Thanks for following up. Simply creating an LLC with no business does not create a deduction. If you were self-employed or independent contractors, then an LLC electing S Corp status would be beneficial tax-wise.
The biggest issue with the LLC is that as the owner of an LLC, you are considered to be self-employed and must pay the 15.3% self-employment tax contributions towards Medicare and social security. As such, the entire net income of the LLC is subject to this tax. With an S Corp, if you work for the entity, you must pay yourself 'reasonable compensation.' Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as 'wages.' Unlike an LLC, where you are subject to employment tax on the entire net income of the business, only the wages of the S-Corp shareholder who is an employee are subject to employment tax. The remaining income is paid to the owner as a 'distribution' which is either taxed at a lower rate or or not at all depending upon the particular facts. BUT, as shareholder, you must receive reasonable compensation. If you get greedy by paying yourself a lower salary with the resulting higher distributions, you risk the reclassifying your distributions as wages. Typically, the best solution is to form an LLC and then elect for it to be treated as an S Corp for tax purposes; this results in the best of both worlds...the flexibility of an LLC and the advantageous self-employment tax treatment of an S Corp. :) As for the car..the answer is yes. If you use the car entirely for business, the lease payments are deductible. Given that you are employees, the best way to reduce your net taxable income is to maximize your contributions to your retirement plans as those contributions are going to reduce your current net taxable income.
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