LLC for Properties and S Corp for Property Management

[Michael Cooprider]

Ok, I have 3 properties under my LLC, Wiregrass Property Investors, LLC (WPI). My wife and I are owners. We make $40,800 a year in rents, before taxes. I also have an umbrella policy to cover my personal assets.

I have just recently filed and paid for an S Corporation to run my property management, Wiregrass Property Management, LLC (WPM). My wife and I own and run this too. Note, for all of you CPAs and Accountants, this was advice from my CPA who is also an attorney in Alabama.

Now, I am just about to pay off all of my houses and all of the rental income will be taxed with very little in the way of write-offs/expenses. I am going to retire in two years and will have no more income under a W2. The structure will be LLC-owned property (WPI) with an S Corp-owned (WPM) rental property for a pass-through entity. Questions/points of interest I have:

1. I am assuming reasonable compensation/income is 10% of the rent and for this, I will pay income taxes on?

2. Will I still get a 20% qualified business deduction on the amount I do not pay the management company, thus saving me on taxable income?

3. Can also put money from my profits into a tax differed account (i.g. a Roth IRA), and will this reduce my taxable income?

4. Will I be subject to excess net passive income tax (I am understanding that this is 25% of my corporate gross. I read that this could me as much as a 21% “Sting” tax.

5. Even though the properties are under the LLC and the management of them is under an S Corp, will my children be charged full capital gains tax if I pass away?

6. Are my long-term rental properties considered passive income and what does this mean to me legally for tax purposes?

7. How much will I have to pay on the dividends paid out the owners? My wife and I only.

I paid $1,800 last year to a CPA who worked for only 20 min to file with just my LLC so I switched to a new CPA/Attorney who is setting all this up. He is telling me it will cost me about $2,000 after the initial cost to do my annual taxes but save me $3000 in paid taxes. That is why I did this in the first place.

I have already paid out $1,000 in legal fees to set up the S Corp, $200 to set up new bank accounts, and will have to pay about $100 a month to use software to run the management company. Not to mention, my time and added headache of the whole thing. Is the juice worth the squeeze in this case? I am a go-getter and do not mind the extra work if I will profit from it but if it is not profitable or not legal, I will not do it.

I know you CPAs do not like to give advice so call it counsel or wisdom from others who have done this or know about these type of tax laws.

Help!