{"id":133801,"date":"2021-02-18T01:30:29","date_gmt":"2021-02-18T08:30:29","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=133801"},"modified":"2023-03-22T03:56:46","modified_gmt":"2023-03-22T09:56:46","slug":"s-corp-election-active-income","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/s-corp-election-active-income","title":{"rendered":"Flippers and Airbnb Investors: Here&#8217;s How an S Corp Election Can Help You"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC2474445625\" width=\"100%\"><\/iframe>  \n\n\n\n<p><span style=\"font-weight: 400;\">Typically, real estate investing is a <\/span><em>passive<\/em><span style=\"font-weight: 400;\"> activity. Profits are subject to income tax\u2014not self employment tax. <\/span><span style=\"font-weight: 400;\">An <em>active<\/em> trade or business, on the other hand, is likely subject to the full 15.3% self-employment (SE) tax. Since a <a href=\"https:\/\/www.biggerpockets.com\/blog\/steps-successful-house-flip\" target=\"_blank\">flipping<\/a> or <a href=\"https:\/\/www.biggerpockets.com\/blog\/ultimate-beginners-guide-real-estate-wholesaling\" target=\"_blank\">wholesaling<\/a> business is considered an active business, house flippers may be subject to the full 15.3% self-employment tax, which can lead up to a $21,068 hit to your earnings. Same can be true for many Airbnb rentals.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Not every flipper or Airbnb landlord will benefit from an S Corp election taxation. However, enough do that you should consider it as an option. Let&#8217;s take a closer look.<\/span><\/p>\n<h2>Why the IRS may see flipping as active income<\/h2>\n<p><span style=\"font-weight: 400;\">Some real estate investors aren&#8217;t really investors (at least according to tax laws). They are property developers who renovate and rehab. In other words, they\u2019re <\/span><em>flippers<\/em><span style=\"font-weight: 400;\">.&nbsp;<\/span><span style=\"font-weight: 400;\">Profits from real estate flipping may be subject to both income tax and self-employment taxes. Flipping is an active business. <\/span>That translates to ordinary income taxes at your marginal rate as well as self-employment tax and\/or payroll taxes. This depends on how the deal is structured. <span style=\"font-weight: 400;\">Compare flipping to <a href=\"https:\/\/www.biggerpockets.com\/blog\/apartment-buy-hold-real-estate-strategy\" target=\"_blank\">buy and hold<\/a> investing, where investors are relying on passive income.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Just as with any other active trade or business, an S Corp election may be a good way to save self-employment (SE) taxes. <\/span><span style=\"font-weight: 400;\">There are a few things flippers should know about organizing and defending their real estate portfolios. Chief among these is how to construct an asset protection strategy that adequately defends against lawsuits:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>How frequently do you plan to make transactions<\/b><span style=\"font-weight: 400;\">? Many flippers will have a property bought and sold inside of a year, for example. Certain entities are better for frequent transactions.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Licensing and other operations issues<\/b><span style=\"font-weight: 400;\">. A savvy house flipper may want to get a real estate license (or work with a team member who has one), even if doing so isn\u2019t legally necessary. What\u2019s best for you in terms of daily operations may come down to personal preference.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>What percentage of business is your flipping activity<\/b><span style=\"font-weight: 400;\">? If you are exclusively a flipper, you will almost certainly require a different approach than an investor with only minor flipping activity\u2014or who doesn\u2019t rely on flipping transactions for profit.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It\u2019s vital that those engaged in active real estate flipping find a way to limit inherent liabilities. For many flippers, the LLC with S Corp election helps square both the issue of liability and how to formalize the flipping business.<\/span><\/p>\n<p><em><strong>Related<\/strong><\/em>: <a href=\"https:\/\/www.biggerpockets.com\/blog\/s-corp-vs-series-llc\" target=\"_blank\"><em>LLC vs. S Corporation: Which Is Better for Real Estate?<\/em><\/a><\/p>\n<h2>Airbnb rentals: substantial services can trigger SE taxes<\/h2>\n<p><span style=\"font-weight: 400;\">If you are renting part of your home as an <a href=\"https:\/\/www.biggerpockets.com\/blog\/how-much-money-can-you-make-airbnb\" target=\"_blank\">Airbnb<\/a> for 14 days or less, you do not have to report or pay taxes on that income at all. Nice, right? Of course, you cannot deduct related expenses either. <\/span><span style=\"font-weight: 400;\">If you have Airbnb properties, you may have an <em>active<\/em> trade on your hands (rather than a passive real estate investing business).<\/span><\/p>\n<p>Normally, income reported on Schedule C is subject to the SE tax, but that\u2019s not always the case for rental properties. When your average stay is less than seven days, it is considered a business and not a rental activity, and is reported on Schedule C.<\/p>\n<p><span style=\"font-weight: 400;\">Schedule C is the tax form filed by most sole proprietors. As you can tell from its title, &#8220;Profit or Loss From Business,&#8221; it is used to report both income and losses. Many times, Schedule C filers are self-employed taxpayers who are just getting their businesses started.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you are renting out a property using Airbnb or a similar service, and want to completely avoid the SE tax, then it is important not to provide <\/span><em>substantial services<\/em><span style=\"font-weight: 400;\"> to your guests. As long as you are simply renting out your Airbnb and providing no additional services, you will avoid the 15.3% self-employment tax, even if it is reported on Schedule C.<\/span><\/p>\n<h2>What are substantial services?<\/h2>\n<p><span style=\"font-weight: 400;\">For a rental property to be subject to the self-employment tax, you would provide substantial services such as:<\/span><\/p>\n<ul>\n<li>Changing linens<\/li>\n<li>Providing fresh towels<\/li>\n<li>Cleaning the rooms during a guest\u2019s stay<\/li>\n<li>Providing hotel-like conveniences such as a coffee maker and coffee<\/li>\n<li>Providing vehicles, bikes, or excursion options<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This is because you are now providing a more hotel-like service, which is considered a business and subject to the self-employment tax.<\/span><\/p>\n<p><em><strong>Related<\/strong><\/em>: <a href=\"https:\/\/www.biggerpockets.com\/blog\/airbnb-real-estate-investing-pros-cons\" target=\"_blank\"><em>Airbnb Real Estate Investing: 6 Pros and Cons<\/em><\/a><\/p>\n<h3>What to do if you provide these services<\/h3>\n<p><span style=\"font-weight: 400;\">Make sure you are properly tracking and deducting all your rental expenses, including depreciation. As we know, this \u201cphantom expense\u201d can cause a property to show a loss for tax purposes\u2014or at the very least significantly reduce the net income.<\/span><span style=\"font-weight: 400;\"> Next you should put your Airbnb properties in an S Corp, or an LLC taxed as an S Corp. This can split your income between W-2 wages, which are subject to the self-employment tax, and distributions, which are not.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Keep in mind that if you\u2019re already earning $137,700 or more before your Airbnb income, you will only pay the 2.9% Medicare portion of the tax (1.45% for the employer and 1.45% for the employee, or 2.9% total) because the Social Security portion of the tax is capped on $137,700 of income.<\/span><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-122069\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/02\/Blog-link-button.jpg\" alt=\"\" width=\"700\" height=\"120\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/02\/Blog-link-button.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2020\/02\/Blog-link-button-300x51.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/p>\n<p>Would you consider using an S Corp for your flipping or Airbnb business\u2013why or why not?<\/p>\n<p><strong>Share with a comment below!&nbsp;<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>In this article, see how an S Corp can help you save on or avoid certain tax deductions with your real estate business.<\/p>\n","protected":false},"author":23983,"featured_media":135347,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4241,7119,5525],"tags":[],"class_list":["post-133801","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-business-management","category-biggerpockets-daily","category-flipping-houses"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/133801","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/23983"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=133801"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/133801\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/135347"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=133801"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=133801"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=133801"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}