There is a lot fanfare around limited liability companies. Everyone seems to have one, whether you’re a dog walker or a welder, a baker or a banker, a taxidermist or a taxi driver. The point is limited liability companies are ubiquitous. So, because they are everywhere, it’s a little discouraging to see so many people form these companies without understanding their basic underlying tax implications. This article deals with how to prepare taxes for a single member limited liability company, with the most common forms highlighted – Form 1040, Schedule C and Schedule SE, along with a mention of Schedules 1 and 2. We’re therefore leaving out a detailed description of the form that accounts for depreciation, Form 4562, Depreciation and Amortization, along with a detailed description of Form 8829, Expenses for Business Use of Your Home, also called the “long form” home office deduction. Those two forms are outside the scope of this rudimentary explanation of the simplest LLC return preparation. Pages and pages could be written on depreciation alone. For our purposes we just want to give a simple overview.
First a little background. The IRS does not categorically recognize LLCs for tax purposes. It only sees a company as a sole proprietorship, partnership, C corporation, or S corporation. When a person has formed a single member LLC, which is the case when the company is owned by a single person, the IRS recognizes that LLC as a sole proprietorship, no different than if the taxpayer had started a company without any government-registered formation. The IRS deems this type of LLC a “disregarded entity” for tax purposes, again, harkening back to the notion that it is no different from a federal tax standpoint than the simplest sole proprietorship. Finally, when a married couple forms a limited liability company as the only two owners, the couple has the option to treat themselves as one owner, and therefore, under the circumstances, the LLC is still considered a single member LLC, and hence a disregarded entity.
Down to brass tacks (or maybe it should be tax!). The first form in any single member limited liability company tax return is the Form 1040, which is the generic main federal tax form from which all other numbers from all other forms collectively constituting a tax return flow into. Not much more has to be said about the 1040 because it’s a necessity for all individual’s federal tax returns.
Next, we start actually accounting for the income and expenses of the LLC itself using Schedule C, Profit or Loss from Business. This form serves the purpose of articulating and summing the gross revenue and business expenses categorically. The Schedule C breaks down business expenses into over 25 different facets from advertising to wages paid to employees. As a result, this form is relatively straightforward and self-explanatory.
The two business expenses found in Schedule C that are less intuitive are the car and truck expenses and the business use of your home, or the “home office deduction” as the latter is generally dubbed. Car and truck expenses are alternatively taken at the per mile allowance, accounted for initially in miles on part four of the form and then translated into a dollar figure by multiplying the per mile allowance rate and then taking that figure and filling in line 9 in part two. For tax year 2019, at the time of this writing, the per mile allowance for each business mile driven is 58 cents. Alternatively, one can choose to total the actual expenses incurred for the use of your vehicle for business purposes, things like fuel costs, repairs, maintenance, and depreciation. Note though that you cannot depreciate your vehicle that you use for your business and take the per mile allowance. Therefore, depreciation of your vehicle is only available when taking the actual vehicle expenses. Also, the home office deduction can either be taken “long form” using Form 8829 or by using the simplified method found on Schedule C itself, which is currently five dollars per square foot of space used in your home for strictly business purposes, up to 300 square feet.
The end result of proper preparation of Schedule C is a net profit or loss, which is articulated on line 31 of the form. Take the amount found on line 31 and enter that same number on Schedule 1, line 3, and thereafter incorporate Schedule 1 in the rest of your return. Furthermore, also use the figure on line 31 of Schedule C and translate it to line 2 on Schedule SE, Self Employment Tax. For the purposes of this article, we’ll only go into detail on section A of Schedule SE, the “Short Schedule SE,” due to the fact that most taxpayers qualify for its use over the “Long Schedule SE.”
As you probably have heard, those that are self-employed with their own businesses must pay both sides of FICA, meaning they must pay for both the employer and employee portions of Social Security and Medicare taxes. Schedule SE allows for the tabulation of these taxes. From line 2 of Schedule SE, you’ll most likely drop down and mark the same amount on line 3. To get an amount on line 4, multiply the amount on line 3 by .9235, and then multiply the amount you got on line 4 by .153 to obtain the total self-employment tax owed, and enter that amount on line 5. Also use this figure on line 5 and enter it on Schedule 2, line 4. Note that even though we have, up until this point, figured the total amount of your self-employment tax, you are still not finished preparing Schedule SE. The last part comes when you multiply the amount on line 5 by .5, thereby giving you the amount of your deduction for one-half of the self-employment tax, which should then be entered on Schedule 1, line 14.
While not an all encompassing explanation of tax preparation for a single member limited liability company, if you use the information in this post, you will successfully figure your LLC’s profit (or loss), along with your self-employment tax obligation and your self-employment deduction. Note though that you should expect to have to do more work in preparing your return, as this article does not cover all aspects of preparation of your Form 1040, or other aspects of a more complicated return with additional forms not discussed herein.
If you’re having problems preparing your single member or multiple member LLC tax return, or have problems with any tax return, or have any tax problem, contact Dino Tax Co at (713) 397-4678 or email us at email@example.com. The initial phone consultation is always free. Also, consider liking us on Facebook: www.facebook.com/dinotaxco.