20 Tax Write-Offs for LLCs and Small Businesses

Owning a business is about more than creating a product that sells or offering something valuable to your clientele. Even companies with high revenue can struggle to make a profit if they don't know how to reduce business costs without sacrificing essential expenses. Tax deduction is one way for small business owners to save money and raise their net profit.

Limited liability companies (LLCs), like all other businesses, have the opportunity to write off certain expenses on their taxes, reducing the amount of income owed to the Internal Revenue Service (IRS). The IRS calls these tax write-offs deductions. Learning how to utilize business deductions can help you reduce your LLC’s taxable income and save money come tax season.

How are LLCs taxed?

LLCs are not a separate tax category and have no classification of their own, which broadens an LLC’s tax filing options. By default, they are taxed the same as partnerships or sole proprietorships, depending on the number of members, but LLCs can also choose to be taxed like corporations instead.

In other words, the IRS considers LLCs as “pass-through entities,” which means the business itself isn't responsible for federal income taxes on business income. Instead, business gains and losses “pass through” to the LLC's members, who pay federal income tax via their own individual tax return. This allows LLCs to increase tax savings by avoiding double taxation, meaning the same income isn't taxed twice on both the personal and corporate level.

In general, LLCs with only one owner are taxed as sole proprietorships. When there is more than one member in an LLC, then the IRS would tax it as a general partnership. If an LLC would rather be taxed as a corporation, it can file  Form 8832 to change its filing status. In either of these cases, LLCs can leverage tax deductions to write off business-related deductible business expenses.

20 common LLC tax write-offs

Available tax deductions vary among businesses. For example, the LLC write-offs for a bathing suit store are different from the LLC write-offs for a furniture manufacturing facility. The following are some of the most common LLC tax deductions across industries.

1. Rental expense

Typically, LLCs can deduct the amount paid to rent their offices or retail spaces with a few conditions. Rent that the taxpayer uses for their business is tax deductible so long as it isn't rent to buy, because conditional sales contracts aren't deductible. Unreasonable rents—such as rents that are higher than market value—similarly aren't eligible for business tax write-offs.

Home office deduction is another possible tax write-off for business owners. An LLC that operates out of a home office can deduct a proportion of the amount spent per month on the home on the condition that the home office qualifies as the principal place of business. This also applies to business owners who rent their home and use a home office as their main office.

2. Office and home office expenses 

Similarly, LLC owners can deduct the cost of business supplies used during that tax year to lower their tax liability. However, it's important to keep clear records to support deductions for your supply expenses, especially for items that could also have a personal use. Keeping records is also a valuable practice to simplify your bookkeeping.

The following are just a few common office supplies that are tax deductible:

• Computers
• Printers
• Ink and paper for printers
• Desks, chairs, and other office furniture
• Business-related memberships and subscriptions
• Utilities
• Shipping costs
• Stationery
• Cleaning expenses

3. Depreciation

Rather than listing capital assets in your office expenses all at once, larger investment items that are useful for more than one year should be depreciated. Deduct depreciation for significant pieces of property, such as a company car, business equipment, or even art pieces that decorate your storefront or office.

Deducting depreciation for costly, long-term business investments allows you to receive reimbursement for the expense incrementally throughout its useful lifetime. Calculate depreciation by dividing the total cost of the asset by its useful lifetime.

4. Charitable giving

Doing good is also good for tax purposes. An LLC can deduct charitable donations of up to 60% of its taxable income—or 25% of its taxable income if it files as a corporation—for contributions made within the tax year. The IRS also allows businesses to deduct an additional 15% of taxable income for food contributions that support infants or individuals who are ill or in need.

5. Insurance

Most insurance that is necessary is deductible as a business expense. For example, professional liability insurance for a therapist would be deductible. Certain amounts paid for insurance for employees, such as disability insurance, are also deductible. However, how and in what amounts insurance premiums are deductible is a nuanced area that varies with the type of insurance.

6. Health care

LLCs can also deduct health insurance premiums from their tax returns. Additionally, self-employed individuals may also be able to deduct personal medical and dental expenses for themselves and their dependents. However, these expenses must be over 7.5% of your adjusted gross income and personally paid for. Medical expenses that insurance or another party reimbursed don't qualify for tax deductions. 

7. Tangible property

The material expenses your LLC takes on in order to run your business are tangible property. This includes the cost of materials, supplies, repairs, and maintenance purchased during the tax year but doesn't include capital assets, which the IRS requires you to depreciate.

8. Bank fees

Bank fees that are directly related to running your business are tax deductible. For example, LLCs can deduct business loans and credit card interest up to the amount earned in investment income. LLCs can also deduct monthly service fees and annual fees for your business credit card as business expenses on their tax return.

9. Payroll taxes

LLCs with employees can deduct the employer portion of payroll taxes, but self-employed individuals can't deduct personal payroll taxes. If you have employees, you may be able to deduct the business portion of payroll taxes, excluding taxes you withhold for federal income taxes, social security, or Medicare tax.

10. Professional expenses

Expenses incurred in maintaining professional licenses, engaging in professional development, and paying for professional resources such as industry journals are deductible.

11. Meals and entertainment

Half of the cost of business meals and entertainment—for example, taking a prospective customer out to dinner—is deductible. Meals with employees can be deducted in full. Be cautious: Meal and entertainment write-offs are notoriously abused. For this reason, the IRS keeps a lookout for meal and entertainment expenses that are disproportionate when compared to the LLC's income and other tax write-offs.

12. Independent contractors

Amounts paid to independent contractors are deductible. However, if the amount paid to the contractor is above a certain threshold, the LLC must also report the amounts paid to the contractor on a Miscellaneous Income form (Form 1099-MISC).

13. Cost of goods sold

LLCs that manufacture or resell products can use the cost of goods sold to reduce their tax obligations. Businesses usually deduct the cost of goods sold by adding up the total cost of goods sold for the year and deducting it from gross receipts. If an LLC deducts the cost of goods sold in this manner, it cannot also deduct that amount as a separate business expense, which would otherwise give the business two deductions for a single expense.

14. Self-employment tax deduction  

Single-member LLC owners must pay self-employment tax, which consists of Social Security and Medicare taxes for individuals who work for themselves. The cost of self-employment tax is 15.3%—2.9% for Medicare taxes and 12.4% for Social Security.

Luckily, the IRS allows self-employed individuals to deduct 50% of what they pay in self-employment tax when calculating adjusted gross income on Form 1040. Moreover, you can deduct the employer-equivalent portion of your self-employment tax (7.65%) from your adjusted gross income.

15. Business startup costs  

Forming a new business can be a significant expense. Fortunately, LLC members can deduct up to $5,000 of costs from the first tax year if their total starting costs are $50,000 or less. These deductions decrease dollar by dollar if your startup costs exceed $50,000, and the remainder is deductible over 15 years. Since small businesses often don't show a profit in their first year, you can use IRS Form 4562 to amortize—gradually write off—these costs over 15 years.

16. Tax credit

Both tax deductions and credit can help boost your tax savings. While deductions lower your taxable income, tax credit is subtracted from the tax itself. Depending on the nature of your business and other factors, there are several tax credits that an LLC—or any company—can benefit from. For example, the Work Opportunity Tax Credit (WOTC) is available to LLC members who employ targeted or disenfranchised individuals. There's also a tax credit available to contractors who substantially build or reconstruct energy-efficient homes.

17. Property taxes

Typically, for-profit businesses can deduct certain state and local personal and real property taxes from their income tax. If your state or county imposed local benefit taxes for improvements to property, those taxes are generally deductible as long as they're for related maintenance, repair, or interest charges. Individuals can deduct up to $10,000 of state and local property taxes.

18. Education

Self-employed individuals can deduct certain work-related education expenses from their self-employment income, which reduces the amount of taxable income for both income tax and self-employment tax. Educational courses or workshops must help improve or maintain your professional expertise to qualify, such as the following:

• Courses related to your business
• Seminars—online or in person—related to your business
• Subscriptions to trade publications
• Books relevant to your business

19. Marketing expenses

Marketing is crucial for attracting new clients to grow your business. For this reason, new businesses can deduct a range of marketing, including printing costs for marketing materials, advertisements, website design and maintenance costs, logos and other graphic design costs, promotional events, and sponsorships.

20. Phone and internet expenses

Business owners can deduct the cost of work-related phone and internet bills. Office phones and internet are fully deductible, while personal phone and internet bills are only partially deductible. Related equipment—such as new phones, computers, and modems—are similarly deductible. 

How to write off deductions

How you file come tax season will depend on a number of factors, including which deductions or credits are relevant to your business. That said, it's helpful to have a general picture of the process. Start by clarifying which deduction or credit you want to claim.

1. Determine the type of write-off

LLCs account for tax write-offs in different ways. Some are written off on a single year's return. This is the case for most smaller expenses, such as material or utility costs. Other expenses—like furniture or business cars—are written off in increments over multiple years; this is called depreciation and usually applies to large purchases such as expensive business equipment. Depreciation must follow an IRS-approved method.

2. Chose a filing method

Learning how to document all your company's various expenses can be difficult in itself, but knowing how to file everything properly is a whole different struggle. Tax advisers, software programs, and the IRS website are useful sources for guidance if you're confused about how to deduct a particular LLC business expense.

LegalZoom also offers LZ Books, an accounting software solution that simplifies the filing process by auto-categorizing income and expenses into tax-ready categories. Come tax season, simply export the data for your tax preparer.

3. Answer questions or complete forms

Claim credits by answering questions via your tax filing software or complete a form and attach it to your paper return. Deductions require documents that demonstrate which expenses or losses you want to deduct. For this reason, it’s vital to keep a thorough record of your income and expenses. Have either your tax software calculate deductions for you or complete Form 1040 and any extra forms and attach them to your paper return. 

FAQs

Can business write-offs be challenged?

Not typically. As long as business expenses are ordinary and necessary, and you keep records to support your claims, the IRS generally won't challenge business write-offs. This is especially true for LLCs, as all of the business' profits that year are typically taxable to the members. For that reason, whether or not compensation for an expense is reasonable or not is rarely an issue.

How can I be sure something is a legit write-off?

If you keep clear records and file write-offs through a tax adviser or software program, your tax preparer will generally tell you whether or not a deduction or credit is legitimate based on a series of questions and answers. You can also search the IRS for forms and limitations on specific write-offs.

Are different business structures allowed different write-offs?

Yes, different business structures may be allowed different write-offs based on how they file their tax returns. For example, profits and losses for LLCs pass through to their personal income without facing corporate taxes by default unless you apply to file as a corporation instead.