Tax man says "Become an S Corp" - thoughts?

[Joanna Lenn]

Hey there!  I own a triplex and I also work a full time job as a W2 employee. 

Due to the new tax law, my tax man says I should become an S Corp asap. This is based on my typical deductions every year - regardless of my triplex income.  He says I can put my triplex insisde the S Corp or not. 

Questions:  

• Any pro/con advice on becoming an S Corps?

• If I do become an S Corp - will that help or hinder me getting loans in the future? I want to get another property.

• If I do become an S Corp - should I put my triplex in there, too? 

• Does having the triplex in the S Corp help protect me from lawsuits?

Thank you for any help.

[Linda Weygant]

Originally posted by @Joanna Lenn:

Originally posted by @Ashish Acharya:

You were also asking if you should put Triplex in the S-corp "too". What were other purposes of the S-corp?  Hopefully, you are not going to say it related to your W-2. 

Yes! Putting the triplex aside... I'm claiming $2,700 in business expenses (for my W2 job) for 2017, and unless I become an S Corp or LLC he says I will no longer be able to claim those, that the new tax law won't allow me to. I'd owe $2,700 more.

Others have already indicated why you shouldn't put your tri-plex in the LLC, so I'm just going to address the words I underlined above.

So, your tax guy is smoking crack - a lot of it - and here's why.

An S-Corp is meant to be a business.  A business is an entity that generates income and expenses and calculates a profit or a loss.

The S-Corp he is proposing generates $0 income and generates expenses that do not benefit the S-Corp - they benefit somebody else's business.

So the S-Corp is going to generate losses year after year after year.  Even in the first year, you will maybe contribute $100.00 to open the corporate account.  Then it generates $2700 in illegally claimed losses.  Your basis is $100, your losses are $2700.  You now have a Loss in Excess of Basis Scenario and.... guess what?   You can't claim those!  You must have basis in your S-Corp equal to at least $0 in order to deduct the losses.

So now you have to contribute more money to your S-Corp in order to increase the basis with the opposing entry being a Shareholder Loan.  Once that loan climbs up to $10,000 or more, you will then need to impute interest on that loan, so now you've got Interest income on your personal return and..... well, this whole scenario just becomes stupider the more I think about it.  So here's the strikes against it:

1.  Your expenses don't benefit Your business (they benefit somebody else's).  Therefore, they are not deductible to you.

2.  Your business is generating no income, so you have losses in excess of basis.

3.  If you generate equity/basis via loans to the business, you'll eventually have imputed interest.

4.  You get to pay your tax guy whatever he charges to prepare an S-Corp return

5.  I totally forgot to mention that you'll have to pay yourself a reasonable salary from a weird fictitious business that has no purpose other than to dodge taxes.  Talking about how that is detrimental to you would take about 3 more paragraphs.

If I knew who your preparer was, I'd be inclined to turn him into the IRS for grossly fraudulent tax positions.  Preparers go to jail for that stuff.  Stay away from this guy.