Am I understanding Flipping & Taxes correctly in 2018?

[Teri B.]

Hello,

This is my first year having my taxes done by a CPA.  When tax season slows down, I will gladly pay to sit down with him to answer questions

In the meantime, I'm trying go get a grip on a simplified breakdown.  There are lot of  good flip threads but I can't find a synthesis.  

Is this close to correct?

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Flipping in an LLC triggers pass-through income taxes if not set up as an s-corp (or even if set up as an s-corp?). So, your net proceeds (money in hand after all your expenses are paid) in most places (though maybe not CA) are taxed at what your regular ole' tax rate is determined to be. If you use the Federal Tax Brackets it will give you a general idea on rates - those brackets are based on taxable income. So, it's based on (all) income after all the deductions, exemptions, etc. Flipping may or may not change your tax bracket - depends on where you fall with all other income.

If you flip you will have to pay self-employment taxes.  That adds another roughly 15.3% in taxes to your earnings on your flip.  So, you should brace yourself for regular taxes + self employment taxes.  So,does that mean if you netted 100,000 on flips you'd be paying $15,300 + reg tax rate?  If you were taxed at 25% (random number) that would be another $25,000?

If you elect to be an S-corp (or other things but not a C corp), you may now qualify for a 20% deduction on 'combined qualified business income' (I think Brandon Hall called it a 'freebie deduction) . So, if you cleared 100,000 on that flip you can knock off 20,000?   This applies up to the 157k/315k threshold.  Does that mean the 15.3% and the 25% are now on $80k?  The 20% deduction does not remove the need to pay self-employment taxes of 15.3% or AMT if that applies.

Or, another line of thought . . .

The 20% deduction = your top tax rate (x) your deduction?  So, using the example above if you tax rate is 25% and your deduction is 20,000, you save $5000 off your final tax bill as your 'freebie deduction'?  Is that right?  That seems like a lot.

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*You can be taxed as an s-corp by electing to do so with the IRS, but you have to commit to the change for at least 60 months. This doesn't make you a true S corp though. An LLC taxed as an S corp is a handy way to fuse asset protection (debatable) and achieve a certain tax treatment.

*You can also pay salaries and take distributions via your s-corp to adjust the 'combined qualified business income' in the first place and also the self-employment tax.  You would want to be honest and reasonable, or else it may trigger unwanted attention/ reassignments/ penalties.  

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This isn't real financial or legal advice.  Much of it is likely incorrect.  I'll see our new CPA as soon as it slows down.