taxes strating wholesaling on rental business card?

Question

hey  i need advice from a cpa. I plan to start marketing for my wholesaling business and will also need printer pc etc. How do i go about doing that I have one rental now which i conduct all my rental related costs under. Should I just put all the wholesaling marketing things under that as well. also my computer, printer all start up equipment or should i keep it seperate from the rental business (just 1 house) lol

Account Closed · Answer

CPAs are not the only tax professionals out there.  Enrolled Agents (EA) and tax attorneys also perform tax services.

Tax professionals are not created equal and every investor should do their due diligence when seeking a tax professional.

I won't say that an EA, CPA or tax attorney designation is better because there is much more to making that decision.  One thing I do believe is that a tax professional working with real estate investors should have some experience in investing.  I have run across many tax professionals that understand the theories taught in school and in tax practice, but rarely understand the practical principles of transactions that are generally learned from transacting.

A CPA, EA or tax attorney can represent a client before the IRS.  I worked in tax resolution and practiced before the IRS on many occassions as well.

Continuing education is required of CPAs, EAs and tax attorneys.  Continuing education requirements differ between each of these designations but there are ethical requirements as well.

A CPA holding themselves out as a tax professional has an ethical requirement to use due professional care.  This means that as a CPA if my area of practice is tax, then ethically I'm required to stay current with the laws and regulations related to this practice.  In general a CPA is not required or has limited requirements to take tax courses, but it is understood in the profession that you will need to take continuing education courses in the areas that you will be practicing.

Account Closed · Answer

Sounds like you have an existing business entity.  How is it structured?  Are you an LLC, S-corp or a sole proprietorship?

Using the same company in this situation may be okay tax wise, but you want to clearly separate these activities.  Your wholesale activities have different tax consequences than your rental properties.

In my opinion I would report your wholesale activity on the Schedule C (assuming you are a single member LLC or a sole prop) as a business activity.  I would report your rental on Schedule E as passive activity (Assuming once again that you are an LLC or a sole prop).

If these activities are not separated you risk having all your activities taxed as though you were a dealer.

Account Closed · Answer

Hi John,

It is best to separate your wholesaling / rehabbing activity from your rental activity.  The rental activity is passive and your wholesaling activity is active.

I would suggest setting up a separate entity actually for the wholesaling business.  Are you going to be doing this full time?  Typically I would suggest an S-corp for this kind of activity but I don't know enough to fully recommend that course.

Account Closed · Answer

I agree that separating the business activities is very important.  Having separate credit cards and bank accounts helps in separating these activities.

John, in your case it sounds like you have one rental property and you want to begin wholesaling.  It would be unwise to combine these activities in your accounting records, bank accounts or credit cards.

The safest way to maintain separation for these activities is to have to separate businesses.  While that maybe the safest choice it is not your only choice.  You can still maintain separation and hold these in one entity.

Steven Hamilton II · Answer

John,  You will want to use a different credit card and keep track of the spending for each different activity.  You do not want to use your rental accounts for your business.  As far as the IRS looks at it, it is an entirely different activity and has severely different tax consequences.  You should have:
Rental checking accounts
Rental credit cards/expense accounts

Business 1 checking accounts
Business 1 credit cards/expense accounts

and so on for each activity.

Financeexaminer,

I have read a number of your posts and I have to say you tend to give a lot of great advice.  Charles as well.  My CPA statement was not in an attempt to discredit Charles, I was only stating that a lot of the CPAs I have dealt with know accounting, and not tax accounting. And it was just a warning to everyone to make sure they do due diligence.
First, I prepare over 500 tax returns annually. I also teach tax theory courses. For tax purposes in an audit, the inclusion of non-related expenses could be detrimental in an audit.

Second, Wholesaling and rehabbing may be combined together; however, one must be careful how they approach the business.   GE is in everything; however, do you know how many tax returns they file annually?  GE is a conglomerate meaning they are corporation made up of a number of different companies that operate in diversified fields.  Each one is a separate corporation; however, they are in fact owned by GE.

Having separate entities; especially if they are sole proprietorships does not mean it will be more expensive.  Someone could purchase an umbrella policy for insurance purposes.  I am all for simplicity; however, the tax code is not always for it.

I am all for a consolidated financial statement; but the individual statements must be prepared before that.

Finance, I agree more information was needed.  That was why I supplied general basic, each activity is separate as Charles said.  The only thing I had to interject on was that using the same accounts could be detrimental for him.

I have an audit going where the auditor has completely thrown out the credit card interest, because the taxpayer had a small previous personal balance and one transaction for his rental property, yet 95% of the balance was business for his Sch C.  I am still working on arguing with the auditor and may have to take it to appeals.  My statements are only for that protection.

Bill Gulley · Answer

Hmmm, let's put this in perspective Steven. First of all, I could disagree with the scope of giving tax advice and representing the public before the IRS on returns that were prepared by an EA.

Secondly, I would disagree with having to do each business function as seperate entities. That's almost like say GE should not own any company that does not make light bulbs, yet the are in everything from jet engines to communications!

Having seperate entities wit different EINs means more cost in managing the entities, more accounting fees and legal fees, maybe that was the basis of the suggestion.

Let's introduce a new term here on BP, Consolidated Financial Statements. That's when financial statements and accounts of different affiliates, subsidiaries or departments of of one company  are carried over into one financial statement.

I'm no tax expert,  just an old regulatory auditor, accountant and finance guy.

Charles, who posted just ahead of you is a CPA and investor who, so far has given solid advice on PB.

I would think before anyone could accurately suggest how his business should be set up more information would be a prudent aspect of consultation.

Steven Hamilton II · Answer

Hi John,

I'm Steven, I'm a tax accountant and Enrolled Agent, that means I represent people in front of the IRS when they get audited.... In other words, I speak tax.(licenses by the Department of Treasury)

First, you rental property is COMPLETELY separate from any other activities you are ever involved in.  I'm going through and audit now where a realtor and landlord combined his expenses and is getting slaughtered because of it.

Second, You will want an entirely different EIN number for your wholesaling, and a separate one for your rehabbing business; they should never be combined.

Third, Your rental activity is all on form Schedule E. Which is treated as passive until you are full time in Real Estate.

Fourth,  Your wholesaling business would be filed on Schedule C as a sole proprietorship until you create and entity(LLC with more than one partner or choose to file as C-corporation or S-corp or S-Corp whichever you choose)

Fifth,  Your rehabbing business would be entirely separate as well.  Each activity must remain separate; however, they may do business together, but most important is a paper trail.  It may take a few extra minutes.  In the long run It will save you hours.

I am available to answer any questions you may have. My family is involved in both flipping and holding long-term.  I also want to clarify that I do not charge for tax advice and am always looking to help answer those questions.

Also please do me a favor anytime any of you talk to a CPA... As them when the last time they took a course in tax theory was.  A CPA is not required to take any CE in taxation after they have their license... So please do your due diligence as well.  I know some very good CPA who know tax very well. I also have quite a few clients who are CPA's and do not like to touch the topic.

Account Closed · Answer

Steven,

Many business owners make the mistake of using a personal credit card or personal bank account to pay business expenses.  This can be problematic.

The best situation is to have separate credit cards and bank accounts for all business entities. It takes time to educate business owners though of the importance of this.

Steven Hamilton II · Answer

Perfect response Charles.  That was the only statement I was trying to make as to the regards of a tax advice. Everyone should just do their due diligence.

My main concern was to the use of credit cards and taking an interest deduction with regards to determining what activity the interest was from.

Steven Hamilton II · Answer

I agree, the only thing is he does need to do is keep separate books from the rental activity. This is only because of the difference in how they are reported.

taxes strating wholesaling on rental business card?

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