IRS Tax Return Filing for Delaware LLC

Delaware is a top choice state for startup entrepreneurs forming a Limited Liability Company (LLC) due to its favorable laws, highly protective legal systems, and low taxation policies.

At the same time, while Delaware offers substantial benefits, LLC owners must make tax filings at both the federal and state levels.

Knowing the taxation policies for Delaware LLCs at the federal and state levels is important to stay compliant and not incur any fines.

In this article, we will examine the guidelines for filing IRS tax return filing for Delaware LLCs, including the structures of taxation, required paperwork, and the most important dates.

Federal Taxation of Delaware LLCs

Except for corporations, LLCs do not incur IRS taxes as a separate legal entity. An LLC will be taxed on how the business is organized and what elections the owners make. Let’s delve deeper into the tax treatment of various Delaware LLCs at the federal level:

1. Single-Member LLC (SMLLC)

A single-member limited liability company is, in general, considered a “disregarded entity.” Hence, for IRS, a single-member limited liability company represents a type of business structure for taxation, therefore all taxes required by the single-member LLC will be filed under the owner’s name.

• Its profit and losses are reported on Schedule C of Form 1040 of its owner.
• If the LLC earns passive income such as rent, it could be required to file Schedule E.
• Self-employment taxes are applicable, which means the owner pays both the Social Security and Medicare taxes.
• If the LLC employs workers, it should complete Form 941 (Employer’s Quarterly Federal Tax Return) and perhaps Form 940 (Federal Unemployment Tax Return – FUTA).

2. Multi-Member LLC

A Delaware LLC with two or more members is regarded as a partnership for federal tax purposes unless corporate taxation is elected.

• The LLC must file Form 1065 (U.S. Return of Partnership Income).
• Every member is issued a Schedule K-1 that lists their allocated share of the income, losses, and deductions from the LLC.
• Members will have to include their portion of profits in their tax returns (Form 1040).
• A foreign partner in the LLC may create a requirement to file for Form 8804 and Form 8805 for tax withholding obligations.

3. LLC Taxed as a Corporation

Instead of a disregarded entity or a partnership, a Delaware LLC can opt for taxation as a corporation. Form 8832 (Entity Classification Election) should be filed to make this election.

• If the LLC decides to take on C-Corporation taxation, they shall be bound to file Form 1120 (U.S. Corporation Income Tax Return).
• When an LLC opts for S-Corporation taxation, it is required to file Form 2553 (Election by a Small Business Corporation) and then submit Form 1120-S (U.S. Income Tax Return for an S Corporation) every year.
• Unlike disregarded entities and partnerships, profits are taxed at the corporate level (for C Corporations) and may incur double taxation if dividends are not structured properly.

Delaware State Tax Responsibilities

While Delaware is popular for its favorable taxation for businesses, LLCs still have responsibilities on the state level. Here’s what you should know:

1. Delaware Franchise Tax

All LLCs established in Delaware are obligated to submit a franchise tax of $300 yearly irrespective of any activity or income.

• The franchise tax is due by June 1 each year.
• LLCs do not have to file annual reports.
• Failing to submit on time results in automatic penalties of $200 plus interest during the time of the failure up to 1.5% monthly.

2. State Income Tax for LLC Members

• Delaware LLCs do not pay state income tax at the corporation level.
• If the LLC earns revenue from Delaware sources, its members are required to submit Delaware’s individual income tax return.
• On the other hand, once they operate outside Delaware, members are subjected to filing income tax in the state of their residence.

3. Delaware Gross Receipts Tax

Delaware is one of the states that does not have a state sales tax; however, it does have a tax on gross receipts of businesses in the state.

• The tax concerns sales within Delaware only; interstate business activities are not affected.
• Rates differ by industry, and thus the tax ranges anywhere from 0.0945 percent to 0.7468 percent.
• This tax is paid every month or every three months.

Tax Deductions for Delaware LLCs

Among the many advantages of LLCs is the tax-deductible expenses that are available, thereby increasing the net income for the LLCs. Here is a list of most of what can be deducted in a Delaware LLC:

1. Business Expenses

• Rent and utilities of an office space
• Premiums for business insurance
• Software and other subscriptions purchased
• Expenses incurred for marketing and advertising

2. Employee and Contractor Expenses

• Salaries and wages paid
• Taxes on payroll
• Payments to self-employed Indy contractors (1099NEC is needed for payments over 600)

3. Home Office Deduction

• A portion of your primary residence that is used for conducting business may qualify you for home office deduction benefits.
• The IRS provides for a simplified deduction rate of $5 a square foot for up to 300 square feet.

4. Travel and Meals

• The trip will cost money, such as the flights, the hotel stays, and the car rentals.
• Business spending on food and beverages provided to employees, clients, or guests for work purposes.

5. Depreciation

• You can deduct assets employed to run a business, such as computers, machines, or desks, over several years.
• With a Section 179 deduction, you can immediately write off certain types of property bought or financed for business use.

6. Contributions to retirement plans

• Contributions to SEP IRAs, Solo 401(k)s, or SIMPLE IRAs can also be written off, which allows business owners to set aside money for retirement.

7. Health Insurance Premiums

• Insurance covering health, dental, and Long Term Care is eligible for deduction by owners of self-employed LLCs.

8. Deductions for Education and Training

• Business-related courses, seminars, and certifications are tax deductible.

Delaware LLC owners should accurately keep track of their documentation and take advantage of deductions available to them so that they are able to legally reduce taxes owed.

Required Documents for Delaware Tax Filing

As with any state filing, your Delaware LLC must file tax documents on the federal and state levels. Preparation of these documents requires a lot of paperwork, which may seem overwhelming at first. Here’s a glimpse into the key documents needed:

Federal Tax Filing Documents:

• EIN Confirmation Letter CP 575
• Form 5472 (if you have a foreign-owned single-member LLC)
• Form 940 (Federal Unemployment tax, if required)
• Form 941 (Employment Tax Returns, if applicable)
• Form 1120-S (LLC/S-Corps)
• Form 1120 (LLC taxed as C-Corp)
• Form 1065 and Schedule K1 (Multi-member LLCs)
• Form 1040 with Schedule C (Single-member LLCs)
• Profit & Loss Statement
• Balance Sheet

State Tax Filing Documents:

• Finances of any Delaware LLC must be reported including on a Delaware Personal Income Tax Return
• Delaware Gross Receipts Tax Returns (if applicable)
• Annual Financial Statements
• Delaware Franchise Tax Payment Receipt

There is now an overarching picture as to how the documents generally may look like. Having these documents increases compliance and avoids fines.

Tax Filing Deadlines for Delaware LLCs

It is very important to make sure that taxes are filed properly, and on time. Failure to achieve compliance will result in having to pay penalties. Below are important deadlines to meet:

Federal Income Tax (Single-Member LLCs & Multi-Member LLCs)

• April 15 (if filing as a disregarded entity or partnership)

C Corporations Tax Filing (form 1120)

• April 15

S Corporations Tax Filing (form 1120-S)

• March 15

Franchise Tax for Delaware LLCs

• June 30

Quarterly Tax Payments Due (for self-employed members)

• April 15, June 15, September 15, January 15

Additional Considerations for Foreign-Owned Delaware LLCs

A lot of international business owners register LLCs in Delaware to conduct business in America. These types of companies do have some additional requirements from the IRS:

Form 5472: Required for foreign-owned single-member LLCs engaged in US trade.

Form 1040-NR: Required for non-resident members earning income from within the United States.

EIN Requirement: Foreign-owned LLCs must get an Employer Identification Number to apportion tax responsibility.

Withholding Tax: If the LLC makes the distribution of income earned in the U.S. to foreign members, withholding taxes may be required under FIRPTA or other IRS provisions.

Common Tax Mistakes to Avoid

Not filing taxes in time

• Penalties as well as interest costs are applicable if deadlines are not met.

Self-Employment Tax Not Paid

• Filing for taxes without election for corporate taxation means LLC Members have to self-employ and pay a 15.3% taxation fee.

Neglecting Franchise Tax Payment Obligations

• Delaware’s $300 franchise tax is often overlooked which can incur penalties or even result in canceling the LLC.

Improperly Maintaining Financial Books

• The IRS has stringent rules regarding reporting income and claiming deductions and expects bookkeeping to support that.

How EasyFiling Can Help with IRS Tax Filing

Filing tax returns for an LLC in Delaware can be challenging, yet EasyFiling helps you effortlessly navigate through the process with customized help. Here’s how EasyFiling helps with IRS tax filing:

Tax Filing Help Offers: We prepare federal tax returns and state tax returns, and pay fees on behalf of the clients, ensuring all tax returns are error-free and filed on time.

Tax Planning: With the advice of our professionals, structural and operational tax classifications are made that lead to the least chances of economic liability.

Filing Support for Franchise Taxes: We prepare and submit the payment and avoid any penalties for late or non-paying of Delaware’s Annual Franchise Tax.

Filing Preparation: We receive all tax documents, such as Form 1065, 1120, or Schedule C, and prepare and file them according to the regulations and requirements of the tax authority.

Continual Integration Support: For ongoing support, we notify relevant individuals about the completion of actions, reporting, as well as alerts regards achieving the correct standing for the company.

Get in touch with us to file taxes for your LLC and we will ensure that these processes are smooth and least costly, contact our firm today!

Conclusion

While Delaware LLCs have many considerable benefits, adhering to taxation requirements is key to ensuring they operate seamlessly without interruptions.

• Single-Member LLC’s taxes can be filed with Schedule C along with the 1040 form.
• Multi-member LLCs tax returns are filed with form 1065 and all members will receive a K1 Schedule.
• Corporation-elected LLC tax filing requirements are: 1120 Form or 1120 S form depending upon the election.
• Delaware imposes an annual franchise tax of $300 but no state income tax at the entity level.

To not incur tax penalties of some sort, make it a point to meet all tax filing deadlines, keep all financial records in check, and always have a tax consultant in reach to help when the situation calls for it.

Following both federal and state laws helps a Delaware LLC to stay in good standing and also reap the benefits of conducting business within the state.

Frequently Asked Questions (FAQs)

1. Do Delaware LLCs pay state income tax?

No, they do not, but members have to report tax on their profit share from the LLC.

2. What is the Delaware Franchise Tax?

There is a $300 annual payment all LLCs must pay even if the LLC is not making any money.

3. What happens if I don’t file my LLC taxes on time?

Fines due to late payments may accrue, as well as other consequences. For this tax, you do incur a $200 penalty for failing to pay Delaware Franchise Tax on time, along with 1.5% interest for each month you delay paying.

4. Can a Delaware LLC be taxed as an S-Corporation?

A Delaware LLC can be treated as an S-Corporation by submitting Form 2553 to the IRS.

5. Is filing Form 5472 essential for a foreign-owned Delaware LLC?

Yes, a foreign single-member LLC is required to report related party transactions with foreign persons and to file Form 1120 with 5472.