Many real estate investors aren’t aware of WHAT allows expenses to be tax deductible. The answer is: a business purpose and profit motive. If you lack one or both, an IRS audit on your rentals will not turn out well, because expenses you thought were deductible are disallowed. The IRS calls these “not-for-profit” activities. Your “rentals” may appear to be “not-for-profit” rentals when you: Charge less than fair-market-rents. Are slow to collect back rents. Fail to take legal actions for…
Beware: If you don’t collect fair market rents (FMR) on your rental properties, your tax deductions may be disallowed by the IRS. The reason is that the Tax Code requires that deductible expenses have a business purpose AND that you have a profit motive in order to take tax deductions. If audited by the IRS, you may have to prove that you’re collecting FMR, which is the going rate for rents of similar properties that someone unrelated to you would…
Ordinarily, the IRS has three years to audit you after you file your tax returns, but some returns can be audited back six years. These audits often involve real estate sales when IRS believes you omitted 25% or more of your gross income. When it comes to real estate sales, IRS argues that taxpayers claimed excess basis for a property when it was sold, resulting in a lower gain reported. If IRS believes the gain was understated by 25% of…
Many real estate investors assume that if audited their records and receipts are all they need to win the audit. However, it’s not always having the receipts that allows for the deductions, but what motivates you and your intentions at the time. Real estate investors need to understand exactly WHAT allows for a tax deduction? (It’s more than receipts). The Tax Code requires that you have a profit motive to deduct the expenses you incur in operating your rentals. If…
It’s not just the lack of receipts and records that cause most real estate investors to lose when audited by the IRS. Often, it’s their own testimony used against them that allows the IRS to reclassify their activity into something passive for a less favorable outcome. To illustrate a difference in the Tax Code over active v. passive participation, let’s discuss two hypothetical neighbors living next door to each other, who appear to had done most everything the same, but…
Having receipts and great records doesn’t mean that an IRS audit will go well. IRS auditors are masters of invoking provisions in the Tax Code that often make receipts and records useless. The tax rules are especially complex when renting a property for a few days at a time, such as renting-out a family cabin when you’re not using it. The following is an example of what can go wrong during an IRS audit of a cabin vacation rental. Facts:…
To help hold onto what you’ve worked hard to accumulate and to manage risk (especially for business owners) it’s important to segregate assets and activities into separate legal buckets. The separate buckets should be put into place BEFORE the threat of legal action or the court may rule that a fraudulent conveyance occurred. The number of buckets needed will depend on the type of activities and the amount of assets you own. For example, if you operate a business AND…
Business owners need to demonstrate good business practices in order to reduce their company’s liability and to prevent personal liability themselves. Operating a business through an LLC or corporation won’t protect your home and personal property from business lawsuits and creditors if you don’t also demonstrate good business practices. The following are some of our recommendations: Maintain the corporate or LLC veil of protection. Even corporations and LLCs that were properly formed could end up losing their asset protection quality…
The vast majority of small business LLCs and corporations in California may lack legal standing due to being improperly formed. To be properly formed under California law: LLCs must file articles of organization with the Secretary of State. These articles must be formally adopted by its members along with a signed operating agreement during its initial organizational meeting and recorded in the first minutes and retained in the LLC legal book. This includes LLCs that elect to be taxed as…
Proper formation of your LLC or corporation is mandatory to have legal standing in California. LLCs that lack operating agreements and corporations without approved bylaws may not be protected in California. Without legal standing your home and personal assets could be exposed to business lawsuits, liens and creditors. (See our article: “Does your LLC or Corporation have Legal Standing?” for details). Not only are operating agreements or bylaws necessary to establish legal standing under California law, they are also important…
If your company is sued, can you be held personally liable? Many people form LLCs and corporations to protect their home and personal assets from business judgments, but the vast majority of small corporations and LLCs have absolutely NO protection, because their owner’s commit alter ego blunders. Alter ego means that the company appears to be an alternate version of the owner; that the law cannot distinguish a separate and distinct difference between the two. When a serious alter ego…
You may have formed an LLC or a corporation with the understanding that your business structure would save you money in taxes and protect you from lawsuits and creditors. But for most small and micro businesses in California that is a myth. Only about two percent are in compliance and most are violating some regulation daily. Warning: Forming a corporation or LLC will not automatically provide you with any tax benefits or protect your assets. Having approved Articles from the…
The Rules for operating an LLC or corporation are complex and NOT COMPLYING with them can cost you thousands of dollars. We can take the burden off of you in keeping your LLC or corporation in compliance with the law to protect your tax benefits and protect your home and personal property from business liability. We have created an on-going year-round compliance and tax planning program for the protection and success of your business. Our Biz Tax & Compliance Coaching…
Under California law if your LLC lacks an operating agreement or your corporation bylaws, your home and personal assets could be exposed to business lawsuits and creditors. Your corporation or LLC could also be subject to unnecessary legal actions and be barred from defending itself or bringing suit for damages against another. Also, its contracts could be deemed invalid by the courts, allowing others to get out of their obligation to your company. Well written operating agreements and bylaws lend…
Many business owners form an LLC or a corporation with the misunderstanding that their business structure will protect them from lawsuits or creditors. However it is rare that these same owners operate their business in a manner consistent with their chosen entity structure, as required by law. Therefore, they often find out that they have no protection. The courts consistently rule that if you are not acting like a corporation or LLC, then you are not one. If you do…
To properly shield your assets requires planning and restructuring as to the way you hold and control those assets. Asset protection planning is the method of preparing for the possibility of future lawsuits by rearranging the ownership of assets so that they are beyond the reach of potential creditors. Taking action to protect your assets must take place before any event has occurred that could result in a claim against you. If you have already committed an act that could…
How can you, as a business owner, protect your assets when you start a business? If you begin a business without incorporating it or forming it as some type of limited liability entity, then all of your personal and business assets are at risk for all debts and claims against your business. If you run your business as a sole proprietorship or a general partnership, then you have no asset protection—all of your business assets are exposed to both, business…
