Considerations for Business Tax Preparation

Posted on October 6, 2015

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How Your Entity is Structured Impacts Your Business Tax Preparation

tax preparationSetting up a new business comes with many important decisions. One of the most critical is how to organize your entity for business tax preparation. If you are a limited liability company (LLC), you will file your taxes differently than other types of companies. A qualified tax accountant can help you make these decisions and guide you through correct tax preparation, but here are a few things you need to know about how to file your taxes correctly:

Tax Law for LLCs

The major difference between LLCs and corporations is their business tax preparation. Unlike corporations, an LLC is not taxed as a separate business entity. In an LLC, the profits and losses are claimed by each member of the LLC. These profits and losses are recorded on your personal tax return, and your business will not pay its own separate federal income taxes, though you may be responsible for an annual state tax.

It’s important to note that the IRS will treat your company as a sole proprietorship or a partnership depending on the number of members that are part of your LLC, and some may be classified and taxed as corporations. Your accountant can advise you about how your business will be treated.

Single Member LLC

If you are the sole member of your LLC, the IRS will tax your business as a sole proprietorship unless you have elected to be classified as a corporation. The LLC does not report the profits and losses and pay taxes, but instead you report them on your personal tax return using the Schedule C attached to your 1040 tax return.

Multiple Member LLC

If your company has more than one owner, the IRS will recognize it as a partnership unless you decide to be treated as a corporation. Your partnership will not pay taxes, but your LLC Operating Agreement determines how each member claims profits and losses on their personal tax returns. You will also need to use Form 1065 as a filing with the IRS that reflects the correct reporting process for income in your particular LLC, and each member of your LLC must receive a Schedule K-1 listing each member’s income, credits and deductions to be reported on their personal tax returns.

If your members decide to split the profits and losses in a way that is different than your member’s percentage interests, you’ll need to seek out guidance from your accountant or a tax lawyer. It will require a special allocation filing with the IRS.

Deciding on entity classification is one of the first big decisions you’ll make as a company. When you are organizing a new company, call on Bert Doerhoff, CPA, at AccuBiz. We have worked with many new businesses making decisions for business tax preparation, and we can offer solid guidance based on our years of experience. Call us today to set up an appointment.

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Posted in: Bookkeeping