All Forum Posts by: Stephen Nelson

If you get an EIN for an LLC and you do it right, the IRS knows the LLC is an entity that can be treated as an S corporation. (That the LLC is what the treasury regulations label an "eligible entity" is embedded in the EIN information.) Thus, you do not need a new EIN when an LLC makes an S election.

My CPA firm does dozens of these elections every year for LLCs. And has for decades.

I missed the podcast. Will try to listen to that after tax season. But, yeah, that seems counterintuitive, doesn't it?

I'm a new participant here so I don't know if the "Rate of Return of Everything" research that appeared a few years ago was debated and discussed a bunch. I'd think it would have been. (The TLDR summary: Housing as an investment produced good long-term returns with less volatility than equities for many countries over last 150 years.)

Note: Here's a link to one version of the paper: The Rate of Return on Everything, 1870–2015 | NBER

In any case, that research suggests real estate is a really good investment. But investing in equities especially through something as tax-efficient and easy as an IRA or 401(k) makes a ton of sense to me, too. My thought or sense then: If you're only going to invest $10K or $20K a year--and that works for your financial goals--an IRA or better yet a 401(k) loaded up with passive ETFs or equity index funds works great. That approach also allows you to focus on your career (which is another investment of your and my energy and talents). And it will let you retire in grand style.

BTW where I think a small business (running your own construction firm, working as a real estate agent or broker, owning your own professional services firm, or owning rental property) makes sense is when you want to try and beat the return you'd get on equities by adding sweat equity and leverage to the equation.

And a further though: Where real estate is really interesting to me as a tax guy is when someone needs or wants to invest lots of pre-tax money. So way more than can be invested pre-tax into an IRA or 401(k). You can accumulate a lot of money in an IRA or 401(k) but you need to do so slowly and over decades. If you start late or some year want to invest a huge amount, an IRA or 401(k) doesn't actually work all that well.

If son got an EIN for an LLC, I think that would still work when or if the LLC goes from single member to multiple member as it does if the LLC goes from disregarded entity to S corporation. (Not saying he should elect S status... only using that as an example of how LLC EINs reflect their tax classification flexibility in many cases.)

Section 195 provides the rule for startup expenditures and the basic rule is you can't deduct startup expenditures until your business starts. And at that point, you amortize them over 180 months.

Example: You run up $75,000 of startup expenditures in year 1 and then start STR January 1 of year 2. In this case, you start writing off the $75,000 in year 2 and do so over basically 15 years.

Some special rules apply for "smaller" dollar situations. For example, if you keep the total $5,000 or less, you can write off $5,000 when you start the business.

If you keep the startup total $50,000 or less, you can write off $5,000 when you start the business and then amortize the reminder over the basically 15 years.

If you spend between $50,000 and $55,000, that $5,000 allowance gets phased out.

A caution: You need to be solid on the Section 195 stuff. It's vulnerability with businesses like STRs where you may start business in, for example, December, only show a little revenue or activity in year one but then put a gigantic deduction onto your return because of cost segregation studies and bonus depreciation.

I don't see this point listed above, but if LLC goes from being a single member LLC to a multiple member LLC, you'll go from having a disregarded entity to a partnership.

That greatly complicates the tax return. A disregarded entity just has its income and deductions reported on Schedule E inside the member's 1040.

A partnership return requires for all practical purposes a real accounting system that generates financial statements and a competent tax accountant.

Note: Not 100% sure this is right, but I think Intuit (which I consider the Costco or Walmart of entity tax return prep) seems to charge $1700-ish for a basic 1065?

One tangential thing that maybe is missed or isn't clear from the above discussions, you will probably not be able to shift from long-term to short-term during the year AND use the "average rental interval of seven days or less" way to categorize the income or loss as nonpassive.

Example: You rent for month of January as "long-term" rental and then do weekly rentals for the remaining 48 weeks. In this case, you have 49 rentals (the one "month" and the 48 "weeks") and you calculate your average rental interval using the formula:

365 days in year divided by 49 rentals

The formula result equals 7.45 days which is NOT short-term. Thus, in the conversion year? You're very possibly still a long-term rental for tax return purposes.

Here's my take on this as a tax guy who sees a lot of STRs:

1. If you do the short-term rental thing right, you will avoid having losses treated as passive. (You only need to have an average rental interval of 7 days or less, materially participate which you may be able to do with a few hours or at most with 100ish hours, and then not screw up by getting entangled in Section 280A.) That means you will be able to use the nonpassive losses.

2. Cost segregation studies move deductions out of future decades and mostly into the purchase year and the year following that. Waiting two or gulp even three decades to deduct your depreciation? That ignores the time value of money. And inflation.

3. They really aren't as expensive as some of the worst case numbers people throw around.

Julio, I think I've been sending a cost segregation study referral to you guys (to Kim) almost every week so far this year...

Love working with you guys.

I think some of the sentences above got garbled. Possibly, @Bruce D. Kowal, you meant to say that capital losses basically only shelter capital gains? (Exceptions exist, e.g., the $3K thing.) Or that passive losses generally only shelter passive income?

But nonpassive losses from a business or rental can shelter any other type of income (earned income, portfolio income, etc) as long as the taxpayer has at risk basis and doesn't run up against the Section 461(l) excess business loss limitation.

Example: Someone uses cost segregation to put a $500,000 nonpassive loss onto their tax return. If that tax return includes a $250,000 W-2 and a $250,000 long-term capital gain? The taxable income equal nets out to zero.

P.S. Er. I'm not sure it'd make sense to burn up depreciation to shelter long-term capital gain. But that's a different topic...

 My experience and advice mirror @Aaron Zimmerman 's. (And we see a lot of cost segregation studies. Dozens a year?)