Question

New LLC

Forum|Forum|2 years ago
August 30, 2023
3 replies
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Hello! I just started a sole member LLC (consulting company) this past week. I have zero experience in what I need to do from a taxation standpoint and would love to get some pointers as to what I need to start doing!

Ask the Experts - Self-Employed - Aug 2023

Q

quorumof1

I'm assuming that you're a single member LLC. If so, here are three things to be aware of are:

1) You will be responsible for paying self employment taxes of 15.3% of LLC net Income in addition to regular income tax.

2) You will be able to deduct all ordinary and necessary expenses of running your LLC business.

3) Report all LLC income and expenses on Schedule C with your 2023 tax return.

The Turbo Tax – Tax Caster app is a helpful application to estimate future taxes-See below link.

TaxCaster

M

mpsaetaAuthor

"You will be responsible for paying self employment taxes of 15.3% of LLC net Income in addition to regular income tax."

So if I make $100,000 in Y1, I will be taxed 15.3% on that, plus regular income tax. What would regular income tax look like there?

And then do I have to do quarterly filings for this sole member LLC?

S

SwapnaM

Thanks mpsaeta for the question!! Kudos on the new adventure!!

If you work as an independent contractor, a sole proprietor, a member of a partnership that conducts business, or a person who otherwise runs a business as your own, you likely need to pay quarterly estimated taxes.

Quarterly taxes generally include self-employment taxes (Social Security and Medicare) plus income tax on the profits that your business made and any other income. If you are also an employee, then you can either increase your withholding with your employer by filling out a new W4. If not it is suggested that you make estimated tax payments depending on your income earned.

TurboTax Help article: Starting a new Business

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M

mpsaetaAuthor

Thank you very much for the help. What classifies as a deductible expense for my business?

S

SwapnaM

To determine whether you can deduct an expense, ask yourself: Is this expense both ordinary and necessary to the business? The IRS requires both elements.

An expense is ordinary if it is common and accepted in your industry.
An expense is necessary if it is helpful and appropriate for your business.

You can write off a wide variety of business expenses you paid during the year, including things like:

Advertising costs
Commissions
Supplies
Legal fees
Repairs and maintenance
office expenses
Home Office
Vehicle expenses

This is where good record keeping can really save you money on your taxes.

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Terri Lynn 11

Hello Mpsaeta,

Congratulations on starting your own business!

This is ceretainly a great accoplishment, however, it comes with a lot of new things to learn, especially when it comes to record keeping and taxes. This means you will need to do a little homework, as such, I have provided some additional links to resources below my response, that you may find useful.

Some of the key things a new business owner, like yourself, will need to focus on when it comes to taxation, is to understand the various start up cost and expenses and the ways they will be applied i terms of your Schedule C.

Startup tax deductions are capital costs

Startup costs are deductible. Startup costs can be anything from market research, analysis, legal fees, to establishing suppliers and vendors.

Most of your startup expenses are treated as capital costs for tax purposes. The IRS considers them long-term assets—you’re investing in the future of your business. As assets, generally you must depreciate them rather than deduct their cost in the year they’re purchased. This means you can recover the expense stretched out over multiple years. The exact number of years you can take a depreciation deduction depends on the nature of each asset. For example, software is depreciated over three years, but if it comes already installed in your new computer, it’s depreciated over five years.

You can elect to amortize other costs

Some startup expenses, such as organizational costs, can be either amortized or you can deduct the full cost in the year you open. But if you choose amortization, certain rules apply:
The costs must be incurred before you open for business.
The associated costs must have also incurred if your business had been operating for years

Amortization is somewhat similar to capitalization in that it also involves stretching deductions out over a period of time.

Some costs don’t qualify as startup expenses

Some equipment you must purchase is treated as a regular business expense. For example, if you’re opening a landscaping business and you buy a truck, generally you must capitalize and depreciate the cost. Such expenses are treated just the same as they would be if you had been operating your business for decades.

Timing can be important

Timing matters, too. “Startup costs are only deductible if your business does indeed start up,” says Capelli. “And they have to be incurred during the planning and development phase of your business. Otherwise, after that, they become operating expenses.” The flip side to this is that even though your business isn’t operational yet when you incur startup expenses, you can deduct them or begin to deduct them in your first year of business.

Keep good records

A deductible expense only does you some good if you can prove you spent the money. The burden of proof is on you to show that you spent what you said you spent. “Good records are vital,” says Capelli. “You have to keep careful track of your expenses and this includes maintaining receipts.” Now that you know the basic rules, check with our other articles on business tax deductions.

Please let me know if you have any more questions or need further clarification on anything.

Thanks, and best wishes going forward.

Terri H

Tax Filing Rules for LLC

Startup Business Tax Tips

Starting a Business

Self-Employment Business Income and Deductions

Small Business Start Up Costs

Starting a Business

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Terri Lynn