Tax Benefits of LLC | LLC Taxes Explained by a CPA - How does a LLC save taxes?

llcs are by far the most popular entity type among small businesses or what exactly are the benefits of a llc how does it protect your business and more importantly what are the tax benefits of choosing an llc over another entity the answers to these questions may influence the entity structure that you choose for your business and how much money you end up paying to the irs hi my name is sherman a cpa with life accounting a full service accounting firm that helps small businesses grow and manage their finances in this episode i'm going to explain all the tax benefits related to llc by the way if you're new to our channel please be sure to subscribe so you don't miss out on future videos that can help you grow your business also if you extract any value from this video please help me out by clicking the like button below lastly although i am a licensed cpa the information in this video is solely for informational purposes only it is not meant to take the place of legal and accounting advice specific to your business with that said let's talk about some llc's before we get into it let me address the most important topic on everyone's mind right now the tax loopholes associated with llc's now i'm sure you've heard of all the stories about how the rich doesn't pay any taxes or how politicians and alleged millionaires and billionaires have tax schemes to not pay any taxes to the irs and maybe you've heard that llcs is exactly what can help you evade those taxes altogether well i've got some news for you it doesn't llc's is not a tax loophole in fact llcs have nothing to do with your taxes in general llcs are legal entities that protect you from personal liability in the event of a lawsuit for example for tax purposes your llc is viewed as either a sole proprietorship or partnership typically in either case it doesn't necessarily mean that you're evading taxes however when stacked up against other entity types there are ways that you can look at an llc as a tax advantage or benefit so with that said let's go ahead and dig into what those tax benefits may be tax benefit number one pass through taxation when it comes to entity taxation there are two type of taxes that you need to be aware of pass through taxation and double taxation pass through taxation means that all the money that your business receives is subject to taxation even if you did not pay yourself a dime from your business income you will be taxed on it now double taxation on the other hand means that technically you're taxed twice first of all your business is taxed on all income and secondly when you are paid you are also taxed personally on the income that you take out of your business with that being said a major tax benefit of llcs is that it is only taxed once with pass through taxation here's an example of what i mean let's say you made 100 000 as a llc if your tax rate is 25 then you would only pay twenty five thousand dollars in taxes as an llc however on the other hand let's say you're a c corporation if you made one hundred thousand dollars as a c corporation your business will be taxed on that income first if the corporate tax rate is 20 then you would hypothetically pay 20 000 in taxes but then you have to also pay taxes on what you pay yourself from your corporation so let's say you decide to pay yourself 50 000 in w-2 wages and this puts you in a 20 tax bracket this would mean that you would have to pay an additional 10 000 in taxes due to your personal income that you've taken from your business so in total as a c corporation you would have paid thousand dollars in taxes whereas as an llc you would have only paid twenty five thousand dollars in taxes now to be fair this is a oversimplified example and there are some additional things to consider like self-employment tax for example however in general this is an example of how someone could view an llc as a tax benefit tax benefit number two s corporation election another tax benefit of llcs is that you can elect to be taxed as a s corporation s corporations are unique in that you don't have to pay self-employment taxes however you are supposed to pay yourself a reasonable salary aka w-2 wages for the work that you perform now the taxes you pay on your w2 wages will typically be about the same as what you would have paid in self-employment taxes however if your business earns over a reasonable salary for your own work then electing to file as an s-corporation may be worth considering again this is simplified information but if you want to weigh the pros and cons of this you can contact us to create a custom tax plan for you all right tax benefit number three tax write-offs the next benefit of a llc are tax write-offs now this is a major benefit for self-employed individuals who may not be writing off everything related to their business like your home office expenses business travel and other business related expenses a llc is typically considered separate from you as an individual which means that your business finances should be separate from your individual finances making it much easier for you to keep track of your business expenses in order to deduct it from your tax return for example if you have a business bank account you can sync your financial information with a bookkeeping platform like quickbooks for example then you can categorize all of your business transactions so you can easily start deducting eligible expenses from your tax return tax benefit number four pass through tax deductions now i know what you're thinking i'm about to completely contradict myself but i'll explain why in just a second generally there is no difference in tax write-offs for a llc versus another entity type like a corporation however llcs are eligible for the 20 pass-through tax deduction that was passed through the jobs act all passed through entity types sole proprietors partnerships llc's and so on can deduct up to 20 percent of their taxable income from their taxes so for example if you were preparing to file a tax return that report one hundred thousand dollars in income then this deduction would reduce your taxable income to eighty thousand dollars if applicable the twenty thousand dollars in savings would save you thousands of dollars on your business tax return now to be fair there are a few rules and regulations that may disqualify you from receiving this tax deduction however if you are eligible for it it could turn out into some big tax savings tax benefit number five llcs are easy to set up one of my favorite things about llcs is that it is fairly easy to set up which ultimately makes filing your taxes much easier and less stressful than other entity types you don't have to worry about divvying up stuff like common stock and preferred stock and there is typically less record keeping required for setting up your llc in the first place ultimately there is less compliance required for setting up llc's so if you don't have a lot of things going on in your business starting off with an llc might be a great option for you okay so those are the major tax benefits of an llc now let's recap today's episode today we explain the biggest tax advantages of a llc first we debunk the myth that llcs in of itself is a tax loophole it's not an llc is simply a legal entity that comes with some protections for you as a business owner then we went into the major tax benefits of a llc those tax benefits were pass-through taxation s-corporation elections business tax write-offs pass-through tax deductions and finally the ease of setting a llc up i hope that you found this video useful and interesting if you did please go ahead and give this video a thumbs up or comment below with any questions you have also don't forget to subscribe to our channel so you don't miss out on other accounting content that we're putting out to help you grow and manage your business finances until next time take care

Channel: LYFE Accounting

Views: 328,481

Keywords: llc tax benefits, llc tax advantages, llc benefits, llc advantages, tax benefits llc, llc tax deduction, tax benefits of llc vs sole proprietorship, llc for tax benefits

Id: JibRkMqhih8

Length: 8min 52sec (532 seconds)

Published: Fri Oct 30 2020