I am just starting a new business with my husband. My husband will continue to work at his current job while I work to grow the business. I have filed to organize the business as an LLC. I have a few tax questions that I seek some opinions on.
1) I have not yet made my corporate tax election for the LLC and I understand that a variety of options are possible. Since I am starting out with a small amount of seed money and am not paying myself a salary until the business is profitable (which could take some time), it seems to me that the only realistic tax option for me is to elect to tax the LLC as a partnership, since I am not an employee of the business. True?
2) Typically, my husband and I file a joint tax return for our personal taxes and last year we were subject to the dreaded AMT. We will likely be subject to AMT again on next year's return. I assume that because we are subject to AMT, it really does not matter that much whether I have deductible business expenses as the AMT will wipe them out anyway. Correct?
You seem to be confusing employee business expenses, reported on Schedule A as Miscellaneous deductions, and thus not allowed for AMT, with self employment income and expenses, reported on Schedule C for sole proprieors and generally allowed for AMT.
If you file as a partnership, the partnership income/expenses are reported to you on the partnership'schedule K/K-1 and also generally allowed for AMT.
You need to decide if you are actually a partner of this partnership or if he will be operating the business as a sole proprietorship.
Your form of business is a legal decision, although your decision affects and is affected by tax consequences.
you don't have to make an election (check the box) if you want to be considered a partnership--that is the default classification for a multi-member LLC. Be aware that since you have already formed the LLC, this business cannot be considered a "qualified joint venture" where husband and wife both file Schedule C's for the same business. Save yourself some grief later on and make sure you know what entity is best for your business before you apply for an EIN. Also, you would only pay yourself a salary if you were a C or an S corporation. Good luck.
Thanks for your comments! I need to do some more research on Schedule C. I am not a sole proprietor as my husband is a member of the LLC along with me.
Acutually, the way I read the above, it's more likely that she (the OP) is the sole proprietor, assuming it's a full time effort for her while her husband is mostly working at an unrelated job.
I am not sure what the threshold is of spousal participation in a business before it would be incorrect to report it as a sole proprietorship.
According to Nolo Press, a spouse can "volunteer" to work for the business, and have it remain a sole proprietorship; but if the "volunteer" work becomes frequent or regular, or the "volunteer" spouse is in contact with the public or signs documents on behalf of the business, then it is no longer a sole proprietorship and must be treated as a partnership.
I know it probably seems like a waste of money you don't have, but please consult an accountant before you do anything else. You'll be able to get advice on setting up the business, how to track and treat expenses, and how to deal with your tax obligations. It will be cheap in the long run.
I used to be a tax collector and dealt with countless failing businesses which were in trouble from the beginning because they knew nothing about how to run a business.
My parents had a situation like that - my mother worked in my father's business. At that time apparently the IRS didn't care if the second spouse was considered an employee or not, no matter how much work she did, because filing a joint return pretty much equalized things.
The only real difference for them was whether withholding taxes were paid by the second spouse, allowing her social security to be higher when they retired.
The biggest differences I can see are SE tax, and possible qualified plan limits. The best case scenario is if each spouse as an active partner is able to make the maximum $49,000 (2009 figure, under age 50) deferral into a plan. One is however paying a large amount of SE tax if one is able to do this, and this scenario assumes a very successful business pulling in about $300K.
Without question, Phil has given you the best advice on this so far - you need to consult with a tax pro and discuss your options, now for the future.
Some states, like California, have a minimum fee for existing - I think CA is $800 a year. Other states don't.
Most states require a separate filing to keep the entity alive - MD charges $300 a year PLUS assess a personal property tax on business assets. BUT if you're a sole proprietor operating from home with less than $10K in assets, other than registered vehicles, this is waived.
LLCs, by default, are taxed as partnerships - assuming they have more than one member. They can elect to be taxed as either C or S Corporations, but doing so creates other issues. For example, it is VERY easy to move in and out of a partnership, taxwise. BUT it is more difficult if you've elected corporation status.
Also, most states have a requirement that corporations hold an annual meeting and maintain minutes and resolutions for major business decisions. Most LLCs are legally exempt from these rules, at least in MD (NOTE this doesn't mean they aren't a good idea, just that they're not required by law). So the question is if your LLC elects corporation tax status are you now subject to the more stringent corporate recordkeeping rules?
LLC with just one member are usually taxed at the individual level. Many times someone will say that a single member LLC files a Schedule C - this may or may NOT be true. For example, a single member LLC that operates a farm may file either a Schedule F or Form 4895 (I am NOT sure about that form number, don't hold me to it). Just like a SMLLC that operates a rental should file a Schedule E.
C corporations can elect a fiscal year easily, but SMLLCs, LLCs and S Corps can't do it so easily.
All Corporations, S & C, have to pay a reasonable salary to the owners if they are taking money out. So if your LLC elects corporation tax status you'll have to deal with payroll, payroll reporting and regular tax deposits. For LLCs & SMLLCs the owners are NOT eligible to take a payroll, instead they take distributions or guaranteed payments. Some tax pros say that ONLY guaranteed payments from LLCs are subject to SE tax, some say all distributions are subject to SE tax. The only thing that is really clear is that ALL net income from an SMLLC, other than a Schedule E, IS subject to SE tax.
Also consider that is relatively easy and cheap to go from a sole proprietor to a single member LLC, to a multiple member LLC, to a corporation. BUT it is costly and not easy to go the other way - if you elect to be treated as a corporation and decide later to unwind it you could be hit with phantom income for the value of the items you put in a year ago and now take out - these get treated as THOUGH they were sold, even when they weren't.
These are just the hot topics - before you get in over your head and make decisions, or fail to make decisions, that are critical to your future, you really should spend a few bucks and meet with a tax pro to discuss your options.
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