BUSINESS INCOME TAX RETURNS
This section describes the federal and state income tax returns that must be filed by various business entities. The business also may be liable for estimated tax payments, sales and use tax, and other taxes which are discussed later in this chapter.
SOLE PROPRIETORSHIP
Federal Income Tax Returns The sole proprietor reports income and expenses from the business on Schedule C (Form 1040) and any related forms and schedules. The net income or loss from the business is then reported on proprietor’s individual Form 1040. The proprietor uses Schedule SE (Form 1040) to report net self-employment income to compute the Social Security and Medicare self-employment taxes. Minnesota Income Tax Returns The proprietor uses Form M1, Individual Income Tax Return. A copy of the Form 1040, Schedule C and other supporting schedules, must be attached to Form M1.
PARTNERSHIP Federal Income Tax Returns
The partnership files Form 1065, which is an information return. Generally, no tax is paid by the partnership with this return. Other forms and schedules may be required, including Schedules K and K-1. Individual partners use Schedule E (Form 1040), which is prepared using information from their Schedule K-1 (Form 1065), to report their distributive share of partnership income, deductions, credits and losses on the individual Form 1040. Information from Schedule K-1 may be reported on other schedules in the 1040 series. Schedule SE (Form 1040) is used to compute Social Security and Medicare self-employment taxes. A married couple who jointly operate an unincorporated business and file a joint federal income tax return can elect not to be treated as a partnership for federal tax purposes provided that the husband and wife are the only members of the joint venture and materially participate in the running of the business. For more information, see, Married Couples in Business and Election for Married Couples Unincorporated Businesses, from the IRS. This election carries over to the Minnesota tax return. Minnesota Income Tax Returns The partnership completes Form M3, Partnership Return, and files it with a copy of federal Form 1065 and Schedules K and K-1. The partnership may also have to pay a minimum fee based on property, payroll, and sales attributable to Minnesota. If the partnership has items of income, credits or modifications that are different from its federal return, the partnership must also issue Schedule KPI and/or Schedule KPC to its partners and include copies with Form M3.
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