SMLLC Tax Questions for Flipping Home Business

Brooklyn, NY · Member since 2017 · 36 posts · 5 votes

Hi,

SMLLC to flip homes.

Say I make 30K in gains during a year flipping homes.

1. I decide to take 15K as my annual pay. Can I take the Pay at end of the year when I'm filing my taxes OR do I have to pay quarterly estimated payments (SE Taxes). Again, until about the end of year I will not know how much profit I will make to decide my Pay.

2. The remaining 15K can I transfer it back to my personal account as a Distribution? Am assuming I still pay income taxes for the 15K gain in my personal return?

Thanks

Mohamed

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Brian Schmelzlen

Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes

Originally posted by @Ned Carey:

@Mohamed Nagoor, @Ashish Acharya What is an SMLLC?

@Brian Schmelzlen

Are you sure? that makes no sense. I can see that there may be no tax advantage and possibly a tax disadvantage but why can't you be an employee of your LLC.

SMLLC is an abbreviation for single member LLC.

Yes, I am sure. This is one of the key differences between LLCs and S-corporations, and one of several reasons why most flippers set up their businesses as S-corporations rather than LLCs.

With an S-corporation you are required to take a reasonable salary (if you are taking any money out of the corporation) and you will pay payroll taxes on the reasonable salary. However, there is no self-employment taxes or payroll taxes on any distributions.

With an LLC, you are prohibited from taking a salary (although you could have a guaranteed payment) and your entire share of the business' profit is subject to self-employment taxes regardless of whether you take it as a distribution or leave it in the business (except income from rentals; that is not subject to self-employment taxes).

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Ashish AcharyaBusiness Member
CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
7y
@Mohamed Nagoor ,
If I remember correctly I had already answered this before but I will do it again.
1. I decide to take 15K as my annual pay. Can I take the Pay at end of the year when I'm filing my taxes OR do I have to pay quarterly estimated payments (SE Taxes). Again, until about the end of year I will not know how much profit I will make to decide my Pay.
- there is not annual pay with the SMLLC. You do not have to pay yourself ( there is no salary). you will be taxed at the total profit when you report the profit in your schedule C. You can leave the money in your SMLLC bank account for however long you want. Since the money is already taxed as you reported it on your Schedule C in the year you made the profit ( 2018), you dont pay tax when you take it out later.
You make 30k in profit.
You will report 30k in your Schedule C ( 1040). you will pay tax for that amount.
You dont have to pay yourself as this is not a S-corp. You reported the profit, but money still sits in your LLC's bank account. You can choose to keep it there for future flips or use it personally. You will not be taxed again if you use it as you have already paid taxes on it.
2. The remaining 15K can I transfer it back to my personal account as a Distribution? Am assuming I still pay income taxes for the 15K gain in my personal return?
Please see above. You can transfer all the money form you LLC account to your account as distribution. There is no tax when you do this as you have already paid taxes on this money.
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Brian Schmelzlen
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
7y
@Mohamed Nagoor
First, as an owner of an LLC you are not allowed to take a salary at all (unless of course you elect to be taxed as a corporation).
However, that does not impact whether or not you should be making estimated tax payments. You are going to have to pay taxes on the $30,000 of profit whether you leave it in the business or not.
Therefore, you will want to make sure that you pay enough in taxes (either through W-2 withholdings if you also have a W-2 job or quarterly estimated tax payments) to qualify for a safe harbor from underpayment penalties. Talk to your tax preparer to see how much you will need to pay in taxes to qualify for the safe harbor.
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
7y
Originally posted by @Mohamed Nagoor:
Hi,
SMLLC to flip homes.
Say I make 30K in gains during a year flipping homes.
You don't make $30K in *gains* flipping homes, you make $30K of income that will be taxed at ordinary income tax rates. (I know it seems like it should be 'gains', but it isn't. When you are flipping homes, the homes are inventory. The income from selling inventory at a profit is taxed at ordinary rates.)
1. I decide to take 15K as my annual pay. Can I take the Pay at end of the year when I'm filing my taxes OR do I have to pay quarterly estimated payments (SE Taxes). Again, until about the end of year I will not know how much profit I will make to decide my Pay.
What you 'decide' to take as 'pay' is inconsequential under the tax code. You earned $30K, so you will be taxed on $30K. If you have not made quarterly payments to cover your tax bill on $30K, you may owe an additional penalty. You can copy and paste this same answer for your question 2. The income is taxed whenever it is earned, and is not dependent on whether you move it between your business and personal bank accounts.
Best of Luck With Your Real Estate Investing!
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Mohamed Nagoor
OP
Brooklyn, NY · Member since 2017 · 36 posts · 5 votes
7y
Thank you all for your responses.
Mohamed
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
7y
@Mohamed Nagoor, @Ashish Acharya What is an SMLLC?
@Brian Schmelzlen
Are you sure? that makes no sense. I can see that there may be no tax advantage and possibly a tax disadvantage but why can't you be an employee of your LLC.
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Brian Schmelzlen
Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
7y
Originally posted by @Ned Carey:

@Mohamed Nagoor, @Ashish Acharya What is an SMLLC?
@Brian Schmelzlen
Are you sure? that makes no sense. I can see that there may be no tax advantage and possibly a tax disadvantage but why can't you be an employee of your LLC.
SMLLC is an abbreviation for single member LLC.
Yes, I am sure. This is one of the key differences between LLCs and S-corporations, and one of several reasons why most flippers set up their businesses as S-corporations rather than LLCs.
With an S-corporation you are required to take a reasonable salary (if you are taking any money out of the corporation) and you will pay payroll taxes on the reasonable salary. However, there is no self-employment taxes or payroll taxes on any distributions.
With an LLC, you are prohibited from taking a salary (although you could have a guaranteed payment) and your entire share of the business' profit is subject to self-employment taxes regardless of whether you take it as a distribution or leave it in the business (except income from rentals; that is not subject to self-employment taxes).
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Paul Allen
Financial Advisor · Virginia Beach, VA · Member since 2017 · 502 posts · 508 votes
7y
Some SMLLCs file form 2553 and elect to be taxed as an S-Corp.
If they do, the owner can also be an employee of the S-Corp. (And draw a 'salary', although doing this with rental property is almost always a mistake.)
By convention, if an SMLLC elects S-Corp taxation we don't refer to it as an SMLLC any longer, but technically it still is. (Because 'LLC' is about liability and not taxation, and the liability protection of being an LLC is still there even if S-Corp taxation is elected...)
It's only confusing if you try to understand it. :P
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
7y
@Brian Schmelzlen thanks, I certainly know what a single member LLC is but in all my years I never saw that abbreviation.
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