Small Business Tax Strategies for Limited Liability Partnerships

Small business tax strategies present 100 percent legal methods for a business to reduce its tax obligation. One of the first questions to ask when you are deciding on your strategy is whether your company is incorporated. Limited Liability Partnerships (LLPs) are unique in this manner. They are typically permitted only for business owners who are in an industry requiring a specific license, such as lawyers or accountants. LLPs do not enjoy the same benefits as Limited Liability Corporations (LLCs), which are fully incorporated. Therefore, the tax strategies will differ.

Forming an LLP

When you form an LLP, you and your partners are still primarily responsible for the business and its activities. With an LLC, the owners essentially officially give up connections, and the LLC owns all assets itself. An LLP is different. While there is some asset protection and a decrease in certain liabilities, the individual partners can still be held liable for a degree of the business's activities. In terms of exposure to liability, however, an LLP is far preferred to a partnership or sole proprietorship. In terms of taxes, though, the LLP may be more costly than operating a partnership outright.

Filing as an LLP

For an LLP, there is a greater distinction between personal expenses and those expenses related to the business. Once you form your LLP, the assets of the LLP will be those used for tax deductions. For example, having a partnership, you may operate out of your home. Since you are not incorporated, the expense of operating out of your home can qualify you for a deduction. When you file as an LLP, you cannot list your home as one of the assets of the LLP since it is owned by you and not the business. You will lose this type of deduction. Therefore, it is important to think which will be more advantageous tax-wise before you officially form your business entity.

Capitalizing vs. Deducting Expenses

Once you have decided whether you will file as an LLP or a partnership, you should begin thinking about the deductions you will take. All small businesses have two options for expenses: capitalization or deduction. Capitalizing expenses is only an option if they directly contribute to the equity you hold in your business. However, if you can capitalize an expense, you can receive tax advantages in the future. You will be able to defer gains on that equity and spread the requirement to pay these gains over time.

Deducting expenses results in an immediate tax benefit in the current year. In the year you set up your business, you can elect to deduct all capital expenses in order to get on your feet a bit more in your first year of operation by keeping your tax liability low. You must deduct operating expenses and costs of goods sold. These expenses cannot be capitalized. Further, you should deduct all your vehicle costs associated with the LLP. Many business owners do not know business credit card interest also qualifies as a deduction. 

blog comments powered by Disqus