LLCs in the US are subject to tax as a separate entity or through pass-through income tax of its members. They must follow the same tax deduction rules as other businesses, with allowable expenses falling into two categories: capital expenditures and business expenses. Business expenses include overhead costs, while capital expenditures require depreciation. LLCs can choose to file taxes as a separate entity or through income tax pass-through.
As a federally recognized business structure in the United States, a limited liability company (LLC) is subject to tax as a separate entity or through the pass-through income tax of its members. Regardless of filing status, however, a limited liability company must follow the same rules regarding tax deductions as other businesses. First, the types of LLC tax deductions available fall into two broad categories: business expenses and capital expenditures. These categories of corporate tax deductions are the same for all business entities, whether a sole proprietor, corporation, partnership, or limited liability company.
LLC tax deductions are applied only for what are called allowable expenses. These expenses fall into two main categories: capital expenditures and business expenses. Capital expenditures are eligible for a partial deduction based on the depreciation principle. According to Internal Revenue Service (IRS) rules, only business expenses are eligible for full deductions.
Capital expenditures, such as the purchase of vehicles, equipment, real estate, or other business assets, require depreciation. Depreciation allows a business to deduct a portion of the asset’s depreciated value or the amount of its useful life that expires during the tax year. Limited capital expenditures such as computers and small office equipment, depending on the specification, may be considered deductions for one year only under Section 179.
In terms of LLC tax deductions, business expenses include nearly every other type of overhead paid by a business that isn’t part of a capital purchase. These tax deductions include payroll, office supplies, meals and entertainment, advertising, facility maintenance, utilities, raw materials used in the production of a product, professional dues, training costs and employee benefits, bad debt and other expenses necessary to run the business. To qualify as an allowable LLC tax deduction or qualify as a tax deduction for any corporate structure, business expenses must meet the IRS criteria for operations that are ordinary and necessary for the conduct of a trade or business. In other words, the expenditure must be common to other businesses in similar – ordinary – sectors and it must be useful for commercial operations – necessary.
When filing annual income taxes, members of an LLC may choose to file taxes on behalf of the corporation as a separate business entity. By choosing this option, LLC tax deductions apply similarly to any other business. If members choose to file using income tax pass-through, however, where tax liability is distributed to all members of the LLC, an information-only tax filing is required. To report and claim business expenses, the LLC must file a disclosure statement, listing all income and allowable tax deductions. Residual income is divided among members and taxed as personal income.
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