View Full Version : 1st time LLCer with some Tax Questions

01-26-2006, 07:18 AM
Hello all,
Amazing forum here, Ive learned a ton just reading a few of the threads.

So here is my dilemma, a partner and I recently just formed a painting company XXXX LLC ect.
The business is about 3months old and it's about time that we get an account and pay ol uncle Sam.

Question is, how does this work?
Let's say we did a job for $2000, we spent $200 on material, does anyone know approximately how many taxes (what's the rate) that we have to pay...and I'm assuming they tax the $1800 and not the 2000 right?

Also, since it'll be our first time filing taxes for this LLC, how do the expenditures that we incurred get deducted... let's say we bought ladders, brushes, rollers ect ect, totalling $10,000 how does that get worked into the equation.

Sorry for the barrage of questions, but I know one of you Tax geniouses have the answer..


04-06-2006, 04:09 PM
---------------> Subject: Taxes

From what I have read elsewhere, your multi-owner LLC will automatically be treated like a partnership (unless you choose corporate taxation with form 8832).

When it is time to file your anual tax returns, your LLC should fill out form 1065 to file as a partnership. This is just an informational form -- you will state that both owners get equal shares of the profits.

The actual profits from the business will be filed on each of the owners' individual tax returns, form 1040. This means that all company profits and losses are "passed-through" to the owners and are included on each owner's personal income tax return under the section for business income. This means that if the business made a total of $30,000 in profits, then you and your partner would each claim $15,000 in business income. This also means that all $30,000 of the business's profits end up being taxed at the owners' personal self-employeed tax rate of about 27%.

Here is a good article about how partnerships are taxed:


However, you are required by law to make quarterly income tax deposits. You must estimate your taxes and send in the money using Schedule C every three months.

Here is a quick tutorial of how your business income will be calculated on your form 1040 (http://www.irs.gov/pub/irs-pdf/f1040.pdf) and schedule C (http://www.irs.gov/pub/irs-pdf/f1040sc.pdf):

- gross receipts or sales, minus returns or allowances
- cost of goods sold (this is the cost of buying or making your inventory)

The difference between those two numbers is your Gross Profit (or Loss if you did not make enough sales to cover your cost of goods sold). For example, if you bought $30,000 of product and you sold it for $70,000, then your Gross Profit is $40,000. For corporations, stocks purchased and dividends paid will also be included in Gross Profit.

But, in your case you are a service business who does not sell goods, but you do buy materials for use on the job. I'm not 100% sure about this, but I think those items such as paint, wood, nails, etc. will be your cost of goods sold because your customer is paying you for both the materials and labor you provide. This does not include tools or equipment that you will keep for use on other jobs (those will be expensed and will be covered in the next section). For example, if you bought $10,000 of materials and were paid $50,000 then your Gross Profit is $40,000.

So to answer your question, yes you would only be taxed on $1,800 if you spent $200 on materials and received $2,000 for the job.

From the Gross Profit amount, the company will deduct most qualified business expenses, such as:

- payroll
- office supplies
- repairs and maintenance
- rent and utilities
- advertising
- travel and entertainment
- depreciation of capital or fixed assets
- and many other qualified deductions

*Don't forget to keep all receipts!

In your case, this is where you will claim ladders, paint guns, hammers, and other tools and equipment, etc.

Let's use the previous example where Gross Profit was $40,000. If the total deductions for business expenses is $10,000 then you are left with $30,000. This is called your Taxable Income.

The Taxable Income is the amount that the IRS wants you to pay taxes on. Although the corporate tax rate is 15%, your business is a partnership and therefore the profits will be "passed-through" to the owners, who then pay taxes on their business income at the self-employment rate of 27%. So if your business has $30,000 total taxable income (you each claim $15,000 on your personal tax returns) then the owners must pay the IRS $8,100 total in income taxes. That is $4,050 for each partner.

Remember, you must use Schedule C to estimate your taxes and both partners must send in quarterly deposits (of $1,012 for this example) every three months.

You must get an EIN.

See the IRS website for more details at http://www.irs.gov/businesses/small/index.html

---------------> Next Subject: Expenses

There are many resources you can use to get help with determining what items you can deduct as business expenses. Generally, there are capital or fixed assets, payroll, business trips, some uses of your home, vehicles, mileage, and many, many other qualified expenses. Almost anything you can think of that is specifically for your business can be expensed, such as operating costs like rent and utilities, office supplies, advertising and more.

Here are a couple good links:



Watch out for captial expenses!

The IRS forces you to stretch out the cost of "capital" or fixed assets over a number of years, called depreciation. That is, you can only deduct part of it each year for a certain number of years. My friend has a Master's degree in Finance and swears this is beneficial to the company.

If you think it would benefit you more to take the full deduction at once there is a way around it -- you can file a form 179 to take it all at once. Of course there are restrictions for filing a 179 that you can learn more about on the IRS website at:


Items that are included as "capital" are purchases for buildings, vehicles, machinery and equipment. Specifically, copy machines, computers, etc. You know it is "capital" if it will last more than one year. In other words, it doesn't get used up or wear out and has a useful life of more than one year. In example, the IRS classifies a computer as a 5-year item and office furniture as 7-years.

Here is how depreciation of capital works:

Depreciation Example

Cost of machine: $14,000
Useful life: 7 years
Depreciation expense: $2,000 per year
(you end up getting back the entire cost of the machine at the end of 7 years)

In your case, a ladder, a circular saw, and other items that will last more than one year should be treated as capital. Let's say you bought a welding machine, it would be capital. Any maintenance and repairs on that machine would also be capital. It would be a good idea to keep a fixed asset record for all of your assets showing the depreciation and have all receipts attached.

---------------> Next Subject: Sales Tax

I don't know if this applies to you, but just in case.

If your company is selling taxable "goods and services" it is subject to state and local sales taxes. The sales tax is paid by the customer who purchased the item -- it is added onto the total on their receipt. Then your company will forward the sales tax money to the State's office of the Comptroller for Public Accounts using the appropriate form on a monthly basis.

The State will tell you what the total sales tax rate is for the location of your company and you will apply that amount to all customer purchases.

I'm also not sure if this applies to you, but as a reseller of goods (paint and nails and stuff for your jobs), you should be able to buy your inventory tax-exempt because you plan to resell it and apply the sales tax to the customer.

You must get a sales tax permit or ID number through your State.

See your State's website for more details.

Hope this helps.