Social Media Influencers Benefit From Pass-Through Taxation: New Mexico LLCs

• Most businesses in the US are pass-through entities seeking to enjoy tax benefits.
• The gap between tax rates by pass-through entities and C-corporations is significant, making many businesses choose the former structure.
• Businesses can take advantage of these benefits by creating New Mexico LLCs

Over 95% of businesses are pass-through entities, according to data from the IRS. Many people are opting for this structure as it offers significant tax benefits. Even large firms opt for an LLC setup instead of a C-corporation to enjoy favorable tax rates. Certain experts now fear that the setup is denying the country much-needed income and want deductions these entities enjoy, like the 20% pass-through deduction, abolished.

What is pass-through taxation?

Pass-through taxation is a method of taxation that applies to certain types of business entities, such as partnerships, limited liability companies (LLCs), and S corporations. Under pass-through taxation, the business itself does not pay income tax on its profits. Instead, the profits ‘pass through’ to the business owners or shareholders, who report their share of the profits on their individual income tax returns and pay taxes at their personal income tax rates.

It's important to note that not all types of business entities are eligible for pass-through taxation. For example, C corporations are not eligible and are instead subject to double taxation. Additionally, pass-through taxation rules can vary by state and country, and some specific rules and requirements must be followed to qualify for pass-through taxation.

Benefits of pass-through taxation

Going for a New Mexico pass-through entity offers several advantages as this resource illustrates. Some of the main ones include;

Prevents double taxation

In the traditional corporate model, profits are taxed at the corporate level and then again at the individual level when shareholders receive dividends. With pass-through taxation, the business profits are taxed only once, at the individual level.

Pass-through taxation is often seen as an attractive option for small businesses and startups because it avoids the double taxation that can occur with C corporations, where the corporation pays income tax on its profits, and then, the shareholders pay income tax again on any dividends they receive. With pass-through taxation, the business owners only pay taxes on the profits they receive, once, at their individual tax rates. This can result in lower overall tax liability for the business owners.

It offers simplicity

Pass-through taxation is simpler than the double taxation model, where the corporation and its shareholders are taxed separately. In the pass-through model, the income is only taxed once at the individual level, making it easier to manage.

They can enjoy a 20% pass-through deduction.

The Tax Cuts and Jobs Act of 2017 (TCJA) introduced a new provision known as the 20% pass-through deduction, also called the qualified business income (QBI) deduction. The deduction is available to owners of pass-through entities such as sole proprietorships, partnerships, S corporations, and some LLCs.

Under the 20% pass-through deduction, eligible taxpayers can deduct up to 20% of their qualified business income from their taxable income. The deduction is subject to certain limitations and phase-out rules based on the taxpayer's income and type of business.

The deduction was introduced to provide tax relief to small business owners and level the playing field with the corporate tax rate reduction. The deduction reduces the effective tax rate on pass-through business income, making it more competitive with the lower corporate tax rate introduced by the TCJA. However, the 20% pass-through deduction is a temporary provision set to expire on December 31, 2025, unless Congress acts to extend it.

Increased personal savings

Pass-through taxation allows for greater opportunities for tax savings through deductions, credits, and other tax strategies, such as retirement plans, that may not be available to corporations. Pass-through entities are taxed at individual tax rates, generally lower than corporate tax rates. This form of taxation also allows business owners to claim business losses on their personal tax returns. This means that losses incurred by the business can offset personal income and reduce the tax burden.

Improved Access to Capital

Pass-through taxation can be more attractive to investors than corporations due to the simpler taxation model and increased flexibility. This can make it easier for businesses to access capital, leading to growth and expansion. Your business also appears to be in better financial health, further increasing its attraction to investors.

How to form an LLC in New Mexico

To form an LLC (Limited Liability Company) in New Mexico, you will need to follow the state's formation requirements, which include the following steps:

• Choose a name for your LLC: The name you choose must be unique and not already used by another New Mexico business. You can search the New Mexico Secretary of State's business name database to check the availability of your desired name.
• Appoint a registered agent: Every LLC in New Mexico must have a registered agent, which is a person or business entity designated to receive legal notices on behalf of the LLC.
• File Articles of Organization: You must file Articles of Organization with the New Mexico Secretary of State's office. This document includes basic information about your LLC, including name, registered agent, and principal address.
• Prepare an Operating Agreement: Although not required by law in New Mexico, it is recommended that you prepare an operating agreement, which outlines your LLC's ownership structure and operating procedures.
• Obtain Necessary Permits and Licenses: Depending on the nature of your business, you may need to obtain specific permits or licenses from state or local authorities.

Comply with Tax and Regulatory Requirements: Your LLC may be subject to various tax and regulatory requirements, such as obtaining an Employer Identification Number (EIN) from the IRS and registering for state and local taxes.

Conclusion

If you are starting a new business, or improving the way in which an existing entity is run, then having a New Mexico LLC offers advantages. This includes using a pass-through entity to enjoy lower taxes and increase your personal savings and your company’s net income. You can also enjoy the simplicity of only filing one tax return. Better yet, the state also offers a straightforward and fast way to create an LLC.