Limited liability companies (LLCs), not unlike just about every other business entity, are subject to their own unique tax rules and regulations. Unlike their corporate counterparts, LLCs aren’t taxed as a separate business entity. Instead, profits and losses “pass through” the company to each member; it’s a simple concept, but one that can easily get lost on those who have never filed LLC taxes for their own company. As a result, it’s important for those who have never filed LLC taxes to mind due diligence and familiarize themselves with the process. Only then will tax season transform from a burden into something investors can look forward to.
The following is intended to provide generalized financial information for a broad audience regarding LLC taxes; it is not a substitute for personalized tax, investment, legal, or other business and professional advice.
Due, in large part, to the Internal Revenue Service’s (IRS’s) refusal to recognize LLCs as a business classification, LLCs are given the opportunity to choose how they will be taxed. Single-member LLCs, for example, may elect treatment as a sole proprietorship or a corporation. Multi-member LLCs, on the other hand, can choose between two unique treatment options: a partnership or a corporation. It is worth pointing out that either LLC electing to be treated as a corporation may subsequently choose to be taxed as an S corporation, too.
It isn’t until a respective LLC elects to be treated come tax time that they’ll be able to file taxes using the following steps:
Complete & File Schedule C: In the event a LLC has elected to be taxed as a sole proprietorship, the first thing it needs to do is complete and file Schedule C (Profit or Loss from Business), which is part of Form 1040. Schedule C will allow sole proprietorships to file both profits and losses on their federal income taxes.
Complete & File IRS Form 1065: LLCs that have elected to be taxed as a partnership will need to fill out IRS Form 1065 (U.S. Return of Partnership Income) and distribute a Schedule K-1 to each of its members. Form 1065 allows the LLC to prepare and distribute Schedule k-1s to everyone, which allows them to record their share of personal income tax. This is important because partnerships are a pass-through entity, meaning the business passes profit and loss responsibility to its owners.
Complete & File IRS Form 1120: If the LLC has elected to be treated as a corporation, it’ll need to fill out Form 1120 (U.S. Corporation Income Tax Return). S corporations, on the other hand, will need to file Form 1120S (U.S. Income Tax Return for an S Corporation).
Complete & File Federal Employment Tax Forms & Returns: LLCs that have elected to be taxed as a sole proprietorship or partnership now need to file Schedule SE (Self-Employment Tax) because the owners are responsible for the self-employment tax on the business’s income. LLCs with employees may need to file additional forms: Form 940, Form 941 and Form 944.
Contact Your State’s Tax Authority: Since LLCs are formed under state law, each state has their own tax rules to follow when filing. As a result, LLCs will want to contact their state’s tax authority to confirm they are satisfying each and every obligation required of them. Since some states don’t recognize federal tax elections or assess business income tax, any LLC looking to properly file taxes will want to make sure they have done everything they need to in the eyes of their respective state.
Contact Your State’s Department Of Employment: Every LLC needs to mind due diligence and confirm they are filing properly. Doing so will require LLCs to contact the state’s Department of Employment to confirm employment tax obligation compliance.
The aforementioned steps pertaining to LLC taxes are intended to provide generalized financial information for a broad audience; they are not a substitute for personalized tax, investment, legal, or other business and professional advice. Therefore, always seek out the assistance of a tax professional who is well-versed in the real estate industry before coming to any conclusions about filing taxes for a LLC.
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There are a number of tax forms LLCs need to be aware of, but the following four are the most common ones you’ll come across:
IRS Form 1120, otherwise known as the U.S. Corporation Income Tax Return form, is required to be completed and filed by LLCs that have elected to be taxed as a corporation. More specifically, however, Form 1120 is used by domestic corporations to:
Report their income, gains, losses, deductions, credits
Figure their income tax liability
For more information on Form 1120, please consult the IRS page dedicated to the corporate income tax return form.
IRS Form 1065, known colloquially as the Return of U.S. Partnership Income form, is reserved for businesses that elect to be taxed as a partnership. Likewise, Form 1065 allows partnerships to report profits, losses, deductions and credits. Form 1065 is important because it allows partnerships to distribute Schedule k-1 attachments to all of their members. Since partnerships are pass-through entities and are, therefore, not required to pay federal income taxes, each individual partner is responsible for recording profits and losses, which this form allows them to do. More specifically, however, Schedule k-1 attachments o Form 1065 are a lot like traditional W-2s.
Intended for use by sole proprietorships, Form 1040 is relatively standard and used to disclose a LLC’s taxable income. In disclosing the taxable income on Form 1040, the IRS is able to determine whether or not the filer will be in line for a tax return or be retired to pay more.
IRS Form 8832 has more to do with how a LLC will be classified in the eyes of the government than anything else. Qualifying and eligible entities may, therefore, use Form 8832 to elect how they will be taxed, as:
An entity disregarded as separate from its owner
Each type of LLC will file their taxes differently, as noted by the following processes:
Single-member LLCs typically start their tax filing process by filling out Form 1040 and any necessary attachments. There are two attachments most real estate investors need to concern themselves with: Schedule C and Schedule E. A Schedule C attachment will disclose the business’s income or loss. Single-member LLC real estate investors generating passive income, on the other hand, will need to attach Schedule E, too. The addition of both attachments should be enough info to comply with Form 1040.
After Form 1040 is completed (with the necessary attachments), single-member LLCs will need to pay the self-employment tax if their net gain was $400 or more over the course of the tax year. In doing so, LLCs will be required to complete and attach Schedule SE to the aforementioned Form 1040.
Lastly, the owners of single-member LLCs will need to report employment taxes. Any LLC that simultaneously pays employees and withholds federal taxes needs to file a quarterly Form 941 (unless the withholdings for the year are more than $1,000). In the event employee withholdings are less than $1,000, single-member LLCs may file Form 943. At the same time, the LLC must provide said employees with a W-2, and file them (along with W-3s) with the Social Security Administration.
The first step for most multi-member LLCs is to file Form 1065. Outside of those LLCs who have elected to be taxed as a corporation, every other multi-member LLC must file Form 1065, which identifies how profits and losses will be distributed between each member. Form 1065 also allows partnerships to distribute Schedule k-1 attachments to all of their members, reflecting their responsibilities on Form 1065.
Not unlike since-member LLCs, multi-member LLCs must pay a self-employment tax. Since the members of multi-member LLCs are considered to be self employed, they must also pay the self-employment tax if their net gain was $400 or more over the course of the tax year.
Last, but certainly not least, multi-member LLCs must report their employment taxes. Like their single-member counterparts, multi-member LLCs must file Form 941 if it pays employees and withholds federal taxes. If the withholdings are less than $1,000, however, the LLC will file Form 943. At the same time, the LLC must provide said employees with a W-2, and file them (along with W-3s) with the Social Security Administration.
Real estate continues to serve as an important tax shelter for savvy investors. If for nothing else, those who know how to navigate tax season may fend themselves with more money at the end of every year. However, today’s greatest tax benefits will only be made available to those who know how to file properly, and LLCs are no exception. Companies that know how to file their LLC taxes correctly are more likely to enjoy tax season, as opposed to those that are unprepared. Therefore, be sure to familiarize yourself with the proper steps on how to file LLC taxes.