Do i need to create a business to deduct business expenses?

17 Replies

Hi Guys,

This is a question that has always been on my mind but i can't quite seem to find the answer too.

Currently i own a few rental properties in Las Vegas. I live in California and would like to go to Las Vegas to take a look at my properties. Can I deduct this trip as a business expense if i do not technically own a business? I do not have a business license (no sole propriertorship, No LLC etc) for my rentals.

I typically deduct property insurance, property management fees etc off my individual personal income. Are there any benefits to starting a business and paying for the yearly fees to run a business?

Any help or link to the answer would be greatly appreciated!

Thank you so much guys!

Have a good one.

Dan

@Dan Trinh

I think what you think is- having entities ( LLCs or DBA as sole pro) is a business and you need those to deduct expenses.

You dont need these entites to deduct all the expenses related to your rentals. Yes, you deduct all the expenses related to rentals on your personal return under Schedule E ( not schedule C as mentioned by @Brian M Sweeney   Schedule C is for Trade or business, not rentals)

Yes, you can register DBA or create an LLC to run a rental, but you would still report that under Schedule E. You rarely get the tax advantage from LLCs for rentals. LLCs are mostly for liability protection.

@Dan Trinh I hold my rentals in an LLC and I do deduct my travel to my out of state properties. I wrote an article on passive losses because this is a topic that folks really don’t understand or take advantage of. I pass my losses from my LLC through on my Schedule E, however it is my understanding thst you can have a schedule E for your rentals even if you dont have an LLC. Hopefully the article below provides some value for you! https://www.redhairholdings.com/blog/why-every-w2-employee-needs-rental-real-estate-to-reduce-taxes

@Dan Trinh

Technically, you DO own a business, from the tax law perspective. There is no requirement to formally create a business entity. The only requirement is to conduct business activities, which you do.

As mentioned by @Ashish Acharya , there're no tax benefits from creating an LLC. You can deduct all business expenses, including your travel to NV, with or without an LLC.

Creating an LLC may provide you with legal protection, which is completely separate from taxes and should be discussed with an attorney.

@Dan Trinh

You are not required to create an entity to deduct expense on your tax return.
If you do not create an entity - the profit of the sole proprietor will be reported on your individual tax return.

For an expense to be deductible it has to be ordinary and necessary to your business. 
It is ordinary and necessary as a real estate investor to travel to the property so he/she can see the condition of the property, communicate with the tenant etc.

Therefore, travel to and from the property can be deductible. There are some quirky rules if you decide to mix business and leisure into a business trip. This is where communication with an accountant can come in handy.

@Dan Trinh No you dont. What I did was before you buy anything open a checking account just for that house and get a debit/credit card. Then get quickbooks and hook it up to that bank account. Quickbooks cost me 21$ a month well worth the time saved and a tax write off. So you got your bank account and quickbooks linked. When you go anywhere and swipe your card quickbooks will pick it up and you just go in and select what type of expense it was. For your mortgage you will have to journal out the principal, interest, insuarance, and taxes on quickbooks. At the end of the year print out the profit and loss statement which is free and send it to your cpa. I actually just am getting approved for lending again and I used my quickbooks report as part of the preapproval package they look very professional. Hope that helps!!!

Great information already here! Having an LLC would provide legal protection. However, you could also get an umbrella insurance policy instead of opening an LLC and moving the financing (if you have any) to the LLC.

Good discussion.

Some years back, I set up a C Corp management company to manage my rentals. Reason is expenses you claim on the Schedule E should be real estate related. The C Corp collects a management fee monthly from my rentals, and it's charged off on the schedule E.

I also have a active business thru an LLC with employees. The major problem I had to contend with back then was my Medical Insurance and co-pays which I cannot list on my schedule E. However if I do it thru the LLC that I have employees, I'm told if I furnish insurance for myself, I must also do so for employees.

At one point, medical insurance was one of my major expenses.

So I set up the C Corp management company where it collects fees, it has a medical plan that pays the medical insurance for it's employee's i.e. me, and also the co-pays. Got legal advice it was OK. I done that for several years till I went to work after retirement for a non profit that provides full coverage as a benefit. By then, I sold the business that was in the LLC.

At one point, prior to Obamacare, the monthly medical insurance for a family came to $1,600/month, and co-pay, etc. on top.

@Dan Trinh I know a lot of banks don’t like to lend to llcs because you can claim bankruptcy on an llc and I don’t thInk you’re personally held liable. So if you move a leveraged asset into an llc it can trigger the due on sale clause. Not saying they would call it due but it could happen.
Originally posted by @Matt Tallent :
@Dan Trinh I know a lot of banks don’t like to lend to llcs because you can claim bankruptcy on an llc and I don’t thInk you’re personally held liable. So if you move a leveraged asset into an llc it can trigger the due on sale clause. Not saying they would call it due but it could happen.

I got an SBA loan for my LLC, and they had me sign a personal guaranty. So the LLC claiming bankruptcy will not help me one bit.

Originally posted by @Matt Tallent :
@Frank Chin hey Frank how do you get an sba loan I don’t know about those?

 I bought a business, and the business owner had a working capital loan through his bank, Chase, guaranteed by the SBA. I used a business broker and it was suggested to me that I also go through Chase to do my banking, as they are familiar with the business and try getting a SBA loan. Turn out it was good advice and Chase gave my business a $200,000 working capital loan guaranteed by the SBA based on the assets of the business. The seller provided me seller financing to purchase his business, I was paying off the seller loan for a while, but the interest rate was so much higher than the SBA, that I was able to use my line to pay off the seller. 

Some years later, I had a funny incident. A VP of business development for Chase came by our business unannounced, wanted to speak to the owner or manager. We thought it was strange, said nothing and let him do his spiel. When he was done, he said "I'll take any questions now but don't you want Chase to be your bank"? So we said, don't you know your customers, we are already customers of Chase. When he got over his shock, asked, "in that case, do you have any complaints and suggestions"? We let him have it because in that part of the county, Chase was the only bank closed on Saturdays, while we're open. We have to go to a bank down the street to change large bills into smaller denominations on Saturdays. A business bank, Capital One, opened a branch down the street, opened 7 days a week. If not for the SBA loan, we would've moved the account.

Chase opened on Saturdays a month later, guess they heard the complaint. I was complaining to the branch manager about something some time later, and she complained they're short handed because they're now forced to open Saturdays. I asked how did that happen? She said someone was complaining about their hours. I sarcastically said someone must have too much time on their hands.

Originally posted by @Matt Tallent :
@Dan Trinh No you dont. What I did was before you buy anything open a checking account just for that house and get a debit/credit card. Then get quickbooks and hook it up to that bank account. Quickbooks cost me 21$ a month well worth the time saved and a tax write off. So you got your bank account and quickbooks linked. When you go anywhere and swipe your card quickbooks will pick it up and you just go in and select what type of expense it was. For your mortgage you will have to journal out the principal, interest, insuarance, and taxes on quickbooks. At the end of the year print out the profit and loss statement which is free and send it to your cpa. I actually just am getting approved for lending again and I used my quickbooks report as part of the preapproval package they look very professional. Hope that helps!!!

 Thanks Matt! I've been thinking about getting some short of rental software. Definitely would save me a bit of time rather than going through the statements by hand!