On average, small business owners pay around 20% to 30% of their company’s gross income per tax year. Whether you’re just starting out, or have been in business for a while, it’s a pretty big hit to take.
Those who want to reduce their expenses and bump up their revenue might be looking into various options. While there are various factors that can combine to decrease costs, one big one is the entity type you choose for your business.
So does having an LLC help with taxes? If so, then what benefits can you get with this entity type? Read on to find out.
Does Having an LLC Help With Taxes?
Yes, there are definitely tax benefits of an LLC that you can enjoy! Below are the main ones you should be aware of.
Pass-Through Taxation
When you create an LLC, the IRS automatically treats it as a pass-through entity for tax purposes. This means that the LLC doesn’t pay federal income taxes.
Instead, as the name suggests, the profits and losses “pass through” to the owner (you). You’ll then report them on your individual tax return.
The biggest benefit you get from this is that you avoid double taxation, which happens with C-corporations. In this entity type, the profits are taxed at the corporate level and again when distributed as dividends to shareholders.
However, you should be aware that if you have a high enough level of profit, it could push you into a higher tax bracket.
Pass-Through Deductions
Thanks to the Tax Cuts and Jobs Act (TCJA), owners of pass-through entities can qualify for a Qualified Business Income (QBI) deduction. If you’re eligible, then you can deduct up to 20% of your business income on your personal tax return.
There are limitations though. The QBI deduction has income thresholds and restrictions for certain service-based businesses. They include law, accounting, and consulting.
Flexibility in Tax Classification
One of the biggest benefits of this entity type is that there’s flexibility in LLC taxes. You can choose how you’re taxed by filing the appropriate IRS forms.
For example, the default for a single-member or multi-member LLC is a sole proprietorship or partnership. But you can also have an S-corporation election, which can reduce self-employment taxes. And a C-corporation election means being taxed separately at corporate tax rates.
With this flexibility, you can adapt the company’s tax treatment as it grows or as tax laws change. For instance, you might start out as a sole proprietorship, but then you can change it to an S-corp in a few years as profits grow.
Self-Employment Tax Savings
As we’ve mentioned earlier, if an LLC elects to be taxed as an S-corp, you can save on self-employment taxes.
This is possible by paying yourself a salary and taking the remaining profits as dividends. By doing this, you reduce the amount of income subject to self-employment tax. Also, only the salary portion is subject to Social Security and Medicare taxes.
Business Expense Deductions
As with most other entity types, you can deduct legitimate business expenses, which reduces your taxable income. Some examples of expenses are:
- Home office costs
- Travel and meals (related to business)
- Advertising and marketing
- Vehicle mileage or lease payments (if used for business)
- Equipment and software purchases
State Tax Advantages
Not all states are created equally; some states have much more favorable tax policies for LLCs. For instance, there are no state-level income taxes in places like Wyoming, South Dakota, and Taxes. Plus, there are lower annual fees or franchise taxes compared to corporations.
If this has perked up your ears about starting an LLC, then use our free business registration service. The only thing you’ll have to pay is the state fee, and we’ll get your LLC up and running.
Start Your Own LLC Today
The answer to the question, “Does having an LLC help with taxes?” is a resounding “Yes.” Not only can you avoid double taxation, but there’s lots of flexibility, and you can claim tax deductions on your tax returns.
Of course, you can only gain the maximum benefits by consulting a tax professional. Not only can they optimize these opportunities, but they can also make sure that you remain compliant with the law.
Sign up with Business Anywhere today if you want to use our free business registration service. We can be your designated registered agent too; in fact, you get a free year’s worth of the service!
