LLC Tax Deductions

What tax deductions are available to LLC owners?

Tax preparation for your LLC or startup can be expensive as well as difficult. If you file alone, you could be missing out on hundreds of dollars in tax deductions annually. With the help of this indispensable tax deduction cheat sheet, you can start taking advantage of the biggest tax benefits you could be overlooking.

“How can I lawfully lower my taxes?” may be on a business owner’s mind. A firm can use deductions in several legal ways to reduce its tax obligation and retain more of its earnings. Whether your company is brand-new or has been operating for a while, you can still benefit from most of these tax breaks. Use our tax deduction checklist, which offers 15 strategies to reduce your tax liability.

1. Office at home

This is a tax deduction that you can claim if you work from home. You can deduct costs related to maintaining your home office from your taxes, such as a part of your home utilities, Wi-Fi, maintenance, insurance, and other expenses. You can deduct actual expenses depending on a percentage of your house used for business, or you can take a standard deduction of five dollars per square foot of the area of your home utilized for business. Keep track of all the invoices and paperwork you receive from your home office.

2. Supplies for the office 

Everything you need to operate your business, including supplies, tools, and equipment, is deductible. These may consist of:

• Computer
• Stationary
• Printer
• Office equipment, such as desks, chairs, shelves, and drawers
• Ink cartridges
• Computer applications and subscriptions related to business
• Mailing and packaging supplies
• Supplies for cleaning

3. Costs of Travel

All of your business and trip expenses are deductible. These can include gas, parking fees, automobile rentals, food, entertainment, air travel, and hotels for business purposes.

4. Internet and phone

So long as you use the phone for work-related purposes, you can deduct the cost of using a landline or a cell phone. This can cover everything from the price of your new smartphone to your monthly cell phone bill.

5. Company Meals

Business dinner reimbursement was limited to 50% until 2021. Fortunately, after the COVID outbreak, this has altered. When “talking shop” with staff members, you can write off 100% of your business lunch expenses for 2022. However, you must save your receipts. Business meals were completely deductible when holding business meetings with employees at a restaurant in 2022. But starting in 2023, the 50% deductibility of business meal deductions was reinstated, returning to the pre-2021 regulations.

6. Startup Expenses for Businesses

This deduction is perfect for new companies that have made financial investments to create and launch their LLCs. If beginning costs are $50,000 or less, new firms can claim as much as $5,000 in taxes for startup costs and an extra $5,000 for organizational expenditures. The excess lowers the amount of the allowed deduction if the beginning costs exceed $50,000. If those expenses are more than $55,000 and need to be spread out over 15 years, the deduction is removed.

7. Bad Debt

Owners of LLCs can claim a deduction from this uncollected, bad debt if they have a vendor or customer who hasn’t paid their invoice, has gone out of business, or has not replied to any attempt to pay off their obligation.

8. Tax on Self-employment

The entire value of the tax on self-employment, which is 2.9% for Medicare and 12.4% for Social Security, is paid by sole proprietors and LLCs with just one owner (15.3% total). Your tax due is decreased since the IRS permits you to subtract 50% of the self-employment tax (7.65%) from your income taxes.

9. Fees for Legal and Professional Services

Attorney fees can mount up rapidly, whether they are for a consultation, contract drafting, or to avoid or defend against litigation. The good thing is that business-related legal expenses are tax deductible. This also holds true for expert costs, such as those associated with tax preparation.

10. Car Related Costs

You may deduct vehicle expenses, including mileage driven, if you use your car for business travel. Additionally, you can deduct the depreciation value of your car and classify it as an asset of your firm.

11. Health Care Costs

Annual medical costs are increasing. Compiling the expenses of your insurance coverage, deductibles, co-pays, and any additional payments associated with medical needs, such as prescription drugs, is one method to save money. For this reason, you should be sure to maintain accurate records.

You can deduct any excess medical expenses from your adjusted gross income if they exceed 7.5% of your income.

12. Interest and Bank Fees

Bank fees and interest payments may significantly reduce a business’s revenue. This is particularly valid in a situation with high-interest rates.

The interest paid on credit purchases made by your company is entirely tax deductible. This also holds true if you borrow money to support your business.

13. Promotions and Advertising

All of your startup-related expenses, such as printing the first set of business cards, announcing a promotion, or starting an advertising campaign, are tax deductible.

Furthermore, since they’re seen as the “cost” of promoting your products and services, the expenses related to managing and hosting your website, promoting yourself online, or even supporting your neighborhood high school baseball team are all tax deductible.

14. Deductions from Retirement Plans

The best option for company owners to save money for retirement and deduct the amount from their taxable income is through a SEP IRA.

15. Business-Related Entertainment

It can be an aspect of your job to ensure your clients have a good time, particularly if you’re trying to establish a rapport and talk business. The majority of entertainment-related expenses are no longer deductible as of the Tax Cuts and Jobs Act of 2017. However, meals associated with entertainment are 50% deductible, provided the expenses are paid separately from the cost of entertainment.

Extra Tax Breaks

In addition, the following are possible tax deductions for 2024:

• The price of certification fees and licenses
• Independent Work Health Benefits
• Donations to charities
• Account for Health Savings (HSA)
• Child Support
• Commercial insurance
• Interest on student loans
• Business-related education

Ways to Avoid Taxes on LLCs

An LLC does not have to pay corporate income tax, unlike a C Corporation. While treating the LLC as a “pass-through” entity for taxation purposes is a significant benefit, it does not eliminate the requirement for you to submit a business tax return. Simply put, the LLC’s income “passes through” to the company owner’s personal taxes. Here’s how you can save money with this and other LLC tax loopholes:

• Making an S Corp filing. Your LLC will have to file taxes as a S Corp in order to receive the full tax benefit. By deducting your salary from some of the revenue and paying yourself a dividend from the remaining money the business makes, you can lower your self-employment taxes.

• Deductions for capital expenses. One major investment that many small businesses make is money to purchase physical assets for their business, such as real estate, cars, buildings, equipment, or technology. You can gradually deduct payments for the maintenance of these assets over the course of the year.

• Deduction for Qualified Business Income. You can deduct this, also known as QBI, in addition to itemized and standard deductions. It has a maximum value of 20%. This is related to net income (after deducting operating costs). You can get instructions from IRS Form 8995 or from a tax expert.

Tax Words to Expand Your Knowledge

It’s critical to understand the terminology used in the tax filing process when completing your business taxes. We’ve compiled an index of the most used tax words along with definitions to help:

Above-the-Line Deductions: Contributions to health savings accounts, retirement accounts, student loan interest, and other accounts are deducted from gross income.

Adjusted Gross Income: All of the year’s earnings, after deducting all allowable costs and deductions, including interest, capital gains, dividends, and wages. Tax liability is determined using the AGI.

Amortization: Technique for deducting an asset’s cost over time, such as machinery, cars, or buildings.

Capital Expenditure: Money allocated to improving a company, especially in terms of increasing revenue potential.

Capital Gain: Money received by selling a piece of real estate, shares, or land. This sum exceeds the asset’s purchase price.

Capital loss: Money lost by selling a piece of real estate, shares, or land. Subtract the purchase cost from the lesser selling price to determine the capital loss.

Carryover: when deductions or credits are carried over to the next year’s tax return and cannot be utilized.

Credit: The quantity that can be used to lower the overall tax burden. The federal income tax bill will be reduced to $900 from a $1,000 tax liability with a $100 credit.

Charitable Contribution: A tax deduction obtained by giving to a foundation, qualifying non-profit organization, or charity. Gifts to charities might be in the form of cash, apparel, real estate, or household goods.

Deduction: A sum of money that can be deducted from taxable income in order to lower the taxable income of the filer.

Dependents: Someone who is financially dependent on the taxpayer. A partner or child may be included in this.

Earned Income Tax Credit (EITC): A tax credit that is refundable for families with children who earn low to moderate incomes.

Estimated Tax Payments: The approximate amount withheld from earnings throughout the course of the year. Business owners can choose to employ this method, which allows them to send in estimated taxes in 4 equal installments distributed on a quarterly schedule.  After the yearly taxes are filed, any overpayments will be refunded.

Exemption: The amount that may be taken out of your AGI to account for each person who depends on your income. Your children, your spouse, or yourself may be exempt.

Filing Status: The IRS’s classification for figuring out the standard deduction and other tax benefits. Five filing statuses are available: single, married (filing separately), married (filing jointly), head of household, and widow or widower (if applicable).

Income Tax: The federal government’s income-based tax levied on individuals, corporations, and families.

Itemized deduction: A detailed inventory of all the allowable deductions, such as those for charity contributions, real estate taxes, mortgage interest, and medical costs.

Pass-through Entity: Entities that are structured to spare business owners from paying multiple taxes. This often enables business owners to pay taxes on personal income received via their venture.

Self-employment Income: Income given to an independent contractor, freelancer, or sole proprietor in exchange for services rendered.

Standard Deduction: The set sum that taxpayers can subtract from income. Whether taxes are submitted as head of household, married, or single, the amount is changed annually.

Tax deductions: These are the costs that can be subtracted from your AGI to determine your final tax burden; they are also known as tax write-offs. The following categories apply to the tax deduction: standard deductions, above-the-line deductions, itemized deductions.

Tax liability: The total amount payable to the IRS as calculated in a tax return.

Taxable Income: The sum that is used to determine the amount of taxes due.

Voluntary Compliance: Meeting tax obligations and truthfully disclosing all income and tax-related activities in connection with IRS filings.

W-2: Employer-paid taxes for full-time, salaried workers.

Withholding: The amount taken out of income, such as wages, to cover taxes.

7 Tax Errors to Steer Clear of This Tax Season

Do you handle the tax preparation for your LLC or startup yourself? When paying business taxes on your own without the assistance of a tax-deductible service, exercise caution since there are potential penalties and fines. Moreover, filing regulations are always changing. Continue reading to discover some typical blunders to steer clear of:

1. Making “avoidable” mistakes on your tax return: Make sure all the boxes you tick are intended to be checked, spell your name correctly, and provide the correct Social Security number or EIN.

2. Neglecting or failing to include information that the IRS already knows: You will start receiving documentation detailing your income as tax reporting time approaches. These could be direct income received, dividends from stocks you own, or bank interest. Since the IRS already knows this information, please enter all of these amounts precisely. If the documents gathered from your company, bank, or brokerage firm don’t match, the IRS will take serious notice.

3. Forgetting to add business deductions: Read over the deductions you are allowed to take lawfully for your firm at the beginning of this article. If you do not include these deductions, your tax liability will increase significantly.

4. Keeping false records: In the event that the IRS audits your company, it is crucial that you preserve all of your invoices, receipts, and other business-related paperwork. Having this documentation will demonstrate the validity of the claimed credits and deductions. Save these documents for a minimum of three years.

5. Missing the deadline for filing taxes: If you have outstanding debt to the IRS, ensure that you settle it by the deadline. The deadline is typically April 15^th. However, if that day comes on a weekend, it may be different. This year, the date is April 15, 2024. A penalty equal to five percent of the amount outstanding will be applied for each month that passes without payment.

6. Failure to file taxes on time: April 15 is the deadline for 2024 tax filings. There can be fines and penalties if your taxes are not filed by the deadline. Try submitting Form 4868 to request an extension if you truly need additional time.

7. Sending in your return without a signature or date: It is surprising how frequently this occurs. You will have to refile your taxes if you followed every piece of advice in this article but forgot to sign your form. Unsigned or undated returns cannot be processed.

Without receipts, what can I claim?

The most effective and safest method of claiming deductions is to have receipts. You will have to present these if you are audited. An invoice, bill, or bank statement may also serve as a record if you file a claim without a receipt. This category may contain things like auto expenses, donations to retirement plans, medical coverage premiums, and mobile phone expenses. Your bank statement or bill statement will contain information about the majority of these items.

For personalized tax advice tailored to your LLC’s needs, consider consulting with a knowledgeable LLC attorney.

Which Tax Write-Off Is the Best?

The answer to this question mostly relies on the kind of your firm and the costs it faces. Nonetheless, you should utilize every one of the aforementioned write-offs in order to have the lowest potential tax liability.

What is the Maximum Write-Off Allowable for an LLC?

Generally speaking, there is no cap on the amount that an LLC may deduct for their firm. It’s crucial to stress that receipts and supporting paperwork must be retained in order to verify write-offs. There are, however, restrictions on some deductions. $5,000 for corporate expenses and $5,000 for startup costs is the maximum amount that can be deducted when starting a firm. If the initial costs are more than $55,000, they can be paid down over a maximum of 15 years.

The maximum amount that can be contributed to a self-employment pension (SEP) fund is 25% of the business’s revenue, or $66,000 in 2023 ($61,000 in 2022). The maximum contribution to a Simple IRA or Simple 401(k) was $15,500 in 2023 ($14,000 in 2022). If you are fifty years of age or older, this can go up to $19,000 (2023) or $17,000 (2022).