Business Taxes: An Overview Guide
Being prepared for tax season is important for any business owner and requires year-round attention rather than last-minute cramming. You're probably used to the terminology and processes for personal taxes, but you might not be fully clear about how these relate to filing your business taxes. The tax category, deductions and forms you file will all depend on your business's legal structure. Operating as a sole proprietor provides the least deductions—but the tax forms are the simplest—while operating as a corporation provides the most deductions.
What are sole proprietorship, partnership and corporation business structure types?
Your business structure or entity type will determine how you pay your business taxes and what type of deductions you can make. You have the fewest business tax deductions when filing as a sole proprietor or as a general partner in a general or limited partnership. In addition, all your taxable income is subject not only to income taxes but also to self-employment taxes, which are Medicare and Social Security taxes combined.
If you operate your firm as a C corporation, the default tax status for corporations, your company can deduct all business expenses, including any salary or bonus you pay yourself as an employee. When you take distributions from your C corp, you'll need to record those on your personal taxes and pay ordinary income taxes on those funds—referred to as double taxation. That's why some business owners opt for S corporation status. It's always best to discuss your options with your trusted tax attorney.
What's the difference between S corps and limited liability companies?
For an S corp election, your corporation must file IRS Form 2553, Election by a Small Business Corporation. With an S corp, you deduct all expenses at the corporate level—however, the corporation does not pay taxes or incur tax losses. Instead, the income or losses pass through to you and any other owners in proportion to your ownership. You then pay personal income taxes on those amounts. You generally won't have to pay self-employment taxes on that income.
If you organized your firm as a limited liability company, or LLC, you have different options. If you own a single-member LLC, it defaults to what's called a disregarded entity, which means you file taxes as a sole proprietorship. If you own a multiple member LLC, that defaults to general partnership treatment, so you file a partnership tax return. For both types of LLCs, you can also formally elect taxation status as a C corp by filing Form 8832, Entity Classification Election, or as an S corp by filing Form 2553.
Business tax forms you'll need
The IRS tax forms you'll need depend on your filing status.
Sole proprietorship and general partnership tax forms
You'll need these tax forms for your sole proprietorship or general partnership.
- As a sole proprietorship or a disregarded single-member LLC, you only file Form 1040 and attach Schedule C: Profit or Loss From Business.
- As a general or limited partnership or default status multi-member LLC, file Form 1065, US Return of Partnership Income.
- The partnership must also prepare and file Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., and issue this schedule to each partner to assist them in preparing their personal tax return. Schedule K-1 delineates the proportion of income or losses attributed to each partner.
- For both business structures, if you anticipate needing to pay $1,000 in taxes or more, file Form 1040-ES, Estimated Tax for Individuals. You can pay it in one lump sum on April 15 (or your region's filing deadline) for the current year or in quarterly payments.
Corporation tax forms
Depending on your taxation status—C corp or S corp—the IRS will require different forms.
- S corp: File Form 1120S, US Income Tax Return for an S corp. Similar to a partnership, an S corp will also need to complete and issue Schedule K-1s (Form 1120S) to the IRS and respective shareholders. You shouldn't need to include this schedule with your personal taxes. Just use it to prepare them.
- C corp: File Form 1120, US Corporation Income Tax Return, for a C corp. In addition, if your C corp will earn more than $500 in income, you'll need to submit Form 1120-W, Estimated Tax for Corporations, to file estimated tax payments.
Standard business tax deductions
To reduce your business taxes, you want to explore all tax break opportunities for maximizing your deductions. These are some of the most common tax deductible business expenses.
- Salaries and wages for yourself and all employees
- Professional fees paid to attorneys, CPAs and others
- Marketing costs such as websites, ads, business development activities
- Transportation, including fuel, insurance, financing costs, maintenance and repair costs
- Supplies used in operating the business, not just for delivering your product or service but also for cleaning and stocking the office
- Inventory purchases
- Interest costs on any loans, credit cards or other debts
- Insurance, including health, general liability or any other types your business pays for
- Association memberships and subscriptions
Your company may be able to deduct up to $1 million in equipment you purchase in the first year instead of depreciating it. However, remember that zero taxes often translates to zero profit or a loss. Keep in mind that lenders look for financially healthy businesses. That's why the best practice is to balance your tax objectives with your overall operating and funding needs.
Unique tax exemptions for businesses
There are additional tax exemptions that may suit your business. For example, there are several tax breaks for eco-friendly businesses that reward businesses making choices that positively impact the environment.
An easy way to make sure you don't miss any exemptions is to use an automated software and consult a trusted local tax attorney who specializes in business and corporate taxation.
Quick tax preparation checklist
Let's review. Before filing your business taxes, it's important to make sure you've got everything on your preparation checklist squared away.
- Plan ahead of your business type's tax day deadlines.
- Find the right tax forms for your business structure.
- Gather your financial records.
- Consult a tax professional early in the process.
Read 4 Key Steps for Small Business Tax Preparation to learn more about each of these preparation checklist steps.
Business tax filing best practices
Once you're prepared, it's time to file your taxes. Whether it's your first time filing or you've filed for several years, it's a good idea to lean into tax season with some business tax filing best practices.
- Keep track of income and expenses in an easy to find place throughout the year.
- Stay on top of bookkeeping either manually or with bookkeeping software.
- Save copies of or links to your tax forms and deadlines so that you aren't scrambling for them next year.
- Stay organized to avoid penalties and stay compliant with tax laws.
- File your taxes online to save time, money, and help double check tax requirements.
For more details on tax filing best practices, compliance tips and tax day deadlines for each corporation type, read The Basics of Filing Business Taxes and Reporting Income.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.