Business Taxes

[PortlandDMA]

What is the name of your state (only U.S. law)? Oregon

This will be my 2nd year filing taxes under an LLC. Under this business I'll turning a profit this year. I want to reduce my tax liability by starting another branch of the company also operating under the same name.

Does this raise a red flag for the IRS?

Thanks

[tranquility]

Except for the expense of opening another LLC, how does this reduce your taxes?

[PortlandDMA]

The 2nd business will operate at a loss this year.

[Some Random Guy]

OK, you lost us.

So, you plan on starting a second business that will lose money in order to save 20% - 36% of the money you lost.

Or, is the second business losing money by increasing profits for the first business? This makes no sense either.

[PortlandDMA]

So, you plan on starting a second business that will lose money in order to save 20% - 36% of the money you lost.

- Just like the first mentioned business I'm running, it too will likely turn a profit the second year...I figured it's better to begin operation now, to reduce the overall cash I've lost between the two (from A. taxes & B. operational/startup expense). Will that not the case?

[tranquility]

You are thinking too much. If you are opening up the second LLC to segregate liability, go ahead. If you are doing it for taxes, don't. You can do the same thing in your current structure and won't have to worry about special accounting rules for "startup expense".

No the IRS will not get a red flag. There is no reason for them to think there is anything wrong. I'm not sure what you mean by "branch". There may be an internal accounting to see how each area of the business is doing, but unless they are seperate entities, the accounting is consolidated.

Just as a business tip, don't do things for taxes, do things for profit. It's fine to expand to increase profit in the future using funds you have made now. And, as a general rule it's better to pay taxes in the future. But, for your decision now, it really doesn't matter much (At least as I understand your facts.) if you reduce your profit from spending more money. You are still spending the money, the tax issue of not having to pay because you spent it or paying because you earned it, is still the same tax issue.

[davew128]

Originally Posted by tranquility

You are thinking too much. If you are opening up the second LLC to segregate liability, go ahead. If you are doing it for taxes, don't. You can do the same thing in your current structure and won't have to worry about special accounting rules for "startup expense".

Not true. Startup expense rules apply to new business activity whether or not its a new entity. If for example he is a franchisee and opens up a new franchise under the same LLC, the costs for setting up that new franchise are subject to the startup cost rule just as much as the first one did.

There may be an internal accounting to see how each area of the business is doing, but unless they are seperate entities, the accounting is consolidated.

Assuming this is a business and not rental properties, you are correct.

[tranquility]

Not true. Startup expense rules apply to new business activity whether or not its a new entity.

Care to define what you mean by "new business activity" and if it applies to what the OP is talking about? Entities can expand. Certain expenses could be considered startup and would have to follow the rules. I suspect what the OP is referring to is not a bunch of feasability studies or in acquiring a new business. I would guess from the general nature of the question, he's just going to open up a second website or something like that. "Creation" costs are not amortizable.

But, you are correct. One can have start-up costs in an existing business.

Assuming this is a business and not rental properties, you are correct.

Hmm...where do you get rental properties from the facts? And, as long as we're picking things out of thin air, what if he makes an aggregation election for the rental real property?

[davew128]

Originally Posted by tranquility

Care to define what you mean by "new business activity" and if it applies to what the OP is talking about? Entities can expand. Certain expenses could be considered startup and would have to follow the rules. I suspect what the OP is referring to is not a bunch of feasability studies or in acquiring a new business. I would guess from the general nature of the question, he's just going to open up a second website or something like that. "Creation" costs are not amortizable.

But, you are correct. One can have start-up costs in an existing business.

I don't disagree with anything you just said.

Hmm...where do you get rental properties from the facts?

You have heard of using examples?

And, as long as we're picking things out of thin air, what if he makes an aggregation election for the rental real property?

With regards to the tax form reporting of the profit and loss of the included properties? Nothing.

[tranquility]

With regards to the tax form reporting of the profit and loss of the included properties? Nothing.

Per Code Sec 469 and accompnying regulations, (Although usually used for material participation purposes for a real estate professional.) you can report the aggregated properties as combined and report it as a single one on schedule E.

[davew128]

Originally Posted by tranquility

Per Code Sec 469 and accompnying regulations, (Although usually used for material participation purposes for a real estate professional.) you can report the aggregated properties as combined and report it as a single one on schedule E.

Yes you CAN. However in practice, you generally don't. Why? Properties in multiple states. Properties with prior passive losses when you make that election and the wide disparity in how software packages deal with that in the context of aggregating properties. The manner in which a client brings you the information. In CA, if each property is in an LLC, you have a state SMLLC return for each property as well, so you need separate reporting for that.

It's not about whether its allowed, its whether it is workable as a practical matter and very debatable.

[tranquility]

Yes you CAN. However in practice, you generally don't. Why? Properties in multiple states.

I agree, at some point you need to report income from different states to the state. If someone has multiple properties in different states, this would be a reason to keep seperate books.

Properties with prior passive losses when you make that election and the wide disparity in how software packages deal with that in the context of aggregating properties.

Our software seems to do OK, but, you may be right. I've only used the one for years and don't have a good background in everything which is out there.

The manner in which a client brings you the information.

They have these things called spreadsheets now. They're a software program and they can be quite useful when preparing tax returns. You should look into them.

In CA, if each property is in an LLC, you have a state SMLLC return for each property as well, so you need separate reporting for that.

Or, in any state where you have to file an LLC return which is treated federally as a disregarded entity.

But, as to the comment:
"There may be an internal accounting to see how each area of the business is doing, but unless they are seperate entities, the accounting is consolidated. "

Assuming this is a business and not rental properties, you are correct.

You meant, from facts you made up and I did not consider, that while legally correct--as a practical matter you would disagree?

[davew128]

Originally Posted by tranquility

I Our software seems to do OK, but, you may be right. I've only used the one for years and don't have a good background in everything which is out there.

I won't mention names but the high end software package put out by one company gets it right while the one by its biggest competitor which is a software bookkeeping company does not. In fact the second company told me I was wrong on the application of the rules even after I gave them the direct on point citation from the regs that said otherwise.

They have these things called spreadsheets now. They're a software program and they can be quite useful when preparing tax returns. You should look into them.

Spreadsheets are so 20th century. There are new technologies called electronic organizer and PDF's where clients give you their information. You should look into them.

[tranquility]

I won't mention names but the high end software package put out by one company gets it right while the one by its biggest competitor which is a software bookkeeping company does not.

One software bookkeeping company puts out two high-end packages. We use one and it works. The other may or may not.

There are new technologies called electronic organizer and PDF's where clients give you their information. You should look into them.

Have you used the organizer yet? (I'm thinking we both use the same software.) While you get to review before it goes into the data file, I have not found any saved time due to those little glitches which puts it just off. The client needs to actually do the work before the e-mail comes in and it is a lot harder to review his little errors as well. Even when we have a "modern" client give us a file from the bookkeeping company who makes our tax software (which we can import directly if we set things up properly), we still put it into a spreadsheet first. We have been an early adopter of software solutions and have found the translation directly to tax very time consuming, prone to error (error which is difficult to find because of the method it is introduced) and not worth the effort. Maybe someday, not today. Have fun with your 21st century solution.

When I write a note, I use a pencil. Do you get out your PDA, use character recognition software, review the result and infrared it to the printer? I haven't found that "solution" very useful yet. YMMV.