Business Income Taxes

I can prepare the tax returns for most any business regardless of the entity type. A business entity can be a sole owner, partnership, LLC, corporation or an S corporation. Each of the business entity types listed below all have special tax rules and state laws. The answer as to which is best, depends on the owners objectives.

Sole Owner business income is reported on schedule C of the owners personal income tax return. Rental income is reported on schedule E and farming income on schedule F of the owners personal tax return. Tax losses and credits may be limited by the passive activity rules.

Partnerships file an income tax return but pay no tax. Income is allocated among the partners and reported on their individual tax returns. Tax income is not the same as distributions received from the partnership. A partner's basis in the partnership is an important factor in determining taxable income. Tax losses and credits may be limited by the passive activity rules.

LLC limited liability companies elect how they choose to be taxed, as a corporation, S corporation, partnership or if only one member a sole owner. California annually charges LLCs an $800 tax and a fee based on gross receipts.  

Corporations are separate legal entities owned by one or any number of stockholders. Money comes back to the owners as employees receiving a paycheck which the corporation can deduct or as dividends which the corporation cannot deduct. Most small corporations with a limited number of stockholders never pay dividends. Generally, lenders will not loan money to a small corporation without the stockholder's personal guarantee. California has a minimum $800 tax on corporations. It is usually not beneficial to put appreciable assets like real estate in a corporation.

S Corporations are regular corporations that have elected to be taxed under a different set of rules. The election can be made at the corporation's inception or at a latter date. S corporations profits are passed through to the stockholders so the corporation pays no income taxes but the stockholders do. California still imposes the minimum $800 or the lower rate of  1.5% (Vs 8.84%). There are no dividends from an S corporation unless there are undistributed profits from before the S election. Stockholders working for the S corporation should be paid wages that are equivalent to what a non-stockholder would be paid for the same work. Stockholders can take distributions from the S corporation tax free that reduce Basis but not more than their Basis.

 

   updated 05/26/07.