Which Tax Return is Right for Your Business?

The Variety of Tax Returns for Business

De-Clutter CartoonOur staff at Ledger Rite prepares:

- Corporate tax returns
- Partnership tax returns
- Non-profit Corporate tax returns

Corporate tax returns can be either forms 1120 or 1120-S.

Form 1120 is for Corporations that are stand alone for tax purposes, a regular corporation with stock holder(s).  The main advantage to the regular corporate structure is if the officer/owners of the corporation would be in a higher tax bracket if profit was distributed to their personal return(s).  In other words, salaries can be adjusted to receive the best tax scenario for the Company and the stock holder/owner(s).

The 1120-S form is for Corporations that have been approved for the S-election.  Instead of the Corp. being taxed on its own, the profit or loss is distributed to the shareholder(s).  The company issues K-1 forms to the shareholder(s), who then take the profit or loss to their personal returns.  This is often a good tax position for smaller companies where the shareholder(s) would be at a lesser tax bracket than the Corporate tax rate.

An active officer/shareholder is expected by the I.R.S. to take reasonable compensation in the form of a salary from the Corporation (to be liable for payroll taxes) and can be distributed any profit up to the amount of salary taken.  The advantage to the shareholder is that the distribution is taxable as gross income, but not subject to Social Security or other payroll taxes.  An added advantage is that unless profit and salary to any one officer/shareholder is more than $350,000.00, a Michigan business tax return does not need to be filed.

Partnership Tax Return

A partnership tax return is filed on Form 1065.  Many small businesses end up in this position because of how the LLC was formed with the State of Michigan.  An LLC is not a recognized entity with the Internal Revenue Service, so the result is that if one person signs the paperwork it is considered a Schedule C (business schedule) on the signer’s personal tax return and if more than one person signs the paperwork, it is automatically considered a partnership by the I.R.S.  The disadvantage to the partners is that all salary and profit are taxed as gross income and Social Security wages.

Non-profit Corporation Tax Return

A non-profit corporation is required to file an annual 990 tax return.  It is a totally different tax format, and although there is no inherent tax liability, penalties can be assessed for late or non-filing of a return.

If you have questions about what format of tax return is best for your firm, please contact us to schedule an appointment for your first consultation.

Contact Ledger Rite today for a free consultation!