What are the Rules of LLC tax filing? - Tax Professionals Member Article By KLSM CPA Firm PLLC
Posted by KLSM CPA Firm PLLC

What are the Rules of LLC tax filing?

What are the Rules of LLC tax filing?

The type of business you own determines what your tax returns will be like to a large extent, whether your taxes will significantly be reduced. Let’s start by defining what LLCs (Limited Liability Companies) are and how owning them can affect your taxes.


LLCs Defined. 

LLCs are a type of business that has been registered with the government and serves as a personal shield from liabilities for the owners. 

It works because it is often excluded from tax obligations as a body itself. But its shareholders get taxed from their profits. The local government or the state authorities might allocate taxes to an LLC. Still, it is the duty and decision of the shareholders to determine whether the company should be taxed as a body, or they individually should be taxed from their income and share in the profits instead. 

LLCs pay taxes in different ways. All levels of government tax LLCs. Their members are required to pay taxes on both their earnings from the company and taxes for self-employment. If the LLC is singly owned or employs several workers, that would also be reflected in the taxes paid. The company's type of product or services will also affect the taxes they get to pay. Some of these taxes include sales tax and payroll tax. And the LLC can apply to be taxed as a separate entity, which could complicate the tax filing process further.

This article will enlighten you on how to file for taxes for your LLC, the types of taxes there are, and how to cut down on the taxes paid. When you equip yourself with the proper knowledge in advance, you will be better prepared to tackle it and make the right decisions.


LLC Tax Filing Rules.

According to the local, state, and federal government laws, filing tax returns for your LLC depends on various factors. But basically, they are dependent on whether your LLC is singly owned or has multiple business partners.

 

Singly owned LLCs

Single member-owned LLCs are often excluded from paying taxes by federal tax laws. All expenses and income generated by the business are directed to the sole owner's tax return. The IRS 1040 form is utilized for this purpose, and the owner will file their taxes under the sole proprietor section. The business's profits or losses by the year's end will either be taxed or deducted from the sole owner's income. 


 Multiple-owned LLCs

Multiple-owned LLCs are also excluded from paying taxes as a body on local, state, and federal levels.   Taxes on income, profits, or losses, expenses, and deductions are shared among the shareholders relative to their shares in the company. Therefore, the tax such companies will pay will depend on their partners' tax income bracket. 

The forms that multiple owned LLCs use in filing for their tax returns are the IRS 1065 forms employed yearly by the business partners to report their income to the IRS. Also, each partner is expected to fill the Schedule K-1 form by the 15th of March every year. The purpose of this form is to give a summary of each member's percentage share in the profit, deductions, losses, and credits of the LLC. And these forms are to be attached to each partner's tax return form when filing to the IRS. 

Since the exclusion of LLCs runs through all levels of government, some states may have their identical variation of the 1065 and Schedule K-1 forms, while some states like California, for example, tax LLCs asides from the prior mentioned taxes.

 

Deciding which tax status is best for your LLC

Owners of an LLC can vote to change their tax filing status to a C or an S-corporation. What this does is that when you choose to change your LLCs tax filing status to that of a C-corporation, you’ll be required to fill the IRS 8832 Form to effect this change. Different forms might be added depending on your state of residence. The IRS 1120 form is the form of choice to file tax returns. Also, you will be taxed with local and state charges for corporations relative to the state you reside in.

Changing the tax filing sustain of your LLC to that of an S-corporation will require you to fill the IRS 2553 Form. The difference between an S-corporation and an LLC is not much. They are both excluded from paying taxes, but the income, credits, losses, and deductions shared between the partners are different. Filing for taxes after you have changed the tax filing status of your LLC to that of an S-Corp will require you to file the IRS 11205 form, 

Any changes you make to the tax filing status of your LLC will not affect its legal status as a company. It is best to seek professional advice on which tax filing status best suits your LLC. But bear in mind that corporations are subject to more credits and deductions than LLCs.


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