LLC: When and how to claim deductions?

[Zakray]

Hi all, new to this forum and new to small business. I recently created an LLC partnership and we took out a company credit card to easily make business expenses.

As I understand it, with an LLC the profits and losses are passed on to the members. So the LLC itself doesn’t get taxed. So, how do I claim deductions from business expenses? Is it when doing my personal taxes? And if so, how do my partners and I separate the business deductions?

Much thanks to anyone who can clear this up for me

[BizAdvisor]

Simply ignore the fact that you're an LLC. In the eyes of the IRS, you are a partnership and should file as such. Why? Because the IRS really doesn't care.

You and your business partner, together, are gonna want to fill out a Schedule K-1 and make 3 copies; one for each of you as well as one for the IRS. The Schedule K-1 details how the business' earnings are divided among the partners.

Now, come tax time, you'll file like you regularly do, but you'll want to attach a Schedule E with your personal tax form. You'll want to use your copy of the Schedule K-1 as a reference to help fill out the Schedule E, but you don't need to send it to the IRS. Just your regular tax form and the attached Schedule E.

[Zakray]

Thanks for your help! Still confused about deductions though. Are you saying we show our overall profits and losses on Schedule E (which would include deductions) and then Schedule K-1 to show how the net profit was distributed among partners? And then whatever my share of the distribution is, that's how much I claim on my personal taxes?

[turboguy]

you don't separate the expenses. You separate the profits of losses. For example if your sales were $ 100,000 and your expenses were $ 37,000 you would have a $ 63,000 profit. If you owned 47% of the business, another person owned 41% and a third person owned the remaining 12%. You would show 47% of the 37 grand on your taxes, the second person would show 41% of it and the third would show 12%.

[Zakray]

Thank you Ray. One other question: we sometimes use our LLC as an umbrella for individual work, meaning I might make $X in profit for the company that only gets paid out to me, not my partner. Does this mean we should decide the percentages in Schedule K-1 retroactively to reflect this? So the amount we're claiming on our personal taxes is accurate?

Example: the company makes $100,000 total, 50% is from jobs my partner and I did together, 40% from jobs that I alone did, and 10% from jobs he did. So should I make the percentages on Schedule K-1 reflect that (65% ownership by me, 35% by him)?

[Zakray]

Anyone able to help with my question?

[turboguy]

That is complex enough that you might want to check with an accountant but there are some parts I am pretty sure on.

The actual ownership should be fixed by an agreement between the two of you and that should not change year by year based on how the income is generated. It can change based on changes in contributions (adding money to the capital account) but I would not think it should be something fluid that changes based on division of income. The best way to deal with that would be payment of wages If one partner generates more company income pay him wages based on that. Otherwise just show it as partners share of income in section III.

[Zakray]

Thanks again Ray. Appreciate your help!