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IRS' new ownership policy can offer savvy owners a tax break.

A new and exciting opportunity has developed over the past few years, an opportunity particularly well suited for real estate owners and operators. However, it is one that is frequently overlooked by many. This article will explain how combined Limited Liability Company and Qualified Subchapter S groups (a group of S corporations wholly-owned by a parent S Corporation) offer the chance to simplify your business life and save a lot of money.

When describing the ownership structure of the typical owner/operator of real estate, an abundance of entities often comes to mind. There are limited liability companies (LLC), limited partnerships (LP) and S corporations. There may even be some old C Corporations creating unnecessary tax or an old general partnership providing no liability protection. Additionally, there may be other entities that have no purpose; except to be an owner in other entities. Understandably, entities accumulate, but your focus should be on trying to manage your business, not your business structure.

Are you starting to get the picture? Lots of bookkeeping here. Tracking loans and transactions between the entities can seem like a second job. There are dozens of tax returns that need to be filed, creating what could be a sizable amount of minimum tax to New York State and New York City. All types of tax pitfalls arise, including charges for interest, management fees and other costs between your entities. And planning whether you will be able to take advantage of losses from certain entities to offset profits from others is a whole other ball of wax!

So what can you do to simplify your business life and reduce both expenses and taxes?

Let's start by looking towards wholly-owned Limited Liability Companies (LLC's) and S Corps (QSSS). It may sound complicated but it isn't. The Internal Revenue Service and New York State offer you the opportunity to have the best of two worlds. First, you can keep your businesses and properties in separate legal entities, which will protect you from liability. This means legal title in separate entities, separate bank accounts (if you are not taking advantage of a conduit account), separate mortgage agreements, etc. However, if you properly structure the entities and file the required elections, the IRS and New York State allow you to combine these entities for tax filing purposes into neat packages.

All of this means that the separate general ledgers, or "books," of each entity are combined into one tax filing for both IRS and New York State. The result is a reduction in tax preparation charges and the elimination of many of the potential tax "audit" traps created by interest, management fees or other charges between entities. Additionally, the losses of entities within the group are directly available for offset against the profits of others. This leaves less room for nasty surprises come tax time. Finally, as an added bonus, you can put some of the time previously spent signing and reviewing stacks of returns to good use.

As always, there are cases where some or all of the entities must file separately, such as where the ownership of each entity is different. Some of the old general partner entities may also still be needed. In my experience however, even in those cases, multiple tax entities can often be reduced to a more organized and less expensive few.

Though New York City entities require special attention, we have been just as successful in reducing New York City minimum taxes by reducing multiple partnership and S Corp entities to a minimum. With New York State and New York City both imposing minimum tax on each entity, the annual tax savings alone can reach tens of thousands of dollars!

Since each situation is unique, it is advisable to review your situation in greater detail with a tax advisor who is well-versed in this area. Simplifying your business life will help you reduce expenses and tax, and allow you to enjoy the time and money you save.
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Article Details
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Author:Newman, Marc
Publication:Real Estate Weekly
Article Type:Brief Article
Geographic Code:1U2NY
Date:Apr 5, 2000
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