All right, today we're going to cover the LLC myth.
So you may have heard that LLCs are magic,
and if you form an LLC, you will automatically get deductions.
You may have seen it on social media, or someone talking about it,
and you're like, oh, well, just form a business,
or form an LLC, and you automatically get deductions.
Well, that's wrong. It's the LLC that,
it's not the LLC that gives you deductions.
It's the other things. It's what you're actually doing with the LLC that gives
you deductions. So, while it is,
it is common, like a common recommendation that I would have for someone that
they set up an LLC, it's not just to get tax deductions.
And it actually does not. That is the myth.
The LLC is LLC itself does not give you tax deductions.
I guess maybe the cost to set up the LLC is likely deductible,
so maybe in that regard it is, but here are some of the facts.
I want to make sure you know. We will be talking about the four
ways that LLCs are taxed. This was covered in like one of the first,
a couple years ago, in one of the first podcast episodes.
I'm going to recover some of those things, so the four ways an LLC
is taxed, and then what the LLC actually does,
like why we like LLCs, why we want to use LLCs.
So, number one, the LLC itself doesn't create the deductions for you.
An LLC, when you think of an LLC,
think of for watching.
It's really just a legal entity structure, and it's separate from taxation. It is
like the way that it's registered with the state,
and that's different. And that's like your name registration,
you fill out the paperwork, the initial registration,
and that's different with the way that you're filing tax returns.
So just think of that, and then in the end we'll cover the four
ways that they can be taxed. But here's why you would form an LLC.
So if you want flexibility and ownership,
like say there's you and a friend or a spouse or a partner,
and you want to own something together, you need some sort of entity to
own that together. And if you want to own a business,
it's got to be held in something. And that is usually an LLC.
That's the most common way to do it. And another thing,
so flexibility and ownership is one of the most important things.
Another one is, is there really is asset protection in an LLC,
keeping your personal assets separate from LLC assets.
I won't get into court case law or even the way that an attorney
would talk about things, but there's a.
There's a reason why attorneys typically recommend forming businesses and having a legal entity
structure and that's to separate things from your,
from your personal assets. Uh,
and there are very specific, like at the state law and there's case law
on this, where when there's lawsuits,
like one specific example is like with LLCs in Wyoming and other states
as well, but there's charging order protection.
So if there is a lawsuit, uhm,
instead of being sued personally,
having a dispute. If there's a charging order protection for your LLC,
and there's a lawsuit,
and you've got other partners, it could prevent that charging order protection.
And can prevent you from needing to liquidate your assets and give it all
up to whoever's suing you. Umm,
so there is some asset protection there. So flexibility,
ownership, asset protection, and then just having,
Like, credibility in your business,
whether you're holding yourself out to the public,
having credibility as a business, uhm,
going to banks, lenders.
Just having that credibility as a business is another one of the big reasons
for it. But none of those, yo,
yo, you'll notice none of those things I mentioned are tax deduction related.
When I, we won't even get into the tax deductions today,
because it's. It's, it's all separate. Uhm,
but now we will get into in this,
this part is confusing. We will get into the way that they're taxed in
the way that LLCs can file tax returns.
And so. The CPA firm owner and doing tax returns.
A big chunk of my life. This is,
this is what a lot, a lot of what we see. Like typical CPAs
will, will see this when you're filing tax returns.
You'll see this. So the four ways.
I'll. Start from, well, it won't even be simple to complex.
I'll just start with the simplest. But the basic kind of default way that
an LLC files as tax returns when there's just one owner is
as a disregarded entity. So. So that means it's like a sole proprietorship and
there's actually no separate income tax filings for that LLC.
There's still state filings. There's renewals and registrations at the state level.
But if you are a sole proprietor and you own 100% of an LLC.
You don't do anything else do it to change it or have a tax
in a different way. Your tax is a sole proprietor.
Meaning there's no income tax filing. Except from what goes on to your
personal taxes. Is it called the Schedule C?
Uh, that's where self employment goes on your personal taxes,
but that's how it would be filed. So that's if you're a one-person LLC.
So if you don't want to- that on your personal tax return.
And this is a common, common recommendation as well.
It's like the most commonly audited tax form by the IRS is the Schedule
C. And so that- what I just mentioned, if your default structure for that
LLC the Schedule C,
a sole proprietor, your self-employed, audit risk is higher,
just naturally with the IRS. So if you want to be taxed in a
different way, and it's still just you,
you have two other options. And if it's only- And maybe we could get
creative, maybe I'll give you the third option as well. You can convert that
LLC to be taxed as an S corporation.
It's still an LLC, it's just taxed as an S Corp.
Or you can be taxed as a C Corp. Which,
uh, a C Corp is kind of like the structure of a,
like a stock, their stock ownership, kind of like a publicly traded as,
as started, like, the income and expenses from that don't end up flowing.
Going through the C Corporation on your personal taxes is just a complete standalone
file. And that's the C Corporation. So the S Corporation is really a really
popular option for business owners.
And a lot of times it's because they're the only owner.
There's some strategies you can do with an S Corporation,
like paying yourself part of what you're paid on a salary.
There's some retirement plan options you can do with S Corporations.
There's some more strategies there, which is why a lot of times we do.
I recommend those. So we've talked about disregarded entities,
files on your schedule C. We've talked about S Corporations.
We've talked about C Corporations, which is how LLCs you can convert to be
taxed in that way after you file some official paperwork.
And then the last one is Partnerships.
An LLC can file as a partnership,
but one requirement with a partnership, you need to have more than one owner.
So it could be you and a friend. And you and a family member,
you and a partner, as long as there's two owners,
you can file as a partnership. We've seen some,
you know, we've seen some unique scenarios and structures where you actually can't have
one of your other corporations Or one of your other entities own part of
your LLC. It's like, there are, there can be partnerships created from
you or your other businesses or you and a spouse.
It gets, it gets pretty fun. So if you've seen some of the white.
I love that type of stuff.
It's, it's fun to structure, but it's, it doesn't need to be overly complex.
Like, you don't, in my opinion, you don't need Cayman Islands, uh,
Cayman Islands. Island corporations and,
and trust. A lot of these just end up in court anyways,
and the IRS goes after them. Uh,
trust that help you write off your personal taxes.
It's kind of just a, yeah, social media guru type thing.
We've seen those hit court cases, but you don't need to go over the
complex or pay $50,000 just for an entity structure set up.
It'll, it'll take some education. I'd say is the biggest thing.
Make sure you understand what you're doing. Um,
get some. Help, like, help is important,
but make sure you get it. I wouldn't offload all of the responsibility in
deciding what structure is best for you. I get the education,
ask questions, watch videos,
really understand it. Understand.
So LLCs, how they're taxed, why you'd form an LLC.
So this is what we've talked about today. And then,
just start taking baby steps, structure the recommendations I make.
I like to structure it in a way where you can. And it's like
building blocks. You can build onto it later. So I would do that.
I wouldn't just dive all in 100% if you don't even know if you're
going to be running, having businesses or certain properties.
You can set it up in a way where you can just keep adding
to those LLCs down the line.
So that's it. LLCs are not magic.
You don't get deductions automatically from LLCs.
It's not the LLC that creates the deduction.
It's, What the LLC is doing? Are you a business owner?
Are you a rental property owner? Are you running businesses?
Are you owning things? What are you doing with it? The last thing I'll
leave you with is, with the IRS,
they've got some tests for determining if, I'm gonna give something as deductible.
And I've covered this on an episode two, but I call it the Pond
Method P-O-N-D. Just kind of,
I want you to think through these steps, if a specific expense is deductible
for you. So, So it needs to have,
so P-O-N-D Pond needs to have a business purpose.
Uh, purpose is the,
the P there. So you need to have a, like a business reason for
it. Like, what's the reason for this? And what, what is that expense doing?
Is it g- You getting a new customer? Is it growing your business?
Is it getting your name out there? Is it paying for supplies or expenses?
It needs to have a purpose. It needs to be,
here's the O. It needs to be ordinary.
Ordinary in type N out. So ordinary,
like, and I'd think of this as like,
kind of reasonable, reasonable and ordinary.
If you are a CPA, like I am,
and you take a client. And have lunch.
Okay. That's, that's likely deductible.
If I fly a client to London,
and take him to lunch there, it's like, that's not very ordinary.
Unless there's a. Very specific reason for it.
It's like, why would I pay? Why would you need to pay $2,000 for
a flight and buy them lunch in London? Like,
there's just some things that are not ordinary. Like, a $50,000 truck or $100,000
truck. For a contractor? That's ordinary.
But if that contractor needed, uhm,
if they went and spent a million dollars on one truck that was gold
plated, it's like, that's, that's not ordinary.
So think of it that way, like, if it's completely,
how did the ordinary and not typical,
then it's, it wouldn't pass that test. So we did P,
it needs a purpose, O, it needs to be ordinary,
it needs to be necessary. Same type of,
same type of testing. Like, necessary,
For the production of income, growing the business.
Um, and then last one is documentation.
The D. Make sure you have documents, documentation for this.
You've got receipts, invoices. Make sure it goes through business bank accounts.
It's a lot easier for the tracking and accounting. And so that's it.
So that is, it's not the LLC.
It gives you the deduction. That's the myth. Do LLCs give you deductions?
No. But what does give you deductions?
What I just mentioned here at the end. The. Uponed method.
Have a purpose, have an ordinary amount necessary and have documents for it.
That's, that's what gives you the deduction.
So that is all for today. Hope that helps.
