Author Topic: LLC and Tax Implications  (Read 3612 times)

ooeei

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LLC and Tax Implications
« on: May 26, 2017, 12:12:51 PM »
So it looks like I'll be going through with the snow cone stand from another thread.  My thought is I'll start an LLC and own the stand under the LLC.  Is there a way I can keep profits from the stand in a business account and use that account to reinvest in other small business ventures, thus avoiding tax liability until I "realize" the profits?  This seems like something that should be possible, but how is it affected if say the account is just in cash for a couple of years?  Is it possible to open an investment account with Vanguard or somewhere for the business so it's not sitting in cash?

I'm also guessing the cost of the stand can be used as a tax writeoff, but it's likely better to depreciate this out over time to make sure I'm saving taxes at the highest marginal rate possible.  I'll research that a bit more, but is that the basic idea?

Sorry for the onslaught of questions, anyone who has experience using business revenue to start up other businesses, your input would be highly appreciated.

Cpa Cat

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Re: LLC and Tax Implications
« Reply #1 on: May 26, 2017, 12:41:44 PM »
Taxes don't work like that.

LLC - single owner - defaults to a disregarded entity. You recognize income as you earn it and pay taxes in the current year, including self-employment tax. The entity's bank account is your bank account, as far as the IRS is concerned. Whether you reinvest the money in other businesses or spend it all on candy, it's still your money that you earned and pay taxes on.

LLC - partnership - not a disregarded entity, but same kind of income recognition and self employment tax.

LLC - S-Corp - Seperate entity, pays you as an employee and distributions as an owner. You can shield some income from self-employment tax, but otherwise pay income taxes in the current year when income is earned. Even if you don't pay it to yourself and keep it in the bank. Taxes when earned, not when distributed.

LLC - C-Corp. To a limited degree, the C-Corp can keep money in it and you won't be personally taxed until it comes out as wages or a dividend. BUT the C-Corp itself has a tax rate and pays taxes when it earns money.

This is the whole reason companies like Apple have billions of dollars overseas. They can't repatriate it without a giant tax bill, even if they're "saving it" for future investment.


As for your stand - it depends on your business profits and overall tax rate. Most people take the full Section 179 deduction on equipment in the year purchased, but not always. Rule of thumb is that paying taxes in the future is better than paying taxes now, due to the time value of money. Also, writing off equipment early can free up cash during your start-up phase by cutting the tax bill. If your business is in a loss situation, then you depreciate.

CareCPA

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Re: LLC and Tax Implications
« Reply #2 on: May 26, 2017, 12:56:39 PM »
Another often under-utilized option:
C corps are taxed at 15% up to $50,000 in profits. There are some strategies for utilizing these if you are a high-earner and your passthrough income would be taxed in the upper brackets.

ooeei

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Re: LLC and Tax Implications
« Reply #3 on: May 26, 2017, 01:00:26 PM »
Taxes don't work like that.

LLC - single owner - defaults to a disregarded entity. You recognize income as you earn it and pay taxes in the current year, including self-employment tax. The entity's bank account is your bank account, as far as the IRS is concerned. Whether you reinvest the money in other businesses or spend it all on candy, it's still your money that you earned and pay taxes on.

LLC - partnership - not a disregarded entity, but same kind of income recognition and self employment tax.

LLC - S-Corp - Seperate entity, pays you as an employee and distributions as an owner. You can shield some income from self-employment tax, but otherwise pay income taxes in the current year when income is earned. Even if you don't pay it to yourself and keep it in the bank. Taxes when earned, not when distributed.

LLC - C-Corp. To a limited degree, the C-Corp can keep money in it and you won't be personally taxed until it comes out as wages or a dividend. BUT the C-Corp itself has a tax rate and pays taxes when it earns money.

This is the whole reason companies like Apple have billions of dollars overseas. They can't repatriate it without a giant tax bill, even if they're "saving it" for future investment.


As for your stand - it depends on your business profits and overall tax rate. Most people take the full Section 179 deduction on equipment in the year purchased, but not always. Rule of thumb is that paying taxes in the future is better than paying taxes now, due to the time value of money. Also, writing off equipment early can free up cash during your start-up phase by cutting the tax bill. If your business is in a loss situation, then you depreciate.

Very helpful, I guess I was thinking about it more like an IRA or something.  So basically the LLC is only for liability, taxes are all on me and in the current year.  Makes sense.  That also makes everything much less complicated.

Another often under-utilized option:
C corps are taxed at 15% up to $50,000 in profits. There are some strategies for utilizing these if you are a high-earner and your passthrough income would be taxed in the upper brackets.

Yeah for now I think an LLC or at most an S Corp is probably my best bet, as from my research C corps end up with a "double tax" situation a lot of the time since you pay taxes on profits, then again on distributions.

FIREby35

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Re: LLC and Tax Implications
« Reply #4 on: May 27, 2017, 08:52:45 PM »
I'd definitely defer to CPA Cat, but if you are going to incorporate at all (i.e. not be a sole proprietor) I'd strongly consider the LLC electing to be taxed as an S-Corp. First, it's easy to set up.  Second, you can declare a low salary (maybe even $0 at the beginning claiming a need to manage cash flow as a start up and no consistent profits) and then pay yourself distributions to the owner and thereby avoid 15.3% self-employment tax. Obviously you could also look for lots of write offs for your cell-phone and other "personal" items that are also used for business.

SeattleCPA

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Re: LLC and Tax Implications
« Reply #5 on: May 28, 2017, 07:08:58 AM »
Taxes don't work like that.

LLC - single owner - defaults to a disregarded entity. You recognize income as you earn it and pay taxes in the current year, including self-employment tax. The entity's bank account is your bank account, as far as the IRS is concerned. Whether you reinvest the money in other businesses or spend it all on candy, it's still your money that you earned and pay taxes on.

LLC - partnership - not a disregarded entity, but same kind of income recognition and self employment tax.

LLC - S-Corp - Seperate entity, pays you as an employee and distributions as an owner. You can shield some income from self-employment tax, but otherwise pay income taxes in the current year when income is earned. Even if you don't pay it to yourself and keep it in the bank. Taxes when earned, not when distributed.

LLC - C-Corp. To a limited degree, the C-Corp can keep money in it and you won't be personally taxed until it comes out as wages or a dividend. BUT the C-Corp itself has a tax rate and pays taxes when it earns money.

This is the whole reason companies like Apple have billions of dollars overseas. They can't repatriate it without a giant tax bill, even if they're "saving it" for future investment.


As for your stand - it depends on your business profits and overall tax rate. Most people take the full Section 179 deduction on equipment in the year purchased, but not always. Rule of thumb is that paying taxes in the future is better than paying taxes now, due to the time value of money. Also, writing off equipment early can free up cash during your start-up phase by cutting the tax bill. If your business is in a loss situation, then you depreciate.

+1 on everything CPA Cat says above.

Regarding the LLC thing mentioned by FIREby35, you probably want to consider starting as a single member LLC and let the business be classified as sole proprietorship. This will keep things simple and make it easier to use the Sec. 179 election if you have another W-2 job in the same year.

Some day down the road, you can make the S election to have the LLC for tax purposes be treated as an S corporation. You would do when/ if the business starts to make more money that what would be a reasonable salary to the owner...

FIREby35

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Re: LLC and Tax Implications
« Reply #6 on: May 29, 2017, 07:20:34 AM »
Hey, CPA friends:

What is the point where is makes sense to take the S-Corp election? Is there a specific number or is it a more fuzzy standard?

Also, can you elect an S-Corp at any time? I assume you can elect at tax time? Can you be sole proprietor on year and S-Corp the next and vice versa?

Thanks.

CareCPA

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Re: LLC and Tax Implications
« Reply #7 on: May 29, 2017, 03:00:34 PM »
My rule of thumb is when the following is true:
(Taxable income of LLC - reasonable salary) * 15.3% > Cost of (S corp return + Payroll administration).
Or in plain(er) English, when the cost of the additional return and payroll is less than the amount of extra self-employment tax you're paying.

Technically you need to make the election by the 15th day of the third month (i.e. March 15) of the tax year.
However, the IRS has historically been extremely lenient with late S-election filings.

ooeei

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Re: LLC and Tax Implications
« Reply #8 on: May 30, 2017, 06:11:16 AM »
I'd definitely defer to CPA Cat, but if you are going to incorporate at all (i.e. not be a sole proprietor) I'd strongly consider the LLC electing to be taxed as an S-Corp. First, it's easy to set up.  Second, you can declare a low salary (maybe even $0 at the beginning claiming a need to manage cash flow as a start up and no consistent profits) and then pay yourself distributions to the owner and thereby avoid 15.3% self-employment tax. Obviously you could also look for lots of write offs for your cell-phone and other "personal" items that are also used for business.

Good advice here.  For now I'm going to focus on getting everything up and running, once I've got an idea of the sort of profits I'm looking at I'll have a better idea of how to file.

SeattleCPA

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Re: LLC and Tax Implications
« Reply #9 on: May 30, 2017, 07:23:02 AM »
My rule of thumb is when the following is true:
(Taxable income of LLC - reasonable salary) * 15.3% > Cost of (S corp return + Payroll administration).
Or in plain(er) English, when the cost of the additional return and payroll is less than the amount of extra self-employment tax you're paying.

Technically you need to make the election by the 15th day of the third month (i.e. March 15) of the tax year.
However, the IRS has historically been extremely lenient with late S-election filings.

+1

FIREby35

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Re: LLC and Tax Implications
« Reply #10 on: May 30, 2017, 08:00:03 PM »
My rule of thumb is when the following is true:
(Taxable income of LLC - reasonable salary) * 15.3% > Cost of (S corp return + Payroll administration).
Or in plain(er) English, when the cost of the additional return and payroll is less than the amount of extra self-employment tax you're paying.

Technically you need to make the election by the 15th day of the third month (i.e. March 15) of the tax year.
However, the IRS has historically been extremely lenient with late S-election filings.

+1

Thanks for the answers. I was genuinely curious.