2. Outline
• Introductions
• Sole Proprietorship
• Partnership
• Corporation
• S Corporation
• Limited Liability Company (LLC)
• Key Financial Ratios
• Tax Return Interpretation
• Individual Tax Return (Form 1040)
• Proprietorship (Schedule C)
• Partnership and LLC (Form 1065)
• Corporation (Form 1120)
• S Corporation (Form 1120S)
3. First things first…
• CHECK:
Check the Name
Individuals
Business
SSN
Tax Period covered
Complete return ( will cover more later)
And very important…..
4. IT MUST BE SIGNED
“Under penalties of perjury, I declare that I have examined this
return and accompanying schedules and statements, and to the
best of my knowledge and belief, they are true, correct, and
complete. Declaration of preparer (other than taxpayer) is
based on all information of which preparer has any
knowledge”
6. Entity Sole
Proprietorship
C corporation S corporation Limited &
General
partnership
Limited
Liability
Company
(LLC)
Tax Form IRS form 1040-
Schedule C or EZ
IRS Form 1120 IRS Form 1120S IRS form 1065 • One member:
Form 1040
Schedule C
• More than 1
member: Form
1065
Owners No separate forms •1099-contract
work
•W2-salaries
(Schedule E)
•Schedule K-
•Schedule K1
•1099-contract
work
•W2-salaries
•Schedule K1
•1099-contract
work
•W2-salaries
Schedule K1
1099-contract work
W2-salaries
7. Sole Proprietorship
• Definition by the IRS:
• an entity that is an incorporated business owned by a single
taxpayer
• Tax implications
• Use schedule C for reporting income and expense
• Subject to self-employment tax (FICA) taxes on employee income
• Subject to both employer and employee portion of FICA for the
sole proprietor
• Advantages:
• Easy tax returns (only need to fill out schedule C compared to
other forms of business)
8. Limited and General
Partnership
• IRS Definition: a relationship between two or more persons who
join to carry a business. Each person contributes skills, labor or
capital, and expects to share profits and losses of the business
• Tax Implications:
• Must file a separate annual return to report income, losses,
deductions and gains, etc. (Form 1065)
• A partnership does not pay income taxes; profits or losses pass
through to individual partners on his or her individual tax return
• Partners are not employees, therefore must pay both income tax
and self-employment tax
• Advantages: partners of limited partnership separate personal
liabilities from liabilities of the partnership entity
9. Corporation
• IRS Definition: prospective shareholders exchange
money or property for corporation’s capital stock. C-
Corporation is recognized as a separate taxpaying entity
(Form 1120)
• Tax Implications:
• Profit of a corporation is taxed when earned, and taxed again
when passed through to individual shareholders– “double
taxation”
• Loss cannot be deducted by individual shareholders; dividends are
not tax-deductible for corporations
• Need to pay income tax and employment taxes including:
• Social security and Medicare taxes
• Income withholding
• Federal unemployment tax (FUTA)
10. S Corporation
• IRS Definition: S Corporation are corporations that elect to pass
corporate income and losses to shareholders for federal tax purposes.
To qualify, the corporation must meet the following requirements:
• Domestic corporation
• Shareholders can only be individual, certain trust and estates
• Have one class of stock
• Have no more than 100 shareholders
• Tax Implications:
• Shareholders report income and losses on their personal tax returns at the
individual income tax rate (Form 1120S)
• Avoid double taxation experienced by corporations
11. Limited Liability Company
(LLC)
• IRS Definition:
• A LLC is allowed by state statute. Depending on elections made by members of the LLC, the IRS will treat a
LLC as either a corporation, partnership, or a disregarded entity (income and losses passed through to
individual members)
• Members of the LLC enjoy “limited liabilities’– separate personal liabilities from liabilities of the LLC
Texas Louisiana Alabama
Formation
Requirements
One member is allowed
to form a LLC (at least
one member); member
can be individual,
partnership, corporation
or any other legal or
commercial entity
Two or more members;
previous entity can be
corporation or partnership
before electing to be LLC
One or more members or
managers
State Income Tax
Classification
State taxes as LLC as
corporations; no state
personal income tax
Follow Federal
classification with respect
to corporate income tax
but not franchise tax
Follows Federal Income
Tax Classification
13. Individual Tax Return
IRS Form 1040 most common for individuals
that owned a business.
The first page shows a summary of the different
sources of income-Including:
a)Salaries
b)Dividends from investments or from C
corporation
c)Business profits (Schedule C)
d)Schedule D- Capital gains from Investments
e)IRA Distributions
f)Schedule E- Rental real estate, royalties,
distribution of profits/losses from partnerships, S
corporations, trusts, and other businesses
organized different than sole-proprietorship
g)Social Security Benefits
Need complete tax return- check first page for
verification of schedules needed.
16. Sole Proprietorship: Example
Part I: Income Section
Line 1: Gross Revenue: $60,288
Line 4: Cost of Goods Sold
Line 5: Gross Profit=Gross
Revenue-COGS: $60,288
Part II: Expense Section
Line 28: Total Expenses before “expenses for
business use of home” (line 30): $42,439
Line 31: Net profit: $18, 501
18. IRS Form 1120-C Corporation
Page one: Income and Tax
Deductions Section
Line 1b: Gross Revenue $670,525
Line 2: Cost of Goods Sold $330,206
Line 3: Gross Profit $280,524
Line 18: Interest Expense
Line 34: Total estimated current year
tax payment due
19. IRS Form 1120-C Corporation Schedule L: Balance Sheet Per
Books
Line 1-6: Current Asset Accounts
Line 16-18: Current Liability Accounts
End of the Year Balance
Balance as of the Beginning of the Year
Line 1: Net Income per books
