I am starting out from scratch after my divorce and am interested in setting up the right corporate entity and accounting for all of my expenses appropriately. I expect to use the income from flips to grow my landlord portfolio but I realize I am about to generate taxes at a new and frightening pace and want to make sure I minimize the liability as much as legally possible by being set up correctly and using the right accounting software that will allow me to track multiple flips at the same time and account for rental income.
Well, whether you do it under your name or a LLC, generally all the deductions are the same... for liability, your rentals should be fine with insurance. Your flips you'll want separately in LLC
Tax efficiency is a little different. Flipping profits are considered active income as you are selling inventory, not investment, properties and you are classified as a dealer. So, think of it as ordinary, wage income where you have to pay self employment taxes as well. If you are seriously making decent money flipping, you would consider electing your LLC to be taxed as a S Corp which will help you save the SE taxes over the "reasonable" salary you'd have to pay yourself. I've seen arguments that make lots of sense to use a C Corp for flipping since the corporate tax rate is so low right now. In this case, if you leave the profits in the C Corp, there is no double taxation and it's potentially taxed at a lower rate than your ordinary income.
Obviously, as you progress through that para it becomes more complicated and costly. Talk with a professional to find out what reallly works for you
Oh, and dont forget that LLC are pass through entities so the funds hit your perosnal return. There is no such thing as leaving your profits in the company. Also, since tea talks are passive income they get probably the best tax treatment so don't try to make a wage out it unless you are doing a
@David M. gave you a solid answer, pretty impressive for a non-accountant.
The starting point is to make sure you will have substantial profits from flipping. I hear that this is your plan, and it sounds like you have some real estate experience, so maybe your expectations are realistic. But today is the new economy, and even experienced flippers are facing brand new challenges.
So, if after deducting all flipping-related expenses, including marketing, driving and everything else, you expect to make more than $50k in the remainder of 2020, then consider forming an LLC and elect it taxed as an S-corp and start a formal W2 payroll for yourself, with tax withholdings etc.
Details matter here, so it's best to consult a tax pro before implementing this plan. Your overall financial situation matters. For instance, if you have a high-paying W2 job, an S-corp may be useless or even detrimental.
If you're not hitting $50k after expenses in 2020, then either start it in your own name or under a simple LLC without any special tax elections. The LLC will then be disregarded for taxes and serve purely for legal protection if operated correctly. Then for 2021, you will want to revisit whether an S-corp or a C-corp structure would be beneficial.
Considering your overall long-term plans, a tax strategist on your team can make a real difference. A collection of random tips from online forums will not substitute for it. You did hire a divorce attorney, I presume, instead of self-educating online. Same here.
As to bookkeeping, you can try to DIY it with something like Stessa. It won't be perfect without professional guidance but it could be good enough, especially considering its $0 cost. Then you would need a good tax accountant to report it correctly, because real estate taxation is tricky.
The king of accounting is QuickBooks Online, with Xero being a distant second. Neither one should be DIY-ed, in my opinion. Real estate accounting is too complicated, especially with a mixture of flips and rentals, and you're likely to create a mess that would be expensive and frustrating to untangle at tax time. With Stessa, you can still mess it up but at least do it for free. :)
I have not addressed asset protection, and that is a job for lawyers. I'm not one.
Thanks for the compliment. Its most appreciated.
I noticed that my earlier post was cut-off for some reason. Perhaps because I was on my smart phone. Anyway, I was trying to say that rental income is passive. I kind of see it as being treated in own category via SchE. Its usually not advisable to take that "profit" and pay yourself a salary from it. Turning your passive income into active income just generates more taxes. Its a much more advanced strategy to do so, if one does it at all --- I personally do NOT agree with it.
Oh, It sounds like you are aware, but I don't want to assume. Along with setting up your company structure for liability and accounting, you need to operate your company correctly. You don't want to "pierce the corporate veil" and lose the liability limitation desired by the LLC. As best as I've figured out in conversations and counseling from my accountant(s) and attorney, its all about NOT co-mingling your funds. Make sure business expenses are paid for from your business bank account and your personal expenses are paid for out of your personal bank account. If an errant charge was made, my understanding is make a transfer between bank accounts for that exact amount and annotate. Another way to think about this co-mingling is what if this was a major corporation of a sort, if you had the company paying for your personal stuff that would something like embezzling or misuse of company funds. So, even though it may be just "you" as the company, it has to still operate as a separate legal entity to maintain its status.
I didn't talk about software in my earlier post. I personally handle my books in an Excel system that I created myself over the years. I also do my own tax returns. My "accounting" is driven by the numbers that I need for the tax forms. That being said, I also happen to be an engineer so putzing around with numbers and spreadsheets is really much more second nature to me. In your case, I'd suggest getting with an accountant and see what will mesh with them. Since it sounds like you really don't want to screw this up, let them do your bookkeeping, accounting, and tax filings for you. Maybe after a year or two, study what they were doing in the system and say take over the bookkeeping. I am assuming here you want to be more hands-on.
That was how I learned. When a "major event" occurred for my tax filings, I had my family accountant create that year's filing for me. I had already studied what i could about filling out the forms, then looking over how the professional is how i learned to do my own returns year after year. It doesn't make me a tax expert, just competent enough at filing what I do -- trust me, I've had a few letters when I started from the IRS catching little mistakes and telling me what my refund was really going to be. Again, how I do and learn is NOT for everybody.