Corporations do not declare their taxes like other types of companies. The taxes of a corporation are paid according to the benefits it obtains, and also, its shareholders pay taxes on their salaries and the dividends they receive (the part of the profit that is distributed among the shareholders of the company).
This tax on dividends, both for the company and its shareholders, is known as double taxation. In other words, when it comes to taxes, a corporation is separate from its owners.
This is because corporations are not classified as transfer entities, as it is the case with sole proprietorships and limited liability companies (LLCs). These two types of businesses don’t pay taxes on their profits but pass the profits directly to their owners, who then report the income or losses of the company in their personal tax returns.
Everything you Need to File Taxes for Your Corporation
Filing taxes for your corporation can be complicated. There are aspects that you must fully understand, such as the taxation of both the dividends of the company and its shareholders.
Of course, there are also IRS forms to fill out, documents to gather, and deadlines to be taken into account.
What Types of Taxes Does a Corporation Pay?
These are the types of taxes that a corporation must pay:
Payment of corporate taxes and shareholders
Corporations must file their return on Form 1120, and pay income taxes based on their benefits.
Also, the owners of the company, if they are employees, must pay taxes on their individual income based on their salaries and bonuses, like any other employee. Salaries and bonuses are deductible business expenses, and therefore the corporation does not have to pay taxes on them.
Tax on dividends
When a corporation distributes dividends among its owners, they must report them and pay the personal income tax based on these amounts. Dividends are not tax-deductible. Therefore, the corporation must pay taxes on them. In other words, dividends are taxed twice: once to the corporation, and then to the shareholders.
How Should I Fill out Form 1120?
Form 1120, Corporation Income Tax Return, is used to report corporation taxes to the IRS. Before filling out this form, review it carefully and make sure you can provide all the requested information. The form is divided into several sections:
- Section 1: Basic information about the corporation. Here you must provide some basic information, such as name, address, date of incorporation, and inventory of business assets.
- Section 2: Information on income. This section includes gross income, cost of sales, dividends, interest, royalties, and capital gains of the company.
- Section 3: Tax deductible expenses. Although you don’t need to submit any documents, you should keep receipts of some expenses, in case of an IRS audit. Among these deductions, you can include repairs and maintenance expenses, rent, donations to charity, advertising expenses, and employee benefit programs.
- Section 4: Taxes, reimbursable credits, and payments. Here you should list the part of the income subject to taxes, amounts of reimbursement, and other amounts owed.
Form 1120 also includes a list of attachments that, depending on the activities of your business, you may also have to submit. Among them are Form 1125-A, Schedule J, Schedule K, and Schedule L.
Can I Claim Tax Deductions?
As we have seen above, there are certain deductions on the taxes a corporation must pay. To reduce the number of taxable profits, corporations can only deduct legitimate business expenses; in other words, those expenses made to increase the profits of the company.
Tax deductions include the costs involved in creating the business, operating expenses, and advertising expenses. Likewise, corporations can deduct the salaries and bonuses paid, as well as all expenses related to medical services and employees’ retirement plans.
You can also add the following: insurance premiums, fees charged by lawyers, accountants, and other professionals or independent contractors, supplies used in the business, and expenses on travel, meals, and entertainment.
Knowing what deductions you can claim will help you make informed decisions and save money on your taxes.
Here you have a list with the most common tax deductions for small businesses
What is the deadline to file taxes as a corporation?
You must file Form 1120 to file your taxes. But the exact date will depend on a very important factor: if you operate on a calendar year or a fiscal year.
- If you operate on a calendar year, you must file your taxes before April 15, 2020.
- If you operate on a fiscal year, you must file your taxes before the 15th day of the fourth month after the end of your business’s tax year. For example, if your company’s tax year ended on November 31, you must file your fiscal report before March 15.
If you need more time, you can get a six-month extension by filing Form 7004 before the due date of your tax return.
Pros and Cons of Filing Taxes as a Corporation
Although filing taxes as a corporation takes time, there are some tax advantages for this type of company.
The lowest corporate tax rate
As of 2018, corporations pay a fixed tax of 21 percent on all their profits. This 21 percent is lower than the five main rates of individual income tax, ranging from 22 percent to 37 percent.
The benefit of lower rates s compensated by the double taxation: when corporate profits are distributed to shareholders, they must pay their taxes based on their personal dividends.
If a corporation wants to retain some profits in the business for future investments, that money will be taxed only once at the corporate income tax rate of 21 percent. Therefore, the owners of a corporation can save money by keeping some profits in the company.
In other types of businesses, such as LLCs or sole proprietorships, owners must pay taxes on all company profits based on their individual returns, even if they do not take profits out of the business.
Additional free-of-taxes benefits
A corporation can deduct the total cost of the complimentary benefits received by the employees, including the owners of the company.
But filing taxes as a corporation also has drawbacks. These are the most relevant:
If you are the owner of a corporation, you will have to submit two tax returns annually: one based on the company’s profits, and another based on your personal earnings.
Unlike a sole proprietor or an LLC, the losses of corporations cannot be deducted from the personal income of the owner.
No personal tax credits
Sole proprietorships can claim tax credits. However, corporations are not eligible for this benefit. Every dollar that a corporation earns is taxed.
Learn how to file taxes if your business is a corporation, an LLC or if you are a sole proprietor
For a broader explanation of the pros and cons of declaring taxes as a corporation, we recommend you to hire a Certified Public Accountant (CPA). A CPA can explain to you the benefits of filing taxes as a corporation, how to minimize the costs involved, and provide you with all the forms you need.
The double taxation may make filing taxes as a corporation complicated and costly. Also, you have to gather a large number of documents and possibly include several schedules.
Remember that any error in your tax return can become a red flag for the IRS and increase your chances to be audited.
That’s why the best thing you can do to prepare your tax return is to keep your records well organized. You may also have to hire an accountant to advise you throughout the process.
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