Thinking of creating an LLC (taxed as a partnership) to deduct rent and other expenses (car lease, some flights, some dinners). LLC would conduct any part-time side-business (say, selling WSO t-shirts, or resume review services - whatever). Does anyone have real experience with that, things I should be aware of, is it worth it, etc.?
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Do you actually have those side businesses, or is this just bullshit? If yes, your business income needs to be greater than your deductions. Your deductions also need to be related to your course of business. I don’t see how your car payment relates to resume review or t-shirt making. If no, then this is straight up fraud and I would advise against it.
You're begging for an audit if you're suggesting doing what I think you're suggesting - creating an LLC which will pay for consumption and then pass through losses to offset your individual income. This is a transparent tax dodge and will immediately trigger all kinds of red flags with the IRS (large pass-through losses of an individually owned llc with no legitimate business history, writeoffs of rent at a residential address that is identical to the LLC owner's address, writeoffs of business dinners).
Maybe the initial post wasn’t clear. There will be a legit LLC operating a small business. I guess LLC will have revenues for $50-100k per year the first couple of years, with 20% margins. Hopefully it makes more money. In any case, it will be very small though compared to my current personal income. I want someone that has done this telling me their experience.
In that case, why do you need the LLC? Are you looking to shield yourself from liability? There's no real tax advantage to this structure as the income is pass-through to your tax return. Even if it's a legitimate business the IRS is very severe with their limitations on claiming even part of the rent if you live at the same address.
Yes, shield from liability. The LLC is being set up either way. And will use my residence as primary place of business, so I know I can deduct part of my rent (that’s easy to google). My question is, to those who have done this, what else can they deduct (phone bills, flights, dinners), and to what extent - and what was their overall experience.
You would be able to deduct a *portion* of your rent, say, whatever the square footage of your office space is relative to the overall home.
So say, you can deduct $10k a year in rent. Also the phone bills related to business. Throw in stationery too. So net net, your upside is you're netting $4k extra/year, and the downside is you go to prison.
This is what they call "asymmetric risk-reward". Except to the downside.
Btw, even the cheapest people I know would pay a tax advisor to chime in on this rather than get tax advice on a random forum.
Why would you go to prison if you are doing everything right? I get from the above nobody does own a small business through an LLC. I’ve seen it in DD processes for family owned companies certain expenses that you’d normally treat as personal being paid by the LLC, though not sure if they were deducted for tax purposes. One company even had the lease on a high luxury Italian sports car, used by the owner! So thought worth asking. I do have a tax advisor, but wanted also to get people’s views - whether it’s was worth the hassle, whether it was simple enough, etc.
It actually is smart to put small businesses in an LLC for the liability protection. With the sports car guy, unless he needed that type of car in order to run his business (which I highly doubt), he was just lucky he never got audited and got away with fraud, which are not footsteps I’d risk following in.
The fact that you have an LLC to run the business has absolutely nothing to do with what expenses you can claim on your taxes - legitimate business expenses are legitimate business expenses no matter what legal structure you choose. Buying a sports car and claiming it as a business expense is an illegal deduction unless there is some reason you needed that car in particular to conduct your business and use it 100% for your business.
You don't need a LLC, you need a tax attorney.
Exactly. It sounds clear from your OP that the side business is just a pretext for avoiding taxes on personal-use stuff, and that is exactly the type of fraudulent scheme that lands you in prison.
But, to reiterate, stop being so cheap and get yourself a tax attorney.
Maybe my point didn’t come across the right way. The IRS provides tax deductions that are legal to small businesses. There’s is nothing wrong with taking those, or even starting a business to take advantage of those. It’s very easy to start a small business, say drop shipping on Shopify/Amazon and get some small revenue and maybe even a profit - and qualify for the tax deductions on business expenses, which include some personal expenses to the extent they contribute to the business (e.g., deduct portion of your rent, or your phone bills). You may save, I don’t know, $10-20k on taxes and only thing you have to do is set up a small business (for avoidance of doubt, a bona fide business). Some of these business expenses can be blurry - you can travel to China, visit family and also visit a factory / suppliers. Is it a business expense? Do you have to prove you had a business meeting? Do you deduct? Do you deduct if your company is making $500k of profit? Do you deduct if it’s making $10k of profits? If the company is unprofitable for the first 5 years, do you still deduct legally allowed expenses? Even if you deduct all in a lawful manner, are there any expense category that is a red flag and likely to get trigger an audit (e.g. I know dinners or “entertainment” is a trigger, as people abuse it - but what else), and hence an expense and a headache (even if you do everything lawful). These type of questions. Don’t think I need a tax attorney, I have a tax accountant that I ask most of these questions. But would have guessed (maybe wrong) in this forum there may be enough people making sufficient money to be taxed at the highest marginal tax rate, while their spouse stays at home and manage a small business - and wouldn’t mind getting some (lawful, gee!) tax deductions in the process. I wanted to hear from these people, who have had this setup for 5-10 years, sharing their experiences (e.g. don’t deduct anything if your company is not making a profit, travel expenses not worth the admin hassle, rent, car, and a phone are always ok and stupid not to claim those)
I don't know about MMPM, but I've been in the highest tax bracket for close to a decade, and I've deliberately continued to file my own taxes the entire time (despite needing to file partnership / K1 returns for the last 5 years) in order to understand how I can optimize my taxes.
Choosing to incorporate a side gig has nothing to do with what you can claim on your taxes. Claiming rent on your residence or the cost of a personal vehicle is an incredibly effective way to get audited, and it doesn't matter whether you do it as an individual or as an LLC.
Want to deduct $10mm? Then I can get 30%:
https://www.irs.gov/compliance/whistleblower-informant-award
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