Every small business has one thing in common: the need to file taxes. The Internal Revenue Service (IRS) and individual states have significant powers to impose and collect taxes, and levy penalties when taxes are not paid.
“This makes it important that you don’t forget or neglect to file, even if your business isn’t making money,” says Bruce McVittie, CPA, President of McVittie Financial Advisors of Newton, Massachusetts. “If you lost money last year, that loss can be used to reduce your personal taxes.”
Here are answers to some of the most important things you need to know about the process. Check with your tax advisor for specific advice for your business.
How are taxes for my business determined and paid?
It depends on the type of business you operate, says McVittie. Sole proprietorships report business income, expenses and profit, which is business income to the owner, directly on a Schedule C form that is filed along with the owner’s personal return. As part of their corporate tax filing, partnerships and S-corporations issue K-1 forms to report business income for the owners to include with their other income and deductions on their personal returns.
Income taxes for C-corporations are generally determined at the corporate level and the corporation pays the taxes based on its net income. Distributions to owners are typically treated as dividends, which are taxable to the owner.
Most businesses also need to pay other taxes such as employment, excise and sales taxes. Most taxes are collected on behalf of the government and remitted.
What are the deadlines?
The IRS has a tax calendar that outlines deadlines for different types of businesses. Some deadlines include the following: Partnerships and S-corporations must file by March 15 so that the K-1s can be issued for owners to report income and pay taxes on their personal returns by April 15. C-corporations typically need to file by April 15.
In 2021, estimated tax payments for individuals are generally due on April 15 (the same day as any unpaid taxes for 2020), June 15, September 15 and January 17, 2022.
Depending on the amount to be paid, employment, excise and sales taxes may need to be paid annually, quarterly or even monthly. Filings can match that frequency but are often quarterly. The exception is the reporting of payments to individuals. These are done annually on W-2 and 1099-NEC forms, which were due, for 2020, by February 1, 2021.
What if I can’t pay? Can I get an extension?
Yes, you generally can get an extension to file certain business income tax, information and other returns; usually for six months. The extension typically allows more time to file, not more time to pay, says McVittie. Many, but not all, states follow federal rules so check with your state’s tax agency. Unpaid taxes are typically subject to failure-to-file penalties plus interest.
McVittie advises his clients who cannot pay their income taxes to pay what they can and notify the tax authorities as soon as possible to work out a plan. Be sure the payment plan you agree to is one you will be able to stick with, he says. “Stretch out the payment plan so that you don’t end up unable to pay this year’s tax bill because all your cash was spent paying off last year’s,” he says.
Extensions for other taxes such as employment, sales and excise tax are not usually granted, notes McVittie. These are considered to have been collected by the business as an agent of the government. The business is expected to set these aside and to pay as required.
What about state taxes?
Businesses need to register and file a state level corporate return in any state in which they conduct business and apportion income accordingly.
Additionally, businesses selling products and services into a state can be required to register with the state to collect and remit sales taxes in that state. The thresholds for registration vary by state and local jurisdiction, notes McVittie. The Small Business Administration (SBA) has a menu of links to requirements for each state.
How do I file?
The IRS is encouraging both businesses and individuals to file electronically and requires it for C- and S-corporations with more than $10 million in assets and those who need to file more than 250 returns (W2, 1099, employment, excise) in 2020, says McVittie. Partnerships with more than 100 partners or more than 100 returns in 2020 must also file electronically. Some states require all business filings to be electronic, while others can only accept paper. Check with the states you do business in to see what they allow.
These are just a few of the questions small business owners should ask their tax advisor when they file. Don’t forget to ask about any changes to the tax code that may impact your business, how your business return might affect your personal return, and ways you can making filing your taxes next year even easier.
This year, for example, McVittie notes that business owners shouldn’t forget about the Qualified Business Income Deduction. “With all the discussion about COVID and related tax provisions, this has kind of slipped out of sight but it’s a valuable deduction — up to 20% of business income — for those who qualify.”
This information is only provided for general informational purposes, and should not be considered as offering individualized tax advice. Please consult your tax advisor on specific issues related to your tax situation.