Which expenses can an LLP deduct?
An LLP can deduct expenditure laid out wholly and exclusively for its business. The expense must not be capital, and it must not be personal. A payment to a partner is deductible only inside the limits in section 40(b).
Which expenses?
Rent of the office, salaries of employees, and a fee for work the business actually uses are the usual cases, when they are revenue expenses of that year. The label on an invoice does not decide it. The test is section 37: the expenditure is for the business, it is not capital, and it is not a personal expense of a partner.
What about payments to partners?
| Payment | What section 40(b) allows as a deduction |
|---|---|
| Interest | Only if the LLP agreement authorises it, and only up to 12 percent simple interest |
| Remuneration | Only to a working partner, and only if the agreement authorises it. On the first ₹3 lakh of book profit, or in a loss, the cap for all partners together is ₹1.5 lakh or 90 percent of book profit, whichever is more. On the rest of book profit, the cap is 60 percent |
A payment the agreement does not authorise is not deducted. What an LLP is, is on the LLP page.
What is not deductible?
Drawings, a personal bill, and the cost of an asset that is capital are not revenue deductions. The partner’s share of the profit that remains is not taxed again in the partner’s hands. Interest and remuneration that were allowed to the LLP are the partner’s taxable income.
Frequently asked questions
Four questions cover a personal expense, partner interest, a non-working partner, and the profit share.
Is every payment the LLP makes deductible?
No. The expense must be for the business. A personal expense, and a capital expense, are outside the deduction.
Can interest to a partner exceed 12 percent?
The LLP may pay more if the agreement allows it. The deduction stops at 12 percent simple interest. The excess is not deducted.
Can a partner who does not work be paid remuneration that the LLP deducts?
No. Section 40(b) allows the deduction only for a working partner, and only when the agreement authorises it.
Is the partner’s share of profit taxed again?
No. The share of profit is exempt in the partner’s hands. Interest and remuneration that the LLP was allowed to deduct are taxable for that partner.
Sources
An LLP is assessed as a firm. Business expenditure is section 37 of the Income-tax Act, 1961. Payments to partners are section 40(b). The partner’s share of profit is section 10(2A).