Author: Leon Clinton

If you are a member of a multimember LLC taxed as a partnership (as most are) or a traditional partnership, you may sometimes pay for business expenses out of your pocket. These expenses can include travel and meals, car expenses, continuing education, professional dues, and home office costs.

There are two ways to handle these payments:

• the LLC/partnership can reimburse you, or
• you may be able to deduct them on your personal tax return.

Reimbursement by the LLC/Partnership

If your LLC/partnership reimburses you, the payment is (a) tax-free to you and (b) deductible by the LLC/partnership, provided that

• the expenses qualify as business operating expenses,
• you adequately document the expenses, and
• you submit them for reimbursement in a timely manner.

Deducting Unreimbursed Expenses on Your Personal Return

If your LLC/partnership does not reimburse certain expenses, you may be able to deduct them on your tax return—but only if your LLC/partnership has a formal policy of not reimbursing those expenses. This policy must be

• stated in the LLC/partnership agreement or another written document or
• established as a consistent routine within the business.

Your LLC/partnership determines which expenses it will or won’t reimburse. 

If needed, the LLC/partnership can amend its agreements to formalize your reimbursement policy. This amendment must be made by the due date of the LLC/partnership tax return for the year (excluding extensions) and will apply to the entire tax year.

How to Claim the Deduction

You deduct unreimbursed expenses on IRS Schedule E. This deduction reduces your taxable income for income tax and self-employment tax purposes.

What’s the Best Approach?

In most cases, getting reimbursed by the LLC/partnership is the better option. But situations exist where members/partners prefer not to use LLC/partnership funds for these expenses.

If you want to discuss LLC/partnership expenses, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 7, 2025

If you operate a sole proprietorship or a single-member LLC taxed as a proprietorship and your spouse is your only eligible employee, you can take advantage of tax-free health insurance reimbursements while reducing your tax liability.

Key Tax Benefits

By reimbursing your employee-spouse for health insurance and medical expenses, you can achieve up to four tax benefits:

1. Tax-free benefit for your spouse – The reimbursement is not taxable income for your spouse.
2. Avoid the $100-a-day penalty – Small businesses with one employee can legally reimburse individual health insurance without triggering Affordable Care Act penalties.
3. Business deduction – Your proprietorship deducts the full reimbursement as a business expense, reducing income and self-employment taxes.
4. Potential Premium Tax Credits – If your household income qualifies, your spouse may still receive government subsidies for health insurance purchased through an exchange.

How the Plan Works

To ensure full compliance and maximize tax benefits, you should

• put the reimbursement plan in writing under IRS Regulation Section 1.105-11(b);
• make it a family plan that covers you, your spouse, and your dependents; and
• require your spouse to submit medical expenses monthly.

If you have no other employees and your spouse actively works in your business, this is a simple and effective way to reduce taxes while covering your family’s medical costs.

If you want to discuss this medical plan, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 4, 2025

A common question among business owners is how to pay themselves from their businesses properly. The correct method depends on your business structure, so I wanted to give you this quick guide to help you navigate this issue.

Sole Proprietors and Single-Member LLCs

• You cannot be on payroll. Instead, you take owner’s draws as needed.
• You report net earnings on Schedule C of your personal tax return.
• You pay self-employment taxes (15.3 percent) on self-employment net income.

Partnerships and Multimember LLCs

Partners cannot receive W-2 wages. Instead, they receive:

• guaranteed payments for services, taxed as income and subject to self-employment taxes
• profit distributions, which are generally subject to self-employment tax (except for passive limited partners)

Cash withdrawals are made through partner draws or profit distributions per the partnership agreement.

S Corporations

• You must pay yourself a reasonable salary as an employee via W-2 wages, which are subject to FICA taxes (15.3 percent, split between you and the corporation).
• Any additional profits are taxed to you personally but can be distributed tax-free.

C Corporations

The corporation pays taxes at a flat 21 percent rate.

You can receive compensation in two ways:

• W-2 wages, subject to payroll taxes
• dividends, which are taxed twice—once at the corporate level and again at your personal level

If you want to discuss how your business pays you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• February 27, 2025