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How To Maximize Tax Savings for Single-Member LLCs

By Matthew Dochnal | Published November 8, 2022

According to data from the Bureau of Labor Statistics, about 20% of small businesses don’t make it past their first year. A contributing factor to this statistic is the fact that many business owners do not take advantage of easy tax deductions.

If you set up your business as a single-member LLC, there’s a significant opportunity for you to reduce your tax burden. But how? In this guide, we’ll walk you through the key steps.

Tax Deductions and Write-Offs for Single-Member LLCs

Single-Member LLC owners can find significant cost savings for their business just by digging into the tax code.

Here are some less obvious business expense deductions that Single-Member LLCs can claim to significantly lower their costs:

  • Home-Office Deduction – Deduct up to $1,500 if you run your business from your home. 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. Since this is a standard deduction, you do not have to itemize things like gas, insurance, depreciation or maintenance. 
  • Cell Phone Deductions – Deduct your monthly phone bill if your cell phone is used for both personal and business purposes.
  • Promotional Events Deductions – Costs related to promotional events for your business, including food, beverages, and room rent, can be written off.
  • Subscription Deductions – You can deduct the cost of business-related magazine subscriptions, journals, or other types of publications.
  • Licensing Fee Deductions – Any licensing fees related to operating your business are deductible.
  • Employee Deductions – You can pay family or friends for assistance with business operations, and these costs are deductible.

How Do Single-Member LLC Taxes Work? 

The IRS treats Single-Member LLCs as “pass-through” entities for tax purposes. Pass-through taxation means that the business’s profits and losses pass through to the single member of the LLC. Business income appears on the LLC owner’s personal tax return. The business does not pay taxes directly and does not have to produce a tax return.

Here are the steps to pay taxes as a Single-Member LLC:

Step 1.) Prepare a Schedule C – All business income and deductible expenses are reported here each year.

Step 2.) Transfer Income to Form 1040 – Any remaining net income from the Schedule C is carried over to Form 1040.

The income on the Form 1040 tax return is subject to both your marginal income tax rate and self-employment taxes, which typically amount to around 15%. 

What is a Single-Member LLC?

A Single-Member LLC is an LLC that has just one owner. Single-Member LLCs are the most common type of business entity used by small business owners because. This is because Single-Member LLCs are easy to set up and operate. They also provide business owners with the legal liability protections that they need to run their business the right way. 

Single-Member LLCs are both versatile and flexible. Entrepreneurs use Single-Member LLCs to protect all types of businesses, one person consulting businesses, to large, real estate investment portfolios. 

What is an LLC Franchise Tax?

Most states, like Delaware, require LLCs to pay an annual fee to keep the company active. For example, Delaware LLCs are required to pay the Delaware Annual Franchise Tax each year. A Delaware LLC needs to pay its Annual Franchise Tax balance on time in order to keep its “good standing” status with the state of Delaware. Think of a franchise tax like a maintenance fee to keep the company’s legal protections. 

The Delaware Annual Franchise Tax is a flat fee of $300. A Delaware LLC needs to pay the Annual Franchise Tax every year after the company is formed. The Delaware Annual Franchise Tax fee does not change depending on business income. If a Delaware LLC is open in a given year, the company will owe Annual Franchise Tax for that  year. 

What if a Delaware LLC Does Not Pay its Franchise Tax?

A Delaware LLC will lose its “good standing” status if the company does not pay its Annual Franchise Tax on time. If the company does not pay its franchise taxes for more than 3 years, the state of Delaware will void the LLC. A voided LLC is no longer able to conduct business. 

Losing good standing status can also have a negative impact on the LLC Members. An LLC that is not in good standing with the state loses its limited liability protections that keep the LLC owners separate from the business. This leaves LLC Members vulnerable to personal liability risks related to the company.

When is the Delaware Annual Franchise Tax Due?

The Annual Franchise Tax for Delaware LLCs is due by June 1 each year following formation. You can make your franchise tax payments through the Delaware Division of Corporations website or Beware of the hefty $200 late fee for missed franchise tax payments.

Optimizing your tax situation as a single-member LLC owner involves strategic steps to leverage tax deductions, understand pass-through taxation, and maintain your good standing through timely franchise tax payments. By following these steps, you can significantly reduce your tax burden and increase your business’s chances of thriving in its market.

When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go