S-Corp reasonable salary and flipping

[Giedrius C.]

Hi all,

I read through forums but haven't seen an answer to the question what is a reasonable salary for 1 owner S-Corp LLC that flips houses? Let's say everything is outsourced - houses are bought from wholesalers, GC does the rehab, realtor sells the house. The owner just finances the business and makes decisions. If there are 1-3 flips a year, the owner will spend only a few hours every month on overlooking the operations. Is it reasonable in the eyes of IRS for the owner to get paid per hour instead of fixed monthly salary? To me it wouldn't be reasonable to pay let's say $5k a month to someone who makes 5 phone calls a month, but IRS could think differently and likely there are precedents already.

Most responses in similar threads are "talk to an accountant" or "pay 60% of the profits and everything will be fine" which is not helpful, it's always safe to pay maximum tax and most accountants who have no experience in the matter will advise that. I'd like to hear from people who are in similar situations or even got audited by IRS and have personal experience in how a situation like this is treated. I appreciate any help. Thanks.

[Linda Weygant]

Originally posted by @Giedrius C.:

Originally posted by @Lance Lvovsky:

@Giedrius C.

Ask your CPA. Seriously nothing in tax law is black and white and there are general rules, but in the end, if you want to sleep well at night, engage a professional.

That's not helpful, I wrote here because I'd like to hear from the ones who have particular experience in the matter either as CPA's or investors.

 It's not helpful, but it's the correct answer.

You are looking for a cookie cutter answer to a topic that is in no way, shape or form a cookie cutter situation.

"Reasonable Compensation" will depend on geography.  Compensation for what you're doing in San Francisco will be way different than it is in rural Kentucky.

How many flips are you doing, what's your level of engagement?  Are you working 1 hour a week on it, 10 hours, 40 hours, 100 hours?

What is your level of expertise vs how well are you doing?  If you suck at flipping and are barely squeaking by with profits then that's going to come to a different level of "reasonable" vs the guy who is crushing it and pulling in several hundred thousand.

The answer to almost every tax question is going to be "it depends".

If you do what 9 out of 10 people on bigger pockets are doing, but your business is not similar to theirs in a few very important aspects, you could be doing things completely incorrectly.

Taxes and business are not a One Size Fits All area.

Find a competent tax professional to guide you through YOUR situation and YOUR goals and YOUR issues and you'll do way better than casting a net out on a forum.