Small Business Taxation
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There are a lot of misconceptions concerning taxation of small businesses, organizations, and clubs. The biggest misconception is that they are not subject to income tax and don’t have to file tax returns. Let’s look at some of these situations and clarify them regarding taxation.
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One overall misconception is that some of these organizations feel they are not a business. Many clubs, such as social clubs have this concept. If an individual or group form and take in money they are a business. There is stipulation that if the gross amount of income is less than $600 then no tax return needs to be filed. Many think that if there is no ‘profit’ from their endeavor then they do not need to file a tax return.
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ALL businesses that have gross income of more than $600 are required to file a tax return. There are some exceptions under section 501(c), but very few. Here is the IRS statement regarding businesses filing tax returns.
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"All businesses except partnerships must file an annual income tax return. Partnerships file an information return. The form you use depends on how your business is organized. Refer to Business Structures to find out which returns you must file based on the business entity established."
[Business Taxes | Internal Revenue Service]
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A lot of the confusion here is that many think that if no Tax is owed then a Tax Return is not required. This is a misconception. In fact, in most cases the failure to file a Tax return, even if no tax is due, is a violation of Tax law and subject to monetary penalty. In some cases, the entity would be considered ‘Tax Exempt’ If they would comply with registration and filing of their tax returns. Most of those Tax returns would be informational only. After 3 years of not filing however, the ‘Tax Exempt’ designation is lost. Now back taxes will most likely be due and penalties and interest could be assessed.
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Tax Evasion is a serious crime; however many seem to ignore that fact. There are countless small businesses, organizations and clubs who fall under this category. If you belong to any clubs or are involved in some small organization or use some small businesses, they may be among this group of Tax evaders. It becomes very common because the Tax evaders continue to get away with their crime year after year.
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Taking a look at why there is little to no enforcement of tax law for this section of tax evaders reveals that the majority of cases would owe no tax leaving them as non-filers. The IRS could prosecute all of these cases and impose penalties for not filing their tax returns, but that would not be a reasonable use of resources of which the IRS is lacking. For most of these cases the likelihood of their being prosecuted or audited is very remote. The IRS is more concerned with Fraud and nonpayment of Taxes than the enforcement of this level of Tax law.
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Each organization will have to make their own decision of which side of the law they wish to be on. My opinion is that it is foolhardy to rely on not getting caught when being compliant with the law is not that difficult and in most cases costs nothing.