LLC tax deduction - How to claim one?

The LLC tax deduction as a classification is not recognized by the federal government and therefore all entities who term themselves LLC or limited liabilities companies must figure out how to pay their federal taxes.

They have three options. They can file returns either as a corporation, a partnership or sole proprietorship. In fact, the federal government classifies certain LLCs as corporations and taxes them likewise.

These LLCs are the ones that have been formed under a State or Federal statute or under the statute of a federally recognized Indian tribe wherein they have been described either as a corporation, body corporate or body politic or a joint stock association. The same is true of businesses owned by state, foreign governments or entities described in section 1.892.2-T. Any Association formed under Regulations section 301.7701-3 is also seen as a corporation by the federal government as are insurance companies.

If an LLC is not a corporation then it can file Form 8832 and elect to conduct business either as a corporation or a partnership. A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership. Similarly, a business entity with a single member can choose to be classified either as an association taxable as a corporation.

If an LLC does not File Form 8832, the default rules come into play. The default rules provide that if the LLC has at least two members and does not specify itself as a corporation then by default it will be considered to be a partnership, and will be required to file taxes as one. Similarly, an LLC that has only one member will have to file taxes as a sole proprietorship.

It is therefore important for all LLCs to file Form 8832, and receive the tax benefits that accrue to them. Also, to get the maximum benefits the LLCs should take the help of tax consultants.