Just got off the phone with my accountant and we decided that an S corp is the way to go to limit my tax exposure. Short term flips are my focus, and she said that without doing as S Corp, I would be paying over 40% taxes on these deals.
Just curious, in your folks experience, does the S Corp make the most sense when trying to limit your tax exposure with regards to short term flips?
Because I buy houses from personal credit lines, my accountant recommended a situation where I loan the S Corp this money to make deals. Any experience with this?
LLC’s don’t have tax laws: you get to choose how to tax it. You may choose to tax your LLC as an S-corp, in which case they are exactly the same to the IRS. Or you can choose C-corp taxation, or partnership or sole proprietor, depending on your particulars. So you really are comparing S-corp to the other tax strategies and then tax your LLC that way. Sounds like you’ve already decided that.
LLC’s are very flexible with regard to taxation.
However, there are some very important differences between LLCs and corporations (including S-corp).
Corporate stock is considered an “investment”. Investments are available to satisfy judgement creditors. So, when you rear-end the lady in the Pinto, she sues you, you lose; your “investment” in corporate stock can be awarded to her in the judgement. Now she owns the company that owns the properties and makes the money.
LLC membership, however, is considered personal property by statute. As such it cannot be awarded to a creditor. Now when she wins the lawsuit, the most she can get is a charging order (which you can frustrate) but she cannot gain control of the company or its assets. You can see this is a much stronger option.
Both the LLC and corporation protect you from company liabilities. Only the LLC protects the company from your personal liabilities.
When you are in the flipping business you have to file form 4797 for each sale of business property . This exercise will direct either the long term gains to Sch D or the short term gain to Sch 1040 treated as ordinary income.
By year end, capital gains and losses are combined into a net capital gain which is taxed at either 15% or 5% depending on the taxpayer tax bracket. If net capital loss you deduct the max 3K and carryover the excess.
Whether LLC, C or S corp, you have to file 4797. For one thing, S corp does not pay taxes, since it is a pass-through entity.
I beg to differ. If you are in the flipping business, your flip properties are merchandise (or inventory) to your business. Income and expenses are reported on Schedule C and net profit is carried over to Schedule SE to compute the self-employment income taxes.
Since there is NO capital gains tax treatment allowed to a flipping business, Schedule D and Form 4797 do not come into play.
lincolninvestor,
Your accountant sounds as if she knows what she is talking about.
flipped houses are not capital assets. they are ordinary income and 4797 and/or Sch D do not apply.
if flipped within an S corp, the income will retain its character upon passthru and the taxpayer will pay regular income tax plus SE on business NET income.
However, if you can take a reasonable salary from the S-corp, remaining distributions will still be subject to income tax, but may avoid the additional SE tax.
If my S-corp nets 50,000 and pays me a salary of 20,000. I avoid the SE tax on the 30,000 left in the s-corp, according to the advice I have recieved.
What are my options with the 30,000 at that point. Does it have to remain within the business, or can I access it for personal use for such things as paying down real estate loans in my name, expenses, etc…I imagine that is probably not allowed with paying the 15% SE tax on it. Hypothetically, if I grew my s-corps retained earnings to $200,000, and then wanted to dissolve the company, would I have access to the 200,000 tax free?
An S-corp is a pass-through entity. All the income earned by the S-corp is passed through to your personal 1040 and taxed. In your scenario, the remaining $30K, no matter whether you take it out of the company or leave it in, will be taxed at your ordinary income tax rate on your personal 1040.