There are plenty of advantages to setting up your business as a limited liability company (LLC). For example, you’ll enjoy less paperwork, fewer reports, more freedom with business decisions, and more options for profit distribution.
The LLC business structure also provides impressive flexibility when it comes to taxes. It’s almost as if LLCs are the chameleons of the tax world, as the IRS doesn’t assign them a specific federal tax classification. This lack of classification means you can use whatever status makes the most sense to your tax strategy, whether it’s a partnership, sole proprietorship, S corporation, or C corporation.
It should be noted that the Internal Revenue Service classifies LLCs as either partnerships or sole proprietorships by default. If there are 2 or more owners, it’ll be considered a partnership. If there’s just 1 owner, it’s a sole proprietorship. Either way, having an LLC allows you to leverage “pass-through” rules so that the business’s expenses and income transfer to your personal tax return. You’ll then personally pay tax based on the profits.
To get the most value from the versatile nature of an LLC, it’s important to familiarize yourself with the relevant tax laws. Here are 8 tips to get you started:
1. Let tax software carry the burden.
Many small business owners still like to track and manage their finances solely on paper. If you’re in this camp, you need to get with the times. Even the most efficient individuals are capable of mistakes, so let technology assist with the preparation and filing of your taxes. You’ll be amazed by how much time a software program will shave from your processes. And if it prevents just one error each tax season, the software will be worth every penny you spent on it.
2. Keep your friends close—and your receipts closer.
Your small business likely saves money each year with tax deductions. These applicable deductions reduce your taxable income and ensure more money stays in your wallet. But those deductions are only valid if you have proof of purchase, so always safeguard your receipts. Storing them digitally is the safest bet, but if you prefer hard copies, make sure you have a designated area for them.
3. Carve out an office at home.
The life of an entrepreneur often requires working from home. If this is the case, consider setting aside an office space. As long as that space is regularly and exclusively used for business-related activities, you can deduct a percentage of expenses related to maintenance, cleaning, utilities, phone bills, and homeowner insurance.
4. Be charitable in all the right ways.
Did you know your LLC can deduct charitable contributions? The catch is that you can only deduct those contributions to the value of 10% of your taxable income. So it might be more impactful on your tax bill if you make charitable contributions on the personal side and report them there.
The point is, it pays to be generous. Just make sure you’re doing it in the most strategic way.
5. Put your automobiles to work for you.
You can reimburse employees and executives for their business-related use of their automobiles. The reimbursement will be at the mileage rate approved by the IRS.
Of course, the versatile nature of an LLC ensures you have options. You could also lease or buy a business vehicle, then include the percentage of personal use for it on the employee or executive’s Form W-2.
6. Eat, drink, and be merry.
Food plays an important role in running a business. Whether it’s taking potential clients to dinner or rewarding your employees with a free lunch, meals can benefit your bottom line in multiple ways. You can deduct half the cost of meals related to professional development and business entertainment. As for meals with your employees, they’re 100% deductible.
7. Never stop learning.
Attending conferences, conventions, and continuing education events is an excellent way to sharpen your skills and stay connected within your industry. When you establish your business as an LLC, you can deduct costs related to these learning and development opportunities. So meals, lodging, travel, and program fees can all help trim your taxable income.
8. Keep your retirement in focus.
You can also deduct any contributions to a qualified retirement plan. The deduction limits vary from plan to plan, so make sure to do your due diligence. But it’s great to know that your efforts to give yourself a better tomorrow will have a direct impact on your taxes today.
If you have any questions regarding the tax benefits of an LLC, don’t hesitate to meet with a tax expert. By leaning on his or her mastery of the tax code, you can hone a strategy to get the best bang for your buck. Even the smallest improvements might add up to big savings, so it’s always a good idea to be as informed as possible.