Form LLC for write offs regardless of buying in my name or LLC?

Question

Have been studying up for a bit, and it's time for me to get started as an investor. I read the other day that if I form a LLC I could be writing off A LOT of my daily expenses since my home is partially used as an office for my investing work and I may drive/fly to visit investment opportunities, etc etc. This seemed amazing to me, and I couldn't wait to form a LLC, get a credit card for business expenses, and feel smug come tax day.

Separately, I've read a lot of debates around buying investments under my personal name or under a LLC. Regardless of the right answer to that debate for me, why the heck don't a go ahead and form my LLC so I can write off all these business expenses (internet, gas, phone, flights, etc). Can I be doing these right offs under and LLC even if I end up buying my first investment in my own name?

I know the best answer is "talk to a local CPA who is familiar with real estate investing", but want to get the BP insights. Also, anyone know a great CPA familiar with real estate investing in the Santa Monica or Los Angeles area?

Cheers!

Brandon Hall · Answer

@James Calabrese you should talk to a CPA :)

As @Jean Bolger mentioned, you don't need to operate out of an LLC. You can operate out of your own name (sole-proprietor) and still have the liberty of taking all the deductions you named. The key will be to show that you are not an investor, but running an active business. It's not difficult to do, but it's best to get with a real estate savvy CPA to get your ducks in a row.

Keep in mind that the tailored expertise you are looking for may not be local to you. Don't be afraid to call on someone non-local. Many of us have clients worldwide and utilize available technology for collaboration.

Brian Fouts · Answer

I got an LLC when I started investing.  It has operated at a loss for three years due to education expenses, travel, etc., but has some minor revenue as well.

My wife has had business expenses, with no revenue, for her music career.  Lot of travel, marketing, etc.  No LLC, was able to deduct the expenses.  Our CPA did the paperwork at tax time.

You can do quite a bit of research online as to what business expenses can be deducted, just need to get organized at it.

A credit card in your business name is okay.  We have one and barely ever use it.  If your expenses are paid by your W2 income, just need to track those expenses.  A CC can help is separating them.

Brandon Hall · Answer

@James Calabrese Your W2 income is unrelated to your business income. You need to be "in business" prior to taking deductions. Though any expense you incur prior to being in business can be capitalized and potentially written off as a start-up expense.

Should they have CA expertise? Yes, so the question would be - does the remote CPA have CA clients? You'll find a lot of real estate CPAs do since CA is a hot spot for REI.

Should you get a business card? If you have an LLC, absolutely. Never co-mingle. If you don't have an LLC, it's less imperative. If you are doing it because you want to stay organized, then yes it's a good way to go.

Very cool that you grew up in Fairfax. I rarely meet people from DC - it's such a transient city.

Hope this helps!

James Calabrese · Answer

Thanks @Jean Bolger and @Brandon Hall. That is helpful input.

To Jean's point that I need income to deduct expenses from - can that be my W-2 income which is unrelated to investing?

To Brandon's comments - Good point that I can go remote with my CPA, but they should have California expertise right? In order to keep my deductions organized, would you recommend a credit card that is only used for business expenses? Should that likely be a small business card? Also, shout out to Washington DC! I grew up in Fairfax, VA and lived in Shaw Howard in DC for 4 years before moving out to Santa Monica.

Jean Bolger · Answer

A single member LLC won't have any effect on your taxes, it is a "pass through entity" for tax purposes. If you are an investor, then yes, there are many things you can deduct, as is true with any self employed business.  But you'll need to have some income to deduct those expenses from.

Form LLC for write offs regardless of buying in my name or LLC?

Most Popular Reply