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Common Questions

Which of my business expenses are tax-deductible?

The deductibility of a business expense depends on the nature of the business. The IRS has stated that for a business expense to be deductible the expense has to be both ordinary and necessary. An ordinary expense is an expense that is common and accepted in your industry, while a necessary expense is an expense that is helpful and appropriate for your business.

What's the difference between an llc and a sole-proprietorship?

A Limited Liability Company (or LLC) is a legal entity formed on the State level. For liability purposes an LLC is generally considered separate from its owner(s). The owners of an LLC are generally not personally liable for business debt and liabilities – rather the LLC is responsible. This adds additional protection from creditors. For instance, if a claim is brought against your business, the creditors typically cannot come after your personal assets such as your personal bank accounts, house or car.

A sole proprietorship is the simplest type of business – this is a business owned directly by one individual. While a sole proprietorship is the simplest type of business to get started, the owner of a sole proprietorship is responsible for all of the liability.

Can I mix personal funds and business funds?

Owners of an LLC will want to separate their personal funds from their business funds by having separate records and separate bank accounts. Commingling funds can lead to the loss of your LLC’s liability protection.

What is self-employment tax? Do I need to pay it?

Self employment tax is a tax imposed in addition to your Federal and State taxes. The self-employment tax rate is typically up to 15.3% and consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Generally self-employed individuals such as independent contractors, and LLCs are taxed as a sole proprietorship. Partners in a partnership are subject to self employment taxes if they have more than $400 in net profit during the calendar year.

What's an entity classification election?

For a sole proprietorship, you will typically report all profit or loss from your business on a separate schedule from your normal 1040 called a Schedule C. Any taxes due, based on profits of the business, would be paid by the owner of the business.

An LLC is unique in that it can change the way it is taxed for Federal Income Tax purposes. By default a sole owner of an LLC would be taxed the same way as a sole proprietorship (or as a partnership, if more than one owner). However, an LLC can potentially elect to be taxed as an S-Corporation or a C-Corporation. This election does not change any of your corporate paperwork, rather how the entity is taxed instead. Each election type comes with its own benefits and limitations.

Can I deduct startup costs?

Yes! You can typically deduct up to $5,000 in startup costs immediately. Startup costs include business expenses that you incurred before your business became operational. Your business is considered operational based on your ability to perform your intended business service, not on profitability. For instance, if you open an e-commerce site and customers are able to purchase goods, you would typically be considered operational, even if you have not had a sale. In addition, you can typically deduct up to $5,000 in organizational expenses (such as legal fees to form the entity) immediately.

I use a portion of my home and vehicle for business. Can I deduct that?

Varying on your circumstance, you may be able to take a home office deduction, as well as a deduction for your business travels (subject to limitations).

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage