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As a federally recognized business structure in the United States, a limited liability company (LLC) is subject to taxation either as a separate entity or through pass-through income taxation of its members. Regardless of filing status, however, a limited liability company must follow the same rules regarding tax deductions as other businesses. Primarily, the types of LLC tax deductions available fall into two broad categories: business expenses and capital expenses. These categories of business 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 expenses and business expenses. Capital expenses may qualify for a partial deduction based on the principle of depreciation. According to the Internal Revenue Service (IRS) rules, only business expenses qualify for full deductions.
Capital expenses, 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 worth or the amount of its useful life that expires during the tax year. Limited capital expenses such as computers and small office equipment, depending on specifics, may qualify as a single year deduction under Section 179.
In terms of LLC tax deductions, business expenses encompass nearly every other type of overhead paid by a business that does not fall under the purchase of a capital asset. Such tax deductions include payroll, office supplies, meals and entertainment, advertising, facilities maintenance, utilities, raw goods used in manufacturing a product, professional dues, employee training and benefit costs, bad debts, and other routine expenses required to operate the business. To qualify as allowable LLC tax deductions, or to qualify as a tax deduction for any business structure, business expenses must meet the IRS criteria for ordinary and necessary in carrying on a trade or business. In other words, the expense must be common to other businesses in similar industries — ordinary — and it must prove helpful to business operations — necessary.
When filing yearly income taxes, members of an LLC can elect to file taxes on behalf of the company as a separate business entity. By electing this option, LLC tax deductions apply much the same as to any other business. If the members elect to file using pass-through income taxation, however, in which tax liability is distributed to all the members of the LLC, an information-only tax filing is required. To report and claim business expenses, the LLC must file an informational return, listing all income and allowable tax deductions. The remaining income is divided among members and taxed as their personal income.
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