C Corporation • A C corporation chooses its tax year when it files its first tax return.
• The first tax year must end within 12 months of the date the corporation was formed. • Non-personal-service C corporations can select either a calendar year or a fiscal year that fits their business cycle, as long as it doesn’t distort income. • Personal service corporations generally must use a calendar year unless they get IRS approval for a different fiscal year or make a Section 444 election . S Corporation • S corporations must use a calendar year unless they can show a valid business reason for a different fiscal year and get IRS approval. • If the S corporation cannot prove a business purpose for a fiscal year, it may be eligible to make a Section 444 election (file Form 8716, IRS Election To Have a Tax Year Other Than a Required Tax Year ) • The S corporation uses the same tax year for both federal and Minnesota income tax purposes. Compensation for Services Businesses use several ways to pay people who provide services. These can include salaries or wages, personal draws, cash payments , or property . This section explains how compensation is treated for tax purposes, especially when paid to business owners. Sole Proprietorship • A sole proprietor is not considered an employee of the business and doesn’t receive wages or salary for tax purposes. • The owner pays tax on the net income of the business, whether the money is taken out for personal use or kept in the business. • Any money or property taken out is considered a withdrawal of income , not additional taxable compensation .
Partnerships • Partners are treated as self-employed , not employees.
• Payments for services made like salaries are called guaranteed payments . These are ordinary income to the partner and either deductible or capitalized by the partnership depending on the payment’s nature. • Partners pay tax on their share of the partnership income whether or not it is withdrawn. • General partners may have this compensation subject to self-employment tax. • Distributions are generally not taxed unless they exceed the partner’s basis (investment amount) in the partnership.
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