LLC Tax Deductions
LLCs are taxed as “pass-through” entities by default, meaning the business itself doesn’t pay taxes. Instead, revenue passes through the LLC to the members, who report the profits and losses on their individual tax returns. LLCs have two major tools for reducing their taxes: tax deductions and tax credits. A tax deduction reduces your taxable income, whereas a tax credit is money from the government that goes toward the total amount you owe in taxes. We’ll go over the most common tax deductions and credits for LLCs.
What Expenses Are Tax Deductible with an LLC?
An LLC can claim a tax deduction on any business expense that the IRS considers a “necessary” and “ordinary” expense. According to IRS Publication 535 (2021), a necessary expense is one that is “helpful and appropriate” for a business, and an ordinary expense is one that’s commonly accepted in your line of work. Here are some of the most common tax deductions for LLCs:
Startup Business Expenses
Money you spend on your business before you begin operations is called a capital expense. Capital expenses can include training for employees, advertising, legal and consulting fees, and other expenses that occur before you actually open your business. According to the IRS Tax Code, you may deduct up to $5,000 of startup costs in your first year. If you have more than $5,000 in startup costs that you want to deduct, you can do so through a process called amoritization or depreciation. This is when you deduct the cost of a business expense in partial amounts over a period of 15 years.
As an LLC member, you’ll need to pay the 15.3% federal self-employment tax each year. The good news is that you can deduct the “employer” portion of this tax (7.65%) from your adjusted gross income on your individual tax return.
If you use a car for business purposes, you can deduct the expenses of owning and operating the car from your taxes. However, if you use the car for both business and personal reasons, you can only deduct the cost of using it for business. According to the IRS, there are two methods for deducting auto expenses:
- Standard mileage rate—Deduct a certain amount (based on the IRS standard mileage rate) for each mile driven.
- Actual expense method—Determine and keep track of the actual costs of operating the car for business purposes, including gas, repairs, insurance, depreciation, etc.
It’s a good idea to consult a CPA to find out which deduction method will save you the most money.
Learn about the benefits of buying a car under an LLC.
If you rent a storefront or office space for your business, you can claim your rent as a tax deduction. Home-based businesses can claim a deduction on the portion of rent or mortgage interest paid for the part of the home they use for business.
Employee wages and the employer portion of payroll taxes are tax deductible. Many employee benefits—such as health insurance—are tax deductible as well.
If you hire independent contractors, you can deduct this expense from your taxes. An independent contractor is a worker who is self-employed and not legally considered an employee of your business.
Certain Local and State Taxes
Many local and state taxes are tax deductible, including:
- sales tax on items bought for business purposes
- state income tax
- real estate tax on business property
- excise and fuel taxes
LLC business insurance premiums are usually tax deductible. This includes liability insurance, workers’ compensation, professional malpractice insurance, and other forms of insurance you purchase for your business.
If you travel for business purposes, you can deduct many of the expenses, including plane fare, taxi or Uber fare, hotel bills, meals, and even dry cleaning.
If your LLC makes a charitable donation, you can claim it as a deduction on your taxes. Donated items—like old computers or furniture—can also be counted as a deduction, unless the items have completely depreciated in value.
Education for you or your employees can be counted as a tax deduction. This can include classes, certification, or books and training materials. However, the education must be related to skills needed in your current business.
Commonly Overlooked Tax Deductions for LLCs
Here are some other tax deductions that LLC owners often overlook:
- Bank service fees
- Business gifts
- Coffee service
- Dues to trade organizations
- Legal and professional fees
- Office supplies
- Petty cash funds
- Tax services
- Theft losses
Tax Credits for LLCs
Tax credits are not the same thing as deductions, but they can also save you money. Instead of reducing your taxable income, tax credits reduce your overall tax burden. Tax credits are given to businesses that do things the government wants to promote, such as reducing their environmental impact or creating work opportunities for marginalized individuals. For example, a business might receive a $20,000 tax credit for installing solar panels on their office building. The $20,000 credit would be subtracted from the total amount the business pays in taxes.
Certain expenses can be claimed as either a tax deduction or tax credit. However, you cannot claim the same expense as both a deduction and a tax credit. In many cases, a tax credit will save you more money than a deduction. It’s a good idea to consult a tax professional to make sure you maximize your tax breaks.
Here are some common business tax credits:
- Employee health insurance
- Paid medical and family leave
- Employer-provided childcare facilities
- Electric vehicle purchase
- Researching new technologies
- Creating job opportunities
- Improving accessibility for the disabled
- Investing in Community Development Enterprises (CDEs)