I’m not sure I had ever been that scared in my life…
…and it all started with a simple LLC!
Despite being a letter from the government, it was clear as could be: I was being charged a nearly $10,000 penalty from the IRS.
What was I going to do? I didn’t even have $10,000!?
And why was I being charged this?
After several panicked hours of research, I finally realized why I was being hit with this fee:
Because I was stupid.
OK, being stupid isn’t technically the reason why I was being charged $10,000.
Maybe “over zealous” is a better term — and it’s a simple mistake anyone could make.
Including you.
It Started With An LLC…
Here’s the deal:
When I first started investing in real estate, I heard a lot about LLCs.
I needed one, right? At least, that’s what I thought.
I had just purchased a triplex with some good friends of mine, so of course, we wanted to becool “official.”
So I went to my Secretary of State’s website and paid the $300 or so for an LLC. I printed out the documents, made a nice file folder for it, and put it in my file cabinet.
Related: 5 Reasons I Do NOT Invest in Real Estate Using An LLC
Now I was official, right?
(In reality, because I never transferred the property into the LLC, the LLC wasn’t doing anything. I assumed I would get the property transferred in soon, but never had the time. Besides, the “Due on Sale Clause” made it a little sticky if I wanted to transfer the property into an LLC anyway. More on that here.)
So the LLC was formed, and the LLC just sat there.
Maybe a mistake — but definitely not a $10,000 mistake. Sure, I wasted $300 on an LLC that I didn’t use.
But the real problem didn’t start until tax time.
The Fateful Mistake
A year later, I started working on my taxes.
Back then, I did all my own taxes using a popular online tax planning software, which was relatively cheap and easy to use.
Because my LLC had absolutely no activity (due to me never transferring the property into it), it didn’t make a profit. So, total taxes owed on that LLC would be $0, of course.
So I just ignored it.
I mean, the IRS wouldn’t care if I mentioned it on the taxes because it made no money, right?
WRONG.
Here’s the problem: The IRS requires that every non-single member LLC (in other words, any LLC that you have that is not you alone or you with your spouse) must file a business tax return (Form 1065) every year — even if the LLC makes no money.
(click to continue reading on BiggerPockets)
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