Brand new LLC what tax classification do I choose?

Question

Hello my name is Christina Gomez, I just bought a home on the Big Island of Hawaii. I am starting a vacation Rental where I will be living full time. I have already applied for my LLC and in the process of getting me state tax license and ID. I am not sure what classification to put my business under. I heard if I File as a pass through entity that my self employment taxes are very high. I also read that putting it into a C-Corporation I could pay myself and pay cheaper taxes that way, but I would be paying double taxes. I am sure this question is for a tax professional but if anyone has an insight or the experience with this question, Any info would be greatly appreciated. Should I just stay with a pass through entity and pay my taxes quarterly?

Christopher Brainard · Answer

Hi Christina and Welcome to BP!

You should use the entity that your CPA tells you to use :)

I'm almost certain that you shouldn't use a C Corp and that you should use a S Corp or LLC, depending on your personal financial situation and how much potential profit your vacation rental is going to earn. If you're worried about self employment taxes and have significant net income, S Corp is probably the way to go and you can even setup a solo 401k to stash cash.

-Christopher

Christina Gomez · Answer

Thank-you Spencer I will keep this in Mind, Thank-you so much for your advice..

Much gratitude for reaching out on this thread. Mahalo

Spencer Hilligoss · Answer

@Christina Gomez - congrats on creating a new business!

Other folks have already mentioned it on this thread, but I wanted to pile on with this key advice: CPAs are worth it! (similar to the advice from @Christopher Brainard: "You should use the entity that your CPA tells you to use")

My partner (wife) and I have worked with the same CPA for the past 6 years, but when we started to get serious about real estate investing we branched out and interviewed a handful of real-estate focused CPAs to get a sense of what we could be missing.

Ultimately, we decided to stay with our current CPA (because he's a breeze to work with and charges competitive rates), but our key takeaway from talking to multiple tax experts was: Great tax and legal advice is worth paying for

The advice found on BP.com is awesome and hugely beneficial, but when it boils down to it... taxes and legality are two areas of advice best left to the experts, in my humble opinion.

Best of luck with your new LLC!

Christina Gomez · Answer

Thank-you so much for all your advice you really helped me make a decision.

Mahalo which means "Thank-you" in Hawaiian..

Basit Siddiqi · Answer

@Christina Gomez

If you are projected to make $40,000 this year - There is room to save on payroll taxes with the S-Corp.You will need to talk to your CPA/Tax accountant and see what portion of the $40,000 will be allocated to salary.

The portion not allocated to salary will generate you 15.3% in payroll taxes.Let me know if you have any other questions

Christina Gomez · Answer

With one Rental unit I am hoping to get 3000.00 a month but down the road it will be double or could even triple. Less than 40,000 a year for now.

Basit Siddiqi · Answer

You pretty much have the option of Disregarded entity or S-corpS-corp can save you on self-employment taxes. However, you have to factor in all the costs associated with having an S-corp.You will need to see if the tax savings associated with having an S-corp outweigh the costs of running an S-corp.

What is your projected taxable income for the year?

Christina Gomez · Answer

ok thank-you. The only thing with disregarded entity is that your self employment taxes will be higher from what I read.

I am the Sole owner of the LLC.  I will be renting my downstairs unit for now and will be doing a bed and breakfast type rental.. Should I change my vacation rental to a bed and breakfast solely? Down the road we want to build yurts and tiny homes once it is up and running. Thank-you so much for your advice.

Basit Siddiqi · Answer

@Christina GomezHi Christina - If you are the sole owner of the LLC - you have 2 options.Disregarded entity - Income/expenses will be directly reported on your personal return. This is the simplest option.

S-Corp/C-Corp - as a general rule - you don't want to hold real estate in an C-Corp.If your vacation rental can be deemed ordinary income(if you provide items outside of solely renting a room such as bread and breakfast) - there may be some advantages of operating it as an S-Corp.If you have other owners in the LLC - you have the option of a partnership taxation or S/C-Corp.

Brand new LLC what tax classification do I choose?

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