Be careful asking bots for tax advice
Artificial intelligence’s latest darling is the ChatGPT chat bot. No doubt it’s compelling. You ask a question, you get answers - detailed, related, well-phrased answers.
While responses are visually appealing and easy to understand, are they ACCURATE?
I don’t know much about AI, but I DO know something about taxes. So I asked ChatGPT:
“What are the tax benefits of an LLC?”
This is a trick question. There typically aren’t “tax benefits” to structuring your business as an LLC. An LLC is a function of corporate law, not a tax construct. However, real life is full of trick questions and false assumptions. I’m phrasing the question to ChatGPT pretty much how I've heard it phrased to me countless times by solopreneurs and others.
Here’s what ChatGPT has to say about taxes & LLCs:
“Pass-through taxation, where the LLC’s profits and losses are passed through to the individual members…” Possibly, but not required. Again, an LLC is a legal structure, not a tax structure. E.g., an LLC can be treated as a C Corporation for tax purposes which would mean company profits & losses would NOT pass through to the owners.
“Flexibility in choosing the type of taxation…” Yup! Spot on. But then this response contradicts its previous response, so…
“Potential for reduced self-employment taxes for members who actively participate in the business.” Oooohhhh. Since this response includes “actively participate” which is primarily a PARTNERSHIP tax concept, I’ll assume the bot is referencing LLCs taxed as partnerships here. Whether pass-through income to LLC members is subject to SE taxes has been hotly debated. The standard guidance these days is that LLC members WILL have self-employment income if they actively participate. It’s the members who DON’T actively participate who may be able to avoid SE tax on their LLC/partnership activity. This is the OPPOSITE of ChatGPT’s answer.
“Potential for tax deductions for business expenses and losses.” Businesses may deduct certain expenses per applicable tax rules, not because LLCs are magically 🪄 allowing this.
“Potential for tax-deferred income through the use of retirement plans for members.” You don’t need an LLC to establish a retirement plan for a business.
Score? I’ll be generous and say 2/5.
Verdict? Be careful asking tax questions to chat bots. At least for now.