Hey tax gurus need your help!!
 

My wife and I started an LLC flipping homes and she's also a new real estate agent. We went to tax guy and realized we'll get hammered with taxes. I know lots of my fellow pilots have side businesses (including real estate investments). Looking for some practical advice on how to limit our tax exposure. Thanks in advance!!

Get divorced?

Ask your accountant about it.

Other than generously allocating expenses thru the llc not a lot one can do outside of specialized real estate that carry tax deductability incentives.

Idk if a non llc with the wife as a RE professional on the joint return would help any. Would carry large PL rider in this case.

If the wife has a W2 income in addition to RE activities it limits this option.

A cpa is good. A cpa that is a tax attorney is a better place to be. Good luck. :)

Thanks Bob!! We r looking at a 45% tax rate the way we have it set up now😝

Omg...thats brutal.

But it also means you two are doing something right. :)

we r doing all right, but not that good to be in that tax rate, just dont think we have it set up very good. the accountants we talk to seem very wary in giving advice, so a tax lawyer you suggest is probably the best for idea! thanks again!

Cpa's generally will not provide tax 'strategies'. You can ask what ifs and they will try and give you filing process and mathematical result answers.

If one carries passive activities on a personal return the annual deductability is limited by AGI. The passive losses are not 'lost' but accrue to be used at future date as charge off against gain realized from book value/disposition price.

If the wife has sole income from active participation as a RE Professional any income reports on the return less operating expenses as a business activity.

Passive? Active? LLC carry thru? Your cpa should be able to run approx #s for you.

we'll do some more research into all those things and bring them up to our cpa. thanks again for your help!!!!

Are you keeping funds the LLC earns in the LLC? Or are you taking them out as income at this time?

I'm not sure what kind of things you can buy for real estate, but I'd assume that a work vehicle would be plausible depending on the scale she's doing. There are usually a lot of things that can go against the income expense wise.

In my case my LLC is for a farm... but for that the hard part is just getting enough income to offset the expenses in general. Starting off with 30+ y/o equipment doesn't help though.

Retained earnings in an LLC are still taxed unless you set it up as a S-corp which doesn't make sense for any small business.

I run a farm with my Dad as a 50% owner and have another LLC for a small trucking company. If you are paying 45% in taxes, you are making money which is the whole point of a side business. Limiting your tax exposure really shouldn't be a goal of any LLC, but can be a small advantage if done right. Paying that much in taxes still gives you 55% more of $0 if you didn't have the business. Taxes are painful, but they are no different than any other expense.

Most CPA's should be very comfortable (and recommend) that you deduct anything that is legal. Personal stuff generally is deductible (cell phone, internet, etc.) as a percentage of use that relates to your business, but it doesn't add up to much really. Large capital investments are where the biggest tax write-offs come from. Trucks, offices, real estate, etc. Your CPA should write off a portion of automobile use for the business, cell phone, internet, and obviously all supplies relating to the business. It is also very easy to write off meals when business is discussed. Grey area's that CPS's will be careful about are home office space and business "vacations". Legit trade show meetings etc. are easy, but need to be well documented. To really lower your effective tax rate much, you need large capital expenses. Farms are great for that, real estate business's probably not so much. The easiest way to go bankrupt is to make capital expenditures just for tax purposes. If it won't make your business more money, don't buy it just because it is a good "tax break".

Your LLC also has to make money or the IRS will classify it as a hobby and limit your deductions to basically 0. They usually don't audit that until you have shown a loss for 3-5 years in a row.

I always tell my friends that ask that running a business can be fun if you enjoy it and if it makes money. Don't ever run a business or buy a farm for a tax "shelter". It's cheaper to just pay the taxes. :)