What You Missed January 2015 General Meeting
by Rob Earhart
Business Structure: What you Absolutely Need to Know
Presented by: Dory Dyess, CPA, MBA
January 6, 2015
I began my career with Leslie Jones in 1995, primarily in the tax practice. In 2002 she moved out and I purchased her practice. I completed my CPA in 2005 and still have my practice in Lady Lake, Lake County, Florida, and have clients all over Florida.
There are four facets of a business: tax savings, asset exposure, audit exposure and accounting and maintenance costs. You have to decide what type of business you will have: investor, wholesaler, landlord, etc.
Your filing status can affect your audit exposure. Preparing your taxes early but holding them until the final due date will decrease your audit risks. These things will affect how you structure your business.
Then you have to decide how to hold the assets: as an owner, manager, or trustee.
Your accounting and maintenance will depend on the different fees for officers, trustees, banking relations, etc.
In 2008, the IRS changed the schedule E to try to determine if you are underreporting income. The 1040 individual tax form is the most audited and the IRS spends the most money on those reports. Even if you only have a few rentals, that can raise your audit chances for your personal return.
Dory then described a situation whereby an investor would purchase a house, rehab it and have a profit after expenses.
If you intended to hold it for long term, but decide in a few months that you did not want to keep it, then you can put it on schedule D and take it as short-term capital gains. If you had held it for more than a year, you would have a stronger case for reporting capital gains instead of just inventory.
Are you a dealer who would have to pay self-employment, or an investor holding it as an investment property? That is the question.
Dory then talked about forming a corporation to obtain and sell property. “You can get a lot of benefits from this type of company,” she explained. The C corp has its own tax liability and does not affect your personal return. You can deduct a lot of things like medical, automobile expenses, wages, etc. Then you would pay personal taxes on the wages which would keep the tax liability lower.
You would pay less on the schedule D but would have a higher risk of audit and might have to pay more in taxes if the argument will not hold water. The corporation is cleaner and gives you more protection.
Dory then opened the floor to questions:
When do you have to form the corporation? “You can take up to 75 days from the first transaction to form the corp. To convert from one entity to another you can do it by the next tax filing,” Dory advised.
How do you transfer properties from a C corp to an S corp? “You would have a few issues but it would be no problem. If you convert from a corp to a partnership, it would cause unrealized capital gains to deal with. One client of mine switched from an S corp to a C corp and started another C corp to fund the monies for management.
A lot of you work with LLC’s without understanding the issues. If you are the only member, it is disregarded and treated as your personal entity and money passes through to your personal tax return. You need two entities with their own ID numbers in order to treat an LLC as a partnership.
Can you receive rents in a trust? “You can own properties in trusts, but if you set up a company to receive rents it gives you some privacy from prying lawyers in case of a lawsuit,” explained Dory.
Is it advisable to get an LLC in another state? “If you have LLC’s in another state, you will have to pay for a resident agent and a mail drop. The costs may add up quickly and can cause difficulties with selling properties with out of state trustees,” said Dory.
Dory remained in the room to answer many more questions from investors with specific needs. Her company is available for counselling and is able to take care of all our accounting needs.