The sad truth is that every year, we have to file and pay our taxes. While it definitely is a pain in the neck, it can also be an opportunity to evaluate your financial progress for the year. The goal for taxes is almost always to maximize your deductions while minimizing taxes, but often this is easier said than done. One way savvy real estate investors can reduce their tax bills without running afoul of the IRS is by paying themselves as much as possible through S Corp distributions. If you want to learn more about the nitty and the gritty of S Corp distributions, read on. Why Real Estate Investors Love S Corps S Corps are considered a “pass-through” entity for tax purposes. This means that the business is not required to pay corporate income taxes. Rather, the profits and losses for the business are distributed to the owners and reported as their personal income. This is a tremendous advantage over C Corps, which is the default tax status for a corporation. Any income that a C Corp makes is double-taxed: once at the corporate level and again on the individual owner’s income tax return. Designating your business as an S Corps allows your company’s profit to only be taxed once. You can also use an S Corp to reduce the burden of payroll and self-employment taxes. We’ll get more into this in a little bit. For now, just know that real estate investors often take advantage of these S Corp tax benefits. However, S Corps will not be suitable for every investor. Due to the costs associated with an S Corp, it usually only makes sense for investors who are earning at least $50,000 annually from their business. If you’re making less than that, the costs of setting up and maintaining an S Corp will probably outweigh your tax savings. Talk to your CPA or a business lawyer to learn whether an S Corp can work for you. Or you can fill out our quick investor quiz and get the help you need. What Is An S Corp Distribution? If you’ve never heard of an S Corp distribution before, prepare to meet your new best friend! An S Corp distribution is your proportional share of the S Corps earnings for the year, based on the number of shares you own. It’s the best way to take money out of an S Corp. If you’re the sole owner of your S Corp, you’ll just get 100% of the income. But if there are multiple shareholders, the earnings will be distributed on a per-share basis. The total earnings will be divided by the number of shares, and each shareholder will receive the same amount per share. So, while the shareholders might not all receive the same total amount, they must each receive an equal per-share payout. For example, say an S Corp has issued 100 shares as follows: Ross owns 35 shares Rachel owns 25 shares Monica owns 20 shares Chandler owns 10 shares Phoebe and Joey own 5 shares each So, if the business made a profit of $1 million, this is how the dividends would be distributed: $350,000 to Ross $250,000 to Rachel $200,000 to Monica $100,000 to Chandler $50,000 each to Phoebe and Joey Limitations On Distributions What’s great about distributions is that it’s considered “passive” income, which isn’t subject to payroll taxes. However, the IRS won’t let you skip out on payroll taxes altogether. Before you can receive any distributions, you’ll have to pay yourself a “reasonable” salary for your contributions to the business. The secret to maximizing your tax savings is to pay yourself the lowest reasonable salary possible and taking the rest of the profits as a distribution. The IRS doesn’t provide any direct guidelines for how to determine if your salary is reasonable, but some factors to consider include: Your training, education, and experience How much work you did What kind of work you did How much time and effort you spent Historical distribution amounts Market rates for similar work If you set your salary too low, the IRS might reclassify some of your distributions as salary, which can lead to penalties and additional taxes. The best way to avoid scrutiny is to consult with your CPA or attorney before setting your salary.