Business Entity Tax Return Review

There are several things we want to bring to your attention.

Form 1120, 1120S and 1065

These are 5-page tax returns with a bunch of supplemental data, similar to a Form 1040. This is the heart of your tax return, and is where all your schedules and other related items are tabulated, and presented to the IRS and local agencies. Please review these pages for accuracy in simple things like spelling and addresses, as well as an overall sanity check on the numbers.

Your individual tax return is summarized on two pages (Form 1040), but partnerships and corporations have a single page and provides an overall summary of income and expenses. Here are some common things to review.

Header

If your corporation or partnership is filing a final tax return, the appropriate box should be checked. If your address has changed, we can use your tax return filing to alert the IRS (states will need additional correspondence). Review your accounting method to ensure accuracy (cash versus accrual).

Gross Income

Line 1 of the tax returns is the gross amount of income reported on your tax returns. Does this appear correct? During the tax return review with you, we will confirm this amount matches your 1099s, point of sale (POS) system, and other income sources.

401k or Profit Sharing (pension)

Oftentimes, a corporation or partnership will make a 401k employer contribution or some other contribution to a profit sharing or defined benefits plan. The problem becomes when the entity writes a check after the tax year is closed. This is not a big deal, but we want to account for the contribution with the associated tax year. Review line 23 (C Corp), line 17 (S Corp) or line 18 (Partnerships) for accuracy.

If you need help setting up a 401k or some other plan, please contact us. SEP IRAs are old school and don’t allow for higher limits or Roth contributions.

Other Deductions (the good stuff)

Line 26 (C Corp), line 19 (S Corp) and line 20 (Partnerships) is the catch-all for all expenses that don’t otherwise fit in the other categories on the main page of the business entity tax return. Office expenses, mileage, home office, etc. will primarily be listed as Other Deductions.

A statement of all other deductions will be contained in the “Required Statements” bookmark in the left-hand viewing pane of most PDF readers. Please review this carefully.

Rental Property

Partnerships and the occasional S corporation might own a rental property. If so, this information is detailed on Form 8825. This is akin to Schedule E of Form 1040 on individual tax returns.

Generally speaking, S Corps should not own rental properties since this income is considered passive, and could artificially inflate reasonable salaries causing an increased tax burden. C corporations do not have a separate form for rentals.

Balance Sheet

Schedule L (either page 4 or 5 of the main tax return, depending on the entity) will report balance sheet items. Please review this page for asset totals and loan balances. Schedule Ls are not required for most small businesses under $25M in assets. However, WCG always prepares this schedule since small businesses have a funny way of becoming a big business or if you want to sell your headache to a buyer.

K-1s

For S corporations and partnerships, your K-1s are included and this is how the business entity profit will flow through to your individual tax returns (Form 1040), and be taxed at each individual owners’ income tax rate. This is why S corporations and partnerships are considered pass-thru entities. If WCG is preparing your individual tax returns, we will automatically include your K-1 detail. If your tax returns are prepared in a different office, please provide the K-1 to be included in your Form 1040.

Please review each K-1 for correct spelling of shareholders or partners, and the correct ownership percentages. Percentages cannot fluctuate from year to year without perfecting the transfer of ownership interests and possible tax obligations.

Two-Year Comparison

As mentioned, this compares your current tax return data to your previous tax return data. In the accounting and engineering world, we are looking for material deltas (differences) or changes. And yes, as a part of our review process, your tax professionals and managers are reviewing this as well.

The Two-Year Comparison is right before the start of the state tax returns. In true comparison fashion, these pages have three columns:

1. where you were
2. where you are
3. and the difference

Review these pages! Your Tax Manager will go through these line by line with you to ensure your understanding and the tax return’s accuracy.

A Two-Year Comparison is only created if WCG has prepared both tax returns.

State Taxes

An S corporation or partnership passes its income tax obligation onto the shareholders or partners. However, some states such as Washington, California, Texas, Tennessee, Virginia among several others impose a franchise tax or a pleasure to do business in our state tax. Review the ActionRequired PDF for specific information. We will also review this will you.