Any high performing Realtors taxed as S-Corps

Rental Property Investor · Tucson, AZ · Member since 2019 · 173 posts · 87 votes

Any high performing agents choose to be taxed as an S-corp??? I heard its expensive to manage and you have to do payroll and bookkeeping.

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Jake HottenrottPro Member

CPA · Belleville, IL · Member since 2014 · 255 posts · 269 votes

@Steven Hamilton II - Don't lie. You don't HAVE to do bookkeeping, just bring a couple of grocery bags of receipts to your tax pro with a round number for mileage. Bingo Bango Bongo.... deductions! Bonus, your tax pro will love you.

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Jamie Rose
Real Estate Agent · Anchorage, AK · Member since 2017 · 294 posts · 182 votes
6y
I am looking to make that switch this Dec/Jan - and at least in Alaska - it sounds very simple - form an LLC to be taxed as an S corp - pay yourself a fair market salary - and reduce your tax burden... consult your CPA.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
I'd advise any of you considering an S-corp to consider a C-corp instead.
Also you are required to do bookkeeping anyway.
[email protected]224-381-2660
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Jake HottenrottPro Member
CPA · Belleville, IL · Member since 2014 · 255 posts · 269 votes
6y
@Steven Hamilton II - Don't lie. You don't HAVE to do bookkeeping, just bring a couple of grocery bags of receipts to your tax pro with a round number for mileage. Bingo Bango Bongo.... deductions! Bonus, your tax pro will love you.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
@Patrick J. and @Jamie Rose -
no, it's not that simple if you're an agent, as opposed to a broker. I know it's heavily promoted within the Realtor circles, but it's a risky route.
As an agent, 100% of the income is for your personal services. It's a flimsy argument that some of that money is somehow "dividends" from your business and not from your personal labor. The IRS is likely to take a position that you cannot take a "reasonable salary" below what you're actually paid for your work. In that case your S-corp setup collapses, along with your tax savings.

Besides, you will likely have a regulatory problem, because only individuals can be licensed as agents, not corporations. You may not able to legally run your business as a corporation - check with your state regulations. And your income will be reportable under your SSN, not under the corporate EIN.

Now, if you're a broker - a completely different game. S-corp (or sometimes a C-corp) is often recommended for brokers.
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Patrick J.
OP
Rental Property Investor · Tucson, AZ · Member since 2019 · 173 posts · 87 votes
6y
@Steven Hamilton II
There are very few expenses as a Realtor so I just throw it on an excel spreadsheet + all of the income and expenses run through my business bank account.
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Patrick J.
OP
Rental Property Investor · Tucson, AZ · Member since 2019 · 173 posts · 87 votes
6y
@Michael Plaks
It would run through a PLLC first and then choose to be taxed as an S-Corp.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Patrick J.:
It would run through a PLLC first and then choose to be taxed as an S-Corp.

This may or may not solve the regulatory/licensing problem, which is not my department, but it does not solve the tax problem I described.
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Michael Plaks brought up an important issue that shouldn't be ignored. Some states don't allow RE agents to operate through an LLC or corporation. Clarifying your state's regulations is step one.
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John Duston
Accountant · Santa Barbara, CA · Member since 2016 · 213 posts · 66 votes
6y
Originally posted by @Patrick J.:
Any high performing agents choose to be taxed as an S-corp??? I heard its expensive to manage and you have to do payroll and bookkeeping.

I know a few do.
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Dassi Lazar
Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes
6y
@Patrick Johnson yup I am. My accountant said it with it once you are making over $60k.
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Patrick J.
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Rental Property Investor · Tucson, AZ · Member since 2019 · 173 posts · 87 votes
6y
@Dassi Lazar
Do you pay your accountant to do payroll and bookkeeping or do it yourself?? I think once its set up, it's easy.
I know some accountants that charge like $1000/month for payroll, bookeeping and taxes and at that point, its not worth paying the Accountant because the costs outweigh the tax benefits.
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Dassi Lazar
Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes
6y
@Patrick J. I am the only one on Payroll so he doesn't charge that much (not sure exactly because I pay a lump sum with my rentals and flips). But he did the math and said the break even point was at $60k which I surpass so it definitely has been worth it.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Dassi Lazar:
@Patrick J. I am the only one on Payroll so he doesn't charge that much (not sure exactly because I pay a lump sum with my rentals and flips). But he did the math and said the break even point was at $60k which I surpass so it definitely has been worth it.

I would be VERY Careful as you may be undercutting your Social Security Benefit down the road. And who knows what might happen in your situation down the road. Not to mention what happens if you become disabled. There are significant issues with that and if he says you only need 60k as compensation. He's a downright fool and could be liable for damages in the future.
Reasonable compensation for your personal services to the entity. If you are creating the income I'd have a hard time saying a large portion is not subject to SE Tax.
[email protected]224-381-2660
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Patrick J.:
@Dassi Lazar
Do you pay your accountant to do payroll and bookkeeping or do it yourself?? I think once its set up, it's easy.
I know some accountants that charge like $1000/month for payroll, bookeeping and taxes and at that point, its not worth paying the Accountant because the costs outweigh the tax benefits.

My single payroll S-corp clients run about $300/Year for payroll. Most handle their month to month bookkeeping. However, with a corporation you MUST maintain a balance sheet and income statement. You also must not commingle expenses. You can arrange detailed reimbursement policies etc. For some a C-corp might be a better idea due to certain fringe benefits.
[email protected]224-381-2660
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Eamonn McElroy:
@Michael Plaks brought up an important issue that shouldn't be ignored. Some states don't allow RE agents to operate through an LLC or corporation. Clarifying your state's regulations is step one.

This is 100% correct especially after the Tax Court Case Fletcher V Commissioner, it is a bigger issue with them. The assignment of income personally earned. So the state MUST allow it.
Once that is determined we review which entity is appropriate.
[email protected]224-381-2660
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Dassi Lazar
Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes
6y
@Steven Hamilton II
I honestly can't remember exactly what he does and why. We had the conversation a few years back but he has been doing this for 40 years and isn't a CPA who treads the waters. I completely trust what he is doing. I have a few things going on so that could be why he advised me to do it this way and not loose benefits.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
@Steven Hamilton II and @Eamonn McElroy - any thoughts on the reasonable compensation issue when the entire revenue is personal commissions? You guys did not comment one way or the other.
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Eamonn McElroy
Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y
@Michael Plaks
I disagree...predictably. But -- it's the holidays so I didn't want to cause a fuss. : )
The 100% compensation theory for personal services ignores the corporation's intangibles and the owner's ability to earn a return of investment on those intangibles and the shareholder-employee's labor. Here we're talking about intangibles such as goodwill, customer and vendor relationships, business contacts, etc. These intangibles generally have a tax basis of 0 if self-generated, but the FMV is likely much higher.
It helps to think of the individual as operating in two distinct and separable capacities here with respect to his or her S Corp. First as the owner, who is due an ROI on the assets of the corp and the labor of the employees. Second as the employee, who should be compensated "reasonably" for any services provided and is not obligated to be compensated a penny more.
Have you seen substantial authority or reasonable basis for a 100% compensation position for service-based S Corps with no employees except for the shareholder-employee? The IRS has to work within the same boundaries that we do, which is why I doubt they'll bring the 100% compensation argument. If they do, it will be shot down quickly.
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Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
6y
I love the flow of this thread.

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They ignore it and the major issued mentioned and go back to asking about bookkeeping.

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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Eamonn McElroy:
@Michael Plaks
I disagree...predictably. But -- it's the holidays so I didn't want to cause a fuss. : )
The 100% compensation theory for personal services ignores the corporation's intangibles and the owner's ability to earn a return of investment on those intangibles and the shareholder-employee's labor. Here we're talking about intangibles such as goodwill, customer and vendor relationships, business contacts, etc. These intangibles generally have a tax basis of 0 if self-generated, but the FMV is likely much higher.
It helps to think of the individual as operating in two distinct and separable capacities here with respect to his or her S Corp. First as the owner, who is due an ROI on the assets of the corp and the labor of the employees. Second as the employee, who should be compensated "reasonably" for any services provided and is not obligated to be compensated a penny more.
Have you seen substantial authority or reasonable basis for a 100% compensation position for service-based S Corps with no employees except for the shareholder-employee? The IRS has to work within the same boundaries that we do, which is why I doubt they'll bring the 100% compensation argument. If they do, it will be shot down quickly.

I will disagree as capital is not a material factor in their compensation it is personal services. I would argue that it would apply if they have a team of agents beneath them admins etc; however, a single agent more than likely should be looking at the majority as compensation. RC averages range all over the place.
I disagree on the FMV of those. The individual is who is bringing the work and their skillset. With employees and a brand, I'd argue otherwise. A typically solo RE agent ideally may not want to consider a corp because Commissions can very greatly from year to year.
[email protected]224-381-2660
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Dassi Lazar:
@Steven Hamilton II
I honestly can't remember exactly what he does and why. We had the conversation a few years back but he has been doing this for 40 years and isn't a CPA who treads the waters. I completely trust what he is doing. I have a few things going on so that could be why he advised me to do it this way and not loose benefits.

You're cutting yourself short by limiting the amount you're paying. What happens if you slip and fall on a property and break your back. What happens when the insurance settlement runs out? We don't want to limit your disability benefit.

[email protected]224-381-2660
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Dassi Lazar
Realtor · Baltimore, MD · Member since 2018 · 53 posts · 46 votes
6y
@Steven Hamilton II
In general I don't count on any government money for retirement or disability. I put money away for that. Who knows if social security will even be around when I'm ready for it. I don't think it's a good idea to give the government your money for rainy days... There's other places to give it to that will also give you tax benefits.
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Brian Bray
Member since 2019 · 1 post · 1 vote
6y
@Patrick Johnson
I just formed an S Corp in Colorado. Seems to make sense to me. Have your accountant run you through the details.
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Michael PlaksPro Member
Tax Accountant / Enrolled Agent · Houston, TX · Member since 2014 · 5k+ posts · 6k+ votes
6y
Originally posted by @Eamonn McElroy:
Have you seen substantial authority or reasonable basis for a 100% compensation position for service-based S Corps with no employees except for the shareholder-employee? The IRS has to work within the same boundaries that we do, which is why I doubt they'll bring the 100% compensation argument. If they do, it will be shot down quickly.

No, I have not. But I do not share your optimism that it's not a threat.
Read this, although certainly not authoritative but just the IRS interpretation:
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues"...But to the extent gross receipts are generated by the shareholder's personal services, then payments to the shareholder-employee should be classified as wages that are subject to employment taxes..."
So I do see the risk that they will take a 100% position. Whether or not it will be "shot down quickly" - we shall see.
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Steven Hamilton IIPro Member
Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
6y
Originally posted by @Dassi Lazar:
@Steven Hamilton II
In general I don't count on any government money for retirement or disability. I put money away for that. Who knows if social security will even be around when I'm ready for it. I don't think it's a good idea to give the government your money for rainy days... There's other places to give it to that will also give you tax benefits.

My father in law who was diagnosed with ALS thought the same thing. He was diagnosed and did not have enough credits in to qualify for benefits at that time. It also left him without medical care. The family burned through over 500k on his medical expenses. My mother in law is definitely feeling that pain now during retirement. Fact is we don't know what will happen and its cheap insurance over the long run.

That said I also have to point out that you may not want to but what the law requires is another thing. The big issue is if the income is generated from personal services or not.

@Michael Plaks @Eamonn McElroy

Here is an interesting case of a broker's reasonable compensation. Sean McAlary Ltd., Inc., TC Summary Opinion 2013-62 Note they did not suggest it based upon total income they based it upon an average hourly

[email protected]224-381-2660
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