The biggest mistake made by people who own a Corporation or an LLC that is inactive is that they assume that since they had “no activity” they do not have to file a tax return.
This line of thinking is what leads to piles of notices of non-filing from the IRS and from your state’s department of taxation along with piles of penalties and interest for non-filing and late-filing.
In addition, some states even charge a higher corporate tax for corporations that are deemed “inactive.”
Take an example of someone who sets up a New York S Corporation, doesn’t start conducting business right away, and decides not to file tax returns for their first two years in business:
- The penalty for not filing a federal tax return is $89 per month that the return is late (typically capped at 12 months). When they ultimately realize that they need to file a tax return, they will end up paying a $1,068 late filing penalty plus 8-12% interest
- The penalty for not filing a NY state tax return and not paying the appropriate corporate tax will be approximately $250 plus 8-12% interest
- NY is one of those states that “penalizes” a corporation for being “inactive.” An inactive corporation could end up paying a corporate tax of up to $800, while if they were deemed active, their corporate tax would have only been $25.
So, this New Yorkers who setup his S Corporation and decided that he didn’t have to file a corporate tax return is now out $1,500-$2,500 when he could have just paid a CPA $250-$400 to prepare his “minimal activity” or “inactive” corporate tax return.
Remember, if you own a Corporation or an LLC, you MUST file a tax return every year, even if you claim to have no activity.
{ 3 comments… read them below or add one }
Very good tip indeed.
Do Schedule K-1s need to be filed also, even if they are zero with no profit or loss?
Hi John,
Yes, K-1s are a required attachment when preparing S Corp tax returns and Partnership tax returns. These K-1s then get distributed to all Shareholders/Partners for the partners to report on their personal tax returns.
In the off chance that there is $0 profit (very unlikely…most companies will have at least a small profit or a small loss), the taxpayer should still report the K-1 with $0 profit on their personal tax return. This will let the IRS and your state(s) know that the entity is still active and had a $0 profit rather than having them flag it as a possible missing item. Also, if you have any carryforwards from prior years, you will want to report the $0 K-1 so that those carryforwards continue to carry forward.
In the event that the K-1 shows a loss, the taxpayer will use that loss (assuming they have sufficient basis) to offset other income. So, in this case, not only is it the right thing to do, but it may also end up reducing your tax bill!