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Is there a tax benefit of creating a LLC when it comes to…

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Is there a tax benefit...
Is there a tax benefit of creating a LLC when it comes to personal income tax? My wife and I tend to owe a significant amount of money to the federal government every year. I am interested in learning if there is a way to minimize this? Also if we lease a car specifically only for business use can the full amount be written off? I would just like some suggestions on ways to be creative. Thanks
Submitted: 2 years ago.Category: Tax
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2/27/2016
Tax Professional: Richard, Tax Attorney replied 2 years ago
Richard
Richard, Tax Attorney
Category: Tax
Satisfied Customers: 56,736
Experience: 29 years of experience as a tax, real estate, and business attorney.
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Good morning Shaun. My name is ***** ***** I look forward to helping you.

Can you provide me a bit more information? Are either of you self employed? Thanks.

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Customer reply replied 2 years ago
No we both work for a large corporation in sales.
Tax Professional: Richard, Tax Attorney replied 2 years ago

Thanks for following up. Simply creating an LLC with no business does not create a deduction. If you were self-employed or independent contractors, then an LLC electing S Corp status would be beneficial tax-wise.

The biggest issue with the LLC is that as the owner of an LLC, you are considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. With an S Corp, if you work for the entity, you must pay yourself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' Unlike an LLC, where you are subject to employment tax on the entire net income of the business, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is either taxed at a lower rate or or not at all depending upon the particular facts. BUT, as shareholder, you must receive reasonable compensation. If you get greedy by paying yourself a lower salary with the resulting higher distributions, you risk the reclassifying your distributions as wages. Typically, the best solution is to form an LLC and then elect for it to be treated as an S Corp for tax purposes; this results in the best of both worlds...the flexibility of an LLC and the advantageous self-employment tax treatment of an S Corp. :) As for the car..the answer is yes. If you use the car entirely for business, the lease payments are deductible. Given that you are employees, the best way to reduce your net taxable income is to maximize your contributions to your retirement plans as those contributions are going to reduce your current net taxable income.

Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as OK, Good or Excellent (hopefully Good or Excellent). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!

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