Corporations For CFDs?
Let's say that I am classified as a dealer in my real estate activities. I've pretty much come to the conclusion that there's no way around it since I will be doing John Locke's method of investing and I don't see how it couldn't be classified as dealer.
So if I take title and sell the houses through a C-Corporation it seems it would be the best route to take. Let me know if I'm incorrect in any of these assumptions:
1. I can have the corp pay me a salary which is tax deductible for the corp and taxed at my ordinary income tax rate to me.
2. I will pay social security and medicare on my salary at the rate of 7.5%+/- and the corp will pay the other 7.5%+/-. Is that 7.5% tax deductible for the corp?
3. If I take dividends on the corporate profits, then the corp is taxed at its rate on that money and I'm taxed at my rate on that money (the double taxation).
4. I can take loans from the corp. The money I borrow from the corp isn't taxed since its a loan. It must be repaid, but if the corp forgives the loan, it's then taxed.
5. My corp can buy my car, my computer, pay for my cell phone, my meals, office supplies, etc and all that is tax deductible to the corp.
6. The corporation can rent space in my house for office uses. That rent is tax deductible to the corp and taxed at ordinary income tax rate to me.
So for example, I may $200,000 in gains from reselling houses in 2004. I pay myself a salary of $50,000. All the expenses (office, cell phone, car, etc) total $25,000 for the year. So the corporation's taxable income is $125,000 which is taxed at a rate of 39%, which is $48,750. I am taxed at 25% which is $12,500. My payroll taxes will be 15% or $7,500. My state tax is 6% or $3k. That totals $71,750 tax on $200,000 income which is 36%.
Seems to me like it's cheaper taxwise to go about this in a corporation because of all the write-offs.
Am I missing anything here? I guess I really don't have a question, just wanted to see if I was thinking this through correctly.
You make want to take a larger salary. I do not remember the numbers but soc sec changes to 0 at some point but ordinary income goes up. I would pay myself as much salary as possible until it becomes = to corp rate. I am going to study those figures myself too. Be careful with the home office thing. Lot of audits over this so I have heard.
Good LUCK and HAPPY HOLIDAYS
Hope this helps some
Ted Jr
Hiya Chris,
I'll throw in on what I know ....
1. Yes.
2. Yes. The Soc Sec and Medicare taxes are payroll expenses to the corp and are deductible.
3. Dont take the excess profits out as a dividend, declare a bonus in the minutes of the corporations quarterly meeting that you have with yourself and cut yourself a bonus check through your payroll process (best to use a 3rd party to do payroll by the way). You will pay the usual personal taxes but the corp will be taxed. This is the way to go, especially if you have very few employees (e.g., yourself and your spouse). If there are other employees, you might have to give a bonus to them as well.
4. Yes. Be careful with loans, especially when they are repaid. For example, you want to loan yourself $25K from the corp. Great idea you say and take a vote (all say 'Aye!'). Your fiscal year has ended and you have not paid back the loan. Not a big deal to you (since you got such favorable terms from the corp.). Ah yes BUT, sez the IRS as that $25K is still an asset on the corp's balance sheet. So, at year end after you have counted every penny and bonused it all out to avoid any C corp taxes, your CPA says "I dont care if the money is not in the corp bank account, you have to pay taxes on it." How do you think I know this one??!?!
5. Yes - keep good records and receipts. Remember that entertainment and meals are only 50% deductible ('no such thing as a free lunch' applies here).
6. This is a little tricky and I personally decided against it based on what a headache it was (impacts adjusted basis on the house when you sell and other annoying things). Just make tons of money and dont worry about this. Or talk to your CPA ... you decide.
Have fun!
Mark
Quote:So the corporation's taxable income is $125,000 which is taxed at a rate of 39%, which is $48,750.chriseaker,
I do not know much about corporate taxes, and usually defer to others on questions such as yours. However, I think you should ask if the corporate tax is a progressive tax.
If so, then the tax on $125K corporate profit might be only $32000 as follows:15% on the first $50,000 = $ 7500
25% on the next $25000 = $ 6250
34% on the next $25000 = $ 8500
39% on the last $25000 = $ 9750I don't know the answer, but the question is worth asking.[ Edited by DaveT on Date 12/28/2003 ]
I'm not an insurance salesman, so don't look to me for answers, but i deducted a bunch of money from my corp. with Key Man insurance policies. Plus, if they're done right, they're not a bad investment vehicle.
I also agree with the home office deductions. If you're making good money, get yourself a nice office! I used to work from home as well, but I got myself an office, and I gotta say, I love going to the office, having meetings in a real conference room, actually waking up on time, and now that I have a bunch of people working for me, they don't all know where I live (or that I live in filth, untill tuesdays when my maid comes).
Plus, it's an expense. I ended up buying my office, so if I move out, I can still lease it at a profit.
Just my 2cents
I would encourage you to look at the S-Corp as your vehicle for doing quick-turn real estate. The expense deductions are exactly the same as for C-Corps with the exception of pension plan contributions and employee benefit deductions. The S-Corp would allow you to take a reasonalbe salary and then pass the balance of your profit to you as a dividend. This means your profits in excess of your salary are only taxed once. Using a C-Corp, and its graduated tax brackets, will make sense when your profit gets near the $360,000 level. Contact a tax professional, who understands entity structures, in your area for details.
Quote:
On 2003-12-29 10:39, ny6389 wrote:
I'm not an insurance salesman, so don't look to me for answers, but i deducted a bunch of money from my corp. with Key Man insurance policies. Plus, if they're done right, they're not a bad investment vehicle.
"Key man" coverage is a good idea, especially if you need the insurance. I believe that the corporation has to 1099 you for the benefit of the premium (at least a portion of it), however.[ Edited by norrist on Date 01/03/2004 ]