What Your CPA Wants You to Know
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What Your CPA Wants You to Know
60. Must-Know Info For Filing an S-Corp or Partnership Tax Return
In this episode we guide you through the critical dates and details that every S-Corp and Partnership owner must know. Don't forget that the March 15th deadline for filing those business tax returns is approaching!
In this episode we explain the 1120S and 1065 tax returns for partnerships and S Corps and how to understand them and the taxes you will pay from your business!
We discuss what you need to give your CPA to file your tax return if you are filing a business tax return.
We also answer these questions:
What's a K-1 and how does it work?
What happens if I don't file on time?
What are ways to reduce taxes if you have a partnership or S Corp?
We got you covered with practical advice on preparing for a smooth business tax return process. We cover the essential documents your CPA needs and the nuances of deductible expenses, including assets like vehicles that can offer significant tax relief.
We emphasize the power of keeping your books up to date—not just for compliance, but to take advantage of tax-saving strategies like the Augusta Rule.
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Another thing that's good to remember throughout the year if you have an S-CorpR partnership is when you're doing your tax planning or your tax projections. That's a huge part of the equation In fact, it might be the most important part of the equation for many people. So make sure that you are keeping up with your books throughout the year. Don't wait until the very end of the year to catch up all your bookkeeping, because that's going to make it impossible to get accurate tax projections throughout the year. Welcome to what your CPA wants you to know.
Speaker 2:Tax and accounting help can be expensive, so we've created this podcast to help guide you through it all and make you feel like you have a CPA in your back pocket. I'm Carson Sands and I'm Taryn Sands.
Speaker 1:I'm a CPA with over 10 years of experience helping people start and grow their businesses and I'm an MBA with a specialization in marketing and entrepreneurship.
Speaker 2:Taxes suck and we want to make sure you don't pay more than your fair share.
Speaker 1:We're here to share everything your CPA wants you to know in a fun and easy to understand way. Let's get started.
Speaker 2:Let's do it. The due date for S-Corps and partnerships is approaching very quickly.
Speaker 1:March 15th.
Speaker 2:This comes as a surprise to many people, especially if you are a new business owner or you recently converted a business to an S-Corp. Today we want to talk about all things S-Corps and partnerships, because that deadline is one month sooner than your typical April 15th deadline. So we're going to talk about the due dates, what those forms are, what is a K1 and how the heck do they work, and then we're also going to give you all of the tax planning and saving tips that we give all of our partnership and S-Corp business owners.
Speaker 1:Absolutely, you know, and it makes a lot of sense if you think about it, because while we prepare many S-Corps, where we also prepare the personal tax return for the owner, there's a lot of people that get K1s from other CPAs. They're only part owners in a company or something like that, and so you just need that extra month to get your K1s together and get them to your CPA to make sure that you have time to get them reported on your personal tax return.
Speaker 2:So it definitely makes sense. It gives you a month between when those should be done until you have to do your personal return and you need that K1. So the first thing that always confuses people is that just because you started a business doesn't mean that you're going to have a business tax return.
Speaker 1:Right, if you are, if you have a small business and you haven't hit that income threshold that we always talk about, which is about $50,000, you might be filing on a Schedule C, which is reported on your personal 1040. So in that case, your due date is still April 15th.
Speaker 2:Yes, and if you just open a business and even maybe filed your LLC, you could still be a sole proprietorship, which is just filed as another piece of paper, basically on your personal tax return. So your due date isn't going to change. We're only talking about S-Corps, which you would have had to specifically file paperwork with your CPA or yourself to elect to be an S-Corps, so you would know, or a partnership, which that's going to be anyone that forms a business with someone else that's not their spouse.
Speaker 1:Unlike an S corp, you could accidentally be in a partnership and not realize it. Yeah, I know that sounds a little silly, but you know people think that you have to go and set up a formal arrangement with a CPA or an attorney in order to have a partnership, and that's just not true. You have to do that to set up an LLC or to make an S election. But if you go into business with somebody that you're not married to, you have a partnership legally. You can't just say, well, hey, we're going to report Half the income and expenses on my schedule, see, and half the income expenses on their schedule, see. Can't do that. You have a partnership, whether you want to or not.
Speaker 2:Yeah, we actually had one of our clients. They started a business just like a small side business, so she has multiple businesses and she was just thinking that we would have everything and put it on their personal returns. So I had to break the news to her that she would have to file by March 15th and it would have to be a separate business tax return.
Speaker 1:And and we've seen where people accidentally were in a partnership and they didn't know until well after the deadline. They didn't file an extension because they didn't know and they got penalties for six months, which is $215 per partner per month. Now we can usually get those waived but still we might not be able to. The IRS might say no one time.
Speaker 2:So try to avoid that and you can learn from Um Melissa and Katie's episode. They actually did stay on the phone. They did not file that first year because they had no idea and I think they got a $200 penalty letter and they called and they did waive it. So if it's your first year, they definitely have some wiggle room in there. So make sure to give them a call if that does happen to you. But, moving forward, you should mark this date in your calendar if you are an escort or a partnership. It is every year on March 15th, with a little asterisk, of course, because if it falls on the weekend it's not March 15th.
Speaker 1:Right. A lot of times it falls on Saturday or Sunday and it's not.
Speaker 2:It always depends.
Speaker 1:Yeah, always depends.
Speaker 2:So, moving on to these two types of tax returns, so one of those is going to be called the 1120s, and that is for an escort. It's really just a name, don't let that confuse you. It's just a form number. I don't know where they get these foreign numbers.
Speaker 1:Maybe it's just the next one in line, I mean the 1120s. When they came up with s-corps, they already had the 1120 for c-corps and so, because it was another type of corporation, it's just the 1120 dash s for s-corp.
Speaker 2:I get that, but where did 1120 come from? Just weird.
Speaker 1:I don't know. I mean, maybe it was the 1120th form that they invented.
Speaker 2:Probably, probably something weird like that, so don't let that confuse you. If your CPA says you know I need to file your 1065 or your 1120s, the 1120s is your s-corp return and the 1065 would be a partnership return. It's just a form number, like your individual tax return is also called a 1040.
Speaker 1:Just like you don't need to be intimidated by the names or the numbers of the forms, there's another one you'll hear people throw around a lot and that's the k1 or schedule k1, and that's just a form or a piece of paper really that's generated From the partnership return or the s-corp return. They both create a k1 and that's where all of the profit gets summarized on the partnership or s-corp return and then the net number is distributed To each partner based on their percentage of ownership, and that is distributed on form k1. So all the k1 is is something that shows your percentage of the income Of the partnership or s-corp that you're an owner of it's basically like getting a w2 from that company.
Speaker 2:It's not a w2, but it's just going to report the income coming from there.
Speaker 1:Right breaks out your portion of the income the interest income, the special deductions and everything like that.
Speaker 2:So don't let a k1 scare you. If you didn't know what it was, that's completely fine. But no, that's the reason for the early filing. So your cpa is going to take that business tax return and they're going to figure out what income needs to go to each partner, so then they can use that k1 and put it on their personal tax return. So hopefully that makes things a little bit clear. And the reason we wanted to bring that up is because it is often a shock to people that they don't owe anything when we send them their business tax return from a partnership or from an S corp.
Speaker 1:Right. So, Taryn, how much does an S corp that makes $100 a profit owe?
Speaker 2:$0.
Speaker 1:What about an S corp that makes $10 billion a profit?
Speaker 2:Oh, $0.
Speaker 1:Right, because the tax is not assessed on the corporation, it's assessed on the owners of the corporation, so it flows through to the individual owners.
Speaker 2:Yes. So when your CPA sends you over that tax return, you're not going to know what you owe. No one is.
Speaker 1:Exactly. But don't get too excited, because if you do make $10 billion on the S corp return, the S corp owes zero, but you as an owner will owe a whole lot of money.
Speaker 2:So the business does not owe money. The people paying for that income are the owners. Now let's track back just a little bit. I do want to bring up just a regular C corp, because that type of tax entity does pay its own taxes. That is the only one that does that and that's not one that we talk about very much, because we do not recommend that type of tax entity.
Speaker 1:Whenever you need a C corp, you'll already be working with an attorney or a CPA and they'll recommend it at that point and talk you through what you need to know about it. It's not something you're just going to set up on your own, or should. That's just. That's beyond anybody. That's not a professional.
Speaker 2:Exactly. You will not accidentally stumble yourself into a C corp.
Speaker 1:Right Now. It's also important to mention that, while the S corp and the partnership do not pay federal income tax, there are times when they pay certain taxes to states. Those taxes are assessed on the actual S corp or partnership, not to the individuals, and that very state by state our state of Texas it's definitely taxed on the business, not on the individual owners. Other states it still flows through to the individuals. So you're just going to have to talk to your CPA about your specific state rules.
Speaker 2:I don't think you said specifically but you're talking about, like the franchise tax.
Speaker 1:Yes, in Texas there's the franchise tax, and the company or the business pays that, not the owners.
Speaker 2:Exactly so. There are some taxes, so you would need to know the specifics, but right now in this episode, we're talking about federal income taxes.
Speaker 1:Right.
Speaker 2:Hello business owners. If your business is making over $50,000 in profit on a schedule C or partnership, now is the time to start thinking about switching to an S corporation. Switching to an S corp is a tax strategy that will save you thousands of dollars every single year. You haven't heard of this tax strategy. Now is the time to inform yourself so you can save thousands of dollars every single year Once you make that switch. We've created an easy guide to explain to you how the S corp works, what the requirements are for your business and how to get started. Because we want everyone to use this tax strategy, this guide is priced at $40, which is way less than the cost of one meeting with your CPA. Also, if you go to our website to purchase, you can use code podcast to get a discount for being a podcast listener.
Speaker 2:Now back to our show. So we've explained how the K1 works. You will get that when you file the business tax return, which will allow all owners to file their personal tax return by the April 15 due date. So you definitely want to get that done as soon as possible. What we tell our clients is yeah, maybe you get us your documents. What March 2,? But just think about how many people are doing their taxes. So you're getting in this like invisible long line. So if you have people that are really needing to file by April, right now you should be getting all of your stuff to your CPA. It is time. And that leads us into the next question. What do I need to give my CPA to prepare one of these business tax returns?
Speaker 1:Well, there's a lot of things. If you are using a bookkeeping software, then just access to that software like QuickBooks Online. That's a great place to start, because so much of the information that we need is found right there in your bookkeeping software.
Speaker 2:And your CPA will be using your profit and loss statement and all of those reports that are in QuickBooks. So if you're using QuickBooks, they need access to that so that they can get in and pull those reports and they need to make sure that you actually are up to date. So your books need to be completely done for the year and reconciled or they can't do your tax return because the numbers aren't going to be right, right, and a lot of times there won't be mileage in QuickBooks.
Speaker 1:So that's one thing that even if you give your CPA QuickBooks access, you still need to let them know what your business miles for the year were if you're using your personal vehicle for that.
Speaker 2:You're also going to want to always have a list throughout the year of assets that you purchased that were over $2,500 and what you sold during the year, so your CPA can easily see what was bought and what was sold.
Speaker 1:That's right, and if you are using QuickBooks online then we'll probably be able to see that in there, as long as you recorded it properly. But most of the town people don't, especially when they buy cars, so it's not a bad idea to send the sales invoice when you buy a vehicle or if you buy an asset at all that's over $2,500 just so we can look and make sure it got added to the books properly so that you get the full credit for your deduction. Seems like almost nobody knows that you get to deduct when you buy a vehicle for example, the cost of the vehicle plus the insurance that you buy, or the extended warranty plus the sales tax, and so a lot of times people are missing $8,000 to $9,000 of expenses for the purchase of that vehicle just because they didn't know those things were deductible.
Speaker 2:And that's why we like to see the actual invoice, so we can make sure that they've put everything in there correctly.
Speaker 1:We'll fix your QuickBooks and we'll fix the tax return to make sure that those numbers are right.
Speaker 2:Yes, there are also some other things that your CPA might ask you for if it applies to you, like loan statements and things like that. To see a full breakdown of what you would need, you can go to our website it's just whatyourcpawantsuninnocom, and there's a tax prep checklist and there's actually one for individuals, so what you need for your personal tax return, businesses and people that have rental properties. So I created it. I think it's really good.
Speaker 1:It is really good.
Speaker 2:And it would help you make sure that if you go down that list, if anything applies to you, gather that for your CPA and when you send that over they're going to think you're like the best client.
Speaker 1:Right.
Speaker 2:It also has some good do's and don'ts.
Speaker 1:So yes, do the do's, don't do the don'ts.
Speaker 2:Don't send all of your paper receipts, for sure.
Speaker 1:No, we don't need those and we'll look at them. Won't take them.
Speaker 2:Yes, we don't need your receipts. You can definitely keep those somewhere. If you are to be audited, you would use those, but your CPA does not want them. We don't need to go through every receipt. If you tell us these are the numbers, that's all we need.
Speaker 1:Another thing that's good to remember throughout the year, if you have an S-Corp for our partnership is when you're doing your tax planning or your tax projections. That's a huge part of the equation In fact, it might be the most important part of the equation for many people. So make sure that you are keeping up with your books throughout the year. Don't wait until the very end of the year to catch up all your bookkeeping, because that's going to make it impossible to get accurate tax projections throughout the year.
Speaker 2:Exactly, and that's why we wanted to end today's episode giving you all of our advice for how you can move forward and what you can do this year to help you on next year's taxes. So these are the things that we always go over with all of our clients who have partnerships and S-Corps so that you can get that number down as low as possible.
Speaker 1:So we're going to give you a list of several great tax savings options. All of these have been covered in a previous episode, so we won't go into the details on every single one because it would take hours. But if you will go back and listen to each episode, we'll give you the episode number. Then you'll get the details for each one of these deductions.
Speaker 2:One deduction that we have almost All of our business owners use, or at least look into, is called the Augusta Rule, and that's a rule that you can pay yourself rent but you do not have to pay taxes on that income personally. There's a lot of other details about that and you can check out Episode 22, which will break it down for you, but that is something if you want to take advantage of. It will lower your taxes that you need to start doing now so that next year's taxes will be lower because of it.
Speaker 1:Also, if you have a partnership or a Schedule C business and you think it might be time to convert to an S-Corp, then go listen to episodes 38 through 40. That is our S-Corp series, where there's three episodes that say who should convert to an S-Corp, how and why it saves you so much money and everything you could ever want to know and more about S-Corp.
Speaker 2:And if you're a person that has a partnership listening to this podcast episode, just a little reminder that if you're making well over $50,000 in profit on that partnership tax return, you want to check out that now.
Speaker 1:You're leaving money on the table.
Speaker 2:Yes, definitely Check out those S-Corp podcast episodes for sure. A big one that people always ask us about is paying your kids. Can you Absolutely?
Speaker 1:As long as they're doing real work, you can definitely pay them.
Speaker 2:So this will go into all of the details, even the labor laws that people ask about how you can do it, and it is different for each tax entity, so you're going to do it a completely different way if you have a sole proprietorship or a partnership S-Corp. So that's why you definitely need to listen to this episode. That would be episode number two. It's going to explain exactly how to do it so you can start doing it in 2024.
Speaker 1:That's right. And spoiler alert, if they're your kids and you have a family business, there basically are no labor laws. You can work them until their backs break.
Speaker 2:Which is what we do here.
Speaker 1:For sure, yes, yes, we don't have three school children at all. They're all hardworking, upstanding citizens.
Speaker 2:We do pay them from time to time to come to the office and do stuff, and their work ethic is not great yet.
Speaker 1:No, they get paid what they are worth, though Not a lot.
Speaker 2:Another great episode to check out is our depreciation episode, which is episode number 50. That talks about how you can deduct and how you should deduct large purchases. So as we get to the end of the year, we get so many emails about should I buy something? Is that going to reduce my taxes? And yes, a lot of times that's a great idea, but most people don't really know all the rules about it and it is changing, so that is a very important episode.
Speaker 1:Yes, and you should buy something if it can make your business more money. You shouldn't buy something just to save taxes so you can stick something in a corner that's going to cost a lot of money.
Speaker 2:And you shouldn't buy something unless you know the tax implications of it. There are a lot of changes coming up and we're just trying to make sure everyone realizes that it's not going to be the same as it was in the past. So let us know before you make any of these big purchases.
Speaker 1:Yeah, like don't get a super yacht unless if you can figure out if it's actually going to be deductible.
Speaker 2:I'm not talking about a super yacht. I'm talking about using bonus depreciation and then oh, like I want to get another car, and then just really screwing yourself over on the tax part of it.
Speaker 1:All right when you have to take all of that trade-in value back in as a gain ouch.
Speaker 2:Yeah, all of that is discussed in episode 50. And if your business is often buying large assets, it's such a crucial episode.
Speaker 1:They have also updated the estimated tax penalty. This penalty has always been around, but it used to be so small that we would tell people don't even worry about it. Just if you like to pay in so that you don't accidentally spend the money, that's a great reason to pay in, but don't pay in because of this little bitty penalty. It's so small I wouldn't even be scared of it. Well, interest rates have gone up and the IRS has adjusted accordingly, so now the penalty is enough to actually hurt a little bit, so it's a good idea to pay in through the year. Do your tax projections and listen to episode 51 to get all the details about how and why you should do that.
Speaker 2:And the reason we brought that up is because if you have a large number on your K1, like some of our clients do let's say your K1 has $100,000 on it you're going to owe a lot of money when you file your tax return if you haven't made any estimated tax payments.
Speaker 1:Yeah, because nobody has been withholding taxes for you on all that income like they do on a W2.
Speaker 2:Now don't be surprised if you have a new business and this is kind of your first time figuring out business taxes. If you get your K1 from a business and it has a large number on it, you're going to owe a lot.
Speaker 1:Yeah.
Speaker 2:And so now we had a lot of clients in the past who prepared for that and they just set the money aside, knowing that they were going to owe a lot when it came April 15th. Now we really need to change that, because it's not worth the penalties anymore. So those people who are used to paying a lot on April 15th we don't recommend them do that anymore because of this new change.
Speaker 1:Right, because that penalty is 8% now, and so even if you have one of these great savings accounts that see some that are paying 4.5 to 5%, it's not worth it because you're paying 8% to the government and we already pay them enough. Let's not give them any extra.
Speaker 2:Yeah, and I guess now they are just like no, like you have to pay us throughout the year. You really don't have an option to wait unless you want to pay us more money. They don't want anyone owing a lot of money when they file their tax return.
Speaker 1:Well, they follow the current rate pretty well. So I mean back when you could get a mortgage for 2.5% and you paid the IRS 3% as an estimated tax penalty. It kind of made sense. Now your mortgage is at 7% and you're paying the IRS 8%. So you know it does follow the trend.
Speaker 2:So we're here bearing the bad news, but it is a very important news and if this applies to you and you generally owe and you want to know how to start making those estimated tax payments, then check out episode number 51. It'll explain this new change we're talking about and how you can make those payments.
Speaker 1:And as much as it's not fun to make those payments, just imagine we get to filing season. We file your tax return and we say your tax issue is $35,000, but you already paid in $35,000. Imagine how great you're gonna feel.
Speaker 2:That would be amazing, but that hasn't happened to us yet.
Speaker 1:No, somebody needs to get us the CPA to do us a tax rejection.
Speaker 2:I guess we'll start making more estimated tax payments now that we're being forced to.
Speaker 1:Yes.
Speaker 2:Well, that wraps up today's episode all about partnerships and S-Corps. If you love this episode or found it helpful, we would really appreciate it if you would share it with a friend or share on your social media.
Speaker 1:Yeah, you don't like paying taxes. You don't want your friend to pay taxes either. It'd be fair.
Speaker 2:Right, it's all selfish if you don't share it really.
Speaker 1:That's right. If you don't share this with a friend that has a business, then that means you don't like them and you want them to pay more tax.
Speaker 2:Right, so share this episode.
Speaker 1:And thank you for listening to.
Speaker 2:What your?
Speaker 1:CPA Wants you to Know.
Speaker 2:Podcast.
Speaker 1:This podcast is intended to provide accounting and tax information for educational purposes only. All tax situations are unique and should be handled with the assistance of a tax professional.