Do you have a lot of medical bills that you pay on each month? Could those medical bills be deducted from your tax bill this year? I was helping my mother take care of all of her finances after my dad passed away. I didn't realize how many bills she had coming in each month for medical treatments that my dad had undergone months, even a year earlier. I started doing some research about medical bills and tax deductions. If you have medical bills, take a minute to read through this blog to gain some knowledge that can help you decide what you can do when tax time comes around.
S corporation shareholders know that their income taxes can be much more complex than the average wage earner. But you may not really understand how your personal taxes are affected and what steps you must take in order to file.
To help you prepare for your tax preparation meetings and have more confidence, here are the four basic steps you'll need to complete before you can hit 'send' to the IRS.
1. Form 1120-S
First, the S corporation must complete its corporate tax form. Form 1120-S sounds (and appears) much like its C corporation counterpart, Form 1120. However, Form 1120-S is merely informational and works as a reference for the IRS to use when evaluating the individual taxes of all shareholders.
S corporations don't actually pay taxes as an entity. This income tax form, though, must be prepared by the company's accountant or you cannot move on to the next steps.
2. Schedule K-1
Once the corporate tax form has been completed, the accountant should next complete Schedule K-1. This divides out the profit and certain expenses or deductible items into individual reports for each shareholder. The amount of your profit and other (called 'separately stated') items depend on your interest in the business and any specific contracts in place.
3. Separately Stated Items
As mentioned, Schedule K-1 lists a number of transactions by the corporation that are used at the individual shareholder level. This list is called 'separately stated items', and may include such things as capital gains and losses, dividends, charitable contributions, foreign taxes, investment income and expenses, or disallowed corporate deductions.
You and your accountant will then determine how to use your portion of these items on your own income taxes.
4. Form 1040
Finally, you are ready to begin work on your own income tax return using Form 1040. Shareholder income from Schedule K-1 is generally taxable income to each individual. In addition, deductible items and available tax credits from the separately stated list can offset this income. Your portion of capital losses by the business, for instance, may be deducted against other investment gains.
This step-by-step process must be completed in order to achieve the right numbers for your own personal taxes. It can be very complicated, so the best results come from working with an experienced accountant familiar with your industry. They can provide the best tax return services. Get started on next year's income taxes by scheduling an appointment before the year ends.
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