T axes can be one of the most intimidating parts of starting a business. Knowing what you owe, what to withhold, and how to get the most out of deductions can be complicated. But what do you do if your business earns no income? Can you deduct business expenses without income? Can you deduct start-up costs with no income?
This article explores whether you need to file taxes and how to do so if your business made no money. In short, your tax obligations vary based on how your LLC is treated for tax purposes, and what the business did during the taxable period.
Does a Business Have to File Taxes If It Made No Money the Previous Year?
A business that earned no money in a year may still be required to file a tax return when:
The business is treated as a corporation
You deduct expenses or claim credits related to the business
You earned income despite not making a profit
Generally, whether your LLC should file a return depends on how you elect to treat it for tax purposes.
When Does a Business Have No Income?
Before you figure out whether and how to file taxes for an LLC with no income, you need to be sure your LLC truly earned no income. For tax purposes, income is a broad category that includes money, property, goods, and services. As a result, even if you did not pay yourself wages or bring in monetary profits, your business may have earned income. You should pay taxes on income when you earn or accrue it, even if the income is not money.
How to File Taxes for an LLC with No Income
An LLC’s members can let the IRS apply default rules to its tax treatment or elect to have the LLC treated as a corporation. You are a member if you own part or all of an LLC. When you elect to treat your LLC as a corporation, the IRS taxes your LLC as a C or S corporation. Each effective tax classification requires different forms and procedures. Depending on what your business does, you may also need to file information returns, pay excise taxes, or report employment taxes.
Disregarded LLCs
By default, the IRS treats an LLC with only one member as a disregarded entity for tax purposes. The disregarded entity itself does not pay taxes. Instead, the IRS treats the LLC member as the relevant taxpayer. When the member files their personal tax return, they include business income and expenses on that return.When you are the sole member of an LLC disregarded by the IRS, you file taxes as if the LLC was a sole proprietorship. You generally report profits and losses on the pertinent schedule attached to Form 1040 or 1040-SR.
LLCs As Partnerships
By default, the IRS treats an LLC with two or more members as a partnership. Partnerships generally file information returns. A partnership must file a return if it:
Receives gross income
Pays or incurs business expenses
Deducts business expenses or claims business credits on an individual return
If your LLC is treated as a partnership, you file Form 1065. In a partnership, profits and losses pass through to the individual members rather than staying with the partnership. Because of this arrangement, the partnership must issue each member a K-1 form, reporting the partner’s respective information. And each member reports their partnership earnings and losses on their individual tax return.
LLCs As Corporations
You can elect to have the IRS treat your LLC as a C corporation or an S corporation. Both types of corporations must file tax returns yearly, regardless of whether they have taxable income. LLCs treated as C corporations should file Form 1120, U.S. Corporation Income Tax Return. LLCs treated as S corporations should file Form 1120-S, U.S. Income Tax Return for an S Corporation.
C corporations are taxed at the entity level. This means the corporation pays taxes on income before dispersing its income to the shareholders. However, S corporations are pass-through entities, as are partnerships. The IRS taxes the money that shareholders of S corporations receive as income, and those shareholders may claim relevant business deductions and credits on their personal returns.
Information Returns
Depending on a business’s activities, it may need to file one or more information returns. You should file information returns when your business makes reportable transactions. Reportable transactions typically involve:
Lending money or incurring debts
Exchanging securities
Distributing profits and dividends
Compensating nonemployees
Paying rent and royalties
Incurring educational expenses
Providing health insurance
Transferring stock
Distributing retirement benefits
Generally, you send an information return to the IRS and to the other party or parties involved in the transaction. FinCEN will also require most LLCs to file a beneficial ownership information (BOI) report.
Excise Taxes
If a business’s activities are related to the following, it may be required to pay excise taxes:
Fuel
Air travel
Certain health practices
Tobacco
Alcohol
A business can pay excise taxes using IRS Forms 720, 2290, and 8849. Many states also impose excise taxes on cannabis businesses.
Employment Taxes
Even if your business earns no income, you may have employees. If so, you must withhold and remit taxes and report any wages, tips, or compensation you provide to employees.
You should pay taxes on income when you earn or accrue it, even if the income is not money.
What Can You Claim on Your Taxes for an LLC with No Income?
Depending on the circumstances, you can claim certain deductions and credits if your LLC earns no income. You can generally deduct a net loss from a disregarded LLC, an LLC treated as a partnership, or an LLC treated as an S corporation if there is separate income to offset it. Individuals cannot generally carry back personal net operating losses but may be able to carry them forward.
If your LLC is treated as a C corporation, you generally cannot deduct business expenses without income. However, in some circumstances, you can carry forward a net loss or certain deductions to the following year.
Taxes for LLCs Without Income
Although an individual without income rarely needs to file a tax return, an LLC without income may need to file. If you elect to have your LLC treated as a corporation, you always need to file. If the LLC is a disregarded entity, you generally follow the rules for sole proprietors and report details on your individual tax return. You must file a partnership return if the LLC is treated as a partnership. Reporting losses in multiple consecutive years may raise hobby loss questions, and the IRS may reclassify the LLC as a hobby, making any losses nondeductible.
Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
