Benjamin Franklin coined the phrase “ Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.” And as far as this being true today, it turns out the latter is as definite as the former, at least when it comes corporate taxes.
If you have just incorporated your small business, filing taxes may not be the first thing on your mind or agenda. And some types of businesses can get away with this in the first year or so, while others cannot. Also, keep in mind that things can get expensive
If you fail to meet your tax obligations from the beginning. Let’s walk thru a few examples to see if your startup falls into the categories of immediate tax filing responsibilities.
Not all businesses are required to file a federal tax return…at first
Depending on your startup’s entity type and initial business activities, you may not have to worry about filing taxes right away.
Partnerships can wait to file federal tax returns.
In the initial year(s) of business, U.S. partnerships do not need to file a federal return if the company has not received income or incurred any expenses treated as deductions or credits for federal income tax purposes. We advise that partnerships should only follow this rule in the period of time in between forming their business and once they actually start paying expenses and receiving income through the business.
So here is another aspect to keep in mind, once you file your first return as a business, IRS tax authorities will expect the returns annually up until you file a “final year” tax return (which makes it clear that you won’t have any more future activities or correspondence with the IRS with this entity). A domestic partnership must file an information return unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.
It is worth noting even if your business is not required the initial years to file a federal tax return, it may still have a state and/or local return filing return obligation depending on the laws of the state where your business is incorporated.
What are the Rules for LLC’s with No Activities
Sometimes a limited liability company has a year with no business activity. A newly formed LLC might not have started doing business yet, and an older LLC might have become inactive without being formally dissolved.
But even though an inactive LLC has no income or expenses for a year, it might still be required to file a federal income tax return.
LLC tax filing requirements depend on the way the LLC is taxed. An LLC may be disregarded as an entity for tax purposes, or it may be taxed as a partnership or a corporation.
Tax Elections for LLCs
If an LLC has only one owner (known as a “member”), the Internal Revenue Service automatically disregards it for federal income tax purposes. The LLC’s member reports the LLC’s income and expenses on his or her personal tax return.
If an LLC has two or more members, the Internal Revenue Service automatically treats it as a partnership. The LLC files an informational partnership tax return and the members also report the LLC’s income and expenses on their personal tax returns.
However, an LLC can change these default classifications and choose to be taxed as a corporation. To do this, the LLC must file Form 8832 with the Internal Revenue Service. The LLC may make this election when it is formed, or it may elect to change its tax classification at a later date.
Corporations must file a federal tax return regardless of whether they have taxable income.
On the complete opposite side of the business tax spectrum, if you are setup as S-corp or C-corp, then you must file a federal tax return regardless of spent any money or received any taxable income so far.
You may not have to pay estimated quarterly taxes if your business did not owe any tax during the previous fiscal year. It is still a good idea to make estimated payments or at least set funds aside, as you will owe the entire year’s taxes on your next annual return.
Even if you did not formally register a business entity, the IRS still considers you a business once you earn more than $400 in revenue in a given year. This type of business is known as a sole proprietorship, and all taxes and deadlines still apply.
Ultimately, if you have created a startup organization and have not started any major operations, we recommend you consult with a CPA or tax advisor to ensure that you remain in compliance with federal and state tax laws. It’s good have a solid tax and accounting foundation in place, before your small business gets up and running. Check out our end of the year business tax strategy guide.