Understanding LLC Taxes

What are LLC taxes?

Individuals may form an LLC, not just for liability purposes, but also for simplified taxation. LLC taxes offer a number of taxation benefits over standard arrangements. The IRS does not consider an LLC as a taxation classification, but LCC taxes will vary depending on how the entity decides to be taxed. This means that they can be taxed as a corporation as well as a partnership or disregarded as separate entity with only one owner. The separate entity will tax the owner rather than the LLC and the income and deductions will be filed on the individual’s tax forms. Multiple member LLCs are taxed either as a partnership or corporation. Single member LLC’s are either disregarded and individually reported, or taxed as a corporation.

How are LLC taxes determined by default?

Without an effort to change LLC taxes classification by the LLC owners, that LLC is treated as a partnership and a partnership tax return will be filled out. Each stakeholder in the LLC files a K-1 form that reflects their income and deductions from the partnership. Single owner LLCs are treated as a sole proprietorship by default and multiple owners are considered a partnership by default.

What is a K-1 Form?

A Schedule K-1 is Form 1065 that determines LLC taxes in terms of the individual owners. The form is a short two pages and the individual discloses information about the partnership, shares of profit, loss and capital and other income generated by the partnership. LLCs filing as corporations must first file the appropriate forms to be considered for corporation taxation, then file Form 1120, the US Corporation Income Tax Return. The purpose of a K-1 form is to account for each partner’s shares, which is used in conjunction with a typical 1040 form to ensure the proper taxation is assessed.

How can an LLC be taxed as a corporation?

One merely has to file IRS Form 8832, widely available online, to elect to be taxed as a corporation. The form is short, at seven pages, with only three pages that need to be filed out by the individual electing to change the designation of the LLC. These forms are processed at locations in Cincinnati, Ohio for Eastern LLCs and Ogden, Utah for Western LLCs. Foreign entities must indicate the country where the LLC was formed in. There is a list of foreign business classifications that are equivalent to an American LLC on page 7 of Form 8832.

What is a flow-through entity?

An LLC is considered a flow-through entity when the income is not taxed as the income goes directly to the partners who are in turn, taxed on their income. Taxing an LCC that serves as a flow through entity would constitute double taxation and therefore would be a non-taxable entity. LLCs that file taxes as corporations are not “flow-through” entities and will be taxed as other corporations would, upon filing their Form 1120 tax return. The only exceptions are LLCs that are classified as “S corporations” under US tax law.