Corporation Or Not?
I know 2 different REI's who both make over $200,00 per year, who have 2 very different opinions on becoming a corporation. And the funny thing is, one says become a corp. for tax reasons and the other says don't for the same exact reason. I'm not asking who is right, but what other opinions are out there and why?
qball definitely become one for tax reasons, write offs are alot better. Talk to any tax advisor and they will show the world of differnce between incorporating and not incorporating.
It really depends on what type of real estate investing one is doing. If your real estate activities are any that would produce ordinary/self employment income, then it would be beneficial to form an S-Corp, so that only what you paid yourself as a salary would be taxed for SE/Social Security and Medicare purposes.
If your activities produce more of a buy and hold passive income, there are really no tax advantages to incorporating, it is more legal protection.
There are definately advantages to incorporaiting, Deductions being one advantage, aynonmity, asset protection, business formality, reduced audit risk, etc... The list is quite extensive and many of my clients save thousands of dollars a year after they incorporate.
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The only advantage in forming a corp is if you are doing flips, with a corp you can avoid self employment taxes. Keep in mind you need a C-corp to avoid the self-employment taxes, LLC or S-Corp will not do the job in this case. Otherwise there is no real benefit to forming a corp or LLC. Get insurance to protect yourself from liability, LLC or corp is no guarantee.
Quote:
Keep in mind you need a C-corp to avoid the self-employment taxes, LLC or S-Corp will not do the job in this case.
Actually, you do not have to pay SE taxes on an S-Corporation's income...[ Edited by rentalman on Date 11/25/2003 ]
If it is income from a home you flipped you do, check with your accountant.
psssst. Are we forgeting something?
"Dealer Status"
If you do flips AND other types of investing, be sure to incorporate so that your flips can be isolated for your inevitable "dealer status" tag that the irs will give you after a few flips.
hope this helps,
clear2close
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Keep in mind that with income of that degree a regular corporation (not s-corp) probably would suit you better. The ordinary income tax rate is very high for someone making $200,000 a year. However, after the first year the distributes to the shareholders is taxed at capital gain rates currently only 15%. This is similar to you owning some stock and having them pay you a dividend. I'm not sure if my terminology of this being called a capital gain is correct but information should be correct.
As always, this advise is from a layman and not an attorney or accountant. Seek competent professionals to guide your financial decisions.
Myfrogger,
A dividend is exactly what you would call it. The Jobs & Growth Tax Relief Reconciliation Act of 2003 changed the tax on dividends to be that of long term capital gains (15%).
However, wouldn't a corporation pay more on $200,000 in taxable income than an individual would?
According to the IRS 2003 tax tables, for $200,000 in taxable income a married couple will pay $47,446 in income taxes, and a corporation will pay $61,250, according to my calculations.
Not only that but if you wanted to take money out of your C-Corp, you would have to pay yourself a dividend. So, assuming you wanted to pay out all the earnings as a dividend ($200,000), you would also have to pay $30,000 in taxes on your personal return.
So, wouldn't an S-Corp still be better?[ Edited by rentalman on Date 11/26/2003 ]
This is the perfect example of why asking for legal/tax advice online is a complete waste of time. There is a half dozen answers and they are all over the place on opinion.
Spend an hour with a CPA who knows your personal circumstances and your states conditions.
However, because I want to be like everyone else here:
Anybody who has $200,000 a year of taxable income generated by realestate transactions or rent and is doing this without a business entity in place is A MORON of the highest degree.
However, I would love to have his problems!!!
I believe there is more to the situation then was provided by the original post.
bansal,
According to Kleinrock's TaxExpert, Analysis of Sec. 1402:
"Income passed through to an individual from an S corporation is not self-
employment income that is subject to the self-employment tax."
Due to the private requests for elaboration of my prior post on this thread, here's what I meant:
Once the IRS sees that you flip houses more than a number(cannot find one guideline on this number) of times/year, they classify you as a dealer. Once that happens, all of your real esate holdings, lease options or sub2's, are taxed as inventory at the end of the year. That means that you could actually have to pay taxes on income that you have not yet made!
Flips are the key to this happening, so do ALL flips in a seperate Corp so that when this happens, and trust me it does, the Corp has dealer status not YOU.
hope this helps,
clear2close
[addsig]
clear2close,
From what I've heard, there is no set guideline on when the IRS classifies you as a dealer. That may be why you can't find any guidelines.
Thought I'd let you know...
To all who can not find the guidelines regarding how many transactions it takes to become a dealer, I refer you to Section 453(I)(1)(B) wherein a "dealer disposition'' of real property is defined asAny disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer's trade or business. I suggest that "ANY disposition" can only be interpreted as one or more. Therefore, you are a dealer if you only do one flip.
What is not found in the tax codes is how many dealer dispositions do you have to do before the IRS catches up to you. If you have not been correctly reporting your income and declaring self-employment income where appropriate, then back taxes plus penalties and interest could be quite a large hit if you have been doing a large number of flips for a few years.
You can always play tax audit roulette and hope that they never audit your return, though you never know when the IRS will put returns with real estate activity on their watch list.