Is A Corporation, Or Individual Better For Purchasing A “flip?”
Hi all, I purchased a property for the purpose of flipping. The deal came up quick so I just bought it fast with cash. I put it in my name. I believe it will sell within the next month or so. Now I’m wondering if the smart play would have been putting it in my S corp. name due to the lower tax bracket associated with my S corp.
Two questions for the group:
1. In general, is it better to purchase “flips” in a corporation name?
2. Is it advisable in this situation to quit claim the property to my corporation, then have my corporation sell it?
Thanks for any answers, Brian
1. As far as the S-Corp tax rate is concerned, it makes no difference on your federal tax return. S-Corp income is taxed at your ordinary income tax rate as it flows through to your personal income tax return on Schedule K-1. Using the S-Corp allows you to reduce the amount of self-employment income tax you would pay on your flip assuming the S-Corp pays you a reasonable salary.
2. Your attorney will have to advise you on the legal benefits to be gained, if any in this situation..
From a tax standpoint, it is always better to engage in Dealer activity as a corporation--not for tax savings, but for protection from being personally classified as a Dealer by the IRS. A C corp may provide tax savings.
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Flipping is self-employment income, so you can reduce your SE tax with an S corp.
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Quote:
but with S corp you could say have 10k salary * .15 = 1500 + 40K *.28=11200 so total of 12,700 in taxes ??
If $10K is considered a reasonable salary (by the IRS), then the formula to estimate your taxes looks more like this: $10K x (.15 +.28) + $40K x .28
You still have to pay ordinary income taxes on your salary in addition to the payroll taxes. I am assuming from your example that you are in the 28% tax bracket.
The 15.3 percent is just SE tax. On your salary, you would withhold 7.65 percent and match that as the employer (7.65 + 7.65 = 15.3), plus federal income tax and state/local (if applicable). As the employee, you may get some of that back in a refund, depending on whether your S corp made a loss or not. The income (after all expenses) of the corporation would flow to your 1040 (exempt from the SE tax).
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