Income Tax on New York State LLC?

10 Replies

I'm looking at purchasing some sfr or small multi families in the western New York area. Does anyone know the income tax rate an LLC would pay in New York State? Besides being able to write off expenses, and depreciation, are there any other advantages in being set up as an LLC ? Thanks in advance I really need to learn more about business taxes and the advantages that can be realized when it is understood.

@Matt Willis LLCs are pass-through entities, meaning the income passes through to the partners and is reported on their individual returns. Therefore, the LLC does pay any income tax.

There is, however, an annual LLC fee charged by the state of NY. If you're the only member of the LLC, it's $25. If there's more than one member, the fee is determined by prior year receipts.

Also, just to clarify one thing - you can write off expenses and claim depreciation whether you have an LLC or not. You don't need to be incorporated to get those deductions; you're entitled to them regardless.

There are no tax advantages or disadvantages to LLCs. They are simply vehicles to limit your liability.

@Nicholas Aiola Thanks Nicholas. Another question, I am a Canadian citizen, living in Canada. My partner(s) will most likely be the same. Do you have an understanding of the tax treaty between the US and Canada? My understanding is that as long as I am not a US citizen, and do not spend 184 days of a 12 month period in the US, than I am except from paying and filing US taxes. The income earned through the LLC would than be taxed as part of my income in Canada? Is that correct?

@Matt Willis That's a very circumstantial question, the answer to which goes beyond the scope of this forum.

One thing I can tell you for sure is that Canada does not recognize LLCs; they are treated as corporations (non pass-through entities).

I would definitely recommend adding a qualified tax pro (both in Canada and the US) to your team.

Good luck!

Originally posted by @Matt Willis :
@Nicholas Aiola Thanks Nicholas. Another question, I am a Canadian citizen, living in Canada. My partner(s) will most likely be the same. Do you have an understanding of the tax treaty between the US and Canada? My understanding is that as long as I am not a US citizen, and do not spend 184 days of a 12 month period in the US, than I am except from paying and filing US taxes. The income earned through the LLC would than be taxed as part of my income in Canada? Is that correct?

Matt:

You will not be exempt from U.S.A. taxes.

The CRA does not recognized LLCs, as a disregarded (pass-through) entity, but treats them as a body corporate regardless of how you elect for the LLC to be taxed in the U.S.A.

If you elect for the LLC to be a disregarded entity in the U.S.A., the IRS will tax the income in your hands. However, because the CRA sees an LLC as a corporation, your will not be able to use your U.S.A. paid income tax as a credit on your Canadian taxes.

If your plan is to elect for the LLC to be taxed as a corporation, then you will have no disconnect between the tax treatment in both countries ... and if this LLC is a 100% child subsidiary of a Canadian corporation, you will be able to repatriate retained earnings to the parent corporation with little to no taxation from the CRA.

You, and your partner, should spend a little money and sit down with a {Canadian} accountant, and possibly an attorney, experienced in cross-boarder business and determine the best ownership stricture to meet your current and anticipated needs ... before you start shopping.

If you ask any tax CPA what reference material contains the highest level of authority, 95% will most likely tell you the Internal Revenue Code, followed closely by Treasury Regulations.  The correct answer is the collection of US tax treaties with participating countries, followed by the IRC and Treasury Regs, as US tax treaties will modify and supersede areas of the IRC.

@Matt Willis If you were running a Canadian sole proprietorship, or a US single-member LLC taxed as a disregarded entity, and had no "permanent establishment" in the US as defined by the US-Canada tax treaty, you would most likely be able to avoid US taxation and be taxed only in Canada. However, that's not what's going on here. Based on what you laid out, you have partners forming a multi-member US LLC for the purpose of investing in rental real estate located in the US. You will not be able to escape jurisdiction of the IRS and will most likely be subject to IRC Sec 1446 partnership withholding on foreign partners if the partnership is throwing off Effectively Connected Income (ECI).

@Nicholas Aiola and @Roy N. are correct in that Canada considers US LLCs to be C Corporations for Canadian income tax purposes, regardless of how they're taxed at the US federal level.

This disparity in treatment between countries often results in "lost" tax credits as the US will tax a partner ON his distributive share of partnership income but NOT distributions, while Canada will tax that same partner NOT on his distributive share of partnership income, but ON distributions.

Partnership tax law, generally speaking, is not friendly to non-resident aliens. There are situations where it makes sense to hold rental real estate inside of a C Corporation and this may very well be one. Electing C Corp tax status for the US LLC will move tax treatment by the US and Canada into parity, and shield all Canadian members from ECI and Sec. 1446 withholding. Favorable dividend withholding rates may be achievable with the US-Canada income tax treaty for members taking distributions.

Strongly suggest OP add a Canadian CPA familiar with investment in the US, and a US CPA familiar with international taxation and investment relating to the US, and have everyone working together to achieve the optimum tax strategy.

@Matt Willis @Nicholas Aiola and @Roy N. both brought up great points. Talk to a cross- border accountant and lawyer BEFORE buying any properties or setting up any companies. A couple hundred bucks upfront can save you thousands down the road.

I can't give legal or tax advice, just speaking from experience and from spending many hours with cross-border accountants and lawyers. 95% of the time for us Canadians, buying properties in a LLC is the wrong way to go. You will be probably be double taxed, paying tax to the IRS and then to CRA when you bring your money back into Canada. When you buy in your own name or a partnership, then you receive a CRA tax credit for the tax that you pay to the IRS.

There are a many different routes you can take, but Limited Partnerships have treated me well.

Good luck and PM me if you need any referrals.