Taxation of the LLC, Taxation in the USA. An LLC is currently not taxed directly, but its members are instead taxed based on the company’s profits. Please note that the considerations we will make also apply to Partnerships, Sole Proprietorships and S-Corporations.
The law provides that the profits are considered as distributed to the members, who will have to pay the related taxes there, even in the absence of effective distribution. The foreign member of an LLC is therefore required to file a tax return in the United States and is consequently subject to the jurisdiction of the US tax authorities, which authorities may require to examine the books of the foreign company.
This is an important consequence and to be taken into consideration. In the event that the profits are effectively distributed to the members, a withholding tax will be applied by the American company on the profits themselves. On the other hand, the losses of an LLC that US shareholders can accumulate and use over the twenty years following the reference year, cannot be deducted by foreign members on the amount due to the US tax authorities.
Automatic reduction of 20% of gross Income
The basic principle is that the QBI – Qualified Business Income according to which the member receives an automatic reduction of 20% of the gross Income. In practice, the taxable Income is determined by reducing the gross Income of the LLC by 20%.
In essence, it is as if the tax rates for LLCs were reduced by 20%.
The taxable Income thus determined flows pro-rata to the individual shareholder.
At this stage, the pro-rata Income received by the individual partner of the LLC is in the form of gross Income. To arrive at the taxable Income of the natural person, it is necessary to deduct the “Standard Deduction” that the American tax reform has established in:
$ 12,000 for taxpayers filing as individuals;
$ 24,000 for married couples.
Subtracted from the gross Income the Standard Deduction, we arrive at AGI – Adjusted Gross Income which, in the tax returns of individuals in America, corresponds to the taxable Income.
In the last step, the AGO is taxed with the rates for the taxation of individuals.
Terms of interest for taxation in the USA
PTE: Pass-Through Entity
Transparent companies, such as LLCs or S-Corporation, Limited Liability Partnership [LLP] or Sole Proprietorship. In this type of corporate form, the company’s Income is taxed by the shareholder.
QBI: Qualified Business Income
It is typical of companies and is calculated by subtracting operating costs and previous losses from gross Income. Income components such as dividends, losses or capital gains, interest income / expense not related to the typical business activity.
AGI: Adjusted Gross Income
It is typical of individuals and is calculated by subtracting from the taxable income the “standard deduction” that is due to each taxpayer [$ 12,000 for taxpayers filing as an individual and $ 24,000 for couples filing tax returns as a couple – “Married, filing jointly”]
Limitations to the Automatic Deduction of 20% of the Income in Favour of the LLC
Along with the tax cuts, however, the United States has created restrictions on the automatic deduction of 20% on the gross income of LLCs to prevent the tax cut from giving rise to abuse:
The automatic deduction of 20% is made in full only for taxable income [net of costs, or profits before tax] of $ 157,500 in the case of a “single” tax return or of $ 315,000 for a “married tax return”, filing jointly “.
The automatic abatement of taxable income is reduced proportionally to zero for QBI [qualified business income] of $ 207,500 in the case of single filers and $ 415,000 in the case of the income tax return of married couples.
Activity Category Limitations
Some professions [SSTB: specified service trade business] such as doctors, lawyers, accountants and the like, cannot take advantage of the 20% reduction on revenues in favour of LLCs.
It is important to note that the activity category limitation does not operate for taxable income less than $ 157,500 [single] or $ 315,000 [married filing jointly]
Taxation of corporations and LLC at the state level
Each state imposes corporate income taxes in divergent measures.
As an example, the state of Delaware imposes an annual tax, the “Corporate Franchise Tax,” on corporations payable by March 1. This tax varies according to the shares authorized for issue. The minimum fee is currently USD.35 (thirty-five) dollars; the ceiling is USD 165,000 (one hundred and sixty-five thousand) dollars. If the fee to be paid exceeds USD. $ 5,000 (five thousand), the Delaware Code provides for quarterly payments: 40% of the tax payable by June 1, 20% by September 1, 20% by December 1, and the balance payable by March 1.
This tax does not apply to the LLC. The state of Delaware requires the annual registration of a corporate report, “Annual Corporate Report,” which generally indicates the address of the company and the names of the officers and directors of the company. The fee for registering this report is currently USD. 25 (twenty-five) dollars. This tax does not apply to the LLC, however, the LLC must pay a fixed annual fee of USD. 200.00 in the state of Delaware.