Reinvest LLC Profit

[elcidb05]

A partner and I own a side business together that is medicine related.  We have a modest amount of profit and would like to do something besides take the profit out and be taxed on it.  We have considered buying property with the proceeds with the intent of renting the property out.  Of course this would be owned by the LLC.

-Are there any gotchas in there that we may not be aware of?

- Is this an effective way of deferring taxes?

- Is there a more advisable way of doing this?

[jfoxcpacfp]

I'm not going to comment on whether this is an effective way of deferring taxes. It's really not that hard to invest in property that loses money. My advice w/b to emphasize net worth over tax savings.

You should separate the real estate into a new LLC for several reasons I can think of off the top of my head:

1. In case one of you decides to buy the other out of the real estate.


2. Because the real estate is passive income and your business results are active (earned) income. You can combine, but just cleaner.


3. For division of asset protection. If you get sued in the medicine-related business, you could also lose the real estate if everything is in one entity, and vice versa.


4. In case you ever bring another partner in to the side business and don't want to have them as a partner in the real estate venture.

I recommend you discuss with your CPA for any gotchas that might impact your taxes. Of course, have a solid partnership agreement for the RE.

[spiritrider]

The profit of an LLC is always subject to personal taxes in the tax year whether it is distributed or not. That is why they are considered pass-thru entities. Only a C-Corp can retain earnings.

[jfoxcpacfp]

I was assuming the OP already knew that and was trying to find ways to reduce taxable income. Maybe it was a stretch, but surely they are already paying taxes on their profits.

[Craigy]

Could be a LLC taxed as a C corp. 

 

Consult a qualified CPA or tax attorney in your area.

[jfoxcpacfp]

Craigy wrote:

Could be a LLC taxed as a C corp.

Consult a qualified CPA or tax attorney in your area.

Click to expand...

Yeah, but I strongly doubt. However, if so, that is reason #5 not to put real estate into it!

[Tim]

“– Is there a more advisable way of doing this?”
Yes, reduce the taxable income, The taxes are the symptom, too much profit is the root cause. No investment guarantees a taxable loss and future gains.

[elcidb05]

So using the proceeds from the business to buy a piece of property does not negate having to pay taxes on those proceeds.  It is treated differently than the expense we would pay for rent.

 

[jacoavlu]

There are no “proceeds”

The entity either does or does not have income (or loss) at the end of the year. Income is “passed through” to the owner(s), who pay tax on that income

Any properly deductible expense of the entity reduces the income of the entity and therefore reduces the taxable income passed through to the owner(s)

But that brushes past the point that you should really consider Johanna’s advice above as to why this might not be the best move even if it accomplishes your goal

[jfoxcpacfp]

elcidb05 wrote:

So using the proceeds from the business to buy a piece of property does not negate having to pay taxes on those proceeds.  It is treated differently than the expense we would pay for rent.

Click to expand...

No, reference @spiritrider and @jacoavlu. Re-reading this, I think you might be conflating investing in property through your business with a Section 1031 exchange, whereby a piece of real estate (typically) is exchanged for another piece of "like kind" real estate and the gain from divesting yourself of the first piece of property is deferred by reducing the basis of the 2nd piece of real estate.

If so, that is not applicable in this situation. Have you discussed with your CPA?