January 11, 2007 KKO Lawyers “Choosing the Right Entity For My Business” “Self-Directing Your...
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Transcript of January 11, 2007 KKO Lawyers “Choosing the Right Entity For My Business” “Self-Directing Your...
January 11, 2007
KKO Lawyers“Choosing the Right Entity For My Business”
“Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?”
Taught by:Mathew N. Sorensen, J.D.
S. James Park, J.D., LL.M.
www.kkolawyers.com856 South Sage Dr., Suite 2, Cedar City, Utah
Telephone 435.586.9366 / Facsimile 435.586.9491
© Kyler Kohler & Ostermiller, LLP 2006
Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual’s or company’s needs.
Instructor Notes
© Kyler Kohler & Ostermiller, LLP 2006
Sales &Operations
SmallBusiness
Sole- Proprietorship
NO ENTITY
100%
Rentals
SoleProprietorship
Ordinary IncomeSchedule C
Passive IncomeSchedule E
Pros and Cons:
Easy to set up but no asset protectionand no tax benefits.
Sales &Operations
XYZ Enterprises, Inc.
C- Corporation
Rentals
“C”Corporation
Issued Dividends
C-CorpTax Return
1120
Notes:
Provides asset protection, but has major drawback of double taxation.
33% 33% 33%
Sales &Operations
XYZ Enterprises, Inc.
S- Corporation
Rentals
“S”Corporation
Flow Thru Dividends (“Net Income”)
S-CorpTax Return
1120S
Notes:
Works well for sales and operations.S-Corporation allows you to minimize self employment tax. Also used for shortterm real estate.
33% 33% 33%
The S-CorporationSalary/Dividend Splitting
Sole-Proprietorship
Limited LiabilityCompany S-Corporation
100kRevenue
50kExpenses
50kNet Income
Self Employment Tax 15.3%
$7,500 (approx)
Before regular income taxand itemized deductions
100kRevenue
50kExpenses
21,750kDividend Income
No Self Employment tax on the Dividend
$3,327 SAVINGS!! (approx)
Before regular income taxand itemized deductions
25kSalary
3,250kEmployment taxes
•This is sample of what one taxpayer may choose to report as payroll. Each taxpayer should analyze their individual situation for the amount of payroll that is appropriate.
Sales &Operations
XYZ Enterprises, LLC
LimitedLiability Company
RentalsLimited
Liability Company(“LLC”)
Flow Thru Income
LLCTax Return
1065unless
SMLLC
Notes:
Protects the business owner from the businesses liabilities. Primary benefit is asset protection.
33% 33% 33%
Sales &Operations
XYZ Enterprises, LLC
“Series” LimitedLiability Company
Rentals #1
“Series”Liability Company
(“LLC”)
LLCTax Return
1065unless
SMLLC
Notes:
Gives you the benefit of having multiple LLC’s and having separate treatment for each series within the LLC. Allows for one tax return.
Rental #2Rental #3
Sub-Series#1
Sub-Series#2
Flow Thru Income
Family Limited Partnerships
Farm landRaw Land
Mom, Dad and/or Childrenas Limited Partners
Charging OrderCharging Order
Firewall From “Inside” and “Outside” Liability
Notes:
Excellent asset protection entity. Allows for protection from inside and outside liability.
Family Limited
Partnership
General Partner
(LLC/Corp)Shell
Limited Partners
Rental Property
Option 1
IRA$$
SDIRA$$
Raw Land
- No Debt- No LLC/LP- No Partners- Direct Investment in name of IRA
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
Qualified Money and Real Estate
Qualified Money and Real Estate
Option 2
IRA$$
SDIRA$$
Rental Property(Income Producing)
Non-RecourseLoan
MortgageCompany
- Non-Recourse Debt- No Personal Guaranty- No Sweat Equity- No LLC/LP- No Partners- Direct Investment in name of IRA
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
Qualified Money and Real Estate
Option 3
IRA$$
SDIRA$$
Rental Property(Income Producing)
Non-RecourseLoan
MortgageCompany
- Non-Recourse Debt- Single Member LLC- UDFI tax- No Personal Guaranty- No Sweat Equity- No Partners- Direct Investment in name of IRA
SingleMember
LLC
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
Qualified Money and Real Estate
Option 4
IRA$$ SDIRA
$$50%
Limited Liability Co.
orLimited Php.
IRAOwner
40-45%
MortgageCompany
Guarantor
Rental Properties
3rd PartyOwner
5-10%- Recourse Debt - YES- Partners -YES- LLC/LP- Yes
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
Qualified Money and Real Estate
Option 5
Self Directed401K or Defined
Benefit Plan
50%
LimitedLiabilityCompany
MortgageRental Properties
Bs. Entity
- Defer up to $44,000in 2006 in 401K
- Contributions vary forDB Plan
IRAOwner
40-45%
Guarantor
3rd PartyOwner
5-10%
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
Self-Directed Plan Compliance Issues
• Must be Real Estate Operating Company if the Retirement Plan and IRA Owner own more than 25% of the LLC/LP See 29 CFR Section 2510.3-101
• Can’t have 100% control of LLC/LP
• Prohibited Transactions Transactions with Prohibited parties Use of Property Compensation of IRA owner
• Administration duties Annual report/valuation to Custodian Bookkeeping and tax return
BEWARE!!This is not a comprehensivelist, and also requiresa properly drafted Company document!!
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?
UBTI and UDFI
• Unrelated Business Taxable Income (“UBTI”)•Exemptions for rental income, interest income, gains from sale of property other than property held for sale in the ordinary course of business.
• Unrelated Debt Financed Income (“UDFI”)
• Two Tier Analysis
• Real Estate Professional / Dealer Status
• Debt is the key calculation
• Trust Tax rates
• 990 Tax Return for IRAs, 5500 for 401ks
** This is only a survey of points to consider, these rules must be studied and implemented with care.
Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do?