Limited Liability Companies have many useful properties for investors. Most of my clients approach me about forming Traditional LLCs or Series LLCs for asset protection, but often are completely unaware of the potential tax benefits their entity may provide. Today, let’s talk a bit about the tactics you can use to minimizing your tax liabilities. Specifically, we will be taking a closer look at the possible tax advantages of using an LLC structure.
Tax Status Flexibility
One of the appealing aspects of the LLC is that you get to choose the manner in which it is taxed. But owners of Series LLCs don’t have to miss out on the fun. In fact, if you own a Series LLC, you can tax each Series differently if you desire. What exactly does that mean? Let’s take a closer look at how LLCs are taxed.
You may make your pick from any of the following three tax status elections when forming an LLC (or Series within a Series LLC):
- Disregarded Entity. A pass-through entity, also commonly referred to as a flow-through entity allows taxes to be passed onto your personal tax return. Learn much more about the benefits of pass-through tax treatment for real estate investors from our previous article on the subject. Single-member LLCs and married couple LLCs are typically treated this way automatically in most jurisdictions.
- Partnership. Partnership taxation is the default status of multi-member LLCs, but they may choose to change to S-Corporation or Disregarded Entity status. In entities taxed as partnerships, each member receives a Schedule K-1 and reports their share of the profits and losses. This information, along with a completed Form 1065 for partnership taxation, will be attached to members’ tax returns. In this way, the company isn’t billed, but the members each pay their fair share of the taxes.
- S-Corporation. This status makes sense for anyone who would benefit from the lower tax rate on the entity’s first $75,000 in income. It’s treated more like a corporation, albeit with different provisions than the more complex C-Corporation. It also comes with a super sexy form called Form 8332. Filling it out might not be a blast, but the savings sure can be for certain investors.
Note that there is an exception to the flexibility norm. Single-member LLCs are more limited and may be forced to file as a sole proprietorship, then report income or losses on their personal returns. It is also important to be aware that the above are simply tax classifications rather than different types of entities. It can be easy to get the impression that an S-Corporation is an entity when indeed it is a tax status, as a C-Corporation is an entity.
Which tax option will be best for you? As with most answers in the financial realm, you’ll find that it depends on your individual circumstances, status, and ambitions in the real estate business. Only a qualified attorney and CPA should be trusted to give tax advice.
Deductions and Credits Galore For Those Willing to Look
If you’re serious about lowering your tax bill you know the power of deductions. So we recommend that you deduct, deduct, deduct everything that you can. No business expense is too small or inexpensive. See if you qualify for fuel deductions, and take a good written record of everything you really need for work and its cost. It may seem silly if you’re looking at many small receipts or expenses, but the old adage about how they tend to add up is true.
The fact that you may not be aware of deduction and credit opportunities is yet another good reason to have a solid CPA and attorney on your real estate dream team. These pros will often point out savings options you didn’t even know you were missing out on. So go forth and deduct shamelessly. It’s a win-win for both client and CPA.
Personal Assets May Be Leased to the LLC
If a valuable assets drag you into a higher tax bracket, an LLC offers a handysolution. You may be able to minimize this situation by leasing the asset to yourself (specifically, your LLC) with a formal leasing agreement. Such arrangements lower taxable income and often allow for deductions.
For example, a home office is an item you lean on come Tax Season when you’re deduction hunting. Learn more details about the home office deduction and who can qualify from our previous educational resource on the subject. Home offices may not only be deducted from your taxes, but also leased back to your LLC. When that leasing agreement goes through, you can write it off and claim it as a business expense. The fact that this type of business expense
Optimize Your LLC Tax Strategy With The Pros at Royal Legal Solutions
Between the asset protection and tax benefits, LLCs may begin to seem like a no-brainer. But to get the right entity that will do the best possible job for you, you may need Our crack team of attorneys and the CPAs we work with can assist you through any tax concerns you may have. As investors ourselves, we may have some more tips that you haven’t yet learned to exploit. Which ones will apply to you will depend on your personal circumstances.
If you are wondering how Royal Legal Solutions can help you save on your taxes, reach out to us today. Our consultants are happy to explain your options to you, answer your questions, and when you’re ready, set up your personalized consultation. We look forward to helping you keep more of your income where it belongs: in your bank account.