At this point if your head is spinning, or if you really don’t know your entity structure, here’s a simple way to start. By default, everyone is a sole proprietor until they formally register as an LLC or Corporation.
In the real estate business, 85% of agents and brokers are sole proprietors.
Sole proprietors don’t need to file a separate tax return for their business income and expenses. They file a separate schedule (Schedule C) as part of their Form 1040 Individual Income Tax Return.
In other words, your 1040 tax return is used to file both your business and your individual taxes.
What tax form do you use if you’ve formed an LLC? There’s no simple answer, because the IRS never created a tax form for Limited Liability Companies.
You can choose to file your LLC taxes by using one of the three business tax forms that already existed before LLC’s became popular.
Those three forms are:
- Form 1040 Schedule C Profit and Loss
- Form 1065 Partnership Business Return
- Form 1120 or 1120S Corporation Return
If you are a single member LLC (ie., you are the only owner), you’ll normally file your taxes on Form 1040, Schedule C. This is the same form as the Sole Proprietors use, as described previously.
If there are two or more members who own the LLC, you’ll normally file your taxes using the Partnership Form 1065
But if you elect to file a corporate tax form, you’d use Form 1120 (C Corporations) or Form 1120S (S Corporations, which are very popular with agents and brokers).
Many agents choose to set up LLC’s, which are less formal and more popular today than a corporate entity structure. Then they realize that LLC’s are subject to the same self employment taxes as Sole Proprietors and Partnerships. At that point, they may elect to use one of the corporate forms as a tax-saving strategy.
Note: legally, they remain LLCs as far as registration with their state corporation commission is concerned. Only their federal tax status changes.
See my blog post or videos titled “LLC versus S Corp” to learn more about this tax strategy, which can save many agents thousands in taxes they shouldn’t have to be paying.
A partnership is any arrangement by two or more parties to manage and operate a business and share its liabilities and it’s profits equally. Partnerships file 1065; multiple member LLCs use the same return, unless they choose a corporate tax status, as described above
The C corporation is the standard (or default) corporation under IRS rules. The S corporation is a corporation that has elected a special tax status with the IRS and therefore has some tax advantages.
Many taxpayers think “S” Corporation stands for ‘small’ business corporations, but in reality both “C” and “S” corporate business structures get their names from the subchapter of the Internal Revenue Code that they are taxed under. (e.g., “Subchapter S”)
The 1120 and 1120S tax forms are more complicated than the one page Schedule C forms used by Sole Proprietors. This is especially true if you’re producing sales of $250,000 or more during the year. You need to report more than just income and expenses; assets, liabilities, and other information is also required.
Sole Proprietors must file by April 15th, the regular deadline that applies to all Form 1040 Individual Income Tax Returns.
C Corporations are also due April 15th, which was a change made in recent years. (C Corps previously were due March 15th.)
However, the due date for Partnership Form 1065 and S Corporation Form 1120S returns is March 15th, one month earlier than the regular income tax filing deadline.
It’s important to note this earlier filing deadline, since late filing penalties are substantial ($195 per member/shareholder per month!)
Jim Flauaus, EA
Real Estate Tax Coach
Enrolled to Practice before the IRS in all 50 states