Setting up a Limited Liability Company (LLC) delivers several tax benefits for investors. One of the most appealing reasons to start a real estate LLC is you get to choose how the LLC gets taxed.
Flexibility When Choosing a Tax Status
You have three options when it comes to selecting a tax status for your LLC.
Also referred to as a pass-through business entity, an LLC formed as a sole proprietorship enjoys the benefit of taxes passing through the sole proprietorship onto the owner of the LLC. The pass-through tax advantage helps LLC owners avoid the double taxation of income and capital gains. Since the LLC does not have to pay income or capital gains taxes, the business enjoys a substantial increase in cash flow.
The Internal Revenue Service (IRS) and a vast majority of state revenue departments consider a partnership to be the default tax status of LLCs that have multiple owners. This means that if you and your partners want to form an LLC as a partnership, you do not have to file any paperwork to make that happen. For LLCs taxed as a partnership, each owner receives a Schedule K-1 and then reports the owner’s share of the profits or losses.
An S-Corporation makes the most sense for an LLC that needs to benefit from a lower tax rate on the first $75,000 of business income. Forming an S-Corporation is easier to do than forming the more complex C-Corporation. Moreover, submitting Form 8332 can help your LLC save money by forming it as an S-Corporation.
Which type of business structure makes the most sense for your LLC? The answer lies in the advice provided by a Certified Public Accountant (CPA) or a state-licensed business lawyer.
Tax Credits and Deductions
Savvy business owners know how to maximize credits and deductions to minimize their tax bills. The key is to maintain a detailed record of every expense that you want to deduct. Keeping an accurate digital report of daily expenses can help you get the most out of tax credits and deductions.
Because state and federal tax laws change about as quickly as the seasons, you should work with a CPA to stay on top of any tax changes that might benefit your LLC. Running an LLC offers owners unique tax benefits that other types of business structures do not get to enjoy.
Lease Personal Assets to Your LLC
Assets can appreciate in value, which can put your LLC in a higher tax bracket. However, you might be able to limit the amount of money that you pay in taxes for a higher valuation of your business assets. The key is to lease an asset to yourself by creating a legally sound leasing agreement. This type of arrangement often produces a lower tax bill because of a lower tax rate, as well as the opportunity to take more deductions.
Let’s say you want to lease your business office back to the LLC. Business owners can deduct the cost associated with running a home office, which means you get to enjoy a huge tax break by leasing the home office to the LLC.
Consult with an LLC Tax Professional
A business attorney who helps entrepreneurs form LLCs can help you maximize the benefits of forming and running the business structure. Your lawyer might offer advice or refer you to a trusted CPA to guide you in the right direction. The goal of setting up an LLC is to maximize the return of your investment. Make that happen by learning about real estate LLC tax benefits from the experts at Cloud Peak Law Group.