If you are like many of our clients at Monarch CPA, you may feel anxiety at the thought of the big tax question: “How much money does my business owe?” When your business is an S corp, partnership, single-member LLC, or other similar “pass-through entity” we’ve got an easy answer for you! Unless you’ve elected to be taxed as a corporation, your business doesn’t owe any federal taxes!
What are Pass-Through Entities & What Businesses Qualify?
Pass-through entities, aka flow-through entities, are pretty easy to get a handle on. In simple terms, imagine there are two kinds of businesses. You have big ones like those you’d recognize as many Fortune 500 companies or from the New York Stock Exchange. These are usually regular old corporations, known as “C corps,” and these businesses pay their own taxes as entities separate from their owners or shareholders. Additionally, the owners and shareholders still have to pay taxes on their personal earnings from the business.
Then you have other business structures like S corporations, partnerships, single-member LLCs, and sole proprietorships. These are the ones we’re talking about here. For the most part, these businesses are considered free-standing legal entities, except as pass-through entities they don’t pay federal taxes. Instead, they “pass” the tax responsibility “through” to their owners.
The owners then report their share of the business’ profits and deductions on their personal tax returns, paying the taxes as individuals rather than as the business. In the case of multiple owners, each is responsible for their own share. But don’t worry if you’re still confused! Monarch CPA will help you figure it all out and get things filed correctly!
Think of Your Business’ Tax Return as a Tax Report
If your business is a pass-through entity, you usually still need to file a tax return for your business by March 15. It can be easier to think of it as a “tax report” instead of a tax return. This tax report is to show your business’ bookkeeping information to the IRS. You’ll tell them how much you made and spent, and include your financials just like with a normal tax return. The main difference is that your business won’t be responsible for paying any of the taxes. Instead, that responsibility gets “passed through” to you. In the case of a sole owner, you’ll use a Schedule C to show the net income of your business. If there are multiple owners, partners, or shareholders, K-1 forms are used instead.
What are Schedule C and Schedule K-1 forms?
Even though your business doesn’t have to pay federal taxes as a pass-through entity, Schedule C and Schedule K-1 forms are needed to show your business’ net income. These are business tax documents that help determine your personal taxable income and liabilities. And in the case of multiple partners, the K-1 form can track the contribution of each partner based on the capital they’ve invested. Sometimes it helps to think of these forms as you would a 1099 or a W-2. Schedule C and K-1 forms are simply documents issued in your name and you must report them on your own taxes.
Accounting for April 15 and Your Taxes
While your pass-through entity itself doesn’t owe any taxes, you still may! Many business owners think they don’t need to include their Schedule C or K-1 in their bookkeeping or personal tax return if they didn’t pay themselves from their business. From the IRS’ perspective, you still benefit from your business’ profits whether you paid yourself or not. The responsibility for your business’ tax bill is passed to you. You may not be able to avoid taxes entirely, but a pass-through entity allows you to avoid double taxation on a federal level.
Call Monarch CPA to Help
Taxes can feel confusing. The IRS can seem scary. And remembering all the forms, deadlines, and special rules for different states or circumstances can be overwhelming.
Monarch CPA is ready to help make your taxes easier. But we don’t stop there! Understanding your business accounting is the first step to reaching your goals. We’re here to support you in boosting your business’ revenue and making smarter financial decisions. Monarch CPA proudly gives you the tools to reach the next stage of your journey. Contact us today to learn more about how we can help you reach your goals!