When forming a Limited Liability Company (LLC), many small business owners question if they can choose to be taxed as a Subchapter S corporation (S corp). Yes, an LLC can choose to be taxed as a S corporation. Before making such a choice, however, there are some prerequisites that must be satisfied.
1. Must be a domestic corporation; 2. May only have persons, select trusts, and estates as stockholders; and 3. May not have more than 100 shareholders.
An LLC can choose to be taxed as a S corp by filing Form 2553 with the Internal Revenue Service (IRS) once it satisfies these requirements. It is crucial to keep in mind that the LLC must submit its election between two months and fifteen days of the start of the tax year in which it desires to be taxed as a S corp; otherwise, it will have to wait until the following year.
The fact that the company’s revenues and losses are passed on to the shareholders and are solely subject to individual taxation is one advantage of choosing S corp taxation. This indicates that the business does not personally pay federal income tax on its earnings. Instead, the stockholders’ individual tax filings provide information on the gains.
S corporations are nevertheless subject to some taxes, such as built-in gains tax on assets that increased in value prior to the S corp election and payroll taxes on employee wages. Additionally, S corps are subject to a corporation business tax in New Jersey.
S corporations are permitted to deduct losses from their taxable income, but the deduction is only worth the shareholder’s basis in the business. Losses incurred by S corporations are deducted in New Jersey on both federal and state tax filings.
If a S corporation incurs a loss, it could be allowed to carry the loss forward to subsequent tax years or back to earlier tax years. This may assist the business in offsetting any future gains and thus lowering its tax obligation. The particular guidelines for carrying losses back or forward, however, can be intricate and should be examined with a tax expert.
Finally, a separate S election is not necessary in New Jersey. An LLC is automatically classified as a S corp for New Jersey tax purposes once it has made the federal decision to be taxed as a S corp. The business must nevertheless submit an annual New Jersey S Corporation Business Tax Return.
In conclusion, if an LLC satisfies certain requirements, it may decide to be taxed as a S corp. Although S corp taxation has some tax advantages, it also has more rules and levies. Anyone thinking about making this choice should speak with a tax expert to see if it is the best course of action for their company.
You must do the following actions in order to incorporate in New Jersey: 1. Pick a distinctive name for your corporation and check the New Jersey Division of Revenue to see if it is available. 2. Submit the Certificate of Incorporation to the Division of Revenue in New Jersey. The Internal Revenue Service (IRS) can provide you with an Employer Identification Number (EIN). 4. Register your business with the Enterprise Services and Division of Revenue in New Jersey. 5. Obtain all licenses and permissions necessary for the functioning of your business in New Jersey.
Keep in mind that these stages may change based on the sort of organization you want to create and the sector you plan to work in. To make sure you take all required actions in the proper order, it is preferable to seek advice from a legal expert or a business formation agency.
Yes, you might be able to file an IRS Form 2553 to become a S Corp retrospectively. The cutoff for making this choice, nevertheless, is typically 2 months and 15 days after the start of the tax year for which the choice is to be applied. For instance, the deadline to submit Form 2553 is March 15, 2021, if you want the S Corp election to take effect for the 2021 tax year. There are certain exceptions to this deadline, but it’s crucial to speak with a tax expert to see if your LLC qualifies for retroactive S Corp classification.