LLC for consulting worthwhile under AMT ?

[Delawaredave5]

We will be snagged by AMT in 09.

Wife is starting a consulting business. I suspect her expenses will exceed her revenue in 09. Let's say she has $5,000 in revenue and $10,000 in cost.

Should I set up an LLC or S-corp in 2009 ? If there's no financial advantage in 08, I'd rather wait to see if consulting stuff pans out.

Would being in AMT world change anything ? Is below true:

Without LLC: the $5,000 revenue would add to our AGI and increase our tax. The expenses would not be deductible (below the 5% threshold).

With LLC: the LLC would transfer a net loss of $5K to our personal return. But our taxes would probably not fall - because of AMT.

Thanks for any input !!!!

 

[ziggy29]

I'd consult a CPA or a tax attorney on this one. The consequences of being wrong seem too great here. I think professional help is well worth paying for where a decision like this is concerned.

 

[Rich_by_the_Bay]

I don't think there is ever a direct financial advantage for a sole proprietor to become an LLC -- it's about liability protection, and all income flows through to your personal return (AMT and all).

Let us know what you learn from your accountant.

 

[Martha]

Rich is right, sole proprietor or single member LLC, the income and expenses are passed through to your spouse. I don't know what you mean about a 5% limit on deducting business expenses for the business if it is not an LLC. If you are an employee and have some business expenses incurred as an employee, there are thresholds to meet before the expenses are deductible, but this doesn't apply if you are running your own business.

 

[Delawaredave5]

Rich is right, sole proprietor or single member LLC, the income and expenses are passed through to your spouse. I don't know what you mean about a 5% limit on deducting business expenses for the business if it is not an LLC. If you are an employee and have some business expenses incurred as an employee, there are thresholds to meet before the expenses are deductible, but this doesn't apply if you are running your own business.

1. If wife gets 1099 for income in her name: then any expenses are recorded on our personal return, form 2106, and only amounts in excess of 2% of AGI are deductible - and our total deductions are reduced further at our income levels for 09. So basically the expenses do not offset revenue.

2. If wife gets 1099 for income to her company: then there's a tax filing for the LLC - where expenses are subtracted from income to get a net gain or loss (in this case, loss) -- and then I think that loss passes to our personal return.

I think in scenario #2 above the expenses are more "usable" against income.

Please don't reply: "talk to an accountant" - I know that....

I'm just trying to see if anyone on the group has had experience in this area - I'm trying to learn before I get professional help.

 

[ziggy29]

Please don't reply: "talk to an accountant" - I know that....

Well, excuse me for breathing. This is not the kind of decision I would want to DIY based on message board advice. But have it your way. I'm out.

 

[clifp]

Since this is pretty esoteric, you might try posting at either the Motley Fools tax board, or Fairmark.com, since they both have tax professional who hang out there.

 

[Delawaredave5]

Well, excuse me for breathing. This is not the kind of decision I would want to DIY based on message board advice. But have it your way. I'm out.

Sorry if I was offensive. I didn't mean to be pissy. I should have said upfront that I understood already this is a "CPA issue".

 

[ziggy29]

Sorry if I was offensive. I didn't mean to be pissy. I should have said upfront that I understood already this is a "CPA issue".

OK, thanks. Not knowing that ahead of time, I've seen people assume they can do very tricky and complex things themselves when the consequences of being wrong are a disaster.

 

[Martha]

1. If wife gets 1099 for income in her name: then any expenses are recorded on our personal return, form 2106, and only amounts in excess of 2% of AGI are deductible - and our total deductions are reduced further at our income levels for 09. So basically the expenses do not offset revenue.

2. If wife gets 1099 for income to her company: then there's a tax filing for the LLC - where expenses are subtracted from income to get a net gain or loss (in this case, loss) -- and then I think that loss passes to our personal return.

I think in scenario #2 above the expenses are more "usable" against income.

Please don't reply: "talk to an accountant" - I know that....

I'm just trying to see if anyone on the group has had experience in this area - I'm trying to learn before I get professional help.

I don't think you are right. If she has a business even as a sole proprietor she can deduct her business expenses. Either as a proprietor or an LLC, she fills out the same schedule C. http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

The 2% limitation does not apply to a business.

 

[Lakedog]

I don't think you are right. If she has a business even as a sole proprietor she can deduct her business expenses. Either as a proprietor or an LLC, she fills out the same schedule C. http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

The 2% limitation does not apply to a business.

This is my understanding as well. I do occasional consulting (as a sole proprietor) for my previous employer and deduct all related expenses.

 

[Delawaredave5]

I don't think you are right. If she has a business even as a sole proprietor she can deduct her business expenses. Either as a proprietor or an LLC, she fills out the same schedule C. http://www.irs.gov/pub/irs-pdf/f1040sc.pdf

The 2% limitation does not apply to a business.

I am not asking "Proprietor vs. LLC" - those are both businesses.

I am asking about my wife's customer either:
a.) Paying her with a 1099 - which simply shows up as income - like a W-2, or
b.) Paying a LLC company my wife established.

 

[Delawaredave5]

This is my understanding as well. I do occasional consulting (as a sole proprietor) for my previous employer and deduct all related expenses.

You have a corporation established - right (either LLC, or sole proprietarship or Subchapter S) ? And your previous employer pays your corporation - right ?

I am trying to compare that option versus my wife's customer simply paying my wife directly with a 1099 (not a company owned by my wife) .

 

[Peter]

As others have said, expenses associated with the 1099 income are fully deductible.

Peter

 

[Martha]

I am not asking "Proprietor vs. LLC" - those are both businesses.

I am asking about my wife's customer either:
a.) Paying her with a 1099 - which simply shows up as income - like a W-2, or
b.) Paying a LLC company my wife established.

Yes, I know. It doesn't matter. As Peter said and I said above, either way you file a schedule C and get to deduct the expenses. Whether the customer issues a 1099 is irrelevant.

 

[samclem]

I'll pile on and tell you the same thing everyone else has--it all goes on Schedule C and she can deduct the legitimate business expenses that exceed the income from her business. Maybe look at the directions on Schedule C for more info--my electronic Taxcut version even references the AMT. And she will be a sole proprietor if you don't set up something else. That's not a corporation.

 

[Delawaredave5]

Thanks for everyone's comments. I learned a lot - and I'll be confirming what I understand with accountant.

Have a great day !

 

[Lakedog]

You have a corporation established - right (either LLC, or sole proprietarship or Subchapter S) ? And your previous employer pays your corporation - right ?

I am trying to compare that option versus my wife's customer simply paying my wife directly with a 1099 (not a company owned by my wife) .

No, I did not establish a corporation -- as samclem said, if you do not set up a corporation, you are a sole proprietor. I am paid directly and use schedule C to report income/expenses.