Business Tax Returns
A business tax return is a set of forms that a business files with the IRS to report its income, expenses, deductions, and credits. It shows the business’s profit, the tax it owes, or whether it is due a refund for taxes already paid.
Filing a business tax return is a legal requirement and ensures that the business complies with federal and state tax laws. The type of return a business files depends on its structure, such as corporations, partnerships, or sole proprietorships, and each has specific reporting requirements. The following is a high-level overview of what forms need to be filed, with more detailed explanations below.
Which form applies to my business?
Choosing the appropriate business structure is critical. Your business tax return determines how income is taxed (at the entity level or passed through to owners) and which tax forms and schedules you will need. Here is a high-level overview with more detailed explanations below:
Multi-member LLC / Partnership: These entities file Form 1065, and income flows through to partners via Schedule K-1. (A “Schedule” is a supplemental IRS form that attaches to your main Form, here Form 1065, to provide the detailed information required by the IRS.)
S corporation: This corporation files Form 1120S. Income, deductions, and credits pass through to shareholders via Schedule K-1.
C corporation: A “C-corp” files Form 1120 and pays corporate tax on net income. A drawback of this entity is that dividends to shareholders can be subject to double taxation.
Single-member LLC & sole proprietor: These businesses report their income on Schedule C of Form 1040, which is actually an individual tax return. See our services page above for details on individual returns.
Filing deadlines: March 15th for an “S-corp” and multi-member LLC/partnership; April 15th for C-Corps, single-member LLC, and sole proprietors
Form 1065 – Partnership Tax Return
Partnerships (including multi-member LLCs taxed as partnerships) must file Form 1065. The partnership itself files the return but generally does not pay income tax; income, deductions, and credits pass through to partners and are reported on each partner’s individual tax return via Schedule K-1.
Key features of this tax structure:
- Pass-through taxation: Form 1065 reports partnership-level items; each partner receives a Schedule K-1 showing their share of business income, deductions, and credits to report on their Form 1040.
- Partner reporting: Partners report K-1 items on their personal tax returns, which affects personal income reporting and any required pay or estimated tax obligations.
- Filing deadline: Form 1065 is generally due on March 15th. However, fiscal-year corporations file by the 15th day of the fourth month after their year-end. Automatic six (6) month extensions are available using Form 7004.
- Complexity & recordkeeping: To support K-1 allocations and deductions, partnerships must carefully track allocations, guaranteed payments, partner capital accounts, and business expenses.
Practical example: Two partners split profits 60/40. The partnership reports $200,000 net business income on Form 1065. Partner A’s K-1 will show $120,000 (60%), and Partner B’s K-1 will show $80,000 (40%). Each partner reports their share on their Form 1040 and pays tax at their individual income tax rate.
Common pitfalls:
- Incorrect profit/loss allocations or failure to document partner agreements by maintaining a written partnership agreement detailing allocations.
- Missing guaranteed payments or improperly classifying owner draws as deductible expenses.
- Incomplete records for business income and expenses are caused by failing to keep receipts, bank statements, payroll records, and depreciation schedules.
If partnership allocations, multi-state income, or K-1 items are complex, consult an experienced accounting firm to avoid costly reporting errors and ensure partners correctly handle their personal and business tax filing.
Form 1120 – C Corporation Tax Return
C corporations file Form 1120 with the IRS. A C-corp is a separate legal entity that reports corporate income, deductions, and computes corporate tax liability on this form. An important characteristic of a C corporation is that profits can be subject to double taxation if they are distributed as dividends to shareholders.
Key features:
- Separate taxation: The corporation pays tax on its taxable income, and shareholders pay tax on any dividend distributions, which can create double taxation on the same economic earnings.
- Deductions and documentation: Common deductible items include salaries, cost of goods sold (“COGS”), rent, professional fees, depreciation, and other ordinary business expenses. It is important to retain payroll records, expense receipts, and depreciation schedules to substantiate these deductions.
- Filing deadline: Calendar year C Corporations generally file Form 1120 by April 15th. However, fiscal-year corporations file by the 15th day of the fourth month after their year-end. Automatic six (6) month extensions are available using Form 7004.
- Detailed reporting: Form 1120 requires schedules for dividends, capital gains, tax credits, and various adjustments to reconcile book income to taxable income.
When to consult a tax advisor: If your corporation has complex items such as significant depreciation, intercompany transactions, multi-state activity, questions about shareholder distributions, and reasonable compensation, it is important to work with an experienced accounting firm. Experienced accountants can help optimize deductions, ensure compliance, and review payroll and owner compensation strategies to help balance corporate and owner-level tax consequences.
Form 1120S – S Corporation Tax Return
S corporations elect to be taxed as pass-through entities and file Form 1120S with the IRS. The entity itself generally does not pay federal income tax; instead, income, deductions, and credits flow through to shareholders via Schedule K-1 and are reported on each shareholder’s Form 1040.
Key features:
- Pass-through treatment: Like partnerships, an S-corp’s income, losses, deductions, and credits pass through to owners.
- Shareholder reporting: Shareholders include K-1’s with their personal tax returns, which affects their personal taxes, including their required estimated tax payments, if applicable.
- Filing deadline: Form 1120S is due March 15th unless the business uses a fiscal year, which would make the filing due on the 15th day of the third month after year-end. Form 7004 can be filed for an automatic six (6) month extension.
- Eligibility and restrictions: S corporations are subject to limits on the number and types of shareholders, generally allowing only U.S. persons, with a statutory cap on the number of shareholders. In most cases, it cannot have multiple classes of stock.
Practical considerations for owners: S corporation owner-employees must be paid reasonable compensation for services performed, as payroll and employment tax compliance are essential. Profits distributed as shareholder distributions are generally not subject to payroll taxes but are reported on a K-1 and taxed at the shareholder level.
Owner compensation in S-corp vs. C-corp: An owner who works in the business should receive a salary (subject to payroll taxes) and may also receive distributions. An S corporation typically avoids entity-level tax on distributions for the owner, but it requires careful documentation of reasonable compensation to withstand IRS scrutiny. This is compared with a C corporation, which ……
If your S corporation has payroll issues, complex shareholder allocations, or multi-state income, consult with an experienced tax professional to ensure you are optimizing tax outcomes and to ensure you are keeping accurate records to support K-1 reporting for owners and the business.
FAQ: Important Considerations of Business Tax Returns
How long should I keep business tax records?
Proper recordkeeping is essential for IRS compliance, supporting deductions, and overall accurate filing. Organizing records and maintaining digital backups is highly recommended to accomplish these goals. While some records may be kept for 3 years, businesses often need longer retention:
At least 3 years: Most business tax returns.
6–7 years: If you underreport income by more than 25% or claim a loss from worthless securities.
Indefinitely: Records related to property basis.
Employment tax records: Keep for at least 4 years after the tax is due or paid.
Business-specific records: Payroll records, depreciation schedules, bank statements, contracts, receipts for significant expenses, and K-1 support should be retained for 7 years when feasible.
When must businesses make estimated tax payments?
Owners of pass-through entities, sole proprietors, or businesses with significant non-wage income may need to make quarterly estimated tax payments to avoid underpayment penalties.
The quarterly deadlines are April, June, September, and January.
Threshold: If the business expects to owe $1,000 or more in taxes, estimated payments are required.
Pass-through income: Owners receiving K-1’s should calculate personal tax obligations and pay estimated taxes accordingly.
Sole proprietors include self-employment tax in estimates.
How can businesses reduce taxes and maximize deductions?
Effective business tax planning requires timely expense tracking, proper documentation, and strategic entity planning.
Document all ordinary and necessary expenses: Travel, meals, office supplies, home office (if eligible), and equipment. Retain receipts to substantiate deductions.
Choose the right entity:
Pass-through entities (partnerships, S corporations) shift tax to owners but may increase personal tax liability.
C corporations pay entity-level tax but offer flexibility for retained earnings planning.
Maintain accurate financial records: Reconcile bank accounts monthly and track income separately to support deductions and prepare precise tax filings.
What are the key compliance practices to help avoid penalties?
Avoiding IRS penalties and interest depends on timely filing, accurate reporting, and prompt responses.
File business returns and extensions on time. Use Form 7004 for corporate or partnership extensions.
Respond promptly to IRS notices and keep documentation of all communications.
Stay up-to-date with major tax law changes affecting credits, deductions, or reporting requirements.
When should I hire a tax professional?
Complex returns, multi-state business activity, significant pass-through income, payroll and owner compensation issues, or suspected IRS notices are situations where professional assistance provides clear value. An accounting firm can also help with entity selection, estimated tax calculations, bookkeeping, and the preparation of accurate tax returns and forms.
The Chamberlain Accounting Firm is one of the leading accounting firms in Bergen County, New Jersey, serving clients across the county, state, and in surrounding states. Our services encompass individual tax returns (Form 1040), business tax returns for partnerships and corporations (Forms 1065, 1120, and 1120S), bookkeeping for small businesses, including solo attorneys and small law firms. We are dedicated to helping people and businesses achieve financial accuracy, maintain compliance, and support growth wherever they are located. Contact us today or call us at (201) 464-1011 to learn how we can help you and/or your business maintain financial health and compliance.