LLC And Taxes!
I have a question on LLC and taxes. I have an LLC that I use to manage my RE investing. I own one of my rentals in the LLC name but the others are in my personal name.
Last year, my CPA told me to run all my rental income and expenses on Schedule E while on Form 1065 & Schedule K-1, I just outlined minimal business expenses that were not particular to one building or the other (Phone, Office Supplies, advertising ... etc.).
Using this method means that my LLC never shows any income, always expenses and there will always have losses. I am worried that the IRS would start questioning if one has a business for years that never seems to show a profit on Form 1065.
From what others have done, is this the best way to handle the situation? The only income to the business is rent from the tenants. How am I supposed to show income for my business if I use Schedule E?
Thanks.
JS
Your CPA is correct. You can not deduct the expenses you describe, unless you are operating an active income business.
Best to consult your CPA further on these issues since s/he is already familiar with your operation.
Loon,
Thanks for your post. I am glad to see that I am not the only one that has this problem of trying to apply expenses for my LLC. I agree with you that splitting up these trips will unfairly load the Schedule E on properties that should not neceessarily carry these costs.
On the other hand, I was worried when newkid explained about the passive vs. active income distinction and the need for additional self employment tax. I always was told (by the tax professionals I used in the past) that an LLC is a pass-throgh entity (disregarded for tax purposes) and thus is not subject to self-employment tax.
Like you I do my own book-keeping (Quickbooks) and I am also worried about making sure that I have the right records to support my valid business expenses. Of course the easiest way would be to hire a full time CPA, accountant or bookkeeper but unfortunately I have not grown to the size where I can afford these professionals.
Oh well, if anyone has more insight to share it sure would be great to hear it.
Thanks.
JS.
I second Newkids recommendation to hire a CPA for additional advice. It will be cheaper now to get the advice then if the IRS comes knocking and the CPA attempts to defend your positions.
There are several solutions to this as I see it.
1. Set up a new LLC and elect to have it taxed as a "S" corp to avoid most self employment taxes through capital distributions.
2. Set up an S corp and either use that or have it be a member in your LLC and take out active profits through the S corp.
I have never had a problem writing off trips etc. to look at property anywhere (including europe).
Most people are not aggressive enough in their write offs. All you have to have is a "reasonable" expectation that the deduction would be or is allowed to avoid the fraud/evasion part.
If the IRS sets aside the deduction then you pay taaxes and usually a "small penalty.
I believe in tax avoidance (which is legal) not evasion.
My CPA told me about one of his clients that took a property write off for 14 years and was so worried that he set aside the money to pay the tax on it each year in case they disallowed the write offs. He had saved $180,000 in the bank.
After 14 years he was audited and they did disallow the write off and he settled for $14,000. You do the math as to whether it was worth it or not.
IN any event I say take advantage of all that you legally and morally can..
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good info thanks
Well-said, NewKid. Right on the money.
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