Bolingbrook, IL · Member since 2012 · 55 posts · 1 vote
Lately, because of the large amount of confusing and low quality information I have read online and my inability to access my book collections, I am confused about taxes.
I have the following questions:
1. Are there any significant differences between a LLC taxed as a proprietor vs a LLC taxed as a S-corp? Both are flow through but I have heard a lot of conflicting information about which is better for real estate.
2. Taxation rates? So let us assume that we maximized our deductions and still end up with an annual net rental income of $1000. Do we pay a self employment tax on this? No right? We pay federal and state at the personal bracket level?
3. In addition, would a growing portfolio of rentals trigger the wrath of the Alternative Minimum Tax?
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
14y
Jack Lee,
Welcome to the board. First let me suggest that you use the search function here and you will find a wealth of information. We love your questions; however, many are repeated regularly.
To answer your questions This only pertains to rental income.
. Are there any significant differences between a LLC taxed as a proprietor vs a LLC taxed as a S-corp? Both are flow through but I have heard a lot of conflicting information about which is better for real estate.
First we need to know what you plan to do as an investor. Are you going to continue to have rental property only or engage in flipping activities? If you plan to only engage as a landlord I recommend keeping the LLC taxed as a disregarded entity. This means that you will not have to file an extra tax return. You also could find that you lose some benefits by this scenario. Simple put: Disregarded LLC is best; however, if you are operating with a partner either a C-Corp or partnership are usually best.
This is only pertaining to rental income. Other income can be a significant factor.
And LLC taxed as a _______.
Disregarded entity: Reports on Form Schedule E attached to the personal 1040 pays no self employment tax. Default if there is only one LLC Member.
[b]Partnership:[\b] Reports on Form 1065 which issues a k-1 to each partner who must report on their personal 1040. The general partner may be subject to Self-Employment Tax on their earnings. Increased costs in accounting and reporting. Default if there is more than one LLC Member.
S-corporation: Reports on Form 1120S which issues a K-1 to each shareholder to report on their personal 1040. A "reasonable salary" must be paid. Social Security and medicare will be incurred upon any salary issued. Increased costs in accounting and reporting.
[b]C-Corporation:[\b] Reports on Form 1120. No reporting is done on the personal 1040. Good for high income individuals in the 28% tax bracket and higher. Increased accounting costs and reporting costs. No salary must be paid. Taxed at 15% on first $50,000 of income. Good for long-term investing in which funds will be reinvested.
2. Taxation rates? So let us assume that we maximized our deductions and still end up with an annual net rental income of $1000. Do we pay a self employment tax on this? No right? We pay federal and state at the personal bracket level?
And LLC taxed as a _______.
Disregarded entity(Single-Member LLC) you will only pay ordinary income tax rates on your rental income. No self emloymeny tax will be paid on rental income.
[b]Partnership:[\b] You will pay at the Ordinary Income tax rates on income passed to your 1040. The general partner may be subject to Self-Employment Tax.
LLC taxed as an S-Corp you will pay ordinary tax; however, once you have an established income the IRS likes to see that individuals are paying the operators a "reasonable salary" for the work being done. That means there will be Self-employment Tax.
[b]C-Corp[\b] you will not have to worry about paying Self-Employmet Tax except for any salary that the corporation decides to pay. There are no salary requirements and if you plan to keep the income in the corporation for a very long time you will not be subject to any double taxation.
3. In addition, would a growing portfolio of rentals trigger the wrath of the Alternative Minimum Tax?
Depending upon the income(positive or negative) of the rentals AMT(Alternative Minimum Tax) may or may not be a factor. A portfolio of rentals in which a loss is shown can be a significant help whereas a portfolio in which there is a large income can be a detriment. There is more cause when the deductions on Form 1040 Schedule A are higher than average.
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
14y
Jack Lee,
Welcome to the board. First let me suggest that you use the search function here and you will find a wealth of information. We love your questions; however, many are repeated regularly.
To answer your questions This only pertains to rental income.
. Are there any significant differences between a LLC taxed as a proprietor vs a LLC taxed as a S-corp? Both are flow through but I have heard a lot of conflicting information about which is better for real estate.
First we need to know what you plan to do as an investor. Are you going to continue to have rental property only or engage in flipping activities? If you plan to only engage as a landlord I recommend keeping the LLC taxed as a disregarded entity. This means that you will not have to file an extra tax return. You also could find that you lose some benefits by this scenario. Simple put: Disregarded LLC is best; however, if you are operating with a partner either a C-Corp or partnership are usually best.
This is only pertaining to rental income. Other income can be a significant factor.
And LLC taxed as a _______.
Disregarded entity: Reports on Form Schedule E attached to the personal 1040 pays no self employment tax. Default if there is only one LLC Member.
[b]Partnership:[\b] Reports on Form 1065 which issues a k-1 to each partner who must report on their personal 1040. The general partner may be subject to Self-Employment Tax on their earnings. Increased costs in accounting and reporting. Default if there is more than one LLC Member.
S-corporation: Reports on Form 1120S which issues a K-1 to each shareholder to report on their personal 1040. A "reasonable salary" must be paid. Social Security and medicare will be incurred upon any salary issued. Increased costs in accounting and reporting.
[b]C-Corporation:[\b] Reports on Form 1120. No reporting is done on the personal 1040. Good for high income individuals in the 28% tax bracket and higher. Increased accounting costs and reporting costs. No salary must be paid. Taxed at 15% on first $50,000 of income. Good for long-term investing in which funds will be reinvested.
2. Taxation rates? So let us assume that we maximized our deductions and still end up with an annual net rental income of $1000. Do we pay a self employment tax on this? No right? We pay federal and state at the personal bracket level?
And LLC taxed as a _______.
Disregarded entity(Single-Member LLC) you will only pay ordinary income tax rates on your rental income. No self emloymeny tax will be paid on rental income.
[b]Partnership:[\b] You will pay at the Ordinary Income tax rates on income passed to your 1040. The general partner may be subject to Self-Employment Tax.
LLC taxed as an S-Corp you will pay ordinary tax; however, once you have an established income the IRS likes to see that individuals are paying the operators a "reasonable salary" for the work being done. That means there will be Self-employment Tax.
[b]C-Corp[\b] you will not have to worry about paying Self-Employmet Tax except for any salary that the corporation decides to pay. There are no salary requirements and if you plan to keep the income in the corporation for a very long time you will not be subject to any double taxation.
3. In addition, would a growing portfolio of rentals trigger the wrath of the Alternative Minimum Tax?
Depending upon the income(positive or negative) of the rentals AMT(Alternative Minimum Tax) may or may not be a factor. A portfolio of rentals in which a loss is shown can be a significant help whereas a portfolio in which there is a large income can be a detriment. There is more cause when the deductions on Form 1040 Schedule A are higher than average.
Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
13y
Steven Hamilton II, Tnx. But this hasn't clarified the truth or fiction in the common wisdom of: only do flips and wholesaleing in an S-Corp.
In an S-corp (or an LLC with the S-corp taxation election) you pay W2 income from your wholesale income and flip profits and some small amount of dividend after you've paid yourself a "market rate" salary. Paying W2 (salary) you loose 6% paying the corp side of FICA.
Having run an IT contractor S-corp, I remember taking many deductions that I knew were not possible if I recieved my 1099 IT contractor pay directly to myself. So I figured that the 6% loss to the gov in the form of corp side FICA payments was made up for with other deductions. At least this is what I thought, I never did a paper comparison of both tax strategies.
In a real real estate business doing wholesaling and fliping, where there's driving expense, buying of software, monthly fees for (too) many services like VA's, call centers, out bound dialers, yellow letter mailing expenses. Can someone pencil both paths: wholesaling/flip income directly onto the 1040 vs through an S-corp to verify which path is more advantagous?
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Curt Smith,
That truly depends upon your situation overall. How much income are we talking about? 30k? 50k? 300k? After expenses?
You do not lose 6% paying the "corp" side of FICA. You are liable for paying that regardless. That means a Sole proprietorship is subject to it as well through Self Employment Tax.
As far as other deductions yes, you can pass some of your income as distributions (Not dividends: Dividends are subject to tax). There is not much that you can't deduct otherwise between both. The Corp allows you to make a higher solo 401k contribution.
Mileage vs actual expense benefits depend upon how many miles you are putting on the vehicle. The more miles the better off you are with mileage. In fact you might be better off just reimbursing your miles from a corporation.
After expenses is what is important. That is what is subject to tax BOTH at ordinary income rates and if the S-corp is paying a reasonable salary as it is supposed to it that will change the amount subject to Social Security and Medicare.
Give me a profit number and I can show you quite easily.
Keep in mind the corp will have higher filing fees for the 1120S, 941, federal AND state unemployment insurance returns, state withholding tax returns.
Rental Property Investor · Clarkston, GA · Member since 2012 · 2k+ posts · 1k+ votes
13y
Oh that's right, SOLOK or SEP retirement plans. That was the big deal when I was running my IT contractor S-corp...
For real estate I don't flip or wholesale, but lets take a number like: $100k / yr income that needs optimal tax treatment (sole propritership vs LLC as S-corp). Wholesaling has alot of driving to look at properties that the IRS does not allow deductions for (pre-purchase miles). But the S-corp might re-imburse??
I think it makes sense to mention the audit risk of sole proprietership vs S-corp, where I've heard / read that the IRS is scrutinizing sole proprieterships much more heavily than S-corps or partnerships (multi-member LLC).
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y
Originally posted by Curt Smith:
Oh that's right, SOLOK or SEP retirement plans. That was the big deal when I was running my IT contractor S-corp...
For real estate I don't flip or wholesale, but lets take a number like: $100k / yr income that needs optimal tax treatment (sole propritership vs LLC as S-corp). Wholesaling has alot of driving to look at properties that the IRS does not allow deductions for (pre-purchase miles). But the S-corp might re-imburse??
Actually those miles are still deductible just as a real estate agent can deduct the miles. If it is someone who is looking for acquiring for themselves yes they can add it to the basis of the property.
Originally posted by Curt Smith:
I think it makes sense to mention the audit risk of sole proprietership vs S-corp, where I've heard / read that the IRS is scrutinizing sole proprieterships much more heavily than S-corps or partnerships (multi-member LLC).
Yes, the IRS does look at more sole proprietorship. This is due to the much LARGER number of sole props.
As long as you are following the rules an audit shouldn't be a problem.
Rental Property Investor · Orlando, FL · Member since 2014 · 25 posts · 2 votes
11y
Steven, you wrote:
LLC taxed as an S-Corp you will pay ordinary tax; however, once you have an established income the IRS likes to see that individuals are paying the operators a "reasonable salary" for the work being done. That means there will be Self-employment Tax.
[b]C-Corp[\b] you will not have to worry about paying Self-Employmet Tax except for any salary that the corporation decides to pay. There are no salary requirements and if you plan to keep the income in the corporation for a very long time you will not be subject to any double taxation.
Here is my scenario.
I am doing syndication with a separate LLC for each project (I have read the pros and cons in other posts ;-) Each project has my overall LLC as the MGR and then in the Operating Agreement I specify each of the members and their percentages. Each project is under $250,000. At the end of the project, the net balance will be distributed per the contribution percentages. The LLC will terminate at the end of each project (or there will be a new Operating Agreement to start over with a new project)
I was going to do the 1065 / K-1 partnership plan, but it would be really nice for the members to avoid social security on their proceeds.
So I will do the 1065 / K-1's and then file the 8832 and select 6a to be a corporation.
LLC taxed as an S-Corp you will pay ordinary tax; however, once you have an established income the IRS likes to see that individuals are paying the operators a "reasonable salary" for the work being done. That means there will be Self-employment Tax.
[b]C-Corp[\b] you will not have to worry about paying Self-Employmet Tax except for any salary that the corporation decides to pay. There are no salary requirements and if you plan to keep the income in the corporation for a very long time you will not be subject to any double taxation.
Here is my scenario.
I am doing syndication with a separate LLC for each project (I have read the pros and cons in other posts ;-) Each project has my overall LLC as the MGR and then in the Operating Agreement I specify each of the members and their percentages. Each project is under $250,000. At the end of the project, the net balance will be distributed per the contribution percentages. The LLC will terminate at the end of each project (or there will be a new Operating Agreement to start over with a new project)
I was going to do the 1065 / K-1 partnership plan, but it would be really nice for the members to avoid social security on their proceeds.
So I will do the 1065 / K-1's and then file the 8832 and select 6a to be a corporation.
Correct?
When does the S-corp // C-corp come into play?
Are the other members purely just bringing the funds or are they active?
Rental Property Investor · Evanston, IL · Member since 2015 · 19 posts · 1 vote
10y
@Steven Hamilton II I landed on this post through another post of yours. I understand having an LLC taxed as an S-Corp is different for every scenario and the amount of income. Do you think it would make sense to structure a business this way if a married couple who brings in approx. 160K combined from their primary jobs is starting out with one rental which would bring in approx 12K-24K income annually? If the single rental property only brings in 12K can you still pay "reasonable salary" to the couple since its such a low profit and have the balance distributed to the two? Or would it make more sense not to elect the LLC as an S-Corp?
New Orleans, LA · Member since 2017 · 9 posts · 6 votes
9y
I have another tax related question.
10 years ago I purchased the double in New Orleans and hired my good friend, David, to manage construction project. My agreement (just a contract between us) with David was that he would collect construction project management fees after i have sold the house and the split would be 50/50.
I did not intend to keep the house for 10 years but one thing led to another and the property stayed in my S-Corp (i created S-corp to put this double under it) where i am 100% owner of. David is an agent of the S-Corp, with title of Vice President but hods 0% shares of the S-corp.
I sold the double in late 2016 and closing company handed me check for $32,000. My mortgage at this point was very small.
My dilemma - How much do i pay David? he is entitled to half of the money but i cant figure how this money will be taxed and therefore if i pay him half of $32,000 ($16,000) now, will i be taxed on the $32,000 or $16,000 from my S-Corp as capital gains? Or capital gains taxes are calculated in some other way? i am not sure how to move forward.
I would appreciate any thoughtful advise on how to best proceed in this situation.
Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
8y
@Steven Hamilton II is it safe to say that it makes little sense to try and save on SE taxes in your flipping/wholesaling business by electing your LLC to be taxed as an S-Corp if you already make a 70K+ w2 income?
@Steven Hamilton II is it safe to say that it makes little sense to try and save on SE taxes in your flipping/wholesaling business by electing your LLC to be taxed as an S-Corp if you already make a 70K+ w2 income?
You would be required to pay a reasonable salary from your corporation either way. So you have to look at that fact. A tax plan truly depends upon each individual's situation and needs. There is NO one size fits all situation. Some might need certain benefits and have large medical expenses that would be completely different than someone who wants to maximize retirement contributions. It is even further different if someone has a large income from another job, or a spouse or is considering getting married, divorced etc.
Rental Property Investor · Buffalo, NY · Member since 2017 · 257 posts · 130 votes
8y
@Steven Hamilton II thanks for replying. Most of my insurance costs are covered by my job. I was trying to gauge when I should start considering being taxed as an S-Corp. I think getting taxed as an S-Corp adds complexity and comes with a cost and wouldn't be worth it until it could save you a significant amount of money. At that point I would be getting a hold of you to do my taxes!
@Steven Hamilton II thanks for replying. Most of my insurance costs are covered by my job. I was trying to gauge when I should start considering being taxed as an S-Corp. I think getting taxed as an S-Corp adds complexity and comes with a cost and wouldn't be worth it until it could save you a significant amount of money. At that point I would be getting a hold of you to do my taxes!
John,
It truly depends. I personally rather enjoy C-corps and partnerships; however, that depends upon the function being done. I feel partnerships have the most flexibility. But if you don't have a partner, there are other options we can look at. The new TCJA law that was passed gives us some greater planning abilities. It all depends upon facts and circumstances, so don't get locked into it NEEDING to be an S-corp, that could actually hurt you. Especially with the new tax rates.