Fix & Flips Tax Strategies - Am I missing anything??

[Brian C.]

My two partners and I recently formed an S Corporation with the goal of generating cash flow from fix & flips so we can reinvest the profits into long-term rentals. We decided on an S Corp so we could reduce SE taxes by only paying SE taxes on a "reasonable" salary as opposed to all of the Company's profits. 

In addition, all 3 of us have good paying jobs ($100k+), so we have no problems reinvesting all of the profits into LT rentals. The ownership split is 40%/40%/20%. 

Based on our year to date activity, we should generate a before tax profit of at least $200k, but hopefully closer to $500k, if we continue at the same pace. We have implemented an Accountable reimbursement plan to reimburse us for mileage, cell phones, meals, travel, etc... In addition, we are considering a self-directed 401k so we can defer up to $53k per shareholder (less contributions from FT jobs) and then reinvest the self-directed 401k funds into LT rentals. 

Also, due to the reasonable compensation rules for S Corp's, I've decided to only pay a year-end net zero bonus, made up of only federal and state withholding, SE taxes and possibility 401k contributions, so it covers each shareholder's total pass-through tax liability and avoids the need to pay monthly paychecks or quarterly tax estimates at the individual return level.

Based on the above facts, am I missing any tax saving strategies? Paying close to 50% in taxes significantly reduces our property buying power so I'm looking for any legal way to reduce our tax liability. 

Is there an argument for paying our wives (assuming they actually help the business in some way) $18k per year and deferring it all into our self-directed 401k? Should we pay each shareholder $140k (assuming we can afford it) so we can max out the 401k employer contribution?

Lastly, will a self-directed 401k allow us to accomplish our goal of reinvesting into LT rentals?

Sorry for the long post and appreciate any feedback.

Thanks!

[Cameron Skinner]

Yeah unfortunately you can't set up a self directed solo 401k with this structure because you can't have any employees other than spouse, you could possibly each partner have his own LLC S-Corp that invest in the main one, but that's a question for Solo 401k experts.

Another strategy may be to rent your flip for at least a year and one day thus converting income to Long term capital gains.

Lastly hire a really good licensed tax professional, someone with some letters behind their name that specializes in real estate, and owns investment property themselves, and someone who will work with you on planning and strategy for your specific situation. 

Hope this helps Good luck!