What LLC Expenses Can I Write-Off?
Business write-offs can help your LLC save a lot of money in income tax. Remember that write-offs are deductions rather than credits; they allow you to reduce the amount income you must pay taxes on, which results in an indirect savings in tax payments. The amount you save from a write-off depends on your tax bracket.
In order to claim a tax write-off, the business expense must be ordinary and necessary. The phrase “ordinary and necessary” is a term of art with a specific meaning. An ordinary expense is one that is common and accepted by other businesses in your industry. A necessary expense is one that is appropriate and helpful for your specific business. Necessary does not mean indispensable; the expense must simply be appropriate for your LLC’s trade. An expense that is ordinary and necessary for one company may not be ordinary and necessary for another.
For example, a retail store probably could not write-off the cost of new cell phones for its employees since such an expense is not ordinary in the industry. A law firm may be able to write-off the cell phones if it can show that providing instant and portable communication to its associates is common in the legal industry (ordinary) and that phones are actually helpful to its business (necessary). An electronic products review website could almost certainly write-off the cost if the phones were provided to employees for the purpose of reviewing them.
If the expense is both ordinary and necessary, you may claim the expense as an offset to the LLC’s income. If your LLC is a pass-through tax entity — it is unless you have intentionally requested a different taxation status from the IRS — you may deduct a proportion of the business expense on your personal income tax return. The proportion you may deduct is equal to your ownership interest in the LLC. For instance, if you co-own an LLC with another person and you each own an equal part of the LLC, both of you may deduct 50% of your LLC’s business expenses on your tax returns.
Business expenses are distinct from three other types of expenses: cost of goods sold, capital expenses, and personal expenses. Cost of goods sold refers to the cost of raw materials, storage, labor, and overhead for an item that your LLC produces. Capital expenses represent investments into your company, such as start-up costs, improvements, and business assets. These types of expenses are also deductible but follow different rules. See IRS Publication 535 for an explanation of those methods.