Flipping homes through an S-corp??

[Jason Ballesteros]

Please bear with me as I am new to the investment and tax implications of flipping homes for profit in less than a years time. My father and I work together in a flooring contracting company. My father has the company under his Corporate name as a DBA. We are trying to understand the capital gains tax implications at the end sale because to start, we do not wish to hold the properties for a period of a year or longer. I understand that we will still have to pay the capital gains tax at a long term rate if we hold for longer than a year.
My question I guess is, Can we not pay ourselves throughout the job so that $$ goes to the basis? I assumed that by doing it this way we will not see as large of a profit on the end sale, hence the capital gains tax would not be as large. We will still be paying income taxes on our profits because they will be distributed to us throughout the job as a salary.
We are capable of doing most of the work to a home ourselves and I figured that would be to our advantage because of the reasoning behind taking a salary out of the project while it is going on. We still would like to keep some funds in the business to grow the business as well.
I have also been reading alot of posts that state the profits on the end sale can also be paid out as dividends to corporate officers or shareholders at the end of the year. Is this correct? By doing this do you avoid large capital gains hits because you are taking the profits out as income? Can employees(like myself and brothers) be paid dividends out of the profits as well. My brothers and I are employees of the DBA.
I have read quite a bit on 1031 exchanges as well and am still a little uncertain if it will fit into our business plan to start because of the inability to hold the properties for a year or more until we build a little more capital.
We just want to maximize profits. I do not feel that the IRS can take our profits as capital gains if we are paying ourselves salaries throughout the construction. We are doing the work and that should be considered our income for work performed.
Any help on this would be greatly appreciated. I think this idea is legitimate but some reassurance or discouragement would help me understand the correct path to take.

[J Scott]

Short term capital gains rate is your marginal tax rate, up to 35%.

If you are being paid as an employee, and you have no ownership interest in the property, then your income will look just like you are a contractor or an employee of any other company. You'll pay taxes on ordinary income, and you'll be required to pay your half of the FICA taxes (the S-Corp that is paying your salary is on the hook for the other half).

The owners of the S-Corp will be the ones who may get the tax benefits. All the profit they make (after all costs, including your salary) will flow through the company to their personal returns. Some of that income may be considered salary (on which they'll pay all FICA) and some of it may be considered a dividend (on which they won't pay any FICA).

Here's an example:

Let's say this S-Corp sells 4 properties next year, and each has a profit of $50K, for gross income of $200K.

The company has $20K in deductible overhead (for things like equipment, tools, office supplies, etc).

The company also pays you (as an employee) a salary of $80,000. They withhold taxes, and pay additional FICA taxes on your $80K salary.

You have received a salary, just like if you had worked any other job. You paid taxes, including your half of FICA, and your employer paid the other half of the FICA taxes. You pay taxes no differently than if you had been working for another company as a stock broker or burger flipper. You are just an employee.

The owners of the S-Corp now have $100K in total income left in the business ($200K - 20K - 80K). They will be required to pay themselves a reasonable salary -- let's say $40K for this example. That $40K is paid as salary, with FICA taxes and everything.

There is now $60K left in the business on December 31. This $60K flows through the owners/shareholders of the S-Corp, right onto their personal tax returns. They will be required to pay income taxes on this $60K, but will not be required to pay FICA taxes, as the distribution is considered a dividend, and not salary (a benefit of the S-Corp).

That $60K would have been subject to about $9000 in FICA taxes, but since it was paid as a dividend, the company (and the owners/shareholders) save that $9000.

Does that make sense?