Being an expert in corporate taxation, you are aware of the difficulties involved in meeting corporation tax obligations. In addition to filing corporate tax returns with federal, state, municipal, and possibly even foreign tax authorities, your business could also need to do so.
Accurately submitting business taxes is a laborious and complex task due to the complexity of the requirements for filing corporate tax returns and the regular changes in tax regulations.
A corporate income tax return must be filed by each American business that makes net income during a tax year. It is another matter entirely whether or not these corporations are required to pay income tax. A limited liability business (LLC), for instance, does not pay federal income taxes, unlike corporations, even if certain states do compel LLCs to do so.
There are two primary categories of corporations that need to submit federal tax returns:
- C corporations: A legal structure for a corporation in which the owners or shareholders are taxed separately from the entity, a C corporation is the most prevalent type of corporation. These corporations are subject to federal corporate income taxation. The taxing of profits from the business is at both corporate and personal levels, potentially creating a double taxation situation.
- S corporations: A type of corporation that may pass income (along with other credits, deductions, and losses) directly to shareholders, an S corporation does not pay federal corporate taxes. Usually associated with small businesses (100 or fewer shareholders), this designation offers the regular benefits of incorporation and the tax-exempt privileges of a partnership.
C corporations and S corporations both must file corporate tax returns to local, state, federal, and maybe international authorities once a tax year via corporate tax returns.
Below are 7 steps for preparing corporate tax returns and filings
1. Determine if your corporation is a C corporation or an S corporation
By default, a corporation other than an LLC in the U.S. is a C corporation. Once you have established your company as a C corporation, you can then file an option to be taxed as an S corporation, which means that tax obligations pass through to the owners’ personal tax reporting.
If you don’t know what kind of corporation your business is, call the IRS Business Tax Line at 800-829-4933. The IRS can tell you whether you should file taxes as a C corporation or an S corporation.
2. Determine your tax deductions for write-offs
The next step in preparing a corporate tax return is determining the tax deductions you’ll be able to write off. For corporations, the IRS allows you to deduct all current expenses necessary for the operation of your business, as well as certain investment and real estate purchases, employee salaries and benefits, some taxes, insurance payments, and more. Section 162 of the Internal Revenue Code details the allowable business expenses.
3. Pay your estimated taxes to the IRS
Next, estimate how much tax you’ll need to pay on the net amount. Then if your business is a C corporation, submit estimated tax payments four times a year to state and federal authorities. S corporations typically don’t pay income taxes, since they pass tax obligations through to their shareholders, which means that they usually don’t pay estimated taxes. However, S corporations do need to pay estimated tax when their tax on built-in gains, the excess net passive-income tax, and the investment credit recapture tax total $500 or more. C corporations usually must also pay estimated taxes to one or more states.
4. File your federal tax return by its due date
C corporations use Form 1120 to file their federal income taxes, while S corporations use Form 1120-S. An S corporation’s shareholders must report their share of income from the corporation on a Schedule K-1 attached to their personal tax returns.
- When are corporate tax returns due?
- C corporations must file on the 15th day of the fourth month after the fiscal year’s end. That means that for C corporations whose fiscal year ends on Dec. 31, tax returns are due by April 15. The only exception to this rule is for a corporation whose fiscal year ends on June 30, which must file a tax return by Sept. 15.
- S corporations must file on the 15th day of the third month, which usually means that these companies’ tax returns are due on March 15. Tax calendar software can help you keep track of these deadlines.
- How do you file an extension for your corporate tax return? The IRS provides Form 7004 for companies that want to request an automatic 6-month extension to file their income tax and other returns. As with tax extensions for individuals, filing the form does not extend the date on which any payment is due.
- What is the penalty for filing corporate tax returns late? Missed-deadline penalties for C corporations and S corporations (if you owe the IRS) are 5% of the outstanding tax for up to five months, shifting to a different percentage thereafter, depending on the amount owed.
- Are you required to e-file your corporate federal return? Most corporations don’t need to e-file, but C corporations and S corporations must file their federal income tax returns through either approved software or a tax professional who is an authorized e-file provider. Tax professionals who want to e-file for their clients must be Authorized IRS E-file Providers or Electronic Return Originators.
5. File your state tax returns by their due dates
You also need to file a return for any state in which you conduct business if that state requires it.
- When are state corporate income taxes due? Although most states require a corporation to file its income tax return on the same day that it files its federal taxes, this is beginning to change. Several states now have due dates one month or later, to give taxpayers more time to complete their federal returns, on which the state returns are based.
- What are the state filing requirements for corporations? Not all states have the same tax filing requirements for corporations. While 44 states and the District of Columbia do have corporate income taxes, some states (namely Ohio, Nevada, Texas, and Washington) tax corporate gross receipts instead. Two states — South Dakota and Wyoming — currently have no corporate income tax or gross receipts tax.
- How are state taxes calculated? States use various formulas to determine how much of a company’s income from sales should be taxed in that state — a process called. It’s important to keep abreast of the apportionment details for each state in which you do business, as well as other state-specific details like corporate tax rates, deduction rules, and due dates for estimated tax payments and annual returns.
6. File local tax returns by their due dates
Corporations may also be liable for taxes to city, county, or regional jurisdictions. Local taxing authorities are less likely to require estimated tax payments, but it’s important to check the local rules that apply to your business. Most local tax returns are due on the same schedule as state taxes, but that is also a detail to check before filing.
7. File international taxes for any business in other countries
U.S.-based organizations that do international business will also need to consider the specialized rules and guidance for paying and filing corporate taxes globally. Companies should keep in mind that the IRS allows companies to file for a foreign tax credit to defray U.S. tax obligations to account for taxes paid to other countries on income derived from business there.
How to Complete Your Small Business Tax Returns
When you first launch a firm, a plethora of ideas will cross your mind, yet taxes are frequently neglected in favor of more urgent matters. However, you can’t merely disregard taxes in the hopes that they will go away. If you don’t pay, you can find yourself in a difficult situation with the tax collector.
Read Also: What is Excise and Tangible Tax?
The financial data used to record spending, losses, earnings, and corporate tax to HMRC is called a small business tax return. Typically, it entails filling out a CT600 form and sending in a financial report that includes calculations indicating your tax liability.
Yes, you can prepare and file your own Company Tax Return. However, lots of companies choose to enlist the services of an accountant to help them out and make sure all information that’s submitted is correct.
What information do you need to provide?
When submitting your self-assessment tax returns, there are a few accounts that you’ll have to consider:
A set of accounts will consist of profits and loss accounts — which gives an overview of your businesses’ trading over a period of time, such as a month, quarter or year. It will also feature a balance sheet that provides a snapshot of your business’s financial condition at any given time, reflecting how stable your business is.
Finally, it will also contain a director’s report that gives an overview of:
- The principal activity within the business
- The names of any directors, including new appointments or resignations within the year
- Policies on employees
- Details of any political or charitable donations
It should be signed and dated by one of the directors of the business.
Corporation Tax calculation
A Corporation Tax calculation can be used to work out the adjusted profits for Corporation Tax purposes — the rules can be extremely complicated, so it’s worth hiring an accountant to help as the profits per account and taxable profits are often not the same figures.
Company Tax return
To submit a Company Tax return, you’ll need to provide information about:
- The details of the company
- Calculation of the Corporation Tax due
- Details of any capital allowances claimed
- Details of any losses claimed
If you do decide to file your return yourself, you must submit this information to HMRC.
“The type of tax that you pay and the method that you’ll pay it will depend on the type of business that you run and the way your company is structured,” explains Laura Court-Jones, former freelancer and Business Comparison Expert at Bionic.
The type of tax that you pay when you run a small business and the method that you’ll pay it will depend on the way that your company is structured. A sole trader will pay different taxes than a limited company or a partnership, for example. These are some of the most common types of taxes that you’ll encounter.
If you’re running a limited company, corporation tax is applied to any profits — including those from trading and the sale of any investments or assets. Corporation tax has a flat 25% charge, regardless of how much profit the company makes.
You’ll need to register for corporation tax within the first three months of starting to trade as a limited company. You’ll then be responsible for ensuring the right amount of tax is paid, so you must keep accurate company accounts and file the Company Tax Return by your deadline.
- How to pay corporation tax
As each business’s accounting year is different, knowing when to file and pay your corporation tax can be a little bit tricky.
Each year, you’ll have to submit a CT600 form to HMRC that’s due 12 months from the end of your company’s accounting date. However, your corporation tax bill must be paid nine months and one day after the end of your company’s accounting date. So, in practice, it works best to complete your company tax return early to find out how much corporation tax you’ll owe.
Income tax is only payable by individuals, so businesses won’t have to pay any income tax on themselves. If a wage is above the personal allowance of £12,570 per year, they’ll be liable to pay income tax (allowance figure accurate as of the 2023/2024 tax year).
“If you’re a sole trader,” explains Laura, “you’ll pay income tax on the profit you make for your business. This can be done on an annual basis and you’ll need to submit a self-assessment tax return to HMRC to calculate how much you owe.”
The rates for income tax are:
- Basic rate — 20%
- Higher rate — 40%
- Additional rate — 45%
- How to pay income tax
The amount you’ll pay for income tax will depend on your tax bracket. Remember that other earrings like savings interest or capital gains may also count toward your income and push you into a higher tax band.
If you’re paid by a company, income tax will be taken through the company’s PAYE scheme.
No matter what kind of business you run — sole trader, limited company or anything in between — if your business makes VATable sales of more than £85,000 a year, you’ll have to register for VAT (value-added tax).
VAT is essentially a tax levied on the value added to a product when it moves through the product chain from a supplier to a buyer and then a customer.
The standard rate for VAT is 20%, but some products or services will sometimes have lower rates.
- How to pay VAT
VAT-registered businesses must pay VAT throughout the course of doing business, with a VAT tax return being filed to declare how much VAT they’ve charged or paid for. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
While it isn’t strictly tax, National Insurance (NI) is money that’s paid to the government.
If your business employs staff, you’ll need to pay the employer’s portion of National Insurance contributions directly to HMRC. Businesses pay 15.05% in NICs for employees that earn above £12,570 per year (as per the 2023-2024 tax year).
However, small businesses may be able to reduce their NICs by up to £5,000 if the business is eligible for the Employment Allowance — a scheme that aims to help small businesses to recruit more staff. Sole traders also pay National Insurance as part of the self-assessment tax.
- How to pay National Insurance
Similar to Income Tax, National Insurance will be taken via PAYE.
If you’re a shareholder in a company, you can pay yourself with dividends. This sum of money tends to come out of profits or reserves and the first £2,000 are tax-free.
The rate that you’ll pay depends on your income tax band but for the 20223-24 year, the rates are:
- Basic rate — 8.75%
- Higher rate — 33.75%
- Additional rate — 39.35%
- How to pay dividend tax
You need to include any dividend income in your self-assessment tax return.
If your business is run from anywhere that isn’t a domestic property — like an office, shop, warehouse or factory — then you’ll most likely be charged business rates. Business rates work similarly to council tax as the bills are calculated and sent out by local authorities. Bills will typically be received in February or March, detailing what you’ll need to pay for the following financial year.
They’re calculated on the property’s ‘rateable value’ which is its estimated rental value on the open market.