The 2021 tax season has begun, and Rooled’s tax experts are busy as beavers. We’re here to help your business navigate tax laws – both old and new – to ensure you’re in compliance and taking advantage of all available tax credits. Our experts have compiled the most common tax-realted questions we get from C-Corp founders. Read on to learn more and if you have any additional questions, you can reach us here.
Although Tax Day for C-Corps and individuals filing income tax returns is April 18 this year, the IRS suggests getting started early on in the season to avoid any last-minute errors and oversights.
When are taxes due?
All tax filings for C-Corps electing a calendar year 2021 are due April 18, 2022, with an option to file for an automatic extension to October 17, 2022. C-Corps file form 1120 and additional forms as may be necessary – for example, if you have foreign related parties or are eligible to claim certain tax credits. For S-Corps and partnerships, the deadline to file taxes for calendar year 2021 is March 15, 2022 with an extension to September 15, 2022.
If a C-Corp incorporated in Delware, then you need to file Franchise Tax by March 1st each year. There is a how-to guide on their website, but we recommend consulting with a tax accountant to ensure you don’t over pay your franchise tax – a frequent mishap since the tax can be calculated using two different methods (Authorized Shares or Assumed Par Value).
Forms 1099-NEC were due January 31. This form is used to report payments to independent contractors (formerly reported on Form 1099-Misc). This means your year-end accounting had to be wrapped up in a timely manner. As long as you’ve maintained good records on your vendors throughout the year the 1099 process is quite simple. Some platforms, such as Gusto and Trinet, will handle the filings directly for vendors paid through that platform. If you haven’t filed yet, we recommend doing so as soon as possible to avoid accruing additional late fees and penalties.
Your payroll provider should handle all the necessary annual reporting such as W2s for employees.
Most of the state deadlines are the same as federal deadlines but talk to your tax advisor to be sure. Many states now require 1099’s to filed.
What taxes do businesses pay in the US?
There are several different taxes that could be applicable to businesses conducting operations in the US, including income taxes (federal, state, and local), employer payroll taxes, sales taxes, franchise taxes, gross receipts taxes, and so on. An experienced tax advisor is essential for maintaining compliance and timely payment.
How do I know if I have to file an income tax return?
All corporations incorporated in the US need to file a tax return, even if there was no activity or realized a loss.
What's the difference between a Form W-2 and a Form 1099-MISC or Form 1099-NEC?
A Form 1099 is issued to an independent contractor for them to report on their individual tax returns. A Form W-2, or Wage and Tax Statement is for employees to report their income and payroll tax withheld. Form 1099-NEC is sent to any self-employed individual or a contractor paid at least $600, Form 1099-MISC is for businesses to report other non-employee payments, such as rent.
Why does employee classification matter?
For any individual that does work for you, it’s important to classify them correctly as an employee or independent contractor. The IRS gives a detailed clarification to the classification.
Employee classification is integral to ensure all legal requirements are held. Classifying workers as an employee or independent contractor can guide you on what taxes to withhold, what benefits to provide, and what other obligations you owe.
Misclassifying employees to save labor costs or even through oversight may result in hefty penalties.
What’s the difference between a tax credit and a tax deduction?
A tax credit is a dollar-to-dollar reduction of the total income tax owed – some credits are even refundable and pay cash regardless of your tax liability, such as the Employee Retention Credit. R&D Credits can also be used to offset employer payroll tax for eligible corporations. A deduction is a decrease to taxable income. In other words, before you calculate your tax, you apply deductions. Talk to a tax expert to find out about all the credits, deductions, or tax breaks for which you may be eligible.
What are some deductions and credits I can claim?
The government provides many possibilities for you to lower the overall taxes you owe as a startup. Some credits, that a venture-backed startup might be eligible for, are:
The R&D Tax Credit for startups investing in research-related activities
The Employee Retention Tax Credit for employers impacted by Covid-19 and those who started business operations after February 15, 2020.
Work Opportunity Tax Credit for hiring from specific targeted groups like veterans
Credit for insurance premiums for providing health insurance coverage to your employees
Extended paid leaves credit for providing expanded paid sick leaves during the pandemic
Typical operating expenses that may be applicable for your startup are listed below. Note that not all are 100% deductible, and you should check with your tax advisor to ensure your tax planning is correct.
Advertising and marketing cost
Rent and utilities
Cost of goods sold
Employee hiring and training
Equipment and asset purchases
Home office expenses
Am I allowed to take a home office tax deduction?
You can use your home office as an expense if you are self-employed, an independent contractor, or a business. If you use a part of your home for your business, you may be able to deduct that as a business expense. The home office deduction applies to all types of homes. There are two specific requirements to claim your home office as a business expense:
You must exclusively and regularly use a part of your home only for your business
Your home should be the principal place of your business
What's the difference between current and capital expenses?
Current and capital expenses are taxed and accounted for differently. Current expenses are day-to-day, general costs of a business such as rent, utilities, etc. Capital expenses (CAPEX) are long-term investments like assets, machinery, etc. Current expenses are expensed and counted as a business deduction for a particular year. CAPEX is capitalized and deducted over its useful life.
I created the company last year & opened a bank account but nothing happened and I didn’t make or spend any money, do I still need to file a return?
Even if your business didn’t have any activity or generated no revenue, you are still required to timely file an income tax return.
I have remote employees in various states, do I need to file tax returns for those states?
Remote working has complicated taxes for businesses. With remote employees, you need to comply with payroll and tax regulations for the state in which your employees are actually based for purposes of work. Your startup will need to register with the tax agencies in the state(s) you have remote employees, and you may be required to file an income tax return for that state too. Check with a tax professional to determine the reporting requirements unique to each state.
One or more of founders and/or shareholders are foreign citizens, are there any specific requirements for filing taxes?
The tax implications for a company with a foreign shareholder and/or a company conducting business operations abroad can be complex. Certain transactions with foreign related parties are reported on Form 926, Form 5471, and Form 5472, among others depending on the activity.
Substantial penalties are imposed on failure to file these returns on time. Moreover, the IRS will charge interest on the unpaid amount past the due date until the date of the return. If you missed a filing then you may qualify for penalty abatement, but it’s important to talk to a tax professional as soon as possible.
I received a penalty notice from the IRS (or State), what do I do?
You may get a penalty notice for various reasons like failure to meet the tax deadline, incorrect information, or additional information requirement. The notice will tell you about the penalty, the reason for it, and the next steps. If for any unfortunate reason you get a penalty notice, contact your tax accountant IMMEDIATELY.
I only spent money last year, we had no revenues and no profit, can I still qualify for a tax credit?
Yes, even if you made no profit, you may qualify for an R&D Credit or an ERC Credit. Both credits can potentially be applied to offset your payroll taxes; the ERC Credit may be refundable and pay you cash beyond your payroll tax liability.
I personally funded various expenses for the company incorporation, should they be included on the company tax return? How?
If you use your personal savings to launch a new business, the expenses may be tax-deductible. You can only claim these startup costs on the corporation’s income tax return. Startup costs are deductible up to $5,000, the excess may be capitalized and deducted when business operations begin. For costs above $50,000, your $5,000 deduction is reduced by the amount over $50,000.
What do I need to do to make sure our R&D expense is eligible for the R&D tax credit?
Maintain detailed records of the qualifying activity, who is working on the project, hours worked, and make note of everyone’s role. Also keep all receipts, invoices, payroll, and expense reports. Review your records with your tax advisor to claim the credit with the filing of your income tax return on Form 6765.
I haven’t filed business tax returns for years, do I need to file? How can I file?
Many founders are busy developing an idea or a product and no money is being made, so they often ignore filing tax returns – sometimes for multiple years. Don’t panic, it’s actually quite common. Just bring any records you have to a tax professional and they will help file all delinquent returns, starting with the oldest. In cases where no tax is owed, you may not be assessed any penalties however you may potentially miss out on claiming certain credits that you would’ve been eligible for if you had filed timely.
I’m pretty sure there are various tax credits available in my state, how do I find out more about those?
Ask your tax professional about the small business tax credits available in each state you file your return in. Additionally, you can visit your state’s website to find out more about credits and tax relief available to small businesses.
Can I keep my own books for my startup and file my own taxes?
You can always attempt to maintain your own books and file your own taxes (either on your own or using tax software). It may seem easy and cost-effective to do so, but you may be missing out on credits you weren’t aware of or end up not being in compliance with ever-changing reporting requirements. Doing your own bookkeeping and managing your own tax returns is like building your own house. Any error or miscalculation may result in structural damage at the very least. The experts can do it better and much more efficiently.
How should I find a tax accountant? What selection criteria should I use?
It is worthwhile for a business to seek a tax advisor throughout the year rather than just before tax season. Find a licensed tax preparer who is not only knowledgeable about various tax requirements and ongoing changes, but also someone capable of supporting you if you get audited. Ensure they understand your business and financial goals, and are communicative throughout the year. You also need someone who can guarantee data security and confidentiality.