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LLC Mini Course No. 3

Save Tax Money–Are you Flushing Money Down the IRS Toilet?

Get More Money by Using your LLC

In the first course, we discussed how to cross the “t’s” and dot the “i’s” in filing your LLC with the state.

In the second course, we talked about choosing a name for your company and then making sure it was protected under the law.

Now comes the decision that frankly most people just default on. How can you save tax money and make the most money out of your LLC?

You can’t turn the crank any faster to make more money – you’re already working as hard as you can.  BUT you can use your LLC to squeeze every possible dime out of your work.  It is often the tax elections you choose that make all the difference in your bottom line and how much money you take home to spend. What are your tax filing options if you have an LLC, and what happens if you don’t meet the IRS filing deadlines?

I was on the internet looking at LLC sites the other day, and I was stunned to find a number of sites that bragged that an LLC was a “pass-through” entity. They touted the LLC as being better than a corporation, because it was a pass-through taxing entity. Whoops!

An LLC isn’t a “pass-through” entity. In fact, it has no “tax structure.” Let me explain.

How is Your LLC Taxed?

When the LLC was first introduced by Wyoming in 1977, the IRS was asked how the LLC would be taxed. It was expected that the IRS would write a code section to “govern” LLCs.

They had written code sections for corporations (Chapter C and Sub Chapter S). They had also made code sections for partnerships and sole proprietors.

Finally, in 1996 the IRS came back with their answer. They wouldn’t write a new code section for LLCs. They just said they didn’t care how the LLC was taxed. It became a “check the box” game.

You get to decide how your LLC is taxed. If you choose to have it taxed using Subchapter S, the IRS doesn’t know, or care, if you have a corporation legal structure or an LLC legal structure. You simply have to follow all the rules under Subchapter S of the IRS Code..

You can choose to have it taxed as a C Corporation using the rules of Chapter C of the IRS Code. Note that if it is taxed under Chapter C, it is not a “pass-through” entity.

Because the IRS doesn’t care how you have it taxed, this gives you a great opportunity to save tax money. You get the double asset protection of an LLC, and you get to choose how you pay your taxes.

Please note, the asset protection of an LLC does not depend on how it is taxed. Asset protection and taxes have nothing to do with each other.

Save Tax Money – Don’t Let the IRS Assign their Default Tax Structure

When the attorney hands the LLC papers to you or you get your wad of papers from an Internet Legal website, the clock starts ticking. You need to start filing papers with the IRS. It can be quite a complex labyrinth of IRS regulations.  Which tax structure do you choose?

If you don’t meet all the deadlines and file the different elections in the right order, the IRS gives you a default tax status. Your LLC will default to a sole proprietorship tax structure if you have a single member LLC, or a partnership tax structure if your LLC has more than one member.

The problem is, if you get the default tax structure, you may be losing a lot of opportunities to save tax dollars. You have just flushed the toilet, and a chunk of your spendable cash went down the sewer.

None of the websites will do a tax analysis for you. That’s never discussed. Your attorney never really gets into the tax discussion either and nobody ever hires their CPA and pays the big bucks to avoid getting tripped up when they form their LLC. BIG MISTAKE!! Let me tell you why.

Lower Your AGI Save Tax

AGI stands for Adjusted Gross Income. It’s the number that basically determines what tax bracket you’re in. It governs what deductions and credits you get. It is a really important number to control. Yet, most people don’t know what it is. You lower your AGI, and you pay less tax.

There is a line on your 1040 tax return that shows your AGI.  Anything above that line adds to your AGI or subtracts from (lowers) your AGI.  You need to work above your AGI line.  Accountants call it “working above the line.”  Unfortunately, most tax and financial advisors work below the line.  You have to learn to work above the line.

There is basically nothing you can do above the line as an individual.  The contribution to a standard IRA is above the line, but that’s about all you can do for yourself that comes in above the line.

The important thing for you to understand is that your little business is your most important tax shelter. Everything that happens in your little business comes in above the line on your personal tax return (unless your business is taxed under Chapter C).  You will use an LLC for your little business because of its asset protection.  But, the tax aspects of your LLC are critical.  You can save tax money on every dime you make (even your W-2 income), if you use your LLC right. And, it will lower your AGI.

As a simple W-2 employee, there isn’t much you can do to lower your AGI. With an LLC, you can do lots of things that will not only give you a deduction, but will actually save tax dollars and lower your AGI. To a large degree, what you get to deduct depends on how you chose to have your LLC taxed. If you are making your money through the sales of goods or services, you need to look closely at having it taxed under Subchapter S.

Here are some reasons why:

–The S taxation structure gives you the option of taking some of your earnings as a “distribution” rather than as a salary. If you make a distribution, you will save the “social taxes” (Social Security and Medicare) on the amount you take as a distribution. That could save you over 15% each year in taxes on the distributed money.

–The S taxation structure also gives you the option of taking deductions for your business travel and expenses. Almost all of your travel can be deductible if it is planned around your business trips. This will save you thousands each year and still let you see interesting places.

–The S taxation structure also gives you the option of taking deductions for your business technology and equipment. This saves hundreds each year.

I have researched and written (together with a former IRS agent) a comprehensive course on several more tax saving scenarios for small businesses called Advanced Tax Tactics, but I hope that you can see the point I am trying to make. You can save hundreds if not thousands in taxes each year.

If your income in your LLC is totally rents (you have designed your LLC to hold a piece of real estate), then you should NEVER have that LLC taxed under Subchapter S.  The IRS will screw you blue when they figure out you get all your money in your LLC from rents and your LLC is taxed under Subchapter S.

Of course, to lower your AGI, you’ll need to make the right LLC elections, and you must learn how to use the law.  It isn’t something your CPA will do for you at the end of the year. It’s something you have to work on all year.  But suffice it to say, your LLC gives you more tax advantages than any other entity.

The tax advantages you get with your LLC can mean the difference between business success and business failure. I have seen small companies double their profits by making the correct tax elections. It’s a big deal!  When you are ready to save, make sure you study my Advanced Tax Tactics.  This is a one-time offer:  I’ll give you 70% off the Advanced Tax Tactics if you use this coupon code: 2QVMHDK7.  Click now or the offer is gone.

In the next course we will talk about the worst mistake people make in designing and setting up an LLC.  The next lesson is called: “A Mistake that Invalidates Many LLCs.


Lee R. Phillips