I have formed my LLC for the purposes of buying and selling real estate and now I have to fill out form 8832 and return it to the IRS - the entity classification election form.
This is a single-member LLC and I’m in Maryland. An accountant I spoke to here locally says I should elect to be a domestic eligible entity with a single owner electing to be disregarded as a separate entity. But I’ve been reading and hearing that I should elect to be taxed as an s-corp, because then I only pay self-employment taxes on what I draw as a salary, not everything that the business earns in total.
In order to do that, am I correct in that I would check the box next to “a domestic eligible entity electing to be classified as an association taxable as a corporation”?
I certainly want to get this right as my understanding is you can change your entity classification only once every 60 months.
Any advice from you seasoned professionals? This new LLC was set up with the anticipation of a big wholesale deal that fell apart on the seller’s end days before closing. Hence, the LLC has had no business as of yet. I intend to continue working the REI market so hopefully that will change soon.
I know you can’t give me “official” advice and that I should still check with a local CPA/tax adviser but in your professional opinion, do you think choosing to go as a s-corp to limit taxes is a wise one?
I am somewhat surprised that the CPA you spoke with did not also tell you that the single member LLC classification election defaults to a disregarded entity. Since this is the default classification anyway, filing Form 8832 is unnecessary, if the default would be your election.
Multi-member LLC defaults to partnership. No need to file Form 8832 if your classification election for your multiple member LLC is going to be a domestic partnership.
Just to explain Mark’s comment a little more –
When you file Form 8832 electing to be classified as a corporation, the default is as a C-Corporation. You need to file Form 2553 to convert the C-Corp to an S-Corp.
I believe you have 75 days to make this conversion, otherwise you have to wait five years. I am a little shaky on this timeline. Perhaps Mark will confirm
the rule is that you can only back-date the 8832 effective date 75 days. However, relief is available that will allow you to go back to the start of your tax year as long as you file the form before the due date of the next return. It’s not a problem if you miss the 75 day window, just a little more work from your CPA.
you can make the election at any time, with the effective date subject to the constraints above. However, once you make the election you can’t change it for 5 years.
If you’re filing a 2553 to become an S-corp, you don’t have to file the 8832. Corporation is assumed by the filing of the 2553. I usually file one anyway, just because I’m like that.
The 2553 must be filed by the 16th day of the third month of the tax year for which it is to take effect. That’s 16 March for most folks. For a new company, the start of your tax year is the date of organization (Not Jan 1 and it’s called a “short” year) and you calculate from there.
so if you’re effective on 5 June, you have to file the 2553 before 16 August to be effective at the start of your first, “short” tax year.
Again, relief is available if you miss the deadline solely because you didn’t file the form on time.
I am not a CPA, nor an attorney. I think it is a misconception that the S-Corp is always preferable to the C-Corp. In most instances – probably 98% of the time – this is true, but not always.
I am told that there are about 300 potential business deductions available to the C-corp while only about 50 are available to the S-corp. If you are to be a full time investor, with no major medical insurance coverage, then the C-corp can pay the insurance premium for its employees as a business expense – not so for the S-corp. Same for life insurance premiums for key employees.
If you will have out of pocket expenses for life insurance and medical insurance, anyway, then pay for these with pre-tax income and expense the premiums to the C-corp. This reduces your corporation’s taxable income, and lowers the corporate tax.
The advice we should have given you is to speak with your CPA and your estate planner and your tax advisor to determine which corporate entity classification best meets your needs, maximizes your after tax income, and facilitates your estate planning.
NONONO. An S-corp can certainly provide insurance benefits, but a 2% shareholder must have the value included in their compensation.
I’m not aware of any deductions not available to the S-corp, although some of the deductions will be taxable or limited to the shareholders, as above. [Section 179, for example, is limited at the shareholder level, not at the S-corp level.]
Legitimate business deductions are ALWAYS deductible.