LLC Tax Advantages
Limited liability companies (LLCs) have some great tax advantages and not a lot of disadvantages. LLC tax deductions are confusing to a lot of people, because there isn’t an LLC tax like there is a “corporate tax.” Your LLC tax advantages are something you control.
When LLCs were created in 1977, the folks that created them in Wyoming asked the IRS how to do an LLC tax return filing. They expected the LLC return to be something that the IRS had to “create.” When the Subchapter S corporation was created, the IRS wrote a whole new IRS Code section (Subchapter S of the code) to define how they would tax the “new type of corporation.”
The IRS took the chicken way out when the LLC tax issue came up. They said that they weren’t writing any more tax laws and the LLC owner could chose the LLC tax structure they wanted. You can choose to have the LLC taxed as S corp, C corp, partnership, or sole proprietor (disregarded entity) – whatever you want.
In order to tell the IRS how you want your LLC taxed, you will get a tax ID number (SS4 Form). If you want your LLC tax filing to be as a corporation you will file a form 8832. After you have filled the 8832, if you want your LLC taxed as S corp, you will file a 2553.
If you chose to have the LLC taxed as an S corp, for example, the tax advantages of LLC suddenly morph into the tax advantages of an S corp. The only tax benefits of an LLC are the tax benefits of the “entity” that the LLC owner chooses to have his LLC taxes paid as.
Having said that, there is one unique feature an LLC has that the limited partnerships and the Subchapter S corporations don’t have. In the other entities, profits and losses need to be “distributed” pro rata to the owners, based upon ownership percentage. One of the unique tax benefits of an LLC is the ability of the manager to make distributions in any proportions to the owners.
That gives the tax advantages of LLCs one up on the other entities. This is particularly important in family “tax shifting” strategies, where the money can be directed to the family member that needs the income at that moment.
LLC tax advantages extend to the ability, as in the S corp, to pay yourself a “reasonable wage” and then take the rest of the “profit” as a distribution. The LLC self employment tax applies to the portion taken as a wage, but the distribution is not subject to the LLC self employment tax. You’ll save about 5-7% in tax on the amounts you take as the distribution.
Overall, LLC taxes are simply the tax structure you chose. If you do nothing when you set up your LLC, you’ll be taxed as a sole proprietorship, if you are the sole owner. If you’re a “partner” then your LLC taxes will be filed as a partnership.
Often the attorneys set up the LLC and throw the papers at you. You then don’t worry about the LLC tax until it’s too late to “pick” your entity form. That’s one of the Mistake Videos you can view on this site. Check it out for more details on LLC taxes.