Q:

Subject: Confusion...

Kerry - Thanks for having your webpage! I found it very interesting reading. Unfortunately, I'm still wondering if I'm doing things correctly.

Suspect some background would be good:

I'm divorced, and paying child support (for another 5-6 years), and alimony. My wife had legal access to my 1040's until now (that has ended in 2008 without a court order).

I've remarried to a legal resident, but non-US citizen (think thats relevant to S-Corp designation?). We formed a C-Corp in late 2006 to deal with single family home rentals we were interested in doing. Since then, we have grown to 6 homes in the area. Someday we would like to own 10, but no more. All are mortgaged in my name, since personal mortgage rates are WAY lower than Corporate mortgages. The C-Corp is the public interface that manages the property, accepts rental payments, pays the mortgages, reimburses travel expenses, etc.

At 10 homes, this company MAY generate $5000/month in profits in perhaps 10 years - and will be losing money or barely breaking even for some time. It was our plan to simply pay my wife a salary to drain that income from the company.

I am wondering if I should convert this C-Corp into an S-Corp, or LLC, in order to simplify accounting. e.g. Turbo-Tax handles rental properties well... and Intuits Rental Property Manager can feed Turbo-Tax directly. This would reduce (eliminate) my dependence on a local CPA that if a MAJOR expense ($150/hr and he loves to try and verify every transaction that occurs in the year, running up the total bill).

Any suggestions?

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

I wish I could be more help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time.

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.  

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.  You should note that geographic location should not be the main criterion for selecting a tax pro.

I do want to caution you from making these kinds of decisions based on your tax and accounting fees.  That is a very short-sighted approach to this kind of thing.  For example, I have plenty of clients with corporations whose annual charges are at least a thousand dollars more each year than they would be if we only had to prepare an annual 1040. However, I know for a fact that in almost every one of those cases, the proper use of their corporations allows them to reduce their overall tax bill by anywhere from $10,000 to as much as $50,000 each year.

I have long advised that there are what I call nuisance factors in having to keep separate books and file separate tax returns for corporations.  Only you can decide how much those factors are worth in dollars and cents.  However, for most people, spending a little extra time and $1,000 more in professional fees in order to save well more than $10,000 in taxes each year makes the nuisance factor seem quite affordable.

As I've constantly warned, there is no one size fits all in terms of the proper entities to use.  C corps do have a lot of tax savings opportunities if you work with an experienced tax professional.  Either way, if you were to use an S corp or an LLC, you would still need to keep separate books and file special income tax returns for them; so I don't see how that should be much of a factor in your decision process.

Also, as I've warned for decades, if you think any tax software, whether it's the consumer oriented TurboTax or the extremely expensive professional Lacerte software that I use, can take the place of a good tax pro, you are dangerously mistaken.  Nowhere is the adage of garbage in, garbage out more appropriate than with tax software.  Saving a few hundred dollars by trying to prepare your own tax returns is insane. Any good tax person will save you much more in taxes than his/her fee, as well as give you more protection against screwing things up on your own.

I'm sorry to be so blunt; but these points needed to be made.

I wish I could be of more assistance; and I wish you the best of luck.

Kerry Kerstetter

Follow-Up:

Appreciated Kerry - I'll go surf your section on selecting a tax preparer.

Thanks,

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 02:34:00 PM Send this post: