Tax Planning Strategies for LLC’s

We’ve had several LLC’s come into our firm in the past couple of months with exactly the same problem. I thought that I would spend some time talking about basic tax saving strategies for the LLC Entity. I’m just seeing way too many people paying way too much in tax.
In order to understand this, you need to be able to separate in your mind, the difference between tax and law. Most people push them together and think “tax law”.
One of the few things that our state has done correctly in the past twenty years is to write an ironclad LLC Structure. I’m not an attorney. I don’t even play on TV. But there are certain instances where an LLC provides even more protection than a corporation.
So from a legal perspective it’s a great choice. But from a taxation standpoint it’s a nightmare.
An LLC is by definition a partnership. Under the IRS Code, partnerships are treated like multiple sole proprietorships pushed together. Why is this a problem? Because you are now set up to pay the maximum amount of tax legally allowable by law for an active trade or business in the United States. You now have to pay both income and payroll taxes on all of your income.
It’s the payroll taxes that are normally the problem on lower and middle income returns. Social Security and Medicare Tax is around 15% of your first $130,000 of income, or $19,500. Sooner or later you are going to turn age 65 and ask for benefits since you are treated as a Sole Proprietor for tax purposes. That’s a lot of additional tax for a middle income taxpayer.
The remedy is simple. We can elect an S-Status on your LLC. Why would we do this? Because S Corp income is not subject to Social Security and Medicare Tax. An S Corp is never going to turn age 65 and ask for benefits.
You can’t get out of paying payroll taxes altogether. As the owner of a profitable S Corp, you are required to have a reasonable salary. So let’s say that we look at the Department of Labor numbers for your particular business and find that the average owner in your business in Illinois makes $40,000 per year.
So we elect an S Status on your LLC. We take out a reasonable salary of $40,000 and save you the payroll taxes on the rest of the $130,000. That’s 15% of $90,000 or $13,500 in savings. Nothing will change on the income taxes.
That’s significant. I have had people ask about their Social Security benefits. I don’t know about you, but I don’t trust the government to properly fund my retirement. If you put $13,500 per year away at 5% interest for twenty years, you will save $446,390.38. There isn’t any way that you could get that back from the Social Security Administration.
It isn’t that simple. There are a lot of other considerations that need to be taken into account, and several other steps that need to be taken. But if you are either a partner in an LLC or a single member LLC, and you think that you are paying way too much in taxes, you should contact us today. We may be able to help you.
And please don’t be foolish enough to take this to your current accountant and expect them to do anything about it. If they had a brain and knew what they were doing, don’t you think that they already would? Or if they do know how to handle something as rudimentary as this and choose not to help you, why would you stay with them?
Please contact us today.
Let me leave with this one thought…
My daughter recently wrote an article for the Inside Publications Newspapers where she looked at what the C-19 Pandemic has done to the live entertainment scene in Chicago. Cassie interviewed six owners of venues. Only one of them had reopened their doors and was providing live entertainment.
The twenty-five percent occupancy restrictions and the 11:00 pm mandated closing times were the main reasons behind the continued closures. The owners just didn’t think that they could pay their bills in that sort of environment. And if they remain closed for the foreseeable future in this Phase Four setting, most will probably not make it.
Is this the future of Chicago? Will this pandemic be allowed to decimate our Arts Scene? How will Chicago survive without our culture?
Very scary. Can you imagine not being able to hit a play on a Saturday night, a Jazz Club, or even a decent Salsa Joint?
Whatever the future holds, we’re going to get through it. We’re going to get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. If there is anything that you need, whether you are a current client or not, please contact us today. I’m here and i remain,
Sincerely yours,
Chris Amundson
Accounting Solutions Ltd.
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