Key Takeaways

  • Form 1065 is used by multi-member LLCs taxed as partnerships, while Form 1120 applies to LLCs taxed as corporations.
  • Form 1120 results in double taxation unless the LLC elects S Corp status and uses Form 1120S.
  • LLCs must be consistent with their tax classification unless they file IRS Form 8832 to change.
  • Key differences between 1065 and 1120 include taxation levels, filing complexity, and eligibility for certain deductions.
  • Late filing penalties can vary greatly depending on which form is required.

Having an LLC 1065 filer is important when running a business. Even if a business decides to be an LLC under the state law, the government won't let a company file federal income taxes when they're an LLC. A company can decide to file federal income taxes as either a corporation or a partnership.

Form 1065 must be sent in when a business files their taxes as a partnership. This is called the Return of U.S. Partnership Income and is reported to the IRS. An LLC's partnership structure is the standard filing status. The IRS states that if a partnership doesn't file Form 8832, they will tax the company as if it has multiple owners.

What Is an LLC 1065 Filer?

In certain states, one person can own a limited liability company, which makes it a sole proprietorship. The LLC needs to file Form 8832 so they can pay income taxes as a corporation. According to the IRS, an LLC can file Form 1065 online. In fact, the LLC is required to file this form online if there are over 100 members. However, a hardship waiver can be requested from the IRS if it's too difficult for the company to file the form online.

Some states may require LLCs to file Form 1065 so they can report their income. The state and federal versions of Form 1065 are similar. States often make it mandatory to send in portions of federal Form 1065 in addition to the state forms.

A company must prepare Schedule K and K-1 when they file Form 1065. Schedule K states what the partnership income is that's offered to every partner. Schedule K-1 shows each partner's portion of the income. An LLC needs to have a copy of Schedule K-1 on different pieces of paper for every partner. The partners should all get a copy of their K-1 from the company so they can use it to calculate their income tax liability.

Which Return to File

One of the following will need to be filed for a limited liability company depending on their situation:

  • Form 1120S (for S corporations).
  • Form 1040 (Schedule C, E, or F for single-member LLCs).
  • Form 1120 (for corporations).
  • Form 1065 (partnership for multiple member LLCs).

One of the following will need to be filed for a limited liability company depending on their situation: Form 1120S (for S corporations). Form 1040 (Schedule C, E, or F for single-member LLCs). Form 1120 (for corporations). Form 1065 (partnership for multiple member LLCs). Additional information about what the best tax reporting form is for a company can be found under IRS Publication 3402 Tax Issues.

If the LLCL only has one member, expenses and income are reported on Form 1040. If the LLC's only member is a corporation, the expenses and income will be reported on Form 1120S or Form 1120. However, single-member LLCs cannot file a partnership tax return.

LLCs that have multiple members will file Form 1065. If they would prefer to file as a corporation, they must submit 8832. This is not necessary if they want to file as a partner. No matter which return the LLC files, they should file the same one for every year in the future.

Business Income Tax (Form 1120 & 1065)

Sole proprietors must report their incomes and expenses on Schedule C and attach it to federal Form 1040 when they file it. Partnerships or corporations normally file a Form 1065 or Form 1120 tax return. Form 1120 is filed each year for corporations. LLCs that have elected the S corporation status must file Form 1120S. All income reported on 1120S normally flows through the owner of the business, so that income is taxed on the owners' Form 1040.

Corporations that aren't eligible for or haven't elected S corporation status will file Form 1120. Tax needs to be paid at a corporate level by these companies. The individuals of the companies will pay extra taxes on Form 1040. Partnerships, on the other hand, file Form 1065 each year. There isn't federal income on this since the income flows through to the company's partners.

Late Filing Penalties and Deadlines

Whether filing Form 1065 or Form 1120, LLCs must meet specific IRS deadlines to avoid costly penalties:

  • Form 1065 is due by March 15 for calendar-year partnerships.
  • Form 1120 is due by April 15 for calendar-year corporations.

Penalties for Late Filing:

  • Form 1065: $235 per partner per month (up to 12 months).
  • Form 1120: 5% of unpaid tax per month (up to 25%), plus potential failure-to-pay penalties.

Extensions are available by filing Form 7004, but interest on taxes owed still accrues during the extension period.

Key Differences Between LLC Form 1065 and Form 1120

Understanding the distinctions between Form 1065 and Form 1120 is crucial for LLCs choosing how to be taxed. Here are the main points of comparison in the LLC 1065 vs 1120 debate:

  • Taxation Structure:
    • Form 1065 is a partnership return. Income flows through to members, who report it on their personal tax returns. There’s no entity-level tax.
    • Form 1120 is for corporations, meaning the LLC pays taxes on its income at the corporate level. If profits are distributed to members as dividends, they’re taxed again (double taxation).
  • Eligibility:
    • Form 1065 is typically used by default for multi-member LLCs unless the LLC elects corporate treatment.
    • Form 1120 is filed by LLCs that have elected to be taxed as C corporations via Form 8832.
  • Deductions and Tax Planning:
    • Corporations (Form 1120) may access more expansive deductions for things like employee benefits and retained earnings, potentially benefiting growth-focused businesses.
    • Partnerships (Form 1065) offer more flexibility in income allocation among members.
  • Complexity and Cost:
    • Filing Form 1120 often involves more complex accounting and higher administrative costs.
    • Form 1065, while still requiring thorough recordkeeping, generally involves less red tape.
  • Self-Employment Taxes:
    • Members of an LLC taxed as a partnership typically pay self-employment tax on the entire income share.
    • In contrast, LLCs taxed as corporations may pay members a salary (subject to payroll tax), and any remaining profit distributions may be exempt from self-employment tax.
  • Consistency Requirement:
    • LLCs must consistently use the selected filing method year after year unless they officially change their tax classification with the IRS using Form 8832.

Frequently Asked Questions

1. What is the main difference between Form 1065 and Form 1120 for an LLC? Form 1065 is used for partnerships, passing income to members. Form 1120 is used by LLCs taxed as corporations, where the company pays corporate taxes.

2. Can an LLC switch from Form 1065 to Form 1120? Yes, by filing IRS Form 8832, an LLC can elect to be taxed as a C corporation instead of a partnership.

3. Do all LLCs file Form 1065? No. Only multi-member LLCs taxed as partnerships file Form 1065. Single-member LLCs use Schedule C (Form 1040), while those taxed as corporations file Form 1120 or 1120S.

4. Which is better for avoiding double taxation: 1065 or 1120? Form 1065 avoids double taxation by passing income through to owners. Form 1120 can result in double taxation unless the LLC elects S corporation status.

5. What happens if I file the wrong form for my LLC? Filing the incorrect form can lead to IRS penalties, delays, or the rejection of your return. It's important to file based on your LLC’s tax classification.

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