One thing you can&'t avoid when operating a business is filing business tax returns and paying income tax on your profits. No matter how meticulous you are with your business taxes, there&'s always a possibility that the Internal Revenue Service (IRS) and state tax agencies will choose your return for audit.
Business Tax Rate Depends on Legal Entity
Choosing among a sole proprietorship, partnership, limited liability company (LLC), or corporation will affect the amount of tax you&'ll pay on business profits. Sole proprietors, partners, and LLC members generally use personal income tax rates to calculate the tax they owe on business profits. Corporations and LLCs that elect corporate taxation are subject to different tax rates that only apply to corporations. Some corporations and LLCs, however, can make a special election to be taxed as an S corporation. This allows you to report business income on your personal tax return.
Use the Appropriate Tax Forms
When reporting business income to the IRS and your state, you&'ll find a number of entity-specific tax forms to choose from. For example, if you operate as a sole proprietor, you report all business income and deductions on a Schedule C attachment to your personal return. But if you operate a corporation, you&'ll need to file on an 1120 or 1120-S form.
Always Be Prepared for a Tax Audit
An audit of your business tax return doesn&'t necessarily mean you&'re in trouble or that you owe more tax. Initially, the auditor will be verifying specific items you reported or, in some cases, the entire return. You have the burden of proving that your tax return is entirely accurate. The only way to do this is to maintain accurate books and records at all times. Being able to quickly show an auditor how you arrived at each number reported on the business return can help you avoid an audit adjustment.
Right to Appeal Audit Adjustments
An auditor&'s determination that you underreported the income tax for your business can lead to additional payments of tax, interest, and penalties. An appeals process allows you to dispute with the IRS an adverse audit adjustment. At all times during an appeal, you have the legal right to hire a lawyer to represent you with this intricate process.
A Business Tax Lawyer Can Help
The law surrounding business taxes and audits is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. We hope you found it useful. For more detailed, specific information, please contact a business tax lawyer.