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What Are The Rules of LLC Tax Filing

What Are The Rules of LLC Tax Filing

If you run your business using a limited liability company (LLC), you will have more flexibility in how the IRS taxes your business profits.


IRS Standard Designation

Immediately after the LLC is created, the Internal Revenue Service automatically treats your company as a partnership, but only for income tax purposes. But, if you are the sole owner of an LLC, you must pay taxes on the business's profits as if you were the sole owner. The two names have different tax reporting rules. If you prefer the tax reporting rules of a corporation, you will have the option to elect corporate tax treatment by filing Internal Revenue Form 8832. Once the election is made, you will not be able to change your LLC designation for five years.


Single Member Filing Requirements 

Single-member LLC is treated as one business. The IRS ignores the LLC as separate and distinct from its owner. Essentially, you are personally responsible for all tax filings and payments. When you prepare your income tax return, you must now complete a Schedule C. Schedule C only reports business income and deductions. If you calculate a profit in Schedule C, the amount will be included with other profits in your report on Form 1040.


Partnership Filing Requirements

LLCs subject to partnership tax rules are not responsible for paying corporate income tax but are responsible for preparing annual corporate income tax returns on IRS Form 1065. This return is for informational purposes only; each owner reports all income, deductions, and credits on the tax return.

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 set up an LLC to run a business that earns $150,000 and has $70,000 in deductible business expenses, each will receive a K-1 plan with $75,000 in income and $35,000 in deductions. Both must report these numbers on their tax returns. Essentially, the business will increase its taxable income by $40,000.


Corporate Filing Requirements

Suppose you choose to make a corporate tax election for LLC. In that case, the IRS will treat your business as a separate taxpayer the same way you are a separate taxpayer from your associate. As a result of this, the business is an entity and solely responsible to the IRS for reporting all deductions and income on Form 1120 each year and for paying tax payments by the deadline.

If the LLC does not pay the tax or file a tax return, you and the other owners will not be personally liable. However, a disadvantage of corporate treatment is that corporate profits are taxed twice. The first level of taxation occurs when the LLC files a tax return, and the second is forced on the owners when they receive a dividend. Each owner must declare the dividend as taxable income on personal form 1040 and pay taxes on it.


Bottom Line

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