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If you are the owner of an LLC and want to file the correct tax return for your business, the job starts with gathering the right documents. You’ll need records to validate all your business’s income, deductions, expenses and other figures reported across various forms. The tax forms you’ll use vary depending on whether you have a single or multi-member LLC or are filing as a corporation. However, no matter what forms you’re filing out, keeping and having access to thorough records is key to smooth tax filing. It doesn’t matter to the IRS whether these records are in electronic or paper formats, but they do need to be complete, clear and up to date. To make sure you’re doing your LLC tax return correctly, talk to a financial advisor who specializes in small business taxes.

","

LLC Tax Filing Basics

","

A limited liability company (LLC) is a business structure that combines some aspects of sole proprietorships or partnerships with corporations. Similar a corporation, an LLC protects its owners from personal liability for business debts and legal issues. And like a sole proprietorship or partnership, owners of most LLCs report LLC profits and losses on their personal tax returns rather than the business paying taxes itself.

","

LLCs register with the states, and the IRS doesn’t recognize LLCs as a taxable business entity. There is no federal LLC return, although states may have forms for LLC taxes. Instead, at the federal level each LLC’s tax status is assigned by default depending on the business ownership structure. This determines how the LLC files and which forms are used. Here are three options:

","

Single-member LLCs report business income and losses on Schedule C, which attaches to the owner’s Form 1040 personal tax return.
Multi-member LLCs file an informational Form 1065 showing total income and expenses plus Schedule K-1s documenting each member’s share. The members report their K-1 amounts on Schedule E with their Form 1040.
An LLC taxed as a C corporation pays taxes on its income before distributing profits to shareholders, and and LLC taxed as an S corporation passes through its income to its shareholders’ personal returns. If you elect to have your LLC taxed as a corporation, you’ll file Form 1120 if it is a C corporation or Form 1120-S if it is an S corporation.

","

No matter its tax status or the forms used, an LLC must maintain documents supporting all numbers entered on returns. The IRS may request proof of any figures during an audit or review.

","

Business Records and Documents You Will Need

","

","

Depending on your type of business, you may have different records and use various formats. For example, an Internet retailer won’t have printed cash register tapes as a brick-and-mortar retailer might. The basic categories of documents required to complete a return for an LLC are the same for all businesses, however. They include the company’s income, expenses, assets and payroll, among other things. Here are details on each:

","

Income Records

","

The most basic supporting documents are those showing gross business revenues for the year. These provide justification for the income figures reported. Key records in this category may include:

","

Business bank account deposits tracing payments received
Cash register tape receipts documenting each sale
Issued customer receipts
Invoices sent to clients
1099-NEC forms if the business was paid more than $600 as a contractor

","

Expense Records

","

An LLC also needs evidence to support the various operating expenses deducted to lower its taxable income. Supporting documents for expenses can include:

","

Canceled checks showing vendor payments
Invoices for products and services purchased
Credit card statements tracing individual charges
Bank and credit card statements to prove payment

","

Asset and Depreciation Records

","

LLCs that own assets also must maintain purchase and sales records related to those assets. This documentation should note:

","

Date and method the asset was acquired
The purchase price and any sales fees
Cost of improvements made over time
Deductions taken for prior depreciation expense
Any casualty losses recorded
How the asset was used in the business
Date the asset was sold or disposed of
The sale price when the asset was sold along with any related fees

","

Payroll Records

","

For LLCs with employees beyond just the owners (unless the LLC is taxed as a corporation, in which case would include owner salary), payroll-related records also come into play for tax purposes. Documents to retain here include:

","

Annual W-2s issued to each worker
Quarterly and annual payroll tax returns filed
State payroll tax and unemployment tax returns
Complete pay records for each employee, such as time sheets

","

Bottom Line

","

","

Keeping accurate, thorough supporting records is crucial for LLC tax filings each year. The right documents validate all tax return figures to avoid issues with the IRS. Maintaining adequate documentation calls for attention to gathering and organizing accurate business records throughout the year. The effort will pay off at tax time when you have everything you need to fill out tax forms and file the correct paperwork with your return.

","

Tax Planning Tips

","$44","

Photo credit: ©iStock.com/Anchiy, ©iStock.com/Rockaa, ©iStock.com/vorDa

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It’s common for family members to lend money amongst themselves, and many choose to charge less than market interest rates as a favor to loved ones. However, the IRS does care about these transactions so there are some things to think about as you’re planning such a loan. While the IRS does afford a break for many of these transactions, a handful of circumstances can affect the tax implications, and gift tax rules also come into play. If you’re considering making a sizable loan to a family member, talk it over with a financial advisor to make sure you set the transaction up properly.

","

Loan Or Gift?

","

The first question to answer is whether this will be seen as a gift or a loan by the IRS. If it’s considered a gift that won’t have to be paid back, the IRS will apply any amount over the annual gift exclusion to your lifetime gift tax exclusion.

","

The annual exclusion amount is currently $18,000, which means for a $45,000 gift you’d have to file a gift tax form reporting it to the IRS. Then the $27,000 that is in excess of the annual gift tax amount would be applied to your lifetime gift tax exclusion. However, since the lifetime gift tax exclusion for 2024 is $13.61 million for an individual, this isn’t likely to be a concern for most people.

","

If it’s a loan that you expect to be paid back, the gift provisions won’t apply and your lifetime gift tax exclusion won’t be affected. You will, however, have to report any interest you receive as income and probably pay income taxes on it.

","

How to Establish a Loan

","

In order to set the loan up so that it’s recognized as a loan, you need a written loan agreement setting out a schedule for paying the money back. You should specify the interest rate charged.

","

In many cases, family members won’t charge market interest rates on loans, giving their loved ones a break. But the IRS has rules regarding such transactions. The IRS sets out applicable federal rate (AFRs), which are the minimum interest rates you’ll have to charge on your loan to make sure it’s not considered a gift loan. These rates may change frequently.

","

Gift loans may or may not trigger tax consequences, depending on the situation.

","

Thinking about giving a gift or loan? Talk to a financial advisor about the tax implications and ways to structure it.

","

Taxes on Interest

","

Any interest you receive will be treated as income for tax purposes. For instance, if you loan a family member $45,000 for a year, and the applicable federal rate for that kind of loan is 4% and that’s how much you charge, you’ll receive approximately $1,800 in interest to report as income and pay any taxes due.

","

If you don’t charge at least the minimum AFR, you may have to pay taxes on the amount of interest you would have received if you’d used the AFR to set the rate. This is called imputed interest. At a high level, if you charged 1% on the loan when the AFR was 4% you would receive $450 in income and also owe taxes on $1,350 in imputed interest. But for a $45,000 loan between family members, special rules can help reduce your tax liability.

","

Loan Exclusions

","

If the loan had been for less than $10,000, the IRS would consider it below the threshold of its concern. You don’t have to collect interest on a loan of that size or have pay imputed interest if you charged no interest.

","

Another exclusion applies to loans like the one you are asking about for loans under $100,000. This exclusion lets you charge either the required AFR or an amount equal to the borrower’s net investment income for the year, whichever is less, as long as the loan is less than $100,000 As an added wrinkle, if the family member receiving the loan had less than $1,000 in investment income for the year, the loan can be free of any interest.

","

While a loan like this may trigger a tax bill for you, it could also potentially provide a tax deduction. That would occur if the family member failed to pay back the loan. In that case, you could write the unpaid amount off as a loss and claim a deduction from income on your taxes.

","

A financial advisor can help you navigate loans, gifts and tax mitigation strategies. Get matched with up to three fiduciary advisors today.

","

Bottom Line

","

Making a $45,000 loan to a family member could impact your taxes by reducing your lifetime gift tax exclusion, by generating taxable current income from interest charged on the loan and possibly by requiring you to pay interest in some cases even if you didn’t receive any. If the loan never get paid back, on the other hand, you might be able to reduce your taxes by writing it off as a loss.

","

Tips

","$57","

Photo credit: ©iStock.com/PeopleImages

"],"experts":null,"link":"/tax-planning/taxes-on-45k-family-loan","published":{"datetime":"2024-3-1","readable":"March 1, 2024"},"shareInfo":{"title":"Do I Have to Worry About Taxes if I Loan a Family Member $45,000?","origin":"/taxes/taxes-on-45k-family-loan"},"isNewsArticle":false},{"id":"cG9zdDoyNTQzMzE=","databaseId":254331,"postId":254331,"author":{"node":{"id":"dXNlcjo5Mw==","databaseId":93,"userId":93,"avatar":{"url":"https://secure.gravatar.com/avatar/04483497dbd73f712b504e401c9c7d22?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Mark Henricks has reported on personal finance, investing, retirement, \r\nentrepreneurship and other topics for more than 30 years. His freelance \r\nbyline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"William","fullName":"Mark Henricks","lastName":"Henricks","name":"Mark Henricks","postCount":{"pageInfo":{"offsetPagination":{"total":778,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mhenricks","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxMzY=","children":{"nodes":[{"name":"Other","slug":"other-taxes","__typename":"Category"},{"name":"Tax Credits & Deductions","slug":"tax-credits-deductions","__typename":"Category"},{"name":"Tax Filing","slug":"tax-filing","__typename":"Category"},{"name":"Tax Planning","slug":"tax-planning","__typename":"Category"},{"name":"Tax Policy","slug":"tax-policy","__typename":"Category"}],"__typename":"CategoryToCategoryConnection"},"databaseId":136,"categoryId":136,"link":"https://smartasset.com/taxes/articles","name":"Taxes","postCount":{"pageInfo":{"offsetPagination":{"total":213,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"taxes","ancestors":null,"parent":null,"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$58","date":"2024-10-22T08:02:43","excerpt":"

\n","featuredImage":{"id":"cG9zdDoyNjU3Mjk=","databaseId":265729,"altText":"","date":"2024-10-21T21:11:43","fileSize":184088,"mimeType":"image/jpeg","modified":"2024-10-21T21:11:48","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/07/iStock-1654722150-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-10-22","readable":"October 22, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxOTY=","databaseId":196,"userId":196,"avatar":{"url":"https://secure.gravatar.com/avatar/7eaae8752922e4afcde743b2103c2edf?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Jaclyn is the Director of Economic Analysis at SmartAsset and a CERTIFIED\r\nFINANCIAL PLANNER™. With a bachelor of arts in economics from The College of New Jersey, she evaluates data for trends that affect your financial life. As a spokesperson for SmartAsset, she has been cited by Bloomberg, CNBC, Business Insider, Fox News, The Hill and many more. 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If you’re making $275,000 a year, you can’t contribute to a Roth IRA due to income limits. However, a backdoor conversion can allow a high earner to sock away unlimited sums in a Roth account, enabling tax-free requirement withdrawals and a way past pesky required minimum distribution rules (RMDs) that many pretax retirement account require. But this will likely require sufficient after-tax funds — such as from a non-retirement bank account or brokerage account — to pay the upfront tax bill that a backdoor conversion strategy generates.

","

Conversions are most advisable for savers who will be in a higher tax bracket after retirement. Assuming these conditions are met, a backdoor conversion can be a useful method of avoiding Required Minimum Distributions (RMDs) and enjoying tax-free withdrawals in retirement. Consider discussing a Roth backdoor conversion with a financial advisor to make sure you understand the ins and outs of this strategy.

","

Backdoor Basics

","

Roth retirement accounts allow savers to use after-tax money to fund accounts where investments accumulate earnings tax-free and, in most circumstances, withdrawals are also tax-free. Another appealing feature of Roth accounts is that they are exempt from RMD rules requiring savers to begin withdrawing from pre-tax savings accounts such as IRAs and 401(k)s after age 73, which can expose retirees to unwelcome tax bills.

","

Roth IRAs also have income limits that make them inaccessible to some high earners. For 2024, individuals earning $161,000, married couples filing jointly earning $240,000 and married couples filing separately earning $10,000 are all prohibited from contributing to Roth retirement accounts at all.

","

However, since 2010 it’s been possible for a saver to convert unlimited funds from a pre-tax retirement account to a Roth account. This backdoor conversion, as it’s known, has become a popular way for people who earn and lot and have saved a lot to get the advantages of Roth accounts.

","

To perform a backdoor conversion, a saver can transfer funds from a pre-tax retirement account such as a 401(k). 401(k)s and other qualified accounts may not limit an investor based on his or her income, and its annual contribution limits are also much higher than Roth IRA contribution caps. Next, they transfer funds from their other retirement account to a new Roth IRA account. Because the funds from the 401(k) are pre-tax, the saver will have to pay income taxes on the converted amounts in that tax year, as if they were withdrawals treated as ordinary income. A large transfer can generate a large tax bill if the entire amount is converted at once. Sometimes conversions of large IRAs are done gradually over several years to manage the tax bill and keep the person in lower tax brackets.

","

After conversion, the funds in the Roth account can grow tax-free and later be withdrawn tax-free, in most cases, in addition to being free from RMDs. There are no restrictions on how much money can be converted at once or on how often conversions are done, so it’s possible to move very large sums through the backdoor process.

","

Consider using this free tool to match with fiduciary financial advisors and discuss your tax strategy.

","

Backdoor Limitations

","

Backdoor conversions solve some problems but may not suit every saver. The major issue is the tax bill that comes due when the conversion is completed. It’s preferable to have sufficient funds to pay this bill in after-tax brokerage or bank accounts, so funds in the retirement account can continue to grow tax-free. Using retirement funds to pay the taxes due can dampen long-term accumulation in the accounts.

","

Another consideration is that backdoor conversions may be less fruitful if a saver if very close to retirement. Specifically, the five-year rule may prevent someone from accessing that money within five years of it being converted.

","

Finally, a backdoor conversion may not be a good idea at all if a saver expects to be in a lower tax bracket after retirement. In this case, it would save money to leave funds in a pre-tax account where they can grow tax-free and withdraw them later when the tax bill will be lower. Remember, a financial advisor can help you determine the right strategy for your goals.

","

Bottom Line

","

For someone earning $275,000 a year, a backdoor conversion is the only way to save for retirement using a Roth IRA. The strategy involves paying taxes now, but allows for tax-free future growth as well as tax-free withdrawals and immunity from RMD rules. There are no income limits for backdoor conversions, and the strategy can be employed as many times as desired. Conversions aren’t always best for savers who will be in lower tax brackets after retirement, and other restrictions may apply. But the strategy is popular for higher-income earners who want the benefits of having funds in a Roth IRA.

","

Tips

","$6a","

Photo credit: ©iStock.com/Rockaa

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The kiddie tax is a set of tax rules designed to prevent parents from reducing their tax burden by shifting investment income to their children. It applies to children under the age of 18, or dependent full-time students under 24, who have unearned income from investments, such as dividends or capital gains. The tax rate for the kiddie tax follows the parents’ marginal tax rate once the child’s unearned income exceeds a certain threshold, which is adjusted annually. Understanding these limits and how the kiddie tax is applied can help manage potential tax implications on a child’s investment earnings. A financial advisor can also work with you to develop a tax strategy and manage investments.

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What Is the Kiddie Tax?

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The kiddie tax was introduced in 1986 as part of the Tax Reform Act to prevent high-income families from avoiding taxes by transferring investments to their children.

","

Before the kiddie tax, parents could reduce their overall tax burden by taking advantage of the lower tax rates applied to children’s unearned income. Congress passed legislation for the kiddie tax and the Internal Revenue Service (IRS) oversaw and enforced it, closing this loophole and ensuring that investment income transferred to minors gets taxed at rates comparable to the parents’ rates.

","

Each year, there is a certain amount of unearned income that can be taxed at the child’s rate before the kiddie tax applies. For income above this limit, the child is taxed at the parents’ higher rate. This structure helps to prevent families from using children’s investment accounts as a tax shelter, while still allowing minors to benefit from their own savings and investments.

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Who Does the Kiddie Tax Apply To?

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The kiddie tax applies to children under the age of 18 and dependent full-time students who are under 24 years old. It primarily targets minors and young adults whose unearned income, such as dividends, interest and capital gains, exceeds the annual threshold set by the IRS. The kiddie tax does not apply to earned income like wages or salaries, which are taxed at the child’s own rate.

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To determine if a child is subject to the kiddie tax, several factors are considered. First, the child must be under 18 or, if between 19 and 23, they must be a full-time student. Additionally, the child must have unearned income exceeding the annual threshold, which is $2,600 for the 2024 tax year and $2,700 for the 2025 tax year.

","

Importantly, if the child is age 18 at the end of the tax year, they cannot earn more than half of their own support for the tax year. Meeting these criteria, any unearned income above the threshold will be taxed at the parents’ higher marginal tax rate rather than the child’s lower rate.

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Kiddie Tax Thresholds and Brackets for 2024 and 2025

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","

The kiddie tax thresholds are adjusted annually to account for inflation. In 2025, the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child’s rate and any amount above $2,700 is taxed at the parents’ rate. These numbers are up from 2024, when they were $1,300, $1,300 and $2,600, respectively.

","

As an example, let’s take a 16-year-old who receives $5,000 in unearned income from dividends and interest on their investment account. Here’s how their income will be taxed under the 2025 kiddie tax rules:

","

The first $1,350 of their unearned income is tax-free.
The next $1,350 is taxed at the 16-year-old’s own tax rate, which, for example, could be 10%. This would result in a $135 tax on this portion.
The remaining $2,300 ($5,000 – $2,700) will be taxed at their parents’ marginal tax rate. If their parents are in the 32% tax bracket, the $2,300 will be taxed at 32%. This would result in $736 of additional tax.

","

In this case, the 16-year-old would pay $135 in taxes at their own rate and $736 at their parents’ rate, for a total tax of $871 on $5,000 of unearned income.

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Reporting and Paying the Kiddie Tax

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To report and pay the kiddie tax, parents can choose between two methods:

","

Have the child file their own tax return: If the child’s unearned income is more than $2,600 in 2024 or $2,700 in 2025, the child must file their own tax return using IRS Form 8615, “Tax for Certain Children Who Have Unearned Income.” This form calculates the amount of tax owed at the parents’ higher marginal rate for income above the threshold.
Include the child’s unearned income in their tax return: Alternatively, if the child’s gross income is less than $13,000 in 2024 or less than $13,500 in 2025, parents may elect to include the child’s unearned income on their own tax return using IRS Form 8814, “Parents’ Election to Report Child’s Interest and Dividends.” This method can simplify the process but may increase the parents’ taxable income.

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In both cases, the tax must be paid by the filing deadline, typically April 15, to avoid penalties or interest on unpaid taxes.

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How to Avoid the Kiddie Tax

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While the kiddie tax is designed to prevent families from shifting investment income to their children to take advantage of lower tax rates, there are strategies that can help minimize or avoid it.

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One approach is to manage the child’s unearned income to stay below the annual threshold. For example, by limiting the amount of income-generating investments that produce dividends and interest, parents can keep their child’s income remains under $2,600 in 2024 or $2,700 in 2025, avoiding the kiddie tax altogether.

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Another strategy is to prioritize investments that generate little or no taxable income. For example, investing in growth-oriented stocks that focus on capital appreciation rather than dividend payouts, or utilizing tax-efficient investments such as tax-free municipal bonds, can reduce unearned income. Additionally, families can invest through tax-advantaged accounts like 529 college savings plans or Roth IRAs (if the child has earned income), where the earnings grow tax-free or are subject to more favorable tax treatment.

","

Parents can also encourage their children to earn their own income. Since earned income is taxed at the child’s rate and not subject to the kiddie tax, having a job or side business can reduce the proportion of a child’s income that comes from investments.

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Bottom Line

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The kiddie tax helps prevent families from reducing their taxes by shifting investment income to children. It primarily applies to unearned income, such as dividends and interest, for children who are under 18 and full-time students under 24 who rely on parental support. Unearned income exceeding annual thresholds is taxed at the parents’ marginal rate, making it harder to use a child’s lower tax bracket as a loophole. Using tax-advantaged accounts, prioritizing growth-focused investments and encouraging earned income can reduce or avoid the kiddie tax.

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Tax Planning Tips

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"],"experts":null,"link":"/tax-filing/kiddie-tax","published":{"datetime":"2024-11-18","readable":"November 18, 2024"},"shareInfo":{"title":"The Kiddie Tax: Rates, Limits and Rules for 2024 and 2025","origin":"/taxes/kiddie-tax"},"isNewsArticle":true}]}]