As a corporate tax professional, you know the complexities of complying with business taxation requirements. Your company may have to file corporate tax returns in multiple states and local jurisdictions, as well as with federal — and perhaps international — tax authorities.
The level of intricacy in corporate tax return filing requirements, coupled with frequent changes in tax laws, makes the job of accurately filing corporate taxes time-consuming and complicated. Read on for a guide to preparing and filing corporate income tax returns.
Does every corporation file income tax returns?
Every company in the U.S. that generates net income during a tax year is required to file a corporate income tax return. Whether these companies must pay income tax or not is a different question. For example, unlike a corporation, a limited liability company (LLC) is not a separate tax entity, so it does not pay federal income taxes (although some states do require LLCs to pay taxes).
The two main types of corporations that must file federal tax returns are:
- 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.
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 filling 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.
Common challenges and pain points for corporations
Tax teams face many challenges in preparing and filing tax returns accurately. It’s essential to keep up with changes in tax rules and regulations, which happen frequently at all levels. This can be particularly challenging if your company has nexus in multiple states and you’re required to file taxes in multiple jurisdictions. A good tax and accounting research tool can be invaluable in these cases.
Tax technology can help your team file your company’s corporate tax returns faster, more efficiently, and more accurately. Thomson Reuters ONESOURCE Income Tax streamlines tax management, freeing up your tax and accounting staff for more strategic work. Learn more about handling business taxation requirements on the “Tips and Tricks for a successful filing season.”