For most of us, completed tax returns are due to the Internal Revenue Service on April 15 every year. Every Form 1040, 1065, 1120, and Schedule C – along with any payments due – must be postmarked and on their way to the regional processing center on that date. But if this is your first year in business, are your tax deadlines the same? What about startup or small business taxes? Does April 15th hold the same weight?
Depending on how you define your “fiscal year,” your tax return (and any money you owe Uncle Sam) may not be due on April 15. As you make your plans for 2020, don’t overlook your tax filing dates. Here’s what you need to know about filing taxes for your startup.
Federal Tax Returns Are Due April 15 (Sort Of…)
Under federal law, taxes for sole proprietors are due: “on the 15th day of the 4th month following the end of the tax year.” Most Americans follow the calendar year as their “tax year,” which means taxes are due on April 15 every year.
The same is true if you are a corporation that isn’t an S corporation: taxes are due on the 15th day of the 4th month. However, these companies have flexibility on when to file taxes. If they use the calendar year as their tax year, then returns must be filed on April 15. If they define their own “fiscal year” instead, then taxes are due on the 15th day 4 months after the fiscal year ends.
For example: Acme Corporation is not an S corporation and defines their fiscal year as the 12-month period between May and April. Therefore, taxes would not be due until Aug. 15, as that would be the “15th day following the 4th month following the end of the tax year.”
There are a number of reasons why a company would choose to follow a tax year that doesn’t follow the calendar year. For businesses that are seasonal in nature, defining a fiscal year that corresponds with natural ebbs and flows lets the leadership focus on taxes when business is slower. And corporations that only operate in one state or region may align their fiscal year with state tax due dates, so that all returns can be filed at once.
No matter how you define your fiscal year, the hard deadline remains: if you don’t file returns and pay taxes by the 15th day of the 4th month following the close of your year, you might face penalties and possible fines.
There is one important exception to note here: all business entities can file an extension, which will give you an additional six months, moving your deadline to October 15th. You still need to file that extension by April 15th, but it can buy you a little time if you need to get your accounts in order.
Different Filing Dates for S Corporations & Partnerships
If your company is organized any other way (such as an S corporation or partnership), you have even less time to file taxes. According to the IRS, your taxes must be filed on the 15th day of the 3rd month following the close of the year. Most S corporations and partnerships follow the calendar year as their tax years, putting the tax due date as Mar. 15.
As noted above, there may be exceptions to that rule. Although most S corporations and partnerships will use the calendar year for tax purposes, they may be able to define a fiscal year if they can establish a business purpose. Some acceptable business purposes include:
- Using a tax year that aligns with the shareholders owning more than 50% of the company
- The company records 25% of their gross-receipts in the last 2 months of a defined 12-month period.
If a S corporation or partnership can’t define a natural business purpose, they must apply for one with the IRS based on business facts and circumstances. If it isn’t approved, then the business will be forced to use the calendar year as their tax year.
Paying Taxes on Time All Year Long
The good news is that tax time doesn’t have to come with a major bill. That’s because most partnerships and corporations must pay a portion of their estimated tax bill quarterly, based on how much they anticipate owning in total tax.
The IRS requires partnerships and S corporation shareholders to make quarterly tax payments if they anticipate owing more than $1,000 in tax when their returns are filed. Other corporations (those not organized as an S corporation) should pay quarterly taxes if they expect to owe $500 or more at tax time.
To make it easy, the IRS divides the calendar year into 4 different payment periods where companies can submit their estimated tax payments by mail or online. As with all tax payments, be careful here, you don’t want to end up getting dinged for underpayment or penalized for being late.
What Do I Have to Do Next?
Although the 2020 tax season is in full swing, preparing for it is a year-long task. For the 2019 tax year, your dates may not change: unless you have a defined fiscal year, partnership and S corporation tax returns are due on Mar. 15, while other corporations will be due on April 15.
For this tax year, there are a couple important steps you can explore to reduce the shock of tax season. First, consider the advantages of declaring a fiscal year. If you have a compelling business case, it may be approved by the IRS and reduce your overall stress. Second, be sure you are paying taxes quarterly and on time, especially if you may owe more than $1,000 at the end of the year. Breaking it up into 4 payments is easier than paying the full amount at filing. Regardless of how you choose to file, it’s best to think of tax preparation as a year-round endeavor — especially if you plan (or hope) to make a profit in 2020 you need to be planning for your 2020 returns!
Confused by all the options available to your business? Or is trying to determine a business case for a fiscal year difficult? airCFO is your business’ partner in ensuring taxes not only get filed right the first time, but on time.