Today, Anderson Advisors attorneys Barley Bowler, CPA and Eliot Thomas, Esq. discuss topics including how 401(k) funds can be borrowed up to $50,000 without tax penalties, while confirming that backdoor Roth IRA contributions made in 2024 but converted in 2025 still allow for additional 2025 contributions. Eliot and Barley discuss why S-corporations cannot deduct wellness expenses through accountable plans unless medically prescribed, and confirm the 20% Qualified Business Income deduction applies across multiple businesses. For entity structures, they recommended against holding appreciating real estate in corporations, favoring disregarded LLCs for asset protection. Regarding trading partnerships with C-corporations, these need written contracts for guaranteed payments, and confirmed short-term rental owners can switch to self-management to claim material participation benefits and accelerated depreciation through cost segregation.

Send your tax questions to taxtuesday@andersonadvisors.com.

Highlights/Topics:

• “Are there ways to withdraw funds from a 401(k), a retirement account, without moving it into an IRA?” a sponsored plan versus an individual plan? “We’re also starting a nonprofit business. And how can we avoid that 10% early withdrawal penalty?” – Take a loan from your 401(k) for up to $50,000 without tax/penalty.
• “I attempted to do a backdoor Roth IRA conversion. On December 24th, I did it at the end of the year. I’m a high-income earner, was not aware of the financial institution, and had made a temporary change. There was some hold time for the funds. We made a deposit contribution at the end of the year. The question here is, the $7000 post-tax contributed to the traditional IRA in December was not available to convert? We went over the past the end of the year to the 2025 tax year, and we’re wondering how that’s treated since the conversion was completed in 2025, but the contributed contribution occurred in 2024. Is another $7000 contribution allowed?” – Yes, you can make another $7000 contribution in 2025 for another conversion.
• “Can we use this to reimburse for gym membership, supplements, wellness plans, stuff like that?” – No, wellness plans aren’t tax-deductible unless medically prescribed.
• “My S-corporation provides financial services.” Another question. We’re talking about the qualified business income deduction, that 199A. That’s a pretty good deduction, 20%. Good chunk of deduction. “Can we take that if we have two different businesses? How does that work? What’s that look like?” – Yes, you can take the 199A deduction for both businesses simultaneously.
• “I have two LLCs holding trading accounts, so a couple of different LLCs.” We’re going to talk about our trade structure a little bit differently. We also have just what we call a safe asset holding straight. If we have a brokerage account, high-value collectibles, or something like that. “Does putting a rental property into a disregarded LLC have any tax benefits?” “Can I transfer the interest of a disregarded to a holding company or to a living trust?” – Yes, with in-kind transfers; check with a broker; generally no tax consequences.
• “I have a trading partnership.” “Do I need a contract?” We’re talking about guaranteed payments here, a very unique payment to a partner. – Yes, need a written contract detailing services between a partnership and C-corp.
• “What are the pros and cons of holding real estate investments in a disregarded LLC, C-corp versus S-corp?”- Avoid S/C-corps for appreciating property; use disregarded LLCs with management entity.
• “We’re buying our first short-term rental this year. Considering using a third-party property manager, can I manage the property next year with material participation?” – Yes, you can manage it yourself in year two and claim cost segregation benefits.

Resources:

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

Full Episode Transcript:

Eliot: All right. Welcome. Here we are at Tax Tuesday. I’m Eliot Thomas, manager of the tax advisors here at Anderson, and I’m joined by my colleague from the tax advising department.

Barley: That’s right, fellow tax advisor, Barley Bowler here, a CPA here in the state of Nevada. Welcome, everyone. Welcome from our Anderson Business Advisors headquarters here in Las Vegas. Good to be here.

Eliot: Rainbow Studio. Good to be here. Toby’s out this week, we’re helping out with that. Remember, this is our Tax Tuesday, where we take questions from you. We’re bringing the tax knowledge to the masses, as we say. We’re going to let some people…

Barley: Don’t act so excited.

Eliot: Right exactly. We’re going to let some people pile in here. In the meantime, something that Toby always likes to do, if you just want to tell us where you’re coming from, we’ll see where we got the farthest person away.

Barley: Yeah, you guys know the rules. For anyone here for their first time, shout us out in the Q&A. Let us know where you’re tuning in from. Great to have you guys back in the chat.

Eliot: Let’s move down so we can see the chat coming in and see where people are coming in from.

Barley: Use the Q& A, plus we’ll be going over your questions today. If you have questions, I think we have an option where we can submit questions in the background as well.

Eliot: Absolutely. Please, by all means, if you have questions, send them through the question and answer. We have a whole team there. We got Matthew, we got Troy, Maria, we got Jeff Stolkin, and others on there. These are all CPAs, EAs, or tax attorneys, and they’re going to answer all the questions that they can for you.

Again, it’s just a time to have fun. Answer whatever questions we got. Remember, all these questions that we’ll be going over, we’re going to go through them here in just a second. They’re all coming from you. Please, during the week, you can always email them taxtuesday@andersonadvisors.com. That’s where we pick them out. Every week we read through every question, or every two weeks we read through all the questions and pick them out for the show, and we’re going to go through those in just a moment.

If you need a more detailed response, you can always go to the Platinum Portal if you’re one of our tax clients, or maybe you have to get a tax package for a consult or something of that nature. We will answer what we can here. Sometimes if they require calculations a little bit more in depth, we probably need a different avenue to get those answered.

Barley: We’re not going to give those answers live.

Eliot: Right, exactly.

Barley: Too much pressure.

Eliot: No, we’re not doing that. Anyway, we got people coming in from Australia.

Barley: Yeah, I saw Australia. There it is.

Eliot: Yeah. I apologize, we had some mic problems, so we got the new one. Dublin, Indiana. There we go. Very nice. All right. We’re going to get started here. You want to go ahead and throw the questions here?

Barley: Yeah, let’s hop in. We got a bunch of great questions to go over today, guys. As usual, these are your questions.

Eliot: We’re just going to read through them first here.

Barley: Yeah, I want to give you an idea, guys, of what we’re going to be going over. Starting off with a couple tricky retirement questions. These are great questions. “Are there ways to withdraw funds from a 401(k), a retirement account, without moving it into an IRA?” Talking about a couple different things there, a sponsored plan versus an individual plan. “We’re also starting a non profit business. And how can we avoid that 10% early withdrawal penalty?” Great question there.

Question (2). “I attempted to do a backdoor Roth IRA conversion.” We know what that is, an after tax conversion. “On December 24th, so I did it at the end of the year. I’m a high income earner, was not aware of the financial institution, and had made a temporary change. There was some hold time for the funds. We made a deposit contribution at the end of the year. The question here is, the $7000 post tax contributed to the traditional IRA in December was not available to convert.”

We went over the past the end of the year to 2025 tax year, and we’re wondering how that’s treated since the conversion was completed in 2025, but the contributed contribution occurred in 2024. Is another $7000 contribution allowed?” It’s a great question. We’re looking at the timing of the contributions because if we want to maximize the contributions. We’ve got to know what kind of time periods we can fit them into.

Great question about using an S-corporation and accountable plan for reimbursements. If anyone hasn’t heard of that, you’re going to have a lot of fun with this one today. This is literally getting tax free cash back in our pocket. That’s actually going to be a fun one, so stick around for that one.

“Can we use this to reimburse for gym membership, supplements, wellness plans, stuff like that?” Very common question. We’re going to be going over that.

“My S-corporation provides financial services.” Another question. We’re talking about the qualified business income deduction, that 199A. That’s a pretty good deduction, 20%. Good chunk of deduction. “Can we take that if we have two different businesses? How does that work? What’s that look like?”

“I have two LLCs holding trading accounts, so a couple of different LLCs.” We’re going to talk about our trade structure a little bit differently. We also have just what we call a safe asset holding straight. If we have a brokerage account, high value collectibles, or something like that. A couple different ways we can talk about that.

“Does putting a rental property into a disregarded LLC have any tax benefits?” Definitely going to go over that. This is where we’re inevitably going to blur the lines a little bit between asset protection and tax planning. They go hand in hand. We have an order of operations, but does putting rental property into a disregarded LLC have any tax benefits? “Can I transfer the interest of a disregarded to a holding company or to a living trust?” Great questions.

“I have a trading partnership.” This is our trade structure when we’re talking about pushing a portion of the capital gains to a C-corp trading partner. This is our trade structure. Toby’s got a great video on this. “Do I need a contract?” We’re talking about guaranteed payments here, a very unique payment to a partner. “What are the pros and cons of holding real estate investments in a disregarded LLC, C-corp versus S-corp?” Classic structural questions, definitely going to be going over those.

Finally, “We’re buying our first short term rental this year. Considering using a third party property manager, can I manage the property next year with material participation?” Great question. We’re talking about a short-term rental, so we can skip that difficult real estate professional status test. Skip right to the material participation test, so definitely looking forward to going over that. Great questions. I want to just give you guys an idea of what we’re going over today.

First, you guys got to subscribe. Of course we have so much educational material between Toby and Clint’s pages, Toby focusing more on the tax planning, Clint more on the asset protection side. Of course, there’s a lot of crossover there. Great videos on there and a lot of them. Toby’s up to almost a thousand videos there. Full speed ahead to that mile marker and captains of industry. He just did a recent one, a total twist for Toby talking about different nonprofit, religious oriented investments. Very interesting. We have a workshop coming up. Tell us about the live events here, Eliot.

Eliot: Yeah, we got the tax and asset workshop coming up here. Saturday is going to be an online one. That’s March 1st and March 8th, and then we have the live one down in Dallas, March 27th through the 29th. That’s just a great event. You can get down there and meet with other clients that we have, prospective clients. A lot of good networking, a lot of good ideas flow back and forth, get to learn a lot.

I always recommend at least going to one of these every year, just so you can keep up and make sure nothing’s changed, because a lot does change in the tax code and asset protection. If nothing changed, then you know you’re good, but still it’s just a great networking, a lot of fun, and they do it at lowest dollar possible. It’s not there to make money or anything like that. The live event again, Dallas is March 27th to the 29th, but we do have the online on March 1st and March 8th.

Barley: Nice. There’s a lot of events coming up. We’re going to touch on that in a little bit here too, guys, give you more information on that. All right, everybody ready to hop in? Let’s put the tax sets on and hop right in. We had some issue with the camera. Yeah, we’re good on video on this end, guys. See if you want to log back off, log back in. Sometimes that helps if you need help with the video portion.

All right, guys, “Are there any ways to withdraw funds from a 401(k)?” What’s a 401(k)? That’s a sponsored qualified retirement plan, not an IRA, not a Roth IRA. They can have those component similar components. “How do we withdraw funds from a 401(k) without moving it into an IRA?”A tricky question there because we maybe wouldn’t even want to do that from the first place, but then for starting a non profit business without incurring the penalty, what kind of guidance we want to get there?

Eliot: Your 401(k), as Barley points out, that’s going to be sponsored by a business. It’s usually a business that you work at. It could be your standard job, your W-2 job, you have one at work or something like that. But then as an individual, you can also have the IRA. That’s something that you, again, as an individual, unrelated to your work, you put into it. You do have to have earned income, but nonetheless, you can contribute to that, and it’s a little bit of a different plan. It has different limits, far less limits of contribution, et cetera.

One thing they all have in common, if you take out money too early, you’re going to get hit with a penalty, typically the 10% IRS penalty that’s being referred to here. In the bigger sense, here, what we got going on, if we have these 401(k)s or any way that we can move that money around, maybe into an IRA or something like that, we’re not going to run into that 10% penalty by the IRS, quick answer is no. Even if you moved it into the IRA, if your 401(k) allowed it, it’s still going to be incurring the 10% penalty if you ever took those funds out.

Something unique that we have with the 401(k), many of them have the option to take a loan out. If we take a loan, what we got going on there? Is that going to be taxable?

Barley: The nice part about it, we hear Toby say this all the time, was it borrow, buy, die?  When we take a loan, that’s not income. It’s not income, so we can borrow against the plan. We don’t have to report that for tax purposes. There’s no income.

Eliot: Exactly right. Typically, the 401(k), it’s going to have, of course, the limit because we can’t do too much of the lending or anything like that out of there, taking a loan. It’s going to be the maximum of 50% of the best amount or $50,000, 50 being whichever is less. We do have that kind of a limit, but in this case, if the 401(k), if the company that sponsored this allows for the loan, then this individual could just take a loan out up to about five years, 60 months, and then just slowly pay that back but take the funds, go ahead and start their non profit. Absent that, I’m not aware of any way we could get money out of here without that penalty.

Barley: Yeah. In a 401(k) plan, you might not want to move it into an IRA anyway.

Eliot: That’s a good point. If it was a 401(k) at their regular job, usually those are quite famous for not being very useful as far as investing. They’re not as broad in what you can get into. Another thought here might be if they have another gig, a side gig business, or something like that that could sponsor a plan, maybe they want to set up their own solo 401(k). We said allow those up. You could move that over there perhaps. Again, it always depends on the rules of the 401(k). Maybe they won’t allow you to do it, but you can always check before you set it up. If you moved it in there again, you’d still have the ability to lend, but you might have more flexibility in your investments.

Barley: Yeah, and this is going to be a big deal for our W-2 employees transitioning to managing and running your own enterprise. You’re going to pull that 401(k) and now create your own corporate sponsored plan. That’s going to be massive benefits. Solo 401(k). A lot of our clients use that. There are restrictions with other employees, but the majority of our clients are closely held, family held corporations. That’s going to be nothing but benefit there.

Ten percent, that’s 59½, I think, for the penalty. That’s generally easily avoidable. There are some exceptions there for some medical, home purchase, or stuff like that. Let us know if you have any questions there. If you have a specific question on that, shoot the platinum portal, let us know maybe what you’re thinking of doing with the funds. They said for starting a nonprofit business.

We actually have an excellent nonprofit team here. Kareem, Savannah, they are in the platinum knowledge room every Thursday from 10:00-11:00 AM Pacific for open nonprofit office hour. Kareem has worked with the IRS for at least 10 years, a long time, and very valuable resource. Please join us there. That’s the Platinum Knowledge Room 10:00-11:00 AM Pacific every Thursday for the non profit open office hour. All right, keep it moving?

Eliot: Yup. Another retirement question.

Barley: Yeah, another retirement. It’s a good one. “I attempted to do a backdoor Roth IRA conversion.” I know that’s a mouthful, but we’re just moving funds from a traditional IRA to a Roth IRA. “Attempted to do a backdoor Roth IRA conversion in December 2024 due to being a high income earner. I was not aware that the financial institution made a temporary change in the hold time of funds for the month of December. The $7000 post tax money contributed to the traditional IRA in December 2024 was not available to convert to the Roth IRA until January 2025. Since the conversion was completed in 2025, but the contribution occurred in 2024, is another $7000 contribution allowed for 2025 to complete another Roth conversion?” The short answer is absolutely yes. This is a great question because we’re talking about these contribution limits and timing. Where do you want to start with this one, Eliot?

Eliot: Again, what we got going on here, we want to move money into a Roth because it grows tax free, but our individual here has a traditional IRA that they put some money into. Normally one gets a deduction when they put it in there. But if you make too much, which we have here, a high income earner, then you’re not allowed to put into that traditional IRA. and get a deduction. What you have to do is take money that’s already been taxed, called after tax dollars, and you can put that in as your contribution to your annual IRA limit, which is approximately $7000. It’s also known as post tax money, as it’s described here.

This individual puts the $7000 after tax into a traditional IRA. As it grows in there, if they left it in there for 30 years, it would reinvest itself and grow and grow. Those earnings would be taxable later on when you took it out. They don’t want that. They want to get into a Roth, where it will grow tax free.

The IRS even has on their website how to do this. You can go ahead and take that amount and convert it into a Roth. You can change an unlimited amount of dollars into a Roth for a conversion because the IRS gets to tax it right away. They’re not scared of you doing that, you can’t move too much. The $7000 is only a limitation to the entry door of getting into the traditional. Again, this was with after tax money. It’s already been taxed.

This individual wanted to move it over into the Roth before the year end of December. It didn’t happen. It got held up, but they had made the contribution. That’s the important part here. They made the contribution into the traditional before the end of the year. We get into January, and that’s where they are able to roll it over. But as we just said, there’s no limit. We can convert all kinds of cash into our Roth.

The question is because it got delayed and pushed over into 2025 until this whole event was done, can I still make a contribution in 2025 for yet another one? Yes, you can because your contribution was in 2024 in this instance here, so you’re allowed to make another one in 2025. The fact that it didn’t get rolled over shouldn’t impact that at all. There you have it.

Barley: Two, you got your contribution limit, and then you have whatever amount you can convert to a Roth. As Eliot pointed out, if you have $100,000 in the traditional IRA, you can convert the whole thing if you want. That’s a taxable event, so we got to be careful with that.

Eliot: Yeah, you may not want to, but you can’t.

Barley: Right. Doing it in chunks maybe is a good tax planning, but that contribution limits going to be the same no matter what. Charlie, just to let you know, Thursday from 10:00-11:00 AM Pacific. That’s the nonprofit open office hour in the Platinum Knowledge Room.

Eliot: There’s people in there.

Barley: Yeah, the whole team’s in there. Thanks, Patty. You got to be a Platinum client. That’s a good reason to become a Platinum client.

Eliot: Yeah they’re the best reasons right there.

Barley: It really is. Let me just pitch that real quick. Five days a week, five hours a day, Staffed by a CPA, an attorney, A tax preparer, a bookkeeper, the non profit team. Every day. I don’t know of another firm that’s offering anything like that. Are they in there right now? No, they’re not in there. They’re gone for the day, but they’ll be back tomorrow. A whole team in there.

Eliot: It’s usually multiple CPAs, multiple attorneys, multiple bookkeeping, et cetera. Yeah, quite a staff there. It’s better than waiting around for trying to get an appointment in another firm.

Barley: Absolutely. It’s a great resource. All right, now we get into it. By the way, we have a team of financial advisors here. They just have so much experience, and I’ve rely on them heavily for all the retirement stuff. They just have so much experience in that stuff. Now we’re getting into a little more of my debits and credits tax wheelhouse here.

“I have an S-corporation. Can I use an accountable plan?” We all know what that is, accountable plan for reimbursements. We’ve been drilling that one, as I said. “Can I use an accountable plan to pay for things like gym membership, ding, ding, buzzword, Sauna membership, we could throw supplements and stuff like that in there? Very common question. Other wellness therapies? To support my employees being and health. To clarify, these are not medical expenses. Ding, ding. That’s the key there.

Medical deductions are treated totally different when we have a wellness plan. It’s just a common misconception. We can’t take it as a tax deduction. That’s the bottom line. The IRS doesn’t allow it as a tax deduction. Might there be some situations where you’d offer it to your employees, they get some benefit, and pay a little extra tax to get those benefits. They might appreciate that and that might help your business. That may very well be a good scenario that’s doable for you. Bottom line, we don’t get a tax deduction for wellness plans, anything that’s not prescribed by a doctor, essentially.

Eliot: Yeah. Again, everyone has a different definition of wellness, if you look this up. If it was actually having to do with a medical condition, then maybe. Rightly so, our question here clarifies that they’re not medical expenses, so we know that’s not the case here. You’re just looking basically a day at the sauna kind of wellness or something. That’s not going to count.

Again, we always talk about it, but the accountable plan, that’s something that is for employees. Here at Anderson, we typically run with an S-corporation or C-corporation because our client owners are going to be employees of those. All it is is a fancy term from the IRS. It means reimbursement, and you’re just getting reimbursed for things. In this case, an S-corporation. It might be for a home office or something like that, but we’re asking about a wellness plan. That’s not going to be one that we can throw in there.

Barley: Great question. Not medical expenses. Yup, great question. Very common. “My S-corporation provides financial services, including invoicing, payroll, and financial analysis for clients. Can I take advantage of qualified business income deduction under section 199A, the QBIT deduction? Also, I have another business as a health insurance gig, sole proprietor, while I’m getting the other business built up. Can I take 199A from that business also? Can I take the 199A deduction for both the S-corporation and the sole proprietor at the same time?” What say you, sir?

Eliot: First of all, our QBIT or Qualified Business Income Deduction is just a part of the Tax Cut and  Jobs Act from back in 2017.  In its simplest form, it just says you get a 20% haircut or 20% deduction against your taxable income right away off the top from your business. It’s not eligible for a C-corporation. C-corporations got the flat tax at 21%. This was meant to level the playing field for all other businesses, your partnerships, S-corporation, sole proprietorships. They can all take advantage of it.

What do we have going on here? We have an S-corporation. Yes, they provide services. There are specific situations with what we call specialized trader businesses, where we might have some phasing out of that deduction. Absent that, here in the S-corporation, it’s certainly qualified for the 199A. It can take a deduction up to 20% maximum. Then we have another business, which is a sole proprietor that we’re starting here. Again, that too is not a C-corporation. It’s a for profit business. They can take advantage of it as well.

Yes, you can have multiple businesses taking advantage of this, and then eventually it just all adds up on one line on your return front page.

Barley: Yeah. Exactly, it’s a tax software like an election. You’re just going to tell the tax software, this business qualifies for that qualified business income deduction, and then it carries right up to your adjusted gross income right below your standard deduction. Get that nice big qualified business income deduction. There are some carry forward elements with that. Same with everything else, guys. If this applies to you and you have questions, please let us know. We could go into way more detail on this. This is a really fun calculation. We could do adjusted basis and all this stuff.

Eliot: W-2s.

Barley: Yeah. By the way, on a more serious note, if you have rental real estate, this may apply to you as well if you’re managing your real estate. It’s not just for traditional businesses.

Eliot: It can get quite complex real easy, but simplified version of it, 20% off, and yes, multiple businesses can take advantage of it.

Barley: Yup, absolutely. Great question. “I have two LLCs and each has a trading account. I find many times I’m doing the same trades in each account. For whatever reason, we have two brokerage accounts in there and two separate LLCs. My question is, can I close the one LLC and transfer the trading account to the other LLC that I want to keep? It’s a great question. We deal with this a lot when we talk about setting up our trade structure for trading.

Eliot: We talk a lot about what an LLC means. What do we got going on there?

Barley: If I can, will there be any tax consequences? That’s going to be followed up by a question from us to you. How is the LLC taxed as disregarded, an S-corp, a C-corp, partnership. We need to elect how the LLC is taxed. That aside, assuming these are disregarded LLCs to you, that’ll be treated one way. If we’re trying to combine accounts into a partnership into what we call a trade structure, setting up a partnership with a C-corporation, that’ll be treated a little bit different going into a partnership or disregarded LLC.

Bottom line, can I transfer the account and keep the LLC you want to keep? Yes, you’ll want to look at the tax consequences. How much detail can we go into that without knowing?

Eliot: Assuming that this is an LLC that’s not a corporation, that is an S or a C, it simplifies our question a lot. You can take any LLC brokerage account, shut it down, move it over, or transfer it while it’s live, if you will.  There, we have a phrase for it. It’s called in-kind. You’ll have to check with your broker to see if they allow in-kind transfers.

We have brokerage number one under an LLC that’s a sole proprietorship, let’s say, and we want to move it into our other LLC that maybe is a partnership. Yeah, you can, as long as Schwab, Fidelity, or whomever says, yeah, you can do in-kind transfers. It will take all your positions that you already have in there for this investment, that investment. Just basically transplant them over here, we don’t have a problem. We’re good to go on that.

Again, if it’s a corporation or an S-corporation, we might have different considerations because we can’t just take things out of an S-corporation or C-corporation without tax consequences. We’d have to look at that. That’s more of a consultation we’d have to sit down to look at. Absent that though, and even putting into a trading partnership that we were talking about, where we have a C-corp that’s a partner and maybe the individual. We do that a lot to get some tax benefits.

We can shift some money over to the C-corp, get some reimbursements, and things like that. That accountable plan that we talked about a little while ago, all that can be done. Now, if you shut down your trading partnership in LLC1, that’s maybe just disregard, owned by you, safe assets LLC, and you put it into one of these partnerships, one thing we have to be aware of is when we move it over here and put it in here, we already had basis. We already had an investment going on.

Let’s say we bought IBM at $10 a long time ago. Now it’s worth who knows what, a couple hundred bucks or whatever. You have to track that when you moved into the partnership, so when later if the partnership ever sells, you have to have that gain that occurred. Up to that point, we moved it in. It has to shift back to the original taxpayer. That’s one thing that you’ll have to be careful with your records just so you’re aware of that. Other than that, there’s typically no tax consequence. Again, if you can do that in-kind transfer, check with your brokerage account group. Normally, we wouldn’t have any tax consequence.

Barley: Excellent. Check out the trade structure. You didn’t mention it, but that may be something. The client didn’t mention that there, but that may be something that’s of value to you. That may be what you’re looking for there.

Eliot: Absolutely.

Barley: “Does putting a rental property into a disregarded LLC have any tax benefits? Can I transfer the interest of a disregarded real estate investment holding LLC to a living trust without tax consequences?” Great question. Actually, neither of these things have tax consequences, generally speaking, but let’s break it down.

We have a rental property. I’ve purchased an asset. Usually it’s easier to get financing in your own name. If you’ve just set up an LLC, there’s no lending history or credit or anything. I may have purchased a rental property in my name, and then we assigned the interest to a disregarded LLC. Any tax repercussions there?

Eliot: Typically not.

Barley: Any tax benefits? The same question, but no tax downsides. Any upside to that?

Eliot: Typically not.

Barley: Not really. All we’re doing is creating liability protection. All we’re doing is limiting the amount of liability that we incur from this business asset. What we’re not doing is creating a separate taxpayer, the need for a separate tax filing. There’s no 1065, 1120, or nothing to file with the disregarded LLC. Why? Because it’s disregarded to the owner and reports on the tax return of the owner. No separate tax return required.

Eliot: When we do this though, remember, this is more of an asset protection tool getting it in there because if we don’t have our asset protection, all the best tax plan in the world isn’t going to help a whole lot because if you get sued, you don’t have that asset protection. There’s nothing to plan for. It’s important that you do have these LLCs and not always think of it from a tax perspective.

There’s a broader course of thought about this. In this case, no tax benefit, but no tax harm either by putting it typically into a disregarded. The only thing I could think of is at the state level, you might have a transfer tax in some states. Pennsylvania is a little rough on that, but other than that, you should be okay. Then certainly moving that LLC, having it disregarded into the living trust, no tax consequence there either. Once you start getting these building blocks, you may in time want to set up a management C-corporation. That could certainly play into it. All of a sudden, we might have some tax considerations, but that’s a little bit deep and outside of this question.

Barley: Yeah, living trust, that’s typically going to be a non taxable event. On the event of your passing, that living trust will just assume ownership of everything that it has been assigned to it, ideally everything. All of your assets will just immediately be owned by that trust. This isn’t my wheelhouse, but this is how we avoid probate. We don’t want our stuff chopped up on the courthouse steps. We want our living trust to detail explicitly how that’s handled. We don’t want the state involved in this. I might be biased a little bit.

All right, good work on that one. Yeah, living trust is, again, go to Toby’s YouTube channel there. There’s tons of references on there. That might be one of the more important things overall.

Eliot: Definitely. What’s the point of having anything if you don’t know how to leave it?

Barley: Yeah, the four legged stool, asset protection, tax planning, legacy and wealth building. That’s what that living trust is all about, and then business operations. We’re running a small business generating income. Excellent. Hey, what’s this?

Eliot: More about the workshop. Again, we have the online event March 1st and March 8th on the Saturdays there. The big one, the in-person live one down in Dallas, March 27th through 29th. Again, just a great opportunity to learn and meet other investors, like-minded. Same questions. Many of them have been through the same things and same concerns that you may have if you’re a new investor. It’s a great networking opportunity, get to have a lot of fun, meet everybody. We love seeing the clients there. It’s a really great event. I highly encourage it.

Barley: Yeah, good time, good synergy. All right, what else? Trading partnership. We mentioned this briefly, our trade structure. The question, “I have a trading partnership with the C-corp owning 15%, me, 85%.” First of all, what’s that? That’s a split. We’ll do a K1 split for the two partners, one being the C-corp, you as an individual being partner number two.  That can range anywhere from 1% maybe all the way up to 20%, and that could be on the high end. That’s going to definitely be a little bit of tax planning involved in making that decision.

Just FYI, that’s what we’re looking at there. The question is, “I want to have monthly guaranteed payments to the C-corporation.” Very specific animal we’re talking about here. Guaranteed payments to partner. This happens in a partnership. It’s a payment to the C-corporation as the other partner. “Do I need a contract between the partnership and the C-corporation?” We certainly want some  documentation there. Contract, yeah, we can call that a consulting agreement and a service agreement. We would want some documentation there. Do we have any explicit guidance on that?

Eliot: Yeah. We want to remember what’s really going on here. You’re paying your C-corporation, or what we’re doing is we’re paying a partner. Just so happens it’s your C-corporation.  Nobody works for free. I’m not going to do anything unless I’m paid to do it, and I have to have a written agreement to do so. There needs to be something in writing what that job is. Our C-corporation can be managing oversight and making sure the tax returns get done for that partnership, making sure that the brokerage accounts kept up to par, this, that, or the other.

Whatever these services are, handling the bookkeeping, whatever it be, it’s going to earn a fee for that. It’s got to be reasonable, but we pay a certain amount for that. We call it a guaranteed payment. That’s a unique phrase only for partnerships. We don’t deal with that when we’re dealing with other structures that we do, just so you’re in the partnership, but yeah, we want to have a written agreement because we want to know what those services are that are being provided. We use that, and then we go out and determine what the basis for that price is or the guaranteed payment. What is the reasonable value of the services being provided? We want that all written out there.

We often talk about having a guaranteed payment maybe every quarter or at the end of the year, but there’s nothing that says you can’t pay it every month. That’s certainly fine. It’s just that you want it written, it’s steady, and it’s consistent for the services being provided.

Barley: This can be a huge benefit too, guys. I’m looking at you, Marvin, Sam, Russell, Nicoletta. You guys have these trade structures. When you start really building out capital gains in the trade structure, you’re going to shift a portion of that income off your tax return, take advantage of all these reimbursements.

What happens if you really get some good income going? We’re going to take a lot of these reimbursements. You might have a lot of income left in that C-corp. That’s why we make this guaranteed payment because now the C-corp has this thing called earned income. Now, you can go and W-2 payroll on that C-corporation. Take a W-2, set up a solo 401(k), all the usual suspects there for maxing out retirement contributions. Can’t do that typically if we just have trading portfolio income. Am I on the right track there?

Eliot: We could. At the C-corp, really what’s happening from a tax perspective is, I always use the example, let’s say you had $100 of gain in stocks and we didn’t have this structure, all $100 hits your return. In this case, we have 15% owned by a C-corp. Automatically, 15% of your gains are going to go in there, and you can distribute out that capital gain to it. That is earned income to the C-corp. It shows up on its return, it’s got to pay tax on that.

You could take that and go ahead and probably pay yourself, but the guaranteed payment allows you get more in there. If your C-corp, if you know it’s appetite for the 280A, having the meetings in your home up to 14 a year, the accountable plan, that medical reimbursement plan, we have that on the C-corporation, all those things exceed that 15% amount that you have coming into C-corporation. We might need a little bit more good time for a guaranteed payment to get a little bit more.

What happens with the guaranteed payment? That is actually a partnership expense, which means that, again, let’s say the guaranteed payment was $10, 15% of that would go as a deduction to the C-corp, $8.50 would be a deduction on your 1040. That’s a deduction against ordinary income, so we can get more deduction on our personal return for that guarantee payment as well, get more money into the C-corporation, more to get reimbursed to us. It’s just a win-win, but it takes careful calculation and takes good planning.

Barley: I know that’s a little confusing, guys, just inherently. The whole idea is, how much can we reimburse tax free out of the corporation into our pocket? Start there and reverse engineer the whole process.

Eliot: Absolutely. Yes, we need a contract.

Barley: Right. Yes, we need a contract. Here’s a good one we can just pick apart from a bunch of different angles. What are the pros and cons of holding real estate investments in a disregarded LLC or an S or C-corp? We may as well throw a partnership in there too. This just go through the whole gamut. By the way, you can have an LLC taxed as a C-corporation, taxed as an S-corp. You can have a true C-corp. Any questions on that, please let us know.

Let’s look at the different pros and cons and different options of how we can hold real estate. Right off the bat, we usually advise against holding appreciating property, appreciating real estate in an S or C-corporation, generally speaking. It’s because if we want to take that property out of the corporation at any point in time, it’s treated as a sale. We’ll owe tax on that if it’s a sale.

There are ways to avoid that, but that can just be a nasty surprise and just want to get that up in the front of the room there. Before you put your property in a corporation, we just want you to know about these repercussions. S or C-corp, we generally recommend against that. Now, good uses for managing properties, a lot of good potential for managing there. Let’s just start with our traditional structure, right?

Eliot: Yeah. Again, it depends with what we’re doing with our investments. If it’s a long term hold, we put it in into a disregard entity, but it’s going to be one that hits our personal return. It can go through a Wyoming holding. That could be a partnership or disregarded to your 1040. Either way, all that rental income hits your personal return. That’s where we’re going to use the disregarded entity in that case.

What if we’re flipping property? If we have a whole different purpose, it’s not a rental or anything like that. Now, when we flip, that’s ordinary income subject to employment tax. If you do a lot of flipping, you might get hit with what’s called dealer status. That means that if you did a lot of it and then just out of nowhere picked up a rental property that you decided to unload because you didn’t want to keep it, they may hit with ordinary tax rates and subject to employment tax again, because the IRS has labeled you a dealer. You’re used to it. You’re used to seeing that activity on your return, and they don’t know if it’s inventory or not.

We can do the flipping in a C or an S-corporation, whereas the long term rentals we would put to the disregarded entity. Just as you pointed out, though, if we had the long term rental in that disregarded, we can use a C or S-corporation to manage. That can help shift some income over, giving you a deduction on your personal return against that rental income.

Barley: Very similar to the trade structure.

Eliot: Absolutely. Same concept, exactly. We’re just getting more money in our C-corporation. Why? Because we got all those reimbursements. What are the big three on a C-corp?

Barley: Medical reimbursements, accountable plan, 280A.

Eliot: Exactly. Accountable plan, underneath that, we’re going to have that administrative office, mileage reimbursement because if we got the office in our house, anytime we drive out of there, reimbursable mileage, so lots of benefits there. S-corporation, we’re not going to have the medical, but we’re going to have the other two. We’re going to have the accountable plan. We’re going to have the 280A.

Again, reasons that we want to structure the way we do. There’s a lot behind it. We certainly want the asset protection. We can shift money around with all these things, but we never want to put that appreciable real estate into an S or C-corporation. Also, as you pointed out, in case you ever try and get rid of it or get it taken out, we have a problem there. But if we ever pass away, our heirs receive stepped up basis only in the shares. The S-corporation, let’s say, has stock and has shares, if the value of those shares is a million dollars, which will be judged by the assets in there, say the house went up to a million dollars, they’ll get a million dollar step up basis in those shares.

Barley: We’re going to sell the shares too.

Eliot: Right, exactly. But the property itself, you had this house as rental in there for 27½ years. You fully depreciated it. You bought it a long time ago at $270,000 or something like that. It’s dropped down to no basis or very little basis. Now, when those who inherit pick up the C-corporation, what are they going to depreciate?

Barley: The whole thing.

Eliot: Nothing.

Barley: Nothing. Yeah, the opposite.

Eliot: Without the stepped up basis. Yeah, there’ll be nothing there that they can go ahead and depreciate. That’s the pros and cons of how we do this. It depends on what you’re doing. (1) Is it a long term hold? (2) Are we flipping? They all have their right place in the toolbox. We pull them out and use them in the right capacity.

Barley: Right. Just to break these out again with the standard Anderson structure, we’d have a rental property held in an LLC in whatever state the rental is located. That can be disregarded. That’s where your disregarded LLC would be holding a rental. Disregarded to a Wyoming holding company, that can also be a disregarded LLC or a partnership. Then we use an S or C-corp for management purposes. Just like Eliot said, we can set up the C-corp for flip properties, set up disregarded LLCs disregarded to the C-corporation for flip properties. I know it’s a lot of information, guys, but you’ve all heard this. Hopefully it’s review for the most part.

All these different entities, this is where your wealth planning blueprint is. Guys, this is where we achieve the small miracle of having your attorney and your accountant stay on the same page, literally and figuratively. This great document called Your Wealth Planning Blueprint is where we can look at tax asset protection and all of the above, legacy planning. For our platinum clients, you know what a valuable thing that is, I hope. Being able to see all our entities, retirement plans, all of the above all in one place. Very beneficial. Absolutely.

All right. What else we got? “Buying our first short term rental this year.” Congratulations.  “We’re considering using a third party property manager to manage it in year one. Can I manage that same property next year with material participation and get the tax deductions with the cost segregation and bonus depreciation?” I love this question. Somebody’s thinking.

Eliot: Quick answer, yes.

Barley: Yeah, absolutely.

Eliot: Yeah. What do we got? Again, short term rental, what’s our short term rental?

Barley: Average stay is seven days or less typically is how we’re going to define that.

Eliot: Yup, exactly. Usually it’s your Airbnb, very quick turnover and the stay, and all that. It has a little bit different presentation of what happens on the return and things like that, but we’re using another manager. Remember, in any business, we have to look to that code section 469, Passive Activity Loss Rules. This is just another business, a short term rental. If you pay someone else to do the job, then typically the results, the gain, the loss, whatever, the income, the losses, they’re going to be passive. What happens with passive losses, et cetera?

Barley: Limited to how much passive income you have. If there’s leftover losses, they can be carried forward, they’re not lost forever. You guys know, we have these silos of income, capital gains, capital losses, ordinary gains, ordinary losses, then we have passive income, passive losses. Bottom line, the losses can only offset the gains in each category, roughly speaking, generally speaking.

Eliot: We got this new house. We’ll get down to the rest of the question here. We’re going to do a cost seg and bonus. That means we’re going to speed up how much deduction we can take potentially quite a bit. That’s typically going to cause a loss. Right now, when we’re paying someone else to do the job, third party property manager, the resultant is going to be passive loss.

There’s nothing inherently wrong with that. They don’t go anywhere if you can’t use them, but you can only use them against other passive income. If we don’t use them against that, they’re just suspended there, they wait and wait until you either sell the property or you have another form of passive income. What we’re asking here is that first year, what if I have someone else do the job, and then the second year I take it over and I am managing it, learned a little bit about it, studied up how to be a property manager for a short term rental, can we materially participate? What is material participation?

Barley: Right. Yeah, absolutely. You can material participate. Remember, we’re talking about short term rental here, so we don’t have to hit that 750 plus hour test, the real estate professional status test. Only looking at the material participation, that’s the most common. If you put 500 hours in the activity, you’re usually good to go. You are designated a material participant. There could be more than one, but if you put 500 hours in, you’re the one.

You can also achieve that same status, pass that same test by achieving a hundred hours and more than anyone else. This is where the property manager comes in. If the property manager only worked 90 hours and you worked 120 hours, then you’re the material participation, then you are the material participant. Yes, this does require you tracking the time of the property manager that you got to guesstimate. The cleaners and the property manager, you got to track their time to weigh that calculation of who is the participant.

Eliot: If you do have another property manager, though, you’re going to have a tough climb trying to get up that hill. You want to be really the manager yourself, but you can certainly have other parties come in and do the cleaning. I mentioned any other work we’re on, but you do need to track their hours to show that you put in more time than they did. That’s usually another one that’s testable for a hundred hours more than anybody else.

There are seven different tests for material participation, but really we only focus on two for this particular situation. Back to it, we had a third party property manager the first year, so it’s all passive activity. Now we’re in year two. We want to do a bonus depreciation, cost seg, and we’re going to manage it ourself. Can we do that? If we do, are we going to get any benefit from it?

Barley: Right, absolutely. The cost segregation study, great question there, we’re going to look at when the asset was placed into service. That’s going to determine what bonus depreciation percentage we use, 60% down to 40%, down to 20% next year. That’ll be one of the first things we look at.

This is totally doable. Sometimes people will say, hey, I want a material to participate, get that big deduction, then I’m out, I’m going to have somebody else rent it. We can do it the opposite way, that’s fine. Have a property manager manage it the first year, you have some income loss, whatever the case, passive income or passive loss.

In year two, when you are the material participant, that’s when we do the cost seg study. If you pass that test, any large depreciation losses from the cost segregation study, if they’re considered active, they will offset your other W-2 income, your other active income. That’s the holy grail of tax planning. How do we touch this already taxed income, our ordinary income? It’s usually very difficult to touch unless we have active business losses, which is what this would create.

Eliot: What’s our cost seg? Why do we care?

Barley: We have a property with a roof on it and a cement pad underneath. Essentially, that’s our 27½ year property, that’s our 39-year property, residential versus commercial. But there’s a bunch of other stuff besides four walls, a pad and a roof. There’s windows, fixtures, flooring, carpet, landscaping, and all these other elements. We can break those out, apply the proper life to those assets, and what this will inherently do is speed up the depreciation process.

Eliot: We take carpet. It’s always a good example. It’s five-year property on its own. In that house, before we do a cost seg, it could be 39. In this case, we’re talking short term. That means commercial. It’s going to be 39 years to depreciate that five-year carpet.

We do the cost segregation, break it into its different components of life’s depreciation lives, one would be in five years. Instead of being deducted over 39, now it’s five, so you’re speeding up a whole lot of depreciation. That means you’re going to have a lot larger depreciation deduction, more than likely incurring a loss. We’re managing it this year, so probably it’s going to be an ordinary loss, and that ordinary loss will offset any other return. That’s the real play here.

The bonus depreciation is we can latch on to the cost seg. It just says that if it’s any of the five-year, 10-year, anything under 20 years, you can immediately speed that up even further. Right now in this year, we’re at 40% here in 2025. Next year, it’s supposed to go down to 20%. There may be changes in tax code. We’ll have to wait and see.

Barley: Fingers crossed.

Eliot: Yeah. If this year was the first year and we wait to manage in 2026,  we’re still going to come back and look to the year that we place it in the service, which was 2025, so we would use 40% bonus depreciation, not 20% bonus appreciation, even though we’re materially participating in 2026. We can flip back to the year that we purchased and place it in the service, take advantage of that, and get a really nice deduction typically.

Barley: Yeah, that’s a fun one. That goes over a lot of different aspects there. Accelerated depreciation, bonus depreciation, those are confusing terms. Essentially, accelerated, it just speeds up the process. Bonus, that 168(k), is the extra we can take on top.

Eliot: Yup. Very good plan here if you want to take advantage of it, get next year, and get that material participation. I think we pretty much beat this one up.

Barley: Yeah, no kidding. Should we see if there’s any questions to go over or hit anything?

Eliot: We got a question here. Is it QBI for owners of sole proprietorships, partnerships, and S-corps? That is correct.

Barley: Fortunately, Eliot and I have Rachel, Jared, Dutch, all in the background answering the questions. Jeff’s in here, Troy’s in here. We have an outstanding team. I would rely on them heavily. You’re getting good measured information there from your advisors.

Eliot: About 120 questions.

Barley: Right, that’s great.

Eliot: Yeah, only six left. I think that was it for our questions.

Barley: Yeah, that’s it for our questions. Make sure you check out the videos. Everything we talked about from the trade structure to the difference between a sole proprietor and an S-corp, the taxation differences, using an accountable plan, I’ve sent that to hundreds of you guys. Maximally how to use that accountable plan. You hear people say, hey, my business pays me back for my cell phone and internet, meals, miles, travel, home office. How does that work? This is exactly how that works. That accountable plan video from Toby’s an excellent resource. Check out the YouTube pages and definitely join us for the live events. Really looking forward to these.

Eliot: Absolutely.

Barley: Any questions that we didn’t get to answer, guys, taxtuesdays@andersonadvisors.com. Email us your questions. That’s where we pick the questions from. Any other questions that we don’t get to here today in the chat, we’ll try to get to all these. If we have any left over we can’t get to, please submit those to the Platinum Portal, and we’ll get you an answer as soon as we can.

Eliot: There we have it.

Barley: Yeah. Do we want to go over any of these or should we let the team handle these?

Eliot: I think there’s only six, let’s let them handle it.

Barley: All right. Trading structure on the side, material participation. Great questions. We’ve got Ross in the chat too, we’ve got the whole team here. Eliot and I are just going to kick back and let the questions get answered here.

Eliot: We’ve got Ross, we’ve got everyone. I think that’s pretty much it.

Barley: Just to remind everybody, every day, five days a week from 11:00 to noon Pacific time is the tax open office hour. We’re in there every day answering your tax questions. It usually gets taken up by all your great questions, but we can always go over topics of discussion. You want to talk estimated taxes, depreciation again, guys, five days a week, five hours a day, lean on that service. We’re all in there just waiting to answer your questions. Come on in.

All right, we’re going to get your questions answered. Thanks so much everybody. Any questions that don’t get answered, submit it to the Platinum Portal. We will see you in two weeks. Hopefully, Mr. Mathis will be back answering questions then.