How to File Taxes for Small Businesses with No Income

Many new businesses operate at a loss, incurring expenses in excess of income. Entrepreneurs and startup owners incur startup costs and legal fees during the first year of operations. Even long-term business owners can experience downturns or operational changes. 

If your business has no income, you might expect not to file an income tax return. However, many companies with no income must file returns. 

This article will explain when businesses with no income must file tax returns. We’ll also summarize the necessary forms and when to file.

Do Small Businesses with No Income Have to File Tax Returns?

Individuals with less than $400 of freelance earnings and under the gross income threshold do not need to file an income tax return. The gross income threshold varies by tax bracket. Individuals with income over the filing limits must generally file returns.

Further, business owners with no income may wish to file tax returns to claim tax refunds or report the following: 

• Tax credits

• Startup costs and other business expenses

• Ownership information

• Estimated tax payments

The IRS requires most companies to file income tax returns, even with no income. Many small businesses file information returns but do not pay taxes.

Additionally, several tax types require periodic filings, regardless of business income. For example, employers must file payroll tax returns and report employee withholding tax information. Many state and local jurisdictions also require sales tax returns for active businesses.

Tax laws can be complicated, but 1-800Accountant helps small business owners comply with tedious rules. Keep reading to learn about the filing requirements for your small business. 

Understanding Your Small Business Tax Responsibilities

Most small businesses must file federal income tax returns. Your federal tax form depends on your business entity type and tax structure. 

Additionally, your business may need to file additional non-income tax returns, such as sales or employment. As explained below, some requirements depend on your business location.

Types of Business Taxes

Depending on your operations and location, your business may need to file returns for the following: 

• Federal and state income tax

• Employment taxes, including Social Security and Medicare

• Sales tax 

• County and local taxes, such as property and school district tax

The remainder of this article will address federal income tax requirements, but professional CPAs can provide specialized state tax advice to support your business. 

Business Entity Structure

Your business structure determines your federal tax return form. Depending on your business type, you must either attach schedules to your personal tax form or file a separate business tax return.

The business entity type also affects whether the company or its owner pays tax on business income. For example, passthrough entities distribute business profits and losses to the company owners. Owners of businesses with no income could benefit from a passthrough structure.

Passthrough Taxation

Passthrough entities report business income and expenses but generally do not pay income taxes. Instead, passthroughs distribute profits and losses to their business owners, who pay personal income tax on their share of business activity.

Passthrough taxation applies to partnerships, S corporations, and limited liability companies (LLCs). However, LLCs with corporate tax elections lose passthrough entity tax treatment.

Passthrough entities must generally file information returns annually to report business activity and ownership information, regardless of whether the companies have business income.

Keep reading to learn the unique tax filing requirements for each type of passthrough entity.

Small Business Tax Filing Requirements by Entity Type

Sole Proprietorship

Freelancers and independent contractors represent sole proprietors for income tax purposes.

Self-employed business owners who earn $400 or more during the tax year must file federal income tax returns to report their business activity. Independent contractors with no taxable income must still file returns to report freelance earnings over $400.

The sole proprietor filing requirement also applies to owners of single-member LLCs without a corporate tax election.

Sole proprietors must use IRS Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report their business activity. Report income from rental properties on IRS Schedule E (Form 1040), Supplemental Income and Loss. 

Attach Schedule C and/or Schedule E to your personal income tax return, IRS Form 1040, U.S. Individual Income Tax Return. 

Additionally, self-employed taxpayers must use IRS Schedule SE (Form 1040), Self-Employment Tax, to report business income and determine their self-employment tax liability.

Partnership

Partnerships do not pay federal tax on business income. However, partnerships must file annual information returns to report business activity and partner ownership information. 

The filing requirement also applies to partnerships with no income.

Partnerships use IRS Form 1065, U.S. Return of Partnership Income, to report business receipts and expenses, partners’ capital activity, and ownership information. The business must also provide each partner with a Form 1065 Schedule K-1, which reports the allocations of income, expenses, and capital activity to that partner.

Partners report their Schedule K-1 income allocations on their personal income tax returns.

S Corporation

S corporations follow reporting requirements similar to partnerships. S corps do not pay federal income tax but file annual information returns.

All S corporations (even companies with no income) must file IRS Form 1120-S, U.S. Income Tax Return for an S Corporation. Form 1120-S details business income, expenses, and ownership information.

S corps must give a Form 1120-S Schedule K-1 to every member. S corporation Schedule K-1s report income and expenses allocated to the business owners. Partners use the information from their Schedule K-1s to report business income or losses on their personal tax returns.

Limited Liability Company

LLC filing requirements depend on the number of business owners and tax elections, if any. 

Single-member LLCs default to sole proprietorships for federal income tax purposes. Multi-member LLCs default to partnership tax treatment. However, LLCs can file corporate tax elections.

If an LLC files a corporate tax election, the company loses its passthrough entity tax treatment. The entity must file corporate income tax returns instead of sole proprietorship or partnership returns. 

Corporate tax elections can offer tax benefits, depending on several business factors. We recommend consulting tax professionals for advice on entity formation and tax planning.

C Corporation

Unlike passthrough entities, C corporations pay federal tax on business income.

All C corps must file IRS Form 1120, U.S. Corporation Income Tax Return. Fortunately, corporations with no income can carry forward losses to future years. 

For example, consider a C corp generating a $10,000 loss during its first year and $5,000 of taxable income during its second year. The corporation can carry forward part of the $10,000 loss to lower the second year’s taxable income.

Foreign Entity

Foreign companies must comply with complex tax laws and filing requirements. Businesses with no income risk fines and penalties for failing to follow the federal reporting requirements. 

Reporting rules vary, depending on the nature of the business. 

Foreign corporations operating in the United States must generally file IRS Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. 

Additionally, if a U.S. business owns a foreign entity, the company must report its ownership. U.S. owners of foreign corporations must use IRS Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. U.S. owners of foreign partnerships must use IRS Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Transactions with foreign entities could require additional reporting requirements. We recommend partnering with tax professionals for help with foreign reporting requirements.

Income Tax Filing Deadlines

Your business tax return due date depends on your entity type:

• Partnerships, S corporations, and multi-member LLCs must file information returns by March 15th.

• Sole proprietorships, single-member LLCs, and C corporations have until April 15th to file income tax returns.

If you want more time to file, consider requesting an extension. Federal extensions generally grant six additional months for income tax filings. Taxpayers can avoid penalties and interest by estimating and paying their tax liability before the return's original due date.

Estimated Taxes for Self-Employed Taxpayers

Most self-employed business owners receive 1099 wages instead of employee paychecks. Accordingly, independent contractors must make quarterly estimated tax payments to avoid penalties.

Taxpayers with no business income should maintain updated bookkeeping to monitor business receipts throughout the year. If your business starts generating revenue, consider making estimated payments towards your income tax liability. 

Self-employed taxpayers can use the IRS estimated tax worksheet to determine whether and how much they should pay.

Make your quarterly estimated tax payments by the following deadlines: 

• Q1 (January 1st – March 31st): April 15

• Q2 (April 1st – May 31st): June 16

• Q3 (June 1st – August 31st): September 15

• Q4 (September 1st – December 31st): January 15

Expert Advice for Small Businesses: Ensure Compliance (And Lower Your Tax Bill)

Income taxes can be tedious and complicated, even for small businesses with no income. Fortunately, 1-800Accountant offers numerous budget-friendly services to help you stay compliant while growing your business. 

Tax experts can support your business with entity formation, tax preparation and filing, and year-round tax advice. As your business grows, professional CPAs offer specialized assistance to help you lower your tax bill.

Schedule a free consultation with tax advisory professionals to learn how tax planning services can benefit your small business.