Posted by JHyre in Ohio on April 27, 1999 at 19:53:26:
No strong preference either way. I’ve never checked to see if S-corps are protection against charging orders. I suspect they are not…so all else being equal, I’d go with LLC for purely passive activity. See how your state treats LLC’s as opposed to S-corps…on average, LLC’s get slightly better treatment (e.g.- no franchise taxes). Also compare the admin costs for each- again, they shouldn’t be all that different.
John Hyre
John Hyre
LLCs and taxes - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 26, 1999 at 10:46:37:
I have read Bronchick’s How To Article on taking title, and I have one question. (Basically, I am trying to figure out what type of entity to make the beneficiary of my trusts.) The vasst majority of my holdings are buy and hold real estate (and since I still have my J.O.B.) a LLC would be perfect.
However, I am working on a deal in which part of the monthly payment would be a lease. I know that I personally could not deduct that from my taxes but that a corp could.
My question is: Can LLCs deduct lease payments? What about “single member” LLCs which Bronchick mentions?
(In writing this out, I am starting to convince myself that S Corp may be the way to go.)
Thanks,
Mark
Re: LLCs and taxes - Posted by JHyre in Ohio
Posted by JHyre in Ohio on April 26, 1999 at 12:15:16:
Hi Mark,
Couple things: Fisrt, I do not understand why you cannot personally deduct a lease if it’s incurred in the course of a business or profit-seeking activity. Basically, whether a lease payment is deductible is driven by the underlying business reasons, as opposed to the type of entity taking the deduction. In short, if Business A can take a lease deduction, it may do so regardless of whether the business form is corporate or sole proprietorship. Ditto that with LLCs, single-member or otherwise.
Both S-corps and LLC’s are good for holding passive income producing properties. If partners are or will be a factor, I prefer LLC’s due to their flexibility (e.g.- can allocate different percentage of loss, credit, ordinary income or gain to each partner) while S-corps require pro-rata pass-through of all income and expense items. If you (or you & spouse) or sole owners, I prefer S-corp- payroll taxes are slightly less of an issue with S-corp. Choice between S-corp and LLC for holding income producing property is also driven by your state’s treatment of each.
John Hyre
Re: LLCs and taxes - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 26, 1999 at 17:42:03:
I file on Schedule E. Where would I deduct lease payments? They are not mortgage interest. Additional expense? I would hate to have to do that. Thanks,
Mark
Re: LLCs and taxes - Posted by Jaime
Posted by Jaime on April 26, 1999 at 13:29:22:
John: Can you explain why payroll taxes are less of an issue with an S-Corp?
Thanks
Jaime
Re: LLCs and taxes - Posted by JHyre in Ohio
Posted by JHyre in Ohio on April 26, 1999 at 14:32:25:
Jaime,
Partnership/LLC income- whether or not distributed- is subject to payroll taxes unless business in not active- this is a question of fact and subject to argument. Temporary regulations provide that if the taxpayer spends< 500 hours/year in the business, no employment taxes are due. Temp regs are decent but imperfect authority. S-corp income is never subject to payroll taxes. The worst that can happen is that the IRS attempts to imupute a salary (upon which payroll taxes are levied) to the owner. This is a remote risk, especially with a passive business. In addition, the IRS usually looks for salary that is too high as opposed to too low. So the difference between S-corp and LLC for payroll tax purposes is fairly small, but all other things being equal, I’ll decide on small issues.
Another thing to consider: LLC’s have greater ability than S-corps to use debt as basis. This is relevent if you forsee losses in the future. Of course, if you forsee non-paper losses, the deal probably isn’t so good…
John Hyre
Re: LLCs and taxes - Posted by Jaime
Posted by Jaime on April 26, 1999 at 16:50:20:
John: Thanks for the explantion. My mgt co is an S Corp and we have some interesting discussions with our accountant about salaries and payroll taxes.
I wasn’t aware, though, aboutn the partnership/LLC thing.
Tell me, in my situation where there is an existing mgt co that will be doing the day to day for the properties we purchase, is an LLC a safe bet for us since we are so heavily involved in RE biz. Or should we be looking at S Corps to hold to be on the safe side?
Jaime
Re: LLCs and taxes - Posted by JHyre in Ohio
Posted by JHyre in Ohio on April 26, 1999 at 19:14:32:
Jaime,
Choosing an entity type involves LOTS of details (income, other entities, exact type of business, etc.). I assume that the focus of your question is on payroll taxes. Given that the MANAGEMENT of real estate (as opposed to more holding of property) is an active business, I would opt for an S-corp because income from an “active” partnership is essentially wage income for general partners/managers. You should pay yourself a salary, albeit one on the low side. If you can find examples of low hourly rates or low commissions, go on the low side of the examples- if you get audited, the IRS will knock you down no matter what, so no point in trying to please them ahead of time by being conservative.
Bear in mind that if you have $72k+ wage income from other sources, payroll taxes are a moot issue for you because you are paying the maximum for 1999 (excepting the roughly 1% medicare tax which has no cap).
John Hyre
Re: LLCs and taxes - Posted by Jaime
Posted by Jaime on April 27, 1999 at 08:08:42:
John: Thanks for your detailed replies.
We are already an S for the mgt co and that is working well for the reasons you mention. I just wondered about the entity for holding investment properties and if your advice would change for someone in my position. that is, someone who has an S corp for a mgt firm who is also going to invest and hold properties. I’m assuming an LLC is still the way to go because it would still be considered passive?