Can an LLC Pay for an Office?

Businesspeople working in office
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If your new limited liability company is your first venture into corporate ownership, it’s easy to get confused. The Internal Revenue Service’s pass-through taxation has a way of blurring the lines between an LLC and its owner, particularly if it has only one member. For all operational purposes, an LLC functions like any other corporate structure, and it can rent office space and purchase other materials as it needs. It’s only at tax time that issues become a little tricky.

Renting Office Space

Just like any other type of business, an LLC needs a place from which it operates, such as an office. An LLC may rent or purchase office space as needed, and members of the LLC don’t need to rent the office as individuals. If the office is necessary to do business and an ordinary business expense in your line of work, you can claim the rent as a deduction and reduce the LLC’s taxable revenue by the amount of the rent.

Using a Home Office

If you’re a member in an LLC that operates out of personal residences, the situation isn’t quite as tidy, but you still have a wide range of leeway in the matter. First, the home office must be dedicated exclusively to business use — claiming a guest bedroom with a family computer in it won’t cut it if you’re audited. It must also be regularly and continuously used in the line of work. If the home office qualifies, you can claim a portion of your mortgage or rent, utilities and insurance as a business expense.

Determining Home Office Deduction

If you use a home office, you must determine the portion of your home devoted to business use, which the IRS refers to as business percentage. To calculate business percentage, calculate the square footage of your home office — multiply its length by width — and divide that figure by the total square footage of your home. After calculating the business percentage, you may claim that percentage of mortgage, insurance and other deductible expenses on your personal taxes.

LLCs and Corporate Taxes

While the IRS requires LLCs to obtain an Employer Identification Number and submit a yearly tax return, most LLCs don’t directly pay corporate taxes. Instead, the company’s earnings “pass through” to members’ individual taxes, where they’re treated similarly to individual income. Because of this, many first-time LLC members confuse the relation between personal expenses and business expenses. In most circumstances, best business practices are to run all expenses, such as office rent, and income through the LLC and let the costs pass through to members’ taxes.

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