LearnAboutLaw Staff July 2007
Owners of businesses often inquire as to whether organizing as an LLC offers any tax benefits. The following are some ideas on how an LLC can be organized in a manner that gives a net tax savings. As with any taxation or legal issue, you should seek professional guidance before putting in place any of the ideas set forth here.
• Dividends and Profits Are Taxed at a Lower Rate Than Salaries . Corporations and LLCs can pay their owners partially in dividends (profit distributions) rather than ordinary income. Dividends are taxed at a maximum rate of 15%. Income, on the other hand is taxed at a maximum rate of 35%. A corporation or LLC owner can take of his or her company’s profit in dividends rather than a salary, thereby reducing his or her tax burden. But the IRS is wise to the device, so you must check with your accountant first though, and you must pay yourself a reasonable salary before getting too generous with the dividends. For further detail, read Use S-Corp Dividends and LLC Dividends to Minimize Taxes.
• Dividends and Profits Are Not Subject to FICA . Furthermore, dividend and/or profit distributions are not subject to 15% Social Security and Medicare taxes as salaries are. Again, the same warnings apply.
• Shift Personal Income into a C-Corporation. A C-Corporation pays only 15% on its first $50,000 of annual income. An individual, however, pays 25% to 38% on his or her personal income $31,851, as well as 15% for FICA (2007 rates). And so, a C-Corporation owner in a high tax bracket can shift his or her first $50,000 of income into the C-Corporation, and can enjoy a significantly lower tax rate on that $50,000 of income. This works best in states with low income taxes. An accountant can help you calculate your tax savings accurately.
• Better Deductions for Losses . LLCs are not burdened by severe restrictions on operating and capital losses. Generally, losses can carry back 3 years, and can carry forward up to 15 years.
• Fewer Audits. Exact figures are disputed, but it is clear that the IRS conducts fewer audits on LLCs and corporations than it does on individuals.
• Medical Insurance . C Corporations (but unfortunately not LLCs or S Corporations) enjoy greater tax deductions for medical insurance premiums paid for an owner-employee. Individuals can only deduct 60% of the premiums, while an LLC can deduct 100% of the premiums.
• Higher 401K Deductions . Through a corporation or LLC, individuals can make higher contributions to 401K plans. Savings may be doubled with a corporate or LLC matching plan.
For information on the tax advantages of corporations, read Tax Advantages of Corporations.