How To Prepare A Corporate Tax Return

Every business has to deal with taxes at the year’s end. When it’s time to file for income tax returns, even for a small-scale business it is possible to do so in a variety of ways. Each business entity requires you to file for a different tax form. Therefore if you run a corporation then by now you must have filed for your tax return will depend on your corporate share of taxes. 

Now, you need to prepare for an annual corporate tax return according to your business structure, how you choose to pay yourself and your employees. In some cases, you may still need to submit a personal tax. 



Steps to Follow Tax Return in 2020

According to the nature of the corporation, you run, special deductions can be made too. So before you start making the decisions and prepare the taxes, you need to remember the following steps. 

1. S Corp vs C Corp

Once a corporation is established, the business is treated as a C corporation. This is vital for federal income tax purposes. 

A traditional corporate that pays the corporate income tax for its profits, shares it with shareholders (also paying taxes) on their salary and dividends. This is what a C corporation is. However, when dividends are involved, double taxation is applicable i.e. both the corporate and individual pay taxes 

S corporations do not pay corporate taxes therefore some companies tend to pay taxes as S corporations to avoid double taxation.

So if a company wants to be eligible for the S corporation they must fulfill the following requirements; 

  • At least have 100 or fewer shareholders

  • One class of stock 

  • Shareholders are not corporations, partnerships, or nonresident aliens 

  • Established as a domestic corporation 

2. S Corp Election 

To become eligible to file as an S corporation you need to fill the Internal Revenue Service Form 2553. Your shareholders must sign it and then file it with the IRS. The deadline is 2 months and 15 days right after the tax year. 

To follow corporate tax returns properly, make sure in case your corporation is newly formed then the tax year will begin in parallel as well. To be eligible for S corporation tax IRS must approve your submission. Once you are elected on the status of S corporation the elected status will stay in effect as long it is either terminated or revoked. 

3. Tax Deductions 

Corporations can deduct employee salaries (or bonuses), health insurance costs, and retirement plans in addition to the other ordinary business expenses. 

These deductions maximize tax savings. Therefore you need to learn about these deductions so that you can maximize the tax savings. 

4. Estimated Taxes 

Since S corps do not pay taxes they still must make an estimated tax payment in some cases. On the other hand, it is compulsory for C corporations to pay the estimated corporate tax income. 

In case corporations fail to pay their share of estimated tax payments in a timely manner, this makes them subject to interest or penalties for underpayment. 

5. Federal Tax Return 

The tax return in 2020 is dependent on the type of corporation you are. For instance, if you are an S corporation then you will file Form 1120S - a tax return showing the corporation's income, expenses, and losses. 

Also, you will be eligible to file a form K-1 for every shareholder, show their income, deductions, and credits 

Whereas C corporations need to file Form 1120. The dividends are reported by the shareholders. These dividends were received from the corporation and personal tax returns.

6.State Tax Returns 

You need to also file the income tax return for your corporation. This depends on the tax status and the state in which your corporation is currently functioning. In case your business is registered to do business in additional states then you are also eligible for the tax to be paid for in states as well. 

Corporate tax returns are easy to confuse to the best of your ability to hire a professional accountant who can do the tax math for you. 

 

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