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.
A deduction is available for wages and salaries the LLC pays if the LLC employs non-members. To qualify, the salary must be ordinary and necessary, in that the employee’s services are helpful to the business and are the type of services similar businesses also seek employees to perform. The IRS will only allow a deduction for salaries that are reasonable under the circumstances. The IRS does not impose a monetary limit, but requires you to look at factors such as the employee’s level of responsibility, amount of hours the employee works to complete duties, cost of living in the relevant geographic area, complexities of the business and the salary history for the employee.
You can deduct all interest the LLC pays on a loan it uses to fund the purchase of business assets or to pay operating expenses. If the LLC is subject to partnership taxation rules, each partner can deduct the portion of interest that reflects his respective investment in the partnership. If you are the sole member of the LLC, you can deduct the entire amount of interest on the Schedule C attachment to IRS Form 1040. However, you must ensure that you do not use business loan proceeds to finance personal purchases or expenses. If you do, you must reduce the deduction by the percentage of the loan you use for non-business purposes.
Most states impose income taxes on businesses that you can deduct from the LLC’s taxable income. Members of an LLC that is subject to partnership taxation can deduct their proportionate share of the income tax a state directly imposes on the business’ income. If you treat the LLC as a sole proprietorship, you can take the deduction as an itemized deduction on the Schedule A attachment to a personal income tax return. However, if your total deductions eligible to for itemization do not exceed the standard deduction amount, you will not realize a tax benefit for income taxes you pay. Alternatively, if the state imposes the tax on gross income rather than net income, you can take the deduction in full without regard to itemized deductions on the Schedule C attachment to IRS Form 1040.
The IRS allows businesses a depreciation deduction when it purchases assets for use by the LLC. A depreciation deduction allows you a tax benefit each year on a portion of the asset’s cost. Both partners and sole proprietors are eligible to take the annual deduction on a personal income tax return.