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Old 09-16-2008, 03:41 PM
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1099 Other Income treatment from C corp

Dear Guru,

I invested in an LLC dedicated to real estate. According to a lawyer, the best way was to incorporate a corporation, and so we did. The corporation received the K1 of the company. Any money received from the investing company was deposited into the corporation's bank account and distributed to myself. When the tax time came around the tax preparer, generated 1099 as other income for the money distributed to myself, as an expense of the C corp so that no tax would be pay at the corporate level. All the income was subsequently reported in my personal tax return.

is this figure correct, and if so, would it pass an audit if challenged?

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Old 09-23-2008, 11:12 AM
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I personally don't like this set up, because, income from the Real Estate is usually considered passive income not subject to S/E tax, whereas the 1099-Misc is considered Active income that is subject to the S/E Tax! Thus, taking a distribution and treating it as a 1099-Misc is subjecting you to the S/E tax.

Further, I am not sure that this is best course of action assuming you continue with this set up. You really should be taking a Corporate Salary instead of a distribution as a 1099-Misc.

Also, I am not sure why you would be holding passive income in a Corporation and subject your corporation to the Personal Holding Company Tax! It would appear that you meet the criteria of being considered a Personal Holding Company as your adjusted income from Rents would be more than 50% of adjusted ordinary gross income!

In short, I strongly advise you to contact a CPA who is very experienced in Real Estate Practice, to review this set up with respect to the tax aspects of this deal.

Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

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