hey BiggerPockets community, I'm just getting started in real estate and following popular belief, I was under the assumption that for tax and liability benefits the first step was to get some corporate entity set up to conduct business. So my partnerand I have an LLC that is being taxed as an S corporation for the past two years. the first year I benefited because we didn't have much success in the business and I was able to use those initial expenses to not owe much in taxes. Now in the current year I haven't done much with the business at all. I decided to take a break and focus other priorities and on learning as much as I could so we can do better next year. Now, I'm wondering what to do for the tax season. I'm not really sure what to expect and what I should be taking advantage of considering that the business hasn't made any money nor incurred any serious expenses. I do still have some startup expenses from the previous year (credit card debt) and could maybe expense some of that? Does anybody have any advice on what to do or what I can expect to owe in taxes?
PS I'm not sure if location plays a role in any of this but I live in Maryland.
I don't know why I keep chiming in with tax-type stuff, but I am not a tax expert. I have an LLC and an S-corp. The way they are taxed at the federal level are very similar (they pass-through to your personal return with a k-1) but the forms for filing are different. An LLC uses a form 1065, partnership return. An S-corp uses a corporate tax form, 1120S. Hopefully you did that right. It's ok to have no material income or expenses to report, just make sure you file on time. Your k-1 can have no income or losses, just make sure you file! Ditto for your state. File your quarterly's if necessary. Thankfully my 'income level' and the fact real estate rentals don't charge sales tax earned me an active non-reporter status after the 1st year. Those quarterly b&o returns were a pain.
I have to go look back at what we filed last year, but I believe we used the 1065 form. It was prepared for us by some tax professionals so I'm going to assume that they gave us the appropriate paperwork for filing. Can you explain to me what those quarterly b&o reports are? I feel like there's some routine compliance things that I missed along the way that I should be doing. But when I initially setup up the entity,as an LLC, we didn't have to do all of that stuff specific to the S corporation. But I'm not sure if that changes now that we're being taxed as in S corporation. Thanks Steve
LLC's cost next to nothing to set up if you know how to file them yourself. I have a fair number of LLC's just to protect assets with the legal protection that comes from that entity and to protect myself from cyber stalkers... If you keep all of your homes under one LLC or one business name anyone can search for all of the properties owned under than entity at the county assessors office... If you set up an LLC and only house one to four properties just think of the fun you can have naming the LLC as you grow your business.
Intergalactic Investor LLC
Death-Star Investments LLC
Out of Capital Investment Group LLC
Enter the name of your business here LLC
Chuck Norris Texas Ranger Real Estate LLC
LLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLLL LLC (imagine that being read as the plaintif in eviction court!)
Oh the fun you would have! And in my opinion a more aggressive tax structure.
@Nicholas Miller hahaha thats awesome! I'll definitely have to keep that in mind when I come up with my next LLC. Your right though it really wasn't that hard to set up online, but this being my first one, I wasn't sure if I missed anything along the way. I guess at this point it doesn't matter all that much
@Richard Adjou, to the contrary, it DOES matter all that much. If your LLC DID elect to be taxed as an S-Corp then it should be filing Form 1120S and NOT Form 1065 which is the default tax structure for a multi-member LLC. And you should file a return to take advantage of any of the expenses you may have incurred even though you may not have much, if any, income to report. If you are using a tax pro, he/she should be able to tell you what forms need to be filed annually - be sure to ask.
Do some searches on multiple LLCs here, bad idea and misconceptions, use one entity, you can hold 500+ properties in one LLC. Again, use insurance for protection as well as good management practices and you won't have any issues!
You may be able to amend your Articles if your business needs or area of concentration changes, changing a tax election is more complicated and can be disallowed, if any of this is applicable.
Bill is right tax issues do matter, improper filings can cause issues, feed back into your accounting and could cause other issues that effect what you may perceive as your corporate shield. Use a pro.
I'll bet that most all of those who do their own incorporating made mistakes and failed to really map out the Operating Agreement properly for better operations and corporate protection, most all, with the exception to attorneys and perhaps CPA types. Just my bet, but no one will admit it I'm sure. Properly isn't easy. Easy is usually sloppy and sloppy is ineffective. :)
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