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LLC Tax Filing Rules

If you run your business as a limited liability company (LLC), you have the freedom to decide how the IRS will tax your business profits. This choice directly impacts the tax filing regulations you must follow. LLCs aren’t bound by a specific set of tax rules; instead, the IRS permits LLCs to adopt partnership, corporate, or sole proprietor tax rules.

  • If you’re the sole member of an LLC, you’ll usually file your business taxes using Schedule C and report your business’s profit or loss on Form 1040.
  • If you opt to be taxed as a partnership, you’ll need to prepare annual partnership tax returns using IRS Form 1065. However, all income, deductions, and credits are passed through to the owners and reported on their individual tax returns.
  • If you elect corporate taxation by filing IRS Form 8832, the default classification is a C-Corporation. In this scenario, the business reports all income and deductions on Form 1120 each year and pays the corresponding income tax.
  • Alternatively, you can choose S-Corporation status for tax purposes, which passes the business’s income to the owners on a Schedule K-1.

IRS Default Designations

For tax purposes, the IRS mostly overlooks LLCs and views two or more individuals or businesses collaborating in a trade or business as a partnership. However, if you’re the sole owner of an LLC, the IRS treats your LLC as if it doesn’t exist and regards you as a sole proprietor. LLCs can be established under state law and then decide how they want to be taxed for federal purposes.

If you prefer the tax filing rules of a corporation over partnership or sole proprietorship taxation, you can choose corporate tax treatment by submitting IRS Form 8832. Once you’ve made this election, you typically can’t switch to another tax classification for five years.

Partnership Filing Requirements

LLCs that follow the partnership tax rules don’t actually pay taxes on their business earnings. Instead, they’re responsible for preparing annual partnership tax returns using IRS Form 1065. This tax return mainly serves as an informational document; all income, deductions, and credits are passed through to the owners and reported on their individual tax returns.

At the end of the year, the LLC reports each owner’s share of these amounts on a Schedule K-1. For instance, if you and a friend form an LLC taxed as a partnership, and the business earns $100,000 with $60,000 in deductible business expenses, each of you will receive a Schedule K-1 showing $20,000 of net income. You both need to report this on your personal income tax returns. Essentially, the business will increase your personal taxable income by $20,000 each.

Corporate Filing Requirements

If the LLC decides to be taxed as a corporation, the default classification is to be treated as a C-Corporation. In this scenario, the IRS treats your business as a separate taxpayer, similar to how you’re treated separately from your friend. Consequently, the business reports all its income and deductions on Form 1120 each year and pays the corresponding income tax.

Alternatively, an entity classified as a corporation can choose to be treated as an S-Corporation for tax purposes. Similar to the partnership tax filing for LLCs mentioned earlier, opting for S-Corp status instead of C-Corp status passes the business’s income through to the owners on a K-1. S-Corps use Form 1120S to file their taxes, and no federal tax is paid at the corporate level.

Many LLCs opt to be taxed as pass-through entities rather than C-Corps to avoid potential double taxation. The first level of taxation occurs when the LLC files a corporate tax return and pays tax, and the second level can happen if the corporation distributes its profits to its owners. According to tax law, these distributions are considered dividend payments, which are typically taxable to owners. However, the corporation doesn’t receive a tax deduction for the payment of dividends. Therefore, the corporation pays taxes on the money, and then the money is taxed again as dividend income on the owners’ tax returns.

Single Member LLC Filing Requirements

Single-member LLCs are usually treated similarly to sole proprietorships. The IRS doesn’t consider the LLC as a separate entity from the owner. In essence, this means that the LLC typically reports its business tax information along with your personal tax returns on Schedule C. The profit or loss from your business is included with the other income you report on Form 1040.

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