Thanks, Khalisha, for reaching out to us with this question. The answer can vary depending on your circumstances.
Limited Liability Companies (LLCs) are a widely used vehicle for protecting your personal assets from potential problems arising from your business -- thus the “liability” part in LLC.
Strictly speaking, the Internal Revenue Service generally considers one-member LLCs as sole proprietorships, and the LLC itself does not have to file a federal return. In fact, technically speaking, the IRS doesn’t even consider an LLC a taxable entity.
Instead, income -- such as from rental property or sales commissions – passes through the LLC to you as the sole proprietor (which I’m assuming you are here) or partnership, and you have to declare all LLC income, and losses, on your individual return.
You do that with Schedule C on your 1040 form. And, naturally, revenue that exceeds expenses from your real estate activities, in this case, is considered taxable profit.
Now, if you had income but it was less than your expenses, you should still include that in your tax return. For one, those losses often can be used to offset other taxable income. Keep in mind, too, that whoever paid you that income is likely to declare that as a business expense in their tax returns -- and send you a 1099 form -- and you want what they tell the revenuer to match what you say, too.
But there’s more. LLCs are actually a state thing, and you need to know the rules about reporting and filing for the state where you registered yours. Many, but not all, states require LLCs to file an annual report and pay an annual fee that can be nominal or significant, and there can be penalties for not complying.
But this all varies by state. For instance, New York requires no report but does have an annual fee of $25 to $4,500 depending on income. If you have no gain, no pain here. There’s no fee.
Lastly, you may not have to file a return at all if your income falls below the IRS threshold for the age and other status categories in which you fall. For instance, in 2020 the minimum for single filers under age 65 is $12,400.
Below that and you don’t have to file a federal tax return. But you might want to anyway if, for instance, you qualify for the earned income tax credit or have withheld taxes from an employer you want to claim as a refund.
So, it all depends on your situation. And, please, consult a tax professional to verify what’s the best strategy for you.
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