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How To Select The Best Entity For Your Real Estate Investments

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It´s about The Entity!

As the Tax Cuts and Jobs Act of 2017 mature tax prepares are becoming very adept at steering their clients through its complexities.

The most important question for small business owners are: is my current business entity tax optimal, or can I do better?

Large businesses operating as C corps got a considerable reduction in their tax rates – down from 35% to 21%, but small businesses have a wealth of new options to reduce tax liability too.

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Tax Planning for U.S. Real Estate Investors

Opting for the Best Entity

  1. The TCJA provides significant tax advantages for S Corps and LLCs but for C corps that are collecting large profits earmarked for debt repayments or capital expenditures the new Act provides for the retention of more profits on an after-tax basis than it does for S corps or LLCs.
  1. For owners planning to sell a business, a C corp provides a ‘qualified small business stock provision’ that allows them to exclude 100% of their gain from income taxes.
  1. Nevertheless, apart from advantages like those mentioned above, the majority of benefits created by the Act are for S corporations. Now is the time to consider opting for S corporation status.
  2. For Rental Income Investment, go for a LLC.
  3. For Flipping, go for a C Corp.
  4. For Construction, go for a S Corp as well as for Real Estate Management.
  5. For Asset Protection, put each property on a separate LLC or create a Land Trust for each property as beneficiary of the LLC if all properties are consolidated into a single LLC.

 

 Section 199A

  1. Section 199A creates the possibility to deduct qualified business income (QBI).
  1. This offers substantial savings for business owners, but companies that wish to benefit must carefully assess how to capture this opportunity.
Your tax preparer must be instructed to assess every opportunity. This means they have to evaluate every entity and every business segment in every entity meticulously to develop specific guidelines for you.

Maximizing Minimization

  1. Small businesses that turnover sales of less than $25,000,000 can also benefit by electing an accounting method that changes them from accrual to cash basis accounting. This provides a one-time tax windfall with many other planning opportunities afterward.
  1. Tax-smart income planning is crucial in terms of the new law.
  1. Doctors and lawyers and other service providers must do everything in their power to keep their owner’s taxable income BELOW $415,000 and as close to $315,000 as possible.
EXAMPLE

Service Business Owner A has a taxable income before contributions of $415,000.  Owner A now makes a $100,000 contribution to a cash balance defined benefit plan. This lowers Owner A’s taxable income to $315,000, saving him approx. $50,000 in tax, depending on which state he operates in.

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Plan Ahead

  1. It is always “tax planning season.” For tax purposes, a five-year tax projection is essential to allow forward strategizing and tax planning that includes:
    • Grouping charitable contributions,
    • Harvesting capital gains in a lower tax year
    • Opening a donor-advised fund
    • Using a charitable trust
  1. Early consultation with tax advisors can enable small businesses to plan for when they become high-net-worth operations and complicated tax, and estate rules make it difficult to transfer or pass wealth to family members or to sell the enterprise.
  1. High-net-worth taxpayers have a window of opportunity NOW while the higher estate tax exemption makes it possible for them to save substantial estate tax by gifting assets to family members, at discounted rates, into a family trust or LLC.

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Accounting & Financial Statements

Big or Small, Tax Planning for All

Tax strategies deployed by qualified advisers can minimize your tax liabilities even if you own a small business.  Those who understand tax law and financial planning can allow even the most modest business to benefit from the rules created by the Tax Cuts and Jobs Act of 2017.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

Contact us for more info about tax strategies for Real Estate Investments. 

Like this article? Join our Real Estate Tax Linkedin Group: U.S. Real Estate Tax Intelligence

 

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Thanks to FAS & CPA Consultants and Fulton Abraham Sanchez, CPA, I was able to resolve a debt of $479,677.71 that I had with the IRS.

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized in Tax Planning for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution and Offshore Strategies. You can email him to fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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