Starting a side business may be a fun way to build off a hobby and make some extra money, but did you know that it could also increase your savings come tax time? While forming a limited liability company (LLC) differs from state to state, doing so might be easier than you think. First, you don’t need a lawyer to set one up. State requirements are usually self-explanatory enough to start one on your own. Depending on your state, it might be as easy as paying a low, one-time fee along with some paperwork.
So how exactly does starting an LLC give you tax advantages? Perhaps the biggest is known as “pass-through taxation.” This means profits and losses go through the individuals owning the business. This means income isn’t taxed on both the personal and business level. Next, if you start a home-based business, you can deduct the business use of your home (with careful record keeping). For example, if you have a home office and use it “regularly and exclusively” for your home business, you could potentially deduct thousands of dollars from your tax bill. While doing this is relatively complicated, the IRS also has a simplified method of determining your deduction up to $1,500.
With an LLC, you have other small business deductions that are legally available to you as well. This is especially important if you have a hobby that you spend money on anyway and are thinking about turning it into a legitimate business. For example, perhaps you spend money on materials for candle-making. If you register as an LLC, those materials become business expenses and may be deductible. If you take a class on candle-making? Business expense.
According to Bankrate, here’s the “deductible dozen” that small-business owners can take advantage of:
- Home office
- Office Supplies
- Other equipment
- Software and subscriptions
- Travel, meals, entertainment, and gifts
- Insurance premiums
- Retirement contribution
- Social security
- Telephone charges
- Child labor
Disclaimer: The purpose of this article is to provide general information that can be used to gain an understanding of US tax laws. The author is not an attorney, financial adviser, or tax adviser. Please consult a qualified professional when preparing your tax returns or making tax-related decisions.