Corporations
Corporations are legal entities that exist separate from their owners, also known as shareholders. These entities are formed for the purpose of conducting business and are recognized as distinct from their owners for legal and tax purposes. The concept of corporations has been around for hundreds of years and is still used today as a popular form of business organization. In this article, we’ll take a look at corporations and their tax implications.
- Identification
In the United States, the name of a corporation must include certain words or abbreviations that indicate that it is a corporation. These words or abbreviations may vary by state, but typically include:
- Corporation or Corp.
- Incorporated or Inc.
- Limited or Ltd.
- Company or Co.
For example, a corporation named “XYZ Corporation” might use the abbreviation “XYZ Corp.” or “XYZ Inc.” in its name. Similarly, a corporation named “ABC Limited” might use the abbreviation “ABC Ltd.” or “ABC Co.” in its name.
It’s important to note that the use of these words or abbreviations does not automatically indicate that a business is a corporation, as other types of entities, such as limited liability companies (LLCs), may also use some of these words in their names. However, the use of the words “corporation” or “incorporated” is a strong indicator that the entity is a corporation.
If you are unsure whether an entity is a corporation, you can usually find information about the company’s legal structure by searching the online business registry of the state where the company is registered. In many states, this information is publicly available and can be accessed online.
- Liability
One of the key advantages of forming a corporation is the limited liability protection it offers to its shareholders. This means that shareholders are only responsible for the amount of money they have invested in the corporation and are not personally liable for the corporation’s debts and obligations. This protection makes the corporation a popular choice for businesses that want to limit their personal financial risk.
- Separate Taxable Entities
In terms of taxes, corporations are considered separate taxable entities and are taxed on their income. The tax implications of corporations can be complex, but the general rule is that corporations are taxed on their worldwide income at a flat rate, which is currently 21 percent in the United States. This means that corporations must pay taxes on their income, regardless of where it was earned.
- Double Taxation and No Pass-Through Structure
One of the key tax implications of corporations is the “double taxation” of corporate profits. When a corporation earns a profit, it is taxed on that profit at the corporate tax rate. When the profit is distributed to shareholders in the form of dividends, those dividends are also taxed as personal income. This can result in a significant amount of taxation on the same income, which is one of the main disadvantages of the corporate structure.
Another important tax implication of corporations is the concept of “pass-through” taxation. This refers to businesses that are not taxed as separate entities, but instead pass their income through to their owners, who are then taxed on their personal tax returns. This is the case with limited liability companies (LLCs) and partnerships, for example. While these businesses still have to pay taxes on their income, they can avoid the double taxation issue that corporations face. Corporations do not enjoy the status of a Pass-through entity, and thus, the shareholders are required to pay tax on dividend declared by the corporations.
- Maintenance of Books of Accounts and Audit
The maintenance of books of accounts is mandatory for all the Corporations incorporated in the US. This is so because Corporations have a mandatory requirement of tax return filing, even in case of loss or no operations.
However, the US tax laws does not impose a Audit requirement on the Corporations. Corporations do not require to get their books of accounts audited under the tax laws of the US.
Form 1120
Form 1120 is a tax form used by corporations to report their income, gains, losses, deductions, and credits to the Internal Revenue Service (IRS) in the United States. It is also known as the U.S. Corporation Income Tax Return.
- Filing Requirements
Form 1120 must be filed by all domestic corporations, including regular corporations (C corporations), personal service corporations, and mutual corporations, as well as foreign corporations that conduct business in the United States. The form is used to calculate the corporation’s federal income tax liability and report its taxable income. The state filing requirements vary with each state and needs to be analyzed as per the state in question.
- Information Disclosed
The form requires corporations to provide information about their ownership, operations, and financial activity, including information about their sales and other income, expenses, and deductions. The form also requires corporations to report any changes in their capital structure, including the issuance or redemption of stock and the payment of dividends.
- Filing Due Date
Form 1120 must be filed annually by the 15th day of the fourth month after the end of the corporation’s tax year, i.e, April 15, 2023. This is based on the fact that the entity follows a Calendar Year as its Accounting Year. The Accounting Year can be chosen while applying for EIN. The due date will change with change in Accounting Year. The due date can be extended by filing Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. The extension provided by duly accepted Form 7004 is 6 months from the original due date, i.e. October 15, 2023 in this case.
- Mode of Filing
Form 1120 can be filed either electronically or it can be physically mailed to the IRS service centres. Electronic filing, also known as E-file, is preferred route. However, in case it can’t be done, there can be a few reasons for it, the filing can be done through postal. However, please note that only Private Delivery Service facilities are accepted by the IRS if the tax return is sent from outside the US.
- Interest and Penalties
It’s important for corporations to accurately complete Form 1120 and to report all of their taxable income, as failure to do so can result in penalties and interest charges from the IRS. Additionally, corporations must keep detailed records of their financial transactions to support the information reported on their tax return.
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