I have a pre-foreclosure deal where I’m going to take control a property that’s a tear down.
I plan to cash out the mortgage holders and build on the site possibly three houses.
Should I create a LLC for this or is my S-corp good enough for this.
:
Any help and advice would be greatly appreciated.
if you already have an S-corp, use it. the idea is to NOT own the properties in your personal name.
mc,
what tax advantages might cash consider though using an S-Corp over LLC or vise versa?
S-corp and LLC taxed as S-corp are one and the same to the IRS. neither has a tax advantage.
same with LLC taxed as sole proprietor (disregarded entity) partnership or C-corp. You get to tell the IRS how you want the LLC to be taxed.
an LLC is a stronger form than a corp. but since you already have the S, might as well use it.
when you say neither has a tax advantage?
what do you mean?
do you mean i can’t deduct cell phone usage, mileage, computer, clothing (with logos on it), entertainment, etc…
my understanding is that if you track everything, you can deduct these items thus lowering your taxable income…if you show reasonable intent.
i know LLC is pass through and S corp is as well…but i’m still not following you on the whole “no tax advantage” thing.
so if LLC revenue is 100k for Qtr 1 - actual expenses come to 45k
and operating expenses expected for 2nd qtr are 20k - that leaves
35k - of which would be taxable in the 1st Qtr…but if my deductions equal say 20% of that - that would be 7,000 so the actual taxable income in Qtr 1 would be
35k - 7k = 28k
right???
this has nothing to do with what is and is not deductible. legitimate business expenses are always deductible. remember, it’s an INCOME tax, not a revenue tax. Income = revenue minus EXPENSES.
I’m saying that a regular S-corp and an LLC taxed as an S-corp are identical to the IRS. There is no tax difference. not even a little bit. the LLC taxed as S-corp IS an S-corp to the IRS.
thus, neither one has an advantage over the other.
right - this i understand.
i thought you were saying LLC or S corp don’t have tax advantages.
but take the INCOME
now, i use my personal car to go to X Y and Z points, throught Quarter 1, i use my cell phone which i pay for personally, but use it for business (50% for business)…i use my computer to send emails, use excel and quickbooks…again, no out of pocket expenses to the business…
there’s deductions in these activities that are not part of my real expenses for the Quarter…but, i deduct them, thus lowering business INCOME.
what you’re saying is those deductions (which are not actual business out of pocket costs) are apart of the expenses, like deprectiating an asset, like building or equipment…that’s another deduction.
stuff that’s paid for last year (quickbooks, excel) are not deductions to anybody this year. now, if you wanted to upgrade, fine, pay for out of the LLC or submit an expense report for reimbursement. it’s a deductible business expense. same for the cell phone, mileage.
you don’t get deductions without spending cash somewhere. if the LLC is going to deduct it, the LLC needs to pay for it.
if i pay 3000 for a computer, lets say from business funds.
that lowers my taxable income by 3000
income = revenue - expenses.
however, the deduction is based on a percentage of the tax bracket, SE tax and state tax.
so in adding them up, if my tax deductions come to 43%…
i take that 43% and claim a tax deduction of 43% on the 3000 computer.
say that’s like $690…
i use this deduction to lower my taxable income more?
i know with computers (equipment) there are different ways to claim deductions (i.e. overtime or all at once), BUT
i get two advantages -
the actual expense of the item - $3000 (which lowers taxable income).
the tax deduction on that item of 43% (for the example).
and if i use personal funds to buy the item, i just have to keep the receipt in my business files and note them in my log as personal money used to pay for a business expense. (i.e. my cell phone). i don’t use company funds to pay for my cell phone - but i’m claiming a deduction because i use my cell phone for business.
am i making any sense?
I think you’re doing it wrong.
the LLC buys a computer. fine, it’s deductible by the LLC. once. all that weird math with the 43% and additional $690 is crazy talk. your deductions aren’t based on your tax bracket.
you buy a computer. not deductible to the LLC. You might want to claim an unreimbursed employee expense deduction on your personal 1040, but the LLC cannot deduct something that it didn’t purchase. I guess you could donate it as capital and depreciate it, but that’s different.
Suppose the LLC agrees to reimburse you for cell phone usage, or half of that computer. fine. submit an expense report. the LLC writes you a check and deducts it. since you’ve been reimbursed, it’s no longer deductible to you personally.
using personal funds to pay LLC expenses is comingling. Using LLC funds to pay personal expenses is comingling. If you use personal funds for LLC business, submit an expense report and reimburse it from LLC funds. Pretend that it’s not “your” LLC, but rather you are working for someone else.
All those unreimbursed expenses in your log? Those are exactly that: unreimbursed expenses, deductible as a Misc deduction on your personal Sch A. Only when they are reimbursed do they become deductible to the LLC. (Well, the LLC can record the liability expenses payable, take the deduction and reimburse you next year, but that’s different. either way the LLC must write a check sooner or later)
Just like if you use your personal car for your regular job. until the employer reimburses you, they have nothing to deduct. and they don’t spend your money or vice-versa. everythingmust be kept seperate.
mc,
i know that everything must be seperate.
however, i don’t believe that i have to write a check for everything i buy personally, that i use for business. it’s like you said, i can log them as accounts payable and take that deduction.
but…
aren’t deductions different from expenses?
i mean, if buy a building for 50,000…with the LLC for business use - that’s a depreciating asset. the expense of the downpayment of 10,000 is recorded under expense (decreasing revenues)…the building is depreciated over time - that’s a deduction.
the expense is the 10,000 out of pocket - which is subtracted from revenues, thus lowering income…
the deduction (depreciation) lowers taxable income further by utilizing appropriate percentages that make up depreciation claim.
right?
now, with the cell phone (getting back to this lol). i pay for it because it is my personal cell phone. however - i use it for business as well. therefore - it is a deductible item, even though the LLC is not paying for it directly…but now - lets say that i have the LLC reimburse me monthly for up to 40% of the cost of my cell phone - now that’s money leaving the LLC to pay for a portion of my personal bill - because i have intent and it is reasonable.
now that’s a direct EXPENSE but then i also receive a deduction because it’s a piece of equipment that is being used for business use.
this is long: From Nolo:
"Because tax deductions are subtracted from income before the income is taxed and not from the taxes you owe, only part of any deduction will end up as an income tax saving. For example a $5,000 tax deduction will not result in a $5,000 income tax saving-it will lower your taxable income by $5,000.
How much you’ll save depends on your tax rate. the tax law assigns a percentage income tax rate to specified income levels. people with high incomes pay income tax at a higher rate than those with lower incomes. these percentage rates are tax brackets.
to determine how much income tax a deduction will save you, you need to know your “marginal tax bracket.” this is the tax bracket in which the last dollar you earn falls. it’s the rate at which any additional income you earn would be taxed.
to determine how much tax a deduction will save you, multiply the amount of the deduction by your marginal tax bracket. if your marginal tax bracket is 25%, you will save 25 cents in income taxes for every dollar you able to lcaim as a deductible business expense.
EXAMPLE: Barry earns 50k and is in the 25% tax bracket. he is able to take a $5k home office deduction. his actual income tax saving was 25% of the 5k deduction - $1250
you can also deduct most business-related expenses from your income for SE tax purposes - the self employment tax rate is about 12% on net SE income (up to $94,200).
In addition, you may deduct your business expenses from your state income taxes…
…so you end up deducting 43% (25%+12%+6%(state)) of the cost of your business expenses from your state federal taxes. for example you buy a 1k computer for your business you end up deducting $430 of the cost from your taxes…in effect the government is paying for almost half of your business expenses."
again the above is the work of Nolo books. not mine.
so…lets say business revenue is 40,000, business buys a computer for 1000 -
my se income is 39,000
THEN i take the deduction for that expense - $430 (43% example above)
taxable income = $38,570
RIGHT?
nope. you’re incorrect. deductions = expenses.
the 10,000 down payment is not a deductible expense.
assets are not expensed when purchased, but over their useful life, this is called depreciation.
you depreciate the 50,000 as deductible depreciation expense until it’s used up. the down payment only reduces the amount you owe - it has NO EFFECT on income or taxes, other than it lowers your deductible interest expense. amounts going to principal are not deductible either for the same reason.
now that cell phone. you pay for it. there’s nothing for the LLC to deduct because it hasn’t purchased anything. Now, if the LLC purchases 40% of the phone bill because it’s used legitimately for the business, then the LLC needs to pay for it. Submit an expense report. the LLC will deduct the 40% it pays for.
If you use that same cell phone for your W-2 employer, how would the company deduct it? just make something up? no. they have to pay you for it. same with the LLC.
your last example made me laugh.
income = 40k
computer expense deduction 1k
taxable income 39k. period. the end.
you’ve already deducted the ful amount of the computer, how do you think you can deduct another $430? then you would have deducted more than the cost of the computer! If you total taxes = 43%, the 1,000 deduction saves you $430 in taxes; reducing your taxes from 17,200 to 16,770.
so let me get this straight.
business buys a building for 50k
business puts down 10k
lowering amount owed to 40k (liability)
the 10k is an expense for the business in that year and lowers only the deductible interest expense (on the loan?).
so the 10k down will show on taxes as part of income (less depreciation deductions)…
the cell phone now…okay…
lol
IF i go through my cell phone bill and document and circle the phone calls i made on personal cell that were business-related - and then match that to the calls that were personal - say it’s 50/50.
for 12 months - you’re saying i need to file an expense report to LLC for that AND the LLC must write me a check for it in order to claim the deduction?
marc, this is too much fun…i’ll never figure out this accounting stuff - i just want a BASIC grasp of it all, so i can keep tabs on my accountant.
cell phone: yep.
you start with 10 of cash.
that’s 10 of net assets
business buys a building for 50
puts 10 down, finances 40
you have assets of 50
liabilities of 40
no revenue and no expenses yet
net assets of 10 still
fast forward a year. you collected rents of 4 (revenue)
let’s say you used 2.5k to make the payments on the 40
2k of interest and 500 principal
4 rents collected (revenue)
2 interest expense paid is deductible
1 other expenses (cell phone!)
let’s say depreciation is 500
taxable income is 500 (4,000 - 2,000 - 1,000 - 500)
now, let’s look at the balance sheet
assets 49.5 (50-500 depreciation)
and 500 cash (4-2.5-1)
liabilities 39.5 (40-500 principal paid)
net assets of 10.5
that 10 you paid down is not ever an expense, not ever deducted from income. you only traded one asset (cash) for another (house)
you should go down to the community college and take accounting 101. it might be good for you and your business.
mc,
i’m with you.
this has really helped me.
i might actually considering taking an accounting course - but i think i’m picking up the basics.
i keep hearing that even acct’s miss tons of deductions - because they’re not minding their own business, they’re minding someone else’s business, so even with a CPA - many business owners/investors are missing out on tons of tax advantages.
anyway, thanks for the feedback and MERRY CHRISTMAS!
Mark,
You took a lot of time in a couple of threads to convince TMCG that his perception of business accounting and tax reporting was distorted.
Thank you for taking the time and making the effort. I am sure that all of us who merely read the threads got something out of it.
okay, i’m back for more…lol
that 10 you paid down is not ever an expense, not ever deducted from income. you only traded one asset (cash) for another (house)
so if i made say 100 and use 10 to put down on a buildling.
i traded 10 cash for 10 into a building.
what happens with that 10?
at the end of the year…that 10 is taxed how?
You have to start with the asset equation:
Assets = Liabilities + Equity
If you start with $10K in cash and no debt, then
Assets = Liabilities + Equity
Assets = $0 + $10K = $10K
Purchase a building for $100K, putting $10K down, financing the balance. Now
Assets = Liabilities + Equity
Assets = $90K + $10K = $100K
Equity in a building, like cash is a capital asset. You merely traded one capital asset, cash, for another, equity in a building. The $10K is not taxed, nor is it a deductible expense in this scenario.
However, you started by saying that you made $100K. If your $100K is net of all expenses, then your taxable income is $100K. You pay taxes on the full $100K. The $10K that you put down on the building came out of whatever was left of the $100K after taxes.
oh boy…
so let me do it this way:
lets say 500k in total revenues
i buy 250k of equipment
100k on advertising, office supplies, energy costs
i take 100k and buy a building (downpayment on 500k building)
lol okay
Assets = Liabilities + Equity
800k = 650k + 150k
Assets - Liabilities = Equity
800k - 650k = 150k (50k cash + 100k down payment on building)
now what gets taxed?
i traded cash of 250k for equipment and a 100k for building and spent 100k on miscellaneous items for business…
i know the 100k on various expenses is deducted from revenue (expenses)…
so that would be
500k - 100k (expenses) - $5000 (depreciation from bldg and equip - $15k (interest paid) - $4000 (principal paid) = 376k?
Out of your $500K revenue, you purchased $250K in equipment and spent another $100K for the downpayment on a building. You traded $350K in cash for $350K in capital assets. After spending another $100K on business expenses, you have $50K left in your bank account.
So now your assets are $250K in equipment, a $500K building and $50K cash in the bank for a total of $800K. Your liabilities consist of a $400K mortgage on the building. Plugging these numbers into the Asset formula and solving for Equity gives you
Equity = Assets - Liabilities = $800K - $400K = $400K
Remember that money spent on capital items such as equipment and even the principal payments on your building loan is not a deductible expense. You are simply trading one capital asset (cash) for another (equity in building and equipment). With $100K in direct business expenses, another $15K in mortgage interest, and $5K in depreciation on building and equipment, your net taxable income is
Income = Revenue - Expenses = $500K - $120K = $380K