There are a handful of legitimate ways to take money out of your LLC without paying taxes on the withdrawal itself: distributions up to your basis, repayment of loans you made to the business, properly documented borrowing from the LLC, accountable-plan reimbursements, and (in multi-member LLCs) distributions of property instead of cash. A few other moves — the S-Corp election, retirement contributions, and everyday business deductions — don’t make withdrawals tax-free but reduce what you owe on the profit those withdrawals come from.
One thing to get straight before anything else. Because an LLC is a pass-through entity, you owe income tax on the business’s annual profit whether you take the money out or leave it in the account. A single-member LLC is a disregarded entity, so profit lands on your Schedule C.1Internal Revenue Service. Single Member Limited Liability Companies A multi-member LLC defaults to partnership taxation and issues each owner a Schedule K-1.2Internal Revenue Service. LLC Filing as a Corporation or Partnership A distribution is just a cash transfer. It doesn’t create income and it doesn’t reduce income. So the strategies below don’t erase tax on real business profit. They work because the money moving into your hands is classified as something other than taxable income, or because a deduction has already offset the profit before it hit your return.
Distributions Up to Your Basis
The cleanest route is a distribution that stays within your basis. Basis is your running investment balance in the LLC: start with the cash and property you contributed, add your cumulative share of profits, subtract cumulative losses, and subtract every prior distribution. Whatever’s left is what you can pull out tax-free right now.
The reason no additional tax hits is that you’ve already paid income tax on the profits that built up that basis, or you’re simply getting back money you contributed. The distribution just reduces your remaining basis by the amount withdrawn. If you contributed $150,000 and profits added another $80,000 over time, you could withdraw up to $230,000 across the years without owing anything beyond the tax already paid on the profits as they were earned.
Once basis hits zero, further distributions are taxed as capital gains.3Internal Revenue Service. Topic No. 404, Dividends and Other Corporate Distributions If you’ve held your ownership interest more than a year, long-term capital gains rates apply, topping out at 20% and dropping to 0% for single filers with taxable income under $49,450 or joint filers under $98,900.4Internal Revenue Service. Topic No. 409, Capital Gains and Losses
The proof burden falls on you. If the IRS asks and you can’t demonstrate sufficient basis, the entire distribution gets reclassified as taxable income. Keep a basis schedule updated at least once a year: beginning basis, plus contributions, plus your share of income, minus your share of losses, minus distributions, equals ending basis. Mundane paperwork that only matters when it matters enormously.
Getting Repaid for Loans You Made to the LLC
If you funded the business with personal savings and documented it as a loan, the LLC’s repayment of that principal is tax-free. You already paid tax on the money before you lent it, so getting it back isn’t income.
The IRS draws a hard line between a real loan and a disguised contribution. To hold the loan classification, you need a written promissory note with the loan amount, a fixed repayment schedule, and an interest rate at or above the applicable federal rate. For February 2026, the AFR runs from 3.56% for short-term loans to 4.70% for long-term loans.5Internal Revenue Service. Revenue Ruling 26-03 – Applicable Federal Rates The LLC needs to actually make the scheduled payments, and the balance sheet should show the liability shrinking as you’re repaid.
Only the principal is tax-free. The interest portion of each payment is deductible by the LLC but taxable to you as interest income. Without formal documentation and consistent treatment, the IRS can recharacterize the entire repayment as a taxable distribution or guaranteed payment.
Borrowing From Your LLC
The reverse also works. Your LLC can lend money to you, and a properly structured loan isn’t a taxable event. You receive cash, but because you owe it back, no income is created.
Documentation requirements mirror those going the other direction: a written promissory note, a stated repayment schedule, and an interest rate at or above the AFR. If the rate falls below the AFR, IRC Section 7872 treats the shortfall as “forgone interest,” which gets recharacterized as imputed income to you and a deemed payment back to the LLC.6Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates A de minimis exception exists: if the total outstanding balance stays at or below $10,000, the below-market rules generally don’t apply unless the loan funds income-producing assets.
The bigger risk isn’t the rate technicality. It’s failing to treat the transaction as a real loan. If you never make payments, ignore the repayment schedule, or borrow more than you’ve contributed, the IRS will likely recharacterize the “loan” as a taxable distribution. Courts have consistently upheld that reclassification when the substance looks more like an owner draining the account than borrowing against it.
Tax-Free Reimbursements Through an Accountable Plan
An accountable plan lets the LLC reimburse you for legitimate business expenses without the payment counting as taxable income. You cover an expense out of pocket, the LLC pays you back, and nobody owes tax on the transfer. The LLC still gets the deduction.
Treasury regulations set three requirements: each expense must have a business connection, you must substantiate each one with receipts or adequate records within a reasonable time, and you must return any reimbursement that exceeds documented expenses.7eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements
Miss any of those three and the whole arrangement collapses into a nonaccountable plan. Every dollar paid becomes taxable wages, has to be reported on a W-2, and gets hit with employment taxes.8Internal Revenue Service. Revenue Ruling 2003-106 If the IRS spots a pattern of sloppiness, it can retroactively reclassify all payments made under the plan. Sloppy records here don’t just cost a deduction; they create new tax liability.
Common items an accountable plan can cover include business mileage on your personal vehicle (the 2026 IRS standard rate is 72.5 cents per mile),9Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile a portion of home office costs, and travel expenses. A contemporaneous log — dates, destinations, business purpose, miles — is what preserves the mileage piece under audit. Reconstructing one from memory in December is how people lose it.
Distributing Property Instead of Cash
For multi-member LLCs taxed as partnerships, distributing appreciated property rather than cash can defer tax that a sale would trigger immediately. Under IRC Section 731, when a partnership distributes property other than money, the partner generally recognizes no gain on the distribution.10Office of the Law Revision Counsel. 26 U.S. Code 731 – Extent of Recognition of Gain or Loss on Distribution The partner takes the property at the partnership’s basis, so the built-in gain isn’t taxed until an eventual sale.
One exception matters. Marketable securities are treated as cash for gain-recognition purposes. Distribute publicly traded stock and it counts as a money distribution, capable of triggering gain to the extent it exceeds your basis. For real estate, equipment, vehicles, and other non-marketable assets, the deferral works as described, and the partnership itself recognizes no gain or loss on the distribution.
This route isn’t available to single-member LLCs, which as disregarded entities don’t have a separate partner-partnership relationship for Section 731 to operate on.
The S-Corp Election: Cutting Self-Employment Tax
Self-employment tax is where LLC owners feel the sharpest pain. The rate is 15.3%: 12.4% Social Security on earnings up to $184,500 in 2026, and 2.9% Medicare with no cap.11Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)12Social Security Administration. Contribution and Benefit Base In a default sole-prop or partnership LLC, every dollar of net profit gets hit with this on top of regular income tax.
Filing Form 2553 elects S-Corp treatment for your LLC.13Internal Revenue Service. About Form 2553, Election by a Small Business Corporation That splits your income into two buckets: a salary subject to payroll taxes, and distributions of remaining profit that aren’t. Only the salary portion draws the combined 15.3% FICA hit.
The salary has to be “reasonable” for the work you actually perform. The IRS weighs training, duties, hours, and comparable pay for similar roles.14Internal Revenue Service. Wage Compensation for S Corporation Officers Paying yourself $30,000 on a full-time business generating $300,000 is exactly what draws an audit, and the IRS can reclassify distributions as wages with back payroll taxes and penalties.
The election generally starts making sense when LLC profit runs above roughly $60,000 to $80,000 a year. Below that, payroll processing and the extra return (Form 1120-S, plus quarterly Form 941 filings)15Internal Revenue Service. Instructions for Form 941 (03/2026) eat the savings. Plan on $1,000 to $3,000 per year in added administrative cost.
Sheltering Income in Retirement Accounts
Retirement plan contributions defer the tax bill entirely. The contribution is deductible by the business, cutting your taxable income now, and the money grows tax-deferred until retirement, when your rate may be lower.
Solo 401(k)
Available to self-employed LLC owners with no full-time employees other than a spouse.16Internal Revenue Service. One-Participant 401k Plans You contribute in two capacities. As the employee, you can defer up to $24,500 of compensation in 2026. As the employer, the LLC can contribute up to 25% of net self-employment income after subtracting half your SE tax. Combined, the two can’t exceed $72,000.17Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
Catch-ups add more room. At 50 or older, you can add another $8,000 to the employee deferral. Under SECURE 2.0, participants aged 60 through 63 get a higher catch-up limit of $11,250 for 2026.18Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026 A 62-year-old with sufficient self-employment income could shelter up to $83,250 in a single year.
SEP IRA
Simpler, less flexible. Only employer contributions are allowed, up to 25% of net self-employment earnings, capped at $72,000 for 2026.19Internal Revenue Service. SEP Contribution Limits No employee deferral, no catch-up. For owners under 50 who can max out the employer piece, either plan lands in the same place. For older owners or those whose income falls in the range where the deferral matters, the Solo 401(k) shelters substantially more.
The employer contribution deadline for both is the due date of your return, including extensions. That gives you until October 15 of the following year to size the contribution around final profit numbers.
Deductions That Shrink the Profit Before It Reaches You
These don’t extract cash tax-free, but they lower the profit your LLC reports, which lowers the tax you’d otherwise owe on money you do take out.
Health Insurance Premiums
Self-employed LLC owners can deduct premiums for themselves, a spouse, and dependents. In a sole-prop or partnership LLC, this comes off as an adjustment to income on Schedule 1 of Form 1040, so you get it even if you take the standard deduction.20Internal Revenue Service. Form 7206 – Self-Employed Health Insurance Deduction For an S-Corp owner, the corporation pays the premiums, adds them to the owner’s W-2, and the owner takes the same self-employed health insurance deduction on their personal return. Same net effect, different paperwork.
Health Savings Account
If you’re enrolled in a high-deductible health plan, HSA contributions give a triple tax advantage: deductible going in, tax-free growth, tax-free withdrawals for qualified medical expenses. Limits for 2026 are $4,400 for self-only coverage and $8,750 for family coverage.21Internal Revenue Service. Expanded Availability of Health Savings Accounts Unlike retirement accounts, HSA funds can be used at any age for medical expenses without penalty.
Home Office
If part of your home is used exclusively and regularly as your principal place of business, you can deduct a share of housing costs. The simplified method pays $5 per square foot, capped at 300 square feet, for a maximum of $1,500.22Internal Revenue Service. Simplified Option for Home Office Deduction The actual-expense method allocates a percentage of mortgage interest, utilities, insurance, and repairs to business use and often produces a larger number, but it needs detailed records.
The 20% Qualified Business Income Deduction
Section 199A lets qualifying LLC owners deduct up to 20% of qualified business income from taxable income. The deduction was set to expire at the end of 2025 but has been made permanent under the One, Big, Beautiful Bill Act. It doesn’t reduce self-employment tax, but it lowers income tax directly.
For 2026, if your total taxable income falls below $201,750 (single) or $403,500 (married filing jointly), you simply deduct 20% of the LLC’s qualified business income. Above those thresholds, the deduction begins to phase out for certain service businesses (law, medicine, consulting, financial services), and wage and property limitations kick in.
Compensation structure matters. Guaranteed payments to partners in a multi-member LLC are excluded from qualified business income.23Internal Revenue Service. Qualified Business Income Deduction Take $200,000 as a guaranteed payment and none of it qualifies for the 20% deduction. Profit distributions and your share of partnership income do qualify. The right balance depends on total income and the type of business, and it’s worth running the math with a preparer before locking in how payments to active members are labeled.