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Limited Liability Companies (LLCs) have become a popular choice for entrepreneurs and small businesses, thanks in large part to the tax benefits they offer.
LLCs are appealing because of the flexibility and protection they provide as a business structure, and because of their significant tax advantages.
We've created this guide to introduce you to the world of tax deductions and write-offs that are available to LLCs. Our goal is to provide a comprehensive understanding of how these deductions can dramatically reduce taxable income and overall tax liability.
The ability of an LLC to use tax credits to lower its taxable income maximizes the business's profitability and enhances cash flow management. It's an essential strategy for financial success and can help with the sting of startup costs in your first year.
By the end, you’ll have a clearer insight into optimizing your tax position and making informed decisions that could lower your tax payments every year.
Tax write-offs, also known as tax deductions, are expenses that a business can legally deduct from its income to lower its taxable income.
Essentially, these are expenses that you incur as you run your business that can be subtracted from your gross revenue to reduce the amount of income that's subject to taxes.
If you own an LLC (often structured as a pass-through entity), write-offs directly affect the income reported on the members' or owners' individual tax returns. Since an LLC's profits and losses pass through to its members, reducing the business income through deductions effectively lowers their personal income tax burden.
The range of expenses that can be deducted is broad (we'll explore them in this article), but to qualify as a write-off, an expense must be both ordinary and necessary for the business.
This means the expense must be common, accepted, and appropriate in the business’s industry.
Understanding and using the most common tax deductions can play an important role during tax time. Here are some of the most common tax deductions that LLCs can leverage:
These common deductions can help you lower your tax bill and ensure you retain more of your earnings. You can then reinvest in the business or distribute profits among your LLC's members.
Consider consulting with a tax professional to ensure compliance with current tax laws and to identify industry-specific deductions (we advise this across the board, common expense or not).
Business operating expense deductions might just be the biggest write offs your LLC will have at tax time. Here’s a high-level look at how LLCs can deduct common operating expenses:
If you run your LLC from a home office, this deduction offers you a valuable opportunity to reduce your taxable income. It is calculated based on the percentage of your home used for business and allows a portion of household expenses to be deducted from taxable income.
To qualify for the home office deduction, two primary criteria must be met:
There are two methods for calculating the home office deduction:
The home office deduction simplifies the process of separating personal and business finances and enhances overall tax efficiency. It provides tax relief but also acknowledges and supports the modern trend of home-based businesses. This makes it an essential part of tax planning for LLC owners operating out of their residences.
If you use your vehicle or travel for business purposes, this write off could be important for you.
Vehicle Expenses
LLCs can deduct costs associated with business vehicles in two main ways: the standard mileage rate or actual expense method.
Whichever option you choose, you'll need to keep detailed logs of mileage, including the date, miles driven, purpose of the trip, and destination. This helps with IRS compliance and accurately calculating the deduction.
Business Travel Expenses
Similarly, travel expenses related to business can be deductible. This includes airfare, hotel accommodations, car rentals, and business meal expenses. To qualify as deductible, the travel must be primarily for business, and the expenses must be ordinary and necessary for the business’s operations.
For instance, if you attend a conference across the country, the costs of traveling to the venue, staying in a hotel during the conference, and eating meals there can be deducted. However, costs associated with personal activities or extending the trip for leisure would not.
The cost of healthcare rises every year, making insurance more needed than ever. Under certain conditions, LLC owners can write off the premiums paid for health insurance, which can provide some relief.
This deduction applies to the premiums paid for the owner, their spouse and dependents. It applies to medical, dental, and long-term care insurance.
There are some limitations, however.
Contributing to retirement plans like SEP IRAs and Solo 401(k)s helps with future financial security and offers immediate tax relief.
They're especially beneficial for self-employed individuals or small business owners due to their higher contribution limits and flexibility compared to traditional retirement accounts.
SEP IRAs (Simplified Employee Pension IRA)
LLC owners can contribute up to 25% of their net earnings from self-employment, with a contribution cap of $69,000 in 2024. This means if you earn $100,000, you could potentially reduce your taxable income by $25,000 by maximizing your SEP contributions.
Solo 401(k)s
This plan enables LLCs owned by a sole proprietor to open a 401(k) with a brokerage and allows for annual savings of up to $23,000 in elective deferrals in 2024, similar to traditional 401(k) participants who deduct contributions from their salaries.
Although designed primarily for one-person businesses, there's an exception that allows the business owner's spouse to participate in the plan. Together, a married couple can significantly boost their retirement savings, potentially contributing up to $138,000 annually to the plan. They could contribute even more if they qualify for catch-up contributions.
Additionally, the Solo 401(k) permits employer matching contributions. As both the employee and the business owner, the individual decides the matching amount. The business can add up to 25 percent of its profits to the Solo 401(k), with a cap of $69,000 in 2024. People 50 and above can contribute an additional $7,500 in 2024 as a catch-up contribution.
Both SEP IRAs and Solo 401(k)s offer tax-deferred growth. Taxes on capital gains, dividends, and interest are not owed until the money is withdrawn during retirement, when many people are in a lower tax bracket.
This deferral also allows the investments to grow without the drag of annual taxes, earning more compound interest.
Choosing between a SEP IRA or a Solo 401(k) can depend on several factors:
Both plans offer the flexibility to adjust annual contributions based on the business’s profitability for the year. This allows LLC owners to have control over their tax liabilities and retirement savings, making them a strategic choice for tax optimization.
This deduction allows LLC owners to manage the financial stress of acquiring capital assets by spreading the cost over the asset's useful life or expensing it immediately.
Depreciation
This deduction allows LLCs to allocate the cost of tangible assets over their expected useful lives.
Common depreciable assets include machinery, vehicles, buildings, and office equipment—items that have a useful life longer than one year.
For example, if an LLC purchases a tractor for $50,000 with an expected lifespan of 10 years, the business can deduct $5,000 each year as a depreciation expense. This reduces the annual taxable income and lessens the immediate financial impact on the business.
Section 179 Deduction
This deduction incentivizes small to medium-sized businesses to invest in themselves by allowing them to immediately expense the full value of qualifying equipment and software.
For 2024, the maximum deduction is $1,220,000 with a purchase limit of $3,050,000, making it particularly beneficial if a business has significant equipment needs.
For example, if an LLC purchases $100,000 in new equipment, the entire amount can be deducted from the taxable income that year.
Choosing between using standard depreciation and the Section 179 deduction depends on several factors:
If you expect your LLC will have higher profits in the future, standard depreciation can spread out deductions and lower taxes over several years. If immediate tax relief is needed, the Section 179 deduction might be more beneficial.
Education and training expenses can enhance the skills of an LLC's members and employees, ideally increasing that person's value to the business. The IRS recognizes the value of these investments by allowing businesses to deduct these costs.
Expenses related to the education and training of employees are generally fully deductible as long as they meet the criteria:
This includes workshops, seminars, courses, and professional development programs that enhance an employee’s job-related skills.
For example, if an LLC pays $15,000 for a team to attend specialized software training that improves their job performance, this expense can be deducted.
In addition to the direct costs of courses and training, associated expenses are deductible. This includes travel, lodging, and meals. For example, if an employee travels to another city for a training seminar, the airfare, hotel costs, and meal expenses during the trip can be deducted.
Investing in employee training improves your workforce, and boosts employee morale and retention. These deductions make it easier for LLCs to continue investing in their team.
Marketing and advertising are essential for LLCs to increase visibility, attract new customers, and maintain relevance in a competitive market. Marketing deductions include a wide range of activities and materials aimed at promoting the business.
Scope of Deductible Marketing and Advertising Expenses:
These expenses should aim to promote the business and its products or services directly. There is no cap on the amount that can be deducted as long as the expenses are reasonable and directly tied to the business activities.
Efficiently using these deductions can reduce taxable income and allow the business to invest in growth-focused activities.
Using the tax regulations that apply to an LLC—often viewed as "loopholes"— can significantly reduce their tax burden.
While these tactics are 100% legal, they require careful consideration to ensure full compliance with the law. We've explored a few potential loopholes (Section 179 deductions and retirement contributions), but there are a few more you should know.
While these loopholes provide opportunities for tax savings, they also highlight the thin line between strategic tax planning and aggressive tactics that might skirt the edges of tax law. Tax professionals can help with strategies to optimize tax benefits and keep an LLC on the right side of the IRS.
This approach ensures that the business:
Maintaining accurate and detailed financial records is essential for an LLC.
Effective record keeping is the backbone of tax compliance, and can prevent penalties. It enables LLCs to prove deductions claimed on tax returns and make potential IRS audits a much easier process.
Accurate records help LLC owners capture all deductible expenses and ensure they don't miss out on any opportunities to reduce their tax liability. Documentation should include receipts, invoices, bank statements, and logs of business transactions.
Ultimately, investing in an accounting system or hiring a qualified professional to manage financial records can support tax compliance and the financial transparency of the business.
Understanding and utilizing tax deductions and write-offs are crucial if you're an LLC owner looking to reduce your taxable income and improve your bottom line.
What can be deducted, from the most common expenses to the lesser known, can vary significantly from one LLC to another.
We encourage all LLC owners to understand the deductions that apply to them and to work with a tax professional (such as a CPA).
A qualified tax advisor can provide personalized strategies that align with your business goals and help you take full advantage of every tax benefit available to your LLC.
Doing so can save substantially on your taxes, stay compliant with tax laws, and ultimately make your business more profitable and sustainable. Don’t miss out on these opportunities—consult a tax professional today to maximize tax deductions and write offs.