how to deduct expenses from llc [Expert Approved]


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Last updated : Sept 25, 2022
Written by : Federico Correira
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how to deduct expenses from llc


Comment by Debi Halleen

zo iss was an old language can ride out my


Thanks for your comment Debi Halleen, have a nice day.
- Federico Correira, Staff Member


Comment by DreseeteExnoxq

hey there youtube so i wanted to do a quick video on what kind of expenses are tax deductible when you have an llc um so i wanted to make this video because i saw another video where somebody was giving people really really bad advice and saying oh if you want to deduct certain expenses that might otherwise be personal just open an llc run all the expenses through there and that's how you can get tax deductions for personal expenditures uh horrible advice that's called tax fraud the rules around deducting expenses apply to all taxpayers right so whether you have an llc that's taxed as a partnership or an s corp or you have a separate c corporation or you're just an individual and you don't even have a business entity you're just a sole proprietor the tax rules around what's deductible applies to everybody okay within certain within certain exceptions but for the most part it's a standard set of rules for for all taxpayers so the first issue is you know if you want to take tax deductions for expenses you have to have a business you can't just open an entity and then run run costs through there um expecting to get tax write-offs for them so the first issue is always you know whether you have an llc or not the question is are you actively engaged in a trade or business and if so you can deduct ordinary and necessary expenses in connection with that trader business right the expenses are deductible under section 162 of the code it's very important that the business be for-profit right it has to have a for-profit motive um and so the irs is very clear that look if you've got some type of operation where you're making a little money but it's a hobby the hobby loss rules apply right so if it's a hobby whether that's in an llc or not i've seen a lot of hobbies in llcs um because there's there's not that for-profit mode of push you're not actually running a business if it's a hobby you can deduct costs right that you incurred in making whatever product or service you were providing but you can't create a loss right so any hobby expenses can only be used to offset any hobby income you earned and then that's it whereas if you're running a trade or business you can basically deduct costs in excess of your revenue right if your business is running at a loss you can deduct those excess expenses so and again just to touch on personal expenses tax code is very clear personal expense under section 162 is not deductible okay where it gets a little tricky is when you have you know expenses that might be 50 50 or kind of a hybrid cost and the example i have down here is is travel expenses for business i see this abused so often and the irs absolutely loves to challenge this because they win almost every time everybody that is an entrepreneur and wants to travel for their business when really it's just a vacation they get caught up in just running all the expenses through not allocating a portion to the personal use and the irs wins they if you can't 100 substantiate that the principal purpose of the trip was for business um and you know you're only deducting the business portion then you're at risk for for an audit and a reversal of those costs the irs is going to hammer hammer you um the best thing to read up on to give more information on these is the irs publication 463 that does a pretty good job at outlaying examples on you know what can be deducted if there's kind of a hybrid component so if you do have a trip for business but then you stick around a couple days after for vacation how do you go about bifurcating those costs and deducting the business portion and then not deducting the personal portion you can still have the company pay for the personal portion of the of the trip right that's fine it's just when you do your taxes the personal portion is a non-deductible basically an m1 reversal right so if you're thinking about how let's say meals for example meals are only 50 deductible and so when you look at your k1 or your tax return you see the deduction for half the cost and then there's that permanent difference where it says look this is a non-deductible expense that's effectively what the reporting looks like if you have a personal portion of a trip being paid for by your company so i think that the takeaway here is be very careful when you are deducting costs inside a company you really want to make sure that they're they are for the business right it has to be ordinary and necessary right necessary being the key point there right it's got to be um principally incurred for to further the business um enterprise right if it's a holiday for an owner uh that's it's going to be tough to argue that that's an ordinary necessary cost and furtherance of the business enterprise itself so um so that that covers it if you have any questions uh feel free to leave me a comment below happy to answer them and um and like always you know definitely appreciate a like on the video subscribe to the channel if you aren't already and i hope to see you again soon thank you


Thanks DreseeteExnoxq your participation is very much appreciated
- Federico Correira


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