http://smallbusiness.chron.com/advantages-using-llcs-rental-properties-25717.html
Limited liability companies (LLCs), are a type of hybrid business entity that provides some of the limited liability benefits of a corporation while still offering the relative simplicity of administration and flexibility of ownership and distribution of earnings of a partnership. The Internal Revenue Service does not officially recognize LLCs as a separate business entity. Instead, LLC members can elect to have their businesses treated for tax purposes as a corporation or as a partnership.
Business Expenses
The general rule for deductions for LLCs is the same as for any other business; you can deduct ordinary business expenses, claim depreciation and depletion allowances, and deduct startup costs over a three-year period just the same as a corporation or sole proprietorship. The difference is that an LLC gives you the option of having all profits flow through to your own personal income tax return as ordinary income just like a sole proprietorship or partnership, or carving off a part of those profits as dividends, which helps avoid Social Security tax liability.
Compensation
An LLC can deduct compensation it pays to the management and staff of the company, though restrictions apply if the company is a corporation. This is because the IRS requires that shareholders of corporations pay themselves a reasonable taxable salary commensurate with their job responsibilities. This is to prevent owners from avoiding Social Security taxes and taking undue advantage of the lower tax rate afforded to dividends from qualified U.S. corporations. LLCs can deduct the costs of salaries and most benefits paid to executives, shareholder-employees, and rank and file staff as business expenses.
Benefits
If you have an LLC and elect to treat the company as an S corporation by filing a Form 2553 with the IRS, the LLC can deduct the cost of health, disability and other benefits paid to workers, including shareholders. If it does, however, those premiums paid on shareholders' behalf become taxable to the shareholder as ordinary income.
Section 179 Expenses
While most expenditures for long-lasting, durable capital equipment must be deducted over time through a process called amortization and depreciation, the IRS allows small businesses to accelerate up to $500,000 of capital investment in the first year. If your LLC is profitable, this could prove to be a significant boost to your cash flows, at least in the short-term. The law governing these deductions is called Section 179. Some restrictions apply to the purchase of passenger automobiles and buildings.
About the Author
Leslie McClintock has been writing professionally since 2001. She has been published in "Wealth and Retirement Planner," "Senior Market Advisor," "The Annuity Selling Guide," and many other outlets. A licensed life and health insurance agent, McClintock holds a B.A. from the University of Southern California.
Photo Credits
- Comstock/Comstock/Getty Images
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