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Get Familiar with Your Taxes
No matter what kind of business you run or what kind of job you do, you need to get familiar with taxes. In particular, LLC taxation if you own and run your own business. Getting familiar with the ins and outs of LLC taxation will make your life easier as well as make your accounting much simpler. You will also be able to take full advantage of your filing opportunities.
LLC taxes are not a complicated matter, but you need to get at least somewhat familiar with tax law. For one, if you are operating a single-member LLC that is considered to be a sole proprietorship or if it is an LLC that owns rental properties you can do your tax return yourself fairly easily. To file your own taxes, all you need to do is add a Schedule C or a Schedule E to your regular 1040 return. A Schedule C is for business while the Schedule E would be specifically for a rental property.
IRS Default Rules
The IRS has come up with a few default rules because a limited liability company can decide how to handle its tax accounting. You can use these default rules until you decide on which accounting approach you are going to go with.
Read Up on LLC Taxes
It’s a good idea to read up on LLC taxes so that you will get more familiar with the topic. There are many variations, and you want to make sure that you catch everything. If you are a husband and wife who own and run an LLC and you reside in a community property state, you may be considered to be a one owner LLC. That also means that your LLC can be disregarded. This means that the business or real estate is irrelevant for tax accounting, or disregarded.
The IRS describes a disregarded entity as a business that is separate from the owner, but it will be disregarded as separate from the owner of the business for tax purposes. Two stipulations need to be met in order to be considered a disregarded entity. The business type has to be separate from the individual, or the business needs to be taxed through the personal tax return of the individual based on net income on Schedule C.
This separation from the owner is a good thing because it limits or separates the liability of the owner and the business against things like lawsuits and debts. Partnerships, corporations, and LLC companies are all different entities from their owners and need to be taxed apart from the owners on different tax forms.
There is an exception. A sole proprietorship which will require a Schedule C to be filed as part of the owner’s tax form is not considered to be separate. Basically, a disregarded entity is just about taxes and how the business files its business tax return.
If you are not sure whether or not your business us a disregarded entity, you should consult with your accountant, but you cannot choose to be a disregarded entity. It all depends on how your business is described.
Get a Professional’s Opinion
Even if you do your homework and read up on LLC taxes, it never hurts to get the help of an accountant. They will have the training and the expertise to lend you when it comes to doing your taxes so that you don’t miss anything or that you make a costly mistake. An accountant can walk you through the process of filing your LLC taxes and can also answer any questions that you may have.
A multiple member LLC will automatically default to a partnership, and that basically means that the income and deductions from this LLC will get reported on a partnership return. The return will then allocate the income and deductions among the members of the LLC. Every partner will receive a K-1 for the partnership, and this K-1 will show the share of the income and deductions that the partner. If only the default were used for taxes, LLC taxation would be pretty straightforward, but it gets more complicated than that.