Filing business taxes for LLC for the first time? Your options for filing federal income tax on business income expand if you form a limited liability corporation (LLC). The tax reporting requirements you must follow will be directly affected by your decision. For tax purposes, the Internal Revenue Service treats LLC either as a corporation, partnership or as part of the owner’s tax return.
- If you are the only owner of a limited liability corporation (LLC), you must declare your business income or loss on Schedule C of Form 1040.
- By filing IRS Form 1065 annually, partners who choose to be taxed as partnerships disclose their business income, gains, losses, deductions, credits, and other information from the operation. Partnerships don’t pay taxes on their income. Instead, the profits or losses are passed on their individual tax returns.
- A C-Corporation is the default tax status for any business that files IRS Form 8832 to be classified as a corporation for tax purposes. In this scenario, the company files a Form 1120 and pays the associated income tax each year.
- For tax reasons, you may elect to be classified as an S-Corporation. The profits from the company are distributed among the owners on a Schedule K-1 in this way.
IRS default designations
For federal income tax purposes, the Internal Revenue Service often overlooks the legal status of limited liability companies (LLCs) and see any business participating in two or multiple entities as a partnership. However, if you’re the only member of an LLC, the IRS doesn’t recognize the LLC separately and reflected on its owner’s federal tax return. LLCs can be set up under state law, and once established, can choose their tax status at the federal level.
By submitting IRS Form 8832 or IRS Form 2553, single-member limited liability companies and partnerships can choose to be taxed as corporations instead of partnerships or single-member limited liability companies. After making this option, you will normally have to wait five years before making another tax classification change.
Partnership filing requirements
To avoid paying tax on their business profits, LLCs that fall under the partnership tax laws must file annual partnership tax returns using IRS Form 1065. All income, deductions, and credits are passed through to the owners, who then record them on their individual tax returns, therefore this return is mostly for informative purposes.
At the conclusion of the year, the LLC issues a Schedule K-1 to each owner detailing their allocation of these costs and income. If you and a friend form an LLC and file your business taxes as a partnership, you will each receive a Schedule K-1 showing net income of $20,000 if the business generates $100,000 and has $60,000 in deductible business expenses. You must then each include this information on your own tax return. The business will add roughly $20,000 to your individual taxable income.
When an LLC files a corporate tax return, pays tax on its income, and then distributes its earnings to its owners, the LLC’s owners may be subject to double taxation. These payouts are treated as dividends and hence subject to taxation under the law. The money is taxed once by the company, and then again when it is reported as dividend income by the owners.
Corporate filing requirements
If the LLC chooses the corporate taxation route. Assume the status of a C-Corporation automatically. Your company will be treated by the IRS as a distinct taxpayer, your company will be treated by the IRS as a distinct taxpayer separate from you and your friend who have their own individual tax returns. As a result, the company files a Form 1120 annually to disclose its financial results and makes tax payments based on those results.
For federal income tax reasons, a corporation might choose to be treated as an S-Corporation. Income from an S-Corporation is passed through to its shareholders on a K-1, similar to the partnership tax return for an LLC described above. S-Corporations pay no federal tax as a business and instead file taxes using Form 1120S.
To avoid the possibility of double taxation, many limited liability companies (LLCs) opt to be taxed as a pass-through entity rather than a C-Corp. The first is the corporate tax that the LLC must file and pay, and the second is the potential personal income tax that the shareholders of the LLC must pay. These payments are treated as dividends for tax purposes. Owners are subject to taxation on dividends. However, dividend payments are not tax deductible for the company. So, first the company pays taxes on the money, and then the owners of the company pay taxes on the money again when they declare the dividends as income.
Single Member LLC filing requirements
In most jurisdictions, an LLC with a single member is handled in the same way as a sole proprietorship. The IRS does not recognize LLCs as legal entities separate from their owners. The LLC’s company tax information is normally included in your personal tax filings on Schedule C. Your business earnings or losses must be reported on Schedule C, together with all of your other income.
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