LLC Option Myths

Today TaxMama® hears from Pistachios, who asks a good question. Basically, he’s a trucker and wants to know what tax entity to use for his new LLC.

license plates - lots of them

Dear Family,

Let’s just clear up some myths about LLCs and the rush to make entity changes.
The answer is a bit long, so if you are thinking of making this decision, please read the whole answer – including my recommendation, in TaxMama’s® TaxQuips Forum.  Here are the high points:

As an individual, you have the following choices when you have an LLC:

a) You can be a disregarded entity

  • This means you file a Schedule C as part of your personal Form 1040 tax return.
  • You can take all your deductions on the Schedule C
  • Your business qualifies for the new 20% qualified business income deduction – Sec 199A.

b) You can be an S corporation.

  • That means filing a separate corporation tax return, Form 1120S,
    • having a payroll (even if you’re the only employee), and
    •  issuing a Schedule K-1 to include in your personal Form 1040 tax return.
  • The S Corp doesn’t pay taxes – you do.
  • You can have the corporation pay all the expenses and deduct them.
    • If you pay anything out of pocket, you MUST submit an expense report and have the corporation reimburse you, in order for the corporation to take the deductions.
    • AND the reimbursement arrangement must be defined in the corporate minutes.
  • Your business qualifies for the new 20% qualified business income deduction – Sec 199A – which gets passed through to your 1040 and you sort out the numbers there..

c) You can be a C corporation

  • That means filing a separate corporation tax return, Form 1120,
    • having a payroll (even if you’re the only employee).
  • The corporation pays taxes on the profit.
  • They issue you a Form W-2 to report your income on your personal Form 1040 tax return.
  • You can have the corporation pay all the expenses and deduct them.
    • If you pay anything out of pocket, you MUST submit an expense report and have the corporation reimburse you, in order for the corporation to take the deductions.
    • AND the reimbursement arrangement must be defined in the corporate minutes.
  • Your business does NOT qualify for the new 20% qualified business income deduction – Sec 199A.

You can read the recommendation in the TaxMama’s® TaxQuips Forum.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion