Real Estate Investor · Richmond, VA · Member since 2008 · 28 posts · 7 votes
I recently attended a bootcamp where one of the speakers was a tax guy. He was apoplectic when he talked about CPAs who set up clients in LLCs with an S-corp tax election in part to save on self-employment taxes. Swear to Jesus, thought he'd stroke out right on stage.
:protest:
His take was that this S-corp election requires Schedules C and SE, putting a red AUDIT ME sign on your back and exposing investors to a high risk of audit (more highly audited than any other type of return). He advised using a multi-member LLC taxed as a partnership, and using other tax strategies to make back the 15% or so you've lost in self-employment taxes. In other words, the high risk of a painful audit outweighs the benefit of self-employment tax savings.
It's not a critical issue for me at this point, but now I'm curious. I brought it up to my CPA, and now she wants to take this guy on and go 15 rounds.
:pissed:
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
If you keep your proportion of dividends down (compared to salary), you should be fine. People get in trouble when they try to define "reasonable salary" as some ridiculously low amount and then pay the LARGE difference in dividends.
Not much of a sample size, but I've had LLCs taxed as S-Corps for more than 10 years now (real estate and non-real estate), and have never been audited...
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15y
If you keep your proportion of dividends down (compared to salary), you should be fine. People get in trouble when they try to define "reasonable salary" as some ridiculously low amount and then pay the LARGE difference in dividends.
Not much of a sample size, but I've had LLCs taxed as S-Corps for more than 10 years now (real estate and non-real estate), and have never been audited...
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
15y
As someone who represents businesses and people in front of the IRS, he may be a moron depending upon the full context of what he was saying.
As long as you pay yourself a reasonable salary, you are fine. If you think it is reasonable to pay yourself a 10k salary when you bring in 100K think again. That is not reasonable.
As far as rentals go, you won't pay SE tax on that income.
And believe it or not S corps are one of the less audited returns. Individual returns are audited more. S corps that do not pay or pay a salary or pay a small one.
Real Estate Investor · Northeast TN, TN · Member since 2008 · 516 posts · 361 votes
15y
Originally posted by calgal:
I recently attended a bootcamp where one of the speakers was a tax guy.
What makes him a "tax guy?" What were his credentials? JD, CPA, EA? Or perhaps none of these?
Originally posted by calgal:
His take was that this S-corp election requires Schedules C and SE, putting a red AUDIT ME sign on your back and exposing investors to a high risk of audit (more highly audited than any other type of return)
If this is what he said, then I certainly agree with Steven; the guy is a moron. An LLC that elects to be taxed as an S-Corp files an 1120S NOT a Schedule C or SE.
The only LLC requiring a C and SE form is a single-member that accepts the default tax status.
Originally posted by calgal:
I brought it up to my CPA, and now she wants to take this guy on and go 15 rounds.
Real Estate Investor · Richmond, VA · Member since 2008 · 28 posts · 7 votes
15y
Mitch, the class was several months ago and - typical - I can't my notes. It was a commercial investing class, and we'd been talking both short value plays of roughly a year as well as longer holds. His talk was geared toward tax reduction strategies for higher net worth investors, combining tax strategies with asset protection and estate planning. Wish I had more details - the room was on fire when he was talking. Oh well. Will post again if I find the notes.
Hi and thanks J Scott. I'm just gearing up for my first investment. My plan is SFH rehabs for short-term cash to build up funds to use in buying apartments. If I'm understanding right, tax-free dividends could be a big portion of those funds. I figure I'll take out enough salary each month to cover my actual expenses.
Some of the strategies I've been reading on the board are mucho cool, but too complicated for my little needs right now. If I can get the basic entity and operating agreements, insurance, and a will in place, I should be good to go. Much appreciate the feedback!
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Originally posted by Bill Walston:
The only LLC requiring a C and SE form is a single-member that accepts the default tax status.
To clarify, the only LLC requiring a C and SE form is a single member LLC that accepts the default tax status, and, operates an active income business.
A residential rental activity is a passive income business and the disregarded entity LLC would still put all the LLC income and expenses on Schedule E (not C and SE).
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
Originally posted by calgal:
I'm just gearing up for my first investment. My plan is SFH rehabs for short-term cash to build up funds to use in buying apartments. If I'm understanding right, tax-free dividends could be a big portion of those funds. I figure I'll take out enough salary each month to cover my actual expenses.
I believe the rule of thumb for a reasonable salary from your S-corp LLC is 40% of income. Confirm with your own CPA.
Real Estate Investor · Northeast TN, TN · Member since 2008 · 516 posts · 361 votes
15y
Originally posted by Dave T:
Originally posted by Bill Walston:
The only LLC requiring a C and SE form is a single-member that accepts the default tax status.
To clarify, the only LLC requiring a C and SE form is a single member LLC that accepts the default tax status, and, operates an active income business.
A residential rental activity is a passive income business and the disregarded entity LLC would still put all the LLC income and expenses on Schedule E (not C and SE).
I concur :-) As the OP indicated the "tax guy" mentioned "using other tax strategies to make back the 15% or so you've lost in self-employment taxes" I spoke only to an LLC with earned income. An LLC with passive income would have no need to save on employment taxes - and, IMHO, no need to file an S-Corp election.
Real Estate Investor · Richmond, VA · Member since 2008 · 28 posts · 7 votes
15y
Originally posted by Bill Walston:
What makes him a "tax guy?" What were his credentials? JD, CPA, EA? Or perhaps none of these?
Bill, he was a CPA
Originally posted by Bill Walston:
If this is what he said, then I certainly agree with Steven; the guy is a moron. An LLC that elects to be taxed as an S-Corp files an 1120S NOT a Schedule C or SE. .....
Sounds like you have the right CPA :-)
LOL - you may be right!
I spent last night tackling the undeclared vs s-corp election, the proper forms, blah blah. I never though I'd say the IRS website is helpful, but I'll be darned. I think I finally get it. I'll have to take a picture of my notes and all the arrows, underlines, scribble throughs, if-then but if-not-then, "huh? Ah-HA! huh, what was that tax guy talking about"? It looks a little, um, Jackson Pollack, but those notes and ya'lls comments really did help.
On an unrelated-ish topic, I'm still not clear why it's better to have achieved a certain positive income from the business before I declare the s-corp election. I don't know how I'm disadvantaged if I go s-corp straight out the gate vs. s-corp at $50K. but that's a post for another day.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Originally posted by calgal:
On an unrelated-ish topic, I'm still not clear why it's better to have achieved a certain positive income from the business before I declare the s-corp election. I don't know how I'm disadvantaged if I go s-corp straight out the gate vs. s-corp at $50K. but that's a post for another day.
I'll admit that I was too lazy to read all of the comments here, but I haven't ever heard of someone waiting to declare s-corp status either. Why anyone would want to do this is a mystery. In fact, there are deadlines to file from my understanding so waiting could be costly. From 2553 is what you use for this. Here is a primer: