This is the second page of my tutorial about the Form 1120. Arts and crafts businesses that are incorporated and didn't make the S-corp election file the Form 1120 to report items of income and loss. The first page in this series discusses all the income and expense items making up
This article walks you through other parts of the form such as general and administrative expenses, Schedule L and M-1. I'm not going to go through the form line by line, rather I am addressing those items which are both particularly relevant to arts and crafts business and that my clients have the most questions about.
Officer Compensation: If you've chosen to incorporate your arts and crafts business rather than operate it as a sole proprietorship, most compensation you receive has to come in the form of a W-2. You can't pay yourself commissions or dividends instead of a regular paycheck.
Believe me, I know it's a pain to run payroll for one person. However, as an officer/shareholder of your business, it's not an option under US tax code.
Net Operating Loss/Special Deductions: If your business had negative taxable income in prior years that you did not elect to carry back, you can use it to reduce your current year taxable income. Any left over, can be carried forward to next year. Arts and crafts businesses will normally not have any 'special deductions'. If you think you might, talk about it with your accountant or tax return preparer.
Total tax: Schedule J does a good job of walking you through tax. Basically the rate is 15% on the first $50,000 of taxable income.
If your arts and crafts business had taxable income of more than $50,000, woo-hoo! good for you. Use the tables to figure the tax for the amount over $50,000.
Schedule K: I discuss the different in my article about Schedule C. Most arts and crafts businesses will use an activity code of 339300 (other miscellaneous manufacturing). However, check out the activity codes at the end of the instructions for the Form 1120 to see if you should use a different one based on what you do in your arts and crafts business.
Most arts and crafts businesses will be checking 'No' for most questions 3 through 18. Here are some instances where you may be checking 'Yes':
- Line 4 (a): Most of my clients own 100% of the stock in their arts and crafts business so they check the 'Yes' box for 4(b), entering in their individual information in Part II of Schedule G.
- Line 10 - Enter the number of shareholders in your business.
- Line 11: Remember when I was talking about electing to forego the carryback period in the net operating loss section above? Well, if you have negative taxable income that you want to carry over to next year check this box.
What's the alternative? Well, you can opt to amend prior year returns, carrying the loss back to get a refund for tax already paid. Then you also have to fill in Line 12.
- Line 13 - Under $250,000. Yippee, a bonus for smaller arts and crafts businesses! If your total receipts and total assets are both less than $250,000 you do not have to fill out Schedule L (balance sheet) or M-1/M-2. This is a tremendous time saver if preparing your own Form 1120. Please note that you don't add total receipts to total assets. Standing alone, they both have to be less than $250,000.
- Line 15 - If you paid independent contractors who are individuals (not corporations) more than $599.99 during the year, you have to issue them a Form 1099-MISC by January 31.
Well, that wraps up the most commonly addressed items on Form 1120. In my next article, I'll be briefly discussing Schedule L, M-1 and M-2 for those business with total receipts and total assets in excess of $250,000.