Understanding how to file LLC taxes, S Corporation taxes and taxes for other business entities can be one of the biggest headaches of owning your own business. Filing taxes for a business entity like an LLC can be especially confusing because of the multitude of options the IRS allows for Limited Liability Companies. The IRS does not recognize Limited Liability Companies as a tax classification. Therefore, for tax purposes, you must select an IRS-recognized business tax classification.
1. One of the first steps to file LLC taxes is to determine how you plan to handle income. How many members are involved in the LLC? Do the members draw a salary from the company, or simply share revenue? If there is only one member of an LLC, does that member want to claim company income on their personal taxes, or file taxes for the company separately? Answering these questions determines what forms and tax classifications are necessary.
2. File a Form 8832 to elect tax classification. Form 8832 notifies the IRS which business entity or tax status you plan to employ for filing tax returns for the LLC. A sole member can opt to either disregard LLC status for tax purposes (thus claiming income on their personal return) or opt to file taxes as a corporation. A multi-member LLC can opt to select S Corporation classification and pass income to each member on a pro rata basis, file taxes as a partnership or opt to file corporate taxes as a separate entity.
3. Forms 1040, 1120 and 1065 are all options for filing LLC taxes. Which form you use is determined by the tax classification chosen on Form 8832. If you’re a sole member and opted to disregard LLC status for tax purposes, you would use a standard Form 1040 for personal income, with appropriate schedules for profit or loss from a business. If you elected to file LLC taxes as any form of corporation (regardless of membership size), you would use Form 1120. S Corporations file tax returns using Form 1120S to report pro rata shares paid to LLC members.
The IRS recommends that two-member LLCs file taxes as a partnership and use Form 1065. The IRS offers extensive information to aid in tax filing for individuals, as well as businesses. They even offer an entire section devoted to tax filing for a Limited Liability Company.
A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.
Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single member” LLCs, those having only one owner.
In summary, actually, LLC taxes are fairly simple. It depends on how many members there are and the choice made by the membership. Do the members elect to be treated as a corporation? If so, then the corporate taxation rules apply including the possibility of S Corp treatment. If not, then two or more members are treated as a partnership. A single member LLC is a sole proprietor for income tax purposes.
Source: Electronic Return Originators, IRS e-file
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