Tax Benefits | Tax Filing | How to fill out Form 1120-S | Estimated Taxes
Starting a business with the goal of “taking it public” or attracting institutional investors is the goal of many entrepreneurs.
Bootstrapping a business and trying to grow it as large as possible, with the goal of either staying on as the founder/CEO or eventually selling to another business, is another common goal of entrepreneurs.
A third objective for starting a business is aiming to sustain a particular level of income with as few employees as possible. These entrepreneurs don’t have the ambition to grow as big as possible and eventually sell. Their goal is to build a business to a specific income level that can sustain the founder’s preferred lifestyle. This is where the term “lifestyle business” comes from.
For many of these so-called lifestyle businesses, the S Corporation entity is a perfect choice for a business entity. You may already be asking yourself how are S Corporations both similar and different to C Corporations? What makes an S Corporation a good fit for a lifestyle business?
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President Dwight Eisenhower and Congress were successful in creating a hybrid entity that helped small business owners in the U.S.
With most featuring three or fewer shareholders, very few S Corporations have to worry about the hurdles surrounding who can be a shareholder, the number of shareholders, being based in the U.S., and having only one class of stock.
That’s why the S Corporation is a perfect fit for these lifestyle businesses whose owner has no grand ambition to grow the business as large as possible and attract as many investors as possible.
An S Corporation files its tax return on Form 1120-S. Each shareholder receives a Form K-1 from the S Corporation. K-1s report each shareholder’s allocation of income, losses, and other financial information from the business including the sale and purchase of assets. The shareholder includes Form K-1 information on their individual tax return.
This section discusses filing an S Corporation tax return and the associated Form K-1s. If you have an S Corporation, please contact our office with any questions about how to file a Form 1120-S or how to include a Form K-1 on your individual tax return.
Record your income. The first section of Form 1120-S is where your business’s income and cost of goods sold are recorded.
Record your expenses. The second section of Form 1120-S is where your business’s expenses are recorded.
Calculate your net profit or loss. Subtract your total expenses from your gross income to compute your net profit or loss. On an S Corporation tax return, the technical name for your business’s profit or loss is “ordinary income or loss”.
Record taxes owed and payments made. The vast majority of S Corporations do not owe taxes at the business entity level. As discussed before, shareholders normally pay taxes on their share of the business’s profits on their individual tax returns. There are several limited circumstances where an S Corporation would owe taxes at the entity level. This is the section where these tax liabilities would be recorded.
Answer questions on Schedule B. Stretching over all of Page 2 and on to Page 3 of Form 1120-S, Schedule B can be thought of as a questionnaire that encompasses various areas of your business. The questions range from asking about the business’s stock structure to ownership interest by shareholders.
Complete Schedule K. This schedule is what will be used to allocate dollar amounts and other information from Form 1120-S to the shareholders.
Complete Schedule L. If required, complete Schedule L. This is where you would report your business’s balance sheet.
Complete Schedule M-1. This schedule is where you reconcile taxable vs. non-taxable income and deductible vs. non-deductible expenses.
Complete Schedule M-2. This schedule is a more detailed look at the shareholders’ capital accounts.
Understanding the limitations that come with S corp entities can help you ensure your business has adequate processes in place to mitigate some of the regulatory drawbacks of forming an S corporation.
The K-1 you receive from your S Corporation will contain the following information to report on your individual income tax return: Ordinary business income or loss; Rental income or loss; Interest income; Dividend income; Royalties; Capital gains or losses; Other income or losses; Section 179 Expense; Deductions that don’t get rolled up into the business’s overall profit or loss for tax purposes; Tax credits; Items that affect alternative minimum taxable income; Items that affect shareholder basis.
This is just a quick overview of Form 1120-S and Form K-1. Please get in touch with our team if you have any questions about filing a tax return for your S Corporation or how to report K-1 information on your individual tax return.
An S Corporation shareholder is generally required to make estimated tax payments, as taxes must be paid as you earn or receive income throughout the year, either through withholding or estimated tax payments. Estimated tax payments are used to pay not only income tax but also other taxes such as self-employment tax and alternative minimum tax.
For estimated tax purposes, your tax year is divided into four payments periods:
NOTE: If the payment deadline falls on a weekend or legal holiday (i.e. Martin Luther King, Jr. Day in January and Washington D.C.’s Emancipation Day in April), you may wait until the following business day to mail or submit your payment.
Here are some suggestions for figuring out how much your estimated tax should be:
A good starting point is to use your prior year Form K-1 received from your S Corporation.
Next, estimate your expected adjusted gross income, taxable income, taxes, deductions, and credit for the entire tax year.
Use the worksheet provided by the IRS in the instructions to Form 1040-ES or call our office for assistance.
If you subsequently discover that your estimate was too high, simply complete another Form 1040-ES worksheet to recalculate your estimated tax when it comes time for your next payment. If your estimate was too low, complete another Form 1040-ES worksheet to adjust your next payment.
You can send estimated tax payments with Form 1040-ES by mail, or you can pay online, by phone, or from your mobile device using the IRS2Go app. You can pay your estimated taxes weekly, bi-weekly, monthly, etc. as long as you’ve paid enough in by the end of the quarter.
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty and/or interest. You may also be charged with a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
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Disclaimer: This page is not intended to be the rendering of legal, accounting, tax advice, or other professional services. Articles are based on current or proposed tax rules at the time they are written, and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.
