Ensure you’re optimizing these key components as an S-Corp real estate professional and challenge your CPA if they have not raised these basic, but valuable, opportunities for your business.
S-Corp Tax Planning to Reduce Taxes for Real Estate Agents
Ryan Millan, CPA
Reduce S-Corporations Owner’s Wages
As the owner of an S corporation, you can legitimately reduce payroll taxes by a meaningful amount - paying yourself a lower salary and taking the rest of your income as distributions. You will need to make sure that you don’t drop your salary below what the IRS considers “reasonable compensation.”
The IRS defines “reasonable compensation" as: The value that would ordinarily be paid for like services by like enterprises under like circumstances. Reasonableness is determined based on all the facts and circumstances.
S Corporation Covers the Owner’s Health Insurance Premiums
The S Corporation can establish a health insurance plan for the owner-employee who owns more than 2 percent of the company in one of two ways:
1) The S corporation pays the premiums for the owner-employee and family, or:
2) The S corporation reimburses the owner-employee for the premiums. How does this benefit you? It is not taxable to the S-corp owner and is deductible on the S-corp return.
Employ Your Spouse or Child
The S Corporation owner must pay payroll taxes on the spouse or child’s wages, but the family enjoys a decrease in income taxes. Each family member can earn up to $12,000 without paying any federal income taxes. The child must perform a function for the business to justify the wages, but this can be a great learning opportunity!
There are additional benefits for spouses and retirement payment considerations that may or may not be a net positive.
Paying children wages out of an S corporation-even with the extra payroll taxes such wages are likely to trigger-may sometimes save enough in family income taxes to make the idea worthwhile.
These savings occur when the shareholder's children pay no or very low income taxes on their wages but the parent pays a high marginal rate (like 40%). In this special exception case, routing money through to the shareholder's children as wages may save the family overall taxes.
If your marginal tax rate is, say, 40% but your son or daughter pays 0%, your family (if not you) saves the 40% income tax. You will pay possibly a 15%-ish payroll tax. So you're not coming out ahead the full 40%. But you're ahead by 25%. Which is not too bad!
Again, caution here: Amounts paid to a shareholder's family member would need to be reasonable. The S corporation must be reasonable in this regard.
Rent Your Home to Your S Corporation
As an S Corporation owner, you can rent your entire home to the S Corporation for up to 14 days per year. The S corporation deducts the full amount of the rent, and the owner realizes the income completely free of income tax. This rental agreement should be evidenced in writing and include a business purpose. For example, a year end strategy meeting or event held with clients to discuss business opportunities.
Reimbursement of Heavy Vehicle Expenses
A qualifying “heavy” vehicle used for business can produce a substantial Section 179 first-year depreciation deduction. Plus, if your home office qualifies as a principal place of business, business-related trips to-and-from that home office rack up business miles.
Heavy Vehicles (Over 6,000 lbs. GVWR): SUVs, trucks, and vans that exceed 6,000 pounds Gross Vehicle Weight Rating (GVWR) qualify for a larger tax write-off for vehicles over 6,000 lbs.
S-Corp: Reimbursement of Travel Expenses
An S Corporation owner who incurs business related travel expenses must submit an expense report and be reimbursed by the S Corporation. Failure to properly document expense reimbursements could mean the disallowance of expenses if your return is examined by the IRS.
S-Corp: Reimbursement of Telecommunication Expenses (Starlink, Wi-Fi, Cell Phone)
When an S Corporation provides an employee with a smartphone or similar telecommunications equipment primarily for noncompensatory business reasons, this is considered a working condition fringe benefit that is excludable from income.
The S corporation can reimburse the employee for the full cost of the phone expenses (including the personal use) and deduct this amount on the corporate tax return. The reimbursement is tax free income to the employee.
How Much Annual Income is Recommended for S-Corp Structure Benefits?
Suggested Annual Profit for Benefiting from an S-Corp Structure:
- General Guidance:
- Many tax professionals suggest that if your business’s net annual profit is around $100,000 or more, you may start seeing meaningful tax benefits from the S-Corp structure.
- Why:
- The primary advantage is the potential to reduce self-employment taxes by paying yourself a “reasonable salary” and then taking additional profits as distributions, which are not subject to employment taxes. However, the exact break-even point depends on your overall tax situation and other business expenses.
Potential Tax Liability Reductions
Implementing the strategies above could generate meaningful tax savings for yourself and your business.
If you are still filing a schedule C as a realtor, check with us to see if you could benefit by switching to an S-corp.
We'll review your current tax situation and let you know the tax planning options available to you.
