THE LLC AND TAX BENEFITS NELLIE AKALP
The LLC (as well as the S Corporation) eliminates this double taxation penalty. The LLC is considered a passthrough entity. It does not file separate taxes; rather, any business income or loss is reported on each individual
owner’s tax return. In the case of a single member LLC, the LLC taxes would be filed under the individual
member’s tax return; in the case of a multi-member LLC, the LLC would generally file a partnership tax return.
All LLC profits flow through to the owners and are taxed at the personal income rate – which depending on
circumstances can be lower than what Corporations pay (of course, you should always check with your CPA or
tax advisor regarding your specific situation…).
The LLC and Losses
The IRS also allows any loss of the LLC to pass through to individuals. This loss can offset other sources of
income – in effect, reducing your overall tax liability. And as an added bonus, in an LLC, members are allowed to
add the amount of the mortgage to their basis for the purpose of computing a loss. For the S Corporation, this is
not the case.
Let’s say you invested $10 in ABC property. Your tax basis is $10. You mortgage the real estate and borrow $20.
Rental income and values decline leaving your property with a $20 loss at the end of year one. Simply stated,
you’ve lost $20 through investment activities in ABC property.
If you had created an S Corporation, the IRS wi ll only allow you to take a $10 loss on your personal income tax
(because the tax basis is $10); the remaining $10 loss will be deferred. But with an LLC, you’re allowed to
deduct the entire $20 in the first year.
Again, it’s always wise to consult with your personal tax advisor, but generally speaking, most real estate
investors choose to form an LLC for their investment properties.
Author: Nellie Akalp
Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO
of CorpNet.com, a legal document preparation filing service, Nellie helps entrepreneurs start a
business, Incorporate, Form an LLC, set up Sole Proprietorships (DBAs) and maintain a
business in compliance with state filing requirements for a new or existing business.