People establish Limited Liability Companies or LLCs for basically 2 reasons, firstly because they want their members or owners to enjoy the freedom of limited liability and secondly because the company can avert being subject to corporate income tax by the IRS. Nevertheless, there are some cases where the LLC owners might as well end up paying increased taxes rather than the commercial shareholders. If you can opt for strategic tax planning, this can diminish the issues related to taxes. Read on to know the ways in which you can skip such issues.
LLC tax structure
When it comes to the tax structure of LLCs, they are usually taxed as ‘pass-through’ entities in a similar way as they do partnerships. When income flows in an LLC, they aren’t taxed. Members or owners are taxed on their respective share of gains and should form IRS Form 1065with the tax returns. The pitfalls of this system are that the LLC members are taxed directly on LLC profits even when the profits are controlled by the LLC and they’re not divided among the owners. Corporate tax rates will also become applicable and sometimes the rates can be more than personal taxes depending on the gain amount. Moreover, there are several tax write-offs which might be applicable on corporations but not on LLCs.
Election of corporate taxation
If an LLC wishes to be treated in the manner of a corporation by Uncle Sam, it has to file Form 8832. This new status won’t have any impact on the limited liability of the LLC or the legal status which it already carries but the impact will only be on the tax treatment. The taxable status can be revoked later on if it’s necessary. The members of the LLC will obtain very little income from the LLC and electing corporate treatment of taxes will allow LLC members to be taxed on amounts which receive LLC at personal tax rates. This new status also lets the LLC to reap benefits of various corporate tax write-offs which could be unavailable otherwise. When the LLC qualifies to receive treatment as an S-corporation under the rules of the IRS, it requires filling out Form 2553 from IRS and become excluded from all other federal taxes.
Tax write-offs of LLC
The LLCs which haven’t chosen to be treated in the manner of a corporation can even write off costs of personal property, expenses of business entertainment, retirement fund contributions, expenses of employee training programs and expenses of continuing education like meals, lodging, travel and fees. LLCs which are taxed in the form of corporations can also do away with dues for professional associations, business insurance premiums, home office expenses and disability insurance premiums.
Therefore, if you want to know about the different strategies to form an LLC with ease, you can check out Incfile reviews as they have effortless details of how you could start off with your own LLC without having to fall in debt.