ARTICLE TABLE OF CONTENTS
Single Member LLC Tax Benefits
There are many benefits of owning a single member LLC (more on that later). When it comes to tax advantages, there are a few key differences you should know as you plan your tax return each year. Forming an LLC may help you deduct some expenses that you were not able to deduct otherwise, such as when operating as a sole proprietor.
Do you work from home?
In many cases, single member LLCs who work from home may be able to deduct some of their business expenses related to doing so. This may include costs associated with internet services and mobile phones (it is important to know that you should only deduct these if they are solely used for your business and not personal use). You may also be able to deduct costs associated with your vehicle if you use it to drive to and from business obligations, such as client meetings.
Does your business have operating costs?
Not every LLC works from home. Many have other operating costs associated with day to day function of the business. It is not always possible to deduct the full amount of operating costs, though. Check with your tax professional for specifics on your business.
Consider organizational expenses, too
It may be possible for your LLC to deduct organization expenses from your taxes as well. These are costs associated with the process of forming your LLC. This may include things like legal fees you have to pay to set up the articles of organization as well as your operating agreement. It may also include the costs associated with accounting services to establish your LLC. Some may have state LLC fees to pay as well.
There are a few things you need to remember about organizational fees. First, they are not capital expenses that you deduct each year. Rather, they are deducted from your taxes for a single year – usually, this is the year that you form your LLC.
Most often, in a single person LLC, you may deduct up to $5000 for such costs. If your costs exceed that amount, no portion of the expense is then deductible. In this situation, the entire amount must be capitalized. In these situations, you are not able to deduct these costs until you dissolve the LLC at some time in the future. The best way to avoid this problem? If you are a single member LLC, avoid spending more than $5,000 on these expenses. That way, you can deduct them.
Single Member LLC Tax Write Offs
As a business, most LLCs will have write offs available to them. This allows them to deduct expenses that are associated with running the business. The type of expenses varies based on the type of operations you are engaged in within your company. Keep in mind that it is always important to check with your tax professional about the availability of these write offs.
Ordinary and necessary expenses
Business owners of LLCs, and most others, are able to deduct expenses that are considered to be ordinary and necessary. Ordinary expenses are those that are considered common expenses within your business industry or the trade. Keep in mind that they have to be necessary costs, and you may have to justify that you need to spend those funds to operate your business.
For large expenses, such as the purchase of equipment, vehicles, and the actual real estate you operate in, you will need to capitalize the expense. As a result, you will only recover the costs over time, generally through the depreciation of the asset over time.
For most other expenses, you can deduct them in the year that they occur. This means you can write off these expenses as you are doing business on your taxes each year.
Because ordinary expenses like this can be very common but also constant, it is important to have a system in place to properly manage them. This includes having good records of inventories of products as well as transactions.
Personal property write offs
Another way to reduce your taxes may be through personal property write offs. These range widely from one company to the next. However, it may be possible to write off and deduct as much as $100,000 in a fiscal year. You cannot deduct more than this.
These deductions are strict and cannot include things like intangible property (such as your company’s copyrights or trademarks). It also cannot include real estate. Other restrictions may apply.
So, what can you deduct like this? You may be able to write off computers, computer software, office supplies, furnishings, and items like this.
Another key rule to know is that if your property purchased for your business is more than $108,000 in any given year, you must capitalize those costs. That means you will need to depreciate any amount over this over time. This is based on the amount of time that the property is considered its useful life. This will vary by the type of accident.
More Tax Breaks for Single Member LLCs
There may be other ways for you to reduce the amount of taxes you pay to operate your business. Here are some of the less known and hidden types of tax breaks your LLC may qualify for each year. Remember to verify if these are applicable in the year you file your taxes and in your type of business. Things change!
• Home Office Deductions: For companies that operate their business from home, there is a $1500 home office deduction available to you. As noted earlier, many of the costs associated with maintaining your business at home may be deducted. However, to do so, you would need to itemize these items, which means calculating out the dollars you spent each month through the year. You can skip that with this $1500 deduction. Do so if you don’t think you’ll qualify for more if you itemize.
• Mileage: Keep track of the number of miles you drive your vehicle each year. You may be able to tap into the standard mileage rate. This differs from year to year but is often around 54 centers per mile. This is only for miles driven for your business (it does not include costs for driving to and from home). You can take this route as a standard deduction. Or, you can itemize all of your insurance, gas, maintenance, and depreciation costs.
• Mobile Phones: In some situations, your mobile phone may work very well for you as a deduction. You can add up the costs of having your mobile phone, including the monthly charge to maintain the line. It’s important to do this only for business use in most cases.
• Licensing Fees: Do you pay licensing fees to operate your business? This may include costs associated with working in a city. It may include professional licensing fees required to allow you to work. If so, those fees may be a write off on your taxes each year that you have to pay them.
• Promotional Events: When you hold a promotional event or you engage in other activities related to the marketing of your business, that is a qualified expense in many cases. As a result of this, you may be able to deduct the costs associated with it. Also, if you are attending a promotional event for your business, you may also be able to deduct some of the costs associated with it including fees you pay for room and board, food, and attendance.
• Subscriptions: Many businesses need to stay up to date on times and have various subscriptions to do so. There may also be costs you pay monthly to remain trained and educated in the areas important to your company. Be sure to keep track of these. Submit them as a part of the cost of doing business.
Do you have family members that help you?
In many situations, you may be able to deduct what you pay them as a part of the business expenses you have. That may include things like having people set up materials, package goods, or provide other services that help you to maintain your business. Be sure to work closely with your tax professional to define this type of work – you do not want to have to worry about paying fees associated with employment taxes.
How Do Single Member LLCs Pay Taxes?
For tax filing purposes, the IRS does not look at a single member LLC as its own entity for filing taxes. That means that they are able to file taxes as if they are a sole proprietorship. In short, that means that you do not have to file a separate tax return nor do you have to pay taxes on both personal and business income.
All businesses, including single-member LLCs, need to report their earnings and pay taxes on them. Being accurate and thorough is critical. To do this, you will complete Schedule C, called Profit or Loss From Business. This is a federal tax return you will find with the IRS each year. It outlines any money you made as well as any losses you have had.
One of the best ways to keep track of income and expenses (including those that may be tax deductions) is to have a separate bank account that collects all money received and pays all costs associated with the business. This makes managing those costs easier to do later.
It is also important to know you have to pay taxes on all profits you receive. That includes any profit that you do not distribute. If you have collected profit in your account, even if you do not pay it out to yourself, you need to report that income.
What Are the Benefits of Being a Single Member LLC?
These tax deductions may apply to other business structures as well. However, there are core benefits of being an LLC that extend beyond this. Specifically, an LLC gains personal liability protection. That means that if someone you provide services to sues you for some reason, they cannot go after your personal assets if the claim relates to your business. That level of protection is often critical when it comes to managing your business.
Likewise, if your personal creditors come after your business, they can only claim the shares of the business you own. In a single member LLC, that may be the entire business. If there are other members to the organization, they cannot claim those parties’ shares.
In a single member LLC, you are personally liable for any liabilities created by your business. Most often, this is one of the reasons why companies invest in insurance protects to minimize their needs.
Managing Your Single Member LLC’s Taxes
The information provided here is up to date and offers the insights you may need as of this time. Yet, things change. It is critical that you consistently work to manage your company’s revenue and debts. Be sure to track all expenses with as much accuracy as possible since that can directly contribute to your tax obligations. The more detailed and accurate records you keep the more opportunities you have for catching potential tax deductions and savings opportunities.
Working with a tax professional is always advisable (and the costs you pay to hire one to manage your business taxes are expenses you can deduct as well). Be sure to ask them about all of the associated tax breaks your business may qualify for so you can count on reducing your taxes and save more money for your business’s profits.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.