LLC Tax Question
I am a beginner to REI and I have formed a single member LLC in GA and looking to buy a house fix it up and then sell the house within the next 6 months. I have a cash gift from a family member to help with the downpayment for the loan. My questions are:
1) When is the best time to deed the property into the LLC?
2) Are there any tax benefits of having it in an LLC?
Thanks :-?
1. Any time is OK. Depending upon the reason for forming the LLC, some might say ASAP.
2. No. For tax purposes, your LLC is a disregarded entity. Whether the LLC is in place or not, your income and expenses from the rehab are reported on Schedule C (1040) and self-employment income taxes are computed on Schedule SE.
DaveT, I have a question for you regarding something you mentioned in your above reply:
I am trying to figure out what type of entities my LLCs are considered for tax purposes. You mentioned "disregarded entity". I have property which is owned by an LLC and there are 2 members in the LLC. Does this mean that my LLC is classified as a "disregarded entity?"
I'm trying to fill out a 1065 and SS4 and they are asking me what my LLC is classified as.
Thanks in advance for your advice!
An S corp will save you +-14% on your taxes over an LLC.
The Internal Revenue Service has taken the position that if you have a SINGLE member LLC it will be considered to be a "disregarded entity" and a "pass thru entity" for Federal income tax purposes, which means it is the same as if the SINGLE member owns the property directly. This means that the income and expenses are reported directly on the Federal income tax return of the single member.
However, if you have a multiple member LLC, like in your question above, it is no longer a "disregarded" entity, but IS STILL a "pass thru entity". The entity typically will file its own "informational" income tax return, report the detail and breakdown to the investors/members, and the members would report the income and expenses on their individual Federal income tax return (the flow thru part).
In many cases, the loss of the "disregarded entity" status does not make any real difference, but it can make a big difference when trying to structure a 1031 exchange where each of the underlying members in a dual/multiple member LLC want to go their separate ways. I will write an article on this issue shortly, because it is becoming a more common problem in the 1031 exchange world.
No tax benefits, protects property in event of a judgement against you.
An S corp has tax benefits.
I was wondering what the tax benefits are for an S-Corp. S-Corps can also be pass-through entities though you do have the option of letting it be taxed on it's own. So it would be taxed 15% instead of whatever your tax bracket might be. That is an immediate savings but then if you ever need to use the money out of the corporation, you would have to do so in the form of a paycheck -and at that time, I understand that you would have to pay personal taxes on that money again. So you end up paying taxes on the money earned in the LLC twice! Is that how you understand it? :-?
dkdrake
LLC is taxed once, on your tax return. If you earn income from it (i.e., if you are the manager) you have to pay self-employment taxes.
So if my LLC is not a disregarded entity, (b/c my husband and I are members) then what do I classify it as? :-?
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=452
Quote:So if my LLC is not a disregarded entity, (b/c my husband and I are members) then what do I classify it as? :-? amyclaire76,
For tax purposes, it is a partnership.
Quote:I was wondering what the tax benefits are for an S-Corp. S-Corps can also be pass-through entities though you do have the option of letting it be taxed on it's own. So it would be taxed 15% instead of whatever your tax bracket might be.dkdrake,
I am not a corporate tax expert, but I believe the S-Corp profits are passed through to the taxpayer as ordinary income (taxed at the taxpayer's ordinary income tax rate whatever that may be), AND the net income is subject to self-employment income taxes.
The C-Corp has a corporate tax rate starting at 15%. The corporate tax rate only applies to the C-Corp.
In ATLinvestor's situation, his LLC activity passes through to his personal tax return and is reported on Schedule C (1040). The net profit from his Schedule C activity is also used to calculate his self-employment income taxes on Schedule SE (1040).[ Edited by DaveT on Date 05/24/2004 ]
Quote:
On 2004-05-24 18:01, DaveT wrote:
Quote:So if my LLC is not a disregarded entity, (b/c my husband and I are members) then what do I classify it as? :-? amyclaire76,
For tax purposes, it is a partnership.
Thanks for your help! Another question:
In its definition of "Partnership" on page 2 of the Instructions for Form 1065 it states "Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists." This is where I get hung up. Does this mean that our LLC has to provide a service to tenants in order to qualify as a partnership? :-?
LLC income has nothing that will allow you to claim capital gains earnings. Earnigs in an S corp can be claimed as capital gains and therefore not subject to self employment tax. I don't care whether it is pass through or not. LLC 15.4% self employment tax.
--------------- Moderator Note------------------
The LLC organized as a disregarded entity to hold rental property provides some measure of asset protection to the member, while still preserving the member's entitlement to capital gains tax treatment when the investment property is sold. Rental property operation is a passive income activity and self-employment income taxes do not apply.
The S-Corp is appropriate for an active income activity such as property flipping. The income derived from the S-Corp passes through to the shareholder/owner's personal 1040 as ordinary income. Unless the owner takes a reasonable salary, all of the income from the S-Corp is considered self-employment income.[ Edited by DaveT on Date 05/25/2004 ]
Quote:In its definition of "Partnership" on page 2 of the Instructions for Form 1065 it states "Mere co-ownership of property that is maintained and leased or rented is not a partnership. However, if the co-owners provide services to the tenants, a partnership exists." This is where I get hung up. Does this mean that our LLC has to provide a service to tenants in order to qualify as a partnership? :-? No. This means that in the absence of a formal partnership entity, merely being co-owners of rental real estate does not make you a partnership for tax purposes unless you perform personal services.
Thanks a lot for your help Dave!
Looking at the original post the poster is attempting to flip or rehab and sell his property. In which case his earnings are "not rental" and not "passive". I have used LLC's and S corps in the past (sometimes together) under the watchful eye of a high powered corporate CPA. Generally when starting a business as an "S" corp one can go one or two years without claiming the "moderate" income and take all profits out in "capital gains" (15%) which in my case are taxed substantially below my regular tax rate. One can claim generally quite effectively that no salary was paid in order to build up the business. After the 1-2 year period you must claim a reasonable income which in a business that earns 100K a year can be $10 an hour ( the price I can get someone to push papers around for me) and the rest can be taken out in capital gains, 20K in earnings subject to self employment tax in OR 15.4% in addition to fed and state tax and the rest (80K) in capital gains. Now I would much rather that the 80K be taxed at the 15% 2004 capital gains rate rather than the 40% + rate when self employment tax is figured in saving me thousands and thousands of dollars over an LLC.
A C corp is taxed at 15% on the first 50K only and money you take out ( your salary) is taxed as well. You have to be generating a lot of money to pencil out a C corp even with all the extra little write offs that are allowed. A C & S can be converted back and forth easily however.
AN S corp has the additional advantages of "pass though" in that you can write off your business expenses against your earnings or your wife's earnings at your day job.
AN LLC has only a few things to offer (though significant) 1. it is easy to set up
2. a creditor with a charging order cannot force the member manager to disburse assets or sell assets and pay the proceeds to the creditor. A creditor cannot take over your membership in an LLC.
If a judgement was made against you and you let the $4 pile up inside the LLC. the creditor would be willing to settle for a lot less in a year or two without any money flowing their way.
This makes it an excellent way to hold rental property or long term property and protect it against spurious lawsuits.
I prefer a mix of LLC and S corp (yes an S corp can be a member of an LLC and pull profits out in a multitude of ways)
The original post asked "are there any tax benefits to having it in an LLC" to which I continue to reply "no" no, NO...
I have set up many of these different entities without a hitch and you can too.
**Dave, feel free to post a response, I am allways ready to learn something new and if I am in error am happy to stand corrected. However using the moderator key as a "bully pulpit" inside my post is a little tacky (especially since nothing was deleted or erroneous). You wouldn't appreciate it if I did it in my forumn to you
Randall
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"Chance favors the prepared mind..."[ Edited by Stockpro99 on Date 05/26/2004 ]
FYI,
Bill Bronchick has some easily understood products on asset protection etc. where you could learn a lot. Additionally I know he does a number of seminars and guest appearances around the country.
In the past he has advertised on this site I believe.
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"Chance favors the prepared mind..."[ Edited by Stockpro99 on Date 05/26/2004 ]