What Are Some Tax Deductions I Get With an LLC?

By Tom Speranza, J.D.

What Are Some Tax Deductions I Get With an LLC?

By Tom Speranza, J.D.

If you own and operate a limited liability company (LLC), you are obligated to pay taxes on the income it generates. If you are the only owner of the LLC, the company is considered a disregarded entity for federal tax purposes, and you report such income on your individual tax return using Schedule C (just as a sole proprietor would).

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If an LLC has more than one owner, it's usually taxed like a partnership. The company allocates its profits to its members, who use Schedule K-1 to report the income on their individual tax returns.

To arrive at its annual taxable income figure, your LLC can deduct business expenses from its gross income as long as those deductions comply with the detailed rules and guidelines imposed by the U.S. Internal Revenue Service. In addition, the owners can deduct some additional expenses they incur directly as business owners.

General Rules for Deducting Business Expenses

Your company's accountant can help your business comply with IRS rules, but you should keep three general principles in mind:

  1. The IRS requires business expenses to be ordinary and necessary. An ordinary expense is one that is common and generally accepted in your trade, profession, or business. A necessary expense is appropriate and helpful for your business.
  2. Business expenses must be reasonable in magnitude. The amount deducted must bear some reasonable relationship to the size, nature, and profitability of your business. For example, a business that generates $100,000 of annual gross income should not deduct $80,000 of client entertainment expenses.
  3. Business expenses are deductible, but personal expenses are not. For example, if you purchase a laptop to use in your business, you can deduct its cost as a depreciation expense. However, if you also use the laptop for personal purposes (surfing the internet, watching movies, online shopping, paying household bills), you must determine the ratio of business versus personal use. The deduction is then limited to the business-related percentage of the laptop's cost.

Types of Business Expenses

The general categories of business expenses that an LLC can deduct from its gross income include:

  • Cost of goods sold. If your business sells tangible goods (as opposed to services), these are the expenses associated with making, buying, storing, and shipping its products.
  • Taxes. LLCs can deduct business-related taxes such sales tax, state and local business income taxes, and the taxes and other withholding amounts paid in connection with employee wages.
  • Start-up expenses. These include filing fees to form your LLC, business license fees, security deposits for office space, furniture and fixtures for an office or store, and legal and accounting fees.
  • Employee compensation. If the LLC has W-2 employees, these expenses include wages, salaries, bonuses, benefits, and employment taxes.
  • Independent contractor payments. If your business buys the services of consultants, salespeople, and other workers who aren't employees (including lawyers and accountants), the fees paid to them are deductible.
  • Business vehicles. These are expenses associated with vehicles used in the business, including the business-related use of vehicles driven for both personal and company purposes. Such costs can include lease payments, fuel, maintenance, and tolls.
  • Interest. This is interest paid on business loans, lines of credit, and credit cards. If these sources of funds are also used for personal items, the interest deduction is limited to the business-related portion of the debt.
  • Bad debt. If a customer doesn't pay an invoice or bill in full, and the unpaid amount is not reasonably collectible, you can deduct the loss.
  • Insurance. You can deduct business insurance premiums, including those paid for general liability coverage, errors and omissions, malpractice, and protection of your tangible assets from damage.
  • Rented space. If your business rents an office, store, studio, factory, or other space, the rent, utilities, and other landlord charges are deductible, along with any fees paid for cleaning, landscaping, or other maintenance services.
  • Home office. If you operate your business from a specific portion of your personal residence, you can allocate a portion of your household expenses to the business and deduct them on your tax return.
  • Capital asset depreciation. You can deduct capital expenses such as renovating an office or store, buying furniture, or installing new IT equipment over a period of years through depreciation. The rules for asset depreciation are complicated, so you should consider consulting an accountant for help.
  • Travel, meals, and entertainment. As a general rule, 100 percent of business travel expenses is deductible, while only 50 percent of the cost of business meals and entertainment qualifies as a deduction. The rules around T&E expenses are complicated, and the IRS tweaks them on a regular basis. Your company's accountant can keep you from making a major mistake on your tax return.

Other Deductions

The members of an LLC also can take advantage of a couple of other deductions:

  • Personal health insurance premiums. If you directly pay health insurance premiums for you and your family, you can write them off on your individual tax returns.
  • Self-employment taxes. The members of an LLC taxed as a partnership are not considered employees of the LLC; they are self-employed. The members can, however, deduct one-half of the federal self-employment taxes levied on self-employment income for Social Security and Medicare.

It's important to carefully track all your business expenses in order to maximize your tax deductions. In addition to the cost of the goods you sell and the overhead costs of creating your products (rent, utilities, wages), you can also deduct start-up expenses, vehicle expenses, office equipment, insurance, and travel and entertainment expenses. You may find it useful to take a photo of receipts to create a digital record of business purchases and travel expenses.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.