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How to Maximize Allowable Tax Deductions and Minimize Tax Liabilities for LLC

How to Maximize Allowable Tax Deductions and Minimize Tax Liabilities for LLC
Ines Zemelman, EA
13 September 2021

There are a number of expenditures you can deduct from your taxable business income called a tax deduction (or "tax write-off"). In order to compute your taxable business income, you subtract the amount of each expense. In essence, tax write-offs reduce the amount of tax you owe. LLC tax deductions are only allowed for expenses that meet IRS standards. Businesses must pay federal income tax only when the LLC earns income and/or has expenses to write-off.

There is a comprehensive list of tax deductions that sole proprietors, partnerships, and limited liability companies (LLCs) can take advantage of in the following table. There are deductions that a small business owner should be aware of related to running a business, as well as deductions that are more personal in nature.

How to stay on top of your deductions?

There can be a challenge for many small business owners to determine what deductions are relevant to their business.

In general, people find it difficult to track deductions throughout the year. Instead, they try to piece things together at year end and run into complications. Are you aware of those restaurant expenses and fuel expenses you incurred in the last year? In most cases, people are not aware of this tax write-off, which means they cannot take advantage of it. The sum of these deductions is quite substantial and there are several tax savings that you are not taking advantage of. 

An accountant can help solve this problem by taking care of your bookkeeping. Maintain accurate records and keep up with your monthly bookkeeping in order to claim these deductions.

When an accountant does your bookkeeping, they catch these deductions every month so you have confidence you’ve caught everything and minimized your tax liability. Then, when the year ends, your accountant will help you file your tax return and annual accounts. 

Rules for LLC tax filing status

The IRS gives you more flexibility when it comes to taxing your business earnings if you use a limited liability company (LLC). You will be subject to a particular set of tax filing rules based on the choice you make. An LLC is not subject to any specific tax rules; it may use the tax rules that apply to partnerships, corporations, or sole proprietorships.

Your business will automatically be treated as a partnership by the IRS as soon as you create it, but it will only be for tax purposes. Tax filing rules for corporations have different filing requirements. If this suits your needs, you can file IRS Form 8832 to obtain this treatment. A person who has made this choice cannot change the designation of the LLC again for five years.

Partnership filing requirements

Taxes on business income are not withheld from the limited liability companies subject to partnership tax rules. Instead, partners must file Form 1065 (partnership tax return) every year to the IRS. Individual owners file their own tax returns in which all income, deductions, and credits are listed. As a result, Schedule K-1s are sent to all LLC owners at the end of the year detailing each owner's share of these amounts. The tax return due date for LLC taxed as a partnership is March 15.

Corporate filing requirements

In the event you elect to treat your LLC as a corporation, the IRS will treat your business separately from you. Because of this, it is the business' sole responsibility to report all business income and deductibles on Form 1120 and pay the appropriate income tax due by its due date.

The owners and you are not personally liable for any failure of the LLC to pay taxes or file returns. Nevertheless, corporate taxation does have a drawback as business earnings are taxed twice. Taxation occurs in two phases: as soon as the LLC files the corporate tax return and as soon as the owners are paid dividends. A dividend is taxable income for individual shareholders and must be reported on their personal Form 1040s and paid to the IRS. The tax return due date for LLC taxed as a corporation is April 15.

Single Member LLCs

Single-member LLCs function just like ordinary sole proprietorships. Tax authorities disregard the LLC entity as its own distinct entity. You are responsible for all tax payments and filings, which implies that all tax payments and filings are your responsibility. 

Rather than simply completing your individual income tax return as always, you must now attach a Schedule C to your tax return. It is only Schedule C that reports your business income and deductions. You include the amount of profit you calculate on Schedule C on Form 1040 along with other income. The tax return due date for LLC taxed as a single member is April 15.

Small business tax deductions

According to IRS, here are a few common deductions your small business should know about:

  • Marketing and advertising
  • Working lunches or dinner meetings
  • An insurance policy for a business
  • Fees charged by banks and interest on business transactions
  • Cars used for business purposes
  • Contractual Labor
  • Depreciation
  • Education
  • Home office
  • Interest
  • Fees for legal and professional services, such as lawyers and accountants.
  • Relocation costs
  • Rent expense
  • Salaries and other benefits
  • Telephone and internet expenses
  • Expenses incurred while traveling

You cannot claim business tax deductions for any expenses outside of your business. 

Hire a professional accountant

As soon as your LLC is established, we recommend that you seek professional tax guidance. It is helpful to hire a certified public accountant or tax professional to keep your LLC in compliance with the state and federal laws, but it will give you access to an advisor if you have other questions about your business.

You still have to file tax documents every year, regardless of whether your business makes a profit or loses money. There is no room for complacency here. A business owner who wants to run a serious operation and avoid getting into trouble with the state should hire a tax expert to help them with their tax returns.

Ines Zemelman, EA
Founder of TFX