How to file taxes for an llc

Even if your LLC didn’t do any business last year, you may still have to file a federal tax return.

by Jane Haskins, Esq.
updated June 10, 2021 · 3 min read

Sometimes a limited liability company (LLC) has a year with no business activity. For example, a newly formed LLC might not have started doing business yet, or an older LLC might have become inactive without being formally dissolved.

But even though an inactive LLC has no income or expenses for a year, it might still be required to file a federal income tax return.

LLC tax filing requirements depend on the way the LLC is taxed. An LLC may be disregarded as an entity for tax purposes, or it may be taxed as a partnership or a corporation.

How to file taxes for an llc

Tax Elections for LLCs

If an LLC only has one owner (known as a “member”), the Internal Revenue Service (IRS) automatically disregards it for federal income tax purposes. The LLC’s member reports the LLC’s income and expenses on his or her personal tax return.

If an LLC has two or more members, the IRS automatically treats it as a partnership. The LLC files an informational partnership tax return and the members also report the LLC’s income and expenses on their personal tax returns.

However, an LLC can change these default classifications and choose to be taxed as a corporation. To do this, the LLC must file Form 8832 with the Internal Revenue Service. The LLC may make this election when it is formed, or it may elect to change its tax classification at a later date.

Filing Requirements for Disregarded Entities

An LLC that is not considered a separate entity for federal income tax purposes is taxed in the same way as a sole proprietor: the LLC’s income and expenses are reported as self-employment income on Schedule C of the member’s personal tax return. You are required to file Schedule C if your LLC’s income exceeded $400 for the year.

If a one-member LLC did not have any business activity and does not have any expenses to deduct, the member does not have to file Schedule C to report the LLC’s income. However, the member will still have to file a personal tax return if he or she had other income, and may have to file a Schedule C if there was self-employment income from another business.

Filing Requirements for an LLC Partnership

An LLC that is taxed as a partnership is subject to the same federal income tax return filing requirements as any other partnership. The LLC must file an informational partnership tax return on tax form 1065 unless it did not receive any income during the year AND did not have any expenses that it will claim as deductions or credits.

Thus, an LLC with no business activity that is taxed as a partnership is not required to file a partnership tax return unless there are expenses or credits that the LLC wants to claim.

LLC Tax Filing Requirements for an LLC Corporation

Corporations have different tax filing requirements than either disregarded entities or partnerships. All corporations are required to file a corporate tax return, even if they do not have any income.

If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.

Even if your LLC has no business activity, it is important to understand your LLC tax filing status and whether it is obligated to file a federal income tax return. Filing required returns on time can help your LLC avoid fines and penalties.

How to file taxes for an llc

LLC tax filing requirements depend on the way the LLC is taxed. An LLC may be disregarded as an entity (sole proprietor) for tax purposes, or it may be taxed as a partnership or a corporation.

Let’s take a look at the different scenarios.

LLC treated as a Sole Proprietor or Disregarded Entity

If an LLC has only one owner, or member, the IRS automatically disregards it for federal income tax purposes. This type of LLC is treated the same as a sole proprietor. The member reports the LLC business income and expenses on his or her personal tax return Schedule C.

Filing Requirements for Sole Proprietors

An LLC that is not considered a separate entity from its owner is taxed as a sole proprietor. Therefore, the LLC’s income and expenses are reported as self-employment income on Schedule C of the owner’s personal tax return. A taxpayer is required to file Schedule C if the LLC’s income exceeds $400 for the tax year.

A taxpayer would also want to file a Schedule C to take a loss on a business. The IRS recognizes that many businesses will have a loss in the first few years. Therefore, the IRS allows a loss on a business 3 out of 5 years. After three years of losses, the business would become a hobby in the eyes of the IRS. This would disallow any further loss unless there is a substantial change in the operation to try to turn the business around. I recommend consulting with a tax professional to know if a loss is allowed for your business.

If a sole proprietor LLC did not have business income exceeding $400 nor does it have any expenses to deduct, the taxpayer does not have to file Schedule C. However, the taxpayer still files a personal tax return to report other income.

LLC treated as Partnership

If an LLC has two or more members or owners, the IRS automatically treats it as a partnership. The LLC files an informational partnership tax return (Form 1065). The income and expenses of the partnership pass through to the owners’ personal tax returns. To learn more about pass through income, read this post.

Filing Requirements for an LLC Partnership

An LLC taxed as a partnership files an informational partnership tax return using tax Form 1065. However, if it did not receive any income during the year AND did not have any expenses that it will claim as deductions, then it is not required to file a return.

Thus, an LLC with no business activity that is taxed as a partnership is not required to file a partnership tax return unless there are expenses or credits that the LLC wants to claim.

Taken directly from the IRS website.

Question:

Must a partnership or corporation file an information return or income tax return even though it had no income for the year?

Answer:
Partnerships and corporations have different standards for filing an information return or income tax return. A domestic partnership must file an information return unless it neither receives gross income nor pays or incurs any amount treated as a deduction or credit for federal tax purposes.

I would suggest filing the partnership return without any income or expenses just to make sure the IRS doesn’t send you a notice of failure to file. Receiving this notice then makes you prove you had no reason to file in the first place. Generally, I say be proactive. If you have a registered partnership, then file the return for it.

The penalty for late filing of the partnership return is $195 per partner per month or part of a month for which the partnership information return is filed late, with the penalty capped at 12 months.

LLC treated as a S-Corporation

When an LLC elects to be taxed as a corporation using a Form 8832 with the IRS, the LLC must file a corporate tax return, even if it do not have any income. To clarify, all corporations including S-Corporations MUST file a tax return, even if they do not have any income.

The S-Corporation status happens by filing Form 2553 and having approval from ALL shareholders or owners. Without 100% approval from all owners, members or shareholders of S-Corporation election, it cannot happen.

Once an LLC has elected to be treated as a corporation (including an S-Corporation) for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.

Filing Requirements for an LLC S-Corporation

An LLC that is taxed as an S-Corporation files a tax return using Form 1120S.

Once again the income and expenses get passed through to its owner, members and/or shareholders. Therefore, the S-Corporation doesn’t itself pay taxes. It simply sends the business income information to the IRS which can be checked on personal returns.

If your business is taxed as an S-corporation and files Form 1120S after the deadline, the IRS charges EACH shareholder a late filing penalty in the amount of $195 for each month, or part of the month, that the return is late for up to 12 months.

To recap

Even if your LLC has no business activity, it is important to understand your LLC tax filing status to know whether it is obligated to file a federal income tax return. Filing required returns on time can help your LLC avoid fines and penalties.

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A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, you should check with your state if you are interested in starting a Limited Liability Company.

Owners of an LLC are called members. Most states do not restrict ownership, so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.

Classifications

Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

Effective Date of Election

An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election PDF , to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances. See About Form 8832, Entity Classification Election for more information.

All businesses, regardless of whether they operate as a limited liability company or not, are subject to the same requirement that a business expense be “ordinary and necessary” before a write-off is permitted. Many business expenses are so common — including office rent and supplies — you probably write them off without referring to any tax publications. An LLC owner can write off a number of other expenses and yield significant tax savings.

LLC Tax Reporting

An LLC is a distinctive business structure when it comes to paying income taxes. The Internal Revenue Service will disregard your LLC entity if you’re the only member and require that you file taxes as a sole proprietor. When more than one member exists, partnership tax rules will apply, meaning you file your taxes in the same way that a partner in a partnership does. With LLCs, the IRS gives you the option of electing corporate tax treatment rather than the default tax designation. The LLC’s designation doesn’t affect your ability to write off business expenses, but it does require that you report deductions on the appropriate tax forms, which are different for each of the designations.

Car Expense Write-off

Whether you use your car for personal and business purposes or use it exclusively for LLC business, some or all of the car expenses you incur are deductible. When the car is used exclusively for business, you can write off all expenses such as gas, oil, new tires, repair charges, parking fees and tolls, insurance premiums, lease payments or part of the purchase price through depreciation. If you use the car for business and personal use, you’ll need to calculate the percentage that relates to the business by multiplying the total expense by the ratio of business miles driven to all miles driven. Alternatively, the IRS allows you to multiply the annual business miles by the standard mileage rate to calculate the car expense write-off.

Business Use of Home

If your home is the center of the LLC’s business operations, you may be eligible to write off a portion of your housing expenses, some of which would otherwise be nondeductible personal expenses. Some of the housing expenses you can write off include rent, utilities and the cost of home repairs. However, you will need to calculate the percentage of your home’s square footage that is used exclusively and regularly for LLC business purposes and multiply the result by the total of all housing expenses you can include.

LLC Organizational Costs

At the time you created the LLC, the state where it was formed charged you a fee to file the formation documents. If you hired a service to form the LLC for you, the fee was likely included in the price you paid for the service. Regardless of whether you formed the LLC yourself or not, you can write these expenses off as organizational costs through annual amortization deductions or, if eligible, you can make an election to write off the entire amount on the first tax return you file after commencing business operations.

  • Internal Revenue Service: Publication 3402 -– Taxation of Limited Liability Companies
  • Internal Revenue Service: Publication 463 — Travel, Entertainment, Gift and Car Expenses
  • Internal Revenue Service: Publication 334 — Tax Guide for Small Business
  • Internal Revenue Service: Publication 535 — Business Expenses

Jeff Franco's professional writing career began in 2010. With expertise in federal taxation, law and accounting, he has published articles in various online publications. Franco holds a Master of Business Administration in accounting and a Master of Science in taxation from Fordham University. He also holds a Juris Doctor from Brooklyn Law School.

How your limited liability company (LLC) files income taxes depends on how you choose to designate your business to the Internal Revenue Service (IRS). Because the IRS does not recognize LLCs as business entities, LLCs are taxed as sole proprietors, partnerships, or corporations, depending on how many owners there are and what type of entity the LLC elects with the IRS.

How to file taxes for an llc

Filing Taxes as a Sole Proprietorship

If your LLC has just one member, you can file as a sole proprietor or elect to file as a corporation. To file taxes as a sole proprietor, you need to complete Profit or Loss From Business (Form 1040, Schedule C) as part of your individual personal taxes. If there is no income to report, you do not need to file this form. If your business deals with a specialized industry such as farming or fishing, file Supplemental Income and Loss (Form 1040, Schedule E), Profit or Loss from Farming (Schedule F), or Income Averaging for Farmers and Fishermen (Schedule J) instead of Schedule C.

Filing Taxes as a Partnership

If your LLC has more than one member, you can be taxed as either a partnership or a corporation. Make the election using Entity Classification Election (Form 8823). To file taxes as a partnership, you must complete Return of Partnership Income (Form 1065) and file it with the IRS. You also need to complete Schedule K-1 for each member and provide a copy to them. The partnership itself does not pay taxes. Instead, each partner reports their share of the profit and loss from the business on their own personal taxes. The K-1 sets out that partner’s profit and loss to be reported.

Filing Taxes as a C Corporation

If you choose to be taxed as a corporation, make the election using Form 8823. When you select taxation as a corporation, it is automatically a C corporation, unless you file further documents, as described below. As a C corporation, you must file U.S. Corporation Income Tax Return (Form 1120).

Filing Taxes as an S Corporation

If your LLC has designated itself as a corporation, you can choose to become an S corporation, which you do by filing Election By a Small Business Corporation (Form 2553). Once you have made this election, file U.S. Income Tax Return for an S Corporation (Form 1120S). The corporation itself is not taxed on profit and loss. Each owner must be given a Schedule K-1, detailing their share of profit and loss, which they report on their own personal income tax.

Filing Federal Employment Taxes

If you are a sole proprietorship, you must file Self-Employment Tax (Form 1040, Schedule SE). If your LLC has employees, file Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form 940) and either Employer’s QUARTERLY Federal Tax Return (Form 941) or Employer’s ANNUAL Federal Tax Return (Form 944).

Filing State Taxes

Check your state laws to determine what, if anything, your LLC needs to file for state income taxes. State filings usually mirror the federal filings, meaning partnerships file as partnerships with the state, corporations as corporations, and so on. However, as this is not true in all states, be sure to research your state’s particular requirements. You also need to determine what you need to file for state employment taxes and sales taxes.

When forming your LLC, you can choose to work with an online services provider to help with the process. Following the right procedure and filing the correct forms can ensure that your LLC meets its tax obligations.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Self-employment has its benefits. An LLC can help reduce your liability without reducing your freedom to run your business as you see fit. And we have you covered at tax time, with TurboTax Home & Business for single-member LLCs, and TurboTax Business for multiple-member LLCs.

Advantages of self-employment

Self-employed business owners who want to reduce their personal liability for business-related debts and legal problems, but don’t want the more complex structure of a corporation, have an alternative: the Limited Liability Company or LLC. This type of business structure has been around for over 30 years, and is now permitted in all 50 states.

Reasons for choosing an LLC

As an owner (or “member”) of a Limited Liability Company, you’re only partially on the hook for unpaid debts or court judgments against your business: Your losses are limited to your investment in the company.

The same is true if you form a corporation, but when you opt for that business structure, you lose a lot of the management flexibility you enjoyed as a sole proprietor (or you and your partners enjoyed in your partnership).

With an LLC, however, you hold on to that flexibility: You can have an unlimited number of members, or just one. A member can be an individual, a partnership or even a corporation. Members can run the LLC themselves or hire an outside manager.

You can even choose how you want the business to be taxed: either as a partnership or a corporation (or, if you have a single-owner LLC, as a sole proprietorship). And LLCs don’t issue stock, so profits are divvied up any way the members choose, with no need for shareholders’ meetings.

Even with all these advantages, there may be situations where you’ll opt to incorporate instead. For example, you may want to be able to issue stock, so you can reward key employees by giving them stock options. Also, in some states certain types of businesses, including banks and insurance companies, can’t form LLCs.

How to form an LLC

Like corporations, LLCs are governed by state law. You’ll need to draft articles of organization in the state where your company is headquartered, file them with the appropriate state office (usually the secretary of state or department of commerce), and pay a filing fee.

Most states make the process easy. They usually have a preprinted form where you just fill in the blanks to provide your company’s information, or they have a sample form to follow.

For LLCs with more than one member, you’ll also need to draw up an operating agreement. Items in this document should include: The rights and responsibilities of the LLC members; what percentage of the business each member owns; how the business will be managed; how members will make decisions on major issues; what the procedures are for adding new members; and what tax treatment the LLC chooses.

Once you’ve established an LLC, you may have to pay annual registration fees to the state.

Tax treatment of an LLC

The IRS assumes that LLCs with more than one member are partnerships for tax purposes. That means the LLC itself pays no tax, but taxable profits and deductible losses are passed through to the members,who are treated as partners under the tax rules.

So at tax time to keep the IRS happy an LLC files Form 1065: Partnership Return of Income. The annual Form 1065 must also include a Schedule K-1 for each member. Schedule K-1 reports the member’s share of LLC income, deduction, and tax credit items. These amounts are then included on the member’s personal tax return.

If you choose to have your LLC file taxes as a corporation, you must tell the IRS by filing Form 8832: Entity Classification Election. At tax time you’ll use Form 1120: Corporation Income Tax Return, or the short form, 1120-A.

If you have a single-member LLC, you’ll file as a sole proprietorship using Schedule C (unless you choose to treat the LLC as a corporation).

A rather sticky issue for LLC members is whether they owe self-employment tax on their share of the company’s earnings. In general, members who are actively engaged in the business must pay this tax.

There is a special rule for LLC members who are the equivalent of Limited Partners and don’t take an active role in the business: They don’t pay self-employment tax on profits the company passes through to them, only on compensation they receive for any services they provide to the LLC.

Here’s the rub: The law isn’t clear on how inactive an LLC member has to be to qualify for this special rule. The IRS tried to clear things up a few years ago by proposing rules that would require self-employment tax to be paid on profits distributed to any member who is personally liable for the LLC’s debts, participates in the business for more than 500 hours annually, or has authority to sign contracts on behalf of the company.

And even if none of those characteristics applied, the proposed rules would require you to pay the tax if you’re a member of an LLC in health, law, accounting, engineering, architecture or consulting. Although the rules haven’t been made final, the IRS has said it won’t challenge anyone who follows them on this issue.

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If you operate your business using a limited liability company (LLC), then you have more flexibility in choosing how the IRS taxes your business earnings. Your choice will directly influence the tax filing rules you are subject to. There is no set of tax rules that specifically apply to LLCs; the IRS allows the LLC to use partnership, corporate or sole proprietor tax rules.

IRS default designations

Immediately after you create the LLC, the IRS automatically treats your business as a partnership, but only for income tax purposes. However, if you are the sole owner of the LLC, then you must pay tax on business profits as if you were a sole proprietor. Both designations have different tax filing rules. If you prefer the tax filing rules of a corporation, then you have the option to elect corporate tax treatment by filing IRS Form 8832. Once you make this election, you cannot change the LLC designation again for five years.

Partnership filing requirements

Limited liability companies that are subject to the partnership tax rules are not responsible for actually paying the tax on business earnings, but are responsible for preparing annual partnership tax returns on IRS Form 1065. This return is for informational purposes only; all income, deductions and credits are reported by each individual owner on their own tax returns.

The LLC reports each owner’s share of these amounts on a Schedule K-1 at the end of the year. For example, if you and a friend create an LLC to run a business that earns $100,000 and has $60,000 of deductible business expenses, then each of you will receive a Schedule K-1 with $50,000 of earnings and $30,000 of deductions. Both of you must then report these figures on your personal income tax returns. Essentially, the business will increase your personal taxable income by $20,000.

Corporate filing requirements

If you decide to make a corporate tax election for the LLC, the IRS will treat your business as a separate taxpayer in the same way you are a separate taxpayer from your friend. As a result, the business is solely responsible for reporting all income and deductions on Form 1120 each year and paying the appropriate income tax by the deadline.

If the LLC fails to pay the tax or file a return, you and the other owners are not personally liable. However, a drawback to corporate treatment is that business earnings are taxed twice. The first level of tax occurs when the LLC files a corporate tax return, and the second is imposed on the owners when they receive a dividend. Each owner must report the dividend as taxable income on their personal Form 1040s and pay tax on it.

Single Member LLC filing requirements

Single member LLCs are treated just like a sole proprietorship. The IRS disregards the LLC entity as being separate and distinct from the owner. Essentially, this means that you are personally responsible for all tax payments and filings. When you prepare your personal income tax return, you must now also complete a Schedule C attachment. The Schedule C only reports the income and deductions that relate to your business activities. If you calculate a profit on Schedule C, then the amount is included with the other income your report on Form 1040.

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If your business is organized as an LLC, it may be taxed as a sole proprietorship, a partnership, or a corporation, and you may be responsible for self-employment taxes in addition to federal and state income tax.

by Jane Haskins, Esq.
updated June 16, 2021 · 4 min read

From a tax standpoint, limited liability companies are like hermit crabs. With no tax classification of their own, they inhabit the tax homes of other types of businesses, and they can choose and change the way they are taxed.

This tax flexibility is one of the things that make LLCs so appealing for small business owners. But if you’re just starting out, the LLC tax filing process can seem confusing.

LLCs can choose to be taxed like sole proprietorships, partnerships or corporations. It’s important to understand the differences between them because the way your business is taxed can affect both your total tax bill and your obligation to pay self-employment tax.

How to file taxes for an llc

How Are LLCs Taxed?

Because LLCs are a relatively new type of business entity, the Internal Revenue Service has not established a tax classification for them. Therefore, while there are forms and procedures for corporate tax returns, there is no such thing as an LLC tax return form.

That doesn’t mean that limited liability company income isn’t taxed. It just means that LLCs are taxed as though they were a different kind of entity.

If your LLC has only one owner (known as a “member”), the IRS will automatically treat your LLC like a sole proprietorship. If your LLC has more than one member, the IRS automatically treats it like a general partnership.

However, if you’d prefer to have your LLC taxed like a corporation, you can change its tax status by filing a form with the IRS.

The Single-Member LLC Tax Return

A single-member LLC that is taxed like a sole proprietorship reports its income and expenses on Schedule C of the member’s personal income tax return. The member then lists the net profit or loss on the income section of his or her Form 1040, U.S. Individual Income Tax Return.

Because the LLC is ignored for tax purposes, an LLC that is taxed like a sole proprietorship is referred to as a “disregarded entity.” The entity is only disregarded for tax purposes—these LLCs still retain all of their limited liability protection.

Multi-Member LLCs Taxed Like Partnerships

If your LLC has more than one member and is taxed like a partnership, the LLC’s income will flow through to the members themselves and will be reported on their personal tax returns.

Specifically, an LLC that’s taxed like a partnership files Form 1065, an informational tax return that reports all of the partnership’s income and expenses.

The LLC also issues a Schedule K-1 to each LLC member, showing the member’s share of the LLC’s profit. Your LLC’s operating agreement should list each member’s percentage share of the LLC’s profits and losses.

LLC members then report their share of profit (or loss) on Schedule E of their personal tax returns. Members must report and pay tax on their entire share of the profit, even if they leave some of those profits in the business rather than taking them home.

Self-Employment Taxes and Estimated Taxes

The members of LLCs taxed as sole proprietorships or partnerships are considered to be self-employed for federal tax purposes. When you work for an employer, your employer pays half of your Social Security and Medicare taxes, and you pay the other half. But when you’re self-employed, you must pay the full amount yourself. On your annual tax return, you are allowed to deduct half of this tax from your income, which slightly offsets the impact of the self-employment tax.

You must file Schedule SE, Self-Employment Tax, with your tax return to report and calculate your self-employment taxes. In addition, self-employed individuals are expected to make estimated payments of these taxes and their personal income tax quarterly throughout the year. Failure to do this can lead to penalties and interest.

LLC Taxed as S Corp. or C Corp.

As an alternative, an LLC can choose to be taxed as a corporation by filing Form 8832, Entity Classification Election, with the IRS.

An LLC can also file a further election to be taxed as an S corporation. Corporate taxation can be more complicated and it’s a good idea to consult an accountant before choosing to be taxed as a corporation. Some of the reasons an LLC might choose corporate taxation include:

  • You plan to leave a substantial amount of money in the business each year to finance expansion or for other reasons.
  • Your profits are far greater than the amount the owner/employees should reasonably make in salary and you want to minimize self-employment taxes.

An LLC taxed as a C corporation files a corporate income tax return each year. The shareholders also report any salary and dividends they receive on their personal tax returns.

An LLC taxed as an S corporation follows a procedure similar to a partnership, filing an informational return and providing members with a Schedule K-1 form showing their share of the profits (or losses). The members then report that income on Schedule E of their personal tax returns.

Knowing how and when to file estimated and annual tax forms for your LLC is an important step in keeping your business’s finances on track. If you’re just starting out, you’ll probably prefer to be taxed as a sole proprietorship or partnership, but as your business grows, you may want to consult with an accountant to see if your LLC might benefit from taxation as a corporation.