How to Tell If You Need to File a Tax Return

Today we’re going to talk about how to tell if you need to file a tax return. We won’t get into a lot of the specific details on numbers and dollar amounts. But we do want to talk about filing different returns and what impacts actually having to file a return. We’ll look at some of the different rules that are out there for people in different entities.

How to Determine If You Need to File Taxes

If you are a C Corp, S corp, a partnership, or any entity you will have some sort of a filing requirement. If any of those types of businesses have any sort of activity, you’re generally going to have a filing requirement with the IRS. Depending on what state you operate in, even if you don’t have any activity there, some of those states will require you to file a tax return, even if it’s zero. It’s really going to depend on the specific circumstances of your business.

You can have an entity that for federal purposes, you may have to file a return, but no taxes are due. But on the state level, there may be a franchise tax, let’s say. Then you would need to file with the state because they will want their franchise fee, whether it’s a minimum fee, or some sort of portion of a fee for having some activity in their state.

We worked with a business that bought and sold real estate in 2020 in a partnership. We filed a tax return in 2021 for the 2020 year, but they had no real estate until part way through 2020. They filed before, and once you file you want to keep filing until that business is closed. The owners didn’t think they had to file a tax return because they didn’t generate any income that year. But I told them, yes, you do have to file because you had activity with a real estate transaction, even though there was no income generated. They obtained an asset and placed it into service. The IRS is going to want to know what’s happening, and what’s going on with that entity.

Federal vs State Tax Returns

Wondering if you need to file a tax return as an individual? They have slightly different rules. Especially if there’s no business involved. On a federal level there are thresholds. You don’t necessarily have to file a return if you’re under a certain threshold. But that may not exclude you from having to file your state and your local taxes. You have to be careful that you still may have some filing requirements, even though a federal return may not be required.

A lot of states actually start with the federal number for how they determine their tax. So you may still have to file with that state or city, but they may be picking up on the federal number to begin with. So you may have to actually produce a Pro Forma federal tax return. You also have to look at if you had any tax payments or any withholdings that you may be under the threshold to file but you could get that money back. So you may still want to file even though you’re under the threshold.

We see that a lot when kids in high school or in college. They don’t make a ton of money and have some federal withholding. But they didn’t need to have federal withholding so we file returns for them to get their money back.

One other item of note in that same regard is, say have something that’s creating a loss or some sort of carryover that you may not be able to get a return on that year. By filing, you’re establishing that loss to be able to carry forward to another future year to be able to use. You absolutely would want to leave money or deductions on the table.

Other Types of Tax Returns

There are some of the other types of tax returns that people tend not to think of that have different rules. Things like payroll taxes and sales tax. In many instances, you are to file quarterly with the federal and state governments, and any local governments potentially, even if you don’t have employees anymore. Let’s say you had an employee and that person left. Right now you don’t have anybody, but you still have to file zero taxes or zero returns for those periods, unless you want to close out those tax accounts.

You’re going to get tax notices if you don’t make those filings. The same thing with sales tax. Sales tax could be monthly or quarterly, or, if you have very little activity, yearly. Once you’ve established your tax account, you have to keep filing whether you have activity or not until you close that account.

Why Should You Keep The Account Open?

Some people will keep their account open for a period of time so that they can get back into it very easily. Filing zero returns is a great way to keep those accounts open for a short term interim. Maybe they have no sales tax for a couple months, but then they decide to start selling tangible property again and collect sales tax. Instead of closing it down and going through all of the gyration of opening them back up again, this allows you to keep the account open, no harm, no foul, no taxes due. Then you can just roll right back into it when it’s time to get going again.

With payroll taxes for state unemployment, they usually attach an experience rate to that. And as a new employer, they tend to have a higher rate to start off with, and that rate could be lowered over time. If you close that account out, then you’re back to when you apply to that higher new business rate. So you may not want that at all. You may want to just keep that account open and keep filing zero returns, especially if you think you’ll have any employees within a short time.