LLC Tax Accounting Options

Many people would find LLC taxation pretty easy if only the default rules were used...

However, you don't have to use the default tax treatment for an LLC. You can elect to opt out of the default tax treatment and choose to be taxed as a corporation.

How to Elect a Different Tax Treatment

Getting treated as a corporation occurs after the LLC and its owner(s) proactively elect to be treated as a corporation.

To elect to be treated as a corporation, the LLC and its owner(s) file an 8832 form. To elect to be treated as an S corporation, the LLC and its owner(s) file a 2553 form.

Both forms are available from the www.irs.gov website.

An important point: If an LLC elects to be taxed as a corporation or S corproation, the LLC is still an LLC. (This is confusing, I know.) But for income tax purposes only the LLC is treated as a corporation or S corporation.

S Corporation vs. C Corporation Election

Let me briefly delve into something already mentioned on this page. There are actually two sets of rules for how the tax accounting works for a corporation.

The usual set of rules appear in a chunk of the tax law called "Subchapter C." Large publicly-held corporations and many other smaller corporations use the Subchapter C rules.

Many small corporations and many small LLCs electing to be taxed as corporations, however, use an alternative set of tax accounting rules that come out of another chunk of the tax law called "Subchapter S." If you've talked to many experienced small business owners, you'll have undoubtedly heard them talk about Subchapter S. Businesses that use the Subchapter S rules, often called S corporations, pay no corporate income tax and often save their owners lots of self-employment tax.

Note: I provide tons of information about S corporations and S corporation taxation at a sister web site, S Corporations Explained. If you're thinking about making an election to opt out of the default tax treatment for an LLC, you may also want to read this website's FAQ article: How S corporations save taxes

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Tools for Saving Taxes

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Tax laws provide active real estate investors with giant tax planning loopholes. A little upfront planning on your part could save you thousands a year...