W-2 Employee w/ Pre-Revenue LLC - Accountant says I should be an S-Corp

[praynmama]

I hired 1800Accountant due to being a first time business owner. I created my LLC but did not elect a status. 1800Accountant says I need to apply for s-corp status to get my business losses to pass through on my personal income.

I’m not sure if this is true and honestly confused. I thinking I’m two years away from generating revenue.

 

[ojpalosa]

@praynmama Not true but an s corp may be a more tax beneficial way to set it up so that you pay less taxes on anything over your personal s corp salary

 

[praynmama]

@ojpalosa I’m a w-2 employee with a side business llc. I was hoping the losses form the business would pass through to my personal income. I was told you don’t need an s-corp unless you are generating 40k+ revenue. But why would the accountant want to put me in an s-corp?

 

[ojpalosa]

@praynmama The losses will pass through as long as you itemize the deductions, which an accountant will tell you if it’s smarter to take the standard deduction or to itemize come tax time. Where an s Corp helps is let’s say you make 40k from your side hustle , as an LLC, the total amount is subject to taxes , including FICA taxes (social security Medicare etc)….. where for an S Corp, you could give yourself a “reasonable salary” of 25k let’s say, on which you’d pay all taxes , and the remaining 15k leftover as “distributions” will be exempt from FICA taxes. The more you have leftover past your reasonable salary , more you save on taxes by not having to pay FICA taxes on the overage. If that makes sense

 

[praynmama]

@ojpalosa Okay, that makes sense. But I don’t think I’ll be generating revenues anyway close to that. Really think I’ll be taking losses on the business for awhile. Since I still work as w-2 employee, I was hoping to take the business losses and pass that on through to my w-2 income.

 

[ojpalosa]

@praynmama Again , that may be possible , but once you start itemizing your losses , you’re not eligible for a standard deduction (which unless your losses are enormous , might not make sense in your case from the sound of it). But yes come end of the year you will be able to either itemize and deduct your losses or take the standard deduction , whatever makes the most sense financially

 

[praynmama]

@ojpalosa OH okay, just like personal taxes. I file my personal taxes every year and never take the itemized. It’s always standard. This applies to business as well?

 

[ojpalosa]

@praynmama This applies if you want to write off your business losses on your personal income tax return against your income. Your other question about the reasonable salary you can still elect s Corp and and pay yourself no salary but at that point might just make sense to leave it as an LLC if you don’t have revenue for years anyway.

 

[mia08]

@ojpalosa Are you saying that LLC losses are considered an itemized deduction? Because that’s not true.

Losses on a single-member LLC show up in the Schedule C, not the Schedule A (Itemized Deductions), and do not have an affect on the standard deduction.

This is assuming the LLC doesn’t repeatedly post losses to the point of triggering the hobby loss rules, which doesn’t appear to be the case here.

 

[praynmama]

@ojpalosa Does it hurt me if I elect s-corp but have no revenue? How would I give myself a reasonable salary if I am not generating any revenue?

 

[ojpalosa]

@praynmama Think realistically what likely will happen is you’ll end up taking the standard deduction anyway. Since I think you’d need to be doing more than 10-12k itemized deductions to make it worthwhile , or whatever the standardized deduction was last year

 

[praynmama]

@ojpalosa Okay, thank you for your help!

 

[jesusculture]

@praynmama I'm not an accountant but I have an S-Corp.

Your accountant wants to have your LLC taxed as an S-Corp. Meaning you can use losses to offset any personal taxable income.

As an S-Corp, you have the ability to report on your personal tax return the income/losses, deductions or credits of the business.

I don't believe they are asking you to change your LLC into an S-Corp, just to have your LLC apply to be taxed as an S-Corp so you can benefit from the losses on your personal tax returns.

 

[praynmama]

@jesusculture Is there a difference to having your llc turned into an S-corp for having LLC taxed as an s-corp?

 

[ojpalosa]

@praynmama You just have to elect your LLC to be taxed as an s Corp

 

[jesusculture]

@praynmama Depends on your state regulations, but in general, the tax structure of an S-Corp is more beneficial when you start growing and generate higher revenue. As an LLC you pay self employment tax which can be more expensive.
It also depends on where you see the business in 5-10 years in terms of growth and if you want the ability to raise capital or take on investors. An S-Corp is more beneficial in that sense.

 

[praynmama]

@jesusculture I really don’t see much revenue generated for a long time. I told 1800accountants this and they seemed to understand and then mentioned how I am a w-2 employee and can pass through the llc losses. I’m afraid they might be pushing me into an s-corp to then charge me for additional work, if that makes sense. If I don’t need to be due to no revenue growth then what is the benefit?

 

[jesusculture]

@praynmama I think I see the confusion. Reporting your losses on your personal tax return depends on how your LLC is classified. Sole proprietorship? Multiple owners? S-Corp? C-Corp? These are all tax classifications and will dictate how you report your taxes. You don’t have to be an SCorp to pass though your losses, but it may benefit you more. Without knowing your business or state regulations I can’t offer any more guidance than that.

 

[praynmama]

@jesusculture Yes, my LLC is registered in IL and is an animation studio. I am creating content like original stories and other videos. I eventually want to take my original story to a crowdfunding platform. The game created in the original story would then be sold on a crowdfunding platform but I need to finish all content first. It’s taking me a long time and I’m incurring losses doing this. Its basically running like a pre-revenue business.

 

[jesusculture]

@praynmama According to IL state website you can’t offset losses on income unless you are an SCorp. That’s why you were advised to change your tax status.

https://tax.illinois.gov/questionsandanswers/answer.605.html