Not so Typical...

[TAX]

Client purchased a motel in WI in Jan 07.

Background:

(1) Purchased existing "C" corporation where land and Building are part of corp! Never asked me until all done! Basically purchased stocks of a corporation

(2) Created ABC LLC (Management company) who conducts daily business

LLC pays rent to Corporation! Thus corporation has rental income.

Questions:

(1) This is no typical. I know it is reverse. Usually LLC has Building and land and business is in Scorp and then LLC pays rent to Scorp. Can I do anything to correct the situation?

(2) Would it be wise to treat LLC as Scorp for tax purposes as LLC conducts business?

(3) Returns to file - Partnership 1065 for LLC (multimember) or Scorp if elected.
Corporation return - where building and land are. Should I convert
this corporation into Scorp?

Thank you for your help!

[Lion]

Corporation

How long has the C-Corporation been in existence? Does it have retained earnings? NOL carryforwards? How much has the building/land appreciated in value? You'll have to run some numbers for various scenarios and discuss with your client. There'll be tax consequences to selling the building/land, etc. Does the corporation expect losses that your client wants to pass through to himself each year? What are the relative tax brackets of your client and of the C-Corporation? What do you see as the benefits of making the S-Corporation election at this time?

[TAX]

How long has the C-Corporation been in existence? Does it have retained earnings? NOL carryforwards? How much has the building/land appreciated in value? You'll have to run some numbers for various scenarios and discuss with your client. There'll be tax consequences to selling the building/land, etc. Does the corporation expect losses that your client wants to pass through to himself each year? What are the relative tax brackets of your client and of the C-Corporation? What do you see as the benefits of making the S-Corporation election at this time?

Thanks! I am looking into answer for these questions.

Is there any more responses, please?

[Bees Knees]

The C Corp cannot elect S status because it is a rental activity. An S corporation election terminates if passive investment income (which includes rental income) exceeds 25% of gross receipts for three consecutive taxable years and the corporation has accumulated earnings and profits from periods when it was a C corporation.

You also don’t want to liquidate the corporation and hold the real estate in an LLC because you would cause all appreciation in the real estate to be taxed upon liquidation. The real estate rental activity is thus stuck within the C corporation scenario.

Ways to limit the double C corporation tax on the rental activity is to run the rental business at even every year. Ways to do that including paying out any excess income at the end of the year as a bonus to the corporate officer through W-2 payroll. Most closely held C corporations have no or little profit since the owners give themselves a W-2 wage equal to any profit in the business. Of course, with the 15% maximum tax on qualified dividends, sometimes the C corporation double tax can be less than the K-1 line 1 profit passed through an S corporation for a shareholder in a higher individual tax bracket.

Bottom line is there is no answer that can apply to all. The answer depends upon the circumstances of your client.

[TAX]

The C Corp cannot elect S status because it is a rental activity. An S corporation election terminates if passive investment income (which includes rental income) exceeds 25% of gross receipts for three consecutive taxable years and the corporation has accumulated earnings and profits from periods when it was a C corporation.

You also don’t want to liquidate the corporation and hold the real estate in an LLC because you would cause all appreciation in the real estate to be taxed upon liquidation. The real estate rental activity is thus stuck within the C corporation scenario.

Ways to limit the double C corporation tax on the rental activity is to run the rental business at even every year. Ways to do that including paying out any excess income at the end of the year as a bonus to the corporate officer through W-2 payroll. Most closely held C corporations have no or little profit since the owners give themselves a W-2 wage equal to any profit in the business. Of course, with the 15% maximum tax on qualified dividends, sometimes the C corporation double tax can be less than the K-1 line 1 profit passed through an S corporation for a shareholder in a higher individual tax bracket.

Bottom line is there is no answer that can apply to all. The answer depends upon the circumstances of your client.

Bees: Thank you. We will keep Corp as it is. But what about LLC that runs motel business on a day to day basis. I think selecting S corp would be better for this LLC. What do you think? I will file late relief for this LLC.(1st year of operation is 2007).

Thanks!

[Bees Knees]

I don't like S corps because of the payroll tax issue. Others will disagree, but I like the LLC taxed as a Schedule C or 1065, particularly if there are no other employees other than the owners. I think payroll is a waste of time and money if the only people on payroll are the owners.

Of course in some states the LLC is more expensive in filing fees than the S corp, so you would have to take that into consideration also.

[TAX]

I don't like S corps because of the payroll tax issue. Others will disagree, but I like the LLC taxed as a Schedule C or 1065, particularly if there are no other employees other than the owners. I think payroll is a waste of time and money if the only people on payroll are the owners.

Of course, some states the LLC is more expensive in filing fees than the S corp, so you would have to take that into consideration also.

Thanks Bees:

They have lot of employees. There are 4 members (owners) besides employees. For some reason these members (owners) are are taking payroll in LLC (They are not suppose to!)