Mansfield, TX · Member since 2013 · 207 posts · 26 votes
This was my first year wholesaling part time here in DFW. I made a decent chunk of change doing it, about 40k. My question is when it comes to taxes, should I utilize a real estate tax professional at the end of the year? Based on what I have researched so far, it might not be worth it, and might be better to use a program such as turbo tax instead.
Money earned from wholesaling seems to be treated as regular income, with any deductions (marketing, website, driving etc.) made on schedule C.
If that is the case it might make the most sense financially to just use something such as Turbo Tax at the end of the year to see how much I need to pay back in taxes. I don't think visiting with a real estate tax professional will save me much money in this case. But I may be wrong, thanks in advance for your feedback.
The OP's question was a lot simpler, implying sole proprietor with no employees, or corporate structure. He stated that he made $40,000 presumed that to be after expenses and therefore 100% taxable for Federal Income tax and in states with state income tax.
Your question can't be answered without knowing the entity structure. If the entity is a C corporation then there is double taxation at the corporate level and the individual level.
However, if the entity is a pass through entity such as an S corporation or an LLC, then the income may pass through the entity without taxation and be taxed at the individual level for single taxation. The 43% tax rate quoted above was for an indidual rate, corporations are taxed at a different rate.
If you plan to grow the business, I would get with a pro. You might not feel like you get good value this year, but you ultimately will.
Thanks for stopping by @Jon Klaus . To clarify, in what sense do you mean value? Do you mean value in the form of a business relationship? Or some monetary value as well in the short term.
Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
12y
Longer term monetary value. One example, if you are successful, someday you will likely have an IRS audit. I'd want someone who is very comfortable and knowledgeable with audits, the Code, and my business.
Involved In Real Estate · Biloxi, MS · Member since 2013 · 76 posts · 30 votes
12y
I can't comment on your specific situation but IMO a tax professional is well worth the expense. I tried using turbotax online this passed year and had myself a pretty decent estimated return but there were a couple of things I wasn't sure about. Due to time constraints I let my CPA do my taxes. My return more than doubled over the turbotax estimate. Regardless of the reason for the difference, I would have lost a considerable amount had I stayed with TT. Plus the pain and time saved is a bonus. I won't venture down that road again. Good luck.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
12y
I'd go ahead and get with a professional. Like Jon said you may not realize a significant monetary benefit this year specifically, but this will be the easiest and cheapest point to bring him into the process. Next year you may decide to use one and then pay more for him to go back and recreate or review your 2013 data instead of just having it set up correctly from the beginning.
It sounds like you have not made any quarterly estimated tax payments. If that is the case you may be subject to a penalty and interest for underestimating your quarterlies (like to zero).
That would would one reason among others to consult with a CPA.
Wholesaling, flipping rehabbing etc are are short term activities subject to ordinary income tax rates up to 43%+ Federal. Fortunately your in TEXAS, so you don't have to worry about state income tax which can carry the total income taxes to over 50% of income.
Good luck to you and continued success. May you income tax bracket exceed 43%, because that means you're making lots and lots of money.
I have a question about the 43% income tax rates. From what I understand this is the way business works
Consumer gives money to business.
Business pays employee to work.
Employee pays taxes on "income" or wages given to them from Business. Business also pays some taxes on wages given to employee.
Business ALSO pays taxes on NET income. Net Income being defined as income after all the expenses are deducted.
Now here is what I get confused. If that NET income is distributed to its shareholders/owners is that money taxed once it gets to shareholder or is it taxed as NET income first from the business and taxed AGAIN when the shareholder/owners receive it.
Example ACME Solutions makes 100K, they pay 30K to their employee to run the business, they pay 3k in wage/payroll taxes, they spend 27k on marketing and other expenses. Acme Solutions would now be responsible to pay Net income taxes on 40K BEFORE its distributed to its members, and if its only one member he/she would be responsible to pay tax on the distribution. And whatever that combination is will be A LOT less than 43%.
The OP's question was a lot simpler, implying sole proprietor with no employees, or corporate structure. He stated that he made $40,000 presumed that to be after expenses and therefore 100% taxable for Federal Income tax and in states with state income tax.
Your question can't be answered without knowing the entity structure. If the entity is a C corporation then there is double taxation at the corporate level and the individual level.
However, if the entity is a pass through entity such as an S corporation or an LLC, then the income may pass through the entity without taxation and be taxed at the individual level for single taxation. The 43% tax rate quoted above was for an indidual rate, corporations are taxed at a different rate.
@David Krulac @Bryan David and @Jon Klaus
I have a question about the 43% income tax rates. From what I understand this is the way business works
Consumer gives money to business.
Business pays employee to work.
Employee pays taxes on "income" or wages given to them from Business. Business also pays some taxes on wages given to employee.
Business ALSO pays taxes on NET income. Net Income being defined as income after all the expenses are deducted.
Now here is what I get confused. If that NET income is distributed to its shareholders/owners is that money taxed once it gets to shareholder or is it taxed as NET income first from the business and taxed AGAIN when the shareholder/owners receive it.
Example ACME Solutions makes 100K, they pay 30K to their employee to run the business, they pay 3k in wage/payroll taxes, they spend 27k on marketing and other expenses. Acme Solutions would now be responsible to pay Net income taxes on 40K BEFORE its distributed to its members, and if its only one member he/she would be responsible to pay tax on the distribution. And whatever that combination is will be A LOT less than 43%.
If Acme Solutions is a sole proprietorship then yes it could be that high if they have other income.
43% would assume a 28% tax bracket plus 15.3% in Self employment tax.
@Bill Mitchell ,
I'd recommend at least sitting down with someone and discussing your situation and get some good quality advice. It should be money well spent.
Investor · Philadelphia, PA · Member since 2012 · 135 posts · 80 votes
12y
@David Krulac Im sorry I was assuming that it goes through a structure such as an LLC taxed as a C or C corp.
Because I thought PART of whole point of starting a business was to lessen your tax liability on a majority of your income. That you pay yourself a "fair wage" and that can be taxed at the highest level of income tax. But all the other income if through the company can be taxed at a lower corporate tax rate.
Although C corporations are subject to double taxation, they also offer greater tax flexibility. In a C corporation, you can use income shifting to take advantage of lower income tax brackets.
To illustrate, let's use an example of a company that earns $100,000. With a sole proprietorship, a business owner who is married and filing jointly would be in the 25% income tax bracket. With a corporation, assume the business owner takes $50,000 in salary and leaves $50,000 in the corporation as corporate profit. The federal corporate tax rate is 15% on the first $50,000. Furthermore, the business owner is now in the 15% tax bracket for his or her personal income tax. This can reduce your overall tax liability by over $8,000.
Mansfield, TX · Member since 2013 · 207 posts · 26 votes
12y
Hey @Shariyf Grevious not to be disrespectful, but this is kind of derailing the thread. You should probably make a new thread for your questions. Thanks
I got to 43% within 39.6% highest bracket Federal individual tax rate plus the Obama health care tax of 3.8%, and did not add in the 15.3% Social Security Tax, which would make the total even higher at 58.7%, not including state and local income tax which obviously varies from state to state. ranging from 0% to about 13%, here its 4.2%.
So total tax at the highest bracket would therefore range from 58.7% to 71.7% taxes, not counting a 25% corporate tax which would raise the rate further to 83.7% to 96.7%
@Steven Hamilton II
I got to 43% within 39.6% highest bracket Federal individual tax rate plus the Obama health care tax of 3.8%, and did not add in the 15.3% Social Security Tax, which would make the total even higher at 58.7%, not including state and local income tax which obviously varies from state to state. ranging from 0% to about 13%, here its 4.2%.
So total tax at the highest bracket would therefore range from 58.7% to 71.7% taxes, not counting a 25% corporate tax which would raise the rate further to 83.7% to 96.7%
If income is subject o SE tax it is not subject to the 3.8%. This goes the same for active participants in S-corps and partnerships. So it would top out at 39.6% + 15.3% assuming the other spouse made enough to bring their income up high enough.
@David Krulac Im sorry I was assuming that it goes through a structure such as an LLC taxed as a C or C corp.
Because I thought PART of whole point of starting a business was to lessen your tax liability on a majority of your income. That you pay yourself a "fair wage" and that can be taxed at the highest level of income tax. But all the other income if through the company can be taxed at a lower corporate tax rate.
Although C corporations are subject to double taxation, they also offer greater tax flexibility. In a C corporation, you can use income shifting to take advantage of lower income tax brackets.
To illustrate, let's use an example of a company that earns $100,000. With a sole proprietorship, a business owner who is married and filing jointly would be in the 25% income tax bracket. With a corporation, assume the business owner takes $50,000 in salary and leaves $50,000 in the corporation as corporate profit. The federal corporate tax rate is 15% on the first $50,000. Furthermore, the business owner is now in the 15% tax bracket for his or her personal income tax. This can reduce your overall tax liability by over $8,000.
That same income if passed to you later on would be taxed at 15-20% meaning you are pushing its tax rate to 30-35%. IF you have no plans to use the funds for awhile or paying family members and such that route may work.
If you are in the highest brackets, it can be advantageous as you will be paying 39.6% on income, but if you issue dividends from the C-corp (that paid 15%) You will end up paying 20% individually. That means an actual effective rate of 35% which is an almost 5% savings.