How to File a Corporate Income Tax Return

The corporate income tax return is the tax filing for C corporations in the United States. All domestic corporations must file this return annually, regardless of whether they have taxable income. The purpose of the return is to report the corporation’s financial information to the Internal Revenue Service (IRS). This includes detailing income, gains, losses, deductions, and credits to calculate the corporation’s income tax liability.

Required Information and Financial Statements

Before beginning a corporate tax return, a company must gather several pieces of identifying information. This includes the Employer Identification Number (EIN), a unique nine-digit number assigned by the IRS for tax purposes. The date of incorporation and the corporation’s total assets at the end of the tax year are also necessary.

A company also needs its principal business activity code, based on the North American Industry Classification System (NAICS). This six-digit code classifies the company’s primary line of business. A business can find its NAICS code on census bureau websites or by reviewing its prior year’s tax return.

The core of the required documentation consists of the corporation’s financial statements for the tax year. The first is the income statement, often called a profit and loss (P&L) statement, which summarizes the company’s revenues, costs, and expenses over the year. Key figures to have finalized include gross receipts from sales, as well as totals for expenses like officer compensation, employee salaries and wages, rent, and interest paid.

The second required financial statement is the balance sheet. Unlike the income statement, which covers a period, the balance sheet provides a snapshot of the company’s financial position on a specific date. For tax return purposes, balance sheets for both the first and last day of the tax year are needed. This statement details the company’s assets, liabilities, and shareholder equity.

Other records are needed to complete the return accurately. This includes a record of all estimated tax payments made throughout the year. Information regarding officer compensation is also required, including the name, Social Security Number, and total compensation for each officer. If the company bought or sold assets like property or equipment, detailed records of these transactions are necessary to calculate depreciation.

Calculating Taxable Income and Completing Form 1120

A corporation’s taxable income is calculated with a formula: gross income minus the cost of goods sold (COGS) and all allowable deductions. This resulting figure is the amount on which the corporation’s tax liability is based. The process involves transferring figures from the company’s financial statements onto Form 1120, the U.S. Corporation Income Tax Return.

The initial section of Form 1120 focuses on income. A corporation reports its gross receipts or sales from its primary business operations. From this amount, the cost of goods sold is subtracted to arrive at the gross profit. Other types of income, such as dividends, interest, rent, royalties, and capital gains, are then added.

Following the income section, the form provides lines for various business deductions. These are the ordinary and necessary expenses incurred while running the business. Common deductions include:

• Compensation of officers
• Salaries and wages for employees
• Business rent
• Taxes and licenses paid
• Interest on business debt
• Depreciation
• Advertising
• Contributions to employee benefit programs

Key Schedules

A corporate tax return includes several schedules that provide supporting detail. One is Schedule L, the Balance Sheet per Books. This schedule requires the corporation to present its balance sheet directly on the tax return, showing assets, liabilities, and equity at the beginning and end of the tax year. Corporations with total receipts and total assets under $250,000 are not required to complete Schedule L.

Schedule M-1, the Reconciliation of Income (Loss) per Books With Income per Return, explains any differences between the net income on the company’s income statement (book income) and the taxable income on Form 1120. These differences arise because some items are treated differently for financial accounting purposes than for tax purposes.

Common reconciling items on Schedule M-1 include expenses that are not fully deductible for tax purposes. For example, the tax deduction for business meals is generally limited to 50%, though certain meals, such as those for a company-wide holiday party, can be fully deductible. Other reconciling items include federal income tax expense, which is not deductible, and tax-exempt interest from municipal bonds, which is not taxable.

The return also accounts for tax credits. Tax credits are distinct from deductions; while deductions reduce taxable income, credits provide a dollar-for-dollar reduction of the final tax liability. After calculating the tax on its taxable income, a corporation subtracts any eligible credits. Examples include credits for research and development activities or for taxes paid to foreign countries.

Filing Procedures and Deadlines

For C corporations that operate on a calendar year, the deadline to file the federal income tax return is April 15th of the following year. If the corporation uses a fiscal year, the return is due by the 15th day of the fourth month after the end of its tax year. Should this date fall on a weekend or a legal holiday, the deadline shifts to the next business day.

If a corporation cannot file its return by the original due date, it can obtain an automatic six-month extension by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. This form must be submitted on or before the original deadline. For a calendar-year corporation, this extends the filing deadline to October 15th. This is an extension of time to file, not an extension of time to pay, and any estimated tax liability must be paid by the original deadline to avoid penalties.

The IRS mandates that most corporations file their returns electronically. Regulations require corporations that file 10 or more returns of any type during the year to e-file their Form 1120. This can be done through approved tax preparation software or by using the services of a tax professional. Any tax due must be paid electronically using the Electronic Federal Tax Payment System (EFTPS). A corporation must enroll in the system before it can make its first payment.