In this episode of Tax Tuesday, Anderson Advisors attorneys Clint Coon, Esq., and Eliot Thomas, Esq., discuss essential tax strategies for business owners and investors. Topics covered include late S election strategies, the best approach for payroll and officer compensation, and the benefits of Solo 401(k) plans over Roth IRAs. You’ll hear about how to tackle tax implications for cryptocurrency staking, offshore trusts, and real estate professional status. Additional insights include structuring holding companies for real estate investments, deducting rental expenses, and handling business losses. Tune in for expert advice on navigating complex tax decisions.  

Send your tax questions to taxtuesday@andersonadvisors.com.

Highlights/Topics: 

• “I’m considering a late S election effective January 1st of 2024.” Okay, so we’re going back in time here for an LLC. “I understand it’s late in the year to get everything in order. I’ve heard others recommend an option to avoid payroll for 2024 by issuing a 1099 miscellaneous as officer compensation in lieu of a late payroll, then get payroll set for 2025. Would you suggest this 1099 approach, or is there still time to get payroll done for all of 2024?” – We don’t advise this here at Anderson. We want you to roll the proper W-2 payroll. Yes, there’s plenty of time.
• “What type of businesses do I need to set up a Solo 401(k) or Roth IRA?” – Look at the Solo 401(k) and use the Roth component built into the Solo 401(k) versus doing a Roth IRA because it gives you a little more flexibility in the control of those funds.
• “Can you review the contribution rules for a Solo 401(k) and for an IRA in 2024? For instance, when you defer income at year end and make a company match, then also the IRA contribution if possible?” – You can contribute up to $23,000 as the employee, and then the employer can contribute up to 25% of your earned wages
• “I invested in a cryptocurrency a few years ago. I have been staking it directly on the network, and in return, I receive a staking reward. How is the crypto activity taxed?” – The staking is usually considered ordinary income. That means it’s going to be taxed at ordinary rates and very likely is subject to employment taxes.
• “I’ve been considering opening an offshore trust that owns an offshore LLC that engages in forex day trading business in the Cayman Islands. I only pay taxes on distributions received from the trust that way, I can grow capital outside the US. Am I on the right path here? And are there other consequences that I should consider?” – The way the US taxes individuals is that when we say worldwide income, it’s not the income you earn in your own name. It’s also the income that you earn through entities that you hold an interest in.
• “I have a real estate professional status.” (We call it REP status for short.) “I have invested in both traditional, rentals, and syndications, both use cost segregation and bonus depreciation. Can I claim the paper loss from real estate syndications together with our other rental activity after electing to aggregate all real estate activity? Is it allowed to claim all losses, or the ones from syndications disallowed?” – You have to work over 750 hours in a real estate trade or business that you ‘materially participate’ in. That could be I sell houses, real estate agent, things like that. I manage houses, anything like that, and that has to be over 50% of your work week. Typically, it’s difficult to do if you have a W-2 job. 
• “I own three separate holding companies, LLC taxed as a partnership for my real estate.” We’d always recommend that, some oil, and mineral rights. “A second taxed as a partnership for active real estate flips.” We might have an issue with that. “S-corporation for technology consulting.” “I saw Anderson videos on holding a passive brokerage account, not active trading, in an LLC for asset protection. Where do you recommend I’d place this? Would it go into one of these other LLCs or some other holding company? I would prefer to avoid an extra annual federal tax filing if possible.” – I would keep it completely separate because you’ve got this one set up for the oil, this one set up for the real estate, this one here is our active business. Putting your brokerage, your savings account into any of those entities just wouldn’t make sense to me.
• “I have a primary residence that I plan to rent after one year, which would be in December. If I put it into service this year, can I deduct expenses that were needed to make it ready for that rental, such as a cost seg for this year?” – It’s a question of when it is placed into service. If we’ve already placed it in the services and we start, depending on what we’re doing to improve on it, if it is just an improvement, that’s still just going to go to basis, and we would depreciate it now that it’s a rental.
• “Clint recommends using a partnership holding company for residential real estate investment. “Do I need to start a new IRS filing submission with a partnership holding company or keep it on my existing Schedule E, personal IRS filing? I have 25 investment homes, so I’d like to minimize the amount of work for this change. I’m not sure how to do this accounting change.” – You can write out 25 little boxes down here that all lead up to just one entity, Wyoming holding. We’ll make them do all 25.
• “I have a relatively new corporation whose expenses exceed income,” so we’ve got losses. “Can these expenses be used to offset income in 2025? If so, how would I indicate this on this year’s tax return?” – If we have more expenses than income, it’s a loss, it can carry forward into the next year.

Resources:

Schedule Your FREE Consultation
Tax and Asset Protection Events
Anderson Advisors
Toby Mathis YouTube
Toby Mathis TikTok
Clint Coons YouTube

Full Episode Transcript:

Eliot:  Remember, Tax Tuesday, we’re bringing tax knowledge to the masses. That’s our goal here. We come on here every other Tuesday. It’s questions from you. You submit the questions through our email site, taxtuesday@andersonadvisors.com. I run through all the questions, pick out those that we can put onto the program. We have a select few that we can take, but we do answer all your questions that you submit.

Also, during the presentation today, if you have any questions, feel free to put them through the Q&A section (question and answer section). Please don’t put them in the webinar chat. We have a whole team here in the background, a lot of accountants and attorneys answering your questions, bookkeepers, et cetera. They’ll handle a lot of those questions. We just try to make this fast, fun, and bring a little bit, again, tax knowledge to you all. 

Clint: You say you make taxes fun?

Eliot: Yeah, we try.

Clint: Wow, all right, start out that way. That’s fun.

Eliot: Exactly, it’s fun times. We got about nine questions today, and we’re going to hit right at them.

Clint: Great.

Eliot: First question, “I’m considering a late S election effective January 1st of 2024.” Okay, so we’re going back in time here for an LLC. “I understand it’s late in the year to get everything in order. I’ve heard others recommend an option to avoid payroll for 2024 by issuing a 1099 miscellaneous as officer compensation in lieu of a late payroll, then get payroll set for 2025. Would you suggest this 1099 approach, or is there still time to get payroll done for all of 2024?”

Clint, what we’re looking at here is the requirement on an S-corp to pay a reasonable wage. We always got to do that. If we take a distribution, we got to pay that reasonable wage. 

What they’re asking here is, well, maybe I can’t get that payroll done before the end of the year—we’re getting towards the end of December—so maybe I can just 1099 it to myself, call it because that’s going to get hit with employment taxes. Government doesn’t care, do they? They get it taken out of there. I still get my payroll, and then I’ll do it right next year. 

People do advise doing that, we don’t here at Anderson. We want you to roll the proper W-2 payroll. Yes, there’s plenty of time. There are payroll companies out there who can do this relatively quickly, but you do want to get on it. We want to make sure it’s paid before December 31st. 

We do not recommend the 1099 approach, although it does. Honestly, if you got on it, I don’t know that the IRS would say anything, but it’s not proper. You want to do it the right way and make sure you have it all coming on to your 1120-S.

Clint: I like the way you set that up for me because you said, hey, we got a blonde attorney here and I got to make it real simple. Eliot, you do a phenomenal job of that, taking complex subject because you lost me halfway through that, and you broke it down now so we can understand that. That’s a good answer.

Eliot: Thank you. I learned from the best. 

Clint: Why do we want to take the compensation here? What is that issue for them? Aren’t there other ways they can pull money out? Why do you want to show compensation? Why not try to take it out as a fringe benefit? Maybe hire your kids before the end of the year, pay them. They have their own standard deduction. You could use that again so they don’t have to pay taxes on it.

Eliot: That’s exactly right. There are all kinds of strategies we can use to hit that income that you have in your S-corp before we have to consider the reasonable wage. That’s exactly what we try and do through tax planning. If you have questions about that, what kind of strategies, or how they would really impact, we’re going to talk about that a little bit later, but we do have a program set up for that, Tax Saver Pro. We’re going to look into that.

Clint’s exactly right. Why not hit all these things first before we have to do that payroll? Because if we lower our overall income, then the amount of payroll you have to do is less, and you’re going to have less employment taxes on it. That’s exactly right. That’s an excellent idea. We will talk about that later on in the program. I will look at that. However, at some point, we do know you have to do that reasonable wage if you take any distribution. That is to say, if you ever take any of the money out from your S-corporation, that’s where it kicks in the code and says you’ve got to pay that reasonable wage.

Clint: What I would also look at too. I’d mention, if you want the compensation, then that would imply you want to contribute money to a retirement plan. In Solo 401(k), you could set that up before the end of the year. You don’t need to fund it right away. You can still wait until you file your tax return to fund it for the prior year. You just have to get it in place before the year’s up. Those are the options. Self-directed IRAs, you can make contributions to as well. Yeah, it makes sense to have compensation for those types of opportunities.

Eliot: Absolutely. That’s the whole carrot and stick that the government approaches us with for those contributions. They have to be earned income. That’s the W-2 part, where you’re going to have employment tax. That’s going to gauge what you can contribute to those plans that Clint is talking about. There you have it. I think that’s our S election and late election.

Clint: All right. Let’s hit the next one.

Eliot: Next question. “What type of businesses do I need to set up a Solo 401(k) or Roth IRA?” A little bit of a trick question here. For a Solo 401(k), any business can be a sponsor. It could be your disregarded entity. It could be your S-corporation like we just talked about. It could be a C-corporation. It could be a partnership. Anywhere we have earned income, it can sponsor a plan like a Solo 401(k).

A Roth IRA is a little bit different. That’s for the individual. Now we’ve got a situation where the individual has already earned some money, and we’ll put into a separate plan, the individual retirement account, the Roth, but that’s not coming from your business. That’s after the individual has already been paid, whereas your Solo 401(k) is being sponsored by a business. A little bit of a difference there, but you could do both in the same year.

Clint: To put the legal spin on this, if you want to set up a Solo 401(k), what’s essential here is that you can have only one owner or two if it’s your spouse, and you can’t have any employees. More importantly, the mistake they see a lot of people make when they want to set up a Solo 401(k), they have another business and that business has employees. They think, I’m going to go do the side hustle over here, the side gig, that’s where I’m going to have my Solo 401(k), and I’m not going to do anything for my employees on the other side. That’s a problem. You cannot set up a Solo 401(k) in that situation.

If you already have a company with employees and you want to set up another business, it will not work. If you’re looking to set up a spouse but you could have a business partner, and you want to hire people, Solo 401(k) is not going to be an option for you. But if it’s just you, you and your spouse, you and a business partner, that’s a great idea. 

The other thing here that when you brought up Roth IRA, you remember, Solo 401(k) has a Roth component built into it. If you wanted to contribute to a Roth, I would probably look at the Solo 401(k) and use the Roth component built into the Solo 401(k) versus doing a Roth IRA because it gives you a little more flexibility in the control of those funds.

In fact, there was a question that came up here by an individual about the back door Roth strategy. We started talking about this probably about 15 years ago before it really caught on, and we would call it the trap door, which means this. You take out a salary out of your company. If you set up a Solo 401(k) and you’re paying $50,000 a year in salary to yourself, you can take that salary and you can personally contribute 100% of it to your Solo 401(k) plan as an after-tax employee contribution. It goes into your 401(k) plan, and you can immediately roll those funds over into your Roth portion of your 401(k).

You can put into your 401(k) Roth plan, not $7500 a year, but up to $69,000 a year. If you’re pulling good money down out of your business and you want to start developing a retirement plan that is going to be a tax-free retirement future for you, a Solo 401(k), there are a ton of options there.

Eliot: Definitely. Solo 401(k) is, as Clint just pointed out, gives you that higher contribution amount. Whereas your Roth IRA, again, it’s just for the individual, and it has a much more limited contribution amount. A really good game plan. Again, you’re learning from the best. Every two weeks, Toby and Clint show. 

All right, next question. “Can you review the contribution rules for a Solo 401(k) and for an IRA in 2024? For instance, when you defer income at year end and make a company match, then also the IRA contribution if possible? Confusing area for many.”

Again, just building off our previous questions here, pretty much the rule for an individual, and again you determine how much you’re paying yourself, the sponsoring entities paying you as earned income, you can contribute up to $23,000 as the employee, and then the employer can contribute up to 25% of your earned wages from that business. 

In other words, if let’s say you made $100,000, you could contribute as an employee up to $23,000. The employer can hit up to 25% or $25,000 with an overall limit of the $69,000 that Clint was just talking about. 

Clint: I agree.

Eliot: As far as timing, one of the rules that we got to watch out for, we got to have that earned income prior to December 31st of that particular year. In other words, you can’t get paid the first or second week of January next year and have it revert back as the employee. We got to know, a lot of this is based on how much the employee is making in that earned income we’ve been talking about. 

The employer, the business, the S-corp, it has all the way until its extension time for its return way into the next year before it has to put its money in. It’s got plenty of time to pony up and put its 25% in, but we got to have it all based on that earned income, which has to be by December 31st.

Clint: A lot of times, when you’re looking at putting in that 25% from the company, it’s not going to all be deductible because it’s based upon your wage. If my company was going to fund my plan with $30,000, then in order for that to be deductible, I would need to be earning $120,000. You have to be taking a salary of $120,000 in order for that contribution to be 100% deductible.

This is a mistake that I catch a lot when I talk to people about this. I go back to that original strategy I just referred to, that trap door Roth. If your business can’t deduct it, then why not just take the money yourself and contribute it right into the Roth account? Because if your business makes that contribution, that money goes in, when you pull it back out, it will be taxable to you. Your business didn’t get a full deduction for it, and it comes back out to you and it’s taxable. You’re better off, in my opinion, taking it out personally and then redistributing the funds.

Eliot: Excellent game plan. As far as the IRA, that does also have a deadline, although we have until April 15th. Because it’s individual, individual return, individual due date is April 15th on your 1040. You can make contributions to that IRA up to that point, but we cannot do it with extension. If we extend that 1040, which is a really great strategy, we just have to be mindful that we have to take care of that IRA first before that.

Clint: Yup. If you haven’t yet subscribed to Toby Mathis’s YouTube channel, I suggest you subscribe to it. He’s doing really well here. If I look at his channel, he has 138,000 views in six days on how net worth explodes. I don’t know what’s in that, but a lot of people are liking it. Become a part of the 138,000 viewers.

It’s a great channel. He provides a lot of important tax information, financial information, and he has that approach that is more common sense when it comes to investing. But if you really want to see a cool channel, hit the button.

I’ve got my own YouTube channel as well. It’s just made a little bit of stuff going on here about asset protection. Also, I just dropped a video on protecting your house. If you’ve seen what’s been going on with Patrick Mahone, Travis Kelsey, and a few of the NBA players out there where they’re out of town, people are breaking into their home, listen, it’s a real thing.

I had a good friend. She went out of town down to Cancun and started posting selfies of herself in Cancun on Facebook, came back, and her house got emptied out. Somebody looked up her name, found out where she lived. 

The idea here is, hey, get your name off of the title. Don’t let thieves know where you live because if they find out you’re out of town, well, that’s just an open invitation, because we know no one’s going to be in that house when I hit it, so I’m not going to get shot.

Eliot: As a professional athlete, it’s pretty easy to know, isn’t it?

Clint: Yeah, it is.

Eliot: Can’t hide on Sunday.

Clint: We have great resources. If you haven’t become a subscriber to either of these channels, I definitely recommend it.

Eliot: All right. We have some stuff coming up here, our tax and asset protection workshop. You know a little bit about that, don’t you?

Clint: Yeah, I do. We’re actually down here in Las Vegas today, and this week we’re teaching a live three-day Tax and Asset Protection event. We teach these four times a year. I’d love to have you come out there and sit down with us. We go really deep on different strategies. 

If you can’t make it out to the live one because our next one’s going to be in March of 2025, catch us on a Saturday. You can see the dates here. In December, we’re going to be covering a lot of different strategies before the end of the year that gets yourself structured and protected, so you hit 2025 off with the perfect foundation in place.

Eliot: Perfect. Back to the questions. “I invested in a cryptocurrency a few years ago. I have been staking it directly on the network, and in return, I receive a staking reward. How is the crypto activity taxed?” I get a lot of questions about this because crypto still is, relatively speaking, in its infancy. We are learning more and more about how it works and the creative uses of it behind the scenes on it, but the tax code is trying to catch up.

What they’ve said so far is we basically have two different components here. Here, we are staking. Staking is simply that you’re operating a business to increase your cryptocurrency. They feed off your blockchain, et cetera, and then they pay you in crypto. When that happens, the first part, the staking advent is usually considered ordinary income. That means it’s going to be taxed at ordinary rates and very likely is subject to employment taxes.

There, we might want to think about possibly how we’re going to work with that situation. But then you do receive the currency itself, the crypto. You get paid in, let’s say, bitcoin, and then later on you want to sell that bitcoin. 

When you receive the bitcoin, again it’s been taxed at ordinary rates. That becomes your basis, your tax basis at that point. But if you sell it later on for a profit, then that’s going to be capital gains. 

As a short-term or long-term, it just depends on when you received it, and then we start that clock for whether it’s over a year or under a year, depending if it’s short-term capital gains, which is taxed at ordinary rates, or after a year, long-term capital gains, where you get a more favorable, lower tax rate. 

Clint: I’m not going to touch that one. You answer that one just perfect. But I was looking at one that just got posted up here from Julian. He said, “I’ve been considering opening an offshore trust that owns an offshore LLC that engages in forex day trading business in the Cayman Islands. I only pay taxes on distributions received from the trust that way, I can grow capital outside the US. Am I on the right path here? And are there other consequences that I should consider?” What would you say about offshore?

Eliot: I try and stay away from them because I’m not too terribly familiar. Often, Toby and Clint tell me to stay away from them. I don’t have a lot of experience with offshore. Often it gets a little bit of a feeling of maybe we’re trying to hide something from the government. Remember, the US government, you’ve got to declare all your income worldwide with the US government. I would not advise an offshore trust. Do you have any feelings on it?

Clint: I would advise an offshore trust because our Cayman office sets them up. There you go. I would then structure it through our Dubai office, where we create Dubai limited liability companies. Julian, you ought to have a Dubai LLC held by a Cayman trust. That goes to asset protection. It really doesn’t address your question on the taxation.

The way the US taxes individuals is that when we say worldwide income, it’s not the income you earn in your own name. It’s also the income that you earn through entities that you hold an interest in. 

You cannot set up a Dubai LLC, forex trade through that, and then you’re in a Dubai free trade zone. You think, all right, well, I don’t have to pay tax because Dubai is not taxing me on this company income. Therefore, I can grow it much quicker. The reality is you will have to pay tax on it, even if you do not repatriate those proceeds because it looks through to you individually. 

We typically save those strategies for asset protection. I think that if you’re trying to reduce your tax rates and you want to go offshore, maybe you move to Puerto Rico or something like that, Act 20, there are opportunities there. That might be something you explore instead.

Eliot: Sounds good. Any more questions we got? It looks like they’re handling them. Okay. Moving on. “I have a real estate professional status.” We call it REP status for short. “I have invested in both traditional, rentals, and syndications, both use cost segregation and bonus depreciation. Can I claim the paper loss from real estate syndications together with our other rental activity after electing to aggregate all real estate activity? Is it allowed to claim all losses, or the ones from syndications disallowed?”

We have a lot of terminology here. We want to break it down a little bit and get some definitions out here. First of all, the real estate professional status, we are talking about rental activity, which traditionally is what we call passive activity. That means if you have overall losses, they can only be taken against other passive income. Passive losses match up with passive income.

In the case of the bonus depreciation and cost segregation, those are two terms that often run together, but they are separate identities. Cost segregation simply says, if I have this building right now—we’re in what we would call a commercial building—we want to depreciate the cost of the building, not the land, and that’s usually done over 39 years, straight line. The same amount, many, many years. Single family home, 27½ years, just on what we call the improvement or the building. 

Cost segregation says, well, now hold on. There are all kinds of pieces to that. We got carpet, we got lights, we got the foundation, and all those independently have a different depreciation life. Carpet, five years. The foundation would still be 27½ or 39 years, depending on if you’re commercial or not. 

Cost segregation study goes in there, breaks the building apart, puts it into 5, 10, 15, 27½, or 39 year property, and that speeds up your depreciation right there. Instead of deducting your carpet over 27½ years, we’re now doing over 5. We get more deduction up front. A dollar today of deduction is worth a lot more if we learned anything from inflation than a dollar of deduction in 10 years from now, so that’s why we want to frontload these costs if we can. 

Bonus depreciation then comes along and couples up with our cost segregation. Bonus depreciation says, if you are under a 20-year life—the 5, 10, 15-year property—you can go ahead and take a massive amount of depreciation. 

We were at 100% bonus depreciation, which meant all that five-year, you deduct right away. Now we’ve slowly moved that down here in 2024. It’s 60% bonus depreciation. Next year is going to be 40%. We’ll have to wait to see what the new tax code says, should we ever get to that point. Right now, that’s what’s going on with our cost segregation and our bonus depreciation.

Now we have these massive deductions. We’re in real estate professional status. To hit that, you have to work over 750 hours in a real estate trade or business that you materially participate in. That could be I sell houses, real estate agent, things like that. I manage houses, anything like that, and that has to be over 50% of your work week. Typically, it’s difficult to do if you have a W-2 job. 

Then we have to materially participate in managing those properties each individually themselves. That has its own test, up to 500 hours per building or something like that for each one of them. That’s very cumbersome to do if you have 20 or 30 buildings. 

You can do what we call aggregation. It’s a selection made. Pull them all together, and you just have to make that material participation test once over amongst all those activities, which would include any real estate activity such as your real estate syndications.

Once you’ve aggregated—we’ve pulled it all in together, we got our 750 hours, we’re putting more time into that, over 50% of our work week—now, can we claim those losses? Yes. It automatically pulls in our syndication losses because we aggregated. Those losses are as good as any other loss as long as we meet all the steps in our aggregation, so it would be allowed.

Clint: What do I have to say about that? All right. There was a question that came up here off the real estate subject matter. People are asking about trading, protecting income they generate from their trading account, and also protecting the assets held in their trading accounts. Do you care if I just go a little separate here?

Eliot: Let’s do it.

Clint: All right, let’s just draw something out here. I’m probably going to break the presentation. There we go. If you have a trading account, you’re looking to protect the assets held inside of the trading. 

What I would do is you create an LLC for your trading account if all you’re doing is looking for asset protection. Now if you want tax savings, and you want to find a way to reduce it like the question that came up and says, hey, I made $2 million day trading this year, then what you should do instead is create a dual entity structure.

In LLC, that’s asset protection for your brokerage account. Of course, you know why we do this stuff. We set it up in Wyoming, so if we get sued and somebody gets a judgment against us, they’re not just going to go down to Charles Schwab, garnish the account, close out all of our positions, and then take our money. We want to prevent that. That’s what the LLC is going to do for you. 

On the active trading side, your strategy would typically look like this. We’re going to create a C-corporation for you, then we’re going to set up a limited partnership right here, and you’re going to be down here. You’re a member or you’re a limited partner in this limited partnership, and this is where your brokerage account is going to be placed. 

With this structure over here, what we’re doing then is looking for ways to take income that would normally flow down and be taxed at your individual rate. We want to upstream income up here to the C-corporation to be taxed at a flat 21% on any gains that stay inside of there.

What we’re also looking to do is expense things out. That means if I made $500,000 from my trading activity this year, and I could push $120,000 up to my corporation, I’ve just expanded the opportunities on what I can do with this money. 

I’m not going to be taxed on $500,000 any longer like I was when I traded my own name. Now I’m an enlightened trader. Instead of being taxed on $500,000, I’m only taxed on what I actually had remaining. Since I sent $120,000 up, that only leaves me with $380,000. That’s going to flow down to me. That $120,000 that goes into the C-corp, that’s when we can start looking at ways to expense it out in a manner that benefits me but is deductible to that corporation. 

If you want to take it a step further, it compounds on what we’ve already been talking about today. If you wanted to put yourself on salary, then you could set up a Solo 401(k) plan up here, and you could jam $69,000 into that plan. Now you could start trading in this account on a tax-free basis, depending on where that money sits, whether or not it’s in your Roth side of your plan or it’s in the traditional side of the plan.

The idea here is that we use combinations of entities to create tax saving opportunities that did not exist on their own. By putting these entities together, that’s where you can start getting some planning working in your favor, even if you have an existing business. 

We run into people that will have maybe an S-corp, and it’s doing really well. Then I go, how do I reduce my taxes? I want to get some tax savings. Maybe we set up a C-corp over here that provides some type of services to the S-corp. You’re moving it off of a flow through status over into that C-corp that’s taxed at a flat 21%. Moving things around like this, we could go on all day. That’s why you come to the event because that’s what we cover here.

Eliot: Exactly, with the asset protection. We just don’t want to just blow over the asset protection. I say this all the time to clients. It’s like, the best tax planning in the world doesn’t do any good if you run into Eliot suing you and you lose those assets. You’ve got to asset protection first, we’ll work on the tax planning then, and then of course you always want to worry about what happens. You want to take care of your trust, your living trust, and things like that.

Clint: It’s one of the things that we do. When we do a tax strategy session, we go through and we look at your taxes. We’ll talk about this a little bit later. Many times by setting up entities, you’re creating the opportunities that you currently do not have. It just amazes me how many people continue to do things in the same way, expecting they’re getting different results. What do we call that? Insanity or something like that. Great strategies. Lots of ways to put things together.

Eliot: All right. This is a little bit long-winded, but hold with me here. “I own three separate holding companies, LLC taxed as a partnership for my real estate.” We’d always recommend that, some oil, and mineral rights. “A second taxed as a partnership for active real estate flips.” We might have an issue with that. “S-corporation for technology consulting.” That’s good. 

“I saw Anderson videos on holding a passive brokerage account, not active trading, in an LLC for asset protection. Where do you recommend I’d place this? Would it go into one of these other LLCs or some other holding company? I would prefer to avoid an extra annual federal tax filing if possible.” Good question. 

Clint’s got his three boxes here that already are existing. If it was going to just be a passive brokerage account, we could put that in another box. We call it safe assets, it depends if we want to put it there, or we could do the trading structure that Clint just talked about. It just maybe depends on how much you have in there, but you are going to be adding some returns. 

I don’t know, Clint, how you feel, but I probably would not put it in a box to your already existing ones because we have activity in there that may be subject to the lawsuit. Do you have any feelings on that?

Clint: Yeah, so I would keep it completely separate because you’ve got this one set up for the oil, this one set up for the real estate, this one here is our active business. Putting your brokerage, your savings account into any of those entities just wouldn’t make sense to me. I like to compartmentalize things. I would create a separate Wyoming LLC right here for my trading account, my savings account. I’d move it from a personal to a protected place by placing it inside of that LLC.

The other benefit that I think people miss many times when we talk about entity structures is that we think of it in terms of today, but I like to look at it in terms of tomorrow as well. When you create these structures, they play really well into your overall state planning. 

Now, when you think about passing on assets to your beneficiaries, we don’t have to list out all the real estate in the various oil and gas interests and then worry about how our children are going to gain title to these assets when we’re no longer here. Instead, what you’re doing is you’re giving them a box. Whatever’s inside of that box they get.

If I have a box that has oil and gas interests, I just have to give them the box, and then now they own those interests. Whereas if I had those in my personal name, we would actually have to go through a process of changing all of that over into our beneficiary’s name, which could be time consuming and expensive.

By structuring your estate today to get the benefits of tax savings and asset protection, you’re also creating a better overall estate planning experience for those of you that are going to be left behind when you’re called home. If that matters to you, then set up structure. 

If you really don’t care because the kids didn’t come over and visit you enough, heck, make it a mess. Let them deal with it. Teach them a lesson. Obviously, they didn’t learn the lesson early on in life. That issue is typically caused by not enough belt when they were younger, in my opinion. As a kid, I didn’t have to use it. You just do this with the buckle and man, they would jump right in the line.

Eliot: We’ve got assault and battery too here. Okay.

Clint: I’m an attorney, that doesn’t work on me. Okay. 

Eliot: Wonderful.

Clint: I’m not bringing back bad memories for you, am I?

Eliot: Internal trauma.

Clint: You got to go in the corner right now.

Eliot: I do remember one time that my dad, the only time I ever got spanked is because I didn’t want to go shopping with my mom. You have to go to that mall. Oh, my gosh, was that terrible. That was the worst experience of ever going shopping.

Clint: You got spanked because you wouldn’t go to a mall.

Eliot: Yeah. He didn’t want to go either. I learned later on because the football game was on, and he didn’t want us making all the noise.

Clint: He wanted to get rid of you.

Eliot: Yup.

Clint: All right. We’re back to this again.

Eliot: Just a reminder. I think we hit all the questions here. I think we got some more. There we go. “I have a primary residence that I plan to rent after one year, which would be in December. If I put it into service this year, can I deduct expenses that were needed to make it ready for that rental, such as a cost seg for this year?” 

All right, so it’s your primary residence. Anything you’re doing right now to try and add, maybe bolster it up, make it look better before you place it into service, that’s just going to get added to your basis, which isn’t bad. It just means if you ever sold, you would have less taxable gain, but you don’t get a deduction right now. 

Whereas if we’ve already placed it in the services and we start, depending on what we’re doing to improve on it, if it is just an improvement, that’s still just going to go to basis, and we would depreciate it now that it’s a rental, once you’ve placed it in the service. Also, you probably have some repairs and regular expenses. Yes, then also, you could deduct those against that rental activity. 

It really becomes a question of when you are placed in the service. That’s really a foundational question that we have to ask about when we look at real estate. If it’s done before it’s placed into service, it’s still going to be considered your primary residence in this instance. 

Afterwards, after we’ve placed it into service, you got people in there, then we can go ahead. Maybe it will still go to basis to be depreciated or other costs such as repairs and things like that. You would be able to go ahead and deduct right away against operational costs.

Clint: Okay, my turn?

Eliot: Yes.

Clint: Okay. Before though, I would even consider something like this, taking your personal residence and just put it into service as a rental because you want to cost seg, remember, it’s off your basis in the property. If you bought a property for $250,000 14 years ago, and now maybe it’s valued at $700,000, you’re thinking, oh, look at all these tax deductions I’m going to get, cost seg of a $700,000 house. No, it’s based on the basis.

You’re not going to be able to take advantage of all of that increase in value for purposes of taxes. That’s why I like to do this strategy. You take your house, forget about cost seg. This is not going to work. You can’t do this and cost seg your property. What you could do, if I bought a house and I owned it for $240,000 and now that property is worth $700,000, if I take that property and I put it into service as a rental, my depreciation basis is based on $240,000.

Actually it’s less than that because you have to take land value off. Let’s say land value is at $40,000, so you got $200,000. Divide it over 27½ years, not a lot, but I’m going to show you how to triple that now. 

Rather than do it in your own name or throw it into an LLC and treat it as a rental, the savvy investor, we’ve been doing this, we create an LLC over here taxed as an S-corporation, and we actually sell your house to your own S-corp. We’ll sell it for $700,000. People say, I don’t have $700,000 to buy my house. You don’t need it. You don’t need $700,000. All you do is agree to repay yourself. Do you get along with yourself?

Eliot: Sometimes.

Clint: Okay, that spanking issue. It goes back to that, going to the mall. If your wife says you got to go to the mall, what do you do? Jump in the car right away, I know you do. 

Here’s what happens now. You sell it to the corporation, the corporation, you’re able to step up the basis to $700,000 because that’s what it bought it for. Now your depreciation is off a $700,000 tax basis versus a $200,000. We just 3x’d the amount of deductions you’re going to be bringing in every year.

If that house was renting for, let’s say you’re making $30,000 a year off of it in rental income or $20,000, it doesn’t matter. The point is this. If you divide $200,000 by 27½ versus $700,000 by 27½, there are a lot more depreciation deductions you’re going to pick up over on this side that you can use to offset that income. 

The sale to an entity, again, as I told you earlier, entities actually provide opportunities. When we set them up, it may make a lot more sense in this scenario. It depends on how long you’ve held the house is what I’m getting at. 

Eliot: I think this is by far the most requested video I get asked about that you have out there, when you sell it to your S-corporation. Clint did a video some time ago about that. We always have clients asking about that. This is just a perfect layout. You’re hearing it from the man himself. That’s a great strategy. You just can’t beat that through depreciation.

Clint: But you just can’t get the cost seg bonus depreciation off of that. The bonus, you can’t do it.

Eliot: We can do the cost seg, we can’t do the bonus. The bonus really is the heavier lift on that depreciation. Great strategy. You can’t beat that S-corporation. If you’re wanting to keep it, if you’re going to hold on to it, which it sounds like that’s what we’re doing here, excellent how that works hand in hand. 

It is, again, all about the structuring. We couldn’t do this if we didn’t have an S-corporation to sell it to. That’s why asset and private protection goes so well hand in hand with the tax if you know what you’re doing, and that’s what we’ve been doing for a long time.

Clint: You know what? I just showed you the benefit of having the step up in basis so you can offset your rental income. One thing I didn’t share with you, which is an even greater tax benefit, if you take your personal residence and you turn it into a rental, you start renting it out, and then you decide three years down the road, I’m going to sell this property, and you sell it, then what’s going to happen is you’ve now created a rental property here. It’s all going to be taxable to you, all your gain on that property. 

But when I sell it to my corporation and I increase my basis, I can elect 121 capital gain exclusion. I’ve now sold this property, $500,000 of the gain that my corporation’s paying me back is completely tax-free. Not only do I get this step up in basis, I also get to pull $500,000 back on that sale completely tax-free.

Whereas if I sold my rental here after a couple of years for $700,000, my tax basis is $240,000. Then my gain on this, which is $460,000, that’s all taxable. My gain here when I sell it for $700,000, that $460,000 gain, that’s all tax-free to me. Again, when you’re thinking through this, there are a lot of iterations that we play into putting this strategy together for people that makes a lot of sense from a tax standpoint.

Eliot: And there are little parts on it, such as if you’re doing it on installment, you want to go ahead and elect the gain up front. There are other things out there that you have to do around. I just want to say that you do want to join our asset and protection programs, et cetera, or become a platinum member, so we can learn a little bit more about your situation and walk you through those extra little steps that you want to take, to make sure it gets done right.

Clint: All right. Perfect. Moving on.

Eliot: This guy recommends using a partnership holding company for residential real estate investment. “Do I need to start a new IRS filing submission with a partnership holding company or keep it on my existing Schedule E, personal IRS filing? I have 25 investment homes, so I’d like to minimize the amount of work for this change. I’m not sure how to do this accounting change.” That’s the beauty of this structure. If he wants to, he can write out 25 little boxes down here that all lead up to just one entity, Wyoming holding. We’ll make them do all 25.

Clint: I’m just going to put that times 25 all rolling down into one Wyoming LLC right here.

Eliot: Exactly. The partnership part, one reason we like to do that is it looks better for lenders. Maybe Clint will go into that a little bit here, but it’s just one return. It is just going to be one tax return for 26 boxes that he just put up here. That’s it. That’s all we’ve had to gain is that one partnership return. With all the benefits you’re going to get from it, it’s worth it. More than likely, you set up a management corporation, but that’s something else.

As far as your Schedule E, what’s going to happen is your 1065, the partnership will file a return, 1065 return, which will give you a K-1. That still comes to your 1040 on what we call Schedule E, it’s just on Schedule E part two as opposed to page one like it has been before, but maybe you can go into about that partnership.

Clint: Okay. Where did this come about? About 18 years ago, when I was just practicing, I was young. I met this guy in California, a real estate investor. He had a lot of properties and a lot of entities set up. He’s working with the CPA. He came to the event and I structured him with a holding company because that’s all he needed. I said, we’ll put this LLC holding company in place.

This one, he already had the holding company treated as a partnership. When I sat down with him, I was trying to add value to the relationship. I said, listen, if we take your LLC that’s a partnership, we turn it into a disregarded entity, you can have all these LLCs and you don’t have to file any tax returns, so you save on that CPA filing. He said, oh, I don’t have to pay my CPA to do a return. I said, nope, it’s going to be disregarded. 

Essentially, this person who sent this question is that’s where they’re at right now. They have everything flowing down to their Schedule E page one, and that’s what I was recommending to him. Now, the CPA said, don’t do it. But the guy liked me and he said, yeah, I want to follow Clint’s advice. Let’s turn my holding company into a disregarded entity so I don’t have to file a partnership return. We did that. A few years later, he was audited.

He made it through the audit just fine, but he had to go through it. No one likes to go through an audit. I got on the phone with him and his CPA, and the CPA brought up the fact that what triggered the audit was the fact that all these properties are on his Schedule E page one, because when you have a lot of real estate and you don’t have a partnership there as a blocker entity, as I refer to it, all those properties show up on Schedule E page one. You keep having to add different Schedule Es and different schedules there, so it blows up your tax return. 

The problem with that is that when you send in a 1040 with a lot of different schedules attached to it, there are a lot of IRS agents who can only audit 1040s. When they see something they’re uncomfortable with, what are they going to do? Let’s put it over here, we’ll take a look at it, and audit that return. Whereas when you take those same properties you run through a partnership, through a 1065, you have a very small pool of IRS agents that are qualified to audit 1065s or business returns.

The likelihood of being audited is much higher when you run everything on your 1040 Schedule E page one, all your real estate versus protecting it with a 1065 partnership return. The reason why we started recommending this was out of that experience that my client had. I told him, I said, I’m sorry, I didn’t realize this was going to happen, and he was fine with it. He said, hey, it was a learning experience. He didn’t hold it against me. Thankfully, he’s still a client, but it did teach me a lot of things.

That CPA that I spoke to, he’d been doing taxes for 20-some years and he said, that was his experience. He used to work at the IRS and he said, hey, at the IRS, I knew exactly how this played out. That’s why he’d recommended it to this joint client. We’d like to do it from that standpoint, reducing your risk of audit. But more importantly, you hit on this. It makes you look better to lenders.

If you deal with conventional loans, Freddie-Fanny stuff, you’ve held real estate for less than a year-and-a-half, and you want to use it for qualifying for that next property purchase, what can happen is if when it shows up in your 1040 Schedule E page one, they have to hold back 25% of your rental income for vacancies because you don’t have enough rental history there.

Where that can be a problem for us, and I’ve run into the same problem earlier on in my investing career, is that you think you’re going into this loan. You have plenty of coverage on the income to service the debt. All of a sudden, they start taking the income away, and that margin gets compressed down. I’m like, no, you don’t qualify any longer. He said, what are you talking about? I got the income. Yeah, but we can’t count all that income because the underwriting guidelines prohibit us from doing that.

The way you trump that is you run it all through a partnership, and they’re allowed to count 100% of it. You can own a property for three months and you can count all of your income if it’s through a partnership. If you didn’t have the partnership, you couldn’t do it. There are tactical reasons to making yourself look better to lenders, reduce your risk of audit of using a holding company in Wyoming like I’ve just drawn out here, and treat it as a partnership for tax purposes

Eliot: There it is, yeah. Great strategy. Again, just one return is all we’re adding to your bucket here at the partnership. But with all that, I can think you see the value behind it. I think that’s just a far superior structure for you. You got that Wyoming LLC charging order protection. Good stuff.

Clint: Yeah.

Eliot: All right. I think this is our last question.

Clint: I’m just going to do a follow-up on that strategy. I talked about selling your personal residence drawn. How about selling it to a C-corp for a tax benefit? There is not a tax benefit in using a C-corporation for that strategy. It’s the S-corporation that provides a tax benefit because of the flow-through nature. 

You never want to trap real estate inside of a C-corporation, unless you’re flipping. Flipping out of a C-corp makes a lot of sense, but holding rental property in a C-corporation never pencils.

Eliot: That’s right. All right. “I have a relatively new corporation whose expenses exceed income,” so we’ve got losses. “Can these expenses be used to offset income in 2025? If so, how would I indicate this on this year’s tax return?”

When we have a net operating loss is what’s going on, we have more expenses than income, it’s a loss, it can carry forward into the next year. There are some limitations due to our Tax Cut and Jobs Act that we got signed in in 2017. What it says is that, let’s say we have a $100,000 loss in 2024. We go forward to 2025. We have to see what the taxable income is on that C-corporation in 2025.

Again, let’s say we have $100,000 of net income in 2025. We can only wipe away 80%—we’re limited—80% of that net gain is the most we can take. We’d have the carryover, the $100,000, wipe and weight $80,000 or 80%, and then that other $20,000 will just carry on to be used in 2026 for the same rules.

Clint: If you don’t make money in the C-corporation, we set it up for you, and it’s traditional Inc, by the way, the strategy we’re going to share here is not using an LLC to be taxed as a C-corp, but setting up a traditional Inc. This is one of the main reasons why we like to do this for our clients who desire C-corporation tax treatment is because if you choose to shut that business down, you’re eligible then for the way in which we set up our corporations for 1244 stock loss treatment.

Essentially what that means is that any losses that have not been utilized inside of that corporation, like Elliot said, let’s say that you carry that over. You only make $10,000, now you’re sitting on $90,000 losses, and you think, oh, I’m going to try this for one more year. You make another $10,000 in income, and now you have $80,000 in losses. You’re sitting, all right, just skip it. It’s not working out, you want to shut it down.

When you shut that down, if it’s set up as a traditional Inc and we have 1244 stock loss treatment, as we do, we built into it, you can take that $80,000, you and your spouse, and you can then apply it to your W-2 income that year in which you close your business down. That’s quite one of our core strategies. A lot of people that start up businesses and then they find, hey, I want to go a different direction.

Eliot: Exactly right. The government put that in for a specific reason to encourage people to put into new companies. There’s a lot of purpose behind what’s in the tax code, but it was designed to encourage investment in new businesses so that people could get that ordinary loss as long as they follow all the rules and the guidelines. 

Again, yes, it’s a great strategy. We can take that $100,000, but you’re going to want to make sure you check all the boxes. I recommend again talking to somebody for some tax planning to make sure we know what we’re doing on that.

Clint: Yeah. You go out there. There are so many CPAs and attorneys. They just pump LLCs all day long because they’re not thinking about the future, about what could possibly happen, and creating exit strategies for individuals that they’re working with. 

That’s why we’re really careful when we make a strategy recommendation, whether or not it’s an Inc versus an LLC, because we’re thinking down the road, hey, we ask you questions, how much are you going to invest in this business? What are those ongoing expenses going to be? What is your expected income looking like? Once we’ve got that number figured out, then we’ll make a determination in which business structure is probably better for you from a future financial standpoint.

Eliot: Exactly right.

Clint: What I want to talk about here is our Tax Saver Pro package. If you’re not familiar with it, what we do here at Anderson, we have this great package called Tax Saver Pro run by Eliot. If you’re one of those that’s been sitting around wondering, hey, where are these tax deductions coming from, what applies to me, what we’ve developed is a system where you’ll be working with us. What we’ll do is we’ll analyze your situation, and we’ll go through it. We have over 1500 different tax strategies that we stress test against you to find opportunities to put money back into your pocket.

We’ve saved some clients over $120,000 in taxes by running and working with them through this system to look for those opportunities, and then we push it forward. We also look at it for this year. We analyze it for future years as well. You know going forward, hey, if you just do these three simple things right here, you’re going to receive this type of savings by putting this in place. 

This is something that’s of interest to you. You’ve been sitting around going, you know what, my tax guy is just not helping me out here, and you want to find out more about what’s available in the tax code that can benefit you. If you’ve been hearing tidbits of information you’ve never heard of before like the strategies we’ve been sharing with you, then you definitely want to look at our Tax Saver Pro package.

I believe right now, we’ve got a special it’s $1995 or $1997 to join this. Guess what? If we can’t save you two times the investment, we’ll give you all your money back. You’ve got no risk in going forward. If we can’t find you the savings, we’ll give you a complete refund on the investment.

Going forward to 2025, there are a lot of opportunities out there. Working on this Tax Saver Pro will create a full tax plan for you. If you’re not using us on the tax side, take it to your tax professional and say, hey, these are the six things that I want to implement now to put money back in my pocket. If you decide you want to work with us, then we’ll give you a $500 credit again towards working with us on the tax side. It’s a great package. The average person, what do they save?

Eliot: I think we were seeing, on average, about $30,000, I believe.

Clint: $30,000, yeah. That’s a lot of money to be saving. That’s just one year. Again, think about that going forward.

Eliot: It keeps multiplying. Certainly, some of the strategies, once they start to see it, you’ll start to see clients open up. Okay, now I’m not as scared of these strategies. Actually, we probably could up that $30,000 number a little bit. 

Clint: And find more opportunities there. It’s a great program. I’d love to make you part of it and your opportunities. All you have to do is go to this link right here, aba.link/ttsaver. If you click on that link, you can see everything that’s included in the package. Again, there’s no risk for you to sign up, where you’ll be talking to Eliot or someone on his team. They’ll be gathering information from you, and then they’re going to run some full blown plans to show you where we can put money back in your pocket.

Eliot: Absolutely. Just one more reminder, we do have our non-profit workshop coming up December 12th with Karim and his staff. If you have any questions about that, do we have a link for that, Patty?

Patty: Yes.

Eliot: She’s going to put that in the chat. Again, that’s our non-profit tax workshop year end. It’s one of our big strategies. If you want to put into a non-profit, maybe we can’t get the non-profit set up between now and December 31st, but we have a way to work with that. Karim, always a genius, always looking at things. We can work with a donor-advised fund. Put money in there and get your deduction here in 2024 before the closeout.

Clint: Yeah. Again, it’s just finding the opportunities, and that’s what we do here at Anderson. If you’re not yet working with us, here’s a great opportunity to get involved. With that, we need to see a little more Toby.

Here’s a little more Toby that we have for you. If you’re not yet a subscriber to his channel, he likes me to put this up twice, three times, potentially it was in here originally. Again, it’s a great channel. Lots of strategies, videos he drops all the time.

The events. Guys, you want to take it all and show you how to put it together? Come to one of the events, check them out. If it’s not one of the in-person live events like we’re doing here in Vegas, they’re free workshops on Saturday. If you know someone who can benefit from this type of information, send them the link to our website to go there and register for it. 

We’ll show you some strategies, how to make yourself anonymous, how to protect your assets, and also to take what Eliot has been touching on in these questions here, how to take real estate, make it your friend, and really help you reduce your taxes and plan for your estate. 

There’s a lot built into that eight hours of information, plus you got the Q&A that comes from working with our attorneys and our tax professionals that are there answering questions like we have on this event.

Eliot: Absolutely.

Clint: All right.

Eliot: Thank you all.

Clint: What do we do now?

Eliot: I think we hit the happy. Just a reminder, if you have questions, submit them to taxtuesday@andersonadvisors.com. That’s where we pick from, the pool of them, and visit us at andersonadvisors.com.

Clint: All right.

Eliot: Thank you, and see you in two weeks.

Clint: Thanks guys.