What was I going to do? I didn\u2019t even have $10,000!?<\/p>\n
And why was I being charged this?<\/p>\n
After several panicked hours of research, I finally realized why I was being hit with this fee:<\/p>\n
Because I was stupid.<\/em><\/p>\n OK, being stupid isn\u2019t technically the\u00a0reason\u00a0why I was being charged $10,000.<\/p>\n Maybe \u201cover zealous\u201d is a better term — and it\u2019s a simple mistake anyone could make.<\/p>\n Including you.<\/p>\n Here\u2019s the deal:<\/p>\n When I first started investing in real estate, I heard a lot about LLCs.<\/p>\n I needed one, right? At least, that\u2019s what I thought.<\/p>\n I had just purchased a triplex with some good friends of mine, so of course, we wanted to be So I went to my Secretary of State\u2019s website and paid the $300 or so for an LLC. I printed out the documents, made a nice file folder for it, and put it in my file cabinet.<\/p>\n Now I was official,\u00a0right<\/em>?<\/p>\n (In reality, because I never transferred the property into the LLC, the LLC wasn\u2019t doing anything. I assumed I would get the property transferred in soon, but never had the time. Besides, the \u201cDue on Sale Clause\u201d made it a little sticky if I wanted to transfer the property into an LLC anyway. More on that here<\/a>.)<\/p>\n So the LLC was formed, and the LLC just sat there.<\/p>\n Maybe a mistake — but definitely not a $10,000 mistake. Sure, I wasted $300 on an LLC that I didn\u2019t use.<\/p>\n But the real problem didn\u2019t start until tax time.<\/p>\n A year later, I started working on my taxes.<\/p>\n Back then, I did all my own taxes using a popular online tax planning software, which was relatively cheap and easy to use.<\/p>\n Because my LLC had absolutely no activity (due to me never transferring the property into it), it didn\u2019t make a profit. So, total taxes owed on that LLC would be $0, of course.<\/p>\n So I just ignored it.<\/p>\n I mean, the IRS wouldn\u2019t care if I mentioned it on the taxes because it made no money, right?<\/em><\/p>\n WRONG.<\/p>\n Here\u2019s the problem: The IRS requires that every non-single member LLC (in other words, any LLC that you have that is not you alone or you with your spouse) must file a business tax return (Form 1065) every year — even if the LLC makes no money.<\/p>\n So, had this LLC been just my wife and I, things would have been fine.<\/p>\n But because it was a partnership with another couple, a business tax return was required, along with K-1s for each partner.<\/p>\n Whoopsies.<\/p>\n About a year after filing those taxes is when I received the letter in the mail. The IRS was fining me almost $10,000.<\/p>\n Why?<\/p>\n Because according to the official 1065 instructions from the IRS<\/a>, “The penalty is $195 for each month or part of a month (for a maximum of 12 months) the failure continues, multiplied by the total number of persons who were partners in the partnership during any part of the partnership’s tax year for which the return is due.”<\/p>\n So, with four partners on the LLC:<\/p>\n $195 x 12 x 4 = $9,360.<\/p>\n Ouch. And that was just for that one year. I could have been hit with several years, and I\u2019m sure I would have, had I not fought my way out.<\/p>\n This post could easily turn into a rant against the IRS, but honestly, it was my own stupidity that caused the problem.<\/p>\n Simply put: I didn\u2019t know what I was doing.<\/em><\/p>\n So what happened? Did I have to pay the fine?<\/p>\n Nope!<\/p>\n The first thing I did was called a CPA I had heard about on BiggerPockets named Amanda Han (from Keystone CPA<\/a>). I explained the issue to her, and she helped explain the problem and how to correct it. (Thanks, Amanda!)<\/p>\n A phone call to the IRS, with a promise not to do it again, and the penalty was waived. One hundred percent\u00a0of it.<\/p>\n Phew!<\/p>\n This is why I still use Amanda Han and Keystone CPA today for my own investing. Not only did she help me out there, but she\u2019s helped me out numerous times since, including preparing my taxes each year.<\/p>\n She even recently helped me\u00a0create a Solo 401(k) so I can use it to fund my real estate deals! Whoop whoop!<\/p>\n And this is also why I pushed so hard to have Amanda write The Book on Tax Strategies for the Savvy Real Estate Investor<\/a><\/em>,\u00a0which launched last week here on BiggerPockets and is on sale until Friday, February 26th.<\/p>\n So, what\u2019s the point?<\/p>\n I made a lot of mistakes, but I guess if I could summarize my entire experience it would be this:<\/p>\n You need to understand basic tax stuff. If not, you\u2019ll do stupid things.<\/em><\/p>\n Don\u2019t go opening up an LLC because you think it\u2019s the cool thing to do. Learn why an LLC is important and the right way to do it.<\/p>\n How?<\/p>\n (Also, trust me, it\u2019s not boring, as you would imagine a tax book would be. It\u2019s filled with stories, humor, education, and wisdom that will help make sure you pay less to the IRS so you have more capital to build your business!)<\/em><\/p>\n![\"70-percent-rule-example\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/70-percent-rule-example.jpg\" "\\"\\"")
<\/p>\nIt Started With An LLC…<\/h2>\n
cool<\/del> \u201cofficial.\u201d<\/p>\nThe Fateful Mistake<\/h2>\n
![\"assigning-contracts\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/01\/assigning-contracts.jpg\" "\\"\\"")
<\/p>\nHow I Avoided the Penalty<\/h2>\n
![\"rent-survey\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/01\/rent-survey.jpg\" "\\"\\"")
<\/p>\nHow YOU\u00a0Can Avoid Penalties from the IRS<\/h2>\n
![\"The](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2016\/02\/Tax-Book-Cover-3d-FINAL-SMALL.png\" "\\"\\"")
<\/a>Well, a good way to start would be to pick up a copy of The Book on Tax Strategies for the Savvy Real Estate Investor<\/a><\/em> today. Inside, you\u2019ll learn about LLCs, deductions, using retirement accounts, and more.<\/p>\n