The Internal Revenue Service has yet to create a tax return for LLCs. The income and loss that a LLC generates is subject to federal taxation; however, the government requires you to utilize a corporate, partnership or personal income tax return to report the LLC’s earnings and losses. If the LLC receives corporate treatment for tax purposes, LLC members are precluded from reporting the income on a personal tax return.
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If you treat a LLC as a partnership for federal income tax, members must report all of the business’ financial gains and losses on a personal tax return. For tax purposes, the IRS imposes all partnership rules on the LLC and its members. Partnerships must report all financial activity of the business on IRS Form 1065. Additionally, the partnership must provide each partner with a Schedule K-1 that itemizes respective shares of income and expenses. When you file a personal income tax return at the end of the year, you must include all amounts that the partnership allocates to you on the K-1 and pay the appropriate tax.
Passive Activity Losses
The IRS does not allow you to deduct LLC losses from other income on the personal tax return if you do not materially participate in the operations of the LLC. Material participation requires that you provide the business with a minimum of 500 hours during the current tax year, provide 500 hours of service per year for five of the last 10 years, or provide 500 hours per year for any previous three tax years if the LLC is a service-oriented business. If you do not meet one of these three requirements, you can only use losses of an LLC to offset future business income.
The IRS disregards the LLC entity if only a single member exists. This requires you to report all income and expenses of the LLC on a personal tax return. You accomplish this by reporting all LLC profits and losses on the Schedule C attachment to IRS Form 1040. If you are the sole member of multiple LLCs, you must file a separate Schedule C for each business that generates at least $400 of earnings during the year.
Net Operating Loss
LLC members who include a net operating loss from business operations on a personal income tax return have the opportunity to reduce other taxable income by the amount of the loss. If you have insufficient income in the current year for the NOL to offset, you can first use the NOL in the prior two tax years, and the remaining balance against income in up to 20 future tax years. Although you include the NOL on a personal tax return, you must generate the NOL solely from the LLC’s operations or from other business activities you engage in. For example, if you claim personal itemized deductions that exceed taxable income, the excess deductions do not create or increase a NOL you generate from the LLC.