My wife and I started a small business last year. We are the only owners and do not have any employees. Can I file my personal income tax separate from my business?
The income tax form that you will need to file for your business depends on the business entity that you established when you started your business. You will need to review your business records to see what entity you formed and follow the IRS’ guidelines on how to report your business income.
The tax filing requirements differ for each type of entity. The business entities available to those starting a business are sole proprietorship, general or limited partnership, C corporation, S corporation, limited liability company (LLC), and limited liability partnership (LLP). While there are many tax and non-tax issues to consider when choosing a business entity, here is a general summary of the income tax filing requirements for each entity.
Sole proprietorships do not need to file a separate tax return. The sole proprietorship’s business activities (i.e., the income and expenses of the business) are reported on Schedule C or Schedule C-EZ (Profit or Loss from Business) of the owner’s individual income tax return (Form 1040). Any net income that is shown on Schedule C is taxed as ordinary income on the owner’s tax return. Any net loss reduces the owner’s ordinary income.
Income from partnerships and LLCs are passed through to the individual partners of the partnership or members of the LLC and taxed at the individual level. Partnerships and most LLCs do not need to file an income tax return. However, these entities are required to file an annual information return (Form 1065) providing the IRS with information on the payments made to their individual partners and members. The IRS compares the information from these filings to the individual’s tax returns to ensure that the payments are being included as income.
Corporations and their owners/shareholders are required to file separate income tax returns (Forms 1120 and Form 1120S). For tax purposes, there are two types of corporations: C corporations and S corporations. Income generated by a C corporation is subject to taxation at the corporate level and the individual level. Pre-tax income is taxed at the corporate level and dividends paid to shareholders are taxed at the individual level.
An S corporation is a corporation that has made a special election to allow it to be treated as a corporation for legal purposes but a pass-through entity (like a partnership) for income tax purposes. The income from an S corporation is passed through to the individual shareholders of the corporation and taxed at the individual level. However, an S corporation is required to file a separate tax return (Form 1120S).
Visit the IRS’ Small Business and Self-Employed Tax Center at http://www.irs.gov/businesses/small/index.html for more information about tax filings for small businesses.