There are many tax advantages of forming a Limited Liability Company (LLC). Not only is it easier to raise money and gain investors when you run a business as an LLC, but it’s also easier to pay income taxes. An LLC is a business structure that will provide many tax benefits for both you and your business.
What is an LLC?
An LLC is a type of business entity that is taxed as a corporation by the federal government but not as an individual by the state. The federal government tax code allows the business owner to subtract certain expenses that they incur, or they can keep the income and will not have to pay tax on it.
What tax benefits are provided by an LLC?
There are many tax advantages to being an LLC. LLCs are taxed as partnerships, which means they are taxed at the entity level, not the member level. All of the personal and business income generated by an LLC is taxed at the LLC’s tax rate and not at the individual member’s personal tax rate.
For example, if the LLC earns $100,000 in net income but each member only earns $30,00 in personal income outside of the LLC, the members will only have to pay taxes on their share of that $10,000, and not the $30,000 in personal income. This is a double tax saving for both the LLC and the members.
What expenses can I deduct?
LLC members are allowed to deduct many of the expenses that the LLC incurs. This includes the expenses that the LLC pays its outside contractors and any rent or utilities that the business pays. LLC members can also write off the expenses related to the business, such as business cards, utilities, rent, and office supplies.
The LLC also is able to receive tax-free distributions given to the members. LLC members can also deduct their share of any losses the LLC takes.
Do LLC members have to file their taxes?
LLC members do not have to file their personal income tax returns if they don’t have any personal income. However, LLC members must file their LLC tax returns. The LLC tax return will show all the income the LLC generates, and members will be able to deduct their share of the income they earned.
The LLC tax return will also show the total amount that the LLC is required to pay in income taxes to the federal government. An LLC must pay this tax from its net income.
Conclusion
If you open an LLC to minimize your tax liability, it’s important to know your tax obligations and the LLC’s tax obligations. If you’re unsure of the process or the information you will need, contact our experts at Abbo Tax CPA in San Diego, CA to learn more about the tax advantages of an LLC are.
