Bank Account Interest and Tax Reporting: The What, Why, and How?
If there’s one aspect of banking that businessmen aren’t a fan of, it’s filing taxes, so much so that several small brand owners never even know their tax rate. To keep yourself from facing the same issue, you’ll need to understand how taxing works.
You may be taxed for various expenses, such as maintenance costs or interest. We’ll focus on the latter half for today.
Whether you’re a new entrepreneur or someone doing business for years, you need to learn how business expenditures are charged to avoid making mistakes on your yearly tax returns.
Today, we’ll take you through how you can report your bank interest to the IRS, the necessary documentation involved, the penalties for failing to report it, and a lot more.
Understanding Tax on Interest in Businesses
Imagine yourself trying to file a tax returns form for interest, only to find that you have no clue what you need to do. Quite the hassle, isn’t it? You’ll normally go through this if you don’t understand the tax implications of bank account interest for businesses.
We’ll go over this topic in layman's terms to save time and simplify things. Now, by default, all businesses are liable to pay taxes. This also includes all interest amounts in their respective accounts.
In general, interest comes under the heading of ‘taxable income.’ This means that you’ll have to include it in the yearly tax returns form no matter what. Another key point to note is that apart from federal, your business will also be liable to state taxes.
The tax rate may vary depending on the type of business you're leading. This is also the case with state taxes, as the rate in one state can differ from another. In any case, you'll come across different tax rates, whether you're in control of an established corporation or are a sole proprietor.
The Different Forms for Reporting Bank Account Interest for Businesses
So you’ve got your basics cleared on how interest is taxed. What’s next? Reporting the bank interest. To do so, you should learn about the different forms involved in the process. Here are the main forms you need to know about:
The 1099-INT form includes all the basic information, such as the total amount and type of interest income. You can find several different segments within this application that show types of interest. Some of these are:
- Interest income
- Early withdrawal penalty
- Investment expenses
- Tax-exempt interest
- Foreign tax (paid)
This form is handed out to taxpayers with a discount on any taxable bond. A part of such discounts can be added as ‘interest income’. Although, only taxpayers who have an annual discount amount of $10 or more have to deal with this form.
Form 1040 (Schedule B)
The 1040 IRS form (Schedule B) is a single-page application only used for certain situations. According to the IRS, you’ll have to fill up this one if any of the following apply to you:
- Gaining accrued interest from bonds.
- Receiving ordinary dividend/interest as a nominee.
- Having more than $1,500 ordinary dividends or taxable interest.
More conditions can apply, but these are the basic and most common ones.
How Do You Calculate the Amount of Taxable Bank Account Interest for Businesses?
We’ve touched on this earlier, but any interest earned on your checking account will be considered taxable as per the IRS. The APY or the Annual Percentage Yield (your return on investment/ interest) stays fixed or variable, depending on the financial institution.
You can either view your annual bank statement or calculate interest according to the APY rate and your deposited money.
Before calculating, you have to consider the laws and regulations of your jurisdiction and make the calculations based on their rules and exceptions.
Your tax bracket ultimately judges the taxable bank account interest. Moreover, the filing process will vary accordingly depending on how much interest you’re earning.
How to Report Bank Account Interest on Business Tax Returns?
As a standard rule of thumb, the IRS (Internal Revenue Service) asks all taxpayers to report interest from taxable accounts such as a checking account.
Receiving the 1099-INT Form
If your business bank account earns more than $10 in interest, the bank will deliver a 1099-INT form which you’ll have to fill out. In case you’ve got yourself an accountant (or even an accounting software), this part will be a breeze since they’ll be doing most of the manual work.
You can also download the 1099-INT form online and follow the same procedure if your bank doesn’t send one.
Filling Up The 1040 Form
Now, chances are, you’ve already heard of this one. The infamous 1040 application is the regular IRS tax form that all taxpayers file once every year. However, you need to focus on Schedule B (Part 1) of this form. This is where information regarding interest earned is added.
Those who receive the 1099-INT form should have little to no issues filling up Schedule B on Form 1040.
Taxable and Non-Taxable Interest
A common question that’s going to bug you as a business owner is, ‘How do I even know what kind of interest is taxable or not?’ We’d love to answer that in this segment. It’s time to see what taxable and non-taxable interests are to understand them better and see how they differ.
This is the one you’ve been introduced to so far in this blog. It’s quite self-explanatory, if anything. All interest that an individual/business earns is subject to being taxed is taxable interest. These can include, but are not limited to:
- Interest in saving/checking accounts
- Treasury bills
Again, this one is just as simple as the one above. Non-taxable interest income is not subject to being taxed at the federal level, at least. We say this because, ironically, even if the name suggests otherwise, tax-exempted interest can still be charged at the state level. Municipal bonds are an example of a non-taxable interest income.
The key factor distinguishing both is where they’re charged. Taxable interest is taxed at the federal, state, and local levels. Conversely, non-taxable interest is charged only at the state and local levels.
Filing Deadlines for Reporting Bank Account Interest for Businesses
The IRS declared the official tax season for 2023 to be January 23. The deadline customarily falls on April 15, but due to this being the weekend and the following Monday being a holiday for the District of Columbia's Emancipation Day, the deadline has been pushed forward to April 18.
Taxpayers have until April 18, 2023, to file for tax returns, or they can have this extended through a request. In this case, the extended deadline would be until October 16, 2023.
Failing to file tax returns on this deadline will call for a penalty fee and interest.
You can also visit the official IRS.gov website to learn more about your refund status or even get answers to common queries.
Penalties for Failing to Report Bank Account Interest for Businesses
When we talk about bank account interest and tax reporting, we need to visit the penalties for failing to comply with the regulations or paying late.
As a business owner, you must know all the income, including interest. It will help you to keep track of the ‘taxable income’ and hopefully not get a penalty. Another thing to note is that the estimated amount has to be paid quarterly.
The obvious consequence you'll face in case you do not report the interest is more penalty. Some of the common types of penalties that apply to firms are as follows:
Late Tax Filing
A late penalty is imposed if an organization does not file its taxes on time or before the due date. You will be charged 5% of the total payable tax every month or half of the month the filing was late.
Also, this fee will not cross 25% of your total unpaid tax and goes up to 5 months. After 150 days, you will be charged with the maximum limit for late filing. However, if you have a tax refund due, you do not owe any late fee for tax filing.
Late Tax Payment
In case you have not paid your due taxes on time or within 10 days, your business will get a monthly penalty of 0.5% of the total unsettled taxes. Similarly, this limit does not exceed 25% of unpaid taxes.
Now, if your business has not filed and paid the taxes, you need to deal with two penalties. Both of which are charged differently.
As a result, the “Failure To File Penalty” rate is deducted from the percentage of “Failure to Pay Penalty''.
For example, if you were charged 4% for the “Failure To File Penalty,” it would be reduced by 0.5% (Failure to Pay Penalty). So, the figure would be 3.5% plus 0.5%, making a total of 4% every month.
In short, the percentage will be the same but divided, like 3.5% for late filing with an additional 0.5% rate for late payment of undue taxes.
Reducing Tax Liabilities on Bank Account Interest for Businesses
We know that taxes aren't a fan favorite for anyone. Here are a couple of ways your business can try reducing tax liabilities.
Get A Tax Advisor
Nothing beats an expert's opinion on a matter. While salaried employees may not find filing taxes difficult, the same isn't true for organizations.
Your business type, profits, accounts, etc., will affect your overall due tax amount. Getting an advisor is your best bet since they can provide personalized solutions for lowering tax liabilities, depending on your situation.
Maximize Tax Deductions
One good thing about taxes is that you can remove certain expenses to lower your taxes. These are called 'tax deductions.' Here are a few examples of this to give a better idea:
- Legal and professional expenses
- Advertising costs
- Start-up business costs
- Bank fees
Understanding Tax For Foreign Bank Account Interest for Businesses
A US citizen with a foreign bank account must report all their income, including interest, of course.
Criteria for Filing
If you are a US citizen, resident, corporation, or partnership with at least one foreign bank account outside of the United States, and the total assets in your foreign account(s) exceed $10,000 in the tax year.
To pay the taxes, your business needs to file a Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN).
All of this may sound complicated, which is why every organization needs to keep up with the international laws and liabilities not to get any penalty or notice from the IRS.
How Changes in Tax Laws Affect Bank Account Interest Reporting for Businesses
Anytime the state or federal brings a change in the tax laws, it is compulsory that you comply with it. You’ve got to be proactive in keeping up with tax changes, as they will affect your business’s financial decision-making process.
For instance, a change in the tax rate, credit, or deductions can affect the overall amount of tax that you need to pay, including interest. Even a change in penalty rate can cause changes in bank account interest reporting since firms will be more vigilant to file and pay on time.
Much of how the Tax Cuts and Jobs Act (TCJA) brought several changes to taxpayers - individuals and corporates, it is key to be up-to-date with such reforms that affect all tax payments.
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