Corporate returns should be just about the easiest tax returns to file. Why? Because C corporations are required to maintain proper books and records throughout the year. That gives you, or your tax advisor, a solid starting point from which to prepare your tax return.
Unfortunately, some corporations only track expenses in chicken scratches and mix in personal income and expenses. If this describes your C corporation in part or as a whole, it’s time to get your books in order and make sure you’re ready for tax time.
Here are eight steps to help you get there. After that, check out our handy infographic at the end of this article to guide your C corporation filing and avoid missing any important tax dates.
Step 1: Book ‘em, Dano!
If you don’t already have proper books, set them up. You can find a terrific QuickBooks ProAdvisor close to home that can help you set up your chart of accounts and get you started for the current year.
Make sure your bank statements are reconciled and that all the transactions, adjustments, fees and charges have been entered on your books.
When entering data from your credit card statements, enter each transaction as a separate line item. In fact, certain payments may need to be broken down directly from the original invoice. For instance, a single hotel charge might include the cost for the night, which is deductible 100%, and room service, which is generally only 50% deductible.
When it comes to purchases of assets costing $500 or more, make sure you have the invoices for those purchases. If you’re using QuickBooks, you can upload a copy of the invoice directly to the QuickBooks entry. This makes life easy if you’re ever audited: You won’t have to look for lost documents.
Also, make a variety of routine journal entries:
- Reconcile loan balances, and move interest payments to the profit and loss (P&L) statement. Click here for a free profit and loss statement and guide.
- Enter depreciation for prior year asset purchases. (We’ll talk about this year’s assets in a moment.)
- Reconcile shareholders’ capital and loan accounts.
- If needed, request officers to submit expense reports to offset some of the draws or advances received.
- Reconcile the outstanding liability and asset accounts, like accounts payable, accounts receivable, sales and payroll (and excise) taxes payable.
Step 2: Know Your Due Dates
Calendar-year corporate tax returns are due on March 15 of each year, unless that day falls on a weekend or holiday. If you have a fiscal-year corporation, your due date will on the 15th day of the third month after your year ends. For instance, if your fiscal year ends on May 31, you would have to file your tax return before August 15.
Good news for next year, sort of. Starting in 2017, the due date will be April 15, or the 15th day of the fourth month. If you file early next year, you won’t have a problem. Your corporation will use Form 1120.
Step 3: Not Ready to File? Extend!
Don’t worry, you’re not alone. Many businesses aren’t ready to file tax returns within three months of their year-end. That’s why Congress invented the extension.
For corporations, use Form 7004 to request an extension. As long as you file the extension before the due date of the tax return, you don’t have to make up any excuses. You will get an extra six months, automatically. For calendar-year filers, that will take you to September 15, which is five months from March 15.
Note: For 2017, the extension will only be for five months, moving it from April 15 to September 15.
Step 4: Review Other Filings
When looking at the tax expense account on your books, don’t just look to see what you have paid. Look to see what payments are missing. Use this brief checklist to make sure you’ve taken care of certain obligations:
- Did you file and pay your annual update with your Secretary of State?
- Did you update and pay your city (county, parish, etc.) or local business license?
- Did you file and pay your personal property tax report?
- Did you file and pay your sales tax returns, if applicable?
- Did you file and pay all your payroll tax returns, if applicable?
- Did you send Forms 1099 to all relevant service providers, landlords, etc.? If you don’t know where to start when filing 1099s, see this article for an in-depth guide.
- If your business moved this year, did you update your mailing address with the IRS, state tax agencies and others?
- Did you update your minutes to include key decisions and policies that went into effect during the year?
- Did you pay all your corporate income tax payments to the IRS, state and any other agency?
Step 5: Make Decisions, and Review Limits
When preparing a corporate tax return, certain decisions will need to be made about how deductions are used.
- What type of depreciation will you be using on each asset purchase? Bonus, Section 179, MACRS, straight-line or cost segregation?
- How many of your contribution dollars will you be able to deduct? (Contribution deductions are limited to 10% of corporate profits, so the depreciation method can affect this deduction.)
- If the corporation is showing a loss, do you want to waive the requirement to use the loss in prior years? If so, you must make the election with the tax return when you file it. Skip that election, and you are forced to carry the loss back to two years ago, whether you want to or not.
- Do you have bad debts you can write off? Are they deductible?
Step 6: Are Your Taxes Still Too High?
What options do you still have after year-end? Look for missing tax credits or special deductions that are available to you.
For instance, I overlooked the Domestic Production Deduction (Form 8903) for many years on my own corporate return. If you sell or produce a product (including software, films, etc.) using materials made in the USA, there’s a special deduction, in addition to the money you actually spend. Suddenly, I realized that the software and books I provide to my students are produced and printed in the USA. Taking advantage of this saved me a few thousand dollars.
As you’re looking for your own deductions, ask yourself:
- Do you qualify for any energy credits, hiring credits or childcare credits?
- Do you qualify for the dividend received deduction?
- Can you still make pension contributions for yourself or toward your employees’ accounts?
If you do, then there’s an opportunity to reduce your overall tax burden.
Step 7: Review and Prepare for Penalties
In spite of their fearsome size, even C corporations can be hit with penalties if their returns aren’t filed timely or properly. In fact, if you miss the tax filing deadline, you may be hit with one of four penalties:
- Interest: Even if you file for an extension, interest will accrue from the original due date. In addition to interest on your principal tax payment, interest will also accrue on any penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax and reportable transaction understatements from the due date (including extensions) to the date of payment.
- Late Filing of Return: Filing a late tax return will incur a monthly penalty of 5% of the unpaid tax for each month, for up to 25% of the unpaid tax.
- Late Payment: If the payment itself is late, a penalty of 0.5% to 1% per month can accrue, with a maximum of 25%.
- Trust Fund Penalty: If your C corporation didn’t pay its anticipated tax bill, then a penalty amount equal to the bill will be applied.
- Other Penalties: When you’re running a C corporation, varying penalties can be imposed for negligence, fraud and providing understated information on the tax return.
If you forget to pay an estimated tax payment by the quarterly due date, you’ll be required to fill out Form 7004, which will calculate a small penalty for late payments. The same penalty rules applied to the tax-filing deadline may also apply to late quarterly tax payments.
Step 8: See Your Tax Pro
When it comes to running a corporation, don’t operate in a vacuum. Set aside a couple hours to consult with your tax accountant before finalizing the details in your books and tax return. This should be a separate appointment where you’re not both rushed and chafing under a time deadline. You want time to sit and really evaluate options.
Oh, yes, one last thing. Don’t forget to make your first 2016 estimated tax payment by April 18. We get extra time because of Emancipation Day, and Maine and Massachusetts can file on April 19, thanks to a delayed observance of Patriot’s Day.
Looking for more tax tips? Then see our small business tax guides for more info on taxes for corporations as well as other business entities. To help you remember when to file, see our date-filled infographic below.