20% of small businesses fail in the first year according to the Bureau of Labor Statistics. One reason is that many business owners cut into their profits by simply failing to take advantage of tax deductions.
If you operate a single member LLC, you can save significantly on taxes – you just need to know the right steps.
What Is A Single Member LLC?
A single member LLC is simply an LLC with only one owner. Small businesses owners employing friends and family members typically use single member LLCs to protect their personal assets from business liabilities.
Single member LLCs however are useful for many purposes beyond just operating businesses. Entrepreneurs use single member LLCs for everything from solo consultant practices to financing real estate transactions.
Hidden Tax Deductions for Single Member LLCs
You can find real savings for your business in the fine print of the tax code- the hidden deductions.
To be clear, the IRS permits these deductions. These established rules make it easier for both the IRS and business owners to manage tax records. To take advantage of tax deductions, detail the expenses on the Schedule C and reimburse yourself from the business bank account.
These not-so-obvious business expense deductions can save huge on costs:
- $1500 Home-Office Deduction
If you operate your business from your home, the IRS allows a home-office deduction up to $1,500. The home-office deduction is a standard deduction, which means it does not have to be itemized.
- Mileage Deductions
You can deduct a standard mileage rate of 54 cents per mile when using your vehicle for business. As a standard deduction, you do not have to itemize things like gas, insurance, depreciation or maintenance.
- Cell Phone Deductions
You can deduct your monthly phone bill if you use your cell phone for business in addition to personal use. If you share a plan with a partner, you would be able to deduct half of the cost from the monthly bill.
- Deductions for Promotional Events
Are you looking to host a promotional event for your business? You can deduct costs related to promotional events including food, beverages, and even room rent.
- Subscription Deductions
You can deduct subscription costs applicable to your business, such as magazine subscriptions.
- Licensing Fee Deductions
Any licensing fees related to operating your business are deductible.
- Employee Deductions
The IRS allows you to pay family or friends to assist you with operating your business, like setting up shows, meetings, or other public events. These costs are deductible as well.
How Do Single Member LLC Taxes Work?
The IRS taxes single member LLCs as sole proprietors. This is known as “pass-through” tax status. Profits and losses pass-through the business to the sole member and appear on the sole member’s personal tax return.
Now, how does pass-through taxation work? Here are the steps:
- Prepare a Schedule C
All business income and deductible expenses are reported on the Schedule C each year.
- Carry Income to Form 1040
Any net income left on the bottom line of the Schedule C is carried over to the first page of the Form 1040.
Business income appearing on a Form 1040 tax return is subject to your marginal income tax rate as well as self employment taxes. The tax rate for self employment taxes is typically around 15% and includes contributions to Social Security and Medicare.
What Is LLC Annual Franchise Tax?
Most states require LLCs to pay an Annual Franchise Tax. For example, Delaware requires LLCs to pay a flat fee of $300 each year after formation. This fee does not change based on business income. Delaware requires LLCs to pay Annual Franchise Tax even if they do not have any income in a given year.
What Happens If I Don’t Pay the Delaware Franchise Tax?
Franchise tax can be thought of as a privilege fee for the liability protections provided by an LLC. If a company fails to pay franchise tax, it will eventually lose its good standing status.
When an LLC loses good standing status, it also loses its limited liability protections. This exposes members to personal liability risk. They could avoid this risk by paying franchise tax on time.
How Do I File LLC Franchise Tax?
Delaware Annual Franchise Tax for LLCs is due by June 1 each year after formation. Franchise tax can be paid through the Delaware Division of Corporations website or through defrantax.com. There is a substantial late fee of $200 for any late franchise tax payments.