S-corp tax related questions

General Real Estate Investing
1

In researching past threads, it seems the most preferred method of business organization is setting up an LLC to be taxed as an S-corporation. That being the case, a couple of questions:

What amount do people in this line of work pay themselves as “reasonable compensation” in order to appease the IRS? Must it be a percentage of what is brought in; I have seen some reference to taking the profits and desingating 60% as wages and then paying the remaining 40% in distributions. Or is it better to say designate in the LLC operating agreement that members will be paid, say $20k for the year, and then what ever is made over that amount by the end of the year can be paid as distributions? What different formulas are people using out there?

Second, what are the most common ways/types of expenses/deductions do you all find yourselves using in this type of business?

Thanks

2

2nd question first. EACH, EVERY and ALL legitimate business expenses are deductible. If it’s for the business, it’s deductible.

Lots of folks use the 60/40 or 50/50 rule. Technically the salary must be considered “reasonable”. Reasonable means: what you’d pay someone with similar experience, doing the same job for the same hours. What’s a property or project manager make? Ask around.

Is $20k reasonable? Maybe, maybe not. Just because it’s in writing doesn’t make it so.