The exact amount of money that your LLC will pay out in taxes is going to depend on how much money your business makes. LLC taxation is based on your LLC’s profit or loss for the current tax year. While you cannot figure out the exact amount of taxes that your LLC is going to pay at year-end, you can gain a better understanding of LLC taxation. When learning about LLC taxation you will find out the various rules that you have to follow and the benefits that are giving to an LLC when compared with other business structures.
The first thing that you need to be aware of is that according to the IRS there is no separate IRS LLC taxation. What this means is that the IRS for federal tax purposes does not recognize the LLC formation. If you choose to form an LLC for federal tax purposes, you must file as a corporation, partnership, or sole proprietorship on your tax return. This means that there are no LLC taxation rules that you have to follow; you will have to follow the taxation rules that apply to the formation that you choose for your tax return.
Forming an LLC can give you some tax benefits, but there are no specific LLC taxation benefits. This is because the IRS does not recognize the LLC as a classification for federal tax purposes. The tax benefits that you will receive depend on how you choose to classify your business for tax purposes.
If you have a single member LLC what this means is that there is only one member or owner for the LLC. Husband and wife teams can also be a single member LLC, if they live in a community property state. Single member LLC taxation is different from normal LLC taxation because of the number of owners involved. With single member LLC taxation the LLC is ignored, you file as a sole proprietorship for federal tax purposes. This means you must file a Schedule C, which reports your business income and expenses, with your 1040.
If you have more than one member, you can choose to classify your LLC as a partnership or corporation for federal tax purposes. If you choose to classify your LLC as a partnership for tax purposes, you will need to file a Form 1065 with the IRS. When filing your federal taxes as a partnership each member of the LLC will only need to claim their share of the income from the LLC. Everything that you need to include will be on the Schedule K-1 for the Form 1065. Each member must complete the Schedule K-1 and attach it to the Form 1065, which is based on the entire business. The biggest benefit to filing as a partnership is that each partner will only have to pay taxes on their share of the income, and you do not get the double taxation that a corporation would get.
If you elect to classify your LLC as a corporation or if it is deemed a corporation by the IRS Entity Classification, rules you will need to file a Form 1120. The 1120 is a corporate tax return, this means that there will be no flow-through items like those that you see with a Schedule C and a 1040. The biggest drawback to filing as a corporation for tax purposes is the double taxation that comes into play. As a corporation, you will have to pay the corporation taxes, but you will also have to pay personal income taxes on any dividends that you receive as a business owner.
