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.

[Ashish Acharya]

@Teri B.

Are you asking questions or letting people know? 

> Both LLC and Scorp are Pass-through entities. The most significant difference is that S-crop avoids SE tax on NI.

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.

> After all the deduction, the net gain (let's say 30k from flip ) passes through and gets added to your W2 ordinary income (if any) and taxed accordingly with new 2018 tax rates.

For e.g. If you had $175k of W-2 income in 2018, your flip profit would be an addition to 175k and be 205k and would be taxed at appropriate tax percentage

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 thIf 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?

You don’t have to pay SE tax on the Net Income for the Flip if you have S-corp. However, you have to pay yourself a reasonable salary that is taxed for FICA ( 15.3%). Your net earning is your Gross flip income over your expenses. So the reasonable salary and FICA share get deducted as a business expense before arriving to NI. The NI is SE tax-free, unlike in other entities such as LLC.e 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.

> 15.3 % is not on the NI, S-crop would have already paid that 15.3 before calculating NI. And yes whatever remains after the 20% deduction is taxed at the appropriate level. You have to factor in Standard deduction and other deduction that you might have on that 80k.

The 20% deduction = your top tax rate (x) your deduction? So, using the example above if your 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.

>Simplified, but yes

*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.\

-> this is not entirely true. You can revoke your S-crop anytime you want, but are not allowed to reelect for 5 years, but IRS lets you reelect under certain circumstances.

*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.

-> Again not true. Distribution has nothing to do with your Income.