Best entity choice for flipping properties

My research has determined this would be an S corporation - does anyone disagree?

Would love to know what others think of this. Have a new client coming in next week who is a Real Estate Agent by trade. Wants to set-up an LLC with an investor (who happened to be a C-Corp) to flip houses. Wanted to know if the LLC could be an S-corp. (Said no.) I'll get more details from him next week as to other factors at play.

I'd be curious to see what some of the others recommend. Generally around these parts it is not recommended that property be held in an S or C due to complications of appreciation should the property need to be removed from the business without an actual sale. If you are flipping them, S treatment would certainly be more favorable tax-wise. Just be sure the parties are aware that if they end up with some property that doesn't sell but has appreciated in value and they need to dissolve the S Corp or otherwise remove the property from corporate ownership, they'll be taking the hit for the appreciated gain on their taxes when the property gets pulled out. I'd also point out to them this is about flipping properties - if they get the idea to start purchasing real estate either for long-term investment and/or rental purposes, revert back to the issues with holding property in an S and consider a new entity taxed as a partnership for those types of ventures.

I have a client who flips houses and makes a substantial profit. Sole proprietor. Over the past several years, I've urged him to talk to a business attorney about forming an LLC and making an S election so that he could avoid the SE tax hit, control the amount of profit that he could pay himself as compensation, and fund a retirement plan.

In these flipping cases where we're using entities, like an S-corp, how is everyone going about allocating (i.e. capitalizing) the owner compensation (and benefits/retirement plan contribution) to the jobs?

Would love to know what others think of this. Have a new client coming in next week who is a Real Estate Agent by trade. Wants to set-up an LLC with an investor (who happened to be a C-Corp) to flip houses. Wanted to know if the LLC could be an S-corp. (Said no.) I'll get more details from him next week as to other factors at play.

why would you say no? Because you don't think it's the right way to do it or because you don't think it's technically possible? Almost all my S Corps created since 2000 are LLCs.

In these flipping cases where we're using entities, like an S-corp, how is everyone going about allocating (i.e. capitalizing) the owner compensation (and benefits/retirement plan contribution) to the jobs?

I only have 1 that is doing this from a corporate level. We allocate 75% of W-2 wages to construction in progress and 25% to overhead (immediately deducted). We pick up 100% of income on the 1040. The only wages are that of the owner. It's a best guess situation.

FYI, I deduct 100% of the wages on line 7 and taxes on line 12, the take a negative "overhead applied" on line 19 which represents the allocation to CIP.

why would you say no? Because you don't think it's the right way to do it or because you don't think it's technically possible? Almost all my S Corps created since 2000 are LLCs.

C can't own an S

In these flipping cases where we're using entities, like an S-corp, how is everyone going about allocating (i.e. capitalizing) the owner compensation (and benefits/retirement plan contribution) to the jobs?

There are two websites that I know of that will determine the amount of reasonable compensation for an S corp. owner, http://www.rcreports.com and http://www.reasonablecompensation.com. Both of these companies use data from the S corp. to determine the portion of total S corp. income that represents reasonable compensation payable to the owner.

Since the property isn't being held in the corp, and is being acquired as inventory, then I would think an S Corp or a C Corp would be the best bet, depending on the taxpayer's level of compliance, the C is always better in my mind. The liability protection is really important with real property activity like this, IMHO.

When I worked for a larger CPA firm many years ago, it was common for construction companies to form a new C Corp every 3 years, in order to help mitigate any future liability. Litigation is always a risk, and I am hyper-aware of this in my own business activity. If any of the buyers tries to come back and sue later, the corp is dissolved.

There are two websites that I know of that will determine the amount of reasonable compensation for an S corp.

The question was how to allocate that reasonable comp to jobs.

How they allocate might not matter. If they stop flipping activities (have no inventory) at year-end, it's pretty easy. If they do have inventory at year-end, however, they should pay me exorbitant sums of money to figure it out. Just kidding, UNICAP is always driven by what they capitalize for book and, with small companies, the level of officer involvement in production and resale activities determines what is allocated.

why would you say no? Because you don't think it's the right way to do it or because you don't think it's technically possible? Almost all my S Corps created since 2000 are LLCs.

C can't own an S

I missed the investor and C Corp part, read too fast I guess