Tax Reduction Podcast

Episode 42. Intercompany Transfers Tax Strategies

• Boris Musheyev • Episode 42

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If you're moving money between your S Corporation and LLC, you need to know these intercompany transfer tax strategies. In this podcast, I explain the right way to transfer funds from your S Corporation to fund real estate investments, new businesses, or other ventures without triggering unnecessary tax consequences. 

Most CPAs give terrible tax advice about intercompany transfers, telling business owners to transfer money directly from S Corporation to LLC without proper documentation. This creates massive tax problems including mismatched distributions, lost equity basis, and inability to deduct losses. I break down exactly how to structure intercompany transfers, shareholder distributions, and capital contributions to maximize tax deductions and avoid IRS issues.

What You'll Learn: How to properly take S Corporation distributions and use them to fund other businesses. Why you should NEVER buy real estate directly with S Corporation money or put property under your S Corporation. The critical difference between shareholder distributions and intercompany loans for tax purposes. How to establish equity basis in your new LLC to make losses tax deductible against your main business income. Why proper documentation of intercompany transfers as shareholder distributions is essential for tax strategy. When intercompany loans make sense versus capital contributions for funding new ventures.

We cover S Corporation distribution tax strategies, LLC formation and funding, establishing basis for loss deductions, and the tax consequences of intercompany loans versus equity contributions. Plus, why most small business owners under $10 million profit should be S Corporations, and how to structure multiple entities for maximum tax savings.

Stop making expensive intercompany transfer mistakes. Learn the right way to move money between your businesses while maximizing tax deductions and avoiding IRS problems.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/?el=podcast&htrafficsource=buzzsprout

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this ...

Speaker 1:

We found about 1.2 million dollars in tax deductions by properly doing intercompany transfers, so it was a huge tax planning opportunity. Does your accountant tell you about this? Absolutely not. A lot of times when a business owner comes to work with an accountant, they do it after the fact, meaning say the return is already done, the year is already over, the transfer is already done, none of it is accounted for correctly, which causes business owners to overpay a lot of money in tax. If you have multiple entities and you're transferring money between entities, you need a tax strategy, and if you don't have a tax strategy, I can guarantee you that you're overpaying in taxes by simple fact that you're not doing intercompany transfers between both of your companies correctly. Hey, so I want to talk to you about intercompany transfers, all right. So it's really, really important. When you have multiple businesses and you're transferring money excuse me, between businesses, it's really important to know how to make those transfers properly, because incorrectly transferring money from one entity to another entity could have, number one, long-term tax consequences and number two, if you have expenses in this new entity, it could limit you how much of those expenses you can actually deduct on your taxes if you don't properly make the intercompany transfers okay.

Speaker 1:

So I'm going to break down this into really three sections. We're going to talk about distributions. First of all. We need to understand what is a distribution from a company so that you can understand how to properly transfer money from one company to another. Because a lot of times, business owners make a mistake and they think you know what? I'm just going to loan money from my one company to another with an intention of never paying it back. Well, if you don't have an intention to pay it back, you could have tax consequences and your accountant won't even tell you this because they probably understand less than you when it comes to intercompany transfer. So I'm going to break that down.

Speaker 1:

So, like I said, I'm going to first explain distributions. What does distributions mean? Second thing I'm going to talk to you about is forming and funding another entity. So you've got your main business and now you're opening up second or third or fourth business. Right? Because with business owners, the story is always the same. Right? There's always this main business that feeds your other businesses. Right? There's always this main business that transfers money to buy real estate, whatever that may be.

Speaker 1:

So we're going to talk about the proper way of funding it after we've learned what is a distribution and, honestly, it's really really important for any business owner to know listen, regardless of the fact whether you have an accountant or not, or you don't have an accountant or really a tax advisor, but if you don't have a tax advisor, get yourself a tax advisor. But for you, the business owner, it's really, really for you to understand it, because you're the one who's making decisions at the end of the day, in your business and you're the one who's transferring money okay, and your accountant may not be immediately available when you need to make those transfers. The third thing we're going to talk about is intercompany loans on those transfers. Should you transfer money as a loan or not, and in what situations should you do that? All right, now, without further ado, let's get going.

Speaker 2:

Welcome to the Tax Reduction Podcast for Money-Making Entrepreneurs with Boris Mushaev. All right Now, without further ado, let's get going. Taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

So, like I said, I'm going to break down this into three sections. The first section I want to talk to you about distributions. Okay, so, majority of business owners, they are set up as an S corporation, whatever business that you're in. If you're a small business owner making a few million dollars in net profit right, or even a few hundred thousand dollars, but whatever it is, you should be an S-corporation. Generally, we start talking about other entities with clients when they make more than 10 million dollars in net profit in their business. I'm like, all right, let's start exploring other companies, other entities such as C corporation. But majority of people are an S corporation and it's very important for you to understand that when you have an S corporation, you can take out distributions from an S corporation. So you've got a W2 salary from your business. Anything that is left over, you take it out as a distribution because you do not pay taxes on that distribution.

Speaker 1:

Taking this distribution is now your money. You can now use this money to fund your other businesses. This could be your existing business, this could be a business that you just formed, or this could be a real estate adventure. What is it Venture? I said adventure. This could be a real estate venture that you want to invest in. But the best way to do it, generally speaking, is first to take the distributions out of the business and then fund it into your other company. Because when you take distributions from your main business and now you fund another company, your new company, that would be capital contribution and you want to have capital contribution because that gives you an equity in this business. But before we get into this section of explanation and teaching you how to do this, you just need to understand that your business S-Corporation. You can absolutely take out distributions to your personal name. What you do not want to do is that if you're looking to buy a real estate, for example, for your S corporation, if you want it for your business or just an investment property, what you do not want to do is buy it with S corporation money. What you do not want to do is put it under the S corporation.

Speaker 1:

So let's say, very common scenario that I see with my clients is that they find real estate and they want to buy real estate, and this real estate they put it into an LLC. Okay, so you've got your S corporation and you've got this LLC. Now this LLC needs to buy real estate. Where is this LLC going to take money from your S corporation, right? So what a lot of business owners do without getting an advice from their accountant, and when they ask their accountant, the accountant doesn't give them the right advice on how to transfer money properly to buy that real estate. So what they do is they transfer the money directly from an S corporation to an LLC.

Speaker 1:

Now is it really a problem? It's not a problem unless it is recorded properly, unless, excuse me, it is recorded improperly on the original transfer. So that transfer now has to be recorded as a shareholder distribution and this money that's put into this LLC has to be recorded as a member contribution. Unfortunately, a lot of accountants don't treat it that way. What they do is that they first file the return for this. Then they realize oh, my client, you have a tax return for a property and now there's a mismatch. Okay, there is a mismatch. So you as a business owner should know that when you want to invest into another business, into another LLC or into another property, do not just transfer money or make the purchase with an S-corporation money. Have a proper paper trail. You take a distribution out and then you make a contribution into this LLC, whether it's a new business or it's a real estate property. Okay, now, now that we have understood what distribution is, let's move on to understand forming and funding another company, which I've already kind of touched upon. Okay, now, if you're forming a new company whether, again, it's a trade or business or it's an LLC for a property, what we generally recommend for all of our clients is to form an LLC.

Speaker 1:

I love LLCs because they're so flexible. You can choose how you want to be taxed. You can either bring in partners, investors, or be taxed as a C corporation for some advanced tax planning purposes, or be an S corporation, whatever it is that your tax advisor tells you. And if you don't have a tax advisor, I can guarantee you right now your accountant is probably not telling you how to properly do intercompany transfers. We have a client that has a medical practice. They've got three or four real estate entities, a couple of other businesses. They've got a total of like 15 other entities. Okay, and this main business feeds all of these entities. Before they came to us, there were so many intercompany transfers without proper loan documents okay, without proper loan agreements and they did not even need to do that, but their accountant never told them the proper way to do things. Okay. So what we did is that we have undone all those transfers on paper, so to speak, and we've properly recorded distribution and the contribution into these entities.

Speaker 1:

Now, why is this important? So let's just take an example. You've got an S corporation that's making a million dollars in profit, got a very profitable business, it has cash okay. Now you're forming another business or you're buying another business and this business is going to have expenses. Okay. First year, let's say you have a loss. If you took out a loan from one business to this other business and you have expenses over here, those expenses are not tax deductible to you because you have no equity, whether it's a startup expenses. Or you bought a lot of equipment and you went into operation before the end of the year and you have all these expenses and losses that you think you can claim but you actually cannot because the transfer between the companies was not done right. So the best way to treat this and again, speak to your tax advisor I'm giving you very general advice. It's not even an advice, it's more like an educational content.

Speaker 1:

But, generally speaking, what you do want to do is take a distribution from your main company to you personally. You take that money and then you contribute into your new company. Because when you contribute into your new company you now have equity and when you have expenses only so you have a loss at the end of the year you would be able to deduct those losses against your first business as your main business net profit on your personal taxes. Why? Because you have equity. When you don't have equity in a business, in most cases you will not be able to deduct the losses from that company. They would be recorded as suspended losses. So that's why when you are taking money out from one business, you want this one business to feed another business. It's really important that you first take out distribution and then you make a contribution.

Speaker 1:

No intercompany transfers. No buying assets with company's money for another business. No buying real estate with company's money for this other LLC that you're forming, because again it could have long-term tax consequences that you would not be aware of. By the way, this is not something immediately you would be aware of. When your accountant is filing your taxes already the next year and they give you a tax bill, you'd be like wait, I don't understand. I have expenses in my new investment. I have losses in my new investment, only to find out that the money was not transferred properly, there's no contributions properly made, only to find out that these losses are not tax deductible until you actually have equity. So that's why definitely speak to your tax advisor about the strategy of transferring money, especially if you have multiple entities Like I. Can't even stress enough how important it is for business owners to follow this rule. All right, the third section that I want to talk to you about intercompany loans.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S Corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

So people ask me Boris, what if I loan money from one company to another? It is absolutely allowed to do, it's legal to do, it's not a problem. But you've got to have a tax strategy, you've got to do it right. In most cases, business owners say you know what? I want to loan money to myself from one business to another business. And first of all, they don't always have an intention to pay back, they just want to transfer money and thinking, hey, loan is just the proper term to use, but really it could have tax consequences. So the question I asked business owners in our tax advisory firm I say, well, are you going to pay the money back? Like no, I don't think I'm going to pay the money back. Okay, I'm like, okay, cool. So if you're not going to pay the money back, take a distribution and contribute and that's going to give you equity in a business. And that's going to give you equity in the business. Any losses that you have could be tax deductible.

Speaker 1:

Now if they say, actually I do have an intention of paying in GetBag, then I don't immediately jump on the fact that they still have to do a loan. I say, well, let's take a look at this new entity. What is the purpose of this new entity? I want to start a new business, right? I'm like okay, are you going to generate profits or losses in your first year? Like, what are your projections? Yeah, my first two years I'm going to be at a loss, right? So I actually have a client right now who has a main restaurant business and opening up three more locations. Okay, opening up three more locations and a lot of money from the main business is being used for renovations of those locations. Now, why is this important? Leasehold improvements are 100% tax deductible, okay. So again, what happens if they don't contribute their own money into these LLCs? They're going to have a lot of losses in these three locations in the first year, but they will not be able to take those losses if they don't have equity in that business.

Speaker 1:

Okay, so what did I do? Instead? I said you know what? From now on, we're just going to take distributions from your main company. We don't need to give them a loan to the other company because there was no intention to pay it back. Right? Even if there was an intention to pay it back, I would tell them how important is it for you to get paid back for that money. Everything is your business's. We want to maximize tax deductions, so what we want to do is actually contribute the money into these three locations. Now you've got all these renovations, leasehold improvements and everything else that's going on can now be deductible once the business goes into operation that first year and in their case it would be so it was a huge tax planning opportunity.

Speaker 1:

Okay, we found about $1.2 million in tax deductions by properly doing intercompany transfers. Now, does your accountant tell you about this? Absolutely not okay, because a lot of times when a business owner comes to work with an accountant, they do it after the fact, right, meaning say the return is already done, the year is already over, the transfer is already done, the tax return for the main business is already filed. Now we got all of these businesses and now there is all these transfers and none of it is accounted for correctly, which causes business owners to overpay a lot of money in taxes. So if you don't have a tax advisor, get yourself a tax advisor. If you have multiple entities and you're transferring money between entities, you need a tax strategy, and if you don't have a tax strategy, I can guarantee you almost 100% that you're overpaying in taxes by simple fact that you're not doing intercompany transfers between both of your companies correctly.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.