September 3, 2016

Taxation of LLCs – Readers’ Questions Answered

Tax Implications of moving an asset from personal property to an LLC

A rental real estate property is owned jointly by a married couple. For liability protection, the asset will be moved to an LLC. What are the tax implications of this move?

Answer

It is a very good idea to get commercial/rental real estate out of your personal name and into an entity such as an LLC (many people used limited partnerships in the days before LLCs became more widely used).

There might be some tax implications, so I suggest you speak with an accountant.

The biggest issue you will have in moving the property to a limited liability company is if the property has a mortgage.

Your mortgage holder is unlikely to simply permit you to quitclaim deed the property over to the LLC. Instead, you’re going to have to work with the lender to either refinance the property or otherwise elect not to exercise the due-on-sale clause in your mortgage.

I have a LLC for snowplow removal but no expenses

by Matt
(XXXX@sbcglobal.net (email changed for your privacy and protection from spammers))

I have a LLC for snowplow removal but no expenses. My friend own a snowplowing business in which I help him. I have opened my own LLC and he pays the company not me but I drive his vehicle and he pays for all repairs and gas. The only thing I have had to purchase is $300.00 worth of insurance. I have a couple questions:

1. I know I have to deposit all the money into a separate account in the LLC’s name, but how can I withdraw money to pay myself?

2. Are you taxed on money that is withdrawn for personal use?

Answer

1. Write yourself a check from the LLC’s bank account.

2. Assuming that the LLC is taxed as a disregarded entity or partnership, you are taxed on the LLC’s net profits–revenues minus expenses.

As you can see from the above equation, the way to lower your taxes is to claim as many expenses from the LLC as you legally can.

It doesn’t matter for tax purposes how much you withdraw.

For some tips on reducing your taxes, I’d recommend taking a look at The Tax Reduction Toolkit.

Another way to “learn” the tax code, in a practical sense, is to use small business tax preparation software, such as TurboTax Online for LLCs

TurboTax takes you through a simple question and answer format about your business income, expenses, structure and so forth. From the questions and help guide, you’ll see which expenses are deductible, and how to take the deductions and lower your taxes.

Can I use my LLC as a deduction for my personal income?

Can I use my LLC as a deduction for my personal income taxes, and if so how do I?

Answer

Assuming that your LLC is taxed as a partnership or sole proprietorship, then any losses from the LLC are recorded on your personal form 1040 tax return.

These losses are deducted against your taxable income and therefore should reduce your tax liability.

If the LLC is taxed as a sole proprietorship (e.g. a single member LLC), your LLC’s business income and expenses are recorded on Schedule C of your 1040. If it’s a loss, you have a negative number, which brings down your overall taxable income.

You’ll find the reference to Schedule C on line 12 of your 1040.

If the LLC is taxed as a partnership (e.g. a multi-member LLC), then the LLC will file a Form 1065 Partnership Tax return. Each member will be issued a Form K-1 showing the profit or loss attributable to each member.

The profit or loss from your K-1 will either increase or decrease your taxable income on your Form 1040.

What deductions can be taken under an LLC

by Jerry
(Colleyville)

What deductions can I take for my LLC business?

Answer

Every expense that is “ordinary” and “necessary” to your business should be deducted from your business revenues in order to arrive at your business’s profits.

If you bought it for your business (and it was a legitimate expense), then it should be reported as an expense.

That means everything from rent paid for your store, to web hosting fees, bank fees, wages to employees (including payments to independent contractors), postage, business mileage, etc.

What portion of commission deductions/withholdings are business expense for LLC?

LLC sole owner gets commission from insurance co. as agent. Deductions/withholdings include:

1/2 of self employment Social Security/Medicare (insurance co. picks up the rest)
“Service” charge from insurance co.
401(k) contribution
Disability insurance premium
Errors & Omissions insurance premium

Which of these can the owner deduct as a business expense?

Answer

Is the LLC actually paying any of these withholdings? If not, then they are already being deducted from your revenues. If you were to take them as an expense again, they’d be double-counted.

Check your 1099 and see if the total income being reported by the ins. co. to the IRS already takes the above deductions into account.

If the ins. co. is reporting your E&O insurance premiums as “income” to you, then yes, you ought to deduct that. You’ll have to see what the ins. co. is reporting to the IRS–then I would check with an accountant.

LLC expenses

by Aaron
(Virginia)

I have an LLC and did not make a profit last year. But I have all of my expense receipts including start up costs, meals, entertainment, and etc. How should my tax guy handle this to help with my deductions….personal vs. business?

Answer

Your “tax guy” should file either a Form 1065 (if you are a multi-member LLC filing as a partnership), or a Schedule C (if you’re a single member LLC).

On those forms, he’ll record LLC revenues and all business expenses and come up with a net profit or loss number.

There is a location on your 1040 to put that profit or loss number. That profit/loss number will influence your taxable income accordingly.

when do i pay taxes and how much

by Matt
(Janesville, WI)

I just started my business snowplowing. I will probably make around $2000.00 between now and March. How do I pay taxes, four times a year or just at tax time? Also I am general contractor but take direction from another person who owns his own snowplowing business and brokers the work out. Do I have to pay the SE tax or not?

Answer

Everyone is required to pay quarterly estimated taxes.

As a W-2 employee, your employer withholds taxes from your paycheck and pays the quarterly estimated taxes on your behalf.

If you do not have anyone withholding taxes and paying on your behalf, you will need to do so yourself.

You can determine your estimated tax liability by working through form 1040-ES from the IRS.

You can also use software such as TurboTax Online which will help determine your final and estimated tax liability.

As a single member LLC should I pay taxes under my EIN or SS# ?

by Jeff
(IL)

As a single member LLC, should I pay taxes under my EIN or SS# ?

Answer

You are going to file your taxes using your 1040, under your SS#.

Your single member LLC revenues and expenses will be recorded on Schedule C of your 1040. On part D of Schedule C, you can also enter your LLC’s EIN if needed (see the instructions).

LLC after January 1st?

by Mary
(NY, NY)

Hi, I am thinking on forming a single member LLC in NY.
Is there any benefit on waiting until January 1st to file my papers?
thanks

Answer

The biggest advantage is that you wouldn’t have to file a tax return for your single member LLC for 2008.

This could be a disadvantage, however, if your LLC would show deductible losses in 2008. If your LLC would show deductible losses in 2008, then by starting your LLC in 2009, you won’t be able to take advantage of those.

Many people choose to start their LLCs in January because it allows them to have a business year that corresponds with the calendar year.

I know that Legalzoom lets you purchase an LLC today, but not have it actually filed until the New Year, as many people don’t like to start businesses right at the end of the year.

Starting off the New Year with your company is a good idea. Take the next couple weeks to get your hands on some good small business accounting software and get organized, so that when you officially incorporate your LLC in January, you are ready to go.

Taxing profits from a LLC that have already been taxed

I have a lot of cash in my LLC. I have been paying taxes on the profits for years via a regular payroll so the money in my LLC has been taxed once. Now I have accumulated a lot of captial in my company. This capital has been left over after paying taxes on the profit via my 1040 every year. How do I draw out these profits without paying tax again?. If I take it out as payroll then I have to pay payroll taxes again.

Answer

It depends on how your LLC is taxed: as a partnership, corporation or disregarded entity.

If your LLC is taxed as a partnership or disregarded entity, then you pay taxes on your LLC’s entire profit each year, regardless of how much you payout to yourself in draws and distributions.

If your LLC is taxed as a corporation, then the LLC will pay taxes itself each year, and then, when you take a dividend, you will report those dividends on your personal return as well (just as if you received a dividend from a stock).

Will my business taxes affect my personal taxes

by Kevin O.

(East Orange)

I started a business and i have a tax id for the business. will this effect my personal taxes when i file with my wife.

Answer

Yes, assuming that you are using a pass-through entity like an LLC taxed as a partnership/sole-proprietor.

Your business income will be reported on your 1040 tax return you file with your wife, and will increase your taxable income.

If your business reported a loss for the year, then your business losses will reduce your taxable income.

Related Questions

  • I just formed my LLC in September of this year. I have yet to make a profit due to still…