What About the LLC Tax Election?

The LLC tax election is important. Many new business owners don’t know that they have the ability to choose how their LLC will be taxed. Others just want to know how to make the choice. If you want to choose how your LLC is taxed, you need to file an LLC tax election.  Just the other day I  received the following question:

“I have a Wyoming LLC which filed Articles of Organization in 4/20/2011 and sat dormant until now. What do I do? My tax attorney said that the LLC should be considered a disregarded entity for tax purposes but you say when it comes to LLC tax election, we can select the way we choose to be taxed.”

This question raises a couple of important issues. First, the LLC tax election must be made when filing your LLC. If you do nothing and you have a single member LLC, you will be considered a disregarded entity for tax purposes. This means means that the LLC money will flow through and be taxed on your personal return. If it is a multiple member LLC, the default tax election is a partnership. If you want the advantage of being taxed as a corporation, you must make the election timely by filing the proper forms with the IRS.

LLC Tax Election = LLC Classified Corporations

If you decide to have an LLC taxed as a corporation, you must file an election with the IRS. If you want to have the LLC taxed as a C corporation you will file Form 8832. If you want to elect to have your LLC taxed as an S corporation, file Form 2553 with the IRS. The SS-4 form says the LLC must timely file Form 2553, and this is a requirement the IRS enforces.

Once you file the 8832 or 2553, make sure file a tax return each year even if your LLC does not make any money. This may seem silly, but it is the law and there can be trouble with the IRS if you don’t file. I have been called by folks who have neglected to file because they did not make any money in the LLC or corporation. Imagine their surprise when the IRS came against them for money they never made. They were charged a penalty of $195 per month per member/shareholder for each month the tax return was late. You can end up owing a fortune to the IRS even though your company never made a dime. Just don’t take the chance. If you don’t make any money in the LLC, still file a zero tax return.

If you want to change your LLC tax election, you can do it for the future.  You can change your LLC tax election once by filing at the first of the tax year. You cannot retroactively change your election. Once you change your LLC tax election you cannot change it again for 60 months.

The decision on how what LLC tax election to make is one you should make with the advice and help of an accountant. Ultimately it is a financial decision that should take into consideration what your business is and how it makes money. The important thing is to understand what your choices are and make the best choice for your business.

By Lee Phillips