Tax Strategies For Corp/ LLC
Hello People,
I own a couple multi families, and was thinking of putting them into an llc. Then was thinking of starting a corp for my properties that i will purchase for flips, like rehabs/ foreclosures. Was also thinking of having the corp act as a property management, collecting rents for the llc. I figure then i could deduct the amount i would pay the corp for management from my flow through taxes of the LLC to further lower my passive income. Since I am still small time, i figure i will not be making more then 50 grand a year in active income for the Corp. I would like to purchase a new vehicle to use unde the corp, and get the deduction, since i have been told i can't deduct a vehicle under an LLC if i am not a full time investor. Is it worth jumping into the C corp right away, even though i won't need to utilize the additional tax bennies like deductible health insurance, and control of money flowing through it, untill i go full time and quit my job. Do you think the S corp will get me going for know, and just step up to the C corp when i really need to, or just do the C corp right off the bat. Please toss in your input, as i am always looking for educated opinions. Thanks.
Is it true that a vehicle may not be deducted under an LLC? Anyone else heard this?
I think there's some confusion on the deductibility of auto expenses vs the limitations placed on the deduction.
Most of the limitations hinge on the vehicle being used more than 50% in a "trade or business". Rental property is generally not considered a trade or business but instead "property held for the production of income". If it were me, I would not want a rental to be considered trade or business because technically income from a trade or business is subject to self-employment taxes.
If the vehicle is not used more than 50% in a trade or business: 1. You cannot take accelerated depreciation but straight line depreciation is available. 2. You cannot take the first-year bonus depreciation 3. The deduction under section 179 is not available
So, you're basically limited to straight-line depreciation or the standard mileage rate, but that doesn't mean it's not deductible. I also believe that the above limitations would apply regardless of what form of entity is used. Even worse, if the vehicle is owned by a corp, the personal use of the vehicle is compensation to the owner and subject to employment taxes.
I would never use a C corp to hold properties. The double tax is not worth it and gain is created if you were to ever take it out of the corp. If you want to deduct health insurance, consider putting some of your activities on a Sch C. (assuming you have some that don't have a high exposure to liability).
Hey Blueford, you are correct that i am able to claim minimal mileage on a vehicle, if i can show related use to the properties. Just wanted to clarify one thing, ,what i was saying is i would hold my passive income rentals in my llc. The corp would act as a management company, wich would constitute active income, that the llc would be able to deduct as an expense paid to the corp, wich would lower my taxable passive income flowing through the llc. Is what you are saying is that if i bought a vehicle under the corp, issued it to an officer of the corp ( me ) is that i would have to pay taxes on the fringe benefit of a company vehicle? If so, i guess i am not clear on this point, as i know many people employed by companies that issue them vehicles, and are not responsible for any portion of that vehicle. Thanks for your input.
Yes, if a separate entity owns the vehicle (corp or LLC) and provides it to you for business use, any personal use is considered compensation (which the corp or LLC deducts), reported on a W-2 and subject to income and employment taxes. I would guess that there's many small companies out there that are not following this rule. Or maybe people never notice that it's included in their W-2.
The corp/LLC set up sounds ok and would be fine if you charged the LLC a reasonable (fair market value) management fee. But I was wondering why you would want to decrease your passive income and increase your active income. Both should be taxable at the same rate and the S corp income has more potential to be subject to employment taxes.
Hey Blueford, To answer your question about passive to active income, my logic behingd it as follows. Since i am still working for a living, my passive rental income has limited deductions, like repairs, depreciation, maybe a couple small other odds and ends, thats about it, wich in itself is fine. The real need for creating the active income for the corp, is not as much remove that 10% i would charge the llc for the corp to manage it, but to legitimize the need for the company vehicle for management purposes. Also my biggest reason is for the short term flips wich would be active income, and if they were not in the corp, but were in the llc, then i would have to pay self employment tax on the active income, where i wouldn't in the corp. By creating the corp, i should be able to lessen my tax burden on the active income, compared to keeping everything passing directly through the llc to me at tax time. Hope this explains my way of thinking on this. Thanks for your insite, much appreciated.