While electronic filing of tax returns has been an option for small businesses for years, many small-to-medium sized corporations are finding that e-filing is becoming a requirement.
Starting with tax year 2005, corporations that have more than $50 million in assets and that file more than 250 returns a year — including forms such as W-2s and 1099s — are required to electronically file Form 1120 or 1120S, U.S. Corporation Income Tax Return. The IRS is allowing corporations, whose returns are due March 15, to request waivers from the requirement, but the fact is, e-filing is likely to become increasingly routine for U.S. businesses.
For tax year 2006, the IRS is dropping the $50 million threshold dramatically, to $10 million, which will force many more small corporations to file electronically. And many sole proprietors, who don’t own corporations and who file their business tax returns on Schedule C attached to their 1040 forms, are also choosing e-filing as an option.
Individual taxpayers are also turning into ardent e-filers. Last year, there was an 11 percent increase in e-filed 1040s, according to IRS spokeswoman Nora Butler.
An increasing number of businesses are using e-filing for tax forms beyond their annual returns — W-2s, 1099s, Form 940 quarterly tax returns and payroll tax Form 941s are increasingly being e-filed.
John Seabrook, a tax partner with Deloitte Tax, said of the growing requirement for e-filing, “that will encompass a very large percentage of the businesses in this country.” He predicted that state tax authorities will increasingly require e-filing as well.
You can learn more about e-filing business returns at the IRS Web site, which has a page called “e-file for Business and Self-Employed Taxpayers.” Click on www.irs.gov/efile/article/0,,id118520,00.html; you’ll find links to other pages that explain which forms you can file electronically, and you’ll also find a list of software companies that the IRS has approved as e-file providers. The list, which has links to the companies’ Web sites, includes well-known tax information and software companies such as CCH, RIA and Intuit.
If you compile your company’s return with tax preparation software or have it completed by a tax professional, e-filing is a natural outgrowth of that process. If you’ve been working with paper, you might want to think about e-filing even if the IRS isn’t requiring you to do it.
The benefits of e-filing are many. You’re less likely to make mistakes, as your tax prep software will catch many errors. That will help the IRS process your return faster, and you’re also less likely to get questions about your return. If you’re due a refund, you’ll get that quicker too.
Seabrook expects advances in software development to further simplify the e-filing process from the business owner’s perspective.
“What should happen is, as the technology improves, there could be the ability to link financial statements and electronically import certain schedules from other company systems” into the tax prep software, he said.
The government isn’t requiring businesses to make their tax payments electronically, but that’s also a task made easier because of high-tech changes. The Electronic Federal Tax Payment System, a government Web site found at www.eftps.gov, allows businesses (and individuals) to make payments online through a secure browser.
However, be aware that you have to enroll in the EFTPS program before you can make payments, and that it will take up to 15 business days to get your personal identification number via regular mail. So don’t put off enrolling if you’ve got a tax payment due in the near future.
But you might already be enrolled — if you applied for a new Employee Identification Number for your business since January 2004 and indicated at the time that you had federal tax deposit applications, you should have been pre-enrolled in EFTPS.
The EFTPS Web site has more information, or business owners can call 800 555-4477.