Inactive LLC Tax Filing: Everything You Need to Know
Inactive LLC tax filing requirements depend on the state in which the LLC is registered, as well as whether any income was received during the tax year.3 min read
2. LLC Corporations
3. Single-Member LLCs and Sole Proprietorships
4. Biggest Mistakes Made by Owners of Inactive Companies
Updated November 24, 2020:
Do Businesses With No Income Need to File Taxes in California?
Some LLCs elect for taxation as corporations, while others elect for treatment and taxation as partnerships. If an LLC elects for taxation as a partnership, it typically will not need to file a tax return if no income was generated during that taxable year. However, if the business has expenses that must be treated as deductions or credits, Form 1065 must be filed with the IRS.
The owners, called members, of an LLC don't need to file the Schedule C form if the business has no reportable income unless the members need to claim deductions or credits. However, even if a member doesn't file the Schedule C form, they still have to file Form 1040 to report any income from other sources.
When reporting income, an LLC can be categorized in one of three main ways:
- Single-member LLC (disregarded entity)
- LLC partnership
- LLC corporation
Corporations and LLCs are distinct and unique business structures. The member of an LLC may elect for taxation as a corporation. A corporation is required in every state to file an annual tax return, even if the business received no income or was inactive during the previous tax year.
If an LLC elects for taxation as a C corporation, the members must file Form 1120, the U.S. Corporation Income Tax Return, every year. If an LLC elects for taxation as an S corporation, the members must file Form 1120S, the U.S. Income Tax Return for an S Corporation, instead. Any member of the business who files Form 1120S must also report corporate income, deductions, and credits on a Schedule K-1, the shareholder's share of income, deductions, credits, etc.
Single-Member LLCs and Sole Proprietorships
When an LLC has only one member, the IRS automatically classifies it as a disregarded entity. In this way, it is similar to a sole proprietorship, which is also classified as a disregarded entity. Owners of disregarded entities must report all income on Schedule C, Profit or Loss from Business, found on the U.S. Individual Tax Return, Form 1040.
Biggest Mistakes Made by Owners of Inactive Companies
The Department of Taxation and Finance in the state of New York has recently started imposing penalties on inactive LLCs and corporations. This department is looking for companies that fail to file their tax returns due to claims of no business activity. When the members of the Department of Taxation and Finance find culprits that aren't filing business tax returns, they can collect filing fees, penalties, and interest, as well as turn the information over to the IRS for investigation on a federal level.
One of the biggest mistakes a business owner can make is assuming that no business activity during a year means the business doesn't have to file a tax return. For corporations and LLC owners, this is not the case. If you're not sure whether your business needs to file, consider hiring an experienced accountant to prepare your business tax returns. This will ensure your company avoids higher filing fees, interest, and penalties.
Another major mistake commonly made by business owners is claiming their companies are inactive. In New York, claiming a business as inactive will result in a higher filing fee for a corporation.
The idea of a business being inactive is confusing because of its terminology. A business owner may think that no business income equals inactivity for the year. However, any business activities conducted by the owner or employees negate the idea that the company is inactive. Your business is not inactive if it:
- Used a business credit card
- Purchased equipment or supplies
- Incurred expenses
- Opened a bank account
- Incurred startup costs
- Engaged in any other business activities
Inactive companies are subject to higher filing fees, so it's best to avoid claiming your company is inactive when it's not. In one example, the owners of a business in New York decided to elect for taxation as an S corporation. The business did not earn any income for the first two years, so the owners didn't file business tax returns. In New York, they could be subject to pay up to $89 for every month it is late, as well as any interest and late payment penalties.
If you need help with an inactive LLC tax filing, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.