Have you Made Your 2011 LLC Tax Election? The Deadline is March 15th

Each year the IRS gives LLC owners an open period to make any tax changes. The change period starts on January 1 and ends on March 15th. After that, you can still make a change to your LLC’s tax election, but you’ll have to do it a bit differently.

Why Change Your LLC’s Tax Election?

The reason you might want to change it is simple: taxes. You can do just about any kind of business through an LLC, but unless you also make the right tax election to go along with your business, you could be paying too much.

When LLCs are created, they have a ‘default’ classification. If your LLC has a single owner, or a married couple who file a joint return, that default is ‘single member disregarded.’ What that means is legally you’ve got an LLC, with all the asset protection LLCs offer, but when it comes to taxes, you’re operating like a sole proprietorship. So, if your LLC is operating an earned income business (i.e., you’re selling something, or providing a service through it), you’ll report its income and expenses on a Schedule C to your personal tax return. If your LLC is used to operate a passive-income business (receiving rent, for example), then you’ll be preparing and filing a Schedule E to go with your personal tax return.

But, for those of you who prepare Schedule C, you know that there’s a hidden tax hit in the form of self-employment tax. All of your net LLC income is taxed once, at your personal federal income tax rate, plus it is ALSO hit with the full self-employment tax rate of 15.3% (although for 2011, thanks to a December tax bill, that’s reduced to 13.3%).

But, if you were to reclassify your Schedule C LLC as an LLC making an S Corporation election, you could eliminate that self-employment tax. Instead you would need to run a payroll for part of your income. Yes, you would have income and payroll taxes associated with that income, but the beauty of the S Corporation election is that you don’t have to take ALL of the income as payroll. You can usually divide that up into 50-50, with 50% coming as payroll and the other 50% coming as a profit distribution, which is NOT subject to payroll tax. For some of our clients, this one change can save them $10,000 or more each year.

To make the reclassification you need to file a form called a Form 2553 with the IRS on or before March 15th each year, to be applicable for that year. And March 15th is coming fast!

And, if you miss the deadline, all is not lost. The IRS has a late-filing option, which involves the same Form 2553 and a couple of extra steps. But here’s the thing. When you make that reclassification before March 15th, it sails through the IRS without a hitch. It’s automatically granted to your LLC. On the other hand, waiting until after March 15th to make the same election means that the IRS has discretion to grant or deny your request. Now most of the time they grant it. Realistically, it’s granted to about 95% of the late-filing requests. However, they don’t have to. Or, the IRS could give you a partial year, meaning you’d have to split up the LLC’s income into two parts, and file both a Schedule C return AND an S Corporation tax return. Either way you’d pay more, in taxes and in return preparation fees.

So, if you’re looking to reclassify your LLC for taxes, now is the time to act! And if you need help, we’re here for you. We’ve made literally hundreds of Form 2553 filings, on-time AND late, and we know how to get it done.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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