S-Corporation Tax Scenarios

[Nur Al Sharif]

Hi guys, 

I've been trying to understand the tax implications of different entity types. I've developed a really short, brief model of how an S-Corp would be taxed, provided that it is 100% comprised of rental properties. My results came out quite counterintuitive; the higher the income, the lower the effective tax rate is (I assume this is because Social Security Tax becomes more and more insignificant, as it is capped at $128,000 of salary). 

Anyway, I attached the quick model. Not sure how accurate it is, if at all. Could you please take a look and vet it? 

Thanks everyone!

[Ashish Acharya]

Originally posted by @Nur Al Sharif:

I think I have narrowed down my confusion - Is the 20% QBI deduction applied to Net Income, or to Retained Earnings? Nur, 

It is almost never good idea to run your rental activity via S Corp. 

People get S Corp to avoid SE taxes, but rental income is not subject to SE taxes anyway, so no need to get an S-Corp. 

Also even if you would get an s Corp, paying salary would subject Payroll tax on the income that would otherwise wouldn’t be subject to SE tax. SE and payroll tax are similar taxes named differently.

If you don’t have s Corp, then you don’t have to pay salary, the SE tax and payroll taxes are not relevant. 

Also you don’t need S Corp for 20%QBI deduction. The Retained earning has nothing to with tax so. QBI is one of the most complicated stuffs, so don’t tackle it yourself.