LLC Taxation Based on Structure
An LLC files taxes based on its structure. Single member LLCs default as sole proprietors, income and expenses directly pass to the owners. Multiple member LLCs default as partnerships, passing income and deductions to partners and the IRS via Form 1065 annually. LLCs taxed as corporations file returns regardless of income, C-corps use Form 1120 and S-corps use Form 1120S, passing income to shareholders who then report income on personal returns. This avoids double taxation of earnings.
Tax Filing for Inactive LLCs
LLCs not filing as corporations may not need to file returns if there is no income. However, many states often require filing anyway and inactive LLCs may still need to file returns based on their tax status. Not filing may lead to penalties, back taxes, or suspension. Some states, like California, charge an annual fee to LLCs operating or organized within their borders, regardless of income.
Managing Losses and Write-offs
LLs with losses have options such as writing off investments, deducting expenses, or carrying losses forward. Worthless investments may qualify for write-offs on Form 8949, and operating losses can help lower or eliminate a tax burden. Most LLC structures allow owners to claim losses on their personal tax returns, however, C corporations are unable to pass losses directly to their owners’ returns.
Regardless of whether it’s mandated, filing taxes for LLCs with no income has its benefits, including establishing a history of deductions and maintaining compliance, especially if claiming tax-exempt status.