INCOME TAXES

Income tax laws are extensive, complicated and constantly changing. While this chapter is not intended to cover all ramifications of income taxes, it does provide some general guidelines for complying with the main income tax rules.

1. INCOME TAX REPORTING

Each type of legal entity is required to file a different type of income tax form, as follows:.

a. Sole Proprietorship: A sole proprietorship is considered a component of the individual's personal tax return. Schedule C, the required tax form, is included with the owner's Form 1040 and for California Form 540. If the business has net taxable income, then Schedule SE must be prepared to determine the amount of self-employment tax that is due to the Federal Government (this is the self-employed equivalent of social security taxes).

b. Partnership: A partnership is not a taxable entity. It is treated as a conduit through which taxable income is passed to the individual partners for inclusion in their respective tax returns. The partnership is required to file Federal Form 1065. For California a Form 565 is required. No income tax is due with these forms, however, included with the forms is a Schedule K-1, which lists the various items of income and credits to be included on the individual partners' returns.

c. C Corporation: A C Corporation is considered a taxable entity and is required to file a Federal Form 1120 and California Form 100.

d. S Corporation: An S Corporation is a type of corporation that has special treatment under the tax laws. Generally, this type of entity is treated in the same manner as a partnership, with certain exceptions. Tax forms required are Federal Form 1120S and California Form 100S.

e. Limited Liability Company: A limited liability company and its cousin, a limited liability partnership (used typically by professional service providers) are generally not taxable entities and are treated as a conduit though which taxable income is passed to the individual partners or members for inclusion in their respective tax returns. These entities are generally required to file the same forms as a partnership. No income tax is due with the forms, however, included with the forms is a Schedule K-1, which lists the various items of income and credits to be included on the returns of the individual partners or members.

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Are there any new considerations I should know when filing my income tax forms for 2011?   There are several new items to consider when filing income tax forms for 2011. You can check out our new article on Income Tax Considerations for 2011.