Keyword: Corporation
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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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