Memo for C-Corporation Taxes, Indiana State - Assignment Example

Memo for C-Corporation Taxes; Indiana Facts A C corporation or a regular corporation is formed when small businesses are incorporated. The significant characteristic of regular corporations is that it is viewed as a legal individual entity which is separate from the owners who now become the shareholders. Shareholders now assume limited liability and are only liable to the level of their investments in the business, meaning their personal assets cannot be attached as is in the case of partnerships and sole proprietorship (Steingold 02). Any debts in the business are viewed as the company’s responsibility and not the shareholders since the individuals are protected in the limited liability clause. Corporation is usually separated legal entity; thus, the Internal Revenue Service (IRS) law views it as an individual taxpayer. From this fact, corporations are often subjected to double taxation. This is because the corporation’s income is taxed from the corporate ground and secondly when the dividends are paid to the shareholders. After the Corporation makes all the business deductions of salaries, interest payments and fringe benefits, the remaining income is taxed at the corporate level, and then the dividends which are distributed to the shareholders are again taxed when they submit their personal returns (Steingold 02). For the case of small businesses, double taxation does not apply because a greater part if not all of the company’s profits are ploughed back into the business and paying of salaries that are deductible. No money is left for payment of dividend due to the absence of shareholders. In an attempt to avoid double taxation, the corporations sometimes increase the salaries of employees to avoid the distribution of income as dividends. The Internal Revenue Services is however aware of this trick and more often carries out audits for corporations’ that pays executive salaries (Steingold 02). Corporations should therefore keep their salaries in a way that is consistent with fluctuating earnings over time. Increased salaries in years of high earnings and low salaries with low earning years, The internal Revenue Service may make a charge for instance if high salary payments are indeed dividend payments To avoid this charge, the company should consider many aspects such as the amount of salaries that other corporations pay for particular similar posts, the tasks performed, the abilities of the workers and the experience in the lines of work. These aspects are more in line with the IRS regulations. Indiana State C Corporations C corporations in the state of Indiana best serve the owners who want a business structure which is formal and the fact that liability is limited. Official documents for forming a c corporation must be filed with the taxes department. Shareholders in Indiana C corporations never report their expense and business income on their individual tax return. On the other hand, corporations pay income taxes and files tax returns at a general lower rate than individuals do (Steingold 02). Individuals however are known to report and pay taxes mainly on income paid to them from the corporations. It should however be noted that corporation shareholders should pay personal income taxes from corporation’s dividend payments even though they have been paid for previously by the corporation. Indiana IRS taxes the gross income of regular corporations at 8% flat rate. The tax returns are due by the date 15th of every fourth month of the tax year. However for corporations whose year matches the calendar year translates to 15th April every year. For example if during the last tax year a corporation had an adjustable gross income of $ 200,000. It will owe the IRS of Indiana an income tax of $16,000 which is 8% of $200,000. The tax rate is however expected to reduce to 7.0 % effective July 1st 2014. Filing of Tax Returns A schedule, K-1 is used to fill in the report for income, dividends, losses and capital gains of shareholders of corporations or trusts. K-1 is prepared for every individual shareholder showing the level of income or losses plus the dividends and extra earnings or incomes from other sources. The K-1 schedule is information is included on the personal tax returns of shareholders on schedule E (Steingold 02). That is on supplemental income or loss. The schedule itself is however not filed with the individual returns, it is only sent to the IRS of Indiana along with the necessary business tax form; that is form 1065 for corporations. Completing a K-1 Schedule for a Limited Liability Company Shareholder Form 1065 is a return used in the US to report income, losses, deductions, and credits among others from the activities of partnerships and corporations. The following information is based on the members share from the corporation tax return (form 1065) (Steingold 02). 1. Information about the corporation. These include the description of the corporation from the location to the business activities and any other details. 2. Information concerning the shareholder including the name, the age, and the address. 3. The type of shareholder. For example preference shareholders or ordinary. 4. Individuals share of profit or loss or capital at the start of tax year. 5. The shareholders capital analysis such as the beginning account balance, the changes and the ending balances. 6. The shareholders share of income, dividends, royalties other incomes and self employment earnings. 7. Shareholders credits. 8. Foreign transactions. 9. The alternative tax items. 10. Non deductible expenses and tax exempt incomes. 11. Distributions 12. Any other relevant information. Filling out a K-1 Schedule 1. Understand the purpose of the K-1 form. The form is designed for use by corporations for the purposes of reporting individual segments of the corporation’s income. It identifies shareholders shares like those of income, deductions and credits. 2. Pick the K-1 form that meets your filling requirements. For instance schedule K-1(form 1041) which is used for share of income the deductions and credits, taxes paid for household employees and money currently held for future distribution. Form 1065 for partnerships share of income deductions and credits. And form 1120s share holders share of income credits and deductions (Steingold 02). 3. Fill out the K-1 schedule form and complete the following mandatory items. Partnership information like the company or employer identification number, employer’s name, address, location and the IRS center where the return for the partnership was filed. Information on the beneficiary including the personal identification number, the address, shares and the profit or loss. Information on the current year’s income, credits and deductions plus other necessary items. 4. Report the income for the beneficiary on the schedule as required by IRS. These are reports generally from: Business income from the sales of goods or services Ordinary dividends. Long-term assets or capital gains held past one year before disposal. Short term capital gains and assets that are held for less than a year. Rental income for usage of property or occupation. Interest income like moneys earned from savings. Qualified dividends. 5. Download and print the schedule or complete it online. The form will request for the following information: Estate name as indicated on form SS-4 that is the application for Employer Identification Number. The Fiduciary name who is the estate administrator. The address and the physical location of the company. Number of K-1 forms Employers Identification Number The date that the corporation was created Interest income. 6. Review the form and make any necessary corrections if need be. 7. Sign and date the form and finally submit as per the instruction page of the IRS booklet. Work Cited Steingold, David M. What kind of tax will you owe on Indiana business income? Indiana State Business Income Tax.2013. Retrieved April 28, 2014, from http://www.irs.gov/uac/Form-1065,-U.S.-Return-of-Partnership-Income Read More