It may be hard to believe, but tax season will soon be here again. A lot has changed, tax-wise, in the past year due to new coronavirus-related legislation.
Here’s a quick look at what business owners need to know about filing their taxes in 2021 and how to make sense of the latest pandemic-related tax incentives.
A sole proprietor does not have any legal separation from their business’s property and liability. Therefore they file a Schedule C (IRS Form 1040) “Profit or Loss From Business,” and it’s considered personal income. The deadline is April 15, 2021.
Also, most sole proprietors must submit estimated tax payments quarterly. According to the IRS, estimated tax is for income that is not subject to withholding, including earnings from self-employment, investments, rentals, retirement plans, etc.
Although state income tax due dates can vary, sole proprietorship deadlines are the same as federal tax deadlines.
Like a sole proprietorship, business taxes are passed through to the partners since there is no legal separation between the business owners and the company. When it comes to tax obligations, the IRS deems all partners equal, and all partners are equally taxed.
The partnership uses IRS Form 1065 (known as the U.S. Return of Partnership) to calculate and submit the partnership’s profit or loss. Partnership owners must list the business’s revenues and expenses and answer several yes or no questions about the company.
A partnership must also file a Schedule K, which breaks down the partnership’s income into different categories, such as ordinary business income, rental income, and interest income. Next, the company fills out a separate Schedule K-1 for each partner where the partner’s share is listed.
The due date to submit Form 1065, Schedule K, and Schedule K-1 is the 15th day of the third month after the end of the partnership’s tax year. For partnerships using December 31 as their year-end, the partnership return due date is March 15, 2021, and the extended deadline is September 15, 2021. Also, partners are not employees and should not be issued a Form W-2.
Limited Partnerships (LP) are partnerships consisting of general partners and limited (or silent) partners. General partners make business decisions, manage operations, and have personal liability for the company’s legal and financial debts. Limited partners may invest money or property in the LP but have no operational responsibility, nor are they personally liable. However, limited partners must also be listed in the Schedule K and receive a Schedule K-1 from the partnership regarding tax filing. This is also the case for a Limited Liability Partnership.
As a side note: The Treasury Department and the IRS have updates to the 1065 partnership form for the tax year 2021 (filing season 2022). The updates promise to simplify how partners compute their U.S. income tax liability regarding international tax matters and how to compute deductions and credits.
Limited Liability Companies (LLCs)
Whether the LLC is a single-member or a multiple-member LLC, the business is considered a separate entity from the members. By default, a single-member LLC is taxed like a sole proprietorship, with the same tax forms (Form 1040 and Schedule C) and deadlines as a sole proprietorship. By default, a multi-member LLC is taxed like a partnership with the same tax forms and deadlines as a partnership (Form 1065 and Schedule K and K-1).
LLC members can also elect to be taxed as a C Corp or an S Corp. If the LLC decides to elect a C or S Corp status, different forms and due dates apply.
C Corporations are separate legal entities from the business owners and therefore file separate tax returns from the owners. Owners of C Corporations are considered employees of the corporation and must receive a W-2 from the corporation. C Corps file IRS Form 1120 (U.S. Corporation Income Tax Return), the deadline being April 15, 2021, for corporations operating on a calendar year (the extended deadline is October 15, 2021). For C Corps not using a calendar year, the filing deadline is the 15th day of the fourth month following the end of the corporation’s fiscal year. Corporations must generally make estimated tax payments if they expect their estimated tax (income tax less credits) to be $500 or more. C Corps use Form 1120-W to make estimated tax payments.
Corporate income taxes are paid at a flat 21% corporate income tax rate. Basic information required on Form 1120 includes the corporation’s name, address, Federal Tax ID Number (EIN), list of assets, and profit and loss information. You must also distribute a Form 1099-NEC by February 1, 2021 (usually January 31 of every year) to any subcontractors and vendors that are not employees but that you paid more than $600 for services. Then you must file Form 1096 to report these payments by the same deadline.
The S Corporation is a legal election offered to LLCs and C Corps so the companies can be taxed as a partnership, avoiding the corporation’s double taxation. As in a partnership, all business income is passed through to the owners and taxed at the individual tax rate. As a bonus, S Corps maintain the personal liability protection available to C Corps.
S Corps file IRS Form 1120-S and these returns are due March 15, 2021 (for those corporations operating on a calendar year) with an extended deadline of September 15, 2021. Again, if the corporation is not on a calendar year, the tax filing is the 15th day of the fourth month following the end of the fiscal year.
To be treated as an S Corp, the business must complete and file IRS Form 2553 no more than two months, and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect. Learn more about the 2021 S Corp election deadline.
Pandemic-Related Changes to Know About
- Paycheck Protection Program (PPP) – All PPP funds distributed in 2020 are not considered taxable income if the funds fall under the forgivable guidelines. Any funds falling outside of these guidelines must be claimed as taxable business income. The June 2020 Flexibility Act amended the PPP loan forgiveness requirements. Payroll costs can now account for 60% of the loan, and 40% can be used for rent, mortgage interest, utility costs, software and cloud computing services, property damage expenses due to civil unrest, and worker protection equipment (PPE).
- Economic Injury Disaster Loan (EIDL) –Initially, funds from EIDL were considered taxable income, but that decision was reversed. Currently, you do not have to count EIDL Advances or EIDL loans as taxable income, but you can deduct any expenses covered by the use of these funds to lower your tax liability.
- Employee Retention Tax Credit (ERTC) – Businesses that had to fully or partially close business operations during any quarter of 2020 due to COVID-19 (and if the business’s gross receipts substantially declined) can claim an Employee Retention Tax Credit. Sole proprietors are not eligible to use the tax credit, nor can any companies having received PPP funding.
- Payroll Tax Deferment – Employers that deferred the company’s portion of Social Security tax on employee wages from March 27, 2020, through December 31, 2020, must pay half of the deferred amount by December 31, 2021. The remaining taxes must be paid by December 31, 2022.
- Families First Coronavirus Response Act (FFCRA) – Businesses providing sick/family leave to employees touched by COVID-19 are eligible for tax credits for 100% of sick-leave pay, family-leave pay, and qualified healthcare plan expenses.
- Expansion of Charitable Gift Deductions – C Corps are temporarily allowed to raise the limit for cash donations from 10% to 25% in 2020.
- Expanded Interest Deduction – The deductible business interest expense has increased to 50% of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for the 2019 and 2020 tax years.
Are you thinking about changing your business structure in 2021? Let CorpNet guide you through the process. We have agents standing by to help!