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  1. #1
    kharvel is offline Junior Member
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    S-corp income: avoid salary distribution by investing in real estate or other assets?

    What is the name of your state (only U.S. law)? Washington state

    Through a WA state LLC S-corporation in which I am a 50% shareholder (my wife is the other 50% since WA is community property), I have earned substantial income from consulting work over the course of the year (2010). This income has been saved up to a substantial amount in a business account belonging to the LLC. I don't actually need this money for personal use and would like to re-invest it rather than have it distributed to me as salary and incur income and SE tax liability on that.

    Is it possible to have the LLC use that money to buy income-producing real estate property in its name or invest that money through a stock account, also in its name? Would that avoid the salary distribution requirement and thus avoid the income and self-employment taxes?

    Basically, if the money earned by a S-corp is used by the S-corp to purchase income-producing assets to the extent that there is no money left to pay salaries, let alone distributions, would the income and SE tax liabilities become zero?What is the name of your state (only U.S. law)?
  2. #2
    LdiJ is offline Senior Member
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    Quote Originally Posted by kharvel View Post
    What is the name of your state (only U.S. law)? Washington state

    Through a WA state LLC S-corporation in which I am a 50% shareholder (my wife is the other 50% since WA is community property), I have earned substantial income from consulting work over the course of the year (2010). This income has been saved up to a substantial amount in a business account belonging to the LLC. I don't actually need this money for personal use and would like to re-invest it rather than have it distributed to me as salary and incur income and SE tax liability on that.

    Is it possible to have the LLC use that money to buy income-producing real estate property in its name or invest that money through a stock account, also in its name? Would that avoid the salary distribution requirement and thus avoid the income and self-employment taxes?

    Basically, if the money earned by a S-corp is used by the S-corp to purchase income-producing assets to the extent that there is no money left to pay salaries, let alone distributions, would the income and SE tax liabilities become zero?What is the name of your state (only U.S. law)?
    It doesn't work the way that you would like it to work. Based on what you have posted, I am assuming that your business is an LLC who has made the election to be taxed as an S-corp.

    All profits of an S-corp flow through to the personal return of its stockholders, whether salaries are paid or not, and whether distributions are paid or not.

    One of the beauties of an S-corp, is that as long as you pay yourself a reasonable salary for the work that you do, with proper withholding and social security and medicare taxes withheld (and the employer's portion paid as well as other employer taxes) the remaining profits of the S-corp are free from SE taxes. However, that does not make them free of ordinary income tax.

    If you have not paid yourself any salary at all for 2010, its going to be problematic if you do not pay yourself a reasonable amount for the work you have done, before the end of the year. Therefore I would suggest that you get together with a payroll service ASAP and get that done.

    As far as the rest of your profits are concerned, you can choose not to take a distribution of those profits, but you cannot avoid tax on the ordinary income.
  3. #3
    kharvel is offline Junior Member
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    LdiJ, thanks for responding. Your assumption is correct - it is a WA LLC that elected to be taxed as S-Corp.

    You said that the PROFITS of the S-Corp have to flow through to my personal tax return. I assume that to mean the NET INCOME. That implies that the gross income of the LLC can be deducted through "ordinary and necessary" business expenses. So here are my questions:

    Does any of the expenditures of the gross income qualify as "ordinary and necessary" business expenses as per IRS/tax laws:

    1) Business acquisitions (in LLC's name)

    2) Real estate, stocks, bonds, etc. (in LLC's name)

    3) Motor vehicles (in LLC's name)

    Basically, I want to minimize the NET INCOME as much as possible.
  4. #4
    davew128 is offline Senior Member
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    Quote Originally Posted by kharvel View Post
    LdiJ, thanks for responding. Your assumption is correct - it is a WA LLC that elected to be taxed as S-Corp.

    You said that the PROFITS of the S-Corp have to flow through to my personal tax return. I assume that to mean the NET INCOME. That implies that the gross income of the LLC can be deducted through "ordinary and necessary" business expenses. So here are my questions:

    Does any of the expenditures of the gross income qualify as "ordinary and necessary" business expenses as per IRS/tax laws:

    1) Business acquisitions (in LLC's name)

    2) Real estate, stocks, bonds, etc. (in LLC's name)

    3) Motor vehicles (in LLC's name)

    Basically, I want to minimize the NET INCOME as much as possible.
    Hire a professional. You don't know what you're doing. None of those items are expenses.

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