📌 Many entrepreneurs opt to structure their small business as a limited liability company, or LLC. An LLC protects owners’ personal assets from lawsuits and some creditors. It also provides an easy-to-use business structure. In addition to these benefits, LLCs also offer numerous tax benefits. Let’s see:
✅ Tax Flexibility
LLCs are in the unique position of being able to choose if they will be taxed as a corporation or as a pass-through entity.
When you create an LLC, you can choose to be taxed as a sole proprietor or partnership, or as a C-corporation or S-corporation. This flexibility provides the ability to choose the most beneficial tax approach for your company.
✅ Avoiding Double Taxation
If you choose to be taxed as a sole proprietor or partnership, you avoid double taxation. Double taxation occurs when a corporation pays taxes on income and the shareholders or owners then also pay taxes on their own personal returns on the dividends they receive.
By not electing to be taxed as a corporation, you avoid this issue.
✅ QBI Deductions
With the Tax Cuts and Jobs Act of 2017, the Qualified Business Income (QBI) deduction went into place for LLCs, sole proprietorships, partnerships and S-corps.
With this deduction, businesses can claim a tax deduction worth up to 20% of their qualified business income.
✅ Business Deductions
LLCs can write off a number of expenses as business tax deductions to help lower the amount they owe on their income tax or the business owes as a corporation. The process for claiming these deductions depends on how an LLC chooses to be classified and taxed.
In the case of pass-through entities, deductions are claimed at the personal level. If taxes are paid as a corporation, deductions are claimed at the business level.
🛑 Common deductible business expenses include:
- Advertising
- Bank and interest fees
- Charitable donations
- Education
- Home office
- Health and disability insurance
- Internet expenses
- Startup costs
- Supplies
- Travel expenses
- Vehicle and mileage
An LLC is the most common type of business entity, mainly due to the liability protection and tax benefits that it offers. LLCs have the flexibility to choose the tax status that will provide them with the most financial perks at tax time.
You may also like | Tax-Aware Investment Strategies You Should Consider
💥 If you would like an advice to get strategies to maximize your tax efficiency, we can help you at Wave Tax. Contact us at info@wavetax.us