Need an S-Corp pro..

9 Replies

Okay here is the scenario:

- "Bob" has the ability to lend me lots of $ throughout the years to buy/hold rentals and probably flip some along the way. 

- "Bob" wants to front me down payments through an Scorp in which me, and a few others are officers and equal shareholders within. "Bob" is in no way, shape, or form, going to ever have a reason to 'screw' me, so please no warnings on how I could get taken advantage of by other shareholders.

- This Scorp does not recieve any income at the moment; it is in no way connected to any separate business and is only intended for use with RE ventures.

- Each shareholder (including myself) is currently employed at their dayjob making salary of their own. RE investment income will be supplementary. 

I need clarification on these technicalities within Scorp fund dispersement for those of you who run your investment careers through an Scorp:

- The properties are going to be sourced to 3rd party PM (not at all associated with said Scorp), so nobody in the corp will be doing enough work to really be an 'employee' of the corp. Do we all still need to take salaries? If so, how would I determine what is 'reasonable' as per IRS? Does our own personal salary help the case of not assuming a salary from the corp to be taxed?

- Do we all get to claim the depreciation/loss amount? Do we need to split it equally?

- Do profits from a flip count as flowthrough income and not cap gains? I imagine if I start flipping I will have to take a salary probably estimated at the avg salary of a GC in my area, as I will spend significant time orchestrating things.

- Is this all even worth it??? Looking at gaining only a few properties max in the first year yielding maybe 100/mo cashflow...Lot of hoops to jump through but the corp is already created, just want to be in accordance should we use it.

Thanks all. If it looks like I looked over something, let me know. Cashflow will be very small potatoes in the eyes of IRS, but I just want to be prepared in the case the deals start rolling in!

Disclaimer: I want to clarify I am trying to gain education to do everything in full accordance with the law. I do not expect the advice given to be official legal advice.

Okay here is the scenario:

- "Bob" has the ability to lend me lots of $ throughout the years to buy/hold rentals and probably flip some along the way.

Is he actually lending to you, or starting a business with you? Big distinction.

- "Bob" wants to front me down payments through an Scorp in which me, and a few others are officers and equal shareholders within. "Bob" is in no way, shape, or form, going to ever have a reason to 'screw' me, so please no warnings on how I could get taken advantage of by other shareholders.

You need the warning. What's in it for "Bob"? Close friends and family are frequently the deals that need to be papered even more than arms length.

- This Scorp does not recieve any income at the moment; it is in no way connected to any separate business and is only intended for use with RE ventures.

This seems irrelevant unless you are buying into the S-corp.

- Each shareholder (including myself) is currently employed at their dayjob making salary of their own. RE investment income will be supplementary.

You already own shares in the S-corp?

I need clarification on these technicalities within Scorp fund dispersement for those of you who run your investment careers through an Scorp:

Go read the form 1120S instructions. Lots of good info there.

http://www.irs.gov/pub/irs-pdf/i1120s.pdf

- The properties are going to be sourced to 3rd party PM (not at all associated with said Scorp), so nobody in the corp will be doing enough work to really be an 'employee' of the corp. Do we all still need to take salaries? If so, how would I determine what is 'reasonable' as per IRS? Does our own personal salary help the case of not assuming a salary from the corp to be taxed?

You're way ahead of yourself. Are you flipping or renting? Flipping, an S-Corp may be fine (check with CPA first), but if you're holding, you typically don't want to hold property in an S-Corp, and in fact, your rental income may disqualify it from S-Corp status. You're asking CPA questions. You need a CPA if you're doing an S-Corp; you should not prepare the 1120S yourself. You should not set salaries yourself either. You should NOT be flipping AND holding for long term in the same entity.

- Do we all get to claim the depreciation/loss amount? Do we need to split it equally?

You need to discuss with CPA. Depreciation is usually split based on the by-laws if an actual corporation or Operating Agreement if LLC taxed as S-corp.

- Do profits from a flip count as flowthrough income and not cap gains? I imagine if I start flipping I will have to take a salary probably estimated at the avg salary of a GC in my area, as I will spend significant time orchestrating things.

Check with CPA, but if you do a certain amount of flips, you will be considered a professional and they will be taxed as regular income, not cap gains.

- Is this all even worth it??? Looking at gaining only a few properties max in the first year yielding maybe 100/mo cashflow...Lot of hoops to jump through but the corp is already created, just want to be in accordance should we use it.

Again, holding properties for rentals is traditionally discouraged to do so in an S-Corp. You need to discuss with a CPA, and then take your CPA's advice on which tax regime you want to be in to a lawyer.

Thanks all. If it looks like I looked over something, let me know. Cashflow will be very small potatoes in the eyes of IRS, but I just want to be prepared in the case the deals start rolling in!

Disclaimer: I want to clarify I am trying to gain education to do everything in full accordance with the law. I do not expect the advice given to be official legal advice.

@Benjamin Ouderkirk As @James Miller mentioned, you are asking a lot of CPA questions and it's going to be very difficult to offer up any actionable advice without fully understanding your tax and financial positions. That said, my general advice is as follows:

Rentals in an LLC separate from your flipping business. You don't want rental income to be classified as active income and subject it to self-employment taxes.

Flips in an LLC taxed as an S-Corp. The reason for this is to limit your self-employment tax liability. You should consider placing each flip in its own S-Corp and also an overarching management company. But again, you'll need to consult a CPA and a lawyer to determine if this makes sense.

Depreciation will be taken into consideration at the entity level and then the remaining entity profits will flow through to each member/shareholder dependent on the equity split. So yes, everyone get the advantage of the tax breaks. 

Profit from flips is active income subject to ordinary tax rates and self-employment tax. 

Is it worth it? I don't know as I haven't seen your tax and financial position, however it's generally worth the cost of an S-Corp to save in self-employment taxes. 

Contact a real estate CPA and lawyer. 

Thanks for the replies @James Miller  @Brandon Hall

After reading through the IRS website and other sources it looks as if my scenario is too unique to get a definite idea of whether or not the corp is a good idea. I will go and speak with a CPA. 

Is the S corp not worthwhile on rental properties considering the rental income is tax-exempt anyway? 

Originally posted by @Benjamin Ouderkirk :

Thanks for the replies @James Miller  @Brandon Hall

After reading through the IRS website and other sources it looks as if my scenario is too unique to get a definite idea of whether or not the corp is a good idea. I will go and speak with a CPA. 

Is the S corp not worthwhile on rental properties considering the rental income is tax-exempt anyway? 

I think you're a bit confused.  Rental income is not tax-exempt.  Rental income is usually passive income and is taxed at your regular tax rate.  It's generally exempt from Self Employment Tax - is that what you're thinking?

The issue with putting rental real estate into an S-Corp is that the passive nature of the income can (often!) disqualifies the entity from it's Subchapter S status and it reverts to a C-Corporation.  

In a C-Corporation, all of the income loses it's tax advantageous status.  All passive income and capital gains/losses become ordinary income and are taxed at a high (35%, usually) corporate rate.

An S-Corp actually becomes disqualified from S-Corp status if more than a certain percentage of gross revenue is 'passive'. So rentals in an S-Corp are not good. And converting from an S-Corp to a partnership usually incurs taxes. You don't hold rentals and rent in the same entity as you do flips. It's just fine to have more than one (and it's usually better from an asset protection standpoint, that way your flips don't create liabilities on your rentals and vice versa). 

S-Corps are not for rentals.

Originally posted by @Benjamin Ouderkirk :

Thanks for the replies @James Miller  @Brandon Hall

After reading through the IRS website and other sources it looks as if my scenario is too unique to get a definite idea of whether or not the corp is a good idea. I will go and speak with a CPA. 

Is the S corp not worthwhile on rental properties considering the rental income is tax-exempt anyway? 

Whoa buddy; I think you need to buy a primer book on USA taxation for small business owners. Rental income is not tax exempt. You pay taxes on it for sure; they just "flow through" to your personal taxes. I think you're confusing SECA / FICA / Medicare versus FIT. Rental income is always going to be subject to FIT, and rarely subject to SECA / FICA. But active activities may be very subject to SECA. 

Thus, an S-Corp lets you split your net income money into a salary that pays FICA and Medicare and FIT, and then distribute the non salary amounts subject to FIT but not FICA and Medicare. 

@James Miller

 as above, I was referring to self-employment exemption. Sorry if my terms aren't spot on, I'm an engineer not an accountant.

I understand how profits get divided and the tax rates as they flow through, was just trying to get a grasp on extra restrictions, such as the passive income disqualification you mentioned. Thanks for your input. I'm seeing my CPA Friday about it.

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