Do I Need One?

If you are not a PLLC, you are operating as a sole proprietor. As a sole proprietor, your broker pays your commission to you as an individual under your social security number. With a PLLC your commission is paid to the PLLC, using the PLLCs Federal Tax ID number. The sooner you establish your PLLC the sooner you can begin avoiding self-employment tax on your commission.

To illustrate this lets compare operating as a sole proprietor vs. a PLLC taxed as an S Corporation.

    Sole Proprietor   PLLC (S Corp)  
  Commission Income

$ 100,000

  $ 100,000

 
  Direct Business Expenses 20,000   20,000  
  Auto Expense 10,000   10,000  
       
  Net Income $  70,000   $  70,000  
       
  Regular Income Tax 5,966   6,709  
* Self Employment Tax 8,598   -0-  
       
  Total Tax Owed $  14,564   $   6,709  
       
  Effective Tax Rate 21 %   10 %  
       
  * Assumptions: Year 2012, married filing joint status, standard deduction, and zero dependents.

Please note your individual tax savings may differ from above based on your specific circumstances and the amount of reasonable compensation declared.
 

Total Tax Savings: $9,148

Yes, You Need a PLLC. Why Pay More Tax than You Have To?

5 ways to give less to Uncle Sam

Reprinted from March 2006 Realtor magazine.

Diane Kennedy, author, with Dolf de Roos, of The Insider's Guide to Real Estate Investing Loopholes (John Wiley & Sons Inc., 2005 revised), offers these tips to Real Estate agents on reducing your tax obligations.

1. Go corporate.

By incorporating your business as a subchapter S corporation instead of operating as a sole proprietorship, you avoid self-employment tax and pay taxes on income at a far lower rate. It will cost you between $500 and $1,000 plus state filing fees to incorporate as an S corporation. Because you'll have less earned income under this structure, your later Social Security benefits could be less, depending upon what you've paid into the system

2. Minimize your business income by classifying a portion of your depreciable real estate as personal property.

Since personal property can be depreciated over 5 to 15 years, as opposed to 27.5 to 39 years for real estate, you will get higher deductions, thereby lowering your taxable income.

3. Deduct a chunk of your vacation costs by looking at real estate investments during your trip.

The key is how many days you spend on your real estate investments during the trip. Every business day that you spend all your time looking at properties, you can deduct 100 percent of your travel and hotel rooms and 50 percent of meals. You don't have to buy anything during a particular trip, but if the IRS questions your return, you'll need to prove you're a serious investor by showing you've made offers on property or have a track record of prior investments.

4. Open a Roth 401(k) in 2006.

This form of retirement savings account not only lets you withdraw funds tax free when you retire but also allows you to contribute up to $15,000 annually, regardless of your income. You can also use funds in a Sole Roth 401(k) to invest in real estate.

5. Take a deduction for your home office.

Many real estate professionals avoided this deduction in the past because the portion of the home used for the office didn't qualify for the capital gains exclusion when the home was sold. However, since 2002, this restriction no longer applies, although, when you sell, you still have to recapture any depreciation you've taken.
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