4 Important LLC Tax Benefits

LLCs are taxed depending on how many owners they have and which tax status they choose. LLCs have the option of electing to be taxed as corporations if they wish, but must make that election with the IRS.

Single-Member LLCs

LLCs with one member are called disregarded entities by the IRS. The LLC’s profit is passed through to the owner’s tax return on Schedule C of Form 1040 and they pay tax on it themselves.

Partnerships

LLCs with at least two members are taxed as partnerships. The LLC must file Form 1065 Return of Partnership Income with the IRS. The IRS then reviews the 1065 to determine whether income has been reported correctly from the partners.

Partnerships must also provide a Schedule K-1 to the IRS, which breaks down each partner’s share of the business’s profits and losses. Then each partner reports this profit and loss information on their individual 1040 tax return.

Corporations

Any LLC that wishes to elect to be taxed as a corporation can make that election using IRS Form 8832, Entity Classification Election. The LLC can choose to be taxed as an S-corporation or a C-corporation.

Further Reading: Best Tax Software for Small Business

Here are the top four tax advantages business owners are able to use when they form an LLC.

1. Tax Flexibility

LLCs are in the unique position of being able to choose if they will be taxed as a corporation or as a pass-through entity. When you create an LLC, you can choose to be taxed as a sole proprietor or partnership, or as a C-corporation or S-corporation. This flexibility provides the ability to choose the most beneficial tax approach for your company.

2. Avoiding Double Taxation

If you choose to be taxed as a sole proprietor or partnership, you avoid double taxation. Double taxation occurs when a corporation pays taxes on income and the shareholders or owners then also pay taxes on their own personal returns on the dividends they receive. By not electing to be taxed as a corporation, you avoid this issue.

3. QBI Deductions

With the Tax Cuts and Jobs Act of 2017, the Qualified Business Income (QBI) deduction went into place for LLCs, sole proprietorships, partnerships and S-corps. With this deduction, businesses can claim a tax deduction worth up to 20% of their qualified business income.

4. Business Deductions

LLCs can write off a number of expenses as business tax deductions to help lower the amount they owe on their income tax or the business owes as a corporation.

The process for claiming these deductions depends on how an LLC chooses to be classified and taxed. In the case of pass-through entities, deductions are claimed at the personal level. If taxes are paid as a corporation, deductions are claimed at the business level.

Common deductible business expenses include:

 

An LLC is the most common type of business entity, mainly due to the liability protection and tax benefits that it offers. LLCs have the flexibility to choose the tax status that will provide them with the most financial perks at tax time.