Real estate investments can help your S Corp keep its money.

Real estate investment can be an opportunity for an inactive S Corp to do something with its undistributed C Corp profits.

With an S Corp, the corporation's income is taxed to the stockholder, but its distributions to stockholders are not. With a C Corp, the corporation pays a tax on its income and then its shareholders must also pay a tax when they receive dividends. When a C Corp is converted to an S Corp, the undistributed earnings from the C Corp typically remain untouched in the new account. Once earnings are distributed by the S Corp, the recipients will owe a tax on the dividend. That's why so many S Corps leave the C Corp money untouched.

Many times when the S Corp stops conducting business, it keeps the undistributed money. However, if an S Corp doesn't meet ongoing activity requirements (at least 75% of gross receipts must be active), it can lose its S Corp status and become a personal holding company. If that happens, the C Corp earning must be distributed and taxes paid.

However, there is an option to defer taxes on those C Corp earnings --invest in real estate.

If 75% of your gross receipts are active, the S Corp is active for tax purposes. Real estate offers the opportunity to change the S Corp's focus so undistributed C Corp earnings can remain protected. For example, a real estate investment nets $25,000 and incurs $75,000 in depreciation--a loss. Given that 75% of the gross receipts--rental, operation depreciation losses--are active, the company can maintain its S Corp status. However, you also may decide to distribute the C Corp earnings now as it will be taxed at a 15% rate, a significant drop over the relatively recent 39.6% rate.