I prepare returns for every type of business entity. Each entity type has its own rules and complexities. For example:
The biggest consideration with Sub Chapter S corps is “reasonable compensation” for shareholders. This is a very big audit area. Because the bottom line flows through to the individual’s tax return, shareholders sometimes think they can draw money out because they’re going to pay on the profits on their individual return. While this used to be a tax loophole, that hole has been closed by now reclassifying these distributions as wages. By preparing these returns correctly, you can avoid triggering audits on “reasonable compensation.”
Multi-state corporations with combined reporting requirements and multi-state tax filings must adhere to state tax rules for each state they do business in. Each state has their own apportionment rules for distributing income and expenses generated in that state.
The IRS has said LLC’s are a creature of state statute – there are no tax forms specific to LLC’s. Those with sole members file a Schedule C with their individual tax returns. Two or more members must file a federal and state partnership tax return.
Two or more owners creates a partnership, regardless of the ownership interest, and are required to file a federal and state returns. Bottom line revenue passes through to each individual partner based on their ownership interest. Partner distributions are subject to self-employment tax, rather than wages, meaning that the return must account for Social Security and Medicare.
Sole proprietors file a Schedule C included with their individual tax return to account for their business income. Many times, sole proprietors are shocked that they have to pay federal income tax plus federal self-employment tax, including Social Security and Medicare.