When Does a New Business Have to Start Filing Income Tax Returns?

Here’s an important business tax preparation question: If you have recently started a business, when are you required to begin filing income tax returns? Let’s answer this question by considering a typical example.

Let’s say you and your two business partners form an LLC in November 2010. You don’t have a profit during the last two months of the year, as you are just laying the foundations, assembling your team of advisors (accountant, attorney, insurance, etc) and doing other preliminary activities. You don’t have any sales yet, but you do incur some expenses to get things going.

You do apply for and receive a federal tax identification number (EIN) from the IRS, and you also get a tax ID from your state.

Do you have to file an income tax return for this first year, even though the business was only in existence for the last two months of the year and had no profit?

The answer is “Yes.”

Here’s why. Since you have an IRS-issued federal tax ID, you are in their system and the IRS will be expecting you to file an income tax return for 2010. Since there are three owners (members), by default the LLC would be taxed as a partnership (assuming that you’ve haven’t chosen to be taxed as a corporation), so the business should file Form 1065 by April 15, 2011, or file an extension on Form 7004. If the LLC files the extension, then the LLC has until Sept 15, 2011 to file Form 1065.

An LLC can also be taxed as a corporation (either a regular corporation or an S Corporation), provided the proper paperwork is filed with the IRS. If that’s the case, then the LLC should file Form 1120 or Form 1120S by March 15, 2011, or file an extension on Form 7004, giving the LLC until September 15, 2011 to file the 1120 or 1120S. (Form 1120 is for regular corporations; Form 1120S is for S Corporations.)

Bottom line: even a business with no profit should prepare and file a return. Otherwise, the business could be subject to the late filing penalties, which can add up fast. Returns with no tax are still subject to a late filing penalty of $89 per owner for each month (or part of a month) that a return is filed late. So in the scenario above, a three-member LLC would be fined $267 ($89 x 3) for each month that the return is late, up to a maximum of 12 months.

To be safe, always prepare and file a tax return for any year that the business is in existence, whether or not there was any profit. Otherwise, you could end up paying hundreds or even thousands of dollars in late filing penalties.