There are three categories of business: small, medium, and large. A small business corporation can be defined as having a stock value of under $1 million at its inception and annual gross income of less than $2 million. There are several reasons why a business owner would choose to incorporate. The most common reasons cited are to protect personal assets from lawsuits filed against the business, to save on taxes, and to obtain contracts from companies that prefer to do business with corporations. It is perfectly legal for an individual to own several corporations as long as those corporations are involved with legal transactions and those transactions are clearly reflected in their books and records (IRC 61, 162, 446, and 1502).

Income and deductions of a corporation are reported on the basis of the annual accounting method and period used by the corporation in keeping its books (IRC Section 446). There are two general methods of accounting, the Cash Basis and the Accrual Basis. If your corporation uses the Cash Basis Method of Accounting, it should report income in the tax year it was received and deduct business-related expenses in the tax year it was paid. If your corporation uses the Accrual Basis Method of Accounting, it should deduct business-related expenses in the tax year those expenses accrued.

Your corporation can file its tax return as a Calendar year taxpayer, a 12-month period beginning January 1 and ending December 31, or a Fiscal year taxpayer, any 12-month period ending on the last day of the month except December. S corporations are calendar year taxpayers. C corporations can choose a calendar or fiscal year to file the end-of-year tax return.

If your corporation uses the Cash Basis Method of Accounting, it must recognize income in the year it was received and deduct business-related expenses in the year they were paid. An exception to this rule occurs if an expenditure results in the creation of an asset having a useful life that extends beyond the close of the taxable year. When this happens, the asset should be capitalized and the basis amortized over a period of time. Your corporation must use the Accrual Method of Accounting if it is engaged in the purchase and sale of merchandise/inventory [regulation 1.446-1(c)(2)]. It must deduct business-related expenses in the year those expenses are accrued. It must recognize income when it is received or due and payable — when all the events have occurred which fix the right to receive the income and the amount thereof can be determined with reasonable accuracy. Hence, a corporation that reports income under this method must recognize income from a sale which occurred during the tax year even if there is doubt as to the collectibility of the receivable. A bad debt deduction or an addition to a reserve for bad debts may be implemented as a solution (constructive receipt of income).

Information required to prepare your corporation tax return

1)

A copy of the last corporation tax return filed with the IRS, state, & city.

2)

The filing receipt you received from the state where the business was incorporated.

3)

The corporation’s federal Employer Identification Number (EIN) obtained from the IRS and the State Identification Number from the state where it was incorporated.

4)

Documents filed and accepted by the IRS and the state if the corporation has elected to file as a subchapter S corporation.

5)

A copy of your state sales tax certificate.

Business Income

a)

Gross income received from all sources including forms 1099 received from other companies for subcontract work that your corporation has done for them during the tax year (IRC Section 61).

b)

Interest earned on your business savings, investment, and checking account(s) during the tax year.

c)

Income from other sources received during the tax year.

Expenses and Capital Expenditure

1)

You can prepare and deliver to me a copy of the year-end worksheet that includes the trial balance, adjustments/adjusting entries, income statement, and balance sheet (GAAP/IFRS recognized).

or

2)

You can prepare and deliver to me the corporation’s gross income obtained from all sources (IRC Section 61), plus a list of itemized business-related expenses that the company has paid or incurred during the year (IRC Section 162).

(a)

Copies of Forms W2 and W3 employees payroll information

(b)

Copies of Forms 1099 showing the amount that you paid to subcontractors and others that worked for you. You paid them with with cash or checks and you did not withhold tax from their pay, therefore, you would not receive a tax break for the amount of money that you paid them if you did not report what you paid them on Forms 1099 (employees vs. independent contractors).

(c)

Copies of sales tax returns that you filed with your state sales tax department and the cancelled checks or credit card statements showing proof of payment.

(d)

Capital assets (property & equipment) purchased (IRC Sections 197, 263).

All the expenses that the corporation incurred during the tax year may not be fully deductible in the year they were paid or incurred. Some of these expenses may have to be amortized/prorated over several years in accordance with the internal revenue code (expense vs. expenditure). The Internal Revenue Service (IRS) and the Securities Exchange Commission (SEC) are carefully monitoring this area following the accounting shenanigans at almost every corporation, including Enron, WorldCom, Global Crossing, etc.

Organizational and Start-up Costs

Amount paid for organizational expenditure under IRC Sections 195(b)(1), 248(a)(b) and 263 to incorporate the business, perform market search, perfecting and defending title to the property. Effective with expenses incurred and paid after October 22, 2004, taxpayers can write off up to $5,000 of startup costs (IRC 195) and up to $5,000 of organization costs (IRC 248 and 709) in the year a new corporation receives income. (These amounts are reduced if the taxpayer has cumulative startup and organization expenses in excess of $50,000. The reduction is dollar-for-dollar for any extra expenses.) The remaining costs must be amortized on a straight-line basis over a period of 15 years. The former 60-month period no longer exists for new costs. This provision is effective for costs incurred after October 22, 2004, although costs incurred on or before October 22, 2004 are taken into account for the $50,000 limitation.

What are the chances the IRS will audit your company?

According to the IRS enforcement results, audit of small business has increased 145 percent from 7,297 to 17,867 this fiscal year and audit of large corporations with assets over $10 million has increased by 14 percent. Officials at the IRS have expressed their intention to audit a larger number of businesses every year.

Make an Appointment for a Professional Tax Preparation