A limited liability company or an LLC offers many tax benefits, including allowing the owner of the company to decide how they want their business to be taxed. This flexibility is allowed to LLCs because the Internal Revenue Service or IRS doesn’t have any special tax qualifications for them, which gives a business owner the freedom to choose how they would prefer to be taxed.
Today, we’ll look at some tax benefits you can avail of if you have established a limited liability company.
You Can Choose Between Four Different Ways of Taxation
A limited liability company has the option to choose between four different ways of being taxed. These four ways are a partnership, an S corporation, a C corporation, and a sole proprietorship.
If you are the sole owner of your limited liability company, you can choose to be taxed as either a sole proprietorship, a C crop, or a partnership. However, if you share the ownership of the company with others, you cannot be taxed as a sole proprietorship.
Factors To Consider When Choosing Taxation Method
There are a few factors you need to consider when you are looking at how you want your company to be taxed.
The very first thing you need to consider is tax rates. You have to evaluate whether it will be more beneficial to you and your business if the IRS treats your company as a corporation or a disregarded entity.
A disregarded entity means that the LLC is disregarded as being separate from the owner of the company. A disregarded entity is treated in the same way as a sole proprietorship when it comes to taxes.
If you decide to state your LLC as a disregarded entity, all the profits you earn from your business will be considered part of your personal income. This pass-through taxation will allow you to simplify your individual income tax returns.
However, if you choose a corporation status, then the IRS will tax your income at a lower corporate rate up to a specific amount.
You can benefit from tax deductions on legitimate business expenses, such as the cost of forming your LLC. All LLC members can report these tax deductions on their personal tax returns, thus saving them money on their taxes.
The number of deductions must be divided between the owners, like the profits of the company, based on the percentage of ownership each member has.
Suppose you want to save taxes on employee benefits such as life insurance, medical insurance, healthcare costs, disability, etc. In that case, it’s better to establish your LLC as a C Corp. Otherwise, these benefits will be taxable to the LLC members.
Furthermore, as an LLC owner, you will be qualified for the Qualified Business Income deduction. This deduction allows business owners to claim up to 20% deductions from the net income of their business, in addition to claiming deductions on ordinary business-related expenses.
If you’d like to consult with a tax professional about your business entity selection, contact us at Advance Tax Defense and Accounting. We’re an accounting and tax company, and we offer our expert tax planning and business financial planning services to all businesses in West Palm Beach, Florida. Get in touch with us today.