Tax Help Reimbursements / Deductions with LLC

I have a business bank account. All of my payments from the website go directly the LLC bank account. I have done some research and I've been reading that the worst thing to do is to take money out of the LLC bank account and deposit it into your personal bank account because of hefty taxing.

I have also read that what should be done is leave the money in the LLC account and use the money from that account to pay for expenses that the LLC can reimburse for like, cell phone, internet services, gas, my car, dining, business travel, computer equipment etc.

3 Questions:

1) Is this true?
2) I know taxes are inevitable, but what is the best way to minimize tax from the LLC?
3) What exactly can I reimburse and what percent of it can I reimburse?

Answer

What you read is partially correct and partially wrong.

If your LLC is taxed as a partnership, then all profits flow through to you personally and are reported on your personal income tax statement.

This is true regardless of whether you leave the profits in your business account or not. (Note, if you are taxed as a corporation, a whole new complexity arises with regards to leaving money in the corporation, which really requires a tax attorney to sort out).

What you read is correct in that you can minimize taxes by having your LLC pay all your business expenses.

This is where you must make best use of being the owner of a small business--by taking every legitimate deduction you can.

You should absolutely pay all your business expenses out of your LLC's business checking account.

I assume from your question that you run a website. So legitimate business expenses would include hosting fees, software purchases, your internet connection, any computer hardware you use exclusively for your business (e.g your laptop), etc.

Here's a 30,000 ft overview of how your LLC taxes will be computed:

At the end of the year, you add up all your revenues from your LLC--adsense income, income from sales of products, affiliate income, and so on. That is your revenue.

Then you add up all your business expenses: phone, internet, hosting fees, money spent on advertising, etc. That is your expense.

Subtrac expenses from revenue and you have your business profit or business income.

It is on this business income that you pay taxes.

As a single-member LLC, these calculations of business revenue and business expenses will all be done on Schedule C of your 1040.

If you do the math, it's clear there are only two ways to cut your taxes:

1. Make less money
2. Increase your business deductions

No one wants to do option 1., so option 2 is where you can save a ton of money.

The few deductions you and I mentioned are only a fraction of all the deductions that a small business owner can take. There are many others as well.

I recommend that you get a copy of Wayne Davie's Tax Reduction Toolkit. It contains 29 small business tax deductions that you've probably never heard of, plus instruction and guidance on how to backup those deductions when dealing with the IRS.

I also take it from your question that you are concerned that the deductibility of an expense depends on whether you wrote the check for the expense out of your business or personal bank account.

You technically can pay business expenses from your personal account and take a deduction, but that is a bad habit to get into. By doing so, you are commingling personal and business assets and risking have your corporate veil pierced. In addition, you might have a tougher time in an audit justifying your home phone bill as a business expense if you paid for it with a personal check.