As we explained earlier (see Federal Employer ID - FEIN), the
IRS does not have forms for LLCs. Instead, you must choose whether to be treated as a partnership or corporation for federal tax purposes.
This kit assumes that you selected to be treated as a partnership on your SS-4 form.
Each LLC which elects to be treated as a partnership must file a federal form 1065. Each member's share of net income is
reported to the IRS and to the members using Schedule K-1. Members pay income tax
on their portion of net income by attaching Schedule K-1 and
IRS 1040 Schedule E
to their federal 1040 tax return.
Filed Schedules K-1 with the IRS and all members on time
then you can check "Yes" for question 5 on page 2 and ignore one third of the
1065 form. You won't have to complete:
The balance sheet information (Schedule L on page 4)
Reconciliation of book income versus tax income (Sch. M-1)
Analysis of members' capital (Schedule M-2)
Section J of Schedule K-1.
How to complete IRS 1065
Calculating net income. Your tax preparer will need:
Income and expense statement
List of any equipment you bought or used, the purchase price and date and the percentage use for business purposes;
List of start-up expenses (do not include items in your income and expense statement above)
Whether any guaranteed payments were made to members (payments for services or
investment return made regardless of the business' profits). These payments cannot
be interest or repayment of start-up costs that you are amortizing. Guaranteed payments
should also be reported on line 4 of both Schedule K and K-1.
Do not include: charitable deductions, section 179 expenses, depreciation, or investment income
such as interest or dividends.
Sch. A: backup for cost of goods sold.
You will need to provide:
Beginning and end of year inventory
Selection of inventory methods (cost, LIFO, etc.)
Sch. K: the LLC's taxable bottom line.
This page starts with the net income from page 1 and
Adds investment income (interest, etc.)
Deducts special tax credits.
Line 4 should include all payments guaranteed to members, even the ones you included
on page 1. That is because these payments are only deductible as expenses for certain purposes
and thus the payments must be added back in this section of the form.
Line 14 self-employment tax. Report the same net income as on line 1 of this page plus any
guaranteed payments to members. Divide this amount between members to use on line 1 of
their Schedule SE. Put your total income before expenses on line 14b.Schedule SE to calculate social security self-employment tax.
Report how much of your net income was distributed to your members (see lines 19a and b).
Each member's share of IRS 1065 Schedule K.
Results from lines 1-20 of Schedule K (page 3 of form 1065) are allocated to each member
on the K-1 forms. Your tax preparer needs the percentage ownership of each member.
Sole proprietors report their business income by attaching schedules to
their personal federal 1040 tax return. After combining Schedule C
income with your other adjusted gross income, pay any tax that wasn't withheld from
other jobs or paid quarterly with 1040ES with this form.
There is an easy Schedule C-EZ for businesses which:
Use cash accounting
Have business expenses of $5,000 or less
Made a profit (not a loss)
No home office expenses to declare
Only one business
No equipment to depreciate
If your business has inventory, it should be using the accrual method of accounting
(see Accounting Systems). Report your cost of goods sold (the cost of any inventory that you
sold) in Part III on the back side of Schedule C.
Cars for employees
Employers who provide vehicles to their employees do not have to keep reports
of vehicle use IF they have a written policy that prohibits personal use.
Commuting is allowed under limited circumstances. The written policies
must meet specific IRS criteria. For complete information, contact the IRS.
How to complete the Sch. C
What to enter
A to H
Basic questions about your business.
On question D, if you do not have employees or a profit sharing plan,
you do NOT need an employer ID number.
Total income less returns less the cost of any items sold.
For line 4, cost of goods sold, complete Part III of this form and enter the rules
on line 4.
Expenses (except Home Office Expenses).
Line 10 Car and truck expenses - see instructions above
50% of "reasonable" meals and entertainment are tax deductible.
Net profit before and after home business expenses. Home business expenses can only be claimed by
Schedule C filers, using IRS form 8829. If your business had a net loss
and it was a result of home business expenses, you must carry-forward these home expenses to
future years (i.e. you can't lower taxes for non-business income using home expense deductions).
Also, if you had a loss but you did not materially participate in the business during
the year, you may not be able to take the full loss this year. Contact the IRS or your
tax advisor for complete information.
Cost of Goods Sold. Enter your inventory purchases, cost of your labor, and inventory
at the end of the year. You cannot deduct unsold inventory as a business expense this year.
Vehicle information. Do not complete this section if you also purchased
other business equipment with depreciation or amortization. Complete
IRS 4562 instead.
Along with IRS 1040 and Schedule C or C-EZ, remember to include:
Each LLC must file a state tax return. Each member's share of net income is reported to the
state and to the members
using Schedule K-1s. Members pay income tax on their portion of net income by attaching
Schedule K-1 to their
540 personal tax return
LLCs pay a direct tax to the State of California. All LLCs should have paid a minimum $800, regardless of its net
income (see 3522). If your LLC had total revenues greater than $250,000, it must pay the
following additional fees with this form:
In addition, members pay state income tax on their portion of the LLC's net taxable revenue,
regardless of whether it was paid to members. Each
member's portion of the LLC's net taxable income is reported on separate Schedule K-1s.
Good news for small businesses
If your LLC:
Has less than $250,000 total receipts;
Had less than $600,000 in assets;
Filed Schedules K-1 with the state and all members on time;
Has 10 or fewer members, then
you can ignore
Schedule L (balance sheet):
M-1 and M-2 (reconciliation of tax versus book income and analysis of members' capital
Item F on page 1 (total assets) and
Item I on Schedule K-1 (analysis of members' capital account).
How to complete 568
How to approach and understand these forms.
Page 1: LLC Taxes
Page 1 asks you to calculate the total LLC tax. If you had under $250,000 in gross revenue, it is $800.
You must also report use tax. This is for businesses which do not file BT-401 Quarterly Sales Tax Returns. They must report the use tax on all Internet and out-of-state purchases you made. The use tax is the same rate as sales tax, but it is charged on out-of-state items consumed in California. See Use Tax for further information.
Net income and fee calculation. Your tax advisor will need:
Income and expense statement
List of any equipment you bought or used, the purchase price and date and the percentage use for business purposes
List of start-up expenses (do not include items in your income and expense statement above).
Guaranteed payments to members are required payments made regardless of the business' profits. This cannot be interest (or repayment) of start-up costs.
Page 2: Sch. A
Schedule A is the supporting information
for cost of goods sold that you reported on Schedule B.
Your tax preparer will need:
End of year inventory
Selection of inventory methods (cost, LIFO, etc.)
Page 3: Sch. K
This is the LLC's taxable bottom line. This page starts with the net income calculated earlier and
Adds investment income (interest, etc.)
Deducts charitable donations
Special tax credits
Line 5 should include all payments guaranteed to members.
You must show how much net income was distributed to your members.
Page 4: Sch. L
Balance sheet for larger businesses. If you are a larger business, provide your tax
preparer with a:
Balance sheet as of 1/1 (beginning year or beginning of business) and 12/31 (ending year).
Page 4: Sch. M
Required for large companies only. Schedule M-1 reconciles your book income with your taxable income and
analyzes your members' capital. Schedule M-2 calculates the members' total capital accounts.
Members do not take "salaries". Any payments to them are capital withdrawals. Provide your tax preparer with:
A history of members' capital contributions and withdrawals.
Page 4: Sch. O
Schedule O - only used if you formed your LLC by closing down another business.
Page 2: Sch. T
Schedule T is for non-California members. If you have non-California members,
please contact an attorney to learn about securities requirements not described.
Each members' share of Schedule K. This form uses information from federal
IRS 1065 Schedule K-1
and makes adjustments (usually regarding amortization, depreciation and tax credits).
The net amount for all members should be equal to your LLC's Schedule K (page 3 of
Your tax preparer needs back-up information for as many of questions A through I as possible.
Your Operating Agreement requires the LLC to provide your members with
Schedule K-1s no later than March 30th. Form 568 and all the members' Schedule K-1s are
due to the Franchise Tax Board on March 15th.
How to submit
Mail form 568 with copies of your members' Schedule K-1 to the Franchise
Tax Board. Mail to:
Franchise Tax Board
P.O. Box 942857
Sacramento, CA with $: 94257-0501; no $: 94257-0500
If your LLC earned over $250,000, enclose a check for the additional fees.
Give your members their Schedule K-1. They should pay any tax due with their personal
tax return 540.
Members...what to do with your K-1
Schedule K-1 (568) shows the adjustments due to different state and federal tax laws.
Results from 568 K-1, column C should be entered on Schedule CA (with your 540 return).
Corporations must complete the Statement of Information every two years.
If you incorporated in an off month
(January, March, May, July, Sep, Nov), you must submit the form
in odd years. All other corporations must complete the form in even years.
The Secretary of State's office will send you the form approximately 120 days before it is due.
If you change your corporate officers between filings, you must submit a new
form. There is no fee.
Call the Secretary of State's Office at (916) 657-3537.
All businesses owe annual property tax on their property. Business property includes your purchased equipment, buildings and supplies, but not inventory.
All businesses with business property exceeding $100,000 are required to file this statement, even if it is not sent to them. The County Assessor has the right to assess all businesses - so if you have business property less than $100,000 and receive a form, you must pay.
The tax rate is the same as other property tax: 1% of the assessed value (plus any extra tax approved after Proposition 13).
The County Assessor will send you a property declaration form in February or March. You must report any business property your business had as of January 1st.
Record business assets you owned as of January 1
Submit the declaration form by March 31 or April 15, depending on your county.
A tax bill will be sent to you in July or July
The tax bill is usually due August 31
How to complete the form
We have included a sample Business Property Declaration form. Your county's form
may vary slightly, but it will ask for the same information. The form usually has 5 parts:
General business information - self explanatory
Declaration of equipment that you own
List the cost of your office furniture, computers, machinery, tools, etc. according
to the date that each was purchased.
Use your annual tax returns for the cost and year purchased.
These items must be put into one of six categories.
Machinery and equipment
Tools, molds, dies
Computers less than $25,000
Computers over $25,000
Declaration of property that you own.
Estimate the value of your:
Construction in process
Equipment out on lease or rented
Add the total equipment calculated on the back of the form and enter it next to Equipment.
Declaration of leased property. If you have leased equipment or other items, you must
show who you leased it from, the year leased, the year it was manufacturered, the annual rent, and the cost to purchase it new.
Preparing 1099s is not user-friendly. The IRS does not have a direct way to input the information online. Instead, it has authorized companies to be 1099 providers. Do a search on the Internet for current providers and prices.
Annual reporting requirement
January 31 to the recipient
February 28 to the IRS
To do it yourself
Doing it yourself is possible, but not user-friendly. You have to use official IRS forms and must prepare them using a computer or typewriter (remember those?). Here is how to do it: Prepare 1 form for each payee.
What to do
Payer is your company
Recipient is the person you paid.
Payer's federal identification number is your social security number.
Recipients' identification number is their social security (if you paid an individual
or sole proprietorship), or their SS-4 number if you paid a partnership.
Remember, if you paid a corporation, you do not have complete a 1099-Misc.
Leave "Account Number" blank unless you use vendor account numbers.
Fill in the relevant boxes. Here are the most commonly used.
Rent to landlords (if you paid more than $600).
Compensation to independent contractors for services (if you paid them more than $600).
Check the box if you purchased over $5,000 of products for resale from this (non-corporate) vendor.
How to complete form 1096
1096 is the transmittal form. It must also be prepared on a computer or typewriter. Prepare one form to transmit all the 1099-Misc.
What to do
Your social security number
Enter the number of 1099s you are enclosing
0, unless you withheld income tax (line 4 on each 1099-Misc)
Add up boxes, 1,2,3,5,6,7,8, and 10 for all the 1099-Misc's Usually all but
1 and 7 are 0.
Check box 1099-MISC - 95
How to submit
Mail Copy A of 1099-M (the red page) to the IRS with transmittal Form 1096
Mail or deliver Copy B and Copy 2 to the receipient (the person or company you paid)
Keep copy C for your records
The IRS will automatically send your 1099-M information to the state tax authority.
A few more rules
$50 fine for ignoring these rules:
Type forms - regular type style
Use original forms - no copies
Submit entire 8 x 11 page - don't cut it up
Don't use dollar signs, commas or other symbols, except you should use decimal points to show dollars and cents.