It sounds like you are planning on having two separate entities? That doesn't seem necessary. Also you can elect S-corp status at a later date if/when it does become advantageous. Starting an S corp now will just increase your administrative burden and tax prep fees.
Good advice from @Nathan Oberle
Why incur unnecessary admin expenses/headaches prior to getting into your first deal? When starting out, less is often more.
Actually, I think it is very wise to have to entities for what @Rhett Z Begley is trying to do.
You wouldn't want to expose the rental assets to the risk of Flips ( contractor falling off the roof). Usually, the activities that have different risk profile should be separated. '
On top of that, I think it is completely ok to get S-corp now. Individual taxpayers who are not engaged in a trade or business but are investigating the potential creation of a new business should consider forming an S corporation to facilitate and conduct all the activities related to the investigation. Expenses incurred in the course of a general search or a preliminary investigation of a new business are personal in nature and are not deductible by individual taxpayers (Rev. Ruls. 77-254, 79-346, and 71-191). Alternatively, an S corporation would treat those expenses as start-up expenditures under IRC Sec. 195. Once the S corporation begins the active conduct of the trade or business, it can deduct/amortize the costs as provided by IRC Sec. 195.
For LLC, you can wait until you actually purchase the property because most like you will not be able to put the rental in the LLC unless you are buying it with all cash.
@Ashish Acharya That's interesting, I thought Sec 195 applied to all taxpayers, including disregarded entities. I thought Regs. Sec. 1.263(a)-5(a)(6) required disregarded entities to capitalize start up costs if they exceed de minimis ($5k). I thought those revenue rulings you mentioned were superseded by more recent Treasury regulations (TD 9107).
I know what you mean.What I meant was some practitioners just capitalized the expense incurred by individuals or disregarded entities as start-up expense when the expenses are really not startup expenses. But yes, start-up expenses applies to all. But if you have a separate entity, some of the cost that would be not deductible for individuals can be deducted if it was not disregarded entity.
TD9107 is regarding capital expenditures for acquiring or creating intangibles. Section 195 expenses and expenses required to be capitalized by section 263 are entirely different. An amount cannot constitute a start-up expenditure within the meaning of section 195 if the amount is a capital expenditure under section 263(a).
So the capitalizing the cost under sec 263 is different than what I was referring to the startup cost. If that makes sense.
Originally posted by @Rhett Z Begley :
We're getting an LLC and S-Corp set up now so we can hit the ground running when we get there.
You're setting up two LLCs, one for rentals and one for flipping. The one you are going to use for flipping you will elect to have taxed as an S-Corp.
Electing S-Corp taxation for the flipping business would be done to improve your tax situation. Electing S-Corp taxation is not a move to make to change liability exposure. The LLC covers that part.
The question is when does it make the most sense to elect S-Corp taxation for the flipping LLC? (The smart guys above are covering that topic nicely! )
Best of Luck with Your Real Estate Investing!
Originally posted by @Ashish Acharya :
@Nathan Oberle ,
But if you have a separate entity, some of the cost that would be not deductible for individuals can be deducted if it was not disregarded entity.
OK, I think I'm following you now. I'm curious what kinds of start-ups costs you've seen with this type of business that can't deducted if you're a disregarded entity?
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