Sometimes a limited liability company (LLC) has a year with no business activity. For example, a newly formed LLC might not have started doing business yet, or an older LLC might have become inactive without being formally dissolved.
But even though an inactive LLC has no income or expenses for a year, it might still be required to file a federal income tax return.
LLC tax filing requirements depend on the way the LLC is taxed. An LLC may be disregarded as an entity for tax purposes, or it may be taxed as a partnership or a corporation.
Tax elections for LLCs
If an LLC only has one owner (known as a “member”), the Internal Revenue Service (IRS) automatically disregards it for federal income tax purposes. The LLC’s member reports the LLC’s income and expenses on his or her personal tax return.
If an LLC has two or more members, the IRS automatically treats it as a partnership. The LLC files an informational partnership tax return and the members also report the LLC’s income and expenses on their personal tax returns.
However, an LLC can change these default classifications and choose to be taxed as a corporation. To do this, the LLC must file Form 8832 with the Internal Revenue Service. The LLC may make this election when it is formed, or it may elect to change its tax classification at a later date.
Filing requirements for disregarded entities
An LLC that is not considered a separate entity for federal income tax purposes is taxed in the same way as a sole proprietor: the LLC’s income and expenses are reported as self-employment income on Schedule C of the member’s personal tax return. You are required to file Schedule C if your LLC’s income exceeded $400 for the year.
If a one-member LLC did not have any business activity and does not have any expenses to deduct, the member does not have to file Schedule C to report the LLC’s income. However, the member will still have to file a personal tax return if he or she had other income, and may have to file a Schedule C if there was self-employment income from another business.
Filing requirements for an LLC partnership
An LLC that is taxed as a partnership is subject to the same federal income tax return filing requirements as any other partnership. The LLC must file an informational partnership tax return on tax form 1065 unless it did not receive any income during the year AND did not have any expenses that it will claim as deductions or credits.
Thus, an LLC with no business activity that is taxed as a partnership is not required to file a partnership tax return unless there are expenses or credits that the LLC wants to claim.
LLC tax filing requirements for an LLC corporation
Corporations have different tax filing requirements than either disregarded entities or partnerships. All corporations are required to file a corporate tax return, even if they do not have any income.
If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.
Even if your LLC has no business activity, it is important to understand your LLC tax filing status and whether it is obligated to file a federal income tax return. Filing required returns on time can help your LLC avoid fines and penalties.
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FAQs
LLCs are not subject to the annual tax and fee if both of the following apply: They did not conduct any business in California during the taxable year; and. Their taxable year was 15 days or less.
Does an inactive LLC need to file taxes? ›
LLC Corporations
It is mandatory for all corporations to file annual tax returns, even if the business was inactive or did not receive income. An LLC that chooses to be treated as a C corporation for tax purposes is required to file Form 1120 (U.S. Corporation Income Tax Return).
What happens if you start an LLC and do nothing? ›
Simply put, yes, you can have an LLC with no income, but that still has expenses. An LLC with no income but deductible expenses can offset future income through a net operating loss deduction. However, the IRS will still regard this as business activity, so it must be reported yearly.
What happens if you have business expenses but no income? ›
Even if your business has no income during the tax year, it may still benefit you to file a Schedule C if you have any expenses that qualify for deductions or credits. If you have no income or qualifying expenses for the entire tax year, there is no need to file a Schedule C for your inactive business.
Do you have to file taxes for a business with no income? ›
You should still file, even if you haven't received income yet. You can show a loss on Schedule C when filing taxes with no income to offset other income.
What is it called when an LLC does not file tax? ›
A disregarded entity LLC is a limited liability company that is not separate from its owner for federal income tax purposes. It's a popular choice for single owners, allowing them to benefit from limited liability protection while avoiding the complexity of corporate tax.
Do I file LLC and personal taxes together? ›
The IRS disregards the LLC entity as being separate and distinct from the owner. Essentially, this means that the LLC typically files the business tax information with your personal tax returns on Schedule C. The profit or loss from your businesses is included with the other income your report on Form 1040.
What happens if your LLC does not make a profit? ›
It is required to file taxes for an LLC even with no income. This is because the Internal Revenue Service (IRS) treats LLCs as pass-through entities, which means that the LLC's income is passed through to its owners and reported on their individual tax returns.
How do I file a zero income tax return? ›
Since you didn't earn any income for the year, you'll enter a "-0-" in each blank. Your total income will also be "-0-." Double-check to make sure that none of the income categories applies to you. For example, if you have money in a savings account that earns interest, you may have to report that interest as income.
Do you have to report your LLC to the IRS? ›
An LLC with only one member is treated as a “disregarded entity,” which means that for federal income tax purposes, it simply does not exist. However, an LLC can elect to be taxed as a corporation by filing Form 8832, Entity Classification Election, with the IRS.
If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040 or 1040-SR. But in some situations your loss is limited. See Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C), for more information.
How much can you write off first year in business? ›
Business expenses incurred during the startup phase are capped at a $5,000 deduction in the first year. This limit applies if your costs are $50,000 or less. 3 So if your startup expenses exceed $50,000, your first-year deduction is reduced by the amount over $50,000.
How do I report cash income without a business? ›
If you're not an employee of the payer, and you're not in a self-employed trade or business, you should report the income on line 8j of Schedule 1 (Form 1040), Additional Income and Adjustments to IncomePDF and any allowable expenses on Schedule A (Form 1040), Itemized Deductions.
Can IRS come after an LLC for personal taxes? ›
While the IRS can't levy your business account for your personal back taxes, the IRS can freeze and seize your company's assets to satisfy your tax debt if your business has a sizable tax liability. In most cases, for the IRS to implement a levy, your business must have: A substantial amount in back taxes.
How long can you run a business at a loss? ›
In a five-year period, you can claim a business net loss up to two years without any tax problems. If you report operating losses more frequently, the Internal Revenue Service (IRS) might rule your business is only a hobby. In that case, you'd have to report the income but couldn't write off any expenses.
What happens if a small business does not file taxes? ›
If the IRS suspects that you have not filed your taxes for several years, they will eventually contact you. Unfortunately, this could lead to serious financial consequences such as fines, penalties, garnished wages, liens on property, and even imprisonment in extreme cases.
What does it mean when an LLC becomes inactive? ›
An inactive business still exists in the eyes of the law. It simply means that it does not engage in any type of transactions or business. As noted before, until the company is dissolved, it will still exist.
Does an LLC avoid self employment tax? ›
If you create an LLC with one member and do not elect to be taxed as a corporation (see below), then you will still continue to pay self-employment tax as an LLC. Your tax liability for self-employment tax does not change. LLC taxed as an S corporation. As an LLC, you can elect to be taxed as an S corporation.
Do I file taxes if I have no income? ›
Any year you have minimal or no income, you may be able to skip filing your tax return and the related paperwork. However, it's perfectly legal to file a tax return showing zero income, and this might be a good idea for a number of reasons.
