Background:
I own a rental property through a single member LLC (say LLC-A). Currently, I am self managing all the operations. I am planning to setup an S-corp (say LLC-B) to manage this rental property and a new property I will be acquiring this year. LLC-A is a disregarded entity for tax purposes and I report the rental income/expense on Sch-E. The income from LLC-B will be reported on Sch-C where all of it will go to my solo 401K leaving zero tax liability.
Problem:
I dont understand why the strategy above is a bad one. I have read many articles from various CPAs advising against it, including my CPA. Whereas I consider it as an excellent strategy. Below is an example which makes me believe why this is a great strategy:
Example:
1) Say I charge $47000 for full 1 yr of management, repair, and clean fees. This is a writeoff on sch-E.
2) $47000 I report as income on Sch-C. Here I am exposed to SE taxes. However, I already maximize social security taxes from my W2 income. Hence, I only pay medicare taxes which will be ~$1100.
3) After paying this medicare taxes I move the remaining amount to my solo 401K making sch-C income zero and tax free.
4) If I did not pay myself, I would have likely ordinary tax on $47K income on Sch-E (even after depreciation, interest, insurance, etc), whereas by moving $47K to sch-C it goes to my retirement account with only medicare taxes due right now. On sch-E this $47K is a writeoff making income zero or creates loss which is carried forward till absorbed by capital gains at sale.
What am I missing? Why everyone is advising me against it including my CPA? Please help me understand. Where am I going wrong?
Regards,
Nick
Side notes:
1) Choosing $47K above as I contribute $23K from my W2 and $70K is max 401K contribution limit for 2025.
2) $47K as management fee for 1 property is high, but for 2 properties it will be <15% of the total rental income which is quite standard.
3) I know only self-employment income can contribute to solo 401K, and management fees ARE a valid self-employment income.
4) Business purpose for LLC-B is literally to manage two rental properties. I don't get it how IRS can classify this as serving no business purpose. After all somebody has to manage the properties, pay utilities, find tenants, pay city fees, etc. LLC-A files sch-E and cant be expected of doing anything as its a passive income and treated as such.
