Flipper/Rehabber · Washington, DC · Member since 2018 · 66 posts · 7 votes
Hello BP Community,
I have an important tax related question that I need someone to help answer. I have created my LLC back in July 2018 and started my first flip in August 2018. I actually had 2 months and 15 days to elect my LLC to be taxed as a S Corp after I created my LLC. However, I unfortunately did not elect as a S Corp in a timely manner.
My first flip is subject for closing on the last week of December and I am starting to wonder if it makes sense to delay the closing till 2019 so that I can be eligible to elect my LLC as a S Corp between Jan 1 - March 15.
However, my big question is...
Can the profits from my first flip still get taxed as S Corp (only on the partial portion of profits I draw as my salary not the distribution I take) even if the project actually started before I elect my LLC as a S Corp but do the closing , say on Jan 2, 2019, which is after the date of my election to tax my LLC as a S Corp?
If you could tag a good CPA that could give an answer shortly, I would greatly appreciate it very much!
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
7y
You have three years and 75 days to make a retroactive S-Corp election under Rev Proc 2013-30.
This means that, as long as your flip is owned by the LLC you can sell it this year and retroactively tax your LLC as an S-Corp.
The tricky part is running late payroll. Penalties can stack up pretty quickly, so if you do decide to go the S-Corp route, I would recommend moving forward with the election sooner rather than later and completing your 2018 payroll asap.
That said, if you have flexibility to push closing, you should explore that. Then in 2019 you'll have more profits to shelter (assuming you do another flip) which will make the S-Corp that much more valuable. There are cons of course, namely pushing income into one year could increase your mariginal tax and also reduce your ability to obtain financing since your 2018 tax return won't show this profit.
I'd say you should speak with a CPA but it's too late in the year to have a good one assist with this, legitimately, under your time crunch.
Accountant · Fort Lauderdale, FL · Member since 2013 · 1k+ posts · 753 votes
7y
@Arthur C.
You (your CPA) can file for a late S Corp election. Though you seem to be under the misconception that only distribution/salary is taxed. That is not correct. All income regardless of distributed out of the S Corp gets passed through and is taxed to you.
Flipper/Rehabber · Washington, DC · Member since 2018 · 66 posts · 7 votes
7y
@Lance Lvovsky
My apologies. I just reread my comment I made and I meant to say taxed the self employment portion only on the salary but not the distribution. Does it matter if the flip project started BEFORE the election to tax my LLC as a S Corp but close the property AFTER the election?
Secondly, how late can I elect to be taxed as S Corp? It is my understanding that I can elect as S Corp within 2 months and 15 days after the creation of LLC or by March 15 of the following year. It is possible to do election late but I'll be subject to sort of a late or penalty fee whatever it may be. So, if that's the case, I would want to try avoid that.
I'm just trying to figure if it makes sense to delay the closing to 2019 but my question I mentioned above re: the date of election after starting the flip project is whether or not it would prevent me from getting taxed as S Corp on profits from that certain project because the election would be made after the project started? Or does it all come down to what year the property closes and if my LLC is set to be taxed as S Corp for that year?
CPA · Raleigh, NC · Member since 2013 · 1k+ posts · 2k+ votes
7y
You have three years and 75 days to make a retroactive S-Corp election under Rev Proc 2013-30.
This means that, as long as your flip is owned by the LLC you can sell it this year and retroactively tax your LLC as an S-Corp.
The tricky part is running late payroll. Penalties can stack up pretty quickly, so if you do decide to go the S-Corp route, I would recommend moving forward with the election sooner rather than later and completing your 2018 payroll asap.
That said, if you have flexibility to push closing, you should explore that. Then in 2019 you'll have more profits to shelter (assuming you do another flip) which will make the S-Corp that much more valuable. There are cons of course, namely pushing income into one year could increase your mariginal tax and also reduce your ability to obtain financing since your 2018 tax return won't show this profit.
I'd say you should speak with a CPA but it's too late in the year to have a good one assist with this, legitimately, under your time crunch.
If moving the close will significantly increase your tax burden next year, depending on the size of your profit, you might be ok with paying very minimal salary this year, as this is the first year. That way your estimated annual employment tax liability is $1,000 or less and you are eligible to file annual (rather than quarterly) Form 944 that is not due until Jan 31st of 2019. Your S-corp needs to document and approve the reason in your minutes as s since this is the first year, there is not enough money for the salary as all the money is going right into the business and you expect to make up for this year salary in the coming year with more salary/bonus. Courts have been ok with this.
When you file your return in 2019, just file as S-corp and attach a statement as required by Rev Proc 2013-30.
You CPA will do that for you if you are not sure.
If that is too much hassle, move the closing. Why dont you run a quick analysis with the projected flip income for the next year and see if moving the close to next year would create adverse tax effect and how much. It might not be significant enough for all this.
You indeed have an option to request S-corp status retroactively, but not really 3 yrs + 75 days. That huge time frame exists in theory, but not in reality, due to the many limitations imposed. In your case, you are well within the available window, so you can still request an S-corp status effective in July 2018 when you file your 2018 return for the company.
There is more to that, however, in addition to the issues my colleagues already brought up.
Did you buy the flip, or did your LLC? Whose name is on the documents? If the flip was purchased under your own name, it's tricky to stuff it inside the LLC for tax purposes. If you want to sell it as an LLC-owned property, you would need to deed it into the LLC first, and this may open a Pandora's box and even derail the pending sale. Be cautious taking this path.
If you will sell it under your own name, reporting it as a sale made by the LLC/S-corp is tricky and may create some IRS issues down the road, as the IRS computer will expect this sale to show up on your personal taxes, not on the corporate.
Now, timing.
I'm not sure if you can even close this week, but if you can, you probably should. I know this sounds odd, because I did not comment on taxes yet. Here is why I never advise postponing closings, no matter what tax ramifications are. During that extra week of delay the buyer might:
change his mind
lose his job
get divorced
get in an accident
die
the property can get burned down or flooded
etc.
The risk of losing the deal to any of this is far greater, in my opinion, than any tax benefits you might extract by waiting. This is how I think, and certainly not everybody thinks this way.
And if you close this week, you also need to pay yourself salary this week, in order to get the desired SE tax savings. Depends on the numbers, of course, because sometimes those savings are much smaller than what investors expect. And sometimes no savings at all.
But if you do elevate tax considerations to the top of your list, then yes, you may close in 2019, report the sale in 2019 and play the S-corp salary game in 2019. Ironically, it may not even result in saving money when the dust settles at the end of 2019, as none of us knows the future.
Much appreciated you willing to take your time to post your comment on this post.
I used my LLC name to purchase my flip project and I will use my LLC name to sell it as well.
Sorry for my ignorance (I tried researching online and I had no luck) but how exactly should the payroll be done to pay myself a reasonable salary? Just write a business check payable to myself and deposit it in my personal checking account? What about the deductions for FICA & Fed/State income withholding tax? Self-employment taxes? Should I deduct them from the gross salary I pay to myself on the check? If so, then how should I calculate the Fed/State income withholding tax?
My plan is to continue flipping and I expect to do 1-3 flips in 2019 separately from the first flip. With my full time job, I anticipate making no more than $84.2K income after considering the standard deduction/itemized deduction.
I agree I will need to talk with my CPA about this but he is on holiday break so like you said I'm under my time crunch...
How am I supposed to pay myself a salary this year in 2018 if I have not yet closed the property until 2019 if I decide to delay the closing? I do not have any cash inflows so I cannot pay myself a salary in 2018. Does this make sense? All the transactions have been cash outflows and they are all expenses related to my flip project.
I'm still struggling to understand re: the estimated quarterly payments that I may be required to file. Does this only apply if I receive sales proceeds from my flip? If that's the case, then should I not worry about it on January 15 of the following year because I have not received the sales proceeds between Sept 1 to Dec 31. Most likely, I will worry about it for the period from Jan 1 thru March 31 and will need to file by April 25 for that period. Is this correct?
Thanks for commenting and the offer of your perspective.
I am glad to know that I can request a S Corp status effective in July 2018 when I file my 2018 tax return for the company.
As I mentioned in my reply to Brandon Hall's comment above, I bought my flip under my LLC name and intend to sell it under my LLC name as well. So, I guess that is a good thing I won't have to deal with any issues related with what you mentioned.
Like I replied to Brandon's comment, how exactly should I pay myself salary this week if the closing occurs this week? Just write a business check payable to myself or initiate an ACH to myself? What about the consideration of FICA & Fed/State income withholding tax? Self-employment taxes? Should I deduct them from the gross first before figuring what my net pay is? I was wondering if it makes sense to subscribe a payroll system like ADP to take care all of the calculations of deductions from my gross salary? Any additional insights you may offer would be greatly helpful!
Thanks for commenting and the offer of your perspective.
I am glad to know that I can request a S Corp status effective in July 2018 when I file my 2018 tax return for the company.
As I mentioned in my reply to Brandon Hall's comment above, I bought my flip under my LLC name and intend to sell it under my LLC name as well. So, I guess that is a good thing I won't have to deal with any issues related with what you mentioned.
Like I replied to Brandon's comment, how exactly should I pay myself salary this week if the closing occurs this week? Just write a business check payable to myself or initiate an ACH to myself? What about the consideration of FICA & Fed/State income withholding tax? Self-employment taxes? Should I deduct them from the gross first before figuring what my net pay is? I was wondering if it makes sense to subscribe a payroll system like ADP to take care all of the calculations of deductions from my gross salary? Any additional insights you may offer would be greatly helpful!
Thanks,
AC
Should we really have this discussion on XMas Eve? :)
You don't want to hear this, but establishing a reasonable salary and calculating a payment is best left to a pro. It is more involved than writing a check / making a transfer to yourself, as you have to calculate and withhold 3 or 4 (if you have a state tax) different taxes. I doubt that you can find a good CPA to help this week, since many offices are closed and others are very busy.
Check with one of the national payroll companies: Paychex, ADP or Gusto. They might do it for you.
How am I supposed to pay myself a salary this year in 2018 if I have not yet closed the property until 2019 if I decide to delay the closing? I do not have any cash inflows so I cannot pay myself a salary in 2018. Does this make sense? All the transactions have been cash outflows and they are all expenses related to my flip project.
I'm still struggling to understand re: the estimated quarterly payments that I may be required to file. Does this only apply if I receive sales proceeds from my flip? If that's the case, then should I not worry about it on January 15 of the following year because I have not received the sales proceeds between Sept 1 to Dec 31. Most likely, I will worry about it for the period from Jan 1 thru March 31 and will need to file by April 25 for that period. Is this correct?
If you are closing the sale in 2019, then there is no need to elect S-corp, thus there is no salary requirement.
For estimated payments, even if you are closing in 2018 or 2019, you probably dont have to make any estimated payments in both the year. I dont know enough info about you. But, If you understand this, it will answer your question:
Estimated Tax Payments must be:
Lesser of
100% of the tax shown on the taxpayer's return for the preceding year or (110% if 2017 AGI was more than150k)
90% of his tax for the current year.
Assuming you had no other income and you didn't owe any tax from the flips last year-2017, you are not required to make payments this year-2018. The same way, you will not be required to make any payments in 2018, because you didn't owe any tax this year 2018. You meet requirement 1 for both the year.
If you have a W-2 job, the withholding will probably meet the estimated payment requirement since you are not required to make any additional payment since you meet the number 1 requirements for both the year.
It seems that you have some basic tax questions, and it would be best to talk to a professional. If you get bogged down with all this detail, which there are 100s other, you will struggle to grow and be stress-free.
Sorry, I didn't have the chance to reply your comments back. Just wanted to say I greatly appreciate your inputs and it appeared that my closing is going to be completed in 2019, which seems to be more favorable for me in terms of my tax benefits. Wish you both Happy New Year and hope 2019 will be a great year for all of us!
