All Forum Posts by: Jeff D.

Could someone please tell me in as general numbers and terms as possible what the overall difference in end taxes might be between these two? Let's say for example the company clears 120k in profit on sold flips each year. I know there's tax savings going the S-corp route, but how much generally?

i actually don't have much overhead stuff to deduct - tools, office, etc are deducted via other biz interests i have. So not much could be shaved off that 25k. However, I was told by someone that I could deduct some of my own personal labor on the flip. That would shave off a few thousand if I could do that and base my number on what it wouldve cost to have a skilled laborer do the work. But i'm not so sure an owner can write off their own time, plus I have no documentation to support my hours. So I'm not going to go for that one unless it's a slam dunk.

As far as startup capital, most came from out an outside lender to buy flip 1. They were paid back plus interest upon sale. And anything I put in out of my own pocket (thru the llc), was paid back to me at sale. The leftovers after everything was paid back was about 25k. Maybe i could scrounge up some additional stuff to lower that number, but not by enough to make much of a difference.

I feel better about the salary issue though. And just to note, the S-corp status strategy came up at the end of the year so I wouldn't have been paying myself a salary along the way anyway. However I guess technically, if taxed as an SMLLC, I would have had to have been sending in quarterly estimates - so a mistake there either way.

And whether a quarterly estimate to send off, or a paycheck each month, the idea of sending off part of what is otherwise the project budget money is really irritating. True, no one wants to works for free, but people are fine to work for free and get paid at the end of the year. For a little 4 month flip, paying myself $500 a month through the project is nerve racking. With the PR taxes thats prob about $3k I have to take out of the account that might be needed if a surprise comes up and puts the project over budget a little. So I guess that will be another carrying cost to factor into things. I wish instead there was a way to just total up the profits for all sold flips at the end of the year, earmark a 40-50% portion as "salary", pay it and the higher PR taxes on it right then, take the rest as distribution, report it on tax forms accordingly, and call it good. Why do I have to pay myself along the way at a monthly minimum!?

Yeah, i've been googling this issue like crazy and generally speaking most say that you gotta pay yourself a salary regardless. And never pay a distribution w/o showing a salary. And further, no salary showing - huge red audit flag for the IRS.

I did find one post that said something to the effect of not needing to for the first year or two as long as there was no gain. BUT in my case, there's gonna be a gain showing.

But I prefer your answer. And yes, seems like it's too late to try and go back and do a late W2-W3, paycheck, etc at this point. I'll just have to hope they don't get picky in on a first year return.

And just so I have this straight, generally the alternative to going the S-corp route as I am would have been to reflect all the flip LLC activity straight on my personal return. Which means quarterly SE estimates and paying the full 15% payroll stuff, right?

The S-corp route doesn't really seem to save any quarterly headaches thats for sure. Still have quarterly payroll stuff for state and fed, plus monthly paychecks to do. Ugh. All just so I can save the 15% payroll stuff on about half the profits. For 25k, that's about $1900 savings. Barely worth it this year. But as things grow it will be. And I won't have the choice to file S-corp status next year if I don't do it now.

"income" meaning the net income, or the gross income?

So are you saying:

OPTION A: 25k distribution AND show a reasonable salary in addition to that distribution?

or

OPTION B: Part of that 25k is distribution and part is salary?

And either way, what about the fact that no paycheck was ever generated in 2011?

I know i'm late, I filed extensions. Also, I have rentals and some other stuff that I think could actually zero out the tax on the Flip 1 gain. (possibly)

So it's coming down to my personal taxes maybe needing an extension. And I can't even guess at the amount to send in with the extension until I atleast take a stab finishing this 1120s and getting a K-1 generated. And I know I may be asking some idiot questions, but I think I'm getting close to understand things. Atleast I had the purchases/ beginning/ ending inventory/ cost of labor stuff pretty much right. And the net income I'm coming up with is about what I figured the gain to be.
But yes, if I file a personal extension I will take advantage of the extra time and get things checked out with an accountant.

True - but at this 9th hour I don't have that luxury. I've already tried. And also, if I don't generally understand COGS and inventory related stuff I shouldn't be going to shop for an accountant until I do. Nonetheless, i've done my taxes for years - most of it biz and RE. I do get the concepts for the most part, but "inventory/COGS" is something i haven't yet had to deal with. And I'm not doing anything hugely elaborate - just trying to figure out the best way to report income from a flip sale and avoid as much SE tax as I legally can. I have a 2nd flip underway, have set up a biz to buy fix sell the "inventory", and plan to do more flips in 2012. So I have to get the inventory concept in my head, accountant or not.

So if the purchase of that inventory is not an expense I can take until it's sold, then I get that. I actually like the concept of each house being inventory. I'm buying and fixing up a product to sell, and those total purchase cost and fixup costs are COGS. Flip 1 was bought fixed sold all neatly within 2011. Flip 2 overlapped into 2012. So I guess I need to think of Flip 2 and all associated costs incurred in 2011 as inventory. And only reflect on the 1120s stuff related to what sold in 2011 which was only Flip 1?

Computing the beginning inventory, purchases, cost of labor, and ending inventory is throwing me a bit:

Beginning inventory would be 0 (new company).
Purchases Im thinking would be purchase/fixup for Flip 1 + everything purchase/fixup for Flip 2 in 2011?
Cost of Labor is already reflected in Purchases above (roofer, etc) so 0.
Ending Inventory would be ? Total Purchases minus all Flip 1 costs?

SO Flip 2 which actually closed on 12/2/2011, is considered inventory? Hmmm.....kind of foggy concept for me....but is it in the same way a store might have bought 75k product in 2011 for resale but didnt sell any of it? I get a little lost with inventory and COGS. And if the store made 25k profit on the stuff it DID sell in 2011, yet at the end of the year bought 75k more stuff to resell, isn't that 75k an expense that can be subtracted off the overall income like utilities and supplies etc etc?

Here's my simplified as possible scenario:

in 2011, I set up LLC, bought and sold flip title in LLC, LLC made 25k profit on sale of flip. Took 25k out of LLC account and put in my personal account. Towards end of 2011, LLC bought another flip for 75k. (Note: LLC is single member with s-corp status)

Soooo - yes, I know mistake #1 was that I took 25k profit out. Was supposed to pay myself a taxed salary, and take rest as k-1 dividend. Didn't know, so I guess penalties will ensue for that.

BUT - being that the LLC had a 25k profit in about September, but then in about December had a 75k expense, doesn't that leave a 50k LOSS on the 1120s form and make the penalties and missing salary issue moot?

Have I got this right? thanks!