I'm setting up a new partnership for the purpose of wholesaling. I want to make sure I'm structuring the business effectively for tax purposes.
New Wholesale Business:
- located in GA (LLCs are easy)
- 2 person partnership
- assignments and/or double closings only (no flips/holds)
I have other business interests so I will be high tax regardless.
- majority owner of S-corp for IT consulting
- W2 for my "reasonable salary" plus shareholder distributions
- LLCs (and trusts, etc) pass through for owning rentals
- LLC pass through for rental property management
- LLC pass through for note holding
This wholesale partnership will be the sole source of income for my partner.
My primary concern is whether separate business entities prevent my rentals from becoming "inventory" when the partnership gets treated as a dealer.
It seems a basic S-corp is the way to go with regard to earned income to minimize SE tax. I'm sure partner and I can figure out a salary schedule even though this venture is straight commission. Thoughts?
Where did the formatting go?
Sorry y'all - I had bullet points to make that post easy to read.
I feel there is a common misconception that "dealer status" is some sort of a disease that once contracted, can spread to the remaining portfolio and other deals you do.
When studying case law and precedent, it's clear that the IRS will view each individual deal you do independent of all others to determine it's own taxation. In other words, your original intent when acquiring that parcel or deal will be the overruling factor in determining its taxation.
With that said, your intent in acquiring your rentals were for investment purposes, not short term profit accumulation or engaging on in a pattern of ordinary business. Thus, beginning to engage yourself in wholesaling deals will not alter your original intent with the rentals, thus not altering their taxation.
So, I would not concern yourself with your rental portfolio being affected in the slightest.
As for how best to structure the entity (S-Corporation versus LLC partnership), an S-Corp will probably be best for your partner, considering his whole source of income is from this activity. Assuming the two of you can reach a fair and reasonable compensation for both him and yourself, the remaining profit distribution would be exempt of employment tax.
When budgeting your payroll tax on your share of the salary, remember to consider the social security portion of FICA is assessed on the first $117,000 of earned income. Thus, if you have already eclipsed that with your IT W-2, the wage income you generate from wholesaling will only be subject to the medicare portion, which is considerably less.
Nathaniel Busch, CPA
Nathaniel Busch CPA, Busch Tax Company, LLC | [email protected]
Thank you. I think you covered even the questions I didn't know how to ask.
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