Sole Proprietor LLC Taxes

[yawo23]

Hi, I began my new cafe business in Ohio on 8/7 this year.  While there is some income from the sales, I am deepy in the red due to the expenses accrued from the start-up costs.  I am not expecting my business will have any net profit this year (even for a good part of next year, if not the whole year 2024).  My question is:

1. Would I need to submit any payment considering there is no net income? 

2. In either cases, would I need to do any special filing to communicate my financial situation to the Federal or Ohio tax authorities?

3. I assume I can carry any expense accrued this year to the next year for tax calculation purposes, correct? 

4. From my understanding, as a sole proprietor in an LLC, I can make draws from my business at any time.  When it happens, I believe I would have to reserve a portion of that money I drew for tax payments.  I assume that reserved money would be going toward the quarterly tax payment?  

5. (Continue from #4)  Would I need to file 1099 for this draw from the business account? 

6.  Is this quarterly tax payment be required for the LLC as an entity AND for me personally?  For example, LLC will have to pay quarterly tax payments on the profit while I will have to make quarterly payments for the withdraw from business to my personal account? 

Thank you! 

[MartyG]

Hi Yawo23,

As a Sole Proprietor LLC, you would be considered a disregarded entity for IRS purposes.  But you would be considered an entity for the Ohio CAT Tax.  With that in mind:

1.  For federal purposes, you would only submit ES payments if you had income not covered by withholding.  Since your business is having a loss for 2023, you would have no requirement for making an ES payment.  My understanding for Ohio, the CAT tax has a minimum tax of $150 for 2023 (I understand that this changes in 2024), so you would need to pay that.  Here is the website for the Ohio Department of Revenue https://tax.ohio.gov/business   This can give you details on the Commercial Activity Tax in Ohio.

2.  For federal purposes, you would just file your 1040.  You would put your income and expenses for your new Cafe business on Sch C.  For CAT, you can just check with the website above.  That tax is based on gross income.

3.  Not necessarily.  For federal purposes, your loss on your Sch C would be netted against all your other 2023 income to produce your 2023 taxable income.  If you income is zero or less, you would likely create a net operating loss to carry forward, but the rules on the exact calculation are complex.  But if you are either married and your spouse earns wages, or you earn wages, the Sch C loss first offsets that other income.

4. You can make draws any time from a Sch C business.  Payments that you make are related to the net income of the business for the years, NOT the draws.  If you are able to make draws because your business is making money, then yes, you would want to make estimated tax payments to cover the net income from the business (assuming any wages or other income is covered by withholding), plus you would need to make estimated payments for your self-employment tax (the equivalent of employer and employee social security and medicare).  This tax is about 15.3% of net income (over and above your income tax).

5.  No 1099s necessary for any draws from a Sch C business

6.  The quarterly payment is ONLY for you personally.  Your single member LLC is considered a disregarded entity (does not exist) for federal income tax purposes.

I hope this helps,

Marty

[rschule1]

Hi there:

1. Would I need to submit any payment considering there is no net income?  Not unless you have income from all sources such as business, wages, stocks, etc.

2. In either cases, would I need to do any special filing to communicate my financial situation to the Federal or Ohio tax authorities?  The state requires heavy lifting in that there could be myriad of local & state licensing requirements. Please contact your state and local taxing authorities for specific information)

3. I assume I can carry any expense accrued this year to the next year for tax calculation purposes, correct?  If the loss is not absorbed in the current year then it can be carried forward as a net operating loss. 

4. From my understanding, as a sole proprietor in an LLC, I can make draws from my business at any time.  When it happens, I believe I would have to reserve a portion of that money I drew for tax payments.  I assume that reserved money would be going toward the quarterly tax payment?  No, draws in themselves are not taxable and do not affect ES payments. However the ability to draw could represent taxable income which would affect ES payments.

5. (Continue from #4)  Would I need to file 1099 for this draw from the business account?  A 1099 to yourself is not required.

6.  Is this quarterly tax payment be required for the LLC as an entity AND for me personally?  For example, LLC will have to pay quarterly tax payments on the profit while I will have to make quarterly payments for the withdraw from business to my personal account?  Your quarterly estimated tax payment will comprise estimated tax on all sources of income including business and personal.  You can use any account to pay it. However,  the payment is not deductible.