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Old 12-10-2013, 06:58 PM
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Join Date: Dec 2013
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New LLC with calendar year expenses but no income

Hello all,

I started an LLC in August of 2013 that focuses on residential real estate flipping. I purchased the first house and have completed the renovations. I have plenty of expenses including the cost of the house but since it has not sold yet I'm wondering how I should be reporting this year taxes. My plan is to report as an S corporation and pass everything on to me (as the sole proprietor). My hope was that it would have sold this year so that I could neatly just pay on the profit.

So what I have is like this (hypothetically), 55K in expenses for CY 2013 and no income. If I write off all these expenses as losses and then pass that through to my personal income (using an S Corp designation) I would be setup nicely this year but next year when the house sells I'll be on the hook for the entire sale price as a income since I would have nothing to write off against it (or at least that's my understanding).

So the question is, an I forced to report the loss this year or can it be deferred to next year?

Any insight would be appreciated!

Dean


Last edited by Deano15 : 12-11-2013 at 11:31 AM.


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Old 12-11-2013, 05:01 PM
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Quote:
Originally Posted by Deano15 View Post
Hello all,

I started an LLC in August of 2013 that focuses on residential real estate flipping. I purchased the first house and have completed the renovations. I have plenty of expenses including the cost of the house but since it has not sold yet I'm wondering how I should be reporting this year taxes. My plan is to report as an S corporation and pass everything on to me (as the sole proprietor). My hope was that it would have sold this year so that I could neatly just pay on the profit.

So what I have is like this (hypothetically), 55K in expenses for CY 2013 and no income. If I write off all these expenses as losses and then pass that through to my personal income (using an S Corp designation) I would be setup nicely this year but next year when the house sells I'll be on the hook for the entire sale price as a income since I would have nothing to write off against it (or at least that's my understanding).

So the question is, an I forced to report the loss this year or can it be deferred to next year?

Any insight would be appreciated!

Dean
In general, you need to report the losses on your 2013 return, NOT on your 2014 return.However, assuming you actively participate in the operation of your S corp and you're not merely a passive investor and sufficient basis in AAA acct.not neg balance in AAAacct.then, if your S corp suffers a loss in the tax year of 2013 you can deduct your share of the loss against your other sources of income, such as dividends, interest, your spouse's wages, etc.say,you own a 100% interest in your S corp. Your S corp suffered a biz related loss of $55k in 2013, then. you have a part-time job from which you earned , say,$20k. You also earned , say,$1k in interest and received a dividend of $1k on stock you own.Your total income from your job, interest, and dividend is $22k. You can deduct the $22k of the $55k loss from your $22k income not from the S corp.you can also deduct the remaining $35k as long as youhave sufficient balance in AAA acct.so,You can only deduct an S corp loss if you have a sufficient tax basis.also youdo not need to issue a w2 to yourself as the corp took looses in 2013.
Note;as you can see, an S corp is a business structure that allows its investors to claim earnings and losses on their personal income tax returns. Before you enter losses reported on a K-1 schedule from an S corp into your personal tax return on 1040, you must be sure you have enough basis as a shareholder to claim the losses. So, knowing how to determine your basis and how the current year's increases and decreases affect it will tell you whether you can claim all or part of the losses or whether they are suspended. you can only deduct losses of the S-Corp against ordinary income to the extent you have basis in the S-Corp.Anything above that is considered a capital loss. It's probably long-term capital loss so it's subject to the $3k per year limit with any amount you can't deduct this year carried forward to future years. If you do that and get a negative number for AGI on line 37 of 1040, then you could have a Net Operating Loss. with NOLs you want someone, a cpa/ an irsea in your local area, who knows what they're doing. And be prepared for your professional to charge more than an average return as it will be a lot of work for him/her. You need report on your 1040 the appropriate amount from your K-1 from the S-Corp. (as said, unless you don't have sufficient basis, then you will need to carry it forward to 2011). The basic rules for using an NOL are: you need to carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver. Also you may carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years. After 20 years, any remaining NOL is cancelled.
It makes financial sense to apply the NOL against the earliest periods possible, since the time value of money dictates that the tax savings in these periods is more valuable than for any tax savings in later periods.
If NOLs are being generated in multiple years, use them in the order the NOLs were generated. This means that the earliest NOL should be completely drawn down before the next oldest NOL is accessed. This approach reduces the risk that an NOL will be terminated by the 20-year rule noted earlier.



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Old 12-11-2013, 08:43 PM
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Thank you for the information!

I do have enough basis to completely write off the losses on my 1040 (since I did participate and am the sole owner). I will have close to 65K in expenditures for 2013 and I can cover that easily from my day job. But are they really losses? Since the money purchased materials that went into the house which increased its value.

I guess I'm still unclear about the write off as the house is an asset with value, right?

This would have been so much easier had it sold this year!!!

Thank you again.

Dean



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Old 12-11-2013, 09:34 PM
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Originally Posted by Deano15 View Post



#1;I do have enough basis to completely write off the losses on my 1040 (since I did participate and am the sole owner). I will have close to 65K in expenditures for 2013 and I can cover that easily from my day job. But are they really losses? Since the money purchased materials that went into the house which increased its value.




#2;I guess I'm still unclear about the write off as the house is an asset with value, right?

This would have been so much easier had it sold this year!!!



Dean
#1;I know what you mean; losses hereby , I mean; business loss that occurs when a company fails to generate enough revenue to cover all expenses associated with the operation of the business. Even if the money was spent to purchase materials that went into the house, it is part of operating expenses of the corp. The main expense that you, as a house flipper, incur is renovation costs. For the sake of adding value to a property, you may spend a considerable amount of time and money doing work on home interiors and landscaping.You may do this work yourself or hire a contractor to do it. Either way, the materials you must purchase for this renovation are deductible business expenses. Whatever you pay the contractor for labor is a deductible business expense as well,Ok??ALSO, virtually you use vehicle a part of your daily business activities. You drive around to find, visit and inspect properties that they are considering purchasing. They may also use your vehicle to transport materials for renovation. When you use your personal vehicle for such purposes, yoiu can deduct a standard rate per mile driven in this capacity. If you purchase vehicle specifically for these capacities, you may deduct the cost of the vehicle as well as maintenance, repair and fuel costs.
If your flip goes sour and you wind up losing money, there's an advantage to flipping as a business rather than as an investment. When it's a business, you can use your net loss to offset other income on your tax return. When it's an investment, you can deduct a maximum of $3K a year in losses as said previously. If your loss is greater than that, you can spread it out over several years, but each year's deduction is limited to $3K UNLESS you have sufficient basis in the corp.

#2; As mentioned above; please read comment on NOL posted previously.
I guess you can contact aCPA/an IRSEA for your fed/state returns and more info in detail



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Old 12-12-2013, 09:35 AM
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Posts: 3
Thank you again for the quick reply!

I've kept good records of miles driven and every penny I've put into the house so I can easily sum that up. But what about the purchase price of the house? Is that deductable as well? Or does that carry over as an asset on the books and shouldn't be concidered an expense?

How would you suggest I approach this scenario when filing:

1. House purchase price 44K
2. Renovation costs 21K
3. House has not been sold, therefore, no income

Also, my tax basis will be over 100K from my day job.

Thank you for your patience as I gain an understanding!

Dean



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Old 12-12-2013, 04:19 PM
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Originally Posted by Deano15 View Post




#1;But what about the purchase price of the house? Is that deductable as well?



#2;Or does that carry over as an asset on the books and shouldn't be concidered an expense?




#3;How would you suggest I approach this scenario when filing:

1. House purchase price 44K
2. Renovation costs 21K
3. House has not been sold, therefore, no income

Also, my tax basis will be over 100K from my day job.

#1; As you can see, NO;it is the basis of the home for renovation.For example, if your home was a gift, your basis will be the same as the donor's adjusted basis at the time it was given to you as long as the FMV of the home is higher than its adj basis. However, if you realize a loss on the sale of your home, your basis is the lesser of the donor's adjusted basis or the fair market value on the date it was given to you. If you just bought it, then your purchase price’d be its original basis.IN GENERAL, After you acquire a home, various events can increase or decrease your original basis in the home. The effects of these events result in your adjusted basis.For example, home improvements are the most common increase that occurs to a home's basis. There are limits on what the IRS considers an improvement. An improvement must accomplish one of the following three goals: Materially add to the value of your home;Considerably prolong its useful life, or Adapt it to new uses. Only the actual costs incurred for improvements can be added to your home's basis. You can't add a value for your own labor.What I mean is that you CAN’T DEDUCT your home improvements on 1120S as biz operating expenses as they are added to your home’s basis.

#2;Correct as mentioned above; needless to say, fundamentally, you need to know your basis in your home to figure any gain or loss when you sell it. Your basis in your home is determined by how you got the home. Generally, your basis is its cost if you bought it or built it. If you got it in some other way (inheritance, gift, etc.), your basis is generally either its fair market value(your purchase price I mean) when you received it or the adjusted basis of the previous owner if you receive it as a gift. While you owned your home, as said,you may have made adjustments (increases or decreases) to your home's basis. The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home.


ALSO NOTE: when you frequently flip real estate for profit, the IRS considers those transactions business income even if you don't. As such, you can expect to be taxed at a rate as high as 38.5 percent ( for 2013, I guess)of your total profits. To help avoid such a hefty tax burden, you may slow down. By living in a property as a primary residence for at least two years, you can renovate and sell for profit without incurring a huge tax bill. At the same time, you can deduct mortgage interest and property taxes from your personal taxes on Sch A of 1040( as long as you itemize deductions) while living in the property.


#3;Then your new BASIS(ADJ BASIS) is NOW $65K;$44K+$21K. As said you CAN’T deduct the improvement cost of $21K as long as it considerably prolongs its useful life, or Adapt it to new uses. Pleased read above.

#3;Then as an S corp sole owner, your basis can increase by $21K I guess. If you purchase property/biz assets, I mean, to use in your business, your basis is usually its actual cost to youincuding improvements or etc.. If you construct, create, or otherwise produce property, you must capitalize the costs as your basis.
Your basis in your S corp helps determine how much tax you owe. It is the S corp's responsibility to issue a Form 1120S Sch K-1 to you.It is the yourresponsibility to track your individual (stock and debt )basis. All information for computing the S corp owners' basis is on Form 1120S Sch K-1. An owner's basis in an S corp helps determine how much tax you owe for the period. you must keep up-to-date information on your basis each year.

If you expect the S corp to incur substantial losses in excess of your basis, then as LTCL, these losses would not be deductible on your personal tax return. $3K is maximum for deduction on yur return as said previously.If your S corp obtains a line of credit that is co-signed or guaranteed by you, to support the losses or cash flow, this method does not increase your basis per IRS rules.The best way to increase Basis in an S corp is to obtain a loan personally byyouand then loan this money to the S Corp. This is referred to as a Back-Back Loan to the S corp, increasing debt/loan basis of your S corp.



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