Do I have to claim my business earnings as my personal income?

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Do I have to claim my business earnings as my personal income?

I am disabled. I have had my defaulted school loans discharged through the disability discharge program. This program has income limits that, if I make more than the maximum income, I would have to begin repayment. I am considering working with the Department of Vocational Rehabilitation to get funding to start a home based woodworking business. I intend to keep the business small and don’t believe it is likely to earn more than the maximum income I am allowed, but if it did, would having a LLC business structure allow me to keep my personal income below the limit?

Asked on December 10, 2016 under Business Law, Colorado

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 4 years ago | Contributor

For a more definitive answer, consult with a tax professional about structuring things for the maximum benefit to you, but as a general matter: 
Most LLCs have "partnership" or "pass through" tax status, which means that the LLC's profit (or, for that matter, loss) "passes through" the LLC and becomes part of your income; so if you went for this most common tax status, LLC profit (that is, net profit: gross sales or proceeds less legitimate business expenses & deductions) would become part of your personal income.
You can instead elect "corporation" tax treatment, in which the LLC is itself taxed. The advantage is that the LLC profit or income is not considered your income until and unless you distribute it to yourself. The disadvantage is, you experience "double taxation" on LLC profit: it is taxed once, as LLC income; then if and when you distribute any to yourself, the amount you distribute is taxed again as part of your income.


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