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Tax Benefits Of Owning An Llc

Inexpensive And Relatively Easy To Form

How to set up an LLC for Investing | Are there tax benefits?

Compared to corporations, starting a business as an LLC is quite easy and inexpensive . The exact process is determined by your state, but the paperwork is typically minimal, as is the cost. In addition to filling out a short formation document, youll need to file articles of organization and an operating agreement, which outlines the ownership structure of the new company. You dont have to draw these up from scratchtemplates can be found online. You can also enlist the help of a tax professional.

Forming an LLC is often more appealing to small businesses than forming a corporation because it involves much less operational complexity. LLCs arent required to hold an annual shareholders meeting, nor do they need to file an annual report each year.

The Tax Benefits Of An Llc For Rental Property

A Limited Liability Corporation or LLC is a popular business structure for real estate investors because it offers flexibility, legal protection, and tax advantages. But you have to know how to properly set up and maintain your business to reap the rewards. Here is a look at a few benefits of llc for rental property owners, along with some of the disadvantages.

Key Points

Separate Business And Personal Expenses

Another major benefit of setting up an LLC is the ability to separate personal and business income. Most banks recommend that you set up an LLC or some business entity before opening a business account for personal liability protection. This will also allow you to establish a business checking account and credit cards so you can effectively separate your personal and business income. This is important to do in case of any lawsuits or audits from the IRS.

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How To File As An Llc

Forming an LLC is relatively simple. While it varies by state, the process typically entails filing articles of organization with the state, completing a fill-in-the-blank form, and paying a filing fee. For better financial and legal protection, owners should create an LLC operating agreement even in states that dont require one.

Anyone can form an LLC, but that doesnt mean anyone can generate income as an LLC. According to CPA Aaron Lesher of Hurdlr, a small business finance app, a regular salaried employee could theoretically quit their job, create an LLC, and sell their freelance services back to their company to avoid paying a higher income tax rate.” However, Lesher notes, The employee-as-an-LLC idea is a massive audit red flag.

It isnt simply up to employers or employees to decide how workers are classified. Their classification depends on how they measure up to various guidelines in the tax code.

The IRS is very clear on the difference between a contractor and an employee, says Josh Zimmelman, president of Westwood Tax & Consulting LLC, a New York City-based accounting firm. There are three main factors they look at: financial control, behavioral control, and relationship type.

“If a company tries to represent that a person whose work hours they are controllingand whose desk space and equipment they are providingis a contractor, they are inviting the IRS, the state, and the Department of Labor to audit them. And they wont win,” she concludes.

Limited Liability Companies And Employees Who Are Minors

What is an LLC?

If the LLC business owner employs their children and those children are minors, they can be compensated for working summer vacations and after school. This is essentially considered a tax-free allowance. A minor child can earn income up to $6,200 before they would need to file their own tax return. When a child is employed by the taxable LLC or corporation, contributions to Social Security still need to be made. However, to be exempt from withholding tax, Form W4E has to be filed. Additionally, a minor is permitted to add up to $5,500 of any income they make into their IRA or their Roth IRA account. If you plan to employ minors at your company, you will want to research both local and state regulations regarding their work hours.

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When Its Time To Sell

Maybe you bought a far-off hideaway that youre lucky to visit a couple of times a year. Or perhaps your vacation home is just a quick drive away, and you spend every possible moment there.

If its the latterand you dont already know which of your homes is your primary residence and which is the second homenows the time to figure it out. Distinguishing between the two can have big tax implications when it comes time to sell.

Thats because a capital gain of up to $250,000 on the sale of the principal residence may be excluded from taxable income.

Your principalor primaryresidence is the home you used most during the five years prior to the sale. But other factorssuch as your jobs location, voter registration address, and banking locationcould also come into play. Among other requirements, you must own and use that principal residence for at least two of the five years before the home is sold.

We knowthats a lot of heavy stuff to take in. But you knew your second home would pay off in more ways than one, right? Now, hurry up and file your tax returnso you can escape to your happy place and forget about burdensome things. Like taxes.

Builds Credit For Your Business

One of the more underrated real estate LLC benefits is the ability to build credit for your business. When an investor determines an LLC is the right corporate structure for them and their business, they can obtain an Employer Identification Number . This essentially allows for your business to build credit without using or impacting your credit. It can be an excellent tool for investors, as it enables you to build a dominant credit rating for your business, including the ability to qualify for credit lines under your business name. This could essentially provide double the borrowing power for investors with both personal and business credit profiles.

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Dues Can Be Deducted Too

Any dues that a taxable LLC or corporation pays in order to be a member of a professional organization can be deducted. Additionally, any magazine or newspaper subscriptions an employee or executive has that are relevant to the business can be deducted. These costs are not a part of employee income.

Choosing Corporate Tax Status For Your Llc

Holding LLC Tax Benefits and Deductions (PROS & CONS)

So far, weve discussed the default income tax rules for LLCs, but things can get more complicated. The members of an LLC can choose for the business to be classified as a C-corporation or S-corporation for tax purposes. The voting procedure and consent required to make this change will be reflected in the LLC operating agreement.

Your LLC can opt to be taxed as a C-corporation by filing Form 8832 with the IRS . If you make this change, your LLC will be subject to the 21% federal corporate tax rate. Youll need to file taxes using Form 1120, U.S. Corporation Income Tax Return. Youll also pay state and local corporate taxes as applicable where your business is located.

To opt for S-corporation tax status, file Form 2553 with the IRS. An S-corp is taxed like a pass-through entity, similar to an LLC, with some differences in how salary and distributions from the business are taxed. To file taxes for an S-corp, submit Form 1120S, U.S. Income Tax Return for an S-corporation, to the IRS.

Note that choosing corporate tax status wont affect your LLC from a legal standpoint. Legally, your business will continue to operate as an LLC. You should consult with a tax professional to see if youd benefit from corporate tax status. Income in a corporation is taxed differently than an LLC, and a corporation is eligible for more deductions and credits.

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Tax Credits And Deductions

Savvy business owners know how to maximize credits and deductions to minimize their tax bills. The key is to maintain a detailed record of every expense that you want to deduct. Keeping an accurate digital report of daily expenses can help you get the most out of tax credits and deductions.

Because state and federal tax laws change about as quickly as the seasons, you should work with a CPA to stay on top of any tax changes that might benefit your LLC. Running an LLC offers owners unique tax benefits that other types of business structures do not get to enjoy.

Tips To Maximize Your Business Potential

  • Enlist the help of a professional if you need help managing the finances of your small business. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
  • Where you bank with your business is often overlooked, but paying attention to this detail can boost your finances significantly. Check out our list of the best banks for small business to take advantage of these opportunities.

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All Profits Are Taxed Regardless Of Income

In a corporation, individuals donât pay taxes on income until itâs distributed. Most corporate income is distributed as dividends. LLC members, however, pay taxes on their portion of the profits, even if the profits havenât been distributed yet. That means that there is a possibility of paying income taxes on money that hasnât made it to you yet.

Why Would An Llc File As An S Corp


Being classified as an S corporation employee has a potentially big advantage: S corporation tax treatment can provide a way to take some money out of your business without paying employment taxes. This is because you do not have to pay employment tax on distributions from your S corporationthat is, on earnings and profits that pass through the corporation to you as an owner, not as an employee in compensation for your services. The larger your distribution, the less employment tax you’ll pay.

The S corporation is the only business form that makes it possible for its owners to save on Social Security and Medicare taxes. Historically, this has been the main reason S corporations have been popular.

If you took no salary at all, you would not owe any Social Security and Medicare taxes. As you might expect, however, this is not allowed. The IRS requires S corporation shareholder-employees to pay themselves a reasonable salaryat least what other businesses pay for similar services. Moreover, due to the pass-through tax deduction discussed below, it can be advantageous for an S corporation to pay substantial employee salaries.

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What Are Tax Loopholes

Tax loopholes are ways in which either businesses or individuals can lower their tax liabilities. While some consider tax loopholes unethical, most corporations are constantly looking for ways to gain an edge n their competitors and deliver returns to their shareholders. An extra two percent can be a substantial amount, which is why some companies will filter money through other entities and pursue other loopholes. Tax loopholes are legal and not to be confused with tax evasion, which is illegal.

Who Should Form An Llc

You as one owner can file an LLC in any state. It is best to form an LLC if you are concerned about dealing with lawsuits and debt that comes from your business.

For instance, if you choose to open a business that will deal with the public, it may be concerning to you that your commercial liability insurance will not protect your personal assets from a slip-and-fall lawsuit. Choosing to operate as an LLC can help you feel more comfortable about these types of situations because your own assets will not be challenged in any type of claim against your LLC.

It is important to know whether or not your business will be allowed to operate as an LLC. The following cannot be an LLC:

  • Any business that is in the banking sector, trust or insurance
  • Architects, accountants, physicians, or licensed healthcare workers in certain states, including California

If you need help with owning an LLC, you can post your legal need on UpCounsels marketplace. UpCounsel accepts only the top 5percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Business Trips And Deductions

When an employee or executive of the taxable LLC or corporation incurs expenses like program fees, meals, lodging, and transportation to attend a business function such as a trade show, convention, or seminar, a deduction can be applied. Even if there will be more than one employee or executive attending a business-related function, this deduction can still be used. Reimbursement for these business expenses is not a part of employee income.

Sea Shells: Pros And Cons Of Starting An Llc For Yacht Jet Golf Cart Or Other Vehicle Ownership

Tax Benefits of using an LLC in Real Estate Investing | Eric Freeman, Beach Fleischman

If you purchase a yacht or jet that will be used for the conduct of your business ventures, the acquisition should of course be structured so that the ownership of the vehicle clearly falls to your company, not to you personally. Most often, the appropriate business structure is a Limited Liability Company , which offers both the liability limits of a corporation and the pass-through taxation tax filing of a sole proprietorship, partnership, or S corporation.

Even if you are acquiring a new vehicle with no immediate use for it within the context of your existing businesses, you may want to consider starting a new LLC under which the purchase is made. Ownership of any vehicle that could potentially result in liability claimsfrom a sleek jet to a sturdy fishing boat, from a third luxury car to a simple golf cartcan put all of your personal assets at risk if a tragedy occurs.

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Most states follow destination-based tax rules, which means that the sales tax rate is tied to the final delivery location of the product or service. A small number of states follow origin-based tax rules, in which case the sales tax rate is tied to the location of the business which sold the good or service. Contact the departments of revenue in the areas where you sell to check the rules that apply to your business.

Lease Vs Own: Tax Benefits Of Buying A Building For Your Business

As a small business advocate, we truly want what is best for our local businesses. Every decision a small business owner makes carries a ton of weight, especially when it comes to leasing vs owning space for their business. Making the decision to buy your first building may be scary but the benefits to owning far outweigh those of leasing and the SBA 504 Program makes purchasing real estate for your business easier. While some of the benefits to owning a building may be obvious, the tax benefits of buying a building for your business are often not factored into the equation but should be!

Recent recipient of an SBA 504 loan, CPA Louise Cochrane, states, I knew from early in my career as a CPA that owning the building for my business was a no brainer. It feels so good to know that I am building equity for my individual future but funding it through the business.

The benefits to owning over leasing are plentiful. By owning your own property, you are making a valuable long-term investment while lowering your taxable income at the same time. In addition to the tax savings, the space is yours to customize, YOU are benefitting from the buildings depreciation not your landlord, your occupancy costs are stable and you have peace of mind knowing youll never be displaced.

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Llc Advantages For Rental Property

One of the biggest LLC advantages for a rental property is shielding your assets.

If your rental property is owned by an LLC, anyone who wants to sue you can only go after what your LLC owns and cant touch your assets.

For example, lets say that you own a rental property and have an irresponsible tenant. Your tenant isnt paying attention one day and their kid nearly drowns in the pool, so they want to sue you for that.

Because the property is shielded by an LLC, that tenant cannot sue for anything you own. They can only sue for the LLCs assets, which will prevent you from losing everything you have to a frivolous lawsuit.

A less obvious benefit among various LLC advantages for rental property is the professional appearance. You will be taken more seriously as a landlord by investors, tenants, repair people, and others if you have an LLC as opposed to not having any formal business structure in place.

If you have a rental property and want to set up an LLC, email me at to begin.

Qualified Business Income Deduction

Pte Ltd Company Pros &  Cons

LLCs are eligible for the Qualified Business Income deduction, or QBI. This deduction was established in 2017 to help reduce the tax rate or obligation for small business owners. With the QBI deduction, up to 20% of the business income can be claimed as a deduction. It is set to sunset, or not be available, in 2025.

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