Do I need to create a LLC?

[Dave T]

Mark,

You took a lot of time in a couple of threads to convince TMCG that his perception of business accounting and tax reporting was distorted.  

Thank you for taking the time and making the effort.  I am sure that all of us who merely read the threads got something out of it.

[TMCG]

okay, i'm back for more...lol

that 10 you paid down is not ever an expense, not ever deducted from income.  you only traded one asset (cash) for another (house)

so if i made say 100 and use 10 to put down on a buildling.

i traded 10 cash for 10 into a building.

what happens with that 10?

at the end of the year...that 10 is taxed how?

[Dave T]

You have to start with the asset equation:  

Assets = Liabilities + Equity

[/list]If you start with $10K in cash and no debt, then

Assets = Liabilities + Equity

[/list]

Assets = $0 + $10K = $10K

[/list]Purchase a building for $100K, putting $10K down, financing the balance.  Now

Assets = Liabilities + Equity

[/list]

Assets = $90K + $10K = $100K

[/list]Equity in a building, like cash is a capital asset.  You merely traded one capital asset, cash, for another, equity in a building.  The $10K is not taxed, nor is it a deductible expense in this scenario.

However, you started by saying that you made $100K.  If your $100K is net of all expenses, then your taxable income is $100K.  You pay taxes on the full $100K.  The $10K that you put down on the building came out of whatever was left of the $100K after taxes.

[TMCG]

oh boy...

so let me do it this way:

lets say 500k in total revenues

i buy 250k of equipment

100k on advertising, office supplies, energy costs

i take 100k and buy a building (downpayment on 500k building)

lol  okay

Assets = Liabilities + Equity

800k = 650k + 150k

Assets - Liabilities = Equity

800k - 650k = 150k (50k cash + 100k down payment on building)

now what gets taxed?  

i traded cash of 250k for equipment and a 100k for building and spent 100k on miscellaneous items for business...

i know the 100k on various expenses is deducted from revenue (expenses)...

so that would be

500k - 100k (expenses) - $5000 (depreciation from bldg and equip - $15k (interest paid) - $4000 (principal paid) = 376k?

[Dave T]

Out of your $500K revenue, you purchased $250K in equipment and spent another $100K for the downpayment on a building.  You traded $350K in cash for $350K in capital assets.  After spending another $100K on business expenses, you have $50K left in your bank account.

So now your assets are $250K in equipment, a $500K building and $50K cash in the bank for a total of $800K.  Your liabilities consist of a $400K mortgage on the building.  Plugging these numbers into the Asset formula and solving for Equity gives you

Equity = Assets - Liabilities = $800K - $400K = $400K

[/list]Remember that money spent on capital items such as equipment and even the principal payments on your building loan is not a deductible expense.   You are simply trading one capital asset (cash) for another (equity in building and equipment).   With $100K in direct business expenses, another $15K in mortgage interest, and $5K in depreciation on building and equipment, your net taxable income is

Income = Revenue - Expenses = $500K - $120K = $380K

[/list]

[TMCG]

here's an interesting question:

the closing fees associated with buying a property - what are these considered - expenses?

i.e.
title insurance
tax certificates
o/n mailing fees
recording fees
other fees


what about assignment fee?

are these deductible items?

[mcwagner]

these are considered part of the cost of the property (cost of acquiring).  not deductible.  they reduce gain when you sell.

[TMCG]

right.  

hey i bought quickbooks - and i consider it a waste of money at this point.  i've been using Excel to manage accounts.

here's a question.

say your one business (LLC) is buying properties - land to hold and properties to rent.

and also has revenue and expenses from sales of a seperate service - unrelated to acquiring real estate.

i've set up Excel to track all revenues and expenses, including partner equity.

but, i'm thinking of seperating the "seperate service" and incorporating it as its own business entity to make things easier.

at our bank - i've set up seperate accounts for each revenue stream.

i'm thinking of incorporating the one service with myself as the sole shareholder - completely seperate from current LLC.

questions:
financial plan is to take income from corp and invest it in LLC, where i am a partner.  thus having LLC acquire real estate.

then final entity may be a Corp for property management, which of course would tend to the properties -

could both my partner and i be shareholders of property management firm?  or must we have a third party (wives) as 50/50 owners of prop management company?

i'm just trying to be creative and follow the rules.

[mcwagner]

no reason they can't run together if that's what you want to do.

[TMCG]

thanks.

[TMCG]

mc,

with the dealer issues of buying and selling real estate -

if LLC buys property and sells it - they'll be considered a dealer.

if LLC buys property and pays your seperate entity to do the rehabs (i.e. C-Corp) - LLC generates an expense report, thus decreasing profits...

as long as it is reasonable (i.e. C-Corp doesn't charge $4 for labor on every $1 in material) - won't this limit the LLC profits and thus limit tax liabilities overall?

LLC pays C-Corp 10k in rehab labor expense - that:

1. lowers LLC profits
2. C-Corp can retain portion of these earnings
3. C-Corp pays me, the employee, a salary for it
4. LLC profit are taxed less due to expense

[Dave T]

TMCG,

Don't overlook the big picture.  The C-corp is also taxed on its net income.