You may wish to file an extension if you do not believe
you will receive your K-1 in time to adequately prepare your return.
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:
How do I terminate a Partnership?
A partnership terminates when one of the following events takes place.
1. All operations are discontinued and no part of any business, financial operation,
or venture is continued by any of its partners in a partnership, or
2. At least 50% of the total interest in the partnership capital and profits is
sold or exchanged within a 12-month period, including a sale or exchange to another
partner.
Regardless of the method of termination, the final Form 1065 (PDF) , U.S. Return of Partnership Income of a partnership and the
corresponding Form 1065, Schedule K-1 (PDF) should be
marked as "Final Return". This notifies the IRS that the partnership has been terminated.
See Treasury Regulation 1.708-1 (b) for additional information on the termination
of a partnership.
The partnership's tax year ends on the date of termination. If a partnership is
terminated before the end of the tax year, Form 1065 must be filed for the short period,
which is the period from the beginning of the tax year through the date of termination. Publication 541 Partnership, for additional information.
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
How is the withdrawal of a partner handled?
Unfortunately, the answer to this question has many variables. Publication 541, Partnerships "Disposition of Partner's Interest" on Partnerships
should provide the information needed.
References:
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