Deducting Self Rental Losses

Dear Clients and Friends:

If you own a building that is rented to your business (self rental) you should consider grouping the two activities together to potentially deduct the self rental losses.

If you own 100% of a business as a proprietorship, S corporation, or single-member LLC and you own 100% of the building that is rented to your business as an individual, S corporation, or single-member LLC the “self rental” income is active and losses are considered passive.  This means that the rental income cannot offset losses from other passive activities (other rental activities) and the rental losses cannot offset income from active activities (business and wage income).

However, if you have the same ownership percentage in both the business and the self rental you may be able to group the two activities together as one activity which would allow the self rental losses to offset your business income.

Example: William owns 100% of an S-corporation that operates an architectural business.  He also owns 100% of a single-member LLC that holds a building that is rented to the S-corporation architectural business.  The architectural business has $500,000 of taxable earnings and the rental property has a loss of $100,000.

Since William owns 100% of both activities and the rental is rented to the business he can elect to group the activities together which will allow the $100,000 loss to be offset by the business income for a net taxable income of $400,000.

In most cases we can work with you to minimize rental losses from self rentals since you are in control of both activities.  However, an example of when this strategy would be beneficial is when it is determined that a cost segregation study can be beneficial in deriving significant depreciation expenses for your self rental that would create a taxable loss.

I hope you find this brief discussion useful.  The grouping rules can be quite complex and require a formal election.  If you wish to discuss your specific needs in greater detail, please give us a call.

Very truly yours,

WRIGHT FORD YOUNG & CO.

Certified Public Accountants and Consultants, Inc.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.

2 People working with paper work

Converting LLCs to S-Corporations

Dear Clients and Friends:

The California Limited Liability Company (LLC) fee based on gross California receipts could be costing your company thousands of extra dollars each year.  A California LLC paid the following fees based on California gross receipts (this fee is in addition to the $800 yearly minimum tax):

 

Gross Receipts: Equal to or over –But not over –The fee is:
$   250,000$   499,999$     900
500,000999,9992,500
1,000,0004,999,9996,000
5,000,000And over11,790

 

In many cases choosing an LLC as a form of doing business is a great choice, LLC’s grant a great deal of freedom and flexibility.  Among the many advantages of an LLC which are not available to S corporations are:

  • Unlimited number of LLC members
  • Special allocations of income, loss, and distributions are allowed
  • An LLC may have a C Corporation, various types of Trusts, or non-US citizens/residents as its owners

With that said, the California LLC fee is charged regardless of what the company’s net income is and it may be to your advantage to convert your LLC to an S-Corporation.  California does not charge annual fees based on gross receipts for S-Corporations, instead California charges a 1.5% tax on the corporation’s net income.  For example, ABC Company has $1,500,000 in sales and a taxable net income of $200,000, if ABC Company is doing business as a LLC it would be subject to a California LLC fee of $6,000.  If instead, ABC Company was doing business as an S-Corporation it would be subject to California S-Corporation tax of $3,000 and potentially save $3,000 in that year.

Before deciding to convert your California LLC into an S corporation you’ll need to contact your attorney to understand the legal ramifications of such conversion.  There may be other future benefits to keeping your LLC intact even if it costs you extra California LLC fees today.  To determine if an S corporation is a more appropriate form of doing business compared to an LLC or any other type of choice of entity issue please contact our office at (949) 910-2727 to discuss further.

Very truly yours,

WRIGHT FORD YOUNG & CO.

Certified Public Accountants and Consultants, Inc.

 

Please note that any tax laws or regulations discussed in this memo may not necessarily be effective after the date of drafting this article.

To ensure compliance with the requirements imposed by the Treasury Department Regulations (Internal Revenue Service), Wright Ford Young & Co. is required to inform you that any tax advice in this written or electronic communication was not intended or written to be used, and it cannot be used, by a client or any other person or entity for the purpose of avoiding penalties that may be imposed on any taxpayer.