Llc Vs. S-corp Tax Basis And Tax Implication

[Ami]

s About Taxes)/LLC vs. S-Corp tax basis and tax implication Advertisement Expert: Ivan Roth - 7/3/2006 I am thinking about starting my first company and based on info from various website and from other sources such as books by NOLO, I have the following questions.

I read that S Corp tax basis in the business does not increase when the company takes on debt.  Conversely LLCs can give their owner the tax benefits of any business debt.   Since distribution of profit from LLC are taxable to the owner only when they exceed the owner’s tax basis, this mean that there may be tax advantage for LLC in the long run.   

-       If such is the case, if LLC borrow $1,000,000 to expand its business; this means it increases the owner’s tax basis in his capital(ownership) interest.  The basis increases, in turn, means that the owner can receive up to $1,000,000 in distribution of profits from the LLC tax-free.  By contrast, S Corp share-holders would have to pay taxes on that $1,000,000, as the the holders do not receive an increased basis in their shares when the corporation borrows money, so a loan of this sort would not provide a tax-benefit to them.  Is this correct?

-       In the long run, if the LLC keeps on expanding their business by continuously borrowing and repaying their debt, the LLC may never have to pay taxes as long as it continue to expand the business by borrowing and repaying up to the amount it borrowed, and then do the same thing all over again.  In contrast the S-Corp cannot have any of this benefit as its basis never increases with the borrowings.  Is this correct?

-       If scenarios above are correct, then an LLC can borrow and expand until it becomes a $1bn business and never pay taxes!!!!

At the end of each year, can the s-corp or LLC don’t distribute its profit and just retains its earnings?  If it retains its earnings, and doesn’t distribute profits to owner or shareholders, is that mean that it doesn’t have to pay taxes?

The 2 questions are very related.  May be I am confused and the books may be referring to distribution upon the sale of the company.  Meaning that each year, the owner of LLC or shareholders of S-Corp will continue to pay taxes on profit; however, when they sell the company, the tax basis then come into the picture and the LLC would only pay tax on the gain above such tax basis(which would include the debt as mentioned)

[Roy]

s About Taxes)/LLC vs. S-Corp tax basis and tax implication Advertisement Expert: Ivan Roth - 7/3/2006 I am thinking about starting my first company and based on info from various website and from other sources such as books by NOLO, I have the following questions.

I read that S Corp tax basis in the business does not increase when the company takes on debt.  Conversely LLCs can give their owner the tax benefits of any business debt.   Since distribution of profit from LLC are taxable to the owner only when they exceed the owner’s tax basis, this mean that there may be tax advantage for LLC in the long run.   

-       If such is the case, if LLC borrow $1,000,000 to expand its business; this means it increases the owner’s tax basis in his capital(ownership) interest.  The basis increases, in turn, means that the owner can receive up to $1,000,000 in distribution of profits from the LLC tax-free.  By contrast, S Corp share-holders would have to pay taxes on that $1,000,000, as the the holders do not receive an increased basis in their shares when the corporation borrows money, so a loan of this sort would not provide a tax-benefit to them.  Is this correct?

-       In the long run, if the LLC keeps on expanding their business by continuously borrowing and repaying their debt, the LLC may never have to pay taxes as long as it continue to expand the business by borrowing and repaying up to the amount it borrowed, and then do the same thing all over again.  In contrast the S-Corp cannot have any of this benefit as its basis never increases with the borrowings.  Is this correct?

-       If scenarios above are correct, then an LLC can borrow and expand until it becomes a $1bn business and never pay taxes!!!!

At the end of each year, can the s-corp or LLC don’t distribute its profit and just retains its earnings?  If it retains its earnings, and doesn’t distribute profits to owner or shareholders, is that mean that it doesn’t have to pay taxes?

The 2 questions are very related.  May be I am confused and the books may be referring to distribution upon the sale of the company.  Meaning that each year, the owner of LLC or shareholders of S-Corp will continue to pay taxes on profit; however, when they sell the company, the tax basis then come into the picture and the LLC would only pay tax on the gain above such tax basis(which would include the debt as mentioned)

[Kenriek]

NOOOOOOOOOOOOOOOO!

LLCs and S corps pass their profits on to the owners even if they keep all the cash

What is confusing you: are the rules to take losses against basis. then there needs to be basis(investment) which can include loans.

sometimes as in the case of Real estate companies can borrow against the increase in the property value and distribute cash as a return of capital which has no tax effect we should all own real estate that appreciates!