Don't Miss These Tax Write-Offs for LLCs
As a business owner, you have a lot of goals, and one of them is likely reducing your income tax bill. One of the simplest ways to reduce your tax bill is to ensure you're taking advantage of every available tax deduction.
Here are some tax-write offs for LLCs you don't want to miss.
Start-up and organizational costs
LLCs are allowed to deduct the cost of starting up and organizing the business. Start-up costs include amounts paid to create or investigate the creation of the business. This might consist of the cost of surveying potential markets, advertising for the opening of the business, and training employees before opening your doors.
Organizational costs include the cost of forming your LLC. This may include legal, management, consulting, accounting and filing fees.
Typically, these costs are considered capital expenditures – rather than deducting them as an expense, you amortize them over 180 months. However, you can elect to deduct up to $5,000 of start-up costs and $5,000 of organizational costs in the first year you are in business if you've spent $50,000 or less.
If you spent more than $50,000 in start-up or organizational costs, the deduction is phased out, dollar-for-dollar, until your costs reach $55,000. Any start-up and organizational expenses that can't be deducted must be amortized. For more information on amortizing these costs, check out Chapter 8 of IRS Publication 535.
Ordinary and necessary business expenses
The IRS doesn't recognize LLCs for tax classification purposes – they may be treated as a sole proprietorship, partnership, S-Corporation or C Corporation, depending on the number of members involved and how they elect to be taxed. As such, there aren't tax deductions unique to LLCs. However, like any business, the costs of operating the business are deductible as long as they are “ordinary and necessary."
An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. The types of deductions that are ordinary and necessary for your business depend on the kind of business you're in, but some common ones include:
- Car expenses
- Credit card fees
- Dues and subscriptions
- Employee benefits
- Legal and professional fees
- Office expenses
- Rent or lease
- Repairs and maintenance
- Salaries and wages
- Payroll, property and state income taxes
Also, although tax reform eliminated the moving expense deduction for most individuals, it is still available for businesses. If you relocate your business, you can deduct business moving expenses, including the cost of packing, loading, and transporting your equipment and offices, and even brokerage commissions you pay to find new space.
For more examples and detailed information on deductible business expenses, check out IRS Publication 535.
The Tax Cuts and Jobs Act of 2017 (TCJA) created a new deduction for owners of pass-through businesses, including LLCs that have not elected to be taxed as C Corporations. Section 199A, also known as the pass-through deduction, lets business owners deduct 20% of their qualified business income.
However, claiming the deduction is not quite cut and dry. For business owners with taxable income over $207,000 ($415,000 if married filing jointly), no deduction is allowed for income earned in a “specified service trade or business," (SSTB). An SSTB is “a trade or business involving the performance of services in the fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees."
If that sounds confusing, it is. The pass-through deduction is a minefield of definitions, rules and limitations. Check out the IRS's FAQs on Section 199A or tax to a tax professional for more guidance.
The Bottom Line
The more tax write-offs you can take advantage of, the lower your taxable income will be. Make sure you look into all deductions you can qualify for — and keep proper records to back up any deductions you claim.