If you've started your business as an LLC (limited liability company), running the business can be as pricey as it is rewarding. After all, you might have expected a few expenses from running your business.
Sure, some are obvious: paying yourself and your employees and marketing.
Others? Not so much! Depending on your business and location, you could pay more than expected for licensing, office space, and insurance.
One expense that often takes LLC owners off guard is taxes.
On the positive side, there are savings to be had! You can write off certain business expenses to help reduce your tax bill.
In this guide, we're breaking down:
- The common (and not-so-common) expenses your business can write off
- How to document your expenses to get the most from your write-offs
- The common mistakes LLC owners make with their expenses
- Some state-specific considerations for writing off expenses
Understanding what's possible will make tax season less stressful and running your business easier.
Understanding Tax Write-Offs for LLCs
Tax write-offs are also known as tax deductions. Simply put, they are expenses that a business can subtract from its total income to reduce taxable income and the money it owes in taxes.
It's important first to understand that you will pay taxes based on your LLC’s taxable income. Tax write-offs are very important for LLCs because they help lower your taxable income. By writing off as much as possible, you will pay less in taxes, which can save a lot of money.
One of the most significant advantages of an LLC is pass-through taxation. This means the LLC itself doesn't pay federal income taxes. Instead, the LLC's profits and losses 'pass through' to the owners, who report them on their personal tax returns.
(Note: This applies to LLCs set up as disregarded entities, partnerships, or S-Corps. If you set your LLC up to get taxed as a corporation, pass-through taxation does not apply.)
Regardless of how your LLC is taxed, understanding and using tax write-offs can significantly impact how much you pay in taxes.
Many types of expenses can be written off:
- office space
- self-employment taxes
- advertising costs
- supplies and equipment
You can also write off smaller expenses like utility bills if it's for business purposes. Using these write-offs, you can keep more of your hard-earned money. Here's a real-world example: Let's say you're the single owner of your LLC, and the business earned $225,000 in income. Without write-offs, that entire amount is subject to taxes. However, if you can write off $100,000 in expenses, your taxable income is now $125,000.
The effort of documenting and claiming expenses is well worth it!
Tax write-offs are essential for LLCs because they can make a massive difference to your bottom line. Take advantage of pass-through taxation and claim all possible deductions to keep more profits.
axesYou can then return the profit to the business or take it home as income.
Common Tax Deductions for LLCs
The specific items you can write off can wildly differ from one LLC to the next, but in general, the IRS will allow you to take deductions that are “ordinary” and “necessary,” reasonable in amount, directly related to the business, and properly documented. Still, some common tax deductions apply to most LLCs that you should know about:
Self-Employment Tax Relief
If you own an LLC, you will likely need to pay some self-employment taxes on the income generated by LLC activities. Self-employment taxes are federal taxes that cover FICA (Social Security and Medicare). Usually, they're taken from your paycheck if you're employed.
Luckily, not all LLC income is subject to self-employment taxes. For example, income from the sale of LLC assets, interest income, dividend income, and other “passive” income are generally not subject to self-employment taxes. Even if the LLC income is subject to self-employment taxes, the good news is that you can deduct half of your self-employment tax from your taxable income. This deduction helps reduce your overall tax bill and makes managing your taxes easier.
Operational Expenses
There are many costs that are essential to your business's day-to-day operation that you can write off. This includes:
- Rent. If your business pays rent (office space, retail space, storage), your payments can be deducted from your taxable income.
- Utilities. Costs for electricity, water, and internet used for your business can be written off. You may even be able to deduct part of your cell phone bill.
- Office Supplies. Items like paper, pens, and printer ink used for your business are deductible. You can even write off cleaning supplies, postage, and software subscriptions.
- Equipment. Write off larger items like computers, printers, and office furniture like desks and chairs. Depending on the type of equipment and value you may be able to deduct the entire amount in one year or spread the deduction out over many years.
- Transportation. If you use your car for business purposes, you can deduct the cost of gas, maintenance, and even a portion of your car insurance. You can even count your vehicle as a business asset and write off the depreciation value.
- Bank Fees: These costs are required to run your business, so they are tax deductible. This includes payment processor fees (Stripe fees, for example).
Home Office Deductions
You can take advantage of the home office deduction if you work from home. This means you can write off part of your home expenses if, among other requirements, you use part of your home exclusively for business, it is your principal place of business or you meet with clients or customers in your home.
You can choose to calculate the deduction as either a flat rate per square foot of your home office or based on the actual expenses multiplied by the percentage of your home used for the business. Under the actual expenses method you can deduct a percentage of certain expenses including:
- Mortgage and Rent Payments. You can deduct a portion of your mortgage interest or rent. You can also deduct HOA fees, property taxes, and home insurance.
- Utilities. A portion of your home’s utilities, like electricity and heating, can be written off.
- Repairs and Maintenance. Any repairs or maintenance done to your home in general can be deducted. You may also be able to deduct all repairs and maintenance performed on the home office space.
- Office Supplies, Equipment, and Furniture. You can write off these purchases as you would with an outside office, but they must be for business use.
The significant distinctions between the two calculation methods are simplicity and the potential amount of the deduction. The flat fee method is easy but may not result in the maximum deduction. The actual expense method is more complicated, but could lead to a higher deduction..
What this means:
If your home is 2,000 square feet, and your office is 200 square feet, under the flat fee method, you will multiply the IRS standard home office deduction ($5 per square foot in 2024) by 200 square feet, or you can multiply the actual expenses incurred by 10% and likely deduct a much higher amount..
Health Insurance Premiums
If you pay for your own health insurance, you can deduct 100% of the premiums from your taxes (per Section 162(I) of the tax code). This applies even if your family is covered and is especially helpful for self-employed LLC owners.
Professional Services
Hiring professionals to help you run your business is often necessary, and the fees you pay them are valid tax deductions. Here are some standard professional fees that are deductible:
- Attorneys: Fees paid to lawyers for legal advice, contract reviews, or other legal services are deductible.
- Accountants: You can write off the fees you pay an accountant, CPA, or tax professional for bookkeeping services, tax preparation, or financial advice.
- Consultants: If you seek out and pay for expert advice on improving your business operations, that's deductible.
- Marketing Services: Fees paid to marketing professionals or agencies to help promote your business can also be written off. You can even write off marketing materials like business cards.
- Contractors: If you've hired an independent contractor, such as a copywriter or a virtual assistant, their fees can also be written off.
These are just some common types of write-offs you can use to lower your tax payments. You'd be amazed how many business owners don't take advantage of them!
Lesser-Known Deductions That Can Benefit LLCs
Now that you understand the most common expenses you can write off, you should know there is more out there. Some you may not know about.
You’re not alone here. Many business owners overlook these lesser-known deductions but can provide significant tax savings.
Let’s dive into some of these hidden tax gems.
Start-Up Costs
If you're working on setting up your LLC or just starting out, you'll understand how fast these start-up expenses add up, so you’ll want to know about this.
In 2024, you can deduct as much as $5,000 for initial costs to pay for things like:
- licensing
- logo design
- market and product survey and analysis
- professional services (consulting and legal fees)
- wages and salaries for employees in training
You can then deduct another $5,000 for organizational costs to set up your business as an LLC.
Here's another real-world example.
If you paid $4,500 for logo design and business licensing and then $2,000 to set up your LLC, you could reduce your taxable income by $6,000 and save on your Year 1 taxes. For new business owners, that can be a huge deal!
Continuing Education Expenses
For many business owners, keeping their skills up to date is essential. Depending on your industry, keeping your business open may even be required.
That's why continuing education expense deductions are so helpful.
If you take courses, attend seminars related to your business, or maintain a designation to operate your business, you may be able to write those costs off. This can include tuition, books, and even travel expenses to get to your classes.
Charitable Contributions
If you donate to charitable causes, you may be able to add those to your itemized deductions —Schedule A (Form 1040) —at tax time. The charitable cause must qualify (such as religious, educational, scientific, and cruelty prevention), and there are some limitations to the amounts you can deduct. Keep in mind that political contributions are not eligible.
Specific Deductions for Various Types of LLCs
Not all LLCs are the same, and the deductions you can claim can vary based on your LLC’s structure. Let's explore some of the unique deductions available for different LLC types.
Single-Member LLCs
A single-member LLC has only one owner and is most like a disregarded entity for tax. This means the business income is reported on a schedule of the owner's tax return. For single-member LLCs, there are several specific deductions to consider:
- Home Office Deduction: If you run your business from home, you can deduct a portion of your home expenses. This includes mortgage interest or rent, utilities, and repairs.
- Self-Employment Tax Deduction: You pay self-employment taxes as a single-member LLC owner. You can deduct half of these taxes on your personal tax return, reducing your taxable income.
- Health Insurance Premiums: If you pay for your health insurance, you can deduct the premiums.
Multi-Member LLCs
A multi-member LLC has two or more owners and is usually treated as a partnership for tax purposes. This means the LLC files a partnership tax return (Form 1065) and issues K1s to the members. Each member then reports their share of the business income on their personal tax return. Multi-member LLCs can take advantage of several deductions:
- Guaranteed Payments: Payments made to partners for their services are deductible as business expenses. These payments are similar to employee salaries and reduce the LLC’s taxable income.
- Section 179 Deduction: Allows LLC members to deduct qualifying equipment, vehicles, and software/apps costs. While there are limitations, these deductions encourage investment in business assets.
- Business Meals and Entertainment: LLC members can deduct half of the cost of meals at business-related events. You may claim your employee's entire meal.
LLCs Opting for S-Corp Taxation
Some LLCs choose to be taxed as an S-Corporation (S-Corp). This election can provide additional tax benefits and deductions. Here are some specific deductions for LLCs taxed as S-Corps:
- Salaries and Wages: Owners who work in the business can pay themselves a reasonable salary, which is deductible as a business expense. Additional amounts the owners receive as a dividend are not subject to self-employment taxes, saving the company and the owner on taxes!
- Retirement Plan Contributions: LLCs taxed as S-Corps can set up retirement plans for their owners and employees, such as SEP IRAs or 401(k) plans. Contributions to these plans are deductible as business expenses, helping lower the LLC’s taxable income.
- Business Taxes: The IRS allows you to write off several business-related taxes. Some federal and state income taxes and taxes on real estate and payroll fall under this category. A word of caution, though: you can't claim personal taxes. All three levels of federal, state, and local income taxes are a part of this. Only taxes paid by your LLC may be claimed as a deduction.
Maximizing Deductions with Proper Documentation
We've shown you that you can deduct many expenses to lower your taxable income.
Maximizing your deductions and being able to easily prove these expenses are valid to the IRS vital.
First, to maximize your allowable deductions, a good rule of thumb is that your business expenses should meet two criteria: ordinary and necessary.
Ordinary expenses are incurred on a regular basis in your type of business. For example, buying paper and pens is an ordinary expense if you run an office.
Necessary expenses are those that are helpful and appropriate for your business. These include advertising costs or business travel.
Expenses that don’t fit these criteria could raise red flags with the IRS and get you audited. That’s where good record-keeping comes in.
You can’t control if you get audited, but you must be able to support your deductions, so keep detailed records of all your business expenses. This includes keeping receipts, invoices, and bank statements. You should also write down the reason for each expense and how it relates to your business. For example, if you go on a business trip, keep the receipt for your plane ticket and note who you met with and why.
Accounting software can be truly useful here. These programs can help you organize your expenses, generate reports, and make it easier to find the information you need at tax time. You can also scan and store digital copies of your receipts to keep them safe and organized.
Remember, you can get audited at any time. Keeping accurate and detailed records makes it easier to prove your deductions if the IRS ever asks. Your efforts will show that your expenses are legitimate.
Plus, staying organized means you won’t miss out on any deductions you’re entitled to, which can save you money at tax time. That’s why we can’t overstate the importance of keeping thorough records to maximize your tax deductions and keep your small business on the right side of the IRS.
Avoiding Common Mistakes with Claiming Tax Deductions
When running an LLC, claiming as many expenses as possible can reduce your taxable income when you file your taxes.
At the same time, there are mistakes that LLC owners make when they claim these deductions, and they could cause trouble if you get audited.
The good news is these mistakes are avoidable.
One significant error is mixing personal and business expenses. This can lead to disallowed deductions and might even trigger an IRS audit.
You've made this mistake if you use the same bank account or credit card for business and personal spending. For example, buying groceries with your business account can make it hard to prove which expenses are for your business. To avoid this, keep business and personal bank accounts separate.
Another common mistake is not keeping detailed records of your expenses. The IRS might disallow your deductions if you can't provide proper documentation. Save receipts, invoices, and bank statements for all your business expenses. Write down the reason for each expense and how it relates to your business. If the IRS asks for proof, you can quickly provide it.
Some LLC owners make the mistake of claiming deductions that aren't ordinary and necessary for their business. Deductions are allowed by the government to offset the cost of running your business. They are not intended to encourage personal spending.
For instance, buying a new computer for your office is a valid deduction, but buying one for personal use is not. You also can not write off personal vacations and meals with your family.
Lastly, be careful with home office deductions. To claim this deduction, your space must be dedicated solely to your business. You can't claim it as a home office if you use the same room for work and personal activities.
By avoiding these common mistakes, you can ensure your tax deductions are valid and keep your LLC in good standing with the IRS. Keep your personal and business expenses separate, maintain detailed records, and only claim ordinary and necessary deductions for your business.
State-Specific Considerations for Tax Deductions
When you own an LLC, you must know that tax deductions vary by state. Each state has its own rules and regulations, which can affect:
- How you manage your taxes
- Your decision to expand your business to other states
Let’s use California as an example to understand how state-specific considerations work. In California, there are unique tax rules and additional fees that LLC owners need to be aware of.
For starters, California LLCs pay an $800 Franchise Tax Board Fee or Franchise Tax even if your business is inactive or losing money. This fee is one of the highest in the country, so it's something to budget for when you plan your finances. The plus side is that it's tax deductible.
California LLCs must also pay a Gross Receipt Fee based on total income if they earn more than $250,000. For example, if your LLC makes between $250,000 and $499,999, the fee is $900. If you earn more, the fee increases.
Additionally, you'll need to pay California state taxes, which range between 1 and 13% of your net income.
Another thing to consider is that some states have rules for certain deductions that are different from federal rules. You should consult a tax professional to follow your state's laws.
Understanding the state-specific rules of the state where you form (and operate) your LLC will help you manage your LLC’s taxes. Keep on top of your state’s tax rules and stay informed about any changes to maximize your deductions and avoid surprises.
Consulting a tax professional who knows the rules in your state can be a great help here!
Get More Tax Credits with a Tax Expert
The U.S. Tax Code is highly complex. DIY-ing your taxes when you own an LLC can be difficult and time-consuming. Worse still, if you make mistakes, you could pay more taxes than necessary and even trigger an audit.
Ensure you pay attention to all key details and take advantage of valuable deductions by hiring a tax professional (whose fees you can deduct). A CPA, accountant, or bookkeeping service can effortlessly help you through tax season.
FAQS
While you’re not likely to avoid taxes entirely, you can reduce your taxable income by claiming eligible expenses as write-offs when you file your taxes.
Yes, the IRS considers alcohol a reimbursable business expense. According to IRS Publication 463, a business-related meal expense "includes costs for food, beverages, taxes, and related tips."
Yes, an LLC can write off car payments if the car is used for business. There are two ways to do this:
Actual Expense Method: You can deduct the costs of using the car for business, like part of the car payment, gas, repairs, insurance, and the car's value going down over time. You need to keep track of these costs and only deduct the part used for business, not for personal use.
Standard Mileage Rate: Instead of keeping track of all the costs, you can use a more straightforward method called the standard mileage rate. The IRS sets this rate each year. You just need to record the miles you drive for business and multiply them by this rate.
