Need help with LLC Startup and Tax info

Discussion in 'Accounting and Taxes' started by bsdubois00, Jun 16, 2011.

  1. bsdubois00

    bsdubois00
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    So I currently run a website that is a public forum and my partner and I are looking to create an LLC for the website. We are in the process of drawing up the LLC Operating Agreement right now but curious about how the tax part works. This will be a partnership - with me being 51% owner and him 49%. How will the taxes work - will we basically split the income and expenses on our personal tax returns?

    Any help and advice is appreciated.
     
  2. ArcSine

    ArcSine
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    Yes. In your OA you'll define how the profits and the losses are to be allocated. These are frequently the same, but need not be. Some partnerships allocate losses differently from the way in which they allocate profits.

    The LLC will prepare a tax return at the conclusion of its fiscal year (federal, and also likely a state return). Included in this return will be forms called Schedule K-1, one for each partner. On the K-1s the LLC shows how much of its various tax items (income or loss, Section 179 deduction, nondeductible expenses, and others) is allocated to each partner.

    Each partner then reports his or her allocable share of each item, as shown on the K-1, on his or her personal return.

    Very simplistically, assume you've decided on a 51 / 49 split on all items. LLC has $100 of net taxable profit in a given year, and has no other items (capital gains, etc.). One partner would report $51 of taxable income on his 1040, and the other partner would report $49 on his.
     
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  3. bsdubois00

    bsdubois00
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    Thanks a bunch.

    One more quick questoin.

    Say we have 1,000 in income - and 750 in advertising or some other write off type expenses. Would each partner claim their % of INCOME ontheir personal taxes and then ALSO claim their % of DEDUCTIONS/EXPENSES on their personal taxes?
     
  4. ArcSine

    ArcSine
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    No, for most items of income and expense, it's simpler than that. From your example, the 1,000 income and 750 expense is netted on the LLC's return, creating a 250 net taxable income. (The LLC return has something similar to an income statement, on which you'd see the 1,000, the 750, and the resulting net of 250.)

    Assuming a 51/49 allocation, the partners would then report 128 and 122, respectively, of net income on their personal returns.

    It's true that certain types of income (interest, capital gains, e.g.) and deductions (Section 179, charitable contributions, e.g.) are not part of this netting process, and are reported separately by the partners. But most of the normal operating income and expense items will be netted on the LLC return, leaving the partners to only report their respective shares of the single net number on their own 1040s.
     
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