What Expenses Can I Deduct as a Member of an LLC?

Members of a LLC must carefully categorize their tax deductible expenses to avoid sanctions.

It is important for members of an LLC to be knowledgeable about which expenses may and may not be deducted from their yearly tax statements. Erroneously deducting items such as start-up costs may incur sanctions from the IRS. The Internal Revenue Service defines deductible expenses as normal and necessary expenses that are incurred during the normal operation of a business.

Vehicles

Members of an LLC may deduct vehicle expenses if the use of the vehicle is directly related to the ordinary and normal operation of the business. Leased vehicles must be under the name of the LLC and directly involved in normal business operations.

Travel

Any travel expenses incurred during the reasonable and necessary operations of a business may also be deducted. A deducted travel expense may be viewed as suspicious by the IRS if the purpose of the trip is not explicitly related to the type of business or service registered on the business license.

Entertainment

Entertainment is another area where its necessity for normal business operations may be suspect. However, food and beverages supplied on business premises to employees, recreational allowances for employees, certain business meeting expenses, and items made available for public use are generally accepted as deductible.

Legal Fees

Any legal and accounting expenses that can be shown as ordinary and necessary to the conduct of trade or business may be deducted by members of an LLC.

Rent

Rent may only be deducted as a business expense if it meets certain criteria. The LLC must not hold any title or equity in the property, the property must be used for the conduct of ordinary and necessary business and the rental cost must be incurred during the taxable year. Spaces split between personal and business use can only have deductions applied to the percentage used exclusively for business purposes.

Maintenance

General maintenance and incidental repairs are eligible for deductions. Replacements and improvements may also be deducted as long as they fall into the necessary and ordinary category.

Materials

Materials and supplies needed for the conduct of business are eligible for tax deductions. Their use must be explicitly related to the normal and ordinary business operations.

Interest

During the course of normal business operations, it may be necessary to borrow funds that will incur interest. This interest and other borrowing expenses are deductible for members of an LLC.

Advertising

The costs of advertising and other marketing are eligible for deduction. The deduction can only be applied to costs incurred during the taxable year.

Rebates

Any rebates paid by the company to a customer is generally eligible for tax deduction.

Donations

LLCs that choose to give donations directly related to the business to charitable organizations and with a reasonable expectation of financial gain based on these donations are eligible to deduct part of the donations. An example is an advertising campaign that announces a store's intention to donate a portion of the total sales received during a certain time.

Miscellaneous

Other concepts exist that are also commonly viewed as necessary and ordinary expenses incurred during the conduct of business. Insurance policies related to vehicles or other integral aspects of the business are eligible. Certain compensation payments may be accepted as deductible. State, local and sales taxes are generally viewed as tax deductible. Reserve accounts, such as funds to cover warranties offered to clients, are also considered tax deductible expenses for LLC members.

References

• AmeriLawyer: "Seven Powerful Reasons to Incorporate or Organize an LLC"
• IRS: Business Expenses