What Can You Write Off on Taxes for an LLC?

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

The Internal Revenue Service treats LLCs differently for tax purposes than other types of entities insofar as members can choose the type of taxation to apply. The LLC is not liable for federal income taxes unless you elect to treat it as a corporation. Otherwise, the members are each responsible for a portion of the tax. However, the same business deductions available to a corporation are available to the individual members on a pro-rata basis.

The Internal Revenue Service treats LLCs differently for tax purposes than other types of entities insofar as members can choose the type of taxation to apply. The LLC is not liable for federal income taxes unless you elect to treat it as a corporation. Otherwise, the members are each responsible for a portion of the tax. However, the same business deductions available to a corporation are available to the individual members on a pro-rata basis.

Interest

You can deduct all interest payments you make during the year on loans you use to acquire business assets or pay LLC expenses. If you obtain a business loan, but use a portion of the funds to finance personal purchases and expenses, you must allocate the interest between the two uses. Interest that accrues on the portion of a loan you use for personal purposes is not deductible.

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Business Bad Debt

Businesses that extend lines of credit to customers can deduct the amount of any debt it is unable to recover. The deduction is available in the year it becomes worthless. A debt can become worthless before the debtor defaults on payments if you obtain information that leads to the same conclusion.

Insurance

You can reduce the LLC’s taxable income by the amount of insurance premiums you pay during the tax year. Deductible insurance premiums include policies that cover business property in the event of fire, storms and accidents, credit insurance that reimburses the LLC for bad debts, group medical insurance for LLC members and employees, liability insurance and workers’ compensation coverage.

Home Office

Members of a LLC who operate the business from home may be eligible for a home office deduction. To qualify, you must use an identifiable space of the home exclusively to conduct the LLC’s business. The home office must also be the principal place of business that you regularly use to meet with clients, store inventory or perform management activities. Eligible home expenses include rent, utilities, cleaning services and repairs that affect the entire home. You calculate the percentage of these expenses to deduct using the ratio of square footage of the office to total square footage of the home.

Stolen Inventory

If the operations of the LLC require it to hold inventory, you can deduct the value of goods that others steal from the company. To qualify for the deduction, the individual who steals the inventory must do it with intent to depriving the LLC of its property. The loss of inventory can be the result of any criminal act such as blackmailing an employee of the company or through criminal misrepresentation. You calculate the deductible loss by reducing the cost of the inventory by any reimbursement you receive from an insurance company.

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What Can an LLC Deduct?

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Related articles

What Expenses Can I Deduct as a Member of an LLC?

The IRS allows the taxpayer ultimately responsible for paying the tax on business income to take deductions for valid business expenses. However, the actual taxpayer for an LLC is not always a member. If you treat the LLC as a corporation for tax purposes, the LLC is the taxpayer eligible to take the business deductions. If you treat the LLC as a sole proprietorship or partnership, members must report business deductions on a personal return.

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.

Can a Sole Proprietor Write Off a Home Office?

Running a business as a sole proprietor means that, for tax purposes, you and the business are one and the same. You pay taxes on the business income just as you would as an individual, and the income is reported on the tax return you file every year. The IRS allows the same expense deductions you would normally take as a self-employed individual working at home.

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