What Do I Need to File Business Taxes?

Understanding business tax requirements is a fundamental aspect of operating any enterprise. This article provides guidance on the necessary information and steps for maintaining tax compliance, helping business owners prepare for their annual tax responsibilities.

Foundational Business Information and Records

Effective tax preparation begins with diligent record-keeping and understanding the business entity. The business structure significantly influences tax obligations. A sole proprietorship reports profits and losses directly on the owner’s personal tax return. Partnerships, including multi-member Limited Liability Companies (LLCs) taxed as partnerships, are “pass-through” entities where income and expenses are reported on individual partners’ tax returns.

C corporations are distinct legal entities that pay corporate income tax on profits, and shareholders are taxed again on dividends received (double taxation). S corporations pass profits and losses directly to shareholders’ personal income, generally avoiding double taxation. LLCs offer liability protection and can choose to be taxed as a sole proprietorship, partnership, S corporation, or C corporation.

The Employer Identification Number (EIN), also known as a Federal Tax Identification Number, is a unique nine-digit number issued by the IRS. It is used for tax filings and other financial purposes. Businesses generally need an EIN if they have employees, operate as a corporation or partnership, or file certain tax returns. It is also often required for opening business bank accounts. Sole proprietors without employees may use their Social Security Number, but an EIN can help separate personal and business finances.

The chosen accounting method dictates when income and expenses are recognized. The cash method records income when received and expenses when paid out, offering simplicity. The accrual method recognizes income when earned and expenses when incurred, regardless of when cash changes hands. While simpler, the cash method has eligibility limitations, with larger businesses often required to use the accrual method.

The business’s tax year, either a calendar year (January 1 to December 31) or a fiscal year (any 12-consecutive-month period), also influences tax reporting. Most businesses align with the calendar year, which simplifies personal and business tax filing. A fiscal year can be advantageous for seasonal businesses. Changing an established tax year requires IRS permission.

Detailed income records are necessary for accurate tax reporting. This includes sales receipts, customer invoices, cash register records, and bank deposit information. Organized records of credit card sales slips and any Form 1099-MISC received are also needed. These documents substantiate gross receipts reported on tax returns.

Comprehensive expense records are important for claiming deductions and reducing taxable income. Businesses must retain detailed receipts, invoices, canceled checks, and bank or credit card statements for all expenditures. Deductible expenses include:
Rent
Utilities
Office supplies
Advertising
Business insurance
Travel
Professional fees
Interest on business loans

Records should identify the payee, amount, date, and business purpose of each transaction.

For businesses with employees, accurate payroll information is necessary for tax compliance. This includes records of wages paid, federal income tax withheld, and employee and employer contributions to Social Security and Medicare taxes (FICA). Employers are also responsible for Federal Unemployment Tax Act (FUTA) payments. Maintaining records of Forms W-4 for calculating federal tax withholding and preparing Forms W-2 for employees at year-end is required.

Information on business assets, such as equipment, vehicles, and real estate, is necessary for calculating depreciation deductions. Businesses track the date of acquisition, original cost, useful life, and prior depreciation for these assets. This asset information helps determine the annual depreciation expense, which reduces taxable income.

Businesses that maintain inventory must accurately account for it for tax purposes. This involves tracking beginning and ending inventory counts and applying a consistent valuation method, such as First-In, First-Out (FIFO) or Last-In, First-Out (LIFO). Inventory is an asset that impacts the cost of goods sold (COGS) and the business’s profit, influencing taxable income. Small businesses may have simplified inventory tracking rules.

Businesses must gather various third-party tax statements and reference prior year tax returns. This includes:
Forms 1099-NEC for nonemployee compensation
Forms 1099-MISC for miscellaneous income
Forms 1099-K for payment card transactions
Forms 1099-INT for interest income
Forms 1099-DIV for dividend income

If the business is a partner or S corporation shareholder, Schedule K-1s detailing their share of income, deductions, and credits are necessary. Prior year tax returns provide historical financial data.

Federal Business Tax Forms

After gathering all foundational business information, the next step involves preparing the specific federal tax forms relevant to the business structure. Each business entity type has distinct IRS forms designed to report its income, expenses, and financial activities. These forms are the primary means by which businesses communicate their financial standing to the federal government.

For sole proprietorships and single-member LLCs not taxed as a corporation, tax reporting occurs on Schedule C, “Profit or Loss from Business (Sole Proprietorship),” part of the owner’s personal Form 1040. Schedule C requires a breakdown of gross receipts and various business expenses, such as advertising, car and truck expenses, office expenses, and utilities. The net profit or loss from Schedule C flows to the owner’s Form 1040.

Sole proprietors and single-member LLC owners are also responsible for self-employment taxes, covering Social Security and Medicare contributions. These taxes are calculated on Schedule SE, “Self-Employment Tax,” based on net earnings from self-employment reported on Schedule C.

Partnerships, including multi-member LLCs taxed as partnerships, file Form 1065, “U.S. Return of Partnership Income.” This form reports the partnership’s income, deductions, gains, and losses but does not pay income tax. The partnership acts as a pass-through entity, passing profits and losses to individual partners.

Financial information on Form 1065, such as gross receipts and operating expenses, is compiled from accounting records. Each partner receives a Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.,” outlining their share of results. Partners use Schedule K-1 information to report their share of income or loss on their personal Form 1040.

S corporations file Form 1120-S, “U.S. Income Tax Return for an S Corporation.” Similar to partnerships, S corporations are pass-through entities and generally do not pay federal income tax. Income, losses, deductions, and credits are passed through to shareholders.

Financial data, including revenue and business deductions, are reported on Form 1120-S. Each shareholder receives a Schedule K-1, “Shareholder’s Share of Income, Deductions, Credits, etc.,” detailing their portion of the S corporation’s financial results. Shareholders use this Schedule K-1 information to report their share of income or loss on their personal Form 1040.

C corporations use Form 1120, “U.S. Corporation Income Tax Return,” to report income, gains, losses, deductions, and credits. Unlike pass-through entities, C corporations are subject to corporate income tax on their net earnings. This form requires comprehensive financial information, including gross income, business expense deductions, and tax credits.

Data for Form 1120 is drawn from the corporation’s accounting records. C corporations report their taxable income and tax owed on this form, reflecting their status as a separate taxable entity.

Other federal tax forms may be relevant depending on a business’s activities. Form 4562, “Depreciation and Amortization,” is used to claim depreciation deductions on business assets. This form requires asset information, including acquisition dates, costs, and depreciation methods. If a business owner uses a portion of their home for business, Form 8829, “Expenses for Business Use of Your Home,” may be used for the home office deduction. All official federal tax forms and instructions are available on IRS.gov.

Federal Tax Filing and Payment Procedures

With all necessary information gathered and forms prepared, the focus shifts to federal tax filing and payment procedures. This involves adhering to specific deadlines and utilizing approved methods for submission and remittance.

Federal tax filing deadlines vary by business structure. Partnerships and S corporations must file by March 15th following the calendar tax year. C corporations generally have an April 15th filing deadline. Sole proprietorships follow the individual income tax deadline, typically April 15th.

Most businesses must pay estimated taxes quarterly to cover income tax and self-employment tax liabilities. Payments are due on April 15th, June 15th, September 15th, and January 15th of the following year. Businesses can make these payments through electronic methods like IRS Direct Pay, EFTPS, or by debit/credit card. Payments can also be mailed with a payment voucher.

If a business needs additional time to prepare its tax return, an extension to file can be requested. For most business income tax returns, this is done by filing Form 7004, “Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns.” Filing this form grants an automatic six-month extension for filing. An extension to file is not an extension to pay any taxes due. Businesses must still estimate and pay any tax owed by the original deadline to avoid penalties and interest.

Businesses have several options for submitting completed federal tax forms. Electronic filing (e-filing) is encouraged by the IRS due to its speed, accuracy, and confirmation of receipt. E-filing can be done through commercial tax preparation software or by engaging a tax professional. Businesses can also mail paper tax returns directly to the IRS. Specific mailing addresses vary by form and location, provided in tax form instructions.

When taxes are due, businesses can utilize several payment methods. Direct debit is an option when e-filing, allowing the IRS to withdraw payment from a bank account. IRS Direct Pay and EFTPS are electronic payment services. Debit or credit card payments can be made through third-party processors, which may involve a fee. Checks or money orders can be mailed with a payment voucher.

After filing and paying, businesses should retain copies of submitted returns and all supporting documentation for several years, typically three to seven, for audit or future reference. The IRS provides confirmation of e-filed returns, which businesses should keep. The IRS may send correspondence after a return is processed, including notices of receipt, balance due, or refund information.

State and Local Business Tax Requirements

In addition to federal tax obligations, businesses must navigate state and local tax requirements. These taxes vary significantly across jurisdictions, so businesses must research and understand the specific rules applicable to their operations. State and local tax agencies often have their own forms, filing deadlines, and payment procedures, distinct from federal ones.

Many states impose their own income tax on businesses. The structure of state income tax varies, with some states mirroring federal calculations but requiring state-specific adjustments. Businesses may need to maintain separate records or adapt federal records to comply with state income tax regulations, which might include specific state-level deductions or credits. Forms and filing schedules for state income tax are managed by the individual state’s revenue department.

Sales tax is a common state-level tax for businesses selling goods or certain services. If a business makes taxable sales, it generally needs a sales tax permit or license from the state. The business collects sales tax from customers and periodically remits these funds to the state. The frequency of sales tax filings is determined by sales volume and state requirements.

Businesses with employees are subject to various state-level payroll taxes. These include state unemployment insurance (SUI) taxes, which fund unemployment benefits, and in some states, state disability insurance (SDI) taxes. Employers must register with their state’s labor or unemployment agency and make regular contributions based on employee wages. These state payroll taxes require separate filings and payments, often with their own reporting schedules and forms.

Property taxes are levied at the local level by counties, cities, or municipal entities. Businesses that own real estate are subject to real property taxes based on the assessed value. In some jurisdictions, businesses may also be subject to personal property taxes on tangible assets like equipment, furniture, and fixtures. Assessment and collection of property taxes are managed by local tax assessors and treasurers, with specific due dates and payment methods varying by locality.

Beyond state income, sales, payroll, and local property taxes, businesses may encounter other local taxes and fees. These can include business license fees, often required for operating within a city or county. Some municipalities may impose gross receipts taxes, based on a percentage of total revenue, or occupancy taxes for businesses like hotels. The specific types and rates of these taxes depend on the local jurisdiction. Businesses should consult their state revenue department and local government offices to identify all applicable tax requirements, filing frequencies, and payment methods.