Deducting an Investment

Today TaxMama hears from Jerry in Utah with a bold question. “My wife and I have a profitable LLC. We want the LLC to invest in a private offering with the intent of generating income from the investment. Will the money I use for the investment still be taxable income? I’d like to ‘’defer’’ the income and take a deduction for the investment until any returns or losses come in. How should I go about making and claiming the investment?”

Hi Jerry,

OK, get ready for a long answer!

Generally, when your business makes an investment in something, it’s an asset on your business’s books – not a deductible expense.

And if the investment produces a stream of income, it will be taxable income to your LLC.

The only way I can think of for your LLC to make an investment in a private offering is to set up a self-directed SEP-IRA or solo 401(k) plan (only available if you have no employees except
your wife and yourself).

When you fund the retirement plan, your business will get a deduction for the contributions (depending on how you structured your LLC).

The annual contributions to the retirement plan may be as high as $46,000 (in 2008) for each of you, depending on your wages or the LLC’s profits – (again depending on how you structured
your LLC). In fact, for each person age 50 or over, you may contribute an extra $5,000.
(Using defined benefit plans could increase the contribution even more. That’s even more complicated – you’ll need expert help to do it correctly.)

If the retirement plan makes the investment in the private offering, all the income from that offering will go to your retirement – and grow tax-free until you draw it at retirement.

If you want to get really fancy, you can even use a Roth-IRA element, in a solo 401(k) and have the investment be tax-free even when you draw it upon retiring.

The drawback to all this wonderful news? Self-directed IRA’s can be very expensive. The entire business structure of the plan might cost you over $5,000 to set up – and over $1,000 per year to maintain – including the tax returns you would have to file. So, to do this, the investment had better be showing a substantial profit.

Remember, most private offerings end up failing or just dragging along. Personally, I wouldn’t use my retirement funds for something like that – unless I was positive the company was going to succeed AND go public.

Before you do anything – engage a good, tax professional who understands how to deal with a variety of business entities to set up your LLC in the correct business format. (See Chapter 3 of Small Business Taxes Made Easy for all the ways an LLC can be set up.)

Then talk to Dan Cordoba at www.myrealestateira.com . He and his team have set up the vehicles to make self-directed retirement plans work for you – and to guide you through all the steps. Tell him TaxMama sent you, to get a discount on their services.

And remember, you can find answers to all kinds of questions about reducing your LLC’s taxes and other tax issues, free. Where? Where else? At TaxMama.com

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