Consultant’s Corner: Tax Returns on Multiple Businesses
Question: I have three sole proprietor businesses. How do I file a tax return on each business?
A sole proprietorship is an unincorporated business owned by one individual. While it is possible to operate multiple businesses under a single sole proprietorship, if the businesses are unrelated or dissimilar to one another, it is more common to operate the businesses under separate sole proprietorships. Separate tax reporting for each business activity may be required as discussed in greater detail below.
As to Federal Tax IDs, or EINs, the IRS is generally reluctant to issue multiple EINs to sole proprietors who conduct multiple business activities under separate sole proprietorships unless they are using separate trade names for each sole proprietorship. A trade name is also known as an assumed, fictitious business, or Doing Business As (DBA) name. If you plan to operate each of your business activities under a separate sole proprietorship and trade name, then you could consider obtaining a separate EIN for each sole proprietorship. However, you may instead find it beneficial to conduct all of your business activities under one sole proprietorship, if possible, with each activity conducted under a separate division or department using a different trade name. This would require obtaining only one EIN from the IRS: one for your lone sole proprietorship. The following is additional information on sole proprietorship taxation and organizational structure for multiple business activities you may find helpful.
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Sole Proprietorship Taxation
As sole proprietorship is a pass-through entity for tax purposes. In a sole proprietorship, the business net profit or loss flows or passes through to the business owner, who reports the business income and expenses on Schedule C of his or her personal Form 1040. When a sole proprietorship is profitable, the business owner periodically takes cash draws from the business to the extent of the business net profits; however, the business net profit is subject to tax regardless of whether the owner ever takes profit distributions from the business. Net profit from a sole proprietorship is subject to federal and state personal income tax and, if net self-employment earnings are $400 or more, the Self-Employment Tax (SE Tax). The SE Tax is reported on Schedule SE to Form 1040. Sole proprietors are not required to withhold payroll taxes from their periodic cash draws, which are not deductible as a business expense by the sole proprietorship, but they may need to make personal estimated income tax payments depending on their personal income tax situation. You can review information from the IRS on the taxation of sole proprietorships here.
Schedule C and SE Filing Requirements
Sole proprietorships can generally report all of their business income and expenses on a single Schedule C (even if they use more than one trade name) provided that their business activities fall under the same Business Activity Code as reported on Line A of Schedule C. However, if a sole proprietorship operates multiple businesses that will fall under different Activity Codes as reported on Schedule C, then the owner should report the income and expenses for each business on a separate Schedule C.
Schedule C must be filed when a sole proprietorship generates any gross income during the tax year, even if the business has a net operating loss for the year. Once a sole proprietorship commences operations, or opens its doors so to speak, it generally becomes necessary to file Schedule C for the business to deduct any net operating losses incurred by the business. An operational sole proprietorship business, for example, must claim business expenses in the tax year during which they are incurred and cannot postpone claiming them to later tax years when the business will have gross income or higher gross income.
As to Schedule SE, when their businesses are profitable, sole proprietors may owe SE Tax and need to file Schedules C and SE even if they do not owe any federal personal income tax. The SE Tax applies when net self-employment earnings are $400 or more (approximately $434 in business net profit) and is assessed at a rate of 15.3%, which consists of Social Security tax of 12.4% and Medicare tax of 2.9%. For more information you can review the IRS’s information on the SE Tax.
You can also find Schedules C and SE and instructions at the IRS websites below:
Schedule C: http://www.irs.gov/uac/Schedule-C-(Form-1040),-Profit-or-Loss-From-Business
Schedule SE: http://www.irs.gov/uac/Schedule-SE-(Form-1040),-Self-Employment-Tax
For more information on Schedule C and Schedule SE, review IRS Publication 334.