SHOULD A REALTOR ELECT TO BE AN S-CORPORATION OR STAY AN LLC?

WHEN WE FIRST BECOME REALTORS WE FIND OUT THAT WE NEED OUR OWN COMPANIES EVEN THOUGH WE WORK FOR A BROKER. THE FIRST THING EVERYONE IS TOLD TO DO IS FORM A LIMITED LIABILITY COMPANY.

AN LLC THIS IS A GREAT IDEA! IT LIMITS YOUR LIABILITY IN RUNNING A BUSINESS AND CAN PROTECT YOUR PERSONAL ASSETS (YOUR HOME, YOUR INVESTMENTS, ETC.) IN THE EVENT OF A LAW SUIT.

BUT FROM A TAX STANDPOINT THIS FORMATION ALONE COULD CAUSE YOU TO BE TAXED 50% ON YOUR NET INCOME (32% Fed Income Tax** + 15.3% Self Employment Tax + 4.63 Colorado Income Tax -- some states are much higher! )

A MORE ECONOMICAL APPROACH FOR THOSE WHO ACTUALLY TREAT THIS LIKE A BUSINESS IS TO ELECT TO BE TREATED AS AN ELECTING SMALL BUSINESS OR SIMPLY AN S-CORPORATION.

S-CORPORATIONS PAY NO INCOME TAX.

THE INCOME IS PASSED TO THE OWNERS ON A SCHEDULE K-1 FORM AND IT IS NOT SUBJECT TO THE 15.3% SELF EMPLOYMENT TAX LIKE THE LLC.

S-CORPORATION INCOME IS SUBJECT TO LESS FED AND STATE INCOME TAX

PRIOR TO THIS PASS-THROUGH, THE S-CORPORATION DEDUCTS A REASONABLE SALARY PAID OUT TO THE OWNERS DURING THE YEAR. THIS DEDUCTION REDUCES THE INCOME TAX ON THE S-CORP INCOME. (IT ALSO CAN BE FURTHER REDUCED BY OTHER BENEFIT PAYMENTS TO THE OWNERS!)

QUALIFIED DISTRIBUTIONS ARE TAX FREE!

AS AN ADDED BENEFIT, ONCE IT IS REPORTED ON THE SCHEDULE K-1 THE OWNERS MAY DISTRIBUTE THE EARNINGS TAX FREE AS SHAREHOLDER DISTRIBUTIONS. (THIS AVOIDS THE DIVIDEND DOUBLE TAXATION OF NORMAL CORPORATIONS!)

BUT WHAT ARE THE CONS?

1. OWNERS MUST GENERALLY BE INDIVIDUALS WHO ARE US CITIZENS.

2. A SEPARATE TAX RETURN IS REQUIRED BY MARCH 15TH.

3. S-CORPS ARE REQUIRED TO FILE PAYROLL TAX REPORTS

4. S-CORPS ARE ENCOURAGED TO HAVE A REASONABLE COMPENSATION STUDY IN THEIR CORPORATE MINUTES.

THE GOOD NEWS IS ALL THE ADDED REPORTING REQUIREMENTS ARE ONLY A FRACTION OF THE COST OF THE TAX SAVINGS TO MANY INCOME EARNERS.

PLEASE DO NOTE: LOW INCOME LLC'S MIGHT NOT SEE ALL THE BENEFITS. CONSULT YOUR TAX ADVISER IF YOU ARE CONSIDERING AND NEVER ATTEMPT TAX PLANNING WITHOUT FIRST SEEKING COMPETENT TAX TAX ADVICE.

IRS CIRCULAR 230 Disclosure: Unless expressly stated, any tax advice contained in this blog / forum, or any attachment hereto, is not intended or written, to be used, and may not be used to avoid federal or state penalties.

** MAX INCOME TAX RATES 2018

MARK TOUSSAINT, PA, MT is a Master of Taxation from the University of Denver Sturm College of Law. In addition to his private practice at TASC Public Accounting and CFO Services he is also professional affiliate faculty at Metropolitan State University in Denver. He can be reached at 303-731-3822.

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