Limited liability companies (LLCs) are a common structure for many small businesses. Most business owners assume that an LLC can only be taxed as a “pass-through” company, which means that taxes are “passed through” to the owner, who includes the income on their own personal return. But, sometimes owners of LLCs decide to instead convert the company to a C corporation, which is taxed differently and thus has different write-offs. Here is what you need to know.
Tax Write-Offs for LLCs as Pass-Through Businesses
While business expenses vary depending on the business operations, structure and accounting method, LLCs can generally deduct business expenses provided they are connected with or pertain to the business and are both “ordinary” and “necessary,” as defined by the Internal Revenue Service (IRS).
According to IRS guidelines, “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Because business expense deductions can vary depending on the business operations, there is no comprehensive list of business expense deductions applicable to every conceivable LLC. But as you consider appropriate tax write-offs for your company, some of the most common include:
- Office space
- Office supplies
- Taxes and fees
- Employee wages and benefits
- Professional development
- Business-related travel
You also can deduct inventory costs as “Costs of Goods Sold” (COGS), assuming you are not classified as a “small business taxpayer,” defined as one who has had average annual gross receipts of $25 million or less for the three prior tax years.
While many business expenses can be deducted as you incur them, items such as vehicles, business equipment and buildings with a useful life of more than a year can be capitalized, and the cost recovered over time through depreciation deductions.
New for 2018: LLC Tax Write-Off Related Rules You Must Know
One result of the 2017 Tax Cuts and Jobs Act (TCJA) is a new 20-percent deduction for pass-through businesses, subject to income limitations. It is known as the “section 199A deduction” or “deduction for qualified business income,” which is defined as “the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business,” which is essentially any business that produces goods. The IRS excludes business such as consulting and investment management, “where the principal asset is the reputation or skill of one or more of its employee.”
And as you consider your tax write-offs, note that the TCJA also eliminated a few business expense deductions that you may have used in the past, including client entertainment and transportation benefits you offer employees.
Tax Write-Offs for LLCs as C Corps
Some business owners decide it would be beneficial for tax reasons to elect to treat their LLC as a C Corp, particularly since the TCJA decreased the corporate tax rate from 35 percent to 21 percent, which could minimize your tax burden.
To file as a C Corp, you need to fill out IRS Federal Form 8832 (C Corp, line 6a) and then going forward you will file your taxes on Federal Form 1120. The tax deductions offered to C corps are generally the same and include charitable contributions.
If you are uncertain about what types of business expenses your LLC may be entitled to deduct, it’s wise to consult a professional accountant or CPA who can help you identify and maximize your allowable business expense deductions.