Income Taxes
The individual taxpayer pays tax on income and distributions from a business in a number of ways. The most common way is to have taxes withheld from wages and reported on a Form W-2. Another common form for reporting small business income is the Schedule C. This form is used by sole proprietors to summarize the revenues and expenses of a business before determining the amount taxable based on the owner’s individual tax rate. Individuals who own interests in partnerships and S-corporations are taxed at their individual tax rate based on income reported to them on a Schedule K-1.
Partnerships and S-corporations are required to file information returns with the IRS each year. A partnership files Form 1065 and an S-corporation files Form 1120S. No tax is paid with the filing of these forms.
A C-corporation pays tax on the net income it has earned at the end of a year. In addition, the shareholder in a C-corporation will pay tax personally on any distributions of profits, such as dividends, that are made to the shareholder. C-corporations file Form 1120 with the IRS.
Franchise Taxes
A franchise tax is a corporate tax on the right to do business in a particular state or locality. Thus, partnerships, sole proprietors, LLC’s and individuals are not subject to franchise tax. Generally, only S- and C-corporations are subject to this tax. In most cases, the amount of tax is based on the capitalization of the corporation, i.e., the greater the amount of capital in the company, the greater the franchise tax. In North Carolina, the franchise tax rate is $1.50 per one thousand dollars of capital (minimum $35 per year).
Sales and Use Tax
Sales taxes are imposed on the retail sale of tangible personal property in a state. The tax rate varies depending on the business.
Use taxes are similar to sales taxes. The tax applies to the purchase of property for use in the state. For example, if a manufacturer buys a machine in Tennessee to be used in a plant in North Carolina, a NC use tax is applied to the purchase. Use taxes are applied at rates similar to sales taxes.
Vendors often require a "certificate of resale" from a customer who plans to use their product and sell it to a third party. For example, if Buyer A purchases t-shirts from Hanes, Buyer A can avoid paying sales tax on the purchase with a certificate of resale. The certificate states that Buyer A is purchasing the shirts to be resold to the end consumer (at which point sales tax will be collected). Certificates of resale can be obtained directly from the Secretary of State. In North Carolina, call (1-800-228-8443).
Annual Report Fees
In North Carolina, C-Corporations, S-Corporations and Limited Liability Companies are all required to file Annual Reports with the Secretary of State. General and limited partnerships are not required to file. The annual fee for the report for corporations is $25 and $200 for limited liability companies. We can prepare the annual report for you along with your business income tax return.
