Friday, January 14, 2011

Business Entity

Q:  My neighbor suggested that I put our 5th wheel into a corporation or LLC, thus turning it into a business, in order to write it off. Will this really work? BM, New Jersey

A.  And your neighbor's professional qualifications are . . .?  The ability to write off your 5th wheel isn't an issue of having a business entity. The only thing that matters is that you use it for business. If you aren't in business, there is no write off. And even if you do have a business, it may not meet the ordinary and necessary requirements set forth by the IRS. Remember also, that each state is different. A separate taxable entity, whether it be a corporation, partnership, limited liability company, family limited partnership, etc. exists only in the eye of the state. Each state has different requirements, and some states now charge a minimum tax just to have the entity in existence. Unless you are prepared to pay extra fees for the entity tax returns, licenses or fees by the Secretary of State, and extra fees for the bookkeeping requirements (you get the idea) . . . . keep it simple!

Remember, this blog is for addressing income tax issues, but quite often, legal ramifications get intermingled. If your neighbor happens to be an attorney, he may have had something in mind, but many attorneys give very sound legal advice, but fail to explain to clients the income tax ramifications and extra costs involved. This very topic came up yesterday when a client called regarding his real estate business. I suggested he contact his broker to check on their errors and omissions policy. We all want to limit our personal liability; but sometimes an insurance policy is the simpler and less costly answer.

If it sounds too good to be true, it is! Even though I do some work while in my rig, I don't write any of it off. I wouldn't pass the ordinary and necessary test, the record keeping is onerous and my job when we are on the road is to have fun!

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