Filing The Corporation Income Tax Return
Every Maryland corporation must file a corporation income tax return, using Form 500, even if the corporation has no taxable income or is inactive.
Corporation income tax returns can be filed electronically, using approved software. Talk to your software provider about electronic filing options.
Every other corporation that is subject to Maryland income tax law and has income or losses attributable to sources within Maryland must also file Form 500.
Corporations operating in Maryland and in one or more other states are subject to Maryland income tax if their Maryland activity exceeds the provisions for federal protection from state taxation. 15 U.S.C. Section 381 of the Interstate Commerce Act prescribes the extent of business activity required before states may impose income taxes.
A Multi-state corporation that operates in Maryland but is not subject to the Maryland income tax is not required to file, although a return reflecting an apportionment factor of zero may be filed for record purposes. We cannot accept letters sent in lieu of filing.
All financial institutions formerly subject to the financial institution franchise tax are subject to corporation income tax and have special apportionment rules. For more information, see Regulation 03.04.08 on COMAR Online.
Reporting And Paying Tax
To report corporate income tax, youll need to file a tax return with CRA. You file your provincial corporate income taxes with your federal income tax return using your business number. Corporations must file a return every tax year even if there is no tax payable.
You dont need a separate provincial account number.
Decide Whether To Be Taxed As An S Corp Or A C Corp
When you form a corporation, your business is automatically treated as a C corporation for federal income tax purposes.
A C corporation is a traditional corporation that pays corporate income tax on its profits, with its shareholders paying tax on the salary and dividends they receive.
This taxation of dividends at both the corporate and individual levels is sometimes referred to as double taxation.
Some small businesses are able to avoid double taxation by choosing to be taxed as S corporations. S corporations dont pay any corporate tax.
The corporations profits and losses pass through to its shareholders personal tax returns, and the shareholders pay taxes on those profits at their personal income tax rates.
To be eligible for S corporation status, a corporation must meet certain requirements, including:
- Having 100 or fewer shareholders
- Having only one class of stock
- Not having corporations, partnerships, or nonresident aliens as shareholders
- Being a domestic corporation
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Sole Proprietorship Or Llcs With One Member
Filing Deadline: May 17, 2021
If you own an unincorporated company by yourself, or youâre an independent contractor, or a Limited Liability Company with one member, file as a sole proprietor. Youâll report your business earnings and expenses through an extra form attached to your personal income tax returnâcalled a Schedule Câno need to file a separate return.
Schedule C is only two pages, and the IRS has fairly detailed line-by-line instructions to help you get it right. When youâve finished, just subtract your total expenses from your earnings to get your net profit or loss. Include this number in your personal tax return.
If youâre planning on claiming itemized tax deductions, youâll need to tally those on Schedule A.
If your total income is below $72,000 you can use the IRS Free File software to file your taxes. If your income is higher than $72,000, you can still take advantage of the IRS free fillable forms.
If youâre going analog and filing a hard copy of your tax return with the IRS, find the address for your state here. Make sure itâs postmarked on or before the deadline.
Heads up: sole props and LLC members are considered self-employed, meaning theyâre subject to self-employment tax .
C Corporations Or Llcs That Elect To Be Corporations
Filing Deadline: April 15, 2021
If your small business is set up as a C corporation, or if you treat your LLC as one, youâll need to prepare a separate business income tax return with Form 1120, in addition to your personal taxes. Thanks to the Tax Cuts and Jobs Act, the corporate income tax rate is a flat 21%. But youâll still need to pay taxes twice, once at the corporate level, and again on your personal income tax return. Form 1120 is also where C corps claim relevant tax deductions.
Form 1120 is similar to the Schedule C form, but it is more complex, requires more detail and is separate and distinct from your personal tax return. The IRS has instructions for Form 1120, and itâs great to have a scan to understand the nuts and bolts, but most small business owners elect to hire a professional to complete these forms.
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Recomputation Of Estimated Tax
If, after paying any installment of estimated tax, the taxpayer determines that a new estimate is required, the payment amounts for the remaining installments may be increased or decreased, as the case may be. The amount required by the new estimate is computed by calculating the difference between the previous estimated tax amount and the new estimated tax amount and dividing that difference between the number of installments remaining to be paid.
Who Uses Form 1120
The IRS requires that all domestic corporations use Form 1120 to determine their income tax liability, reporting their income, gains, losses, deductions, and credits even if the corporation had no income.
Form 1120 isn’t used by Subchapter S Corporations. This business type files its business tax return on Form 1120-S.
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What Happens After You Have Filed Your Return
After we receive your return, we send it to Corporation Services of the responsible tax centre for processing. To find your tax centre, go to Find a CRA address.
After we assess your return:
- we send an email notification that there is mail for you to view in your secure online account, if you registered to receive e-mail notifications through My Business Account, or
- we mail a notice of assessment
As soon as you get the notice of assessment, compare it to your copy of the corporation’s return. Contact us if you need us to clarify or explain any part of the assessment. You can call the telephone number provided in the CRA’s correspondence. If you do not have contact information, see how to Contact the Canada Revenue Agency.
Cancel Or Waive Penalties Or Interest
The CRA administers legislation, commonly called taxpayer relief provisions, that allows the CRA discretion to cancel or waive penalties or interest when taxpayers cannot meet their tax obligations due to circumstances beyond their control.
The CRA’s discretion to grant relief is limited to any period that ended within 10 calendar years before the year in which a request is made.
For penalties, the CRA will consider your request only if it relates to a tax year or fiscal period ending in any of the 10 calendar years before the year in which you make your request. For example, your request made in 2021 must relate to a penalty for a tax year or fiscal period ending in 2011 or later.
For interest on a balance owing for any tax year or fiscal period, the CRA will consider only the amounts that accrued during the 10 calendar years before the year in which you make your request. For example, your request made in 2021 must relate to interest that accrued in 2011 or later.
To make a request, fill out Form RC4288, Request for Taxpayer Relief Cancel or Waive Penalties or Interest. For more information about relief from penalties or interest and how to submit your request, go to Taxpayer Relief Provisions.
ReferencesIC07-1R, Taxpayer Relief Provisions
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Stock Dividends From C Corporations
A C Corporation may choose to distribute some of the profits of the company as dividends, which are distributed to shareholders. The percentage of dividends that each shareholder is entitled to depends on how many shares they own.
Dividends that are distributed to shareholders are taxed twice . They are taxed first at the corporate level as profit , and again at the individual level as stock dividends .
Corporations Can Be Hit With Amt
Like individuals, corporations can become subject to an Alternative Minimum Tax if they have gained the benefit of “too many” tax preference items. For corporations that are subject to AMT, the general rate is 20 percent
Most small corporations will be able to avoid the corporate AMT–oftentimes far more readily than high-net-worth individual’s can. The corporate AMT will not apply to any corporation if:
- the corporation is in its first year of existence or the corporation was treated as a small corporation exempt from AMT for all prior tax years after 1997 and
- its average annual gross receipts for the last three years ending before the 2009 tax year did not exceed $7.5 million .
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How Do I File My Taxes As An S Corp
Form 1120S, U.S. Income Tax Return for an S Corporation is the tax form S corporations use to file their federal income tax return.
1120S is a five page form from the IRS, which looks like this:
Youâll need the following information on hand before filling out 1120S:
- General information about your business, including your date of incorporation and the date you elected S corp status
- A profit and loss statement and a balance sheet for your business
- Information about any payments you made to independent contractors totaling at least $600 for the year
Page one of 1120S is divided into four parts:
The top third of the form containing fields A-F is where youâll input your contact information, dates of incorporation and S corp election, your assets, etc.
The Income section will ask you about all of your companyâs revenues for the year, which is information youâll get from your income statement.
The Deductions section is where youâll record all of your businessâ deductible expenses for the year, which youâll also get from your income statement .
The Tax and Payments section applies to corporations that began the year as a C corporation and filed for S corp status during the current tax year. Youâll use this section to list any estimated taxes you paid during the year, and calculate any taxes you owe or overpaid due to the switch.
There are also six schedules attached to 1120S, the first three of which are mandatory:
False Statements Or Omissions
We will charge a penalty if a corporation, either knowingly or under circumstances of gross negligence, makes a false statement or omission on a return. The penalty is the greater of either $100 or 50% of the amount of understated tax.
Reference Subsection 163
Note
If a corporation is charged a penalty for making a false statement or omission under subsection 163, the corporation cannot be charged a penalty on the same amount for failing to report income under subsection 163.
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Adjustment Of Overpayment Of Estimated Income Tax
Revised Statute 47:287.656 allows corporations to file an application for an adjustment of an overpayment of its estimated income tax for a taxable year. The application must be filed after the close of the taxable year and on or before the 15th day of the fourth month thereafter, and before the tax return is filed. However, no application will be allowed unless the adjustment amount is at least ten percent of the corporations estimated tax amount and more than $500. This application for an adjustment of overpayment of estimated income tax does not represent a claim for credit or refund. There is no application form for this adjustment. However, the request should include the following information:
The estimated income tax paid by the corporation during the taxable year.
Amount that the corporation estimates its income tax liability is for the taxable year.
Amount of the adjustment.
Other pertinent information.
Within 45 days of the date that an application for an adjustment is filed, the adjustment will be allowed or disallowed if it is determined that the application contains material omissions or errors. If the adjustment is allowed, the secretary may credit the amount of the adjustment against any other tax liability owed by the corporation and refund the remainder.
Converting A Company To A C Corp Can Help You Establish Some Legal And Financial Separation Between You And Your Business But The Switch Involves More Paperwork And Red Tape And You Could Face Double Taxation Do The Benefits Of Being A C Corp Outweigh The Risks
A great way to build some legal protection into your business is to incorporate. Many people incorporate to gain limited liability to protect personal assets from company liabilities such as lawsuits or creditors. Incorporating also can reduce a business’ taxes if it earns a lot of revenue, make it easier to seek venture capital or other outside investment, and in some cases provides more flexibility for your business. For federal income tax purposes, corporations are governed by the Internal Revenue Code and there are different types of corporate structures to consider. The basic type of American corporation is governed under Subchapter C of the Internal Revenue Code, so they are called C corporations. S corporations start out as C corporations but make a special tax election to have income, deductions, etc. taxed directly to shareholders .From a legal standpoint, C corporations are separate entities that can sue and be sued. From a tax standpoint, they are separate taxpayers, paying tax at special corporate tax rates that differ from those applicable to individuals. Whether you are in business by yourself or with one or many other co-owner and want to set up a C corporation, be sure to follow certain legal and practical steps to help ensure success.The following sections will review what a C corporation is, the pros and cons of structuring your business as a C corporation, and how to go about setting up a C corporation.
Forming a C Corporation
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How To Register A Formal Dispute
Many misunderstandings are caused by a lack of information or by a simple miscommunication. That’s why we say: Talk to us.
If you have new or additional information, you or your authorized representative can ask for a change online at My Business Account, Represent a Client, or by writing to us. Many disputes are resolved this way.
If you disagree with an assessment or a determination, you can make a formal objection.
Filing an objection is the first step in the formal process of resolving your dispute. You have 90 days after the date of the notice of assessment or determination to file an objection.
For information on extended time limits, due to COVID 19, that apply to notices of objection, go to COVID-19 Ministerial Orders and select Explanatory Note: Time Limits and Other Periods Act Income Tax provisions.
You can file an objection:
- online in My Business Account or in Represent a Client by selecting “Register a formal dispute under “Corporation Income Tax
- by mail, using Form T400A, Notice of Objection Income Tax Act, or writing to the chief of appeals at your Appeals Intake Centre
In all cases, you have to explain why you disagree and include all relevant facts and supporting documents.
For large corporations, your objection must:
ReferenceSection 165
ReferenceSubsection 225.1
For more information about objections and appeals, see Guide P148, Resolving your dispute: Objection and appeal rights under the Income Tax Act, or go to Complaints and disputes.
How To Prepare Form 1120
You can prepare your own corporate tax return, or you can use a tax professional to take care of it for you. The major tax software programs have corporate tax return tools you can use if you want to do it yourself, but you should still have a professional look over your final return before you file it.
You’ll still have to prepare documents and gather the appropriate forms and schedules to provide to a professional if you decide to hire someone else to take care of the return for you.
Corporate income taxes are complicated, so using a tax professional is usually the safest choice. Many interacting forms and schedules must be completed, and they must all be correct.
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Not Every Corp Can Be An S Corp
While there is no income limitation on S corporation status, restrictions on the number and types of shareholders and the types of stock can make it difficult to operate a large business as an S corporation. In most cases, family-owned business and small businesses generally are not affected by the limitations.
Only a corporation that meets all of the following requirements can make a valid S corporation election.
C Corp Status Has Pros And Cons
Before selecting or rejecting the corporation business structure, it’s important to consider both the advantages and disadvantages that a corporation has under federal tax law. Too often, small business owners fear incorporating because of the specter of “double taxation.” While this can be a consideration, it is certainly not the only consideration and, often, it is not the “deal killer” that business owners imagine.
Salaries may offset corporate income
Not all of the corporate profits will be subject to double taxation.
The operators of the corporation may withdraw reasonable salaries and these salaries are deducted from the corporation’s profits. This means that the salaries are not taxed at the corporate level. In some cases, the entire net profit may be offset by salaries to the owners, so that no corporate income tax is due.
On the other hand, if the corporation pays dividends to the shareholders, those payments are subject to corporate-level income tax. However, the individual does not have to pay self-employment tax on the dividends. And, qualifying dividends are taxed at capital gains rates and not the individual’s top marginal tax rate. Finally, dividends paid to a shareholder that actively participates in the business are not subject to either the 0.9 percent Medicare surtax on earnings or the 3.8 percent tax on net investment income that are levied on higher-income taxpayers.
Warning
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