Irs Small Business Forms
irs small business forms
Small business taxes – How To Reduce Your Taxes By Being Taxed As An “S” Corporation
Looking for an effective tax reduction strategy for your small business? This article explains how to reduce your taxes by choosing to be taxed as an S corporation. Question: What do all the following small business owners have in common? 1) C corporation shareholders; 2) sole proprietors; 3) partnership partners; and 4) limited liability company (LLC) owners who are being taxed like a sole proprietorship or a partnership. Answer: Each of these entity types has the potential to pay less tax by choosing to be taxed like an S corporation. C corporation owners face the dreaded double taxation of corporation profits. Any corporate profits are usually taxed twice. The corporation must pay its own corporate income tax on those profits. And if the corporation distributes those profits to the shareholders as dividends, those dividends get taxed a second time on the personal income tax returns of the individual shareholders. Ouch! Sole proprietors, partnership partners and LLC owners all face the dreaded self-employment (SE) tax on their business profits. And unlike an employee, they pay twice as much SE tax (15.3%) than their employee counterparts pay in payroll tax (7.65%). What are all these small business owners to do? One option is to choose to be taxed like an S corporation. An existing C corporation that switches to S corporation status can avoid the double taxation of corporate profits. This is possible because an S corporation typically doesn’t pay any corporate income tax on profits. The profits are only taxed to the individual shareholders on their personal income tax return. End result: no double taxation. Sole proprietors, partners and LLC members can legally reduce SE tax by receiving reasonable employee compensation from the S corporation. If this compensation is less than the total business profit, the remaining profit legally avoids payroll tax, because only employee wage/salary is subject to payroll taxes. How do you “choose” to be taxed like an S corporation? This choice is made by filing Form 2553 with the IRS, Election by a Small Business Corporation. Think of this form as an application by an existing small business to be treated like an S corporation for tax purposes. Here’s how it works for each entity type: C corporation. File form 2553. That’s all there is to it. You don’t have to shut down the existing corporation; nor do you have to form a new corporation. The existing corporation continues to exist, just like it did before, as a corporation in good standing of the state in which the corporation was formed. Limited liability company. Likewise, just file Form 2553. You don’t have to shut down the LLC and/or form a new corporation. The original LLC remains intact for legal purposes. You simply submit Form 2553 in order to tell the IRS you want your business treated like an S corporation instead of a sole proprietorship or a partnership. Sole proprietors and partners. Before filing Form 2553, you must form a corporation or LLC. Once this new entity is set up, submit Form 2553. Important: There are specific rules regarding the timing of the Form 2553 filing, so be sure to read the instructions carefully or consult with your tax professional.
About the Author
Looking for more small business tax tips? For a free copy of the 25-page Special Report “How To Instantly Double Your Deductions”, visit http://www.yousaveontaxes.com . Wayne M. Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.
How to inform IRS of business closure?
I had a small home business last year and when we filed our taxes we added in the income from that business (we had a EIN#) I am no longer doing that work, havent for any part of 2008, but I want to hold on to the EIN#. Is there a form we should fill out or anything? I’d hate to not file anything this year and have a red flag go up….
If you had employees, check the box on the 941, 940, and 1120 or 1065, that says “~company no longer has payroll; out of business” or words to that effect. Same with the state sales tax, withholding tax and similar reports, if applicable. If you had no employees and this was just a sole-proprietorship, Schedule C business, you don’t need to do anything to keep the EIN “alive”. You may have to do something under your home state’s law, however, to retain your franchise (ie, corporation, partnership, LLC, etc.). Annual franchise taxes for a dormant business are usually minimal.
Good luck!
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Classic Internal Revenue Service Business Tax Preparation Film DVD: 1970s Small Business Finance & Accounting Tax Preparation & Advice Film $12.99 No one likes to pay taxes – whether you’re an individual or a business. The complexity, anxiety and frustration of the bureaucratic process affect us all. There’s the fear of filing wrong and being penalized, the fear of a thorough, unexpected audit, and the disappointment of forking over a large chunk of hard-earned money to Uncle Sam. This vintage film breaks down the basics of business taxes fo… |
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