Retained earnings
This might be a simple question but I got different answers for this. I have a small business with LLC with 2 partners (50/50). We have retained earnings in this and only a took a portion of our profits for 2019. The question is a) Is the total profit taxable? b) can we opt now to not retain and take out the profits? C) or if we take money now or retain the earnings how do we report on 2020 taxes? TIA
Posted Apr 3, 2020, 3:30 PM UTC
11
How is your LLC taxed? Unless you elected to be taxed as a corporation, the default treatment is as a partnership. There is no real concept of "retained earnings" in this case - the LLC must file a tax return on Form 1065 and the income will be distributed (for tax purposes) to the partners pro rata on Schedule K-1 whether or not you actually take a cash distribution. The only exception to this is if you are married to your partner and live in a community property state (then you can just file Schedule C). If you aren't familiar with any of this, I suggest consulting a professional to help with your company.
The only way to defer individual income tax on earnings realized by a business is to form a C corporation, but that is taxed at the corporate level as well as the individual level.