Real Estate Accounting Tax Policy

Having a PLLC Could Save Realtors Thousands in Taxes

What is a PLLC? Is a PLLC right for you? How exactly will filing as a PLLC save you money in taxes? This article will answer all those questions and more.

Properly establishing a PLLC could save realtors thousands of dollars in unnecessary taxes. But what is a PLLC? Is a PLLC right for you? How do you establish a PLLC? How exactly will filing as a PLLC save you money in taxes? I’ll answer all those questions and more.

What is a PLLC?

A PLLC is short for a Professional Limited Liability Company. A PLLC is much the same as an LLC, but a PLLC is sometimes required for professionals incorporating in specific states. Some states require professionals to file as a PLLC, while other states don’t allow this filing status whatsoever (to see the requirements in your state, click here).

The main distinction between an LLC and a PLLC is that a PLLC offers members limited liability status except in an instance of malpractice. Members within a PLLC will only be liable for their own malpractice but not the malpractice of other members within the PLLC. But what exactly does this mean? Let’s break this down with an example.

If a realtor were to establish a PLLC and contribute $100,000 towards the business, then they would only stand to lose $100,000. Essentially, the assets of the business can be claimed by creditors if the business closes, but the individual realtor’s personal assets could not be touched.

However, in the case of malpractice a realtor would not get the limited liability protection and could lose everything in the business, and their own personal assets, as well. This is why having professional liability insurance is so important for realtors (to learn more about professional liability insurance for real estate agents, click here).

Is a PLLC Right For You?

If a PLLC isn’t required in your state, then incorporating as one might not be necessary. Odds are you’ll still be personally liable for business debt if you’re operating a small agency because no bank is going to give you a business loan otherwise. Additionally, having a combination of E&O (Errors & Omissions) insurance and general liability insurance should be enough to cover a small practitioner from most legal liability. Therefore, the protections of a PLLC could be easily replicated using adequate insurance coverage.

Regardless, if you chose an LLC or PLLC (or neither filing option) you’ll file your business tax return as a Schedule C on your 1040. For small sole proprietors this is the best option because it reduces the cost to file an additional tax return. Business income and expenses will be reported on your 1040, and the total net income will be subject to both federal income tax as well as self employment tax. This is true regardless of whether or not you incorporate because an LLC and PLLC is considered a disregarded entity for tax purposes.

Using an S-Corp to Reduce Your Tax Bill

Incorporating as a PLLC only has a tax advantage when it is taxed as an S-Corp. Filing an S-Corp status is quick and easy and only requires a few filing requirements. The added tax benefit is well worth the filling fees and I’ll show you how.

Let’s use an example of two real estate agents – Bill and Janet. Bill does not have S-Corp status on his PLLC and reports his business income on his individual tax return. Bill made $100,000 in income and pays federal income tax and self employment tax on the total amount. In self employment tax alone, Bill will have to pay $15,300. This is because self employment income is taxed at 15.3% ($100,000 x 15.3% = $15,300).

Janet is clever and incorporated her business as an S-Corp. Janet is considered the owner of the S-Corp and its sole employee. IRS requires owners of S-Corps to receive reasonable compensation so Janet pays herself $75,000 in wages. Janet also made $100,000 in income this year – $75,000 in S-Corp wages and $25,000 in S-Corp business income. Janet will pay federal income tax on the total $100,000 but will only pay the 15.3% self employment tax on $75,000 in earned income from her S-Corp wages. In this example, Janet saved $3,825 in self employment tax just by using an S-Corp.

Conclusion

Having a PLLC may or may not be the right move for you. However, the real benefit of incorporating as a PLLC is the tax advantage of being taxed as an S-Corp. This could potentially save you thousands of dollars in tax while offering you limited liability protections. This protection, along with adequate professional liability and general liability insurance, can save real estate agents thousands of dollars in the long run.

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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