Personal or Corp loans to Real Estate LLC

[Todd M.]

Hello,
Seeking opinions/insight into "loaning" from one of my corporations to another from a tax perspective:

Quick Background:
I have a C-corp for software development business. I have an LLC for my real estate business which consists of one duplex and one four-plex.

Once or twice a year, I loan money from the C-corp to LLC and I'm wondering if this is a good idea from tax avoidance perspective? In other words, I'm trying to lower my taxable income in the C-corp while injecting the LLC with cash for improvement projects.

Let me be clear on something though- I pay taxes, but I am always trying to legally lower my tax payments. I'm sure there are plenty of other people on this board who understand.

Thoughts? Alternative ideas to consider?

Thanks in advance,
Todd

[Vikram C.]

Todd, there are many ways to reduce your tax rate legally. Your ability to do this will depend to some extent on how much money you are making. The more money you have, the more advanced your tax strategies can get because some strategies require some fixed costs in terms of creating entities, paying lawyers, etc.

Here are a couple of things you can think about. (You would need to consult a tax attorney to get the details worked out. A regular CPA is not good enough to do advanced tax strategies unless you are dealing with a partner in a large accounting firm.)

Option 1. Convert ordinary income into capital gains. The company that has the extra cash to distribute can buy your shares in your other company. The profit on the sale of the shares will be capital gains as opposed to ordinary income if done right. Your laawyer will have to help you through valuation, related party transactions, etc.

Option 2. You are very lucky in that you are in the software business. This is because it is very easy and natural to "offshore" your taxes along with your costs. Set up an offshore software development entity in a country that has low wages and zero income taxes on software exports. Then, your onshore software company can outsource work to your offshore company. The latter company has tax-free income that should not be taxed to you if you structure the thing properly to avoid controlled foreign corporation, transfer pricing and other such rules. Your U.S. company gets a tax deduction when it pays the offshore company for services rendered.

Anyway, the thing is, you should make sure the deals you do are legitimate transactions and the valuations and pricing are based on reasonable rates. Your tax attorney and the better CPAs will be able to guide you through all this. If there is enough money at stake, it will make sense to do these things. Your local neighborhood CPA will not be good enough to handle these things, especially the international stuff.

Good luck and let us know if you find a good solution that works for you. Others might be interested in it as well.