Spec Build - should LLC file under S-corp?

2 Replies

so I've filtered through the archives and didnt see an exact fit to my question so here goes.

I have a lot that will have potentially 3 spec homes build on them. The 1st is under way and will be completed Jan/Feb of 2015. The 2nd will start and finish in 2015 leaving me with a potential gross of $200k+ I have a W-2 and the properties will be build under my LLC.

I've heard that the profit $100k per build will go attached to my normal taxes as earned income ONLY I would also be taxed under self-employment and the "new" Obama tax!  

(per 2 CPAs)(Yes "we" can) thus taking a substantial hit on the profit vs. the normal "earned income tax" like I originally thought.

Would it make sense to have the LLC file under an S-Corp in 2015 in preparation of selling 2 houses, pay myself 1/3 profit as salary, then the other 2/3s would stay in company/ and eventually be paid as dividends thus saving from self-employment tax/ Newere Obama Tax and possibly if held for over 1yr tax drops to 15%?

I don't care to walk a grey line and risk anything w/ an IRS audit, but want to save as much $ as possible to throw back into more growth?

(Too bad 1031s arent an option)

Also if the land was purchased at $20k per slice/lot and i valued them as $50k once sold, would the sell of land be taxed as a straigh capital gain and not be subject to these other taxes?

Any initial guidence would be appreciated as I will be working w a CPA, just want some initial feed back.

Thnx

Drew

anyone out there have any advice?

First, I'm not a tax professional, so ignore the rest of my post...

Second, there of LOTS of misconceptions in your post.

Let's start with this:

"I've heard that the profit $100k per build will go attached to my normal taxes as earned income ONLY I would also be taxed under self-employment and the "new" Obama tax!  (per 2 CPAs)(Yes "we" can) thus taking a substantial hit on the profit vs. the normal "earned income tax" like I originally thought."

Unless you're operating under a C-Corp, all net income will flow to your personal taxes (not just $100K), and if these are spec builds, all net income will generally be subject to some Social Security and Medicare taxes (self employment taxes).

Next, let's tackle this:

"Would it make sense to have the LLC file under an S-Corp in 2015 in preparation of selling 2 houses, pay myself 1/3 profit as salary, then the other 2/3s would stay in company/ and eventually be paid as dividends thus saving from self-employment tax/ Newere Obama Tax"

Filing as an S-Corp won't allow you to defer salary/distributions or taxes.  If you operate under an S-Corp, all income will still flow through to you in the year it was earned.  That said, after paying yourself a reasonable salary (typically, about 60% of the income you earned), the rest can be made to you as a distribution, and you'll save the employee side of the self-employment taxes on the distribution.

In other words, you can typically save 50% of of the self-employment taxes on about 40% of your income by using an S-Corp.

Let's move on to this:

"...and possibly if held for over 1yr tax drops to 15%?"

This income will never be capital gains income (subject to only 15%) regardless of how long the investment is held (and has nothing to do with how long the income is held prior to being paid out).  The IRS doesn't care about how long you held the property -- they care about your intentions with the property.  If you intended to sell it as a spec house, it doesn't matter if you sold if after 5 months or 5 years -- it's dealer inventory and subject to ordinary income taxes.

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