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Corporate
Tax Preparation Checklist
(Basic
Information)
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
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1)
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A
copy of the last corporation tax return filed with the IRS, state,
& city.
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2)
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The
filing receipt you received from the state where the business was
incorporated.
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3)
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The
corporation's federal Employer Identification Number (EIN) obtained
from the IRS and the State Identification Number from the state
where it was incorporated.
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4)
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Documents
filed and accepted by the IRS and the state if the corporation has
elected to file as a subchapter S corporation.
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| 5) |
A
copy of your state sales tax certificate.
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Business
Income
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a)
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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).
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b)
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Interest
earned on your business savings, investment, and checking account(s)
during the tax year.
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c)
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Income
from other sources received during the tax year.
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Expenses
and Capital Expenditure
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1)
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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).
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or
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2)
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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).
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Copies
of Forms W2 and W3 employees payroll information
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| (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).
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| (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.
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| (d) |
Capital
assets (property & equipment) purchased (IRC Sections
197, 263).
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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.
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Organizational
and Start-up Costs
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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.
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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.
Will
you be audited by the IRS?
Click HERE
to do a quick estimate.
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