I'm signing the papers to sell my first flip in a few hours. Despite everything going wrong that could have gone wrong, we're actually going to make money on the deal. (Wooo!) The flip was done in a multi member llc that me and my partner each own 50% of. I kept very good records of every expense incurred throughout the project. At the end of the year I assume I'll need to generate some sort of forms for tax purposes that show how much money each of us made. What do I need to do? Do I actually need to give myself and my partner a 1099? Do I just make the distributions to each of us and then each of us reports it on our own returns as other income without an official form? Something else?
Have you met with your CPA? If you don't have a CPA, then I recommend you get one.
Your multi-member LLC will be required to report all income and expenses on a separate tax return. Assuming it is a partnership for tax purposes, then it would be a Partnership tax return. If an S Corp election was made, then it would be an S Corp tax return. The LLC also needs to obtain an EIN.
Your best next step is to speak with a CPA.
Get an accountant and for estimated fees. Many you generate yourself Excel with receipts. They audit and charge you by what they do. CPA issues 1099 also for a small fee.
The forms and tax law are constantly changing by hiring a CPA(not tax filer) to represent you he can go to court on your behalf.
@Ari Bachrach Congrats on your 1st flip.
A couple things needed for tax time:
As a multi-member LLC you will need to file Form 1065 (Partnership Return) by default.
You will need to retain some of your profits for taxes on the flip. Depending on your specific tax situation and bracket you will need to retain a portion of your profit and potentially submit an estimated payment in Q3 (September 15th).
Lastly, each contractor you paid over $600 will require that you send the IRS and the contractor a 1099 for the amounts that you paid them in 2018.
Hope you will be able to roll your profits into the next flip! Best of luck.
Here are specific answers to your questions:
At the end of the year I assume I'll need to generate some sort of forms for tax purposes that show how much money each of us made.
- Your LLC will either file Partnership ( or S-corp tax return if you have elected to be taxed as the S-corp). This return will show how much money you made in this deal and the profit will be flow to you via K-1s ( similar to W-2s) from the return you will file.
- You then will report the profit in your personal return.
What do I need to do? Do I actually need to give myself and my partner a 1099?
- As mentioned above, you dont have to. The entity return will generate k-1s that will show your portion of the profit.
Do I just make the distributions to each of us and then each of us reports it on our own returns as other income without an official form? Something else?
This is confusing to so many investors. Let me try to clarify.
- Taking out distribution and reporting income are two different things. Even if you dont take out the money that you made out of the LLC bank account as distribution, you still need to report your portion of the income in your personal return.
- And, generally, if you do take out the money out of the LLC, there is no tax implication.
- Let's say you made 30k in profit, and you and your partner decide to take out 5k each as distribution. You dont get taxed for 5k. You pay taxes on 30k.
- So, taking out money out of LLC has nothing to do with reporting the profit you made on the deal.
- this might be little confusing so it is best to talk to a qualified professional.
Also, if you guys plan to do this more and more, try electing to be taxed as S-corp to save almost 15% tax on your profit. Talk to your professional.
Congrats and Good Luck :)
Thank you *all* (seriously, there are more of you to thank in this thread than I can count). I guess my first incorrect assumption was that this llc would be treated as a disregarded entity just as a single member llc was.
I looked at the 1065 and it doesn't look too bad. I'll have my CPA prepare that and the K-1s at the end of the year. (On the plus side, by thinking of this ahead of time I won't be rushing in April)
@Ashish Acharya thanks for the tip on S corp taxation. When the dust settles from this and we sit down to talk about our next project, I'll add this to the list of things to discuss.
Couple additional points to add to my colleagues' excellent answers.
The 15% savings that @Ashish Acharya mentioned are not guaranteed. It's case by case, and discussing it with your CPA is a must.
Beware that an S-corp election makes quite a few things more complicated. If your CPA does endorse an S-corp, make sure to ask him about changing your business practices to comply with S-corp rules.
When doing distributions, remember to leave enough money in the company account for future expenses, including paying the CPA.
If you're planning to dissolve the company, I recommend prepaying the CPA before dissolving. (And give him my contact info, so he knows where to send a thank you card.)