Overview of LLC Taxation Options
An LLC can elect S corporation status if IRS requirements are met. Choosing S corporation status saves taxes for some LLC owners. For others, an S corporation adds complexity without benefits.
Revoking S Corporation Status
To revoke S corporation status, send three items to the IRS: Letter of Revocation, Statement of Consent for S Election Revocation, and IRS Form 8832. Call the IRS at 800-829-4933 with questions.
Benefits and Considerations of S Corporation Election
Using an S corporation designation just for tax purposes is possible. Possible benefits include cheaper startup costs and simplified operations. However, heavy IRS scrutiny to ensure payments are not mischaracterized is a disadvantage.
- LLC members must receive reasonable salary based on role.
- Remaining profits distributed as dividends.
- LLC members don’t pay self-employment tax on income received.
Transitioning to S Corporation Status
To change LLC tax status to an S corporation, file Form 2553 with the IRS attached to a 1120S return S corporations must file yearly. LLCs taxed as an S corporation must file Form 2553 when filing taxes to elect the status.
- Specifically, LLCs taxed as an S corporation can change status anytime by filing Form 2553.
Differences in Tax Treatment
LLCs electing S corporation taxation have different treatment than LLCs with default pass-through taxation. By default, LLC income passes through to owners who pay self-employment taxes. An S corporation owner is considered an employee.
Tax Implications
An LLC electing S corporation status offers potential tax savings in the right circumstances. S corporation status allows the benefits of LLC limited liability and favorable taxation.
Summary
An LLC can elect S corporation status if IRS requirements are met. Choosing S corporation status saves taxes for some LLC owners. For others, an S corporation adds complexity without benefits.