4 LLC tax benefits in 2024 (2024)

If you own a small company, you may be considering structuring your business as a limited liability corporation or LLC. LLCs are seen as a favorable entity type by many business owners. The “limited liability” portion of the name means that the personal assets of the members of the LLC are protected; they cannot be used to cover any obligations or debts of the company.

Beyond personal asset protection, there are several LLC tax benefits to consider. Explore these benefits in the next few sections to determine whether an LLC offers the ideal business structure for your entity.

4 tax benefits of an LLC

There are several tax benefits of an LLC to consider when deciding whether it is the ideal structure for your business. These include flexibility in taxation, pass-through taxation, qualified income deductions and other tax deductions.

1. Pass-through taxation

Pass-through taxation is another reason to consider structuring your small business as an LLC. George Birrell, President of Taxhub, explained “the income, losses, gain, losses, credits, etc. from an LLC will flow through to the LLC members and they need to include their share of income/losses/deductions, etc. on their own personal income tax return.”

Compared to C corporations that face double taxation (at the company level and by the shareholders on dividends), LLCs are only taxed once.

2. Flexibility in taxation

One of the main benefits of an LLC is that it provides you with flexibility in regard to how your business is taxed. The way in which an LLC is taxed will depend on the selected tax status and the number of members. The four potential classifications include sole proprietorship, partnership, S corporation and C corporation.

Birrell explained, “An LLC is considered a ‘disregarded entity’ by the IRS, meaning the IRS has no tax law written for this specific entity unlike partnerships, S corps and C corps.”

• Sole-proprietorship: Single-member LLCs default to this tax status, also designated as a disregarded entity. All of the income and expenses from the business are passed through to the owner, who reports them on their return.
• Partnership: Multi-member LLCs default to a partnership tax status. The income of the LLC passes through to the members. Taxation of partnerships requires filing Form 1065 with the IRS and issuing Schedule K-1s for members to use when filing their taxes.
• C corporation: LLCs may choose to be taxed as a C corporation by filing Form 8832. With C corporation status, the net income of the company is double taxed at both the corporate level and at a more favorable rate on the after-tax profits, which are distributed as dividends.
• S corporation: To avoid the double taxation of a C corp, file form 2553 to choose S corporation status, setting your organization up as a pass-through entity. With S corps, taxes are filed based on the individual rate of each owner. The IRS requires that a reasonable wage be paid to all members.

As a disregarded entity, Birrell highlighted the “flexibility in tax status of an LLC. Specifically, the IRS allows LLCs to elect to be taxed as [an S corp or C corp]. Additionally, if there is only one member in the LLC, [it] can elect to be taxed as a sole proprietor.”

3. Qualified business income deductions

In 2017, with the passage of the 2017 Tax Cuts and Jobs Act, another benefit for LLCs was introduced. Owners of LLCs (and other pass-through businesses) can deduct up to 20% of their qualified business income (QBI). With this deduction, the LLC’s and owners’ taxable income is effectively reduced, without impacting the owner(s)’ adjusted gross income.

4. Other tax deductions

QBI deductions are not the only deductions LLCs can take to reduce their taxable income. Other potential deductions to explore with a qualified tax preparer include:

• Phone and internet services.
• Office supplies.
• Mileage and vehicle use.
• Travel expenses.
• Home office expenses.
• Business meals.
• Health insurance premiums.
• Disability insurance.
• Charitable donations.

LLC taxation vs. other business structures

The table below provides additional information about how LLC taxation compares with other common business entity types.

Frequently asked questions (FAQs)