Flipping With A C Corp
I know that most of you are saying "Why would I do that?" My response is "Why not?" It's not a fit for everyone. If you're independently wealthy and using your own funds I would suggest a different strategy. If you invested money into your RE Education then allow me to explain how it works. Double Taxation people just calm down for a minute. Double taxation occurs when there is money remaining within the Corporation after all expenses and Salary. So allow me to tell you a story.
David pays $40,000 for his Real Estate Investing education. He then creates a C Corporation and begins flipping houses. He does his first flip and earns a profit of $50,000. The Corporations then writes him a check for $40,000 to reimburse him for his education. That check is deductible to the Corporation, but not a gain to David as he is being reimbursed for his out-of-pocket expenses incurred on behalf of the Corporation.
David completes a 2nd flip earning another $50,000 so there is $60,000 profit within the Corporation. David wants to do more houses, but he still has a full time job and he is limited by time and money. But $60,000 isn't close to most Presidents/Directors of Corporations, but David is happy so he takes the $60,000 salary and adds it to his W2 salary and pays tax on it.
Or because David was a client of Anderson Business Advisors we made him aware of an Internal Revenue Code that would allow the Corporation to rent his personal residence for Corporate Meetings up to 14 times per year. Those costs are deductible to the Corporation and David is allowed to rent his home 14 times per year and not report the income as gain. There are some intricacies such as obtaining bids from competitive service providers, but we help you cross your I's and dot your T's. Say to rent a conference room at 3 different hotels with video, food & beverage was $900/$875 & $850. So David's Corporation pays him $800 per meeting and after 14 of them the Corporation deducts the expense of $11,200 and David puts that same amount into his pocket and it's not reported as gain.
But now David's taxable W2 income is only $49,800, but didn't he get to keep more? And that's leaving out buying a new truck, cellphone, medical reimbursements and I could go on and on. Not to mention that when your income is W2 obtaining funding is less difficult that when you use a pass through entity and have to show your business returns. So for these reasons and more a C Corporation makes a lot of sense for many people for several years until it's time to change it's tax election to an S Corporation. What did your advisor start you off with?