20 Reasons Why You Should Not Use S-Corporations For Real Estate, 20 Reasons To Use LLC-Partnerships 🎄

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20 Reasons Why You Should Not Use S-Corporations For Real Estate, 20 Reasons To Use LLC-Partnerships

[Notes: LLC-partnerships do not have the following disadvantages by default, election or planning. On the legal side, the limited liability company (LLC) gives the corporate shield of limited liability and on the tax side, partnership tax law gives very favorable tax benefits; a great combination for real estate.

1.S-corporations are on the IRS hit list and audited much more than partnerships.IRS audits of small business corporations have skyrocketed by 145%!

2.S-corps are designed for active (ordinary income) businesses. Thus, using an S-corp for flips is a blatant admission of costly dealer status and impairs dealer-avoidance planning.

3.An S-corporation is subject to more payroll filings because S-corp

shareholders are employees and must receive a reasonable salary.

4.An S-corporation is subject to more IRS scrutiny and controversy

over the issue of paying reasonable compensation to shareholders.

5.S-corps have limits on fully deducting rental property tax losses because such losses are limited to the shareholders basis in the S-corps stock, which does not include third party leverage, such as a mortgage.Result: A loss of current tax savings.

6.S-corp distributions of tax-free borrowed money to shareholders could end up being taxable because of the above basis limitations. This could result in a tax bill of $1,000s!

7.Termination of an S-corp status freezes the deductibility of unused carryover losses.

8.Taxation on distributions of appreciated property deeded from the S-corporation to the shareholder even though you get no cash.

9.Taxation on the liquidation of the entire S-corp entity (with appreciated assets) even though cash may not be realized.

10.Conversion of an S-corporation (with appreciated assets) to an LLC will result in tax liabilities even though cash may not be realized.

11.Transfers of debt-free appreciated property to an S-corp is taxable if the contributing shareholder is not in control of the corporation immediately after the transfer.

12.Transfers of property with debt to an S-corporation do not increase the basis of S-corporation stock resulting in the loss of deductions.

13.In the event of a shareholder split-up, a stock ownership interest in an S-corp does not qualify for a 1031 tax-free exchange with no planning opportunities.

14.Income and losses must be apportioned strictly in accordance with the exact number of shares owned, with no variations of special allocations to different shareholders.

15.S-corporations restrict or complicate the opportunity for deferring capital gains via a charitable remainder trust.

16.S-corporations cannothave as shareholders IRA, corporations, partnerships and non-resident aliens. Otherwise it will lose S status to a C-corporation.

17.Upon death, there is no step-up in basis for the assets within the S-corporation. This is a deadly tax trap for the surviving shareholders including family members.

18.The purchaser of a stock interest in an S-corp cannot get a step-up in basis for the appreciated assets within the S-corp. This results in the loss of huge tax savings.

19.An S-corp can have only one class of stock ownership. Not being able to treat entity owners differently puts a limit on legal and tax-reductions planning.

20.Because of the above, shareholder debt that resembles equity too closely could be treated as a second class of stock causing loss of S-corp status to a C-corp.

21.If a profitable S-corp has passive income that exceeds 25% of gross income for three consecutive years, there will be loss of S-corp status to a C-corporation.

22.There is the need to properly and timely make the S election and continually comply with the various federaland staterequirements to preserve S status. (Loss of S status to C status could be a tax disaster in itself).

23.A few states tax S-corps but not LLCs. More taxes down the drain!

[NOTES: Sorry, its 23 reasons, not 20!And there are even a few more S-corp drawbacks.C-corporations have most of the above disadvantages plus their own pitfalls such as double taxation, higher capital gain rates, straight-line deprecation recapture, accumulated earnings tax and usually state taxes. Accordingly, both S and C-corporation are tax indigestion for real estate investors.]

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