Creating a secondary business

[Lucas A Riemens]

I am considering forming an LLC for landscaping and a second for construction. The thought being that it would create additional tax breaks when purchasing equipment etc that would be mainly used to maintain my properties. I believe that the companies can show a loss for up to three years before needing to turn a profit allowing me to write-off/amortize all of the equipment and expenses related to them then show nominal profits from them going forward. Is my though process correct or can I just include these expenses in the LLC that owns the property?

Thanks

[Kory Reynolds]

You can just allocate the equipment costs to your rentals, no need to set up a separate entity. Just allocate in a reasonable manner across your properties.

If everything you do is real estate, there are only a couple reasons to set up a separate management type company. Generally it can be disadvantageous as this would create self employment income, where leaving the income in the rental it is not subject to self employment. The reason you may want to do it anyways is to create self employment income to take advantage of the deductions for self employed health insurance and some retirement plan types.

I will also note that an entity doesn't have to show a profit after 3 years to be a business - that is just one consideration in the facts and circumstances test. This particular rule was created to help rule out hobby losses, particularly horse racing. We have clients that have shown losses for way over 3 years straight where no way in heck you would call it a hobby. I have one entity 10 years strong of losing over several million a year, and they are convinced it is going to turn around, and it is run as a business - facts and circumstances, it's a business.  In the case of providing services to your other businesses, with losses many years straight would likely still be considered a business.