The following identifies the various business entity formations and characteristics of each.
Limited liability company (LLC*) – A business structure that blends some characteristics of a partnership and a corporation. Liabilities are limited to the owner’s agreed investment in the business. A LLC is an entity formed under state law by filing articles of organization. None of the members of an LLC are personally liable for the business’s debt. An LLC is not necessarily a corporation. The LLC concept came about to provide added risk limitations that a corporation (e.g. Sub Chapter S) did not always provide. Business formations can be set up as: Partnership LLC, Sole Proprietorship LLC, S Corp LLC.
Limited liability partnership (LLP*) – A hybrid form of a general partnership.
Limited partnership (LP*) – A form of partnership in which liabilities are limited to general partners, while limited partners’ liabilities are limited to their agreed investment in the business.
S Corporation – An eligible domestic corporation that can avoid double taxation (once to the corporation and again to the shareholders and/or employees). This business structure is exempt from federal income tax other than tax on certain capital gains and passive income. The income passes through to individual shareholders and is taxed at the individual level. An additional requirement is to obtain a Federal Employer Identification number. According to federal guidelines, to obtain a S Corporation status federal Form 2553 must be filed with the Internal Revenue Service. Tax filing requires IRS Form 1120S.
Sole Proprietorship – A person who conducts business for profit. The sole owner assumes complete responsibility for all liabilities and debts of the business. Sole proprietorships may be required to register with State Departments of Revenue. Tax filing requires IRS Form Schedule C.
Partnership – Two or more individuals that own a for-profit business. All partners are responsible for the liabilities and debts of the partnership. Tax filing requires IRS Form 1065.
*Limited liability partnership, limited liability companies and limited partnerships are unincorporated entities, but are still considered formally organized entities.
A trust’s treatment for tax purposes is determined by the Trust Agreement. This details specific requests of the originator or Grantor.
The following statements outline the taxation of Grantor trusts.
1. If the trust is a revocable trust, and the grantor is also the
beneficiary, then a tax return (Form 1041) generally is not prepared. All income
generated by the trust assets is reported on the Form 1040 of the
2. The taxable income of the trust is reported on the grantor's tax return.
I have been doing a number of amended returns for taxpayers so far this summer. The actions of creating the IRS Form 1040X of course as a result of either the taxpayer finding a reason or in most cases the IRS sending one of those dreaded letters (e.g.CP2000) stating that an amount of $15,000 is due.
So, what exactly is this process all about?
How can I explain to the interested reader of this article what they should or should not concern themselves with?
In this initial article, l am going to stick with just a few basic areas and then expand topics in subsequent writings. I will guarantee you that all the examples are real. I have experienced each one.
What is the purpose of the 1040X?
You filed an original return (e.g 1040A) for… let’s say the tax year 2010. The return was filed timely, on or before April 15, 2011. The end result of either owing or getting a refund doesn’t really matter for this example.
During April 2012 you discover hiding in your desk drawer (while finalizing your return for the tax year 2012) a 1099Misc with the year 2010 on it. There is an amount of $2,000 in box 7. Normally when you have filed returns you did not have a document like this but thinking back to 2010 … now it all comes back to your memory that you agreed to deliver some products for a friend and she wrote you a check for that amount.
She sent a Form 1099Misc to the IRS and to you around February 2011. Plenty of time you to include with your return.
You need to amend the 2010 tax return by preparing a 1040X and mail it to the IRS. This should be done sooner rather than later because you have unreported taxable income that is accumulating interest due the IRS. The IRS knows that you did not report the income since they received a copy of the Form 1099Misc. Their audit process just has not pulled your return up for an error yet but you can count on receiving one of those letters informing you that you owe additional taxes plus interest. It could arrive any day.
The Question is…Should you wait until the IRS Letter arrives or mail the 1040X to “cut them off at the pass”?