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In 2011, my business is expected to have a significant increase in net profits.
As an LLC, profits typically pass through to the owner(s) as income at the end of the year.
In an effort to reduce immediate profit, can the LLC buy up assets (mutual funds, stocks, etc) and hold onto them until a year with low income? The LLC will declare the purchase of assets as an expense and the sale as profits. The accounting term for this is "Investment Center", but I am not aware of it is something that can be done in an LLC.
The idea is to take profits in a lower tax bracket since my business income is not steady.
Has anyone done this or have any insight on whether it is possible?
Well is it tax evasion? or merely tax mitigation/avoidance? It seems to me that this is all via legal means, but wanted to verify. Hence why I posted this here for additional input.
Sometime next year, I'll push this idea to the accountant... but while my accountant is very good, he's not very creative about internal accounting.
The LLC will declare the purchase of assets as an expense and the sale as profits.
The only reason anyone gets a deduction for anything is section 162 of the IRC which limits deductions to "ordinary and necessary" expenses of operating the taxpayer's trade or business. And, if the trade or business is buying and selling securities then they are inventories which must be counted as of the end of the fiscal year and reduce the expense incurred for the purchase of inventory.
The only reason anyone gets a deduction for anything is section 162 of the IRC which limits deductions to "ordinary and necessary" expenses of operating the taxpayer's trade or business. And, if the trade or business is buying and selling securities then they are inventories which must be counted as of the end of the fiscal year and reduce the expense incurred for the purchase of inventory.
Nice try though.
I see, thanks for your input. My idea is flawed but I'm sure that this is not a new concept.
What is the proper way to implement an investment center within an LLC? And what is the impact on taxes?
I think that the term investment center is like "cost center" or "profit center." Basically just an accounting term indicating the grouping of transactions for reporting on a particular activity.
LLC's are entities that are formed to conduct activities in a legally separate existence, like corporations and partnerships.
I think it might help for you to google "starting a new business" and get familiar with the terminology and the issues. Feel free to DM me if you get stuck.
NJ, if you want a good exercise, consider creating a tax shelter by starting a business of selling coins, adopt LIFO, and continually selling your inventory and simultaneously replacing it with an equal amount of higher grade coins. Under the inventory rules the more valuable coins are deemed sold instead of the actual cheaper coins resulting in a tax loss and an inventory that is far more valuable than it's tax basis.
Grant a security interest in the coins to a money lender for a non recourse loan, don't pay and let him take the coins. Do you have to pick up the income then?
Thanks for your input guys. As it's been suggested by you guys, the method in which I originally described is not possible.
For those wondering, my business is an IT services company (operating since 2006) and is expected to triple in profits (yes, that's profits, and is a conservative estimate at this time) in 2011.
I am meeting with some accountants that were referred to me in 2 weeks and will be learning more about my options.
This is kind of boring advice, but have you considered buying real estate to use for the business? Obviously it's not nearly as liquid as securities, but you might be able to get in at the right price now and have some appreciation going forward. And if times get too tough you can shrink your operation and lease out part of the space.
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