Small Business Taxes ? How to Avoid IRS Penalties | Virginia IRS ...

Small Business Taxes ? How to Avoid IRS Penalties

Article by Wes Hamilton

If you own a small business, you must understand the basics of business entities and the income tax return requirements for each. Here?s a crash course to get you started. It?s critical that you know what type of entity you have and what type of tax return must be filed. Failure to file the proper tax return on time can result in IRS penalties and interest.

Sole ProprietorshipIf your business is not a partnership, corporation, or LLC, then by default you are a sole proprietorship. From both a legal and tax standpoint, there is no distinction between you and the business, so you have unlimited liability. You report the business on your personal income tax return (Form 1040) via a special form called Schedule C. Several other forms may also be required on your personal return, depending on the complexity of your business and the nature of its operations.

PartnershipA partnership is an agreement between two or more persons to carry on a business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. A partnership must file an annual income tax return to the IRS (Form 1065) to report the income, deductions, gains, losses, etc., from its operations, but the partnership does not pay income tax. Instead, it ?passes through? any profits or losses to its partners via a form called Schedule K-1. Each partner includes his or her share of the partnership?s income and expenses (as reported on the K-1) on his or her personal tax return.

CorporationFor tax purposes, there are two main types of corporations: the C corporation and the S corporation. When you form a corporation according to the laws of your particular state, the IRS automatically assumes you are a C corporation for tax purposes. To become an S corporation, you have to apply for S corporation status via a special application (Form 2553), which the IRS will accept if you meet the criteria to become an S corporation. From a tax standpoint, there are significant differences between a ?C? corp and an ?S? corp.

C Corporation. The profit of a C corporation is taxed twice ? once to the corporation and a second time to the shareholders when distributed as dividends. (This is the dreaded ?double taxation of corporate profits?). However, shareholders cannot deduct any losses of the corporation. The C corporation files Form 1120 to report its income and expenses to the IRS.

S Corporation. If your business qualifies, it can avoid double taxation by becoming an S corporation. An S corporation generally is exempt from federal income tax, but still must file an income tax return called Form 1120S. The income or loss of the S corporation is transferred from the corporation to the individual shareholder?s personal income tax returns via Schedule K-1, which the corporation must give to each shareholder.

Limited Liability Company (LLC)This is the newest kind of entity. From a legal standpoint, the LLC is much like a corporation, offering limited liability to the owners (which are called ?members?). From a tax standpoint, the LLC is like a chameleon ? it can be taxed however it wants to be taxed, provided the proper paperwork is filed with the IRS. If there is only one owner/member, the LLC can be taxed like a sole proprietorship, a C corporation, or a S corporation. If there are two or more owners/members, the LLC can be taxed like a partnership, a C corporation, or a S corporation.

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The author is the owner of an established plumbing business. He writes articles on consumer information / protection, business in general and home improvement.For more FREE INFORMATION visit here and here thank you!

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Source: http://irs-taxattorney.org/virginia/2011/06/17/small-business-taxes-how-to-avoid-irs-penalties/

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