Over the last few years the popularity of business owners setting up LLC’s has increased. LLC’s have many advantages over sole proprietorships and standard partnerships. Many business owners call the LLC “the perfect hybrid business model”. LLC’s have a low cost to set up, are easier to meet the accounting paperwork on when you first get going, and provide good liability protection.
When you are reviewing a self employed borrower’s business tax returns we have all seen the SCH C, 1065’s, 1120S, and 1120 forms but what tax form does an LLC use?
The answer? The IRS does NOT have a separate LLC tax form!
Since the LLC is a new business entity the IRS has NOT come up with a separate tax form for them yet. Instead of creating a new tax form the IRS has instructed business owners using an LLC to use the existing SCH C and 1065 forms for their LLC’s.
Single member LLC’s will use the SCH C form to report the business income and expenses. When you are reviewing the schedule C you follow the same underwriting guidelines for calculating income as a regular sole proprietor using the schedule C. There will be one difference which is the single member LLC owner CAN give the member/owner a W-2 income salary like the LLC’s big brother 1120S and 1120 business. If you find a borrower who is issuing a W-2 salary just add that w-2 to the amount of income you have calculated from the schedule C. As with any self-employed borrower do NOT use current paystubs only W-2 from previous filed tax years!
When an LLC has more than one owner, regardless of percentage of ownership, the IRS instructs them to use the 1065 Partnership return. The same rules are followed to calculate income as a standard partnership uses, but just like the single member LLC, a multi member LLC can provide W-2 income for its member/owners. Note: a non LLC or LLP partnership using the 1065, the owners or general partners can NOT give themselves a W-2 salary but instead take draw income or end of year K-1 income. To properly calculate income take the K-1 income add in the W-2 income and if necessary you may add additional income based on percentage of ownership from the 1065 itself, and finally add those three income components together.
As always we hope this has provided some light on your self-employed tax returns! As always we like to remind you UberWriter is a FREE online income analysis tool that has these rules set in stone in it is programming. This allows you to get your borrower’s income quickly, accurately, and fully documented in seconds! Check us out at www.blueprintio.wpengine.com and sign up for your free account!