As a serial entrepreneur, I know what it’s like to be in the early stages of a business, endlessly searching for strategies to improve profitability.
But what if I told you there was something pretty simple you could do that would save you hundreds of thousands of dollars?
That’s right—there’s a solution right in front of you that instantly increases your profits.
All you have to do is take advantage of a few simple tax deductions for LLCs.
When you know about these tax strategies, you can maximize your business’ potential by never leaving money on the table. To help you do this, I’m going to break down each of these tax write-offs for LLC owners. We’ll cover:
Basic LLC Tax Deductions
- Car Deductions
- Home Office
- Bonus Depreciation
- The Augusta Rule
- Cost Segregation
- Defined Benefit Plan
Basic LLC Tax Deductions
The salt and pepper tax deductions outlined below should be on every business owner’s tax returns. Before starting an LLC, these are important strategies to be aware of. If you’ve already started your business, but aren’t taking these business tax deductions, don’t worry. We’ll go over what you need to do to save money for your small business with these simple LLC tax write-offs.
Did you know you can write off your car, even if you purchased it in your own name? Many new business owners miss out on this deduction because they don’t realize this is entirely legal if they use the car for business purposes.
How to Calculate Your Car Deduction
There are two ways to calculate your car deduction amount. Each method has advantages and disadvantages, and will likely produce different results. To get the biggest deduction possible, calculate your deduction amount using both methods and take the bigger deduction. It’s your choice whether you want to use the Standard Mileage Method or the Actual Expenses Method, but remember you can’t do both.
- Standard Mileage Method: You can deduct $0.56 for each mile driven in your car for business purposes. Check your odometer at the beginning and end of the year to find the number of miles you put on the car. Then multiply that number by .56. For instance, if you drove 10,000 miles for business purposes during the year, your calculation is: 10,000 x .56 = $5,600, so your deduction is $5,600.
- Actual Expenses Method: To calculate your deduction using the actual expenses method, you’ll need to track everything you spend on your car during the year. This includes your car payment, auto insurance, gas bills, maintenance, car washes, new tires, and depreciation. Depreciation is calculated by spreading the cost of the car over a five-year period. Divide the cost of your car by five to get your yearly depreciation expense. For example, a car purchased for $50,000 has $10,000 in depreciation expense each year for five years because $50,000/5 = $10,000. This means you can deduct $10,000 each year for five years.
Want some great news? Anything tangible that you use inside of your business can be written off. From pricey technology to regular office supplies, this tax break can save you thousands.
Examples of equipment include:
- Cell phone
- Paint for the walls
- Office chairs
Now, here’s the caveat: your CPA won’t help you think of every possible deduction. To save the most money possible, track everything you purchase for your office and be thorough when making your list of equipment expenses.
You may be wondering if it’s possible to write off equipment you purchased before opening your business. Ask yourself, do I use this for my business? If the answer is yes, then write it off! All you have to do is find out how much the equipment is worth today. Its current value is the amount you’ll write off. For example, if you purchased your laptop three years ago for $2,000, but today it’s worth $1,000, you can write off $1,000.
Home Office Deduction
Old-fashioned CPAs might tell you the home office deduction is a red flag to the IRS, but that information is long outdated. 20 years ago, the IRS began frequently auditing people taking home office tax deductions because home-based businesses were uncommon. At the time, many taxpayers were writing off their home office expenses, even though they also had office space somewhere else. The problem is, legally, you cannot deduct expenses from a home office and expenses from another office space.
How to Calculate Your Home Office Deduction:
- First, calculate the square footage of your home.
- Next, calculate the square footage of your home office.
- Then, divide the square footage of your office space by the square footage of your entire home.
For instance, if your home is 1,000 square feet and your home office is 100 square feet, your calculation will look like this: 100/1,000 = 10%. Since your home office is 10% of your total home, you can deduct 10% of utilities and other expenses.
Examples of Home Office Expenses
- Security system
We’ve covered tax strategies for new business owners, but what if you’ve been in the small business ownership game for a while now? If you’re the owner of an S corporation, a C corporation, or an LLC that is highly profitable, there are advanced tax strategies that will help you offset your taxable income and improve your bottom line.
If you ask for advanced tax advice from your CPA, they might just tell you to max out your retirement account. While maxing out your retirement accounts can be a good tax strategy, there are other advanced strategies you should be taking advantage of. Find out what they are below.
You might be thinking payroll doesn’t sound like an advanced deduction. That’s probably because most people don’t realize how important it is to pay yourself as a business owner in a way that maximizes your tax savings. If you don’t know the best way to pay yourself, you’re likely to find yourself in a position where you’re overpaying taxes.
New small business owners often pay themselves as an LLC, which means they are subject to a 15% self-employment tax. If you convert your business to an S corporation, you can avoid that self-employment tax. However, there are costs and benefits to switching to an S corporation. I recommend only LLCs bringing in over $40,000 in net income make the switch to an S corporation.
To see how you can use payroll for maximum tax savings, let’s imagine I own a small online outdoor clothing store. I’ve recently converted it from an LLC to an S corporation, and we’re bringing in $100,000 in net income. I’m going to pay myself $50,000. That money will be subject to a social security and Medicare tax of 7.65%, so my payroll tax would look like this:
Payroll tax = $50,000 x 7.65% = $3,825
I’ll be paying $3,825 in payroll tax.
How to Calculate a QBI deduction
The $50,000 of net income I have left after paying myself is my taxable business income. However, that income is subject to a QBI deduction. QBI stands for qualified business income, and this deduction allows you to write off 20% of your business income. That looks like this:
QBI deduction = $50,000 X 20% = $10,000
I can deduct $10,000 from my taxable income. $10,000 is a pretty good deduction, right? But if you know how to use this tax strategy to your advantage, that deduction can be even higher.
Let’s say instead of paying yourself $50,000, you decide to pay yourself $30,000 out of your $100,000 in net income. Your payroll tax now looks like this:
Payroll tax = $30,000 X 7.65% = $2,295
With this new payment structure, I’m only paying $2,295 in payroll tax, saving me over $1,500.
After paying yourself $30,000, you have $70,000 in taxable business income. That income is subject to the QBI deduction, which looks like this:
QBI deduction = $70,000 X 20% = $14,000
Your QBI deduction is now $14,000, which means you’ve increased your deduction by $4,000 just by adjusting your own wages.
This example shows how you have to be intentional and smart about paying yourself as a business owner. If you just shoot from the hip rather than shoot with a sniper, you’re going to end up paying extra taxes.
Our second advanced tax strategy is bonus depreciation. This tax strategy leverages tax code IRC-179, which was created to write off certain items quickly. When you combine IRC-179 with bonus depreciation, you can write off 100% of business purchases.
Normally, you can’t write off the purchase of certain equipment all in one year. When you buy anything with a lifetime longer than one year, like a camera, laptop, or car, you’re supposed to write off the expense over time.
Sometimes small business owners don’t have the capital available to spread the write-off over time. If you purchase a major piece of equipment, you might need that money back during that year. Bonus depreciation allows you to get that money back more quickly.
To help out the small base business owner, bonus depreciation states that if you have an item that you spent your money on, that has a useful life of 20 years or less, then you can write off that item all in one year.
Now that you know about bonus depreciation, you may be tempted to write off every expense possible this year. However, you have to know when it’s the right time to pull the trigger on this strategy, or you might find yourself stuck in a tough spot down the road because you already wrote off all your expenses at once. Use bonus depreciation selectively to get the best results for your business.
The Augusta Rule
This rule is an advanced tax strategy, not just because it has a cool name but because most taxpayers don’t know how to leverage it to their business’ advantage.
The Augusta Rule was created because tons of people used to visit Augusta, Georgia, during the U.S. Open Golf tournament. While there, they would rent houses from residents in Augusta for the duration of the tournament. To prevent the residents from an extra income tax due to the rental income they made during the tournament, the Augusta Rule was created.
The Augusta Rule says that you can rent your house out for 14 days or less and receive a deduction as a business owner.
This means you can rent your house to your own business for a fair market and justifiable amount and claim that income as a tax deduction. Sounds too good to be true, right? But this is an actual rule created by the IRS. As long as you know how to use it properly, you can get a major write-off for your business.
If you plan to leverage the Augusta Rule for tax savings, make sure you’ve set it up correctly. The IRS will want to know if your house is really being rented to your business when you said it was. Keep track of answers to each of these questions:
- What types of business activities are occurring in your home during the time period?
- If you are holding meetings, what are the meetings concerning, and who is in attendance?
- How are your business activities documented?
As long as you document everything properly, the Augusta Rule is an excellent strategy for saving you money.
A niche-specific strategy is a business tax strategy based on your specific tax makeup. These strategies won’t work for everyone because they are primarily meant for taxpayers investing in real estate or the stock market. If that’s you, keep reading because you’ll likely want to leverage one of these strategies.
Cost segregation is a tax strategy that can save real estate investors thousands. This strategy allows you to write off the depreciation of a property you own. It’s kind of like when you buy a car, and the car decreases in value over time. You get to write off that depreciation. The same thing is true when you purchase a building. If you are renting that building, that means it’s being used for business purposes. As the building ages, its depreciation is a tax write-off.
Unfortunately, the time frame for the depreciation of buildings is incredibly long. If you have a residential rental property, you can write off the depreciation over the course of 27 and a half years. If you own a commercial building, the time frame is even longer. Commercial properties can be written off over 39 years.
But, savvy real estate investors consider a cost segregation study.
During a cost segregation study, someone calculates the costs associated with all of the different components inside of your property. I’m talking about the flooring, the lighting, the appliances, and all of the different pieces that make up your property. Doing this allows you to accelerate depreciation, so you don’t have to wait decades to write off the full value.
Even better, cost segregation studies can be done for new and existing properties and take less than five days to complete.
Keep in mind there are some rules about how your losses can roll over to offset other forms of income. Cost segregation studies require you to understand what they mean in depth because there are some circumstances where they can get complicated. That’s why it’s crucial to always speak with your tax advisor before implementing any of these niche strategies.
Defined Benefit Plan
This next niche strategy is for high-income earners or someone ready to make large contributions to their retirement accounts. It’s called a defined benefit plan.
A defined benefit plan is a retirement account where you get to make very large retirement contributions all at once. Last year, I had a client drop $150,000 to his defined benefit plan, and I have tons of clients who have contributed even more than that. So, I’m talking about massive contributions.
If you are creating a defined benefit plan, then you are setting up a retirement account where you’re defining the benefits right now ahead of time. Your contributions depend on multiple factors like your age, demographic, and years in business. The third-party associate that helps you set up your defined benefit plan will let you know how much you can contribute.
Additional Expenses Most People Miss
Now that we’ve gone over some important tax strategies for you to be aware of, here are a few business expenses that a lot of people forget to write off. If you’re not writing these expenses off, you’re leaving money on the table.
- Bank service charges: Does your bank charges monthly service fees, transfer fees, credit card fees, or overdraft fees? These charges are deductible. When you visit an out-of-network ATM to withdraw money, the associated charge is also deductible. Keep track of these expenses to save money for your business.
- Commissions: Commission fees are often a necessary cost of doing business. While many people remember to track standard fees, keeping track of commission fees can often fall to the wayside.
- Consultant fees: Small businesses can benefit from working with strategy consultants, legal consultants, marketing consultants, and many other types of consultants. If you paid a consultant during the tax year, that expense is deductible.
- Travel expenses: Everything from hotels, transportation, and food is deductible when traveling for business. Keep your receipts to know how many travel-related expenses you and your employees incur.
- Business magazines and books: Continuing education is essential for staying up-to-date in your industry. Because of this, business magazines and books can be considered one of the costs of doing business. Keep track of the magazines and books you purchase to write off the expenses.
- Business gifts: Many businesses send thank you gifts to customers, clients, or employees. These gifts are deductible, however, there is a limit of $25 per gift per person. If your business sends gifts that cost an excess of $25, you will not be able to deduct the entire cost.
- Business association dues: Small businesses can benefit from joining a business association because it can provide visibility, networking opportunities, credibility, and referrals. Many of these organizations have dues required for membership. These dues are tax-deductible.
Maximize the Money You Save With a Tax Strategist
When you know how to do it, you can save hundreds of thousands of dollars through LLC tax deductions. But, you’ve really got to know your stuff. To get the most out of your LLC tax write-offs, you should consider working with a tax expert.
If you want to see some real savings during tax season, reach out to me or schedule a call with a member of my team. Or as always, you can learn more by listening to my podcast or watching my YouTube channel.
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