How do Owners of US LLCs Optimize Taxes in 2023?

The most common and attractive legal and tax structure in the United States is the Limited Liability Company a.k.a. LLC. It’s a flexible system that allows both residents and non-residents, including companies, to be owners, shareholders, or partners in an LLC. 

FYI: Companies registered in the USA can’t completely avoid taxes. Unlike some places that only tax based on where the income is earned, the USA follows international tax rules. So, to find legal ways and decide how to save on taxes with an LLC in the USA, be sure to carefully choose the right business structure and state for LLC registration.

LLCs and their advantages in the USA

If you’re not from the USA and want to not only lower your taxes but also register a company in a large reputable jurisdiction, creating an LLC could be the best choice.

How does an LLC help with taxes? In the USA, an LLC gives you flexibility in how you pay taxes. You can choose to be treated as a sole proprietorship, partnership, or corporation, depending on what works best for your business. This way, you’ll be able to use an LLC to reduce taxes.

LLC tax advantages depend on its structure. Here’s what they include:

1. Protecting your assets from company debts, especially if you set up an LLC as an S Corporation.
2. Paying taxes as a partnership, single-member LLC, or S Corporation, where only the business owner or partners are liable for taxes, and no separate tax exists for the company.
3. Having the opportunity to expand your business globally and make profits from around the world.
4. Getting tax benefits by deducting expenses like business travel, office costs, and using a home office, to lower your overall tax burden.
5. Working in the USA as a director or business owner with no need for a green card or US visa.
6. Accessing credit products designed specifically for small businesses in the USA.
7. Legally reducing tax load for non-resident LLCs that don’t do business in the USA, aren’t tax residents, and have no economic presence in the state where they are registered.

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How are LLCs taxed in the USA?

The way LLCs are taxed in the United States depends on their structure, the number of owners, and where the latter live. Normally, an LLC is treated as a transparent entity for taxes with no corporate tax to pay. Instead, each owner pays taxes on their share of the profits.

But if the founder and the LLC are not U.S. residents, they don’t have to pay taxes in the country. In this situation, it makes perfect sense to create an LLC for tax purposes in the USA. This is a legal way for an LLC to avoid taxes, and it won’t cause any issues with the IRS.

If an individual registers an LLC in the USA, it is treated as a sole entrepreneur by the IRS, which comes with specific tax and administrative liabilities. Here are the main points:

• This type of company does not require an Employer Identification Number (EIN).
• The individual is responsible for paying self-employment tax, which comes at a rate of 15.3%.
• If the LLC is engaged in passive business activities like real estate investments, the individual is not required to pay taxes on personal income, including social security and Medicare taxes.

The owner reports the company’s profits in their tax return using Schedule C of Form 1040 and handles the tax payments themselves.

Legitimate tax optimization strategies for LLCs in the USA

Single-member LLCs can avoid paying US taxes in certain situations:

• The LLC does not owe any taxes in the country where it is registered.
• Its owner is not a tax resident anywhere or is a tax resident of a country with a territorial tax system.

To be eligible for exemption from US federal income tax, an LLC in the United States shall meet these 3 requirements:

• It is fully owned by non-US residents, whether individuals or companies.
• Such an LLC has no presence or economic significance in the United States.
• The income generated is not considered connected to the country where the LLC is registered.

Non-resident aliens (NRAs) are individuals who don’t have US citizenship or a green card and haven’t met the substantial presence test. If any of these conditions are met, all income earned by the LLC’s owner is subject to US taxation.

Partnership approach in the context of LLCs in the USA

LLCs with multiple owners are taxed as partnerships. Each owner, also known as a partner, files their own individual income tax return. The LLC itself doesn’t pay corporate tax, which makes it easier for the owners to manage their taxes.

Here’s how an LLC and its owners handle their taxes with the US tax authorities:

• The LLC submits Form 1065, called the Income Tax Return for Partnership, to the IRS.
• The LLC also provides Schedule K-1 to the IRS, which shows each owner’s portion of the profits and losses.
• Each owner files a personal tax return using Form 1040 to ensure that the information matches what is stated in Schedule K-1.

FYI: Non-residents may only register an LLC in the USA by hiring a local registered agent.

US corporations (LLC С/S)

Based on their goals, LLCs in the US have 2 incorporation options:

• C Corporation: This option involves business taxes and taxes on capital gains from shareholder’s dividends. Even though double taxation may seem like a drawback, it’s favored by large international companies with complex structures. In such cases, the LLC’s income tax rate is only 21%, compared to 22-37% for LLCs with separate income for owners and/or partners.
• S Corporation: For federal tax purposes, S Corporations don’t pay corporate income tax. Instead, members are taxed based on their share of business profits. Unlike sole proprietorships or partnerships, members of an S Corp LLC don’t pay self-employment tax.

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How can I optimize the taxation of my LLC in the USA?

Learn how you can reduce or optimize LLC taxes in the USA:

• LLCs that use pass-through taxation, like single-member LLCs, partnerships, and S corporations, are not double-taxed. They only pay taxes on their business income, and not on both corporate and personal levels. Corporate tax rates only apply to C-corporations.
• If the source of income, as well as the jurisdictions where you pay taxes and where your business operates, aren’t related to the United States, then you don’t have to pay taxes in the United States. This means you’re fully exempt from federal and local income taxes.
• The standard business deduction lets you claim different expenses, thus lowering the amount of taxable income. Such expenses include things like advertising, bank fees, charitable donations, education, home office costs, insurance, startup expenses, travel costs, and more.
• Qualified Business Income (QBI) deductions are available for LLCs classified as sole proprietors, partnerships, and S corporations. With these deductions, you can lower tax payments for your LLC by up to 20% of its qualifying income.

What is the best place to incorporate an LLC?

To discover the best countries and US states for registering an LLC in 2023 as well as legally minimizing taxes or reducing them, consider the founder’s goals and where they live.

For example, some states in the US let LLC owners stay anonymous:

• Wyoming, Delaware, and New Mexico don’t reveal the names of LLC founders to the public. Only a registered agent has access to this information, and the state can get it upon request.
• Delaware doesn’t require the names of LLC members and managers to be disclosed.
• In New Mexico, there’s no need to provide or keep information about LLC members and managers. If the company is not based in New Mexico, it doesn’t have to file reports or pay fees and taxes. To protect the beneficiary’s personal information, third-party providers are used, just like in Delaware.
• Nevada and Wyoming allow nominee services to protect the owner’s personal information in an LLC.

When it comes to offshore countries, registering an LLC comes with tax advantages in places like Nevis, the Marshall Islands, St. Vincent and the Grenadines, the Isle of Man, and others.