LLCs Should Consider Corporate Tax Choices C
How is a limited liability company taxed by the IRS? What shades and options exist? Many entrepreneurs ponder such considerations when deciding on a business structure for their startups. It is therefore likely that you have been – or will be – the recipient of these questions from your customers.
By default, an LLC is taxed as an overlooked entity – either as a sole proprietorship or as a partnership (depending on whether it is owned by one or more members). However, one of the most attractive features of the entity (second only to the benefit of personal liability protection) is its tax flexibility.
It is not uncommon for qualifying LLCs to file for S corporation tax. After all, filing Form 2553 preserves the tax reporting simplicity of LLC tax treatment while helping entrepreneurs minimize their burden. personal tax on social security and health insurance. (i.e. salaries and wages of members are subject to FICA while profit distributions paid to members are only subject to income tax).
But what about LLCs that want to be taxed as C corporations? What are the possible benefits and what should business owners think about?
Reasons an LLC may want to choose C corp tax treatment
While most limited liability companies prefer their default tax treatment or S corp choice, some may benefit from corporate tax treatment. Here are some of the considerations that can make taxing C corporations attractive:
- Fewer limitations on certain types of deductions (such as employee life and medical insurance, child care allowances, pension plans and education reimbursements);
- Perhaps a lower overall tax burden if the corporate tax rate is lower than the individual tax brackets of LLC members;
- More flexibility in determining the company’s fiscal year, potentially making it easier to carry profits and losses forward or backward; and
- Fewer ownership restrictions than S corporations.
Tax advantages and consequences to consider
Effective January 1, 2018, the Tax Cuts and Jobs Act made changes specifically applicable to LLCs and C corporations. Clients should consider the following issues when considering a choice tax C corp.
- The C corporate tax rate became a flat rate of 21%. (Previously, corporate tax rates ranged from 15% to 39%).
- A 20% income tax deduction for flow-through entities (for sole proprietorships, partnerships, corporations and S corporations) has been introduced. Note that it is limited to specific industries. The deduction is phased in to $326,600 of adjusted gross income for married taxpayers filing jointly and $163,300 for all others.
In addition to the changes to the TCJA, LLC members must also consider whether the potential double taxation of C corp profits will affect them and their business financially.
Questions and answers about C corp tax treatment for LLCs
Below are some questions posed by attendees of a recent webinar. I thought it might be useful to address them here to give you something to think about when clients approach you about them.
1. Is it free for an LLC to file IRS Form 8832 to elect to be taxed as a C corporation?
Yes! But business owners may incur minimal costs if they use an accountant, lawyer, or online business document filing service to prepare and submit the form on their behalf.
2. How long will it take for the new election to take effect?
Processing times vary. Lately there seems to be a longer lead time. However, the elections are effective as early as 75 days before the date of filing with the IRS.
3. Can an LLC become taxed again as a sole proprietorship or partnership after electing C corporation tax treatment?
Yes he can. But the IRS has a 60-month limitation rule for LLCs that started out as a skipped entity and then filed Form 8832 to transition to C corp taxation. An LLC cannot revert to its default method of taxation until 60 months after its election becomes effective.
Some exceptions exist to this rule. For example, the rule does not apply to a newly formed LLC that has elected the C corporation tax treatment in effect on the date of its formation. In addition, the IRS may allow an LLC to change its election classification before the end of the 60-month period if more than half of the LLC’s ownership interest (as of the effective date of the election) belong to people who did not have interests. in the corporation on the effective (or filing) date of the corporation tax election.
4. If a multimember LLC wants to file for C corporation tax treatment, do all members have to sign the change?
Yes. Form 8832 has a “Declaration of Consent and Signature(s)” section where members, officers, and managers of the LLC must sign their names.
Owners of a multi-member LLC who are considering making a C corp tax election should agree on the tax treatment and follow the rules on how it affects their business and their own personal tax returns.
If an LLC files for C Corp tax treatment, all members of the company’s payroll will receive a W-2 from the company and a 1099-DIV for dividends paid to them.
The LLC taxed as a C corp remains an LLC
Clients should understand that electing the C corporation tax election for an LLC does not otherwise alter the compliance obligations of the underlying entity. When an LLC is taxed as a C corporation, it continues to follow the non-tax compliance rules and regulations for LLCs. For example, it is not required to appoint a board of directors or adopt regulations. LLC compliance requirements vary from state to state, so it’s critical that your business customers do their homework to understand their responsibilities.