I have a tax related question. Things moved quickly these past few months, which has resulted in the creation of an LLC (S Corp status), Real estate sales commissions, & rental income.
Current status: Real estate commission income and real estate rental income are coming into the same LLC. Is that an issue?
I'm record keeping, but any advice would be great. What systems do you all have in place for solid record keeping come tax time.
You may need to separately account for both classes of income because for example, one may be considered active trade or business income, and one may be considered passive income. If so, then each class of income will potentially be subject to different provisions of the law and you will need to know the treatment of each income class to properly categorize and report it at the entity level, and its subsequent treatment on your ownership level return (i.e., your individual return).
No, it isn't an issue but when taxes are filed they are treated differently. Any CPA or solid tax accountant shouldn't have an issue preparing your taxes. This is quite common. Any real estate agent who owns property will have both rental income as well as commissions through a 1099 or W-2 so you should be good to go. Don't sweat it...just keep good logical records and track expenses appropriately because some income will be treated as SE (self employed) and the other as rental. Don't sweat it.
Thanks @Christopher Smith and @Brett Sorenson .
For record keeping purposes I've been doing it manually, but would you suggest quickbooks or quicken to go to the next level?
And as an S-Corp, are quarterly taxes a mandatory payment?
It is up to you. Quickbooks is cheap and can be directly connected to bank accounts and will help you track everything. In the end you will get out of it whatever you put into it.
Just track rental income vs rental expenses and do the same for commission based income.
Income flows to individual return so quarterly estimates being mandatory generally depends on your overall agi.
Gotcha - this was super helpful. thank you.
Being a Broker or a Real Estate Sales Person would be in a separate company file from your Rental Income. ( If you are going to do your own Taxes. If you have a CPA who will take care of your tax filings then read what I wrote below)
Rentals are filed under Schedule E, (landlords) (Same scenario as the above paragraph)
Real Estate Sales Person or Brokers are filed under a different Schedule. (Same as the above paragraph)
Now, with that said and done, QuickBooks is mainly for you to keep track of your profit and loss. You turn a copy of QuickBooks over to your CPA monthly or at the end of the year, and they will take your data and do their thing pertaining to what the Government wants. In other words, they will break your data down to fit Government regulations on their software.
Therefore, in this case, you could enter your Real Estate Sales Commission with your Rentals. However you will list it as a Real Estate Commission Income Account in your Chart of Accounts. And, you will list the properties you made your commission off of as a class. This will help tell not only you but your CPA what income came from the right source, Real Estate Commission or Rents.
Once again, the only time you need to worry about Schedules is if you plan to do your taxes yourself without a CPA. Then it becomes important.
But if you turn your data over to an Accountant or CPA and you break down your data by class or sub accounts, you can do quite well with QuickBooks.
Example in your Chart of Accounts
Real Estate Commission ...............................
Rental Income Properties
1234 First Street
5678 Second Street
91101 Third Street
Real Estate Commission
2956 Mayfield Lane
1929 Wyoming Street
8252 Wisconsin Street
Just think of QuickBooks as a paper ledger sheet.
You have titles or headers and then you list what pertains to that header or title underneath it and you indent.
Same thing in QuickBooks
It's all about TITLE, COLUMNS, INDENTING.
Indenting words in QuickBooks are called sub-accounts, jobs, and sub-classes
That's all there is to it.
@Account Closed thank you for all the great information. I definitely plan to lean on a CPA for now, but good to know how to make their life easier!
@Dakota Mivshek Don't forget about the payroll requirements for an S-corp. Make sure to pay yourself a "reasonable salary." A CPA can help you determine what that may be.
The other thing you'll need to be careful of - if 20% or more of your income in the S-Corp is passive (ie, rental) income, then the IRS can choose to invalidate your S-election and you will revert to a C-Corp (usually) not an LLC, so you'll have a mess to untangle.
Best practice is to hold your rentals in an LLC and your commissions through the S-Corp. As @Daniel Hyman indicates, you MUST also pay yourself a reasonable salary, file federal and state payroll tax forms quarterly, sign up for unemployment insurance and, in some states, pay mandatory worker's comp insurance. Make sure you know and understand all the rules because the IRS doesn't allow ignorance of the rules as an adequate excuse when they start assessing penalties.
@Linda Weygant whoa... thank you for the input. I'll be dangerously close to that 20%, so it looks at this point I best create an add'l LLC for the rental property to avoid any confusion...