What If I DON'T Want to Be Paid by My LLC?

Question

So, newbie question here. Hypothetical situation: I have an LLC that owns 3 sfh properties, and the NOI for the year is $20,000. Do I HAVE to pay the taxes on that $20,000 if I choose to keep it in the LLC and, for example, reinvest it in the purchase of another property? I don't need the income at present. I'd rather "let the profits ride" and keep adding to the LLC with my own income for now. Do I have to pull the NOI out, pay the tax, and then put it back in each year? Guidance appreciated on this one!

Jon Holdman · Answer

You don't have to pull the money out of the LLC, but you do have to pay taxes on it. An LLC is a pass through entity for taxes, unless you've elected to be taxed differently. So all the income that's under the LLC shows up on your personal tax return and you must pay the tax.

Jon Holdman · Answer

Oh, that's much more complex. The LLC will need to file a partnership return and give each member a K-1. Each member has some percentage ownership in the LLC, usually based on their capital contributions. The LLC earnings would be split up according to each member's ownership.

You sure you really have $20K of NOI on three SFRs? That's $555 per property per month in NOI and that is truly outstanding. You're deducting depreciation and all your expenses (interest, taxes, insurance, maintenance, etc., etc)?

Marc Winter · Answer

@Wendy Patton hit it. Roth IRA is the way to go if you don't need to 'spend' the profit now (other than investing in more property), and profits from any sales are tax-free. Do some research about it --great way to go!

Wendy Patton · Answer

Next time if you want to leave the money in there and re-invest you need to do a 1031 Exchange - learn more about those - AND better yet set up a self directed IRA Roth - that you can do your deals in if you don't need the profit out yet. Then there is no exchange needed

Basit Siddiqi · Answer

@Alfred LittonThe LLC would be required to file a partnership return and distribute a K-1 to each member. The allocation of profits/losses must be allocated that is described in the operating agreement.If the operating agreement mentions each member gets 33% - then each member will get an equal 33% of the income/losses.

Partnership returns were due March 15 unless you filed an extension of time to file the return.
While Texas does not have a state income tax - they do have a Texas LLC tax return requirement.

Rental income/losses is not subject to FICA Tax so it does not matter if you are above the social security base.

Alfred Litton · Answer

@Jon Holdman The $20K was just hypothetical (or maybe wishful thinking!). Sorry for the confusion!

Alfred Litton · Answer

Okay. So I could simply pay the taxes on the $20K but leave it in the company then. Well, I guess that only partly sucks! Thanks!

Deborah Burian · Answer

And I'm going to be the downer and add, if you haven't already filed your business tax return the penalty is per partner/per month and adds up in a heck of a hurry.

John Horner · Answer

Your LLC should be taxed as an S-corp, your accountant can file for that request. Then you still have to pay income tax on the profit but you will save pay the self employment tax until you actually pay yourself from that LLC. Hope that helps!

Michael Lynch · Answer

This definitely becomes more complicated. If you are simply distributing the net taxable income from the LLC which is only operating rental properties, the income would not be subject to FICA tax. If the income is negative, you may be subject to the passive activity rules--seems quite possible given that you are over the FICA limit. I believe you would be best served by developing realistic projection numbers and then checking out your tax situation and possible ways to handle the LLC.

What If I DON'T Want to Be Paid by My LLC?

What If I DON'T Want to Be Paid by My LLC?

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