June 2022

Pratt and LeFevre Corporation
https://prattandlefevre.com/contact-us/
450 Simmons Way, Suite 760,
Kaysville, Utah 84037
833-722-8848

GROUPING: TAX STRATEGY FOR OWNERS OF MULTIPLE BUSINESSES

Most business owners don’t understand the difference between being “Actively and Materially” involved in a business. In a corporation or an LLC in which the owner/member is one of the management or an active member in the operations of the LLC, they have a tax advantage.

In an S Corporation, the IRS does not consider the owner/officer of the corporation as being actively involved in the management of the company. Therefore, any distributions over and above the required W-2 wages, which are taxed, are not considered active income. Therefore, they are taxed as an investment return, a dividend. This distribution now is considered Passive Income.

As explained by the Bradford Tax Institute in April 2022 newsletter:

.…You need to consider the grouping rules that apply for passive-loss purposes.

Should one of your businesses lose money, you may not deduct the losses from that business during the current tax year unless you materially participate in the business or, if grouped

…. materially participate in the group; or

….do not materially participate but have passive income from other sources against which to deduct your passive business losses.

In other words, Passive income can only be reduced to zero and then only by passive losses. If you lose money in a business that is considered a passive business for you, you cannot use that passive loss to reduce any other taxable income.

Grouping means taking similar business ventures and grouping them all into one active business activity. Most of the time this is used for entrepreneurs who operate sole proprietorships. We suggest a client form a corporation or an LLC in which the entrepreneur is actively and materially a member and a manager. If an LLC it must be a Multi Member LLC, taxed as a partnership. This makes grouping easy, without worrying whether or not you are operating a business correctly and whether or not you can deduct any losses.

Passive Income is earned from real estate managed by a Property Manager or a business in which you have an investment but do not materially participate in the management.

YOUR BUSINESS STRUCTURE TYPE MAKES A HUGE DIFFEEENCE IN TAXES!

For more information, just drop us an email at info@prattandlefevre.com

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