Preparation of an LLC or Limited Liability Company Tax Return generally comes in four different categories, those being…
– Schedule C on Form 1040
– Schedule E on Form 1040
– Form 1065, U.S. Return of Partnership Income
– Form 1120S, U.S. Income Tax Return for an S Corporation – LLC Taxed as S-Corp
I hope that you are beginning to understand just how difficult and complicated tax work for LLC’s can be. One of the biggest problems is deciding which tax form to use in the first place. The next thing is that Federal & State Income Tax Law differs greatly between the individual forms. What can be done or deducted on one is completely forbidden on the other three.
Schedule C on Form 1040
By definition, an LLC is a partnership. Many clients, for various liability and taxation reasons, have a single member partnership. This is what we would call a Disregarded Entity. While legally being a partnership, you don’t have any partners. As such, if you have an active trade or business you would file as a sole proprietor on Schedule C of Form 1040, even though you have a separate and distinct legal partnership. Many find the Schedule C to be an expensive form of taxation because your income is subject to both Income and Self-Employment (Payroll) Tax.
Schedule E on Form 1040
If you have a single member LLC that is operating a passive trade or investment type business, then you would file your income tax from the partnership on Schedule E of your Personal Income Tax Return. This is common for people holding investment real estate, which by definition is normally considered passive income with material participation. Any income is only subject to Income Tax, but your losses may be limited depending on your Active versus Material Participation Status.
Form 1065, U.S. Return of Partnership Income
If there are multiple partners meaning two or more in the partnership, then most of the time we use the 1065 Partnership Return. These returns can be tricky because the individual partner accounts must be separately maintained for the proper reporting of K-1-P Income. Payments to partners can be treated as either a Return of Capital or Guaranteed Payments.. If the Partnership is being closed down, payments to partners can also be considered Short or Long-Term Capital Gains. Most clients consider the 1065 to be another expensive form of taxation because payments to partners for services rendered are considered Guaranteed Payments which are subject to both Income and Self-Employment Taxes on your personal income tax return.
Form 1120S, U.S. Income Tax Return for an S Corporation – LLC Taxed as S Corp
One way to relieve part of the payroll tax obligations on an LLC whether single or multiple member, is to have an LLC taxed as an S-Corporation. This has become quite common recently with LLC’s becoming one of the most popular forms of entity ownership. Corporation income is not subject to payroll taxes. With the s-status, income taxes are only paid once at the federal level. While owners of S-Corporations, or partners treated as S-Corporation Shareholders are required to take a reasonable salary, the entire profit of the company is not subject to payroll taxes. This offers a tax planning opportunity to many of our clients.
If you have any questions, or need some tax planning advice, don’t hesitate to contact us. For more information in this regard please go to