A short public service announcement for this U.S. tax filing season: Forming an LLC and having it pay for household expenses (or any non-business expenses more generally) will not let you claim deductions that you otherwise wouldn't be able to claim.
A single-member LLC, which is what I see in most of the abusive cases, will by default be taxed as a "disregarded entity" for U.S. federal income tax purposes, meaning that the IRS pretends it doesn't exist as separate from its owner. By extension, any deductions that it tries to claim will only be allowed if the owner (in this case an individual) can themselves legally claim them.
Under current law, the general rule is that individual taxpayers can only deduct purported business expenses if they are "ordinary and necessary" expenses incurred in the individual's "trade or business." An LLC doesn't magically have a trade or business just by existing. Similarly, just because you claim to have a business doesn't make a deduction "ordinary and necessary." Additionally, a separate law prohibits deductions of personal expenses. Here are some examples of how all these provisions interact:
That new G-Wagon you bought through an LLC with no business activities? Not deductible – there is no trade or business, and this looks like a nondeductible household expense.
That steak dinner with your Uncle Larry that you put on the company credit card? Not deductible – even if there is a trade or business, this meal is for pleasure. Even if it were a business meal, various restrictive rules apply to deductions of meals.
The $100 of groceries you bought at Food Lion for the family? Not deductible – that is a personal expense.
The new lathe you bought for the woodworking business you run out of your garage? Deductible – you bought it for work and are using it in the trade or business.
Please don't make the mistake of thinking an LLC lets you deduct things not otherwise deductible.
Links to places where this was discussed elsewhere, to prove I'm not wrong:
A reddit thread from a few years ago
The first Substack article I found when searching the word "LLC"
No, You Can't Form an LLC to Deduct Your New Car (Or Other Personal Expenses)
byu/Taxing_Tom intax
Posted by Taxing_Tom
3 Comments
Duh, that’s why I formed a C-Corp.
To go one step further – I’d say that somewhere along the way people got the wrong idea about needing an LLC to even deduct legitimate business expenses.
You forgot the fraud. How comfortable people are with committing fraud. The answer is very. Very comfortable.