Your Tax Questions Answered
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Pilot does the bookkeeping and taxes for thousands of startups and growing businesses, which means we get A LOT of questions about taxes. Below, we’ve compiled some of the most common questions we’ve gotten over the years.
How much does the tax filing change from an LLC to a C Corp entity?
In general, limited liability companies (or LLCs) file Form 1065, whereas C-Corps file Form 1120. Often, LLCs are seen as more complex since each member of the LLC must allocate the proper ratio of profit, losses, and capital each year on schedule K1. With a C-corp, no owner allocation is needed.
In recent years, the reporting requirements for LLCs increased in complexity. As of the 2020 tax year, the capital account for each LLC member has to be tracked year over year, which has placed even more burden on LLC businesses and their tax accountants.
Additionally, an LLC doesn’t pay income taxes directly (although certain state minimum taxes may still apply). Any deductions or credits are passed through to each member of the LLC. Those members will then incorporate schedule K1 into their own personal or corporate income tax returns.
If the company was in a net loss position this year, do we get an income tax credit back that we can apply to future years?
When a company lands in a tax loss position in a given tax year, a net operating loss (NOL) is generated. For a NOL in 2020 and beyond, you can carry that loss forward indefinitely, and when the company is in a future taxable position you can apply that NOL to a future tax bill. However, you can only offset 80% of a given year’s tax liability using NOLs generated in 2020 or later.
For businesses that have NOLs before 2020, the 80% limitation does not apply. You can offset 100% of a year’s tax bill using NOLs originating from before 2020. However, these NOLs expire after 20 years.
So, yes, NOLs are very helpful for companies that have historical losses because they can apply those past losses to relieve some of the tax burden when they reach profitability.
What are some of the key tax deadlines I need to be aware of?
There are more than 10 important income tax filing deadlines throughout the year and missing can lead to costly penalties and fines. Here are a few of the important dates for early 2024.
January 31 - 1099-NECs Due
You must file 1099 forms for vendors, contractors, and freelancers in the United States who were hired by your company and paid at least $600 throughout the year.
Vendors, contractors, and freelancers must also receive a copy of their 1099-NEC form by the filing deadline.
Specific types of vendors covered by this requirement include individuals, sole proprietors, partnerships, and limited liability companies (LLCs).
This form, as well as other information returns, are due at the beginning of tax season because they are designed to help the IRS reduce fraud by verifying income that individual taxpayers report on their tax returns.
February 28 - San Francisco Annual Business Tax Return Due
Any company that conducts business in San Francisco, except for lessors of residential real estate, must file an annual business tax return with the City and County of San Francisco unless they qualify for certain exemptions or have allocated taxable gross receipts under $2.09 million.
March 1 - Delaware Franchise Tax Report Due
All companies incorporated in the state of Delaware must file an annual report and pay a franchise tax every year, regardless of whether you generate any revenue or profit.
Limited partnerships, limited liability companies, and general partnerships formed in Delaware don’t need to file an annual report, but they must pay an annual $300 tax due June 1st.
The amount of taxes that your business will pay is based on your company’s authorized shares.
If the tax is not paid on or before March 1, the state imposes a $200 late penalty, plus a monthly interest fee of 1.5%
March 15 - Income Taxes Return or Extension Due (Calendar-year S Corps, LLCs)
April 15th - Income Taxes Return or Extension Due (C Corps)
These tax documents must be filed with the IRS by March 15 (April 15 for C Corps):
Form 1065: This form is used to list your partnership’s total income or loss, along with any applicable deductions, such as salaries, guaranteed payments to partners, rent, taxes, and repairs. Schedules attached to this form will ask you about your partnership, any changes that occurred during the last tax year, how much income was brought in, and how much money was spent during that same time.
Schedule K-1: This form is used to report each shareholder, member, or partner’s share of the income, losses, deductions, credit, capital, and more throughout the tax year. General and limited partners alike need this form to report their proportional share of the partnership’s income or loss on a federal income tax return.
Alternatively, a company can file federal, state, and local income tax extension requests and expected payments by March 15th for an automatic 6-month extension to file Form 1065 and K-1s. This allows your tax preparer time to file a complete and accurate tax return.
There are more dates you need to know
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When do I have to start filing taxes?
Even if your business entity doesn’t have any financial activity yet, the IRS and state/local tax authorities still require you to file income taxes returns starting with the year of incorporation... So yes, even if you had zero revenue or minimal operations this year, you must file income tax returns.
An exception applies to partnership and LLCs only - if the company had zero activity for the tax year, no federal tax return is required (but certain state filings may still apply).
What is the R&D Tax Credit?
The Research and Development (R&D) Tax Credit is one you can apply for if you have qualifying R&D expenses, where you could get up to $500,000 back. You can claim these against your income or the employer portion of Social Security taxes as part of your payroll taxes. Beginning with the 2023 tax year, eligible companies can also claim these credits against Medicare taxes if their credits exceed $250,000. Both pre-revenue or unprofitable companies and revenue generating companies can qualify for this credit. Learn more in our comprehensive guide to the R&D Tax Credit.
Can subsidiary companies qualify for R&D tax credits? For example if the software development is taking place in another country?
No, any wages paid to employees outside of the U.S. are not qualified. The R&D activities have to happen in the U.S. to claim this credit. The entity claiming the R&D credits must also own the IP of the product in development.
Is there more information available about the Research & Development (R&D) legislation change?
Before the 2022 tax year, companies could expense 100% of their R&D expenses in the year they were incurred. Starting in the 2022 tax year, companies must capitalize on their R&D expenses and amortize them over five years for domestic R&D expenses, and 15 years for foreign R&D expenses. Section 174 (R&D) expenses include the following direct and indirect expenses:
- Wages paid to employees working on research and development activities
- Wages paid to contractors working on research and development activities
- Expenses incurred related to research and development supplies
- Overhead associated with research and development activities such as R&D facilities costs, travel costs, patent costs, and R&D-related depreciation
This law change is significant as companies that have historically been in taxable loss positions could be triggered into a taxable income position if the R&D spend is high enough for a given tax year. However, there is the potential for this new law change to be repealed.
Do I need to file payroll taxes for employees if the company doesn’t generate income?
Yes, you need to file payroll tax returns if you have W-2 employees, even if you don’t generate income yet. Your payroll provider can help you stay compliant with relevant federal and state payroll taxes.
How do remote employees affect a company’s tax filing obligations?
Hiring remote employees can certainly affect your state income tax obligations. Generally, once a remote employee begins working in a new state, “physical presence” in that state is established, and triggers an income tax filing requirement. Some states also impose a bright-line nexus test where if sales, property, or payroll exceeds a certain amount in a year, a company is required to file a state income tax return for that year.
If company contractors lived outside of the United States and earned more than $600 in a year, are they obligated to complete a Form W-9? Also, should the company send them a Form 1099-NEC?
International contractors are not required to complete a Form W-9 and a Form 1099-NEC filing is not required. Generally, the income of the international contractor should be withheld for federal tax purposes at 30% unless the contractor is claiming US tax treaty benefits. If the contractor wants these benefits, they should fill out Form W-8BEN (individual) or W-8BEN-E (business entity) prior to starting work and return the completed form to the company. While Form W-8BEN(E) is not required to be filed with the IRS, the company must keep any Form W-8BEN(E)s in its records as the IRS may request these forms in the event of an audit.
Do you have any other tax questions we missed? Email us at firstname.lastname@example.org and let us know.
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