Discussion:Capital Contribution Deductions
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Discussion Forum Index --> Tax Questions --> Capital Contribution Deductions
| 20 November 2007 | |
| I have been operating a sole proprietorship taking income for a number of years, and just created a single-member Virginia LLC to protect my personal assets as my business grows. I will also be electing to file my LLC taxes as a corporation so that i receive the lower tax rate versus passing it through to my personal taxes (at a higher rate)...
I am aware that any capital contributions i make to the company are tax deductible for the LLC. However, how do i treat these on my personal taxes? 1) for example, the cost to incorporate was paid for by personal funds before the LLC existed. so can i deduct these costs on my personal tax return as a business expense? 2) Also, I would like to take the remaining income I have from my sole proprietorship and combine it with new income from the LLC to purchase some computer equipment. Before my LLC, i would have been able to deduct the (section 179) business expense from my personal income.. However, if i contribute this income to the LLC, and then purchase the equipment through the LLC, would i be able to deduct the contribution as a business expense on my personal income? Would i then still be able to deduct the expense of the equipment from the LLC's income? Thanks, Mark | |
| 20 November 2007 | |
| Contributions to LLC does not create a deduction for the LLC itself. It simply does not count as income for the LLC for tax purposes. As for your personal taxes, it does not create a deduction for you by contributing capital to the LLC. Who ever you went to for advice must be out of his or her mind.
Also, having a LLC taxed as a C Corporation (I assume no SCORP election was filed), does not necessarily give you any tax savings and may cost alot more than running it as a Sole Proprietorship. I usually have my clients think a few times and run some CBA sheets before making a decision. SM LLC DE will also protect you from liabilities. I highly recommend that you seek and retain a knowledgeable accountant ASAP. To answer your questions: 1) Depends but more information is needed. Start Up Costs are usually expensed and amortized. Question is did you really elect corporation status? 2) You are no longer the same entity. The Corp LLC is seperate from you now. All transactions thru the LLC/CORP is seperate from you. Also, the IRS never allowed DOUBLE DIPPING. =) Get a accountant now before it is going to cost you BIG BUCKS down the line. | |
| 20 November 2007 | |
| If you do not "check the box" for the LLC to be taxed as a corporation, it will be a disregarded entity for purposes of your individual income taxes. You'll just go right on as before, reporting its income and expenses on Schedule C of your 1040, and pay income and SE tax on the net income.
If you elect corporate tax treatment for the LLC, it will be an entity separate from you as an individual. Yes, its income will be taxed at the corporate rate, but the corporation must pay you a salary commensurate with the value of the services you provide to it. You will be an employee of the corporation, which will issue you a W-2, and you will pay individual income tax on your salary. The corporation will pay its half of the FICA tax and your half will be withheld from your salary, and all of it paid to IRS by the corporation. If the corporation has taxable income after deducting your salary, it will pay tax on that income at the corporate rate. If you withdraw those earnings from the corporation, that will constitute dividend income to you, and will not be deductible by the corporation. You will pay individual income tax on the dividend. You can avoid the double taxation of the corporation's net income by making an S election for the LLC. In that case, any net income of the corporation after deducting your salary will be taxed to you on a flowthrough basis, and not taxed (for federal purposes) at the corporate level. You can then withdraw those funds without tax consequence, since you will already have paid tax on the income. As Peg said, your capital contributions to the LLC, whether single-member, C corporation, or S corporation, are not deductible by either you or the entity, and are not taxable income to the entity. You should also consider the state tax consequences of your choice of entity. Some states impose their net worth based franchise taxes on all limited liability entities; others impose them only on corporations, and not on LLCs that have elected corporate treatment for income tax purposes. Some states impose entity-level income taxes on LLCs that are otherwise treated as flowthrough entities. You need competent professional advice before you go any farther with this. As Peg suggests, you have either been given bad advice or have misunderstood the advice you have received. | |
| 21 November 2007 | |
| I have not received any professional advice, and am obviously incorrectly interpreting the information I've found out there.. :) ..
So, I have not elected YET to tax the LLC as a corporation.. I sounds like I should not. There won't be any personal legal liability issues if I leave the LLC as a "disregarded entity", correct? I understand there are other ways that would invalidate this (such as using my personal bank account, etc), but just leaving the LLC as a "disregarded entity" won't in itself give me any personal legal liability, correct? In terms of purchasing this computer equipment, it sounds like I should purchase it personally and deduct the expense against the original sole-proprietorship income i received previously.. then i should contribute it to the LLC. I'm assuming it is not smart to use this personal equipment for the LLC unless I contribute it, right ? Do I need to do anything formal to do so? and yes, it sounds like i need a CPA :) | |
| 21 November 2007 | |
| Virginia does not have a franchise tax issue. However, West Virginia does. If you produce income in both states, you will have to file both Virginia and West Virginia. Right now, your schedule C income is producing income tax and self-employment tax. Setting up a LLC taxed as a S-corp could be to your advantage, but seek the advice of a tax professional. Expenses you pay for personally can be reimbursed by the S-corporation and therefore deducted on the business return. The S-corporation is a pass-through entity which means the IRS doesn't normally tax at the entity level, but passes it's income to its shareholders via a K-1. The K-1 is reported on your personal return. | |
| 21 November 2007 | |
| Mspatts, you definitely should seek out a competent tax professional. You may end up causing yourself a lot of headaches and unnecessary expense down the road if you continue trying to do things on your own. There's a reason it takes us years to even begin to understand tax compliance. You're better off focusing your energy on what you do best, and leave the tax return (and maybe accounting) to a tax advisor. | |
| 23 November 2007 | |
| As far as liability protection is concerned, the tax treatment of the LLC has no significance. As you suggest, the important thing for maintaining liability protection is to treat the LLC for all purposes (other than tax, if it does not elect corporate treatment) as an entity separate from yourself. That means it has its own bank account and its own books and records separate from your individual records, and that it meets all of the reporting and other requirements of the state law under which it is organized. This is true regardless of the tax treatment it chooses.
The income from your sole proprietorship is your money and you can do whatever you like with it. You can contribute funds to the LLC (that will become your capital account in the LLC) and purchase the equipment in the LLC's name. But don't take another step without consulting competent tax and legal professionals. | |
Ksnoopytax (talk|edits) said: | 24 November 2007 |
| When I originally read this post, I had the same reaction as everyone else here but i'll re-enforce it just the same. We do this for a living and are very busy at it. Before anything is done that will cost more time and money to be undone, consult a tax professional. When you read tax rules especially in an article or otherwise, if you don't understand the whole picture, it could cost you dearly in the long run. I bet every professional on this board has new clients come in on a regular basis that talk to them when the damage has already been done and not before. I know I do. | |
