I recently received a question at USTaxAid.com about a client who had put his long term rental real estate inside an S Corporation. He’s now heard that S Corps with income should pay the owner a salary. How much salary should he pay himself?
There is a lot to unpack in that short paragraph.
Let’s start with the choice of entity. The best business structure to use for real estate passive investments is an LLC. If it’s a single member LLC, the income and expenses will be reported on your Schedule E. If it’s a multi-member LLC, you’ll use a partnership return.
The S Corporation is used for real estate business, not passive real estate properties. If that’s where you are now, though, let’s start there.
If all you have inside your S Corporation is rental property, than the K-1 that accompanies the return is going to show rental income or loss. You do not need to pay yourself a salary if you have income.
However, let’s now look at this in light of the new Tax Cuts and Job Act. If your income is under $315K (married filing jointly) or $157.5K (single), then you will receive a 20% reduction in the amount of taxable flow through income. That works whether you have a Schedule E, partnership or S Corp. However, it gets more complicated if your income is over that amount. At that point, you may need to have a salary in order to take advantage of some of the tax reduction. That’s all part of the overall strategy you need to have to move forward in 2018 to take advantage of the new tax laws.
This year, 2018, is the year when you have to get your 2017 tax return prepared and do more planning then you ever have done before for the next year. If you don’t, you’ll miss out.
It’s that simple. Plan and save. Or ignore and it pay more. Which will you choose?