Just as with other kinds of entities, there are pros and cons for using LLCs. As with any entity choice, there is no such thing as a cut and dried selection process. It requires an intelligent judgment from an experienced professional tax advisor after asking a lot of questions, as I explain in this vidcast.
Financing an SUV For an LLC - VidCast
We have been looking at ways in which to improve the quality of our content; so we are adding short videos (VidCasts) of my answering reader questions. These should be more enlightening than the completely text versions.
This is going to be an evolving process as we become more proficient in utilizing this medium and our skills with the software and equipment improve. Our goal as of now is to do the same kind of Q&As as I have been posting for several years on my blog in these free short YouTube videos.
As we become more comfortable with this technology, we also plan to present some more intense live online webinars on some of the topics that seem to have the most interest around the country. There will be a charge for these to cover the costs, as well as for our time. As charitable as we are, we are evil capitalists and do intend to make a profit on this venture. The mini-classes will be of particular interest to small business owners and investors who are interested in learning techniques on how to minimize their taxes, as well as professional tax advisors with whom I can share my 34 plus years of experience. The costs will be very reasonable and much less than the $250 per hour that clients are paying me for one on one consulting.
This first batch of VidCasts that we produced are rough as we learn how to operate everything; but the information they contain should be useful for anyone wanting to keep their taxes down.
If the embedded player doesn't work in your browser, you can go directly to the YouTube page to watch it.
Buy SUV personally or through LLC?
I currently have a day job where my gross pay will be around $110,000 for 2007. I also own a 60% stake in an LLC, seperate from my $110,000 job. I need to buy an SUV for my LLC for about 80% business and my use only. In respect to Tax Code Section 179, what is my best strategy for buying a $30,000 SUV that is section 179-eligible? Can I personally take the Section 179 tax break? Or do I get only 60% of the section 179 deduction? Can I take the section 179 deduction on my own or does it have to be through the business? Your help is greatly appreciated.
This is the kind of thing you should really be discussing with your own personal professional tax advisor because there are a lot of factors to take into consideration.
Tax-wise, you could achieve pretty much the same benefits either way; buying it personally or through the LLC.
From a more practical sense, what would concern me more is how you and your partner in the LLC can ensure that you are each getting your fair share of the deal. It's an easy enough task to specially allocate the Section 179 for the purchase to your K-1. What gets messier is how to allocate the operating expenses. Are you going to pay them personally or is the LLC? The person who is handling the tax and accounting work for the LLC should also be part of this decision process to see if it would just be cleaner to have each of you take care of your vehicles on your own, which is what I frequently see with situations similar to yours.
There are obviously other factors to consider when working with a multi-owner business that wouldn't be a concern for a company owned by a single person or a married couple.
Good luck. I hope this helps you and your personal professional tax advisor work out the best game plan for your unique circumstances.
thanks for the response Kerry!
Hello I hope all is going well. I recently viewed your website and was inspired to contact you based on the fact that you seem to have a no b.s. attitude towards taxes. I have an LLC which buys and sells real estate and I am in the process of selecting my CPA. The physical address is in Va, but I Incorporated in NV and would like to find someone who can help me maximize my profits through taxes. Any chance you would be able to help me or have an recommendations?
There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium. You will need to work directly with an experienced tax pro who can analyze your unique circumstances.
You need to be extra careful of the state tax issues. Just having your corp set up in Nevada won't negate the requirement to file tax returns for any other states in which you sell real estate. However, a good tax advisor will be able to help you devise effective ways by which to shift the net profits out of the taxable states to the tax free Nevada. In fact, that would be a good question to pose to any prospective tax advisors you are considering using. Any who don't know how to do this, or tell you it isn't possible or is too much hassle to justify the tax savings, are obviously not experienced enough to fill your current needs.
I wish I could be more help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time.
Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.
If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.
I wish I could be of more assistance; and I wish you the best of luck.
Subject: Can An LLC Donate Money?
Love the blog, thanks for answering all of my questions thus far, I was just wondering if a business (specifically an LLC) could donate money and deduct it from its income? And not to fret, I'm on my way to getting an actual tax expert in my area, I just have to vet out a few contenders. :)
How an LLC deducts its charitable contributions depends on how the LLC is being reported and taxed, which is an extremely important decision you need to make with the assistance of your professional tax advisor.
If it's a single member LLC and you are reporting it on Schedule C, the contributions are shown on your Schedule A.
If it's a multi member LLC and you are reporting as a partnership on Form 1065, contributions are passed through to the members on their K-1s, where they end up on the members' Schedule As.
If it's being taxed as an S corp on 1120S, it's handled the same as with a 1065.
If it's taxed as a C corp, the contributions are deducted on the 1120 with the normal limit of only allowing a current deduction of 10% of that year's taxable income. Any excess is carried over to the next tax year.
As you can see, what you may have considered a simple question doesn't have a quick answer and illustrates the need for a good professional tax advisor before you set up an LLC.
Unreimbursed LLC Expenses
Subject: Re: Partnership question - limited or general partner?
Another question for you, Kerry,
First off, I'm glad you survived tax season - congratulations.
The service company in which my husband holds a partnership (medical services) is set up as an LLC.
law states the following with regard to service LLCs: Maryland
§ 4A-301.1. Liability for negligence in rendering professional services.
(a) Individual liability.-
(1) An individual who renders a professional service in this State as an employee of a domestic or foreign limited liability company is liable for a negligent or wrongful act or omission in which the individual personally participated to the same extent as if the individual rendered the service as a sole practitioner.
(2) An individual who renders a professional service in this State as an employee of a domestic or foreign limited liability company is not liable for a negligent or wrongful act or omission of another employee or member of the limited liability company unless the employee is negligent in appointing, supervising, or cooperating with the other employee or member.
(b) Company liability.- A domestic or foreign limited liability company whose employees perform professional services within the scope of their employment or within the scope of the employees' apparent authority to act for the limited liability company is liable to the same extent as its employees.
(c) Liability no greater than in nonprofessional company.- The personal liability of a member of a domestic or foreign limited liability company that provides professional services is no greater in any respect than the liability of a member of a limited liability company which is not engaged in rendering professional services.
I am familiar with Treasury's temporary regulation 1.469-5T, and it seems as though if the state of incorporation allows for limited liability for the member, the member is passive and limited partner, even if he/she fails the test for passive activities. I couldn't find any ruling/regulation with regard to the professional service industry though, except that if you provided a professional service you CANNOT be considered a limited partner. Seems to be contradictory.
The issue is the unreimbursed partnership expenses incurred throughout last year. General partners get to deduct UPE from the Social Security Wages listed on the K-1 to figure out the Medicare tax. Limited partners, according to the directions on the SE, seem to not have that ability.
So the question is - is he a limited partner for IRS purposes or a general partner? It's a small difference, but hey - every little bit helps! Thanks,
The application of SE tax to LLC income has long been an issue of debate among tax pros, and one I have written about several times over the past few years.
Because of the lack of an explicit law on this matter, there is no cut and dried answer that will satisfy everyone. Some people take the approach that no LLC income is subject to SE tax, while others apply it to all of the LLC net income. A common compromise position is to treat it similarly to the comparable issue with S corps. Under this approach, the member's income that is directly attributable as compensation for services rendered would be subject to SE tax, while the net income that is a result of being an investor in the business would not be.
This issue obviously needs to be settled for your husband's treatment of his share of the LLC income first before addressing the appropriate way to handle his unreimbursed expenses. If he is reporting SE income from the LLC and those expenses can be connected by him to the generation of that income, he can deduct them against that SE income when calculating the actual SE tax. Likewise, if none of the LLC income is being reported as subject to SE tax, none of the related expenses would be usable in calculating the SE tax. Similarly, if he is using the compromise approach I mentioned above, any unreimbursed expenses that are connected to his non-SE investor income could also not be used to offset the SE income.
I hope this helps you understand how murky this issue is. This is obviously something that you need to work on with your own personal professional tax advisor.
Thanks Kerry!The way we have the (as of today, still unfiled but extended) tax returns calculated now, his income is subject to SE tax. He fails two of the passive/limited partner tests - the 500 hour test and the personal services test, so we didn't even consider the idea that his guaranteed payments were exempt from SE tax.The confusion lies (and the tax advisor is confused as well) with the directions for Form SE, which states that general partners only may deduct the unreimbursed partnership expenses (UPE) from the social security wages in box 15 of the K-1. Limited partners do not that get, though perhaps they're left off because limited partners generally do not pay SE tax on guaranteed payments. The 1065, which was prepared by another firm, however, identifies my husband as a 'limited' partner. That also has not yet been filed, and should probably then be corrected before it is, so that we can deduct the legitimate UPE from the SECA wage base to calculate the SE tax.I'll take what you responded as confirmation of the way that we were thinking - since all of his income (guaranteed payments) is subject to SE tax, then he can legitimately deduct unreimbursed partnership expenses from his income on the SE form.Thanks again for your help.Regards,
This is a perfect illustration of why there is so much confusion around the proper tax treatment of this relatively new form of business entity, the LLC, which is basically a hybrid of partnerships and corporations.
Even in a limited partnership, one person had to stick his/her neck out and be a general partner, which made him/her personally liable for all of the business's debts. With an LLC, all of the members can be limited in regard to personal liability for the company's debts. In essence, nobody is a general partner and everyone is technically a limited partner.
However, when any of the members take out guaranteed payments, which the LLC deducts as an operating expense, those payments would be treated the same by the member on his 1040 as would guaranteed payments received from a normal partnership, and be subject to SE tax. Likewise, his unreimbursed expenses used to generate that income would be deductible on his 1040 in exactly the same manner as if he were in a normal partnership, reducing Schedule E and SE income.
The debatable issue regarding SE tax has to do with the K-1 pass-through income, which is the company's net profit after deducting guaranteed payments.
It's confusing, but you and your personal professional tax advisors should be able to sort it out for your situation.
1031 of LLC Property
Subject: Exchange Question
Dear Tax Guru,
I own a residential rental property in AZ under an LLC with a partner. We are in the process of selling it after two+ years of ownership.
Am I able to do a 1031 exchange with the proceeds of this sale into a commercial property that I am looking to invest in under a different LLC with another partner?
Thanks for your help.
It depends on the official ownership title for the property. If it's in your individual names, you can each use your share of the proceeds for whatever you want, 1031 exchange or taxable sale.
If the property's title is in the name of the LLC, and you don't all want to reinvest into new property, you will need to get your share out of the LLC's name and into your own name before the disposal, so that you can do a 1031 with your share of the proceeds. This is a common event and any experienced title company or abstract attorney can handle this.
You also need to coordinate with your and the LLC's tax preparers to keep track of the property's cost basis, the distribution to you, and the reporting of the 1031.