An Intro to LLC Tax Law
by JamieD, Former Moderator
- Created: April 12, 2010, 3:10 pm
Tax requirements are constantly changing and different laws and forms apply to different business structures. This quick guide provides information to understand the basics on filing taxes for your LLC as of December, 2009. Nevertheless, please visit the IRS's LLC page for up to date information.
First, some background on Limited Liability Companies (LLC): An LLC is a relatively new, hybrid-type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. LLC owners are called members and there is no maximum number of members per LLC.
The federal government does not recognize a Limited Liability Company as a classification for federal tax purposes. LLCs must file tax returns as a corporation, partnership, or sole proprietorship. Several factors determine which business type your LLC should be classified as for federal tax purposes:
- Certain LLCs are automatically classified and taxed as a corporation by federal tax law. LLCs that are not automatically classified as a corporation can choose their business entity classification. To elect a classification, an LLC must file Form 8832. This form is also used if an LLC wishes to change their classification status. Tip: The IRS offers guidance on how to determine which classification you should file.
- LLCs that do not elect a classification, and are not automatically classified as a corporation, are classified according to federal default rules. These rules are defined by the number or members in an LLC.
Tax elections are in effect on the date the LLC enters on line 8 of Form 8832. If no date is entered, the election is in effect as of the form's filing date. Elections cannot take place more than 75 days prior to filing Form 8832. It's also important to note that you cannot make the election effective for a date more than 12 months after filing Form 8832.
If an election is the 'initial classification election,' rather than a request to change an entity classification, there is relief available for a late election. See instructions for Form 8832 for more information.
LLCs should file tax forms according to their new federal tax classification. The following forms should be filed depending on your classification:
- Corporation - Form 1120 (U.S. Corporation Income Tax Return)
- Partnership - Form 1065 (U.S. Return of Partnership Income)
- Sole Proprietorship -
- Form 1040 Schedule C (Profit or Loss from Business - Sole Proprietorship)
- Form 1040 Schedule E (Supplemental Income or Loss)
- Form 1040 Schedule F (Profit or Loss from Farming)
- Form 1040 Schedule J (Income Averaging for Farmers and Fisherman)
- A Schedule SE, Self-Employment Tax may be required if your LLC is filing as a sole proprietorship and its net income is more than $400. Regardless of your classification, it is important to check with a tax lawyer, accountant, or small business expert to make sure you're filing all of the correct forms.
Special considerations and Extra Help
If you decide to convert your business into an LLC you may affect your tax requirements. For additional information on the kinds of tax returns to file, how to handle employment taxes and possible pitfalls, refer to IRS Publication 3402 Tax Issues for Limited Liability Companies.
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