There are many misconceptions related to New Mexico LLCs and how they are taxed. This is due to the flexibility that limited liability companies have when selecting their form of taxation and how they pay New Mexico LLC taxes. It's also because providers in other states promise benefits they can't deliver.
For example, many consider forming a Nevada or a Wyoming LLC because those states offer no income tax. However, a majority of clients will never see this benefit because LLCs usually have pass-through status. This is something the other incorporation providers don't tell you while they are busy trying to sell you.
What Is Pass-Through Taxation?
A pass-through election is when the company's earnings flow directly onto your personal income statement. This means that when you run an LLC, the double taxation that corporations experience won't apply to you. In short, this means you record the company's earnings as if they are your own. If you live in Ohio, this means you pay Ohio's personal income rate. If you live in Georgia or Washington, then you pay that state rather than where you incorporated. For this reason, it doesn't matter where you create your company or where your registered agent is. What matters for LLC taxation and determining your New Mexico LLC tax rate is where you live.
Forms of Pass-Through Taxation
The pass-through classification is the default for limited liability companies. If you are a single-member LLC, then your company will be considered a disregarded entity. If you have multiple members, then the company will be treated as a partnership. In a partnership, the company will issue a K-1 report to the IRS, with the owners in turn reporting that income on their personal statements. The K-1 is required to ensure that the owners stay honest about their share of the earnings. The LLC pass-through tax rule means that the company does not pay any taxes itself.
There is also the option of electing for Subchapter S, or S corp, taxation for an LLC. This is another pass-through election and is not inherently better than being a disregarded entity or partnership. Your accountant can tell you which is better for your situation, and the answer may change from year to year when you file your New Mexico corporate income tax return.
Changing Your Default Classification
The Internal Revenue Service (IRS) assigns you a default classification when you apply for your Employer Identification Number (EIN). If you want to change it, then you must submit either form 2553 for S corp taxation or form form 8832 for everything else. We can assist you with filing these forms if needed.
You have 75 days after obtaining your EIN to submit the above forms and have them be retroactive. After that period, you may change your classification once every five years and the change will not be retroactive.
Things You Need to Know About New Mexico LLC Taxes
If you're self-employed, you've felt the 1099 pinch in April more times than you can count. It's an unfortunate truth of being self-reliant and running a business that's just your own. Self-employment taxes are rough because they're developed to encourage people to work for companies. Why? Companies are simply easier for the government to keep track of. If they incentivize you to work for a company, it makes their job easier.
It doesn't necessarily mean that they're getting more money from you, though. Let's take a look at how an LLC can benefit you, your business, and your tax bracket. We can help you explore the taxation of an LLC and options for reducing your tax burden. Note that we're only talking about federal taxes here: State and local tax rules can vary widely across the country.
How You Are Taxed
When you place your business in the hands of an LLC, you are no longer taxed for your business as a private business owner. Instead, the LLC is taxed. You are only taxed for your earnings as a single person employed by your LLC. For taxation purposes, your LLC will be as large of a company as any other in its tax bracket when the New Mexico LLC tax rate is applied.
You'll also have the option of choosing from two different taxation scales. Either C or S taxation can benefit your LLC based on its earnings, its losses, and exactly where it is in the evolution of existing as a business.
Investing Your Wages in Your Assets
One tricky way of lowering your New Mexico business tax rate is keeping your assets involved in the company, or having the company pay for necessary items. This doesn't mean that you use company funds to enjoy your trip to Disney World, unless there's a verifiable business reason (such as a convention based around your business) to do so. It does mean that you can write off your new truck purchase if you have a farm and you require the truck to conduct business. Simple, right?
Many small or single-person LLCs use this trick all the time to avoid high taxes during a particularly successful business year. You get write-offs for your needed business-connected purchases rather than having to worry about them on your own tax reports.
Leasing From Yourself
If you have a home office, you can lease that from yourself, deduct the lease from your personal income, and essentially create a totally legal tax circle. You make no income from the lease because you are the person leasing it, yet your business can write off everything in seconds.
You can also do this if you need a more substantial business structure or perhaps if you need to rent equipment for an event, a repair, or something else. If you can legitimately tie the daily function of your business into the situation, you can certainly use it as a write-off during tax season. Renting rather than buying (and being responsible for the upkeep of the equipment long-term) may be a bit more costly, but it also ends up being another wonderful deduction for you. Weigh it appropriately.
Other Business Expenses
If you are supporting the LLC as you go about your daily routine, you can write it off. Though we suggest that you don't get too excited writing off things like your daily lunch, you certainly could do that if you were out getting business supplies and had to grab food.
Avoid extravagance and daily minutiae if you can. Let the little things pile up, like business supplies and that scissor lift you had to rent to remove a tree from your house/place of business, instead.
Finding the Line Between Smart and Suspect
The difference between an extreme number of tax write-offs and being smart about your deductions varies greatly depending on your business. It's impossible to tell you, personally, where that line is. After all, a cattle farmer will have different deductions than someone whose LLC is focused on inflatable bounce house rentals for kids' birthday parties. Simply remember that you can be audited at any time and required to provide proof of purchases, leases, and other such documentation.
Know, too, that the IRS doesn't play nice with those who don't give them what they want and what they need to process an audit. We recommend keeping at least five years' worth of documentation for your New Mexico LLC taxes in a safe location at all times.
Set Up Your New Mexico LLC Today
The first step toward business success is setting up your LLC in New Mexico, and that's our specialty. Let us help you set up an anonymous LLC in New Mexico today and we can even provide free mail forwarding and virtual offices. Contact Cindy's New Mexico LLC Formation Service today to see how quick and easy it can be to set up your business.