If you have a limited liability company (LLC) that had no income in the past year, you’re probably wondering what you’ll need to do at tax time. You may have to file taxes–it depends on your situation.
This handy guide lays out all you need to know about filing taxes for an LLC with no income.
How LLCs Are Taxed
LLCs are pass-through entities, which means income passes through the business to the owners, who are known as members.
If the LLC has only one member, it’s taxed as a sole proprietorship. If the LLC has more than one member, it’s taxed as a partnership.
But LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. You can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings are greater than those additional expenses.
How to File Taxes if Your LLC Is Taxed as a Sole Proprietorship
You’re taxed as a sole proprietorship if you have a single-member LLC. All income and losses are reported on your tax return on Schedule C.
If your LLC generates more than $400 annually, you must report it on Schedule C of your tax return. However, if your LLC has no income and activity, you’re not required to report that.
However, if you file a personal tax return, you may need to file a Schedule C for self-employment income and pay self-employment taxes. For example, if your LLC had expenses for the year but no income, you’d have a loss. Therefore, you should file taxes and report the loss to reduce your tax burden.
Some states require you to file state taxes even if your LLC has no income, so check your state laws or talk to a local tax professional.
How to File Taxes if Your LLC Is Taxed as a Partnership
A multi-member LLC is taxed as a partnership and files Form 1065, a U.S. Return of Partnership Income, for informational purposes only. Individual members report income and losses on their tax returns. A partnership return is not required if the LLC has no income or losses and no activity, a partnership return is not required.
Again, members still may need to file a Schedule C for self-employment income and pay self-employment taxes. Furthermore, some states require you to file state taxes even if your LLC has no income.
How to File Taxes if Your LLC is Taxed as a Corporation
You can elect to have your LLC taxed as a C-Corp by filing Form 8832 or an S-Corp. In an S-Corp, income passes through the business to shareholders. Thus, the business is not responsible for corporate tax.
However, you do have to file form 1120-S, whether your LLC had income or not.
LLCs choose to be taxed as C-Corps must file Form 1120, a U.S. Corporation Income Tax Return. LLCs taxed as corporations will pay corporate taxes on the LLC income, and members will pay taxes on dividends they receive. Form 1120 must be filed whether your LLC had income or not.
LLCs taxed as sole proprietorships or partnerships are not required to file federal LLC tax returns if the LLC has no activity. On the other hand, some states require that LLCs file tax returns whether they have activity or not.
LLCs taxed as corporations must always file a federal tax return, regardless of activity. In addition, check your state regulations for state tax filing requirements for your LLC.
If your business has income or expenses, you must, of course, file taxes. You also need to be aware of state regulations since laws differ from state to state.
Not filing taxes or filing taxes incorrectly can lead to massive fines and additional penalties, so be sure you are aware of all the relevant laws and stay in full compliance. In addition, having a tax advisor is highly recommended to ensure your LLC can continue to do business uninterrupted.