Saturday, February 21, 2009


Limited Liability Companies are subject to several unique tax angles.
A single-member LLC is a ‘disregarded entity’ for Federal tax purposes, so you would report it as if the business was a sole proprietorship. It would be reported on Schedule C, E, or F or possibly Form 4835.

An LLC can elect to be taxed as a corporation by filing Form 8832. It can further elect to be taxed as an S-Corporation, in which case, the income or losses would flow through to the owner and no corporation tax would have to be paid. If the S-Corporation election were not made, then any gain would be subject to corporation tax and any loss could only be used to offset past or future gains by the corporation.

If the LLC is a multi-member LLC, and does not elect to be taxed as a corporation, then it will file its taxes on Form 1065 as a partnership. Any gains or losses will flow through to the LLC members. Gains and losses will be reported by the LLC members on their Form 1040 as either ordinary gains or losses , capital gains or losses, or passive gains and losses.

There is no official guidance on the subject of whether the same self-employment tax rules apply to an LLC as the rules for a partnership. The prevailing opinion is that self-employment tax is due on an amount equal to a “reasonable salary” in an S-Corporation. LLC members do not receive a salary per se, but the equivalent of a salary is called a “guaranteed payment.” So self-employment tax should be paid on the guaranteed payment the LLC member receives. Some accountants have expressed the idea that half of the LLC member’s income from the LLC should be reported as a ‘guaranteed payment’. Another thought is that it should be the wage you would need to pay someone else to perform the same work.

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