If you operate your business using a limited liability company (LLC), then you have more flexibility in choosing how the IRS taxes your business earnings. Your choice will directly influence the tax filing rules you are subject to. There is no set of tax rules that specifically apply to LLCs; the IRS allows the LLC to use partnership, corporate or sole proprietor tax rules.
Key Takeaways
• If you’re the single member of a limited liability company (LLC), you’ll typically file your business tax information on Schedule C and report the profit or loss from your business on Form 1040.
• If you elect to be taxed as a partnership, you’ll prepare annual partnership tax returns using IRS Form 1065, but all income, deductions and credits are passed-through to the owners and reported on their own tax returns.
• If you elect to be taxed as a corporation by filing IRS Form 8832, the default is to be treated as a C-Corporation. In this case, the business reports all income and deductions on Form 1120 each year and pays the corresponding income tax.
• You can choose to be treated as an S-Corporation for tax purposes. This passes-through the business' income to the owners on a Schedule K-1.
IRS default designations
The IRS mostly ignores LLCs for tax purposes and considers two or more people or businesses working together in a trade or business to be a partnership for tax purposes. However, if you are the sole owner of an LLC, then the IRS "disregards" your LLC and considers you a sole proprietor. LLCs can be formed under state law and then elect how to be treated for federal taxes.
If you prefer the tax filing rules of a corporation to partnership or sole proprietorship taxation, then you have the option to elect corporate tax treatment by filing IRS Form 8832. Once you make this election, you typically cannot change to another tax designation again for five years.
Partnership filing requirements
LLCs that are subject to the partnership tax rules don't actually pay tax on their business earnings, but instead are responsible for preparing annual partnership tax returns using IRS Form 1065. This tax return is mostly for informational purposes; all income, deductions and credits are passed-through to the owners and reported on their own tax returns.
The LLC reports each owner's share of these amounts on a Schedule K-1 at the end of the year. For example, if you and a friend create an LLC to run a business that taxed as a partnership, earns $100,000 and has $60,000 of deductible business expenses, then each of you will receive a Schedule K-1 with $20,000 of net income. Both of you must then report this on your personal income tax returns. Essentially, the business will increase your personal taxable income by $20,000 each.
TurboTax Tip: A member of an LLC can face double taxation when the LLC files a corporate tax return, pays tax on the income, and distributes its profits to its owners. The tax law considers these distributions to be dividend payments, which are taxable. So the corporation pays taxes on the money, and then the money is taxed again as dividend income on the owners' tax returns.
Corporate filing requirements
If the LLC elects to be tax as a corporation. The default is to be treated as a C-Corporation. In this case, the IRS will treat your business as a separate taxpayer in the same way you are a separate taxpayer from your friend. As a result, the business reports all income and deductions on Form 1120 each year and pays the corresponding income tax.
An entity classified as a corporation can elect to be treat as an S-Corporation for tax purposes. As with the partnership tax filing for LLCs above, making an election to be taxed as an S-Corp instead of as a C-Corp passes-through the business' income 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 choose to be taxed as one of the pass-through entities rather than as a C-Corps to avoid possible double taxation. The first level of tax occurs when the LLC files a corporate tax return and pays tax, and the second can happen if the corporation distributes its profits to its owners. The tax law considers these distributions to be dividend payments. Dividends are typically taxable to owners. But, the corporation does not get to take a tax deduction for the payment of the dividends. So 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 typically treated the same as sole proprietorships. The IRS disregards the LLC entity as being separate and distinct from the owner. Essentially, this means that the LLC typically files the business tax information with your personal tax returns on Schedule C. The profit or loss from your businesses is included with the other income your report on Form 1040.
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FAQs
The IRS disregards the LLC entity as being separate and distinct from the owner. Essentially, this means that the LLC typically files the business tax information with your personal tax returns on Schedule C. The profit or loss from your businesses is included with the other income your report on Form 1040.
Does an LLC need to file taxes if there is no income? ›
All corporations are required to file a corporate tax return, even if they do not have any income. If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.
Do you have to report your LLC to the IRS? ›
A domestic LLC with a single owner is disregarded for federal tax purposes unless it elects to be regarded separately from its member, in which case it is treated as an association that is taxable as a corporation.
What are the tax implications of an LLC? ›
LLCs are considered “pass-through entities,” which means the LLC itself does not pay federal income taxes on business income. Instead, income “passes through” to individual members of the LLC, who pay federal income tax earned from the LLC via their own individual tax returns.
Can IRS go after my LLC for personal taxes? ›
While the IRS can't levy your business account for your personal back taxes, the IRS can freeze and seize your company's assets to satisfy your tax debt if your business has a sizable tax liability. In most cases, for the IRS to implement a levy, your business must have: A substantial amount in back taxes.
Can a single member LLC file its own tax return? ›
For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
How do LLC owners avoid taxes? ›
LLC owners can avoid paying employment taxes by making a corporate tax election with the IRS. The members of an LLC can choose to have the company be treated as a C-Corporation (C-Corp) or an S-Corporation (S-Corp) depending on which structure provides the biggest advantage to the business.
Will I get a tax refund if my business loses money? ›
If you open a company in the US, you'll have to pay business taxes. Getting a refund is possible if your business loses money. However, if your business has what is classified as an extraordinary loss, you could even get a refund for all or part of your tax liabilities from the previous year.
Can an LLC deduct expenses without an income? ›
Yes, even if your LLC has no income you can still write off expenses and report it as a loss. Since this counts as business activity, you need to clearly report it on your annual taxes.
Can I use TurboTax if I have an LLC? ›
TurboTax has two products to serve business owners—TurboTax Home & Business is designed for sole proprietors and 1099 contractors, while TurboTax Business helps you prepare taxes for corporations, partnerships and LLCs.
Consequences of Non-Compliance: If you don't file the required tax return or pay the annual fee, the LLC may face penalties and interest on unpaid taxes. Additionally, the state could administratively dissolve your LLC if these obligations remain unfulfilled for an extended period.
How much can an LLC write off? ›
The Tax Cuts and Jobs Act (TCJA) added the latest LLC tax benefits. This act allows LLC members to deduct up to 20% of their business income before calculating tax. If you don't choose S corporation tax status for your LLC, members can often avoid higher self-employment and income taxes with this deduction.
What happens if you start an LLC and do nothing? ›
Even with zero business activity, you might still have to file a federal tax return. It's like getting a gym membership but never showing up – you still have to pay. The LLC's tax filing requirements will depend on how it's taxed, whether it's disregarded as an entity, or taxed as a partnership or corporation.
How much should an LLC put away for taxes? ›
Use the 30% Rule
Tax obligations vary from one business to another, but a good rule of thumb is to save 30% to 40% of your business income for taxes.
Is it better to be taxed as an individual or an LLC? ›
The true advantage of an LLC over other business entity types comes in the form of tax benefits. LLCs give business owners significantly greater federal income tax flexibility than a sole proprietorship, partnership and other popular forms of business organization.
How do I separate my LLC from personal taxes? ›
Corporate Taxation: Alternatively, an LLC can choose to be taxed as a C corporation by filing Form 8832 with the IRS. If you elect to be taxed as a C corporation, the income of your LLC is taxed at the corporate tax rate. In this case, your LLC's taxes would be separate from your personal taxes.
How does owning a business affect my personal taxes? ›
If an individual is earning business income and owns an unincorporated business by themselves, that person is considered a sole proprietor. For a sole proprietorship, their business income is reported directly on their personal federal income tax return, which means their business doesn't owe taxes separately.
How do you file taxes if you own a business? ›
To file your annual income tax return, you will need to use Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), to report any income or loss from a business you operated or profession you practiced as a sole proprietor, or gig work performed.
