Tax returns are due Sept 15th for flow-thru entities (S Corps & Partnerships)
While filing your business returns yourself or through help, it is very important to know
the right deadlines marked on your calendar. The federal income filing deadline for tax
purposes for flow-through entities is normally on the fifteenth day of the third month, i.e.
March 15 for a December 31 year-end, and September 15 for those on extension.
Flow-through entities, also known as pass-through entities, are legal business entities
that are not subjected to corporate income tax. It passes any income that it makes
directly to its owners, shareholders, or investors i.e. the income ‘flows through’ to
investor or owner. All the profits flow through to owners and are taxed under the
individual income tax, not separately. The losses of the company can be applied against
the personal income of the owner. It includes partnerships (limited, general, and limited
liability partnerships), LLCs, sole proprietorships, and S corporations. A C-corporation
that pays corporate tax is not a flow-through entity.
KEY TAKEAWAYS:
● Flow-through entities pass all their income on to the owners or investors.
● They are used as a device to avoid taxation
● Through them, the income of the owner is taxed under the individual tax rate for
income, not corporate tax.
● Advantage: Income from the business is only subject to a single layer of income
tax and individuals may deduct business losses against current income from
other sources.
● Disadvantage: Owners will still be taxed on income that they do not directly
receive.
When the tax time comes around, the net income of a flow-through entity is calculated
by reducing the deductible business expenses from the gross income of the business.
Then the net income is divided among the owners as per operating bylaws and owners
pay the personal income tax based on personal tax rate instead of corporate tax. If you
are an owner of a flow-through business and you report its income and deductions as
your personal tax returns, then you can use form 4868 to file for an extension. This form
is used to file for an extension on personal tax returns, which will also include income
from the business.
The application for extension must be filed by March 15. Under the new law, the
maximum extension is for six months. Filing for an extension is tax-smart if you cannot
devote just enough time to file tax returns. Extensions have two deadlines, first one is
for filing for an application for extension, which is March 15, 2021, and another one is
the deadline for filing for a tax return at the end of the extension period which is
September 15, 2021. The extension is granted by the IRS automatically if you fill the
extension application form completely and file it by the original due date, estimate the
due tax properly, and pay the tax that is due.
It should be noted that an extension of time for filing the tax return is not an extension
for payment of tax due. You should pay the estimated tax due on the original due date
or else the IRS will add interest and penalties.
Sole proprietorships and Single-member LLCs file Schedule C with their personal tax
return to arrive at their net taxable income. Schedule C is filed along with Form 1140
used for filing the individual tax return. Partnerships and multi-member LLCs file form
1065 along with Schedule k-1 for tax returns since multi-member LLCs are often taxed
as partnerships. S corporations file information reports on Form 1120S and provides
Schedule K-1 to the individual shareholder.
Schedule K-1 is filed with Form 1120S and Form 1065 to report the share of net income
or loss of each shareholder or partner from a flow-through business. It reports taxable
income, detailed with income and deduction items mentioned separately. It is worth
noting that only pass-through entities can file Schedule K-1.
If you have taken an extension of filing the tax returns, you have until September 15 to
file an extended tax return.