What Can an LLC Deduct?

By Jeff Franco J.D./M.A./M.B.A.

The only time a limited liability company is responsible for remitting federal income tax payments is if the members elect to treat it as a corporation for tax purposes. If the LLC members do not elect corporate tax treatment, each member is responsible for reporting a portion of the LLC's income and deductions. Regardless of how you classify the LLC for tax purposes, the business is eligible to deduct a wide range of business expenses.

The only time a limited liability company is responsible for remitting federal income tax payments is if the members elect to treat it as a corporation for tax purposes. If the LLC members do not elect corporate tax treatment, each member is responsible for reporting a portion of the LLC's income and deductions. Regardless of how you classify the LLC for tax purposes, the business is eligible to deduct a wide range of business expenses.

Employee Salary

The amount of wages an LLC pays to employees is eligible for a tax deduction. Wages include all cash, property or services you provide in exchange for the employee’s services. Although you are free to pay an employee any amount of compensation, the IRS allows a deduction only for the portion that is reasonable under the circumstances. A determination of reasonableness balances the employee’s compensation with the complexity of the duties he performs, the amount of responsibility you give the employee, cost of living in the geographic area and the individual achievements of the employee.

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Rent Expense

The amount the LLC pays to rent property it uses solely for business purposes is fully deductible against the LLC’s income. However, the amount of rent must be reasonable in comparison to comparable properties in the area. Deductible rent only includes the expense you incur during the tax year. If the LLC prepays the rent that is properly allocatable to a future tax year, the deduction is not available until that future year.

Advertising

You can deduct all advertising costs that directly relate to the promotion of the LLC’s business and for which you reasonably expect a future benefit. You must reduce the deduction for any portion of annual advertising that attempts to influence any governmental legislation, regardless of whether you expect a future benefit from the lobbying activities.

Start-Up Costs

The start-up costs you incur before the LLC is operational qualify for a tax deduction. These costs include expenses you incur to create or investigate the purchase of a business, such as initial marketing and training employees. Start-up costs are capital expenditures and subject to amortization deductions over a period no less than 180 months. However, the IRS allows the LLC to deduct up to $5,000 of start-up costs on the first tax return. You must reduce the $5,000 deduction by the amount of total start-up costs that exceed $50,000.

Casualty Loss

If the LLC suffers loss or damage to property as a result of a casualty, a portion of the loss may deductible. A casualty is any sudden and infrequent event, such as a tropical storm or car accident, that is capable of causing damage to property. The loss you can deduct on the business property is equal to the basis of the property less its salvage value, minus the amount of any reimbursement you receive from an insurance company. The basis represents the cost of the property reduced by the amount of prior depreciation deductions the LLC takes.

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Are LLC Startup Expenses Tax Deductible?

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Can a Sole Proprietor Deduct Attorney's Fees Related to Starting a Business?

When operating a sole proprietorship, your business and personal assets and liabilities are one in the same. As a result, you report all business income on your personal tax return using a Schedule C. You can, however, report the same deductions that other business structures can, which may include attorney fees you pay during the startup phase of the business.

Deductible Expenses in a Sole Proprietorship

When you earn income through a sole proprietorship, you report it on a tax return a little differently than an employee reports wages. The Internal Revenue Service still expects to see all business earnings on a 1040, but unlike an employee, you separately report business income on a Schedule C. One of the main benefits of filing a Schedule C is the long list of deductible expenses you can report to reduce the income tax you owe.

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