No one likes taxes, but who doesn’t like paying less? So if you’ve recently formed a limited liability company (LLC), you should learn all you can about all the possible tax deductions for you and your business.
Fortunately, this guide lays out all the necessary information to ensure you’re maximizing reductions and not paying more taxes than you should.
How LLCs Are Taxed
LLCs are pass-through entities, which means income passes through to the member or members. If the LLC has only one member, it’s taxed as a sole proprietorship. If the LLC has more than one member, it’s taxed as a partnership.
However, LLCs are unique because they can elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who are members in the case of an LLC – must also pay taxes on their distributions. This is called double taxation.
However, members are subject to self-employment tax in an LLC taxed by default as a sole proprietorship or partnership. Once such LLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings exceed those additional expenses.
Common LLC Tax Deductions
Here’s the list of items you can deduct as a business owner.
1. Startup Costs
If you recently started your LLC and your startup costs were less than $50,000, you can generally deduct up to $5,000, plus up to $5,000 of the organizational costs for registering your LLC.
You can deduct the rent if you rent any physical space for your business, such as an office, storefront, or warehouse. In addition, if you run your business from home, you should be able to deduct a portion of your rent.
Those expenses should be deductible if you’re responsible for utilities in the space you rent.
4. Cost of Goods Sold
The costs of purchasing your goods for resale or for the parts you use to manufacture your product may be deductible.
5. Tangible Property
If you purchase tangible property for your business, whether equipment or a building, you may be able to deduct the cost of the property or take a depreciation expense.
6. Independent Contractor Costs
The cost should be deductible if you hire independent contractors, such as consultants or marketing professionals.
7. Business Insurance
If the insurance you have for your business is considered necessary, it should be deductible. Insurance deductions, however, can get complicated, so check with your tax advisor or contact the IRS.
8. Professional Expenses
The cost should be deductible if you pay for professional licensing or continuing education related to your business.
9. Meals and Entertainment
If you take clients or employees to dinner or entertainment venues for business purposes, you should be able to deduct at least a portion of those expenses. The IRS, however, looks at such expenses very closely, so make sure you keep careful records of the purposes of each cost.
10. Charitable Donations
Generally, you can deduct charitable donations from the LLC for up to 10% of annual LLC income.
11. Self-Employment Taxes
You can usually deduct half of your self-employment taxes each year.
12. Professional and Legal Fees
You can deduct fees you pay to tax advisors, attorneys, or other business advisors.
13. Bank Fees and Loan Interest
If your bank charges fees for business banking services or if you pay interest on any kind of business financing, your fees and interest payments should be deductible.
14. Marketing Costs
The money you spend to market your business should be deductible.
15. Business Travel Expenses
If you travel for business purposes, costs incurred may be deductible.
16. Business Vehicle Costs
Mileage and registration fees on a business vehicle may be deductible.
17. Office Supplies
Basic office supply costs may be deductible.
Taxes are never fun, but sharply reducing what you owe can be. It’s highly recommended, however, that you employ the services of a tax advisor to help you prepare and file your taxes. The last thing you want is to make a mistake that could lead to fines and other penalties for your business.