Do LLC Tax Rules Allow Corporate Tax Treatment?

LLC tax rules may permit an LLC to be taxed as a C corporation, provided that Form 8832 Entity Classification Election is filed before the beginning of the tax year or within 75 days of formation. This election may be important for LLCs and their members who desire to reap the advantage of the lower federal corporate tax rate of 15 percent as oppose to having distributions to members of a multi-member LLC being subject to a maximum individual tax rate of 35 percent.

LLC Corporate Election

The election allows the LLC to begin to treat income as corporate income upon completion of Form 8832 and a deduction of compensation paid to members and employees and other business expenses. The net income of the LLC, now treated as corporate income, is reported on IRS Form 1120 U.S. Corporation Income Tax Return. Forms 8832 and 1120 are available online through the IRS website.

Disqualification for Corporate Tax Treatment

To qualify for the reclassification election the LLC must provide personal services and a member who is not an employee of the LLC must have an ownership stake of at least 6 percent. If this is not the case, any such member without a sufficient ownership interest will continue to be taxed as high as 35 percent potentially on the distribution of earned income from the LLC.