Escaping the Tax Trap: S Corp Moves to Keep Your Money Yours

Mike: [00:00:00] Welcome back to The Hidden Money Podcast. Kevin and I are in studio again today. Today we are gonna talk about something near and dear to us, S Corp Strategy Secrets for Small Business Owners, self-employed people, it's needed. It is one of the most often missed opportunities. Kevin and I see. Just working with everyday potential clients walking in the street or going to a business meeting.

Mike: Um, please stay tuned for this focus. Pick up these amazing secrets to help change your life by changing your tax. 

Kevin: Yeah, and I see this often kind of when people transition from a W2 job to being a contractor. Mm-hmm. Being a business owner now you gotta, [00:01:00] it's a, it's very easy. To just be a sole practitioner or sole proprietor and report all your income and expenses right on Schedule C.

Kevin: 'cause that's what sole proprietors do. Yeah. You just report it on your 10 40 and mosey on down the road. It's very easy. It's also very easy to overpay your tax. That's super easy too. I mean, just too 

Mike: easy. 

Kevin: Yeah, it, we see it all the time, so it does take a little bit more work and effort and strategy and thinking.

Kevin: But it's not overly complex. And then you have CPAs who do this all the time who can actually enact this stuff and prepare the tax. I returns for you. But S corporations are the number one thing I wanna look at when someone's transitioning from a W2 to a 10 99. As 

Mike: a matter of fact, this is the first question we ask anyone that we're interviewing to come join the firm if they can't figure this one out.

Mike: They've been in the business for a few years. We generally don't have a second interview with 'em, right? Yeah. We say if you're a sole proprietor, client walks in. He's a sole proprietor. He made [00:02:00] $200,000 in the income last year, reporting it on his Schedule C. What can you do to change that? What can you do to improve his tax situation?

Mike: Um, let's talk about self-employment tasks. 'cause this is the big pain point that S Corps help alleviate. If you are working in a W2 job for any employer, I. You have two kinds of taxes taken outta your paycheck. Actually more, but two main ones, right? You have your income tax, they do withholding for you, and they pay it to the government on your behalf.

Mike: And it's prepaid tax. It's your paid income tax in during the year. But then there's Social security and Medicare or FICA taxes. The employer withholds generally 7.65% of every dollar you make. They take that from your paycheck before they send it to you. They take 7.65%, but then they're required to match another 7.65%.

Mike: So I know it's a little complicated arithmetic here without our 10 keys, but that's [00:03:00] 15.3%, 15.3% of every dollar you make. Boom. If you're self-employed, you're paying that to the IRS. If you're a sole proprietorship and then you gotta pay income tax. 

Kevin: Mm-hmm. This is on top of it. So self-employed people, you still contribute to Medicare and Social Security, whether you like it or not, like those programs or not, you're contributing, you're required to contribute to Medicare and Social Security.

Kevin: If you have active income like that, and the S Corporation shields, some of that burden. Because what happens is, let's say you make a hundred thousand dollars as a contractor and you're just a sole proprietor and reporting that on Schedule C, and let's say that a hundred thousand dollars is your take home, your net, 'cause you're taxed on your net, not your gross.

Kevin: So after expense, your net is a hundred thousand dollars, you're gonna pay income tax on that through your or normal, ordinary. Tax tables, then you're gonna pay that 15.3% on that a hundred on top of it. That's $15,300 going to Medicare and Social Security Systems. So what an S corporation does, let's say you take that [00:04:00] same a hundred thousand dollars and move it through an S corporation.

Kevin: S corporations are not subject to. Any self-employment tax, but you can't completely bypass Medicare and Social Security. Again, you have to play the game a little bit, but the way you play the game inside of an S-corp is you set yourself up on payroll, which Mike, you just kind of went into. If you're a W2 employee, you're paying Medicare and Social Security as well.

Kevin: So let's say you run that a hundred thousand through the S Corporation, we might set your salary at 30. $30,000 or 40, whatever is reasonable. We, we can get into reasonableness of, uh, compensation 'cause that's a very key component of this. But let's say your, your reasonable comp is $30,000 inside the S corp.

Kevin: You're gonna pay your self-employment tax, your 15.3% on the 30. Then the remaining 70 leftover is only subject to income tax. So now your true tax savings, just from when we're looking at self-employment tax is 15.3% on $70,000 in this. Just [00:05:00] very rudimentary example. Yeah. Just to grasp it. 

Mike: Let me rewind a second.

Mike: Just go back over this and make sure we're drilling in and hammering in this, this, this important, important, um, material. If, let's say you've got, let's say you're married, your spouse makes some good money, and then you have decided you're gonna go out on your own and you make close to 200 grand, but all of your taxes are paid at 37% because your combined income with your wife has put you over that threshold.

Mike: Um. Or your spouse. Um, that means 37% income tax, 15.3% on the first 170 grand self-employment tax. That's 52.3% in tax, more than half not counting state income taxes if you don't happen to live in a great state of Texas. So one of the few other states that don't have income tax. You wanna give the government more than a half of which you are working hard to make no.

Mike: Another very important um, point we have to make here. [00:06:00] Tax law is very, very clear and very explicit. You are not allowed to create an S corp just to save an SE tax. That can't be your motivation or your primary motivation. So let's talk about another really good motivation to create an S corp. If you haven't been in business for at least two full years in S-corp, and even if you have been, you own your own business, your own S-corp, or your own sole proprietorship, sorry, you own any business.

Mike: You try to go get a mortgage, it gets a little difficult. They don't do just the standard W2 applications. It's harder to get lend ability, not impossible, but harder. Um, if you have an S corp, you're paying yourself a W2. You're able to pay in an scorpion. You are allowed to pay yourself. You're required to pay yourself a reasonable wage via W2 if you're a sole proprietorship.

Mike: You can't pay yourself a W2, at least you're not supposed to. So that is a great reason to do it. And then it so happens [00:07:00] you're not paying more than half of your income to the IRS. You can reduce your SE tax or the government 

Kevin: programs that you don't really aligned with. I don't wanna pay to Social Security.

Kevin

Mike: once? 

Kevin: You can see your work history Yeah. From whenever you first started and see how much in Social security and Medicare you've paid 

Mike: It. Had my bag boy job back when I was like in seventh grade. It's in there. It's amazing.

Mike: In the early eighties. It's 

Kevin: crazy 'cause I've had a, I've held a job since I was probably 14. Um, just, you know, working at Kmart and working at all these odd, odd jobs at restaurants and all this stuff and it has it. Then they actually have record. I can see my history of my work history all the time since I was like 14 or 15.

Kevin: And at the very bottom it tells you your total taxes, paid social security tax. I've paid and total Medicare. 

Mike: Ouch. [00:08:00] I don't even wanna know, and 

Kevin: hundreds of thousands of dollars that if the government allowed me to take hold of that and just put it in the s and p 

Mike: 500 

Kevin: I, it could be worth three to 400,000 right now, but instead it's going into this abyss.

Kevin: So if you've never logged, this is just a fun exercise. If you're like, I don't know if an SCORP is for me, go to your social security account. Go to Social Security. I don't know what the website is. Dot gov. Just Google Social Security. Create an account, log in, um, link it to your social and you will find your work history and you'll see how much you've paid into those two programs.

Kevin: It should shock you. 

Mike: And if that doesn't get your attention to go back, rewind this, this podcast and learn this stuff, I don't know what will. Yeah, no, 

Kevin: it's, but you could stop. So you and I, we have our own S corporations too. We do. Um. Well, you know, every dollar that we make is active and earned income, and I don't wanna pay to Medicare and Social Security.

Kevin: Now I'm paying my reasonable share. I'm not skirting the system, but at the same time, I'm not tipping 'em. Um, and so we funnel everything we can as much as we [00:09:00] can through these S corporations, um, before personal, 

Mike: and it can be aggressive. But the way Kevin and I mitigate is we pay our W twos at the max amount to where.

Mike: So if this changes every year due to inflation, right now about the first $170,000 you make, whether as an employee or self-employed, is subject to payroll tax, both Social Security and Medicare. Once you get over that threshold, it's only subject to Medicare at that point. So it does drop precipitously.

Mike: So if you're one of the ways to mitigate this, I'm not saying it's the best way and that's not, not everyone needs to do this. In our case, we pay the amount. So we're maxing on our social security. Even though it hurts, I mean, it's the law. We gotta follow it, but we do a lot of other things to legally to make sure we're not overpaying our taxes.

Kevin: Yeah. So that's the big, that's the biggest aha moment with the S corporations is limiting. Legally trying to limit the amount of Medicare and social security tax you pay. And it's not as simple as that, especially in a [00:10:00] year where you convert from a W2 to a, to a S corporation or to a contractor. Uh, 'cause one of the, one of the secrets here is you may not need the S Corp right away.

Kevin: So let's say you're making $200,000 as a W2 earner, um, and ha let's say in August you transitioned to being self-employed. Well, you've already almost maxed. Your Medicare 

Mike: and Social Security. And social 

Kevin: security all, all the way through that August, um, timeframe. 'cause you're gonna hit the 170 cap. So now every dollar you earn after your W two's already capped you.

Kevin: Every dollar you earn going forward, you're only gonna pay the 2.3%. 

Mike: Yeah, 2.7, 2.7 1.45 times two. There you go. 2.9. It only took us three times. CPAs here. 2.9. 2.9. Um. Let's talk about before we get more into the S corp and why you really should consider, especially if you're self-employed, um, [00:11:00] some of the not so wonderful benefits or requirements.

Mike: If you have an S corporation, you're required to file a separate tax return each and every year. Where if it's a sole proprietorship, it's just a schedule attached to your personal 10 40. Um. If you're paying for someone to do your taxes, you're gonna be paying at least double, most likely, um, 'cause you're paying for two separate tax returns.

Mike: As an S Corp owner, you are required to pay yourself reasonable compensation via W2, which means you have to run payroll. It's gotten a lot easier these years. There's these lot of bookkeeping firms will do it for you, but even if you don't wanna work with a bookkeeping firm, you can go hire a company like Gusto.

Mike: We, we use them for our own firm's payroll and once you get it set up, you can set and forget it. They do all the filings for you, the payroll, tax deposits, all that. But those are the two requirements you will definitely have when you create an S-corp. 

Kevin: Yeah. And here's a little secret, you don't have to keep yourself on payroll for the full year.

Kevin: Mm-hmm. [00:12:00] You can 'cause all the, all the, all we're worried about is when you get to your S-Corp tax return that on, when we file an S-Corp tax return, there's an actual box that says Officer comp. Officer comp is you're, you're basically self-reporting to the IRS. How much did you pay yourself? Reasonably as the owner of the company, if there's a number in that box that ties to your W2, you're in good shape.

Kevin: If you're just a single, um. Member. So what you could do is you actually don't have to remit your payroll January through November inside your own S-corp. You can save it, keep it for business, whatever you need to do. Then in December, you could bonus what you, we could figure out your reasonable comp.

Kevin: 'cause reasonable comp. Could it? It's not just, you know, what would you make? In the open market, it starts there. What would you make given your position in the open market that needs to be your salary in the S corp? That's kind of where we start. 

Mike: Or what would you have to pay someone else to do your job if you were gonna be passive?

Kevin: Yes. But then we also [00:13:00] need to take into account cash flow, um, because let's say your radiologist and the market demands, I make four to $500,000 a year. Well, if my S corp does not generate four to $500,000 of revenue, I don't think it's very reasonable. I go take a loan to pay my payroll. That makes zero sense.

Kevin: So cash flow is a big part of this. So you can hold onto your cash January through November, get with your CPA for that Q4 last December, uh, meeting. And then what we can do is generate the max that you should pay yourself and bonus that year to get your W2 right where it should be. We're not. Overpaying throughout the year.

Kevin: 'cause what happens if you set your salary at 200 and then cash flow issues come up or you overpaid yourself? What if we could have gotten by with less? Well, once you pay yourself a W2, you can't unwind that. So just don't pay yourself January through November and then calculate the actual true pinpointed amount with, uh, payroll in December and just do a one bonus [00:14:00] check and then be done.

Mike: Yeah. And there's one more added benefit to that that's available to s corp owners is if you have happened to underpay by accident or for whatever reason, you are self-employed, withholding taxes or your estimated tax payments throughout the year, um, and you're gonna face some penalties. If you pay yourself tax withholding through that W2, even in the month of December, nearly every time you can get that to apply for the whole year and eliminate your potential, um, estimated tax penalties.

Mike: Um, let's go into this reasonable, um, let comp a little bit more because there's a whole lot that goes in there, right? The IRS. Well, tax law says all the, all facts and circumstances need to be considered when determining what reasonable comp is. I hear over and over again, well, I spoke to my CP and he said I need to pay at least 60% of, of my total income in W twos.

Mike: Where's that come from? I [00:15:00] see no law that says that that's just being lazy. That's not true. Um, I mean, there are averages you can go back and figure out. But that's not, that's not tax strategy. No. That's not good advice. No, it's not a certain percentage. It's not a certain dollar amount. It's based on all of the facts and circumstances in your particular situation.

Mike: If you are self-employed, you got a whole lot more things to think about than a W2 employee at a big company, right? You gotta figure out what am I gonna do to grow my business next year? What am I gonna do to maintain our current growth strategy? What am I gonna do to pay for that inventory, um, in December, for Christmas?

Mike: Um, what am I, there's so many more facts and circumstances that impact what's reasonable and. Just those few things I mentioned are reasonable facts and circumstances to reduce or or to change the amount that you're paying yourself. We could probably talk for two hours on reasonable comp. You and I have had a lot of those audits in our past and we've studied a lot [00:16:00] on that and read a lot of tax court cases, but don't take the general rule of thumb, especially if you have weird situations, if you have a lot of facts and circumstances and don't apply to everyone else.

Mike: Um. You've got a lot of maneuverability in that. Yeah. 

Kevin: Yeah. Reasonable comp. Yeah. Like you mentioned, reasonable comp on it's, they're not as common as they were and not, not saying they couldn't pick back up, but. The whole thought. Let's say you make a million dollars in your S-corp and then in your S-corp tax return, there's a hundred thousand sitting in officer comp.

Kevin: That's probably not reasonable. So here's the risk you get pulled for audit. They challenge you on that. They could revoke your S election if you don't play this right? So if you're drastically or not even paying into Medicare and Social Security via the W2, they could just say, okay, well we're just gonna tax all million dollars.

Kevin: Is gonna be subject to Medicare and Social security, and your 

Mike: S corp is no longer in existence and you're 

Kevin: revoked, and so then you're in big trouble. So that's the biggest risk here is sometimes you want to [00:17:00] pay that tax, you have to, but you wanna make sure you're paying it fairly. Um. Because you're hedging your, your risk there.

Kevin: And very rarely do you hear us say, Hey, pay your share of tax. This is one instance where it kind of makes sense to pay your share, but make sure you're doing it strategically and not just blindly doing a 60% coverage or, I mean, that makes me, as an accountant, feel all well and good. If you make a million bucks and your salary is 600, I don't have a reasonable comp audit.

Kevin: I don't have anything to worry about as a professional. I mean, you've paid everything you need. It makes my job super easy from the fact that it's lazy. 

Mike: Yes, it's lazy, and that means you probably overpaid your taxes. And then your tax strategist, lazy Kevin over here who doesn't practice like that, um, got away with it, but you paid too much in taxes.

Mike: Um, please don't, don't do that. Don't do 

Kevin: that. And, but also, don't pay yourself too little. Another secret though, and this is it's very cool trick. Um, the, I like that secret where you have, where if you haven't paid any estimated [00:18:00] payments, just do a Q4 bonus and have it all go to withholding and accounts for the full year.

Kevin: That's a beautiful trick. Uh, another cool trick is let's say you have been in Scorp and you've been one for several years and you've never put yourself on payroll and you've gotten away with murder basically for the past few years. Well. Let's say it's time to file. Let's, because right now we're in June of 2025, so it's the 2024 filing season.

Kevin: We're filing for 24 tax returns. Let's say we get an S corporation that made $500,000 and there's no officer comp. 

Mike: This actually happens more often than than you'd you Very common with new clients. We get. 

Kevin: Yes. Very common 

Mike: that way. Get it. We're looking at their scorp and they never paid themselves a salary, and we're like, uh, you haven't gotten audited yet.

Mike: How can we fix it? It's too late to go back and pay yourself W2. It's June already. 

Kevin: Yeah, it's, we're in June of 25. You can't go back in time. Pay yourself that salary. So what we do is. And this is all fair. You could put, let's say they made that $500,000 on an S-corp. We could put a [00:19:00] $200,000 number in the officer compensation.

Kevin: We move it outta distributions. 'cause when you're reporting your balance sheet, everything has to balance, hence the term balance sheet. So you have to move it outta your distribution account. The money they've taken out of the S corporation, you just reclassified to officer comp line on the S corp.

Kevin: Simple enough there, and it's reducing their taxable income on the S corp. Now when you get to the 10 40, I mean, that's all well and good, but nothing's really changed except you've moved numbers. 

Mike: And if you don't do the second part, you might get in trouble for having to move those numbers. The second part 

Kevin: is where the actual actual crux is.

Mike: Yes. 

Kevin: The first part, that's just a journal entry to make sure your compensation's at least there so you're not triggering audit. The second part is when you get to your 10 40 tax return, you go to a Schedule C, you put that. Number that you put on the officer comp that you reclassified from distributions, you put it directly on the Schedule C and you actually have it calculate self-employment tax on Schedule C.

Kevin: So you're paying your Medicare, you're paying your social security tax, [00:20:00] it's just not through a formal W2 or payroll. Instead, you're doing it just vi via the Schedule C government's out, not out any money. You're, you're reasonable, you've paid your tax. I get that's a way to really save your hide if you've never paid yourself salary and you're filing a tax return.

Mike: And we do that a lot. But let me give this disclaimer, there's actually no authority that exists within tax law, treasury regulations that allow for this. But there's so much that you do that is not in the regulations. What you're doing basically is you're saying, Hey, government, I recognize I made an error, so I'm gonna make it right and make sure you've gotten enough tax pay.

Mike: 'cause that's all they care about. And even, I don't know how many dozens of times we've done that, Kevin, but not once, have we ever, no. And there's been a few times where those clients got audited, but not once did they get mad about it. They're like, that's Iris's 

Kevin: argument. They're gonna come in and be like, where's your, where's your payroll?

Kevin: Right. I'm like, it's right here. Well, okay, well what's the net 

Mike: hurt? I, I did have an agent tell me once, make sure it's on W2 going forward. Yeah. Um, but 

Kevin: this is a [00:21:00] one time band. It's a mitigation, this like a bandaid, like break glass in case of emergency. Yes. It's kind of like you have a substantial amount of S corp income.

Kevin: You've never paid yourself salary. Break the glass, do that little roundabout way, satisfy the government for that year, but get yourself on payroll going forward. 

Mike: Yeah. And the few minutes we have left, I wanna cover two more topics. The one is the pass through deduction or 1 99 a deduction, or it's got a bunch of names.

Mike: QBI, the QBI deduction. There's a couple more names, but that has complicated core reasonable comp and figuring out what to pay. Because you're allowed to get a deduction if you're, if you have your own business, if you're a sole proprietor, you're allowed to take the full 20% deduction of your net income from your sole proprietorship.

Kevin: Could be 23%, 

Mike: hopefully it will be 23% when the BBB passes, whether it's 20% or 23%, you want that QBI deduction, sole proprietor making $200,000 net a year. On your Schedule C, you get a $40,000 deduction you put [00:22:00] in an S corp. Let's say you only pay yourself $40,000 of W2 salary. You don't have any other employees and you're making the exact same amount of income.

Mike: Now you're only allowed to deduct 20,000 instead of 40,000. So you gotta be careful with that. The rule on 1 99 A is you have. You're limited. Um, there's actually a bunch of limitations, but the main one we're focused on here is you cannot take more of a pass through deduction than 50% of the qualified wages you paid.

Mike: Not 10 90 nines, not contractors, but W2 wages. So you wanna make sure your W two's high enough. We do this with all of our clients 'cause you never know exactly what the amount is in the beginning of the year. But that's, that's our exercise in November and December with our clients. We figure out how much have you paid yourself?

Mike: How much have you paid your other employees? What's your potential? One nine oh a deduction. Do we need to bonus you? Are you good? Um, be thinking of that. 

Kevin: Yeah. 'cause this comes out, this, you can come out ahead doing this by paying [00:23:00] more in payroll mm-hmm. Than you normally would like. If this is going for like closely held as corporations where you may be the only employee, you may be just a sole proprietor S corp.

Kevin: If you have other employees in your W2, and you probably already hit this cap, but the thought being, what if you are, your salary is already at the 170,000 mark. You're already capped on a lot of your payroll tax, but to maximize your your QBI deduction, we need a $300,000 payroll because you're making them, you know, 1.2 or $1.4 million.

Kevin: Well, you're gonna pay a little bit more in payroll tax. But you're saving for every dollar that you're paying in payroll tax, you're saving, well, more in QBI deduction at the ordinary tax rates. Yeah. So you're gonna be paying a little bit of payroll tax, but getting an ordinary income tax. 'cause remember you're paying those two taxes.

Kevin: You're paying income tax and you're paying, uh, employment tax, your Medicare, social security. So we'll pay a little bit over here to save a lot over here a lot. So there's a big difference. So, um, make sure this is all [00:24:00]part of tax planning and it's a little bit more advanced. But that's something, like you said, it's not a 

Mike: perfect easy formula.

Mike: You can just apply. You've got to analyze it, you've got to walk through it. There's a break even analysis that needs to be done, 

Kevin: but that's what exactly what a, a strategist, like that's exactly what we do. We tell all, all of our staff to do that, and so we're making sure we're maximizing our QBI. 'cause now it's even more beneficial if this bill goes through at 23%, your savings go up even more.

Kevin: And there's other, there's other traps in the, in the QBI deduction. Oh yeah. Like specified service trader businesses and things like this. But generally speaking, your payroll should be healthy enough to keep you out of trouble with the IRS for reasonable comp, and it should be healthy enough to maximize your QBI deduction.

Kevin: If you take two things away, it's those two things, um, outside of creating your S corp to shield some of that se tax that you're required to pay. 

Mike: Yeah. We're running on time on this episode, but I do want to get into how do you create an S corp? What is it? How do we do it, and when should you do it? Um. The [00:25:00] normal way to create an S corp is within 60 days of the starting period of your S corp.

Mike: Generally within 60 days of January 1st, right? Or when you create a new entity, you have to file the S selection form 2, 5, 5, 3. You just file it. You send it in, there's a fax number. Now you can fax it in and usually get approval is much faster than where you step the paper, file them in, but. Let's talk about most businesses.

Mike: Uh, here. I gotta give this disclaimer. Kevin and I are not licensed attorneys. We are not attorneys. We're not qualified to offer legal advice. It's against the law for us to offer legal advice. Please consult with your attorney when you're creating any type of entity, because a big reason you're doing that is for liability protection, which we're not allowed to address.

Mike: But from a tax perspective, you have new clients coming in, Hey, I've been W2 for the last 10 years. I know I can do this better on my own. I'm starting this business. Do I create an S corporal election now? Well, you could, but what if, 'cause remember now you have to file two tax turns and you have to pay payroll.

Mike: What if your first year, you're, you're just getting up and [00:26:00]running, you're just a loss, just you haven't hit the ground and you've got a net loss. You don't necessarily want an s escort for a net loss, or you're only making 10 grand in profit. You don't need an s escort. It's not worth all that other stuff.

Mike: Um, what I prefer and what I recommend, but do consult with your attorney, but from a tax perspective. Create a single member LLC. You're the only owner of it with a single member LLC. You have multiple options of how you filed on your tax return. By default, if disregarded entity, it's just considered a sole proprietorship on your tax return.

Mike: I. But if you have that LLC, and, and that's the important part, get it created as soon as possible. Let's say you thought it was gonna take you two or three years to get your business up and running and really start making money. Let's say come September, October, you have hit it outta the park, you got half a million in income, and then you realize, oh goodness, um, maybe I need to do that S Corp thing.

Mike: Guess what? It's not too late. If you created that LLC, there's something called a retroactive S selection where you're allowed to, [00:27:00] as long as your LLC was created, you can go back and start it and or recreate it as an S corp. Retroactively, if you didn't form that LLC, you can't do it. The other thing I like, and again, purely from a tax standpoint, again, you gotta consult with your attorney.

Mike: Is always start with an LLC and then elect to have it taxed as an S corp. As Kevin was talking about, reasonable count, let's say you just created a corporation, a C corporation, you created it and then you found an election to have as an S corp. The IRS takes your S election from you. It's gonna revert back to what it was originally, and very rarely does it make sense to have a C corporation, so it could hurt you badly.

Mike: But if you lose your S status or maybe want to get, stop being an S escort for good tax planning reasons, go back to being a single member LLC or even a partnership, you can do that if you started it as an LLC and filed the election to be taxed as an escort. Anything to add to that? 

Kevin: That's good.

Kevin: Sometimes we do revoke [00:28:00] with a simple letter to the IRSS selections. Um, there's, there's reasons we do that. Um, good reason oftentimes it's, uh, ownership changes because one thing we didn't hit on, there's two things I want to hit on. Ownership changes inside of an S corp, or if you have multiple members in an S corp, you have to distribute money out of an S corp at your ownership percentages.

Kevin: No ands, ifs, or buts. If Mike and I were in the same, uh, uh, s corporation, which we're not. Um, and let's say we were 50 50 partners in an S corp. Mm-hmm. And I decided, eh, I'm not gonna work this month, but you worked your butt off and you generated three to 400 grand of revenue in our S corp that we started together.

Kevin: And you're like, Hey, I'm gonna take my distribution from what I earned. You were on vacation all month. I'm taking my cut. Wrong. Can't do that. Yeah, you have to. You're gonna be splitting those profits with that person 50 50, no matter what the circumstances is, partnerships are different. If you're in a partnership, then you can allocate [00:29:00] distributions and income however you see fits so long as it's within the guardrails of the operating agreement.

Kevin: So that's trap. That's a trap inside of an S-corp if you're with multiple people. So S-Corps don't always make sense, but there's ways to structure it where you can have a partnership, an S-Corp interest, own inside of a partnership and allocate. We can help you with all the entity, uh, uh, kind of structuring.

Kevin: Ah, 

Mike: the other limitations for an scorp, you can't have less, it can't be a hundred owners or less. You gotta have actual people that own it. You can't have entities that own your SCORP unless you do the Q cell election. Um, and you can only have one class of stock, which again goes to this whole partnership difference.

Mike: One class of stock means everyone gets the same treatment. Every shareholder gets the same distribution percentages, every shareholder gets, um, the same voting rights. That doesn't always make sense. Scorp, if you're a service business and you're the only person owning it and running it, um, it probably makes good sense for you.

Mike: Again, you gotta be careful that a, the specified service trader [00:30:00]business. Um, but. Those are the general rules. There's always a lot of caveats here. Mm-hmm. But the, generally speaking, those are the rules for an S corp, how you get it created. You should always consult an attorney and don't, this is general tax advice.

Mike: Don't just watch this podcast and say, okay, I'm gonna go start an S corp. Make sure you talk with a tax strategist and probably an attorney too. 

Kevin: Yes. 'cause every circumstance is different. Um, you know, our podcast, we just like to be educational. We just like to bring things out to the general public. Then you have to take this and you have to kind of funnel and filter it for your certain, your situation, just because everyone's different.

Kevin: And yeah, if tax law was an easy blanket, we can cover everybody with. It would be, or really easy not, wouldn't be nice. 

Mike: Yeah. We just have, we just have a spreadsheet. Everyone, we wouldn't have to work anymore. We wouldn't have to train our team on how to do tax advice. Correct. You'd have a spreadsheet and say, go check these boxes, and that's your tax budget.

Mike: Except 

Kevin: robots do it. 

Mike: It doesn't work like that. The 

Kevin: other, the last thing I wanna touch on and one thing never to do, this is a secret. I don't know if it's a secret. I've seen it done enough [00:31:00] times where I, I feel like there's some hacks out there that are doing this. Do not put real estate inside of an S-corp.

Kevin: Please, for the love of God, do not put real estate inside of an S-corp. Okay. Maybe one out of a thousand reasons. Uh, I can see maybe doing it. But generally your real estate income's not subject to any employment taxes. Then you're just creating basis issues. We need to even get into basis. Basis is such a huge thing inside of an S corporation because it's, we probably just need to do our own podcast on it.

Kevin: Wait, we should do that one. But BA base do not, just don't put real estate inside scorp. Scorp are for active trader businesses that are generating self-employed income. Passive investments that you're gonna need me maybe doing some depreciation or aggressive tax planning with You don't want in an S corp, especially if you're gonna be leveraging buying assets, you might wanna look at the S corp and see if that makes sense as well.

Kevin: Yeah. Um, yeah, debt is always weird inside of an scorp when it comes to the de deductibility of those items. Yes. [00:32:00]

Mike: Then that is a general rule. I'd say it's more like one out of a hundred times that I've seen where it makes sense to have real estate. Not one out of a thousand, but it, it's. I just don't want it.

Mike: I see a dozen times my entire career where it made sense to have property in an S corp and. 99.99% of the times when someone comes to us in that property in S corp, it is a big problem. It's a pain in the butt to get it out. It it, it is not just pain to get it out, but it's expensive. It eliminates or greatly prohibits them from being able to do the tax planning they could do with that property.

Mike: That's theirs. They listen to some toker telling them to put it in this corp and. Now we gotta unwind this mess and we get paid well for that. But it's not money well spent in my opinion. No, no. It's fixing 

Kevin: a mess. Yes, it's, I don't wanna fix a mess. I want to strategically plan, but I guess that you could, we could look at it.

Kevin: That's planning. 

Mike: But it is planning. It's just the cost that you're gonna incur that you shouldn't have had to. So take Kevin's advice. Don't put real estate into an S corp unless you have a really good reason for it. And you've talked with a tax strategist. Thank you everyone for [00:33:00] being here. We hope we've helped share some of the cool secrets of Scorp.

Mike: Um, there's a whole lot more. Um, hope you enjoyed it. Make sure you like and subscribe. It will help us continue to grow the education. We want to change the way people see taxes. Taxes can be the greatest benefit in your lifetime, not the greatest hindrance. We wanna change the world to get people to understand that.

Mike: So please, like please subscribe and tune in next time for our next episode.

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