Paying state and federal taxes will quickly show any business owner how hard it is to operate and maintain a well-structured business. There have been some questions around Limited Liability Companies being tax-exempt, but over time the state government has made improvements on tax laws.
Although an LLC can be anything from a single owned business, to a large global corporation, the structure does allow for improved protection over personal goods, safeguarding the members from certain liabilities and allowing them to separate their assets from the business. This means that in the event of business disrupters assets will be protected by the legal business structure. But as this allows for more separation and privatization of certain goods, many owners have seen a way to curb high-income tax, withhold losses, business expenses, and pass-through fewer liabilities.
What are New Jersey tax benefits?
For most instances, the state allows for certain provisions on tax-exemption, but these are only limited to a select few businesses. The state does have a 6.25% sales tax on certain items, but it doesn’t charge sales tax on a large variety of unprepared foods, household paper products, medical supplies, and clothing.
Yes, this does mean that LLCs selling these products will not be required to add additional taxes, but in certain urban sprawls or zones, sales tax is cut by almost half to 3.3%, enlarging economic development in these areas.
How does an LLC become tax-exempt?
There is a lot of speculation around whether or not a newly formed LLC can become exempt from tax. Tax-exemption is largely dependent on your type of business and the structure thereof, but many LLC owners can apply for sales tax exemption. The REG-1E application is completed in advance during the formation process. This will entail the business to become exempt from certain sales tax items, and in time can apply for an IRS 501(c)(3) determination letter.
The REG-1E form needs to be completed within 6 months of forming an LLC in New Jersey. With this, it’s good to remember that although an LLC was formed, the 501(c)(3) tax-exemption status is more suitable for nonprofit organizations and businesses. There are limitations on the type of businesses these may be and can include houses of worship, educational, literary, veterans, scientific, and emergency volunteer services.
What does 501(c)(3) mean for an LLC?
New Jersey Division of Taxation may require new LLC owners to file both state and federal state forms. This will be on both business profits, personal income received from the business, and also employee tax deductions. The 501(c)(3) tax-exemption status is only applicable if the business is registered as a nonprofit business or organization and will not entail any tax-exemptions for owners who use an LLC as a for-profit entity.
Most U.S. nonprofits trade under this status, but owners and shareholders hold no real profits from the business, and everything that the business makes is automatically re-invested into various projects and operations. Be advised that there are several requirements and standardized guidelines set-out by the IRS to obtain 501(c)(3) status.
Are there any tax benefits for LLC owners in New Jersey?
Indeed, depending on the “role” you play in the LLC, it will reflect on your tax filing. Single-member LLCs are taxed as a sole proprietorship, while multi-member LLCs can opt to be taxed as a corporation or perhaps a partnership.
This might become difficult, as LLCs who choose to be taxed as a corporation will be again taxed on any profits, resulting in a “double-taxation.” Single-owned LLCs can make certain deductions, including home-office space, mileage, and travel costs. Larger LLCs might see a pass-through on profits, and will only pay tax on personal income, but this will apply depending on the role a member fills within the LLC.
If you want to set up an LLC in New Jersey, read our extensive how-to-guide online.