Single Member LLC

A Single Member LLC, is a legal entity business owned by one individual. The primary advantage of an LLC is that it provides limited liability protection to its member. This means the member's personal assets are generally protected from the debts and liabilities of the LLC. A Single Member LLC is treated as a "disregarded entity," meaning it is taxed as a Sole Proprietorship and does not file its own separate tax return. Instead, the profits or losses of the business are reported on the member's personal tax return under Schedule C (Form 1040).

Bookkeeping

Gross Receipts or Sales

  • Any cash or checks of business sales that were NOT reported to you on a 1099-NEC or 1099-MISC.

  • You should receive a Form 1099-NEC from anybody who paid you at least $600 for services performed if you are not an employee of that person.

  • At least $600 for:

    • Rents

    • Prizes and awards

    • Other income payments

    • Medical and health care payments

    • Crop insurance proceeds

    • Fish you sold from your fishing business

    • Notional principal contract

    • Attorney services

    • Fishing boat proceeds

    • At least $10 for royalties or broker payments in lieu of dividends or tax-exempt interest.

  • Payments you received for goods or services total over $20,000 AND over 200 transactions. Both criteria must be met. This includes:

    • Cash App

    • PayPal

    • Venmo

    • Stripe

    • Amazon

    • eBay

    • Etsy

    • Shopify

    • QuickBooks

    • Square

    • POS Systems

    This includes payments for any:

    • Goods you sell, including personal items such as clothing or furniture

    • Services you provide

    • Property you rent

    The payments can be made through any:

    • Payment app

    • Online community marketplace

    • Craft or maker marketplace

    • Auction site

    • Car sharing or ride-hailing platform

    • Ticket exchange or resale site

    • Crowdfunding platform

    • Freelance marketplace

  • When reporting rental income, you should include the following types of income:

    • Rental Payments: The most obvious type of income to report is the rent payments you receive from tenants. This includes any advance rent payments you receive (rent paid before the period it covers).

    • Security Deposits: Normally, security deposits are not included in your income when you receive them if you plan to return them to your tenants at the end of the lease. However, if you keep part or all of the security deposit during the year because your tenant does not live up to the terms of the lease (e.g., for damage repair or unpaid rent), that amount becomes taxable income in the year it's kept.

    • Expenses Paid by Tenant: If your tenant pays any of your expenses, those payments are rental income. For example, if your tenant pays the water or sewer bill for your rental property and deducts it from the normal rent payment, the amount the tenant paid is considered rental income.

    • Property or Services in Lieu of Rent: If you receive property or services as rent, instead of money, you must include the fair market value of the property or services in your rental income.

    • Lease Cancellation Payments: If a tenant pays you to cancel a lease, this is also considered rental income.

    Form Schedule E is required to be filed.

  • Miscellaneous Income

    • Finance reserve income

    • Scrap sales

    • Bad debts you recovered

    • Interest (such as on notes and accounts receivable)

    • State gasoline or fuel tax refunds you received in 2023

    • Credit for federal tax paid on fuels claimed on your 2022 Form 1040

    • Prizes and awards related to your trade or business

    • Recapture of excess depreciation, including any section 179 expense deduction.

    • Other kinds of miscellaneous business income

  • This would include allowances, rebates, refunds to your customers, or returned sales.

Business Expenses

Administrative Expenses

  • • Monthly Service Charges: Fees charged by the bank for maintaining your business bank account.

    • Transaction Fees: Charges for specific transactions, such as wire transfers, overdrafts, or excess transactions beyond what is included in your account package.

    • Credit Card Processing Fees: Fees charged for processing customer credit card transactions.

    • ATM Fees: Charges for using ATMs, especially when using machines outside of your bank's network.

    • Instant Transfer Fees: Fees for services that expedite funds transfers, such as immediate transfers to an external account.

  • The amount of premiums paid for business insurance. The types of insurance that might be included are:

    • Liability Insurance: Covers damages or injuries to others caused by your business activities. This can include general liability insurance, professional liability insurance (also known as errors and omissions insurance), and product liability insurance.

    • Property Insurance: Provides coverage for business property and assets in case of damage or loss due to events like fire, theft, or natural disasters. This includes insurance for business buildings, equipment, and inventory.

    • Business Interruption Insurance: Covers loss of income and operating expenses if your business is temporarily unable to operate due to a covered event, like a natural disaster.

    • Vehicle Insurance: For business-owned vehicles, this includes coverage for damage to the vehicle and liability in case of accidents.

    • Workers' Compensation Insurance: Mandatory in most states, it covers medical expenses and lost wages for employees who are injured on the job.

    • Umbrella Insurance: Provides additional liability coverage beyond the limits of your other policies.

    • Specialized Insurance Policies: Depending on the type of business, there may be a need for specialized insurance, such as malpractice insurance for medical professionals, cyber liability insurance for businesses handling sensitive data, or marine insurance for shipping goods.

    Not Health Insurance

    Don't include the amount paid for employee accident and health insurance.

  • Expenses for lodging and transportation connected with overnight travel for business. You can't deduct travel expenses if your employment away from home lasts longer than a year.

  • These expenses can be deducted if they maintain or improve skills required in your current business, trade, or profession. Common types of deductible education and training expenses include:

    • Workshops and Seminars: Costs for attending workshops, seminars, or conferences that are related to your business or industry.

    • Continuing Professional Education: Fees for courses or training programs required to maintain professional licenses, certifications, or to stay current in your profession or industry.

    • Trade Publications and Books: Costs for books, trade publications, and subscriptions that are specifically related to your business or industry.

    • Online Courses and Webinars: Expenses for online educational courses or webinars that are relevant to your business operations or help improve your business skills.

    • Travel and Accommodation: If attending educational events or training courses requires travel, the associated costs like airfare, hotel stays, and meals may also be deductible, subject to standard business travel deductions rules.

  • Enter the following expenses:

    • Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business

    • Fees for tax advice and for preparation of tax forms related to your business

    • Expenses for resolving tax deficiencies related to your business

  • Expenses incurred for the upkeep and repair of business property and equipment. These costs are necessary to keep the property in good working condition and are considered ordinary and necessary business expenses.

    • Routine Maintenance: Costs associated with regular servicing and upkeep of business equipment, vehicles, or property to keep them functioning properly and to prevent major repairs. This could include oil changes for business vehicles, HVAC servicing, or cleaning and maintenance of machinery.

    • Minor Repairs: Expenses for fixing small problems or damages that occur during the normal course of business. This might include fixing a leaky faucet, patching a hole in the wall, or repairing a broken window.

    • Supplies and Materials for Maintenance: The cost of supplies and materials used in the repair and maintenance process, such as paint, small parts, and tools.

    The cost doesn't add to the property's value or increase the life of the property. Don't deduct the value of your own labor. Make sure to not include the cost of restoring or replacing property. These costs should be capitalized.

  • Research and Development (R&D) can be deductible if these expenses associated with the development of new products, services, processes, or improvements to existing ones. They must be directly related to the business and aimed at discovering information that could eliminate uncertainty about the development or improvement of a product or process.

    Common R&D expenses include:

    • Research Facilities Costs: Expenses related to maintaining and operating facilities used for R&D activities, such as lab space or testing facilities.

    • Outside Research Costs: Fees paid to third parties for conducting research activities on behalf of your business.

    • Prototype and Model Costs: Expenses incurred in creating prototypes or models as part of the R&D process.

    • Testing and Certification Costs: Expenses related to testing, certification, and obtaining regulatory approvals.

  • The following is a list of taxes and licenses you can deduct:

    • State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, also include this amount as gross receipts or sales.

    • Real estate and personal property taxes on business assets.

    • Licenses and regulatory fees for your business paid each year to state or local governments. However, some licenses may need to be amortized.

    • Social Security and Medicare taxes paid to match required withholding from your employees' wages.

    • Federal unemployment tax paid.

    • Federal highway use tax.

    • Contributions to state unemployment insurance fund or disability benefit fund if they are considered taxes under state law.

Operational Expenses

  • Expenses incurred in promoting your business and its products or services.

  • The cost of renting or leasing equipment used in your business operations. Common examples of equipment rent include:

    • Machinery and Tools: Renting specialized machinery, tools, or equipment necessary for your business operations, such as construction equipment, manufacturing machinery, or landscaping tools.

    • Office Equipment: Leasing items like copiers, printers, computers, or other office machinery.

    • Vehicles: Renting or leasing vehicles used for business purposes, such as delivery trucks, vans, or cars for business travel.

    • Specialized Equipment: Renting equipment specific to your industry, such as audio-visual equipment for an event planning business, medical equipment for a healthcare practice, or restaurant kitchen equipment.

  • Business meal expenses are deductible only if all of the following conditions are met:

    • The meal expense was an ordinary and necessary expense in carrying on your trade or business.

    • The expense was not lavish or extravagant under the circumstances.

    • You or your employee was present at the meal.

    • The meal was provided to a current or potential business customer, client, consultant, or similar business contact.

    • In the case of food or beverages provided during or at an entertainment event, the food and beverages were purchased separately from the entertainment, or the cost of the food and beverages was stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

  • If you have a mortgage on any real estate that is used in your business (not including your main home), enter the interest you paid for the year to banks or other financial institutions for which you received a Form 1098 (or similar document) as Mortgage Interest.

  • Enter office operating expenses such as computer software, applications, printers, postage stamps, etc.

  • • Office or Store Space Rent: Payments for leasing or renting the space where you conduct your business, such as an office, storefront, workshop, or studio.

    • Warehouse or Storage Space Rent: Costs for renting space to store inventory, supplies, or business records.

    • Land Rent: If your business requires the use of land, such as for farming, landscaping, or an outdoor event space, the rent paid for this land would be included.

    • Rent for Other Business Properties: This can include any other type of property rented for business use, such as a parking lot for company vehicles or a meeting room for client consultations.

  • This includes tangible supplies that aid in the operation of your business and that were purchased during the year such as pens, pencils, and ink.

  • Examples of deductible uniform costs include:

    • Uniforms for employees in service industries (e.g., waitstaff, healthcare workers, delivery personnel).

    • Protective clothing required for work (e.g., hard hats, safety shoes, gloves).

    • Costumes for entertainers or public speakers.

    • Specialized athletic clothing for fitness trainers or instructors.

  • The utilities section typically includes expenses such as:

    • Electricity: The cost of electricity used in your business premises.

    • Gas: If your business uses natural gas for heating, cooking, or other operations.

    • Water and Sewer: Charges for water and sewer services.

    • Trash Removal: Fees for garbage and waste disposal services.

    • Telephone Services: This can include both landline and mobile phone services if they are used for business purposes. Note that if you use a phone for both personal and business purposes, you can only deduct the portion of the expenses that directly relates to your business use.

    • Internet Service: The cost of internet services used for business operations.

Labor Expenses

  • These expenses can vary widely depending on the nature of the business, but commonly include:

    • Sales Commissions: Payments to independent sales representatives or agents who are not employees of the business. These are typically based on a percentage of the sales they generate.

    • Finder's Fees: Payments made to individuals or companies for referring new clients or customers to your business.

    • Service Fees: Fees paid for certain professional services, such as fees for payment processing, brokerage services, or auction services.

    • Consultant Fees: Payments to consultants who provide expert advice for your business, but are not employees.

  • Contract labor includes payments made to nonemployees who performed services for your business. Don't include contract labor that has been deducted somewhere else on your return.

    Contract labor includes payments made to non-employees to whom a Form 1099-MISC or Form 1099-NEC was provided, or would have been provided had you paid them more than $600 for their labor.

    Contract labor does not include salaries and wages paid to employees.

  • Any contributions made to employee benefit programs that are not an incidental part of a pension or profit-sharing plan.

    For example, include contributions for accident and health plans, group-term life insurance, and dependent care assistance programs.

    Do not include contributions you made for yourself as a self-employed person for group-term life insurance or accident and health insurance.

  • Contributions made by the business to retirement plans for the benefit of its employees, including the owner if it's a sole proprietorship. This line item covers expenses related to setting up and contributing to qualified retirement plans, such as:

    SEP (Simplified Employee Pension) Plans: Contributions made by the employer to SEP IRAs set up for the benefit of the employees.

    SIMPLE (Savings Incentive Match Plan for Employees) IRA Plans: Contributions to SIMPLE IRAs, which are retirement accounts that small businesses can set up for their employees.

    Solo 401(k) Plans: Contributions to a 401(k) plan for a sole proprietor with no employees (other than a spouse).

    Defined Benefit Plans: Contributions to pension plans that promise a specific monthly benefit at retirement.

    Profit-Sharing Plans: Contributions to plans that give employees a share in the profits of the company.

  • Wages you paid are reported to your employees on Form W-2.

Vehicle Expenses

  • 2023 Mileage Rate: 65.5 cents/mile

    Business transportation costs you can deduct:

    • Traveling from one workplace to another workplace when traveling within your "tax home" area.

    • Visiting clients or customers.

    • Going to a business meeting or other related business function away from your regular workplace.

    • Getting from your home to temporary workplace (either within your tax home or outside that area) when you have one or more regular places of work.

  • The full price of your car including sales tax.

    If you have financed or have a car loan for the vehicle, the IRS considers that you own it for vehicle expense purposes. The original cost or cost basis of the vehicle can be “depreciated”.

    2023 Depreciation Rules:

    1. Vehicles below 6,000 lbs: Deduct up to $12,200 on first year or up to $20,200 with bonus depreciation. $19,500 in the second year; $11,700 in the third year; and $6,960 in subsequent years.

    2. Vehicles over 6,000 lbs: Deduct up to $28,900 on first year. $19,500 in the second year; $11,700 in the third year; and $6,960 in subsequent years.

  • If you lease a car and use it in your business, you can deduct the portion of the lease payments that reflects the business use of the vehicle.

  • • Fuel: Gasoline, diesel, or other types of fuel used in the vehicle.

    • Oil: Costs for oil changes and necessary oil for the vehicle.

  • Car insurance premiums are considered an ordinary and necessary business expense when the vehicle is used in the operation of your business.

  • • General maintenance and repairs necessary to keep the vehicle in good working condition.

    • Replacements of parts due to wear and tear or damage.

    • Services such as oil changes, brake repairs, tire rotations, and other similar maintenance tasks.

  • • Purchasing new tires.

    • Tire installation services.

    • Tire maintenance, such as rotations or balancing

  • • Vehicle registration fees required by your state or local government.

    • License plate fees.

    • Regulatory fees associated with the vehicle.

  • If you rent a garage, parking space, or storage facility specifically for your business vehicle, the cost of this rent is considered an ordinary and necessary business expense. This includes expenses for:

    • Renting a garage or parking space to store or park the business vehicle.

    • Renting storage space for a vehicle used exclusively for business purposes.

  • • Parking Fees: Costs for parking your vehicle at a meter, parking lot, or garage while conducting business activities. This does not include parking fees at your home office location.

    • Tolls: Charges paid for toll roads, bridges, or tunnels while traveling for business.

  • Property taxes for vehicles, also known as vehicle registration fees in some jurisdictions, can be deductible as a business expense if the vehicle is used for business purposes.

  • If you are a sole proprietor and you use a vehicle in your business, you can deduct the portion of the interest on the car loan that corresponds to the business use of the vehicle.

Home Office Deduction

  • The ratio will determine the deductible portion of your home office. So we’ll need these 2 items:

    • Square Feet of Area Used for Business

    • Total Square Feet of Home

    For example, if your home office is 200 square feet and your total home is 2,000 square feet, you can deduct 10% (200 ÷ 2,000) of home expenses.

  • In order to deduct your rent, one of the following must apply:

    • You use part of your home exclusively and regularly as your principal place of business, as a place to meet or deal with patients, clients or customers in the normal course of your business, or in connection with your trade or business where there is a separate structure not attached to the home.

    • You use part of your home on a regular basis for certain storage use such as inventory or product samples, as rental property, or as a home daycare facility.

  • If you are a homeowner and use a portion of your home exclusively and regularly for your business, you can deduct a portion of your mortgage interest as a business expense. Form 1098 may be used to calculate the deduction.

  • If the household expenses and repairs benefit the office space, they are deductible. Expenses such as painting your home or fixing the roof of your home are deductible.

  • Real estate taxes can also be deducted as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. You can deduct a portion of your real estate taxes based on the percentage of your home's total square footage used for business.

  • Renter’s insurance is deductible as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. If you meet the criteria for the home office deduction, you can deduct a portion of your renter’s insurance as a business expense.

  • Homeowner's insurance is deductible as part of the home office deduction, provided you use part of your home exclusively and regularly for business purposes. If you meet the criteria for the home office deduction, you can deduct a portion of your homeowner's insurance premiums as a business expense.

  • If you had a casualty or theft, like from a hurricane, tornado, fire, theft or vandalism that affected your home office, you can claim a business deduction for that loss. Casualty losses can be direct or indirect.

    Direct casualty losses are casualty losses that only affect your home office.

    Indirect casualty losses will be multiplied by your business use percentage. For example, a storm damages your roof. Since the roof is part of the whole house and used for both business and personal purposes, this is an indirect expense.

  • • Electricity Bill

    • Gas, Sewage, and Water Bill

    • Internet and Phone Bill

Inventory and Cost of Goods Sold

In most cases, if your business made money from the production, purchase, or sale of merchandise, you have to take inventories into account at the beginning and end of the tax year.

  • The value of inventory at the beginning of the tax year.

    Inventory should include the following:

    • Merchandise or stock in trade

    • Raw materials

    • Work in process

    • Finished products

    • Supplies that physically become a part of the item intended for sale

    • Also, the following merchandise should be included in inventory:

    • Purchased merchandise if title has passed to you even if the merchandise is in transit to you or you do not have physical possession of it for another reason

    • Goods under contract for sale that you have not yet segregated and applied to the contract

    • Goods out on consignment

    • Goods held for sale in display rooms, merchandise mart rooms, or booths located away from your place of business

  • Items bought for resale or that become part of the goods you produce for sale.

    • Raw Materials and Supplies: Costs for materials and supplies that are used in the production of goods for sale.

    • Products for Resale: Expenses for purchasing goods that are intended to be resold to customers, typically in the same condition in which they were bought.

    • Freight-in Costs: Shipping and handling costs associated with getting the items to your place of business.

  • Manufacturing labor costs include the wages and salaries paid to employees who are directly involved in producing the goods. This can include workers on the production line, machine operators, and other direct labor employees. It's important to note that these costs should only include the direct labor involved in making the products, not the labor costs for administrative or sales staff.

  • These costs are considered part of your business expenses and can be deducted in the year they are used or consumed.

    • Raw Materials: The basic materials from which your products are made. For a manufacturing or production business, this could be things like wood, metal, fabric, or ingredients.

    • Supplies: Items that are used in the production process but are not directly part of the final product. This might include things like adhesives, cleaning supplies, or small tools.

    • Consumables: Items that are used up quickly, such as paper, printer ink, or office supplies.

  • Additional expenses that are directly associated with the production or acquisition of the goods you sell, but which do not fit neatly into the categories of "Purchases," "Labor Costs," or "Materials and Supplies." These can include:

    • Factory Overhead: Costs related to manufacturing that are not directly tied to a specific product, such as utilities for the manufacturing facility, depreciation on equipment, and rent for the production space.

    • Indirect Labor: Wages for employees who contribute to the production process but are not directly involved in making the products, such as quality control inspectors, supervisors, and maintenance staff.

    • Packaging Costs: The costs of packaging materials for your products.

    • Freight-in: Shipping costs for bringing materials or inventory to your place of business.

    • Other Manufacturing Expenses: Various other costs directly related to the production process, such as costs for molds, dies, or tooling used in manufacturing.

  • The value of inventory (unsold and on hand) at the end of the tax year.

    The ending inventory typically includes:

    • Finished Goods: Completed products that are ready for sale but have not yet been sold.

    • Work-in-Progress (WIP): Goods that are in the process of being manufactured but are not yet completed.

    • Raw Materials: The basic materials and supplies that are on hand and will be used to produce goods.

Depreciation and Amortization

Depreciation and amortization are accounting methods used to allocate the cost of tangible and intangible assets over their useful lives, respectively.

  • A depreciable asset a property that a business owns and uses for its operations, which has a useful life of more than one year and loses value (depreciates) over time due to wear, tear, and obsolescence. These assets are used in the business and are not intended for resale in the course of business. The cost of depreciable assets cannot be fully deducted in the year of purchase; instead, the cost is spread out (depreciated) over the asset's useful life. Common examples of depreciable assets for businesses include:

    1. Buildings: If a business owns the building in which it operates, the cost of the building (not the land) can be depreciated.

    2. Vehicles: Cars, trucks, or vans used for business purposes.

    3. Machinery and Equipment: Items such as computers, office equipment, manufacturing machinery, or tools used in the business.

    4. Furniture and Fixtures: Desks, chairs, shelves, and other office furnishings.

    5. Leasehold Improvements: Improvements made to a leased property, such as adding partitions, painting, or installing new flooring.

  • Amortization is a financial term used to describe the process of gradually reducing the cost or value of an asset or the balance of a loan over a period of time. It involves making regular payments that cover both the interest and a portion of the principal amount of a loan. The concept of amortization is commonly used in the context of loans (like mortgages) and intangible assets. There are two main types:

    1. Amortization of a Loan: This refers to the process of paying off a debt over time through regular payments. A portion of each payment goes towards the interest, while the remainder is used to reduce the principal balance. Over time, the interest portion decreases and the principal portion increases, eventually paying off the loan in full. An example of this is a mortgage loan, where the borrower makes monthly payments that are calculated to pay off the loan over a specific period, such as 30 years.

    2. Amortization of an Intangible Asset: This involves gradually writing off the cost of an intangible asset (such as patents, copyrights, trademarks, or goodwill) over its useful life. Instead of expensing the entire cost of the asset in the year it is acquired, it is spread out over several years, reflecting the asset's consumption, use, or decline in value. For example, if a company acquires a patent that is expected to be useful for 10 years, the company will amortize the cost of the patent over those 10 years, affecting their financial statements accordingly.