How to Prepare Corporate Taxes
- 1). Gather the profit and loss statements and balance sheets for the corporation. You must ensure that the profit and loss statements are complete up to the end of the tax year. Examine the appropriate corporate tax form, either an 1120 for C-Corporations or an 1120S for S-Corporations. The corporate returns are divided into three sections on the first page. Section one is labeled "Income." It includes the gross receipts or sales of the corporation. The cost of goods sold is subtracted from gross sales. Other income categories added include dividends, interest, gross rents and royalties, capital gains income and the gain or loss from 4797, which is the form used to report the sales of business property. The last part is for "other income."
The second section of the 1120 is labeled "Deductions," and the third is labeled "Tax Refundable Credits and Payments." This third section is where all payments made for taxes due are recorded along with the credits issued. - 2). Complete the attached schedules for the 1120. Part of the totals that are entered into the boxes on the first page of the 1120 are calculated using the schedules found on the last four pages. The second page has three different schedules on it. The Schedule A is for calculating the "Cost of Goods Sold" for those corporations that resell goods. Line 8 on Schedule A is the total of all cost of goods sold, and this total is transferred to Line 2 of the first page of the 1120.
Schedule C is for calculating dividends and special deductions. These are for income a corporation makes through owning stock in other corporations, whether foreign or domestic. The calculated total is entered on Line 19 of Schedule C and on Line 4 of the first page of the 1120. Schedule E is for the reporting of the compensation for officers of the corporation. The names, Social Security numbers and percentages of stock owned in the corporation are placed here with the total going into Line 2 of this schedule and on Line 12 of the first 1120 page.
Page 3 of the 1120 starts with the Schedule J, labeled "Tax Computation," which adds up all income tax owed, including alternative minimum tax and corporate tax. Tax credits are subtracted from the tax owed, and that total is also reported on Line 31 of the first page. Schedule K is for the reporting of accounting methods used and the business activity codes and information on any stock of other companies owned by the corporation. - 3). Transfer amounts on the balance sheet to the Schedules L, M1 and M2. The final page of the 1120 is the Schedules L with the M1 and M2. Schedule L is a balance sheet for the tax form, dealing with the assets, liabilities and shareholders' equity. The Schedule L has four columns for each of the balance sheet categories. The first two columns cover the balance sheet at the beginning of the tax year, the third and fourth columns are for the end of the tax year. As a balance sheet, the total on Line 15 for "Total Assets" should equal the total on Line 28 for "Total Liabilities and Shareholder's Equity." Schedules M1 and M2 are for the reconciliation of the income and retained earnings per books with the return.
- 4). Sign and copy the return, retaining the copy for your records. It is now ready to be mailed to the IRS.
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