Starting your own business and taking control of your company’s destiny is an admirable feat.
However, owning a business also comes with significant responsibilities, such as fulfilling tax obligations, including tax filing.
Take a look at this article to discover everything you need to know about filing taxes for an LLC in the United States for the first time.
Guide on the Tax Regime for Foreign-Owned LLCs in the United States
In tax matters, an LLC with foreign owners is classified as a foreign-owned enterprise. This entails different tax treatment compared to companies owned by U.S. citizens.
Under IRS regulations, LLCs are considered “Pass-Through” entities. This means that the taxes that must be paid pass directly through the company and fall on its owners.
In many cases, LLCs often do not pay taxes if they do not meet the ECTB criteria, which means being involved in regular and substantial business activities or having a local agent residing in the United States. If they meet these requirements, then they must pay taxes.
What’s Needed When Filing Taxes for an LLC?
To prepare your company’s tax return, you will need to have various financial documents from the year at hand:
1. Financial Statements:
- Income statement.
- Balance sheet.
- Cash flow statement.
2. Information about Your Company:
- Industry to which it belongs.
- State in which your business operates.
3. List of Owners:
- For sole proprietors or single-member LLCs, you will need to complete Schedule C for business income or losses (Form 1040).
- For multi-member LLCs or partnerships, you should complete Form 1065 for the LLC or partnership. Each partner must submit a Schedule K-1 along with their personal tax return.
Your profits (or losses) are your company’s income minus expenses.
In most cases, your share of business profits is included in your personal tax return along with your personal income, deductions, and credits. This figure will determine your taxable income.
Note: If you overpay, don’t worry. The government will notify you if you’ve paid too much and refund the extra money. If you owe more taxes than you’ve already paid, you will need to pay the difference.
What’s the Difference Between Filing and Paying Taxes?
Filing taxes and paying taxes are two important aspects of the tax process, but they have different meanings:
Filing Taxes
It refers to officially reporting your income, expenses, deductions, and other relevant financial details to the government on a tax return form. This declaration provides a clear view of your financial situation for calculating the taxes you need to pay.
You need to complete and submit a tax return form (such as Form 1040 in the United States) before the deadline set by the tax authorities.
In this declaration, you have to detail your income, deductions, and tax credits, which ultimately determine the amount of taxes you owe to the government.
Paying Taxes
It involves remitting the funds owed to the government, whether to the Internal Revenue Service (IRS) in the United States or other tax authorities in different countries.
These funds are used to finance public services and government programs.
After calculating the amount of taxes you must pay (based on your income, deductions, tax credits, etc.), you need to make the payment to the government by the established due dates.
Expenses You Can Deduct from Your LLC Taxes
Deducting expenses from your taxes is an important strategy to reduce the tax burden.
Now, we’ll show you the types of expenses that can typically be deducted in tax returns:
1. Business Expenses
- Office Supplies: Items like paper, pens, and computers used for work.
- Business Travel: Expenses for transportation, accommodation, and meals while traveling for business reasons.
- Vehicle Expenses: Mileage related to business travel and, in some cases, the cost of operating and maintaining a commercial vehicle.
- Office Rent: Payments for renting your commercial workspace.
- Salaries and Benefits: The wages paid to employees and the benefits you provide, such as health insurance and retirement plans.
- Courses and Training: Costs of educational programs or training related to your industry or business.
- Insurance Premiums: Payments for health, dental, and vision insurance premiums for yourself, your spouse, and children.
- Donations: Donations to charitable organizations are generally tax-deductible.
- State and Local Taxes: You can deduct certain state and local taxes paid during the year.
- Hiring a tax agent
- Home office expenses (services or rent)
- Marketing and advertising
1. Salary and Benefits:
2. Education-Related Expenses:
3. Medical Expenses:
4. Contributions to Charitable Organizations:
5. Tax-Related Expenses:
6. Others
It’s important to keep a detailed record of these expenses, and you should also ensure compliance with the specific tax rules of your country and state.
Consulting a tax accountant or specialist can be beneficial to optimize tax deductions according to your financial and legal situation.
It’s Time to File Taxes. What to Do?
At this stage, you need to decide whether you want to handle your tax return on your own or if you prefer the assistance of a professional.
If you choose to do it yourself, you can use tax software on your computer. These programs will guide you through the process, asking you key questions and helping you complete the return before submitting it.
Another option is to fill out paper forms and send them to the Internal Revenue Service (IRS).
Make sure to have all your financial documents in order: financial statements, receipts, and any other documents supporting your income and deductions. Additionally, provide accurate and verifiable answers to any questions that may arise during the process.
If you prefer professional assistance, an accountant or tax preparer can take care of the entire process for you. At Rex Legal, we are fully qualified to assist with your business tax return.
We are well-versed in tax laws, and we will help you maximize your deductions and ensure compliance with all regulations. Contact us here.
Tax Obligations for Corporations
When an LLC chooses to be taxed as a corporation, the default choice is to be treated as a C-corporation.
In this situation, the IRS considers your company as a separate taxpayer.
As a result, the company must report all its annual income and deductions on Form 1120 and pay the corresponding income taxes.
However, an entity classified as a corporation has the option to elect S-corporation tax treatment (provided eligibility conditions are met).
Tax Obligations for Single-Member LLCs: What You Need to Know
Single-member LLCs are treated similarly to sole proprietorships when it comes to taxes. For the IRS, the LLC is not considered a separate entity from the owner; it is treated as a ‘Disregarded Entity.’
In practice, this means that the LLC’s tax information is generally reported along with your personal tax returns using Schedule C. The profits or losses of your business are included with other income on Form 1040.
Annual Obligations for LLCs
Each year, LLCs must fulfill a series of financial and legal responsibilities, including:
1. Paying the Annual Fee: This involves paying the required annual fee to maintain the active status of the LLC. This amount varies by state and is essential for the LLC to continue operating legally.
2. Renewing the Registered Agent: LLCs must renew the designation of their registered agent. The registered agent serves as the official point of contact between the company and the state, receiving legal documents and important notifications on behalf of the LLC.
3. Filing an Annual Report: Filing an annual report involves providing updated information to the state. This may include details about directors, managers, or members of the LLC, as well as changes in the company’s structure. It is a way to keep the state informed about the composition and operation of the company.
4. File Your Tax Return: LLCs must file an annual tax return with the IRS. Depending on the chosen tax structure for the LLC, such as a C Corporation, S Corporation, or Limited Liability Company (LLC), tax obligations will vary. It is crucial to accurately report the income, deductions, and other financial aspects of the business on the tax return.
My business didn’t make a profit; do I still need to file taxes?
If your business didn’t generate income (or had losses), you likely don’t have to pay taxes. However, the IRS might require you to file a tax return.
Even if you didn’t make a profit, we advise you to file your tax return. Likewise, if you don’t owe money, the IRS won’t penalize you for not filing.
Who can assist me in filing taxes for my LLC?
Good news! At Rex Legal, our experts can guide you through the complex tax processes.
If you’re looking to simplify your business’s tax filing and ensure compliance with all legal requirements, don’t hesitate to contact us. We’re here to help!