LLC Tax Deductions: Everything You Need to Know
LLC tax deductions are local, state, and federal government deductions on taxable income for entities formed as LLCs. 3 min read
3. LLC Business Expenses Write-Offs
4. Tax Credits
5. Should I Form an LLC or a Corporation?
LLC Tax Deductions
LLC tax deductions are local, state, and federal government deductions on taxable income for entities formed as LLCs. Deductions are reductions in the income that is eligible to be taxed.
Limited Liability Companies, or LLCs as they are often called, are taxed either as sole proprietorships or partnerships. This is true unless the LLC members have elected to be treated as a corporation. One tax benefit for LLCs that elect a “C” Corp tax is that they pay only 15 percent tax (that’s federal tax) on the first $50,000 of eligible income.
LLC Business Expenses Write-Offs
Deductions reduce the amount of income taxed. Expenses related to the operation of a business, in this case an LLC, can be written off. This means the amount of the expense can be subtracted from the amount eligible for federal tax. This is another way to say deductions.
LLCs can take deductions on the expenses of operation for the first year. Amortization for 180 months can be elected if the expenses of that first year are not deducted during that first tax year. The Internal Revenue Service determines whether an LLC start-up expense can be deducted. Generally, to qualify, the expense must have been paid or incurred prior to the day the business began operating. These expenses can include:
- Business Advertising
- Market Analysis
- Salaries for New Employees
- Training Expenses for Employees
- Consulting Fees
- Professional Services (i.e., accountants, lawyers, etc.)
There are also some additional deductions that can be overlooked by new business owners:
- Transportation Costs (i.e., taxi or Uber)
- Banking Service Fees
- Dues to Professional or Trade Associations
- Trade Seminars and Conferences
- Membership Costs for Clubs
- Continuing Education Classes for Professionals
- Gifts for Businesses
- Certain Equipment and Software
- Trade publications and books
- Petty Cash
- Theft losses
- Parking or Meters
- Consulting Services
- Coffee Service
- Commissions and Incentives
- Tax and Accounting Services
This is not an exhaustive list. The IRS has an entire catalogue of tax credits for business. It’s best to get the advice of a tax professional when deciding which deductions you are eligible to subtract from your LLC’s taxable income.
Tax credits are received by LLCs for qualified expenses. Tax credits are subtracted from the tax itself rather than from the amount of the LLC’s income being taxed. The Internal Revenue Service allows credits for companies who do things that they would like to promote.
Examples of these activities are renewable fuel sources or utilization of alternative motor vehicles (with either a reduced fossil fuel imprint or none). LLCs can qualify for these credits and others with the help of good documentation and a tax professional.
Generally, all taxes paid in the operation of an LLC are deductible. However, when and how they are deducted from the taxable income depends on the tax type. For example, sales tax that you pay on goods bought for the day-to-day operation of the LLC is deductible as part of the cost of the good.
On the other hand, a large asset of the LLC may need to have the tax added to the asset’s cost basis. Federal income tax on an LLC’s income is not deductible. Sometimes state LLC income tax can be deducted on a federal income tax return if the return is itemized.
Should I Form an LLC or a Corporation?
The LLC is a flexible corporate structure that allows an organization more freedom in the way that it does business. Like a corporation’s owners (shareholders), an LLC’s owners (members) are provided personal asset protection from the debt and legal liabilities of the business. Their liability is limited to their investment in the business, whether a corporation or LLC.
Tax is one area where LLCs give greater flexibility than a corporation. If an LLC has an operating agreement in place, then it can provide provisions for management structure and buy-sell requirements.
If you need help with forming a new business, setting up an LLC or any other legal need, you can post your legal need (or post your job) on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.