Business owners generally form corporations because of the personal liability protection it offers shareholders for debts and contractual obligations that arise in business. However, with personal liability protection also comes the requirement to file corporation tax forms with the Internal Revenue Service each year. This is because corporations are treated as separate taxpayers, meaning the entity is responsible for paying tax on its earnings and filing corporate tax returns.
Preparing Form 1120
All corporations that haven’t made an election to be treated as an S-Corp must prepare the corporation’s taxes on Form 1120. Since the corporation is a taxpayer that’s completely separate from each shareholder, the name and address you insert at the top of the form must be the corporation’s legal name and the address of its principal place of business. And just like how you enter your Social Security number on your personal tax forms, the corporation must have an employer identification number (EIN) that must be entered on the tax form. This EIN is unique and identifies the corporation to the IRS.
Calculating Corporate Taxes
The taxable income of a corporation is calculated as the sum of all revenue the business earns minus all deductible business expenses. You can take a deduction for any expense that’s “ordinary and necessary” for the business. Deductible expenses may include payments for advertising, rent, supplies, employee wages, bad debts, depreciation on the acquisition cost of business assets, and state and local corporate taxes, to name a few. Once you finalize the corporation’s taxable income, you then calculate the tax owed by applying corporate tax rates, which can range from 15 to 39 percent.
Benefits of NOL
If your corporation ever has a bad year and losses money instead of earning profits, it won’t owe any income tax, though it will still need to file a tax return. When corporations suffer a net operating loss, or NOL, the IRS allows it to carry the loss back to the two most recent tax years to offset the taxable income that was reported and obtain a refund or credit for a future tax year. In the event the prior two tax returns also report losses or the NOL is reported on the company’s first tax return, you can carry it forward up to 20 years to reduce future taxable income.
Filing Corporate Returns
When you file the first 1120 for your corporation, you and other shareholders need to decide whether to maintain the corporation’s books and records on a calendar or fiscal year basis. With a calendar year, the corporation closes its books on December 31, while a fiscal year ends on any other day. Regardless of which accounting year you choose for the corporation, the corporate tax return is due on the 15th day of the third month following the close of the tax year, which for a calendar year corporation will be March 15. You have the option of filing the return electronically or by mail, but when it comes to making tax payments, it must be done electronically.