Please Help! Protection or not from a LLC?
After reading books talking to my accountant and lawyer I am still confused on the protection of an LLC. Here is where I am confused.
The LLC is an entity that I perform business under as a single member/manager. To be a seperate entity I have to seperate the entity and myself but I can still claim losses on my taxes. Since all losses and gains float to me, I can save some of my other income from taxation.
Is this risky to claim a loss on my personal income taxes and save my income from another job from taxation.
I'm a bit confused about your post. If when you created your LLC you did not elect to be treated as a corporation, then you should be able to have your gains/losses pass through your personal tax returns.
For example, you work for ABC Company making $45,000 a year. You hold some Real Estate in your LLC that you pay interest on the mortgage. Plus you have expenses in upkeeping and managing that property. Not to mention the expenses of depreciation.
Now if you have a competant CPA (Accountant) he/she should know exactly how to structure your Personal Tax returns in order to reflect those gains/losses from your real estate.
But you still will probably have to pay some taxes. There are limits to how much of a loss you can write off. If your current Accountant can't tell you this, find another one.
Ho...
This is not legal advice so consult a professional. CYA having been instituted:
LLCs or FLPs or LPs or Corps have many "protective" attributes. The most important being...........
1) They are NOT you. If something bad happens in the course of business the "business" entity is liable NOT you, unless you personally did something to allow liability to attach. For example: A corporation in which you own stock serves coffee to someone who proceeds to spill it on their lap and get "burned". The company may be liable for damages etc., this is why your company has liability insurance, but you as stock holder are not. Your stock may be devalued or even zeroed out in bankruptcy but that is all you can lose. UNLESS you served the coffee, made the coffee too hot or told the kid to serve the coffee, in that case YOU, and hopefully your liability insurance company, are liable as well as the corporation.
2) The second protective value is more esoteric. It has to do with if you are personally sued and lose a judgment in excess of your insurance or lose an uninsurable issue like a bad debt. Now what happens to your assets. This is a question for real asset protection.
FLPs, LLCs, some trusts and knowledge of various exemptions under the law can be helpful in proofing your estate against catastrophic loss. They must be set up correctly, in concert and in a timely fashion or they may not function as desired.
If this is the kind of protection you desire it is never too early to start learning about and building your estate plan.
Own your assets in properly set up and structured FLPs or LLCs. Use mortgages to move equity to other "safe" entities. Do business in zero net asset corporations. Wrap the whole thing in a Living Trust. Attach various irrevocable trusts as appropriate. Simple. <IMG SRC="images/forum/smilies/icon_rolleyes.gif"> [ Edited by rse2 on Date 02/24/2003 ]
I re-read my post and it was kind of confusing. If the LLC is set up so that the gains and losses float to me, then where is the seperation of corporation and myself? If per chance I am sued is seems like it would be easy for the other party to prove that an entity does not really exist. The LLC is a fairly new type of corporation and has not had many court cases to date.
Lets say at the end of the year with all depreciation and expenses my LLC shows a paper loss of $3,000. Can I claim this loss on my personal tax returns.
Does anybody else?
Quote:
On 2003-02-24 22:47, BWBSTL wrote:
I re-read my post and it was kind of confusing. If the LLC is set up so that the gains and losses float to me, then where is the seperation of corporation and myself? If per chance I am sued is seems like it would be easy for the other party to prove that an entity does not really exist. The LLC is a fairly new type of corporation and has not had many court cases to date.
Taxjunkie says:
The separation under state law. The entity and you are considered separate for state liability law, whereas if you own 100% of the LLC it is disregarded for tax purposes. Federal tax law does not deal with liability protection (except in some very narrow circumstances which are probably not relevant to your situation).
It still might be possible for a creditor to sue you and if successful get a judgment against the assets in the LLC. However, this will only occur if a court permits the judgment creditor to "pierce the LLC veil." In most states this is not possible, since most states only permit a "charging order" (meaning the creditor has only financial rights of the member; i.e., entitlment to the profits when and if distributed).
Lets say at the end of the year with all depreciation and expenses my LLC shows a paper loss of $3,000. Can I claim this loss on my personal tax returns.
Does anybody else?
Depends. First, if you own 100% of the LLC, you will report the activity under either Schedule C (if you are in a trade or business) or Schedule E (if you are only in an investment activity) of your 1040 tax return. If you only occassionally buy properties or have only a few properties to manage, then you are probably in the investment activity. To be a trade or business under the tax law your activity must be continuous; meaning regular time spent on the activity. Most investors are not aware of this caselaw rule. They assume if they buy 1 property a year and rent it out, they are in a trade or business. The difference between a business or investment activity is important because legitimate expenses of a business are deductible "above the line" (meaning directly from your gross income) whereas investment activity expenses are subject to the 2% adjusted gross income floor (i.e., known as the 2% haircut). Also, investment activity can be subject to the passive loss rules under Section 469 of the Internal Revenue Code. Your question pretty much goes to that issue. If you don't spend at least 750 hours per year on your investment activities, then your $3,000 loss will only be deductible against passive investment income or gains for the year (i.e., stock dividends, interest, etc.), NOT YOUR SALARY INCOME. If you don't have any passive investment income, well the $3,000 losses will be a passive loss carried over to future years when you have passive income.
Talk to your CPA or tax attorney, they can help you set up your investing operations to maximize your deductions.
Hope that helps,
Taxjunkie
[ Edited by DaveT on Date 03/02/2003 ]
Quote:If you don't spend at least 750 hours per year on your investment activities, then your $3,000 loss will only be deductible against passive investment income or gains for the year (i.e., stock dividends, interest, etc.), NOT YOUR SALARY INCOME. If you don't have any passive investment income, well the $3,000 losses will be a passive loss carried over to future years when you have passive income.
The difference between a business or investment activity is important because legitimate expenses of a business are deductible "above the line" (meaning directly from your gross income) whereas investment activity expenses are subject to the 2% adjusted gross income floor (i.e., known as the 2% haircut).Taxjunkie,
Depending upon the amount of active income, can't I use up to $25K in passive losses to offset other income when I actively manage my passive investment rental property?
The 2% rule got my attention too, since the context of this discussion is the rental property owner filing Schedule E. I have quite a few rental properties, and "deduct" all my investment rental expenses against rental income in full on Schedule E. How is the 2% rule in play for me? If it is, then I have been doing my tax returns wrong since the 2% rule came into effect.
Up to now, I have only been applying the 2% rule to investment expenses related to my stock portfolio for things like safe deposit box rent and professional portfolio management fees.
[Depending upon the amount of active income, can't I use up to $25K in passive losses to offset other income when I actively manage my passive investment rental property?]
You use the term "actively manage" and passive investment in the same sentence. That is confusing to me since a passive activity is not active management, nor is active management of an investment considered a passive activity. Section 469 of the IRC deal with this and uses per hour guidelines to determine what is a passive activity, active activity, and investment activity. There is "3 baskets" of income and losses. Losses from one basket cannot be used to offset income from a different basket.
If you spend more than 750 hours per year on the activity (or if you normally earn your living in the real estate business), the activity is considered "active" even though it might still be an investment (as opposed to a trade or business). In that case, the passive activity loss rules of Section 469 will not apply and you don't have to worry about not being able to use the $25,000 of passive losses against your ordinary income.
[The 2% rule got my attention too, since the context of this discussion is the rental property owner filing Schedule E. I have quite a few rental properties, and "deduct" all my investment rental expenses against rental income in full on Schedule E. How is the 2% rule in play for me? If it is, then I have been doing my tax returns wrong since the 2% rule came into effect.
Up to now, I have only been applying the 2% rule to investment expenses related to my stock portfolio for things like safe deposit box rent and professional portfolio management fees.]
If you have quite a few rentals and manage them yourself, you might be considered to be in the trade or business of "real estate management." In that case, you could file under Schedule C which will allow you to avoid the 2% AGI rule and allow you to deduct more expenses since they will be "above the line." Schedule C deduction will almost always be superior to Schedule E deductions since any trade or business expenditure that is not a capital expense may be deductible under Section 162 of the IRC, whereas investment expenses (including Schedule E investment expenses) will be limited under Section 212 of the Code (such as the 2% AGI rule).
By the way, deducting rental expenses against rental income is ok (and that is why you can net the two on Schedule E), but if you have more rental expenses then rental income, you may find you will have unused deductions.
Taxjunkie