Is your 2018 personal tax return ready to be submitted to the Internal Revenue Service (IRS) by April 15? Or, are you still hungry for Toby Mathis and Jeff Webb of Anderson Advisors to answer your tax questions? They bring tax knowledge to the masses; although sometimes they would rather bring tacos. It’s like Taco Tuesday, but with tax. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- When’s your personal tax return due? April 15, but you can file an extension to submit it on October 15
- What’s the penalty for not filing a 5500 first solo 401(k)? About $750
- I have a C Corp with no business; do I still need to file? Yes; if filing as a corporation that exists, you are required to file a return, but partnership rules are a bit different
- What’s the $250,000 of income are total asset value? Total value of all assets; not for an IRA, but a 401(k)
- What deductions can I take as a W2 contractor? Most employee reimburse expenses were removed; take standard deduction, or itemize without reimburse expenses
- Can I reimburse health insurance from the S Corp I own? Yes, but you account for that as wages, so you’re paying tax on it
- How do you report and issue a 1099 miscellaneous form? Report payments of more than $600 made to others that are not corporations on the 1099 MISC form with the vendor’s name on it
- What’s required to move an existing business to an opportunity zone? You can’t take something you already own and make it into an opportunity zone property unless somebody’s investing in it that’s not related to you
- What’s the difference between an opportunity zone and 1031 exchange? 1031 exchange is for real estate only, and you have to exchange property for more real estate
- Where do I find areas that are opportunity zones? Is there a Website? Yes, just search for Opportunity Zone Heat Map on Google
- Can we write off repair expenses, like roof shingles for personal hall? No because It is personal property; you can’t write things off for repairing your house
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Resources
Extension of Time To File Your Tax Return
Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs
Full Episode Transcript:
Toby: Hey, guys! This is Toby Mathis.
Jeff: And Jeff Webb.
Toby: And you’re at Tax Tuesday. Welcome to Tax Tuesday. This is like Taco Tuesday but with tax. We’re bringing tax knowledge to the masses. I wish I was bringing tacos to the masses.
Jeff: Oh, that would be awesome.
Toby: Alright. Let’s just dive right on in. We have a lot to go over. We’re going to try to be on time today which is supposed to be an hour but if you’d know us, I think a lot of time we’re an hour was in never. You ask really intensive question. We’re going to ask you to do it through our platinum portal if you’re platinum or just send it on in to taxtuesday@andersonadvisors and we’ll get you an answer. If you need a detailed response that’s tax specific that requires a professional to actually work with you then you’ll need to be a platinum client or become a tax client.
This is fun, fast, and educational. We want to give back and help educate. The whole idea here is to give you as much information in a short period of time as possible that you could use to increase your knowledge of the taxes, so you’re not scared. Frankly, the more you get to know it, the less likely you’re going to be freaked out by it. It’s the way I look at it. It’s kind of like, “A little bit of knowledge goes a long way to keep the nerve set at ease.” Just play along with me here.
“When is your personal tax return due?” Alright. Jeff, what is the answer? When is your personal return tax due?
Jeff: The original due date is April 15th. Keyword, original due date, because you can extend your tax return.
Toby: By right which means your actual due date is October 15th. They spoon feed us the April 15th. That is not the due date of your personal tax return; the actual due date is October 15th.
Here’s the next one I’m going to launch, “When are your personal taxes due? When are your taxes payable due?” Your taxes are due on April 15th. Somebody who’s a tax professional is going to say, “Oh, they’re pay-as-you-go.” No. Your actual due date for making sure that your personal taxes are due—we’re talking about personal taxes here—is April 15th. The tax return is due October 15th. Why is this so important? Well, this is important because we like to file extensions and what’s really important is when are owed tax is due, now you know, it’s April 15th.
When’s our tax return is due? Much later. In other words, you can file an extension by right. It’s not something you’re requesting; you automatically get this. That’s why I say when are the returns is actually due, they’re not due on April 15th, they are due on October 15th, and this year I think it’s October 16th or something like that.
Jeff: No, it’s 15th.
Toby: It is the 15th?
Jeff: Well, I’m not sure.
Toby: No, the September is the 16th for S-Corp or partnership.
Jeff: Right.
Toby: But your tax should due, let’s just say, it’s going to be October 15th. When are your taxes due if you want to avoid penalty as an interest? You pay your taxes the amount that you anticipate that you’re going to owe in April. I want to make sure that you don’t confuse this two concept because then, “Why are we even filing extension if it’s not due until October?” Keith, you have to let the IRS know that you’re extending otherwise they’re going to say you’re just late, but you have a right. This isn’t a request for an extension, you automatically get an extension. Your taxes are technically not due until October 15th. The taxes are paid by April 15th.
Now, the reason that I like to have extensions is because all the stuff that occurs between April and October. If you’re like me, you may have K-1s, you may have properties, you may have businesses, and you may have mistakes that were made. Or, if you don’t have businesses, maybe you have some investments, maybe somebody sent you a 1098 and then they restate it, or somebody gives you a K-1 and then they restate it. That happened to us the first year they required basis reporting on options. Do you remember that one, Jeff?
Jeff: Oh, yeah.
Toby: How many companies restated their 1098?
Jeff: Virtually, all of them that I can remember.
Toby: Just about everybody screwed it up. Guess what, everybody that filed their taxes on April 15th got to do? They got two amend them. If they didn’t, then they were more likely flagged for an audit because you’re going to have a 1098 that does not link up; it is not accurate to the 1098 that’s filed in your return. Those two are going to automatically kick it out saying, “Hey, somebody is reporting a different income to this guy.” And granted, it’s pretty easy to fix, but still, you’re getting that letter from the IRS.
Jeff: A few years back, the tax law said at that time, before April 15th, that you couldn’t deduct your mortgage insurance premium. Then they changed that mid-stream. Again, we were amending returns for all these people who wanted to get their returns done early.
Toby: Anybody that’s been doing this for long enough is going to have a pretty strong opinion. There’s some people that are like, “Oh, I’ve never been late on my return. I always file in April.” Or if they have an S-Corp, “I’m never late on my return. I always file it on XYZ. I file it on March 15th.” I always say, you’re doing the government a huge favor by jumping in there and trying to get everything in early, but you’re doing yourself a disservice because a, you’re stressing yourself out. Like, we’re getting those, “They stress us out.”
We’re getting people saying, “No, I demand. You have my taxes due on this date.” Come on, we’ve got years of the books to go through. There’s questions, there’s things, and what, you’re going to have an artificial deadline because you wanted to feel good? At the end of the day, it’s literally like you’re putting pressure on something that doesn’t need to have pressure. The stress doesn’t need to be there. Just file what you believe is the taxes. If you overpay it, you’ll get it back. If you underpay it, you’ll pay a little bit of interest. You don’t even get penalties as long as you’re filing on time.
Jeff: If you pay within 90% of what you owe, there’s usually no penalties involved. What’s a little crazy about this is the IRS’ unofficial position on extensions, you often hear people say, “I don’t want to extend. I’ll be subject to an audit or it’s going to increase my audit risk.” IRS actually prefers that you extend the returns.
Toby: You know what increases your audit risk? Having to file out a whole bunch of amendments and having bad information. We tell these people all the time, because we do thousands of returns here, and you’ll have somebody issuing up K-1s and their books aren’t really great like, “Hey, if you’re not sure on this, don’t issue it. There’s nothing worse that sending out 400 amended K-1s to your investors.” Then they’d just want to wring your neck. You’re better off waiting and getting it done right the first time.
“What are the taxes payable in April 15th and the estimate?”
Jeff: We often estimate because we don’t have all the information but when we do so, we estimate conservatively.
Toby: In other words, you’re better off to pay a little bit more there. But let’s just say you don’t, as long as you’re within, like Jeff said, within 90%, you’re not going to have penalties and the interest is what, half a point a month?
Jeff: A month, yeah.
Toby: It’s 6% a year so you’re getting a loan. Shoot, you’re giving yourself the Summer to basically go through it. Here’s the other reason that this is really important, if you have a business and it has a qualified retirement plan—and this could be a cash balance plan, defined benefit plan, 401(k), solo 401(k), any of those—you can make a contribution to that or the business can make a contribution I should say, up until it files its tax return and you file your tax return. Which means if you have a 401(k), let’s say I took a salary of $60,000 and I deferred $19,000 into it, the company can still match up to 25% of my salary as a contribution and it writes it off from last year. Even though we’re sitting here in 2019, we could make contributions in 2019 that are deductible in 2018, from last year, up to 25% in the case of a 401(k). In a defined cash balance plan or defined benefit plan, it’s the entire amount. What you’re looking at is saying, “Alright, how much could I do?” I’m $60,000 for example, I could make a $15,000 tax deductible contribution for last year.
Jeff: When can you pay that?
Toby: I could pay that up until September 15th.
Jeff: Exactly. Here’s what has always been our policy is you need to extend that corporate or partnership or whatever return it is we’re talking about that has a QRP. We have that extended due date. I mean, do you agree with that if I don’t extend my…
Toby: You’re done. If you don’t extend, your hosed. I had that same conversation with a guy who once. He was like, “No, I’ve never been late on my S-Corp,” so you can tell I’m bitter about this. He was like, “I’ve never been late. I’m going to file my S-Corp.” I was like, “Please don’t.” Then he goes, “I already know what everything is. I know what my numbers are. I’m not going to be changing anything.” I was like, “Okay.” His accountant filed it with one of us and we filed it, the March 15th S-Corp, and then he filed his personal but as he’s filing his personal, he says, “Wow, this is much more than I thought,” so he extends his personal.
We’re into the Summer and he realizes, “Hey, I have a bunch of money in my company. Why doesn’t my company go ahead…?” It was a sizable amount; it was about $27,000 that he could have matched on his salary. He goes, “Hey, could we still make a contribution for last year? I heard you could.” I said, “Yeah, if we had a time machine, we can go back and then undo the fact that we’ve had that silly tax return that you made me file. I wish we hadn’t.” Then he learned his lesson on that one and he says, “Point taken.” It cost him about $6000 in taxes—is what it ultimately costs, but it’s one of those annoying things where he could’ve gotten a deduction.
Alright. We have a whole bunch of questions on this. “Does the C-Corp get an automatic extension as well?” Yes. “S-Corp?” Yes. C-Corp, is it a six month?
Jeff: C-Corp is six months except for that we are June […].
Toby: Yeah, it’s kind of a funky one, so it’ll be due with your personal. The S-Corp gets a six month, but it was due…
Jeff: Original due, March, extended through September. And even the qualified plans for the 5500s they get automatic…
Toby: Everything gets automatic extension. They’re tricking us as taxpayers, 93% […] by the way, is at April 15th. They’re really good at tricking us, those little sneaky rabbits. Alright, let’s see. “What should you pay by April 15th if you’ve been getting refunds for the previous years?” Nothing. You can jump in on this if you want, Jeff, but if you’ve been getting refunds, you’ve already paid. Thornton, you’re good. What you’re doing is you’re just pushing back your refunds. The times that I file on time is if I have a loan that requires my tax return, or I need a big refund.
“Is there a cost for an extension?” No. What’s the form?
Jeff: For personal, 48-68.
Toby: 48-68 or you just email us and say, “Please file my extension.” Do we do it as a courtesy?
Jeff: If we do your taxes, we do it as part of courtesy. We may charge if you don’t. I think a certain nationwide firm charges $100 for an extension.
Toby: Boo! “What is the penalty for not filing a 5500 first solo 401(k)?”
Jeff: There are remedies for that. I think it’s around $750 to remedy that. For non-profits and retirement plans, they have to be filed a long time or the penalties can be pretty ugly.
Toby: Let’s see. Somebody asked this, “I live in California, so if the 2017, I’m not so confident about getting a refund.” Well, don’t worry about it. If you’re within 90%, you’re okay. “How do you go returns from solo 401(k)s?” Somebody is saying yes. Only if you’re over $250,000 of planned assets. Folks establish the IRAs. We have a company that we came over too, IRA Club is really good, if you’re looking for someone that is self-directed. If you’re not needing a self-directed, you’re just going to trade, then I would do TD Ameritrade or Schwab or one of those. If solo 401(k), if it’s a husband and wife, and less than $250,000, you’re not required to do a tax return.
“What are you charges for filing taxes as personal business?” It varies. What you do is you end up having somebody take a look at them and they’ll give you a pretty good idea, a ballpark. We never want to tear you away from somebody who’s doing a good job. If you’re happy with your guy, we can look over their stuff, it’s free. If you’re platinum, we do a two-year tax review as a compliment and we could tell you whether they’re doing things right.
“I have C-Corp with no business, do I still need to file?” Jeff, yeah. You have some business no matter what.
Jeff: Yeah, if you’re filing as a corporation not being as a C-Corp or an S-Corp, as long as that corporation’s in existence, you are required to file a return. Partnership rules are a little different, but corporations got to file.
Toby: Alright. Somebody just said, “What is the $250,000 of income are total asset value?” It’s total asset value of the IRA.
Jeff: Of all assets.
Toby: Yeah. It’s not for an IRA; it’s for a 401(k). Here’s what we’re going to do. We’re going to jump into the questions that we have…
Jeff: […] some question.
Toby: …that we’re asked. But first off, free stuff, because we love free. Tax Tuesday free stuff. Go to iTunes and sign-up for us and leave us a review and say that we’re alright, so that we like to keep doing this because well, believe it or not, this is fun, but we don’t want to waste your time or ours. If you like our podcast and stuff, please let everybody know. Google Play is free. Hey, we love free.
Jeff: Free tacos would be good.
Toby: You with the tacos. Alright, opening questions. “Can you trade within a Roth IRA or an LLC account with an EIN number.” We’ll answer that one. What deductions can I take as a W2 contractor?” We will answer that. “What types of moving expenses are tax deductible? How do you report an issue in a 1099-MISC? Is it too late for 2018? What are the advantages of becoming an opportunity-zone business?” You guys are asking some pretty good questions.
Let’s jump in the first one. “Can you trade within a Roth IRA or an LLC account with an EIN number.” Jeff and I are both scratching our heads on this one a little bit. Alright. Yes, you can absolutely trade within a Roth IRA and absolutely you can trade with an LLC with an EIN number. The question is, can you trade with a n LLC that’s in a Roth IRA with an EIN number?
Jeff: Oh, interesting.
Toby: Yeah, and the answer is yeah, you could do that too. I don’t see why you would. You’re just creating an extra LLC. But if you wanted to trade—when you say trade—maybe you want to trade a non-marketable security, maybe you’re doing some private placements and things like that, and your custodian won’t let you. Then you can set up an LLC if you want to do real estate and things like that. It’s a good idea to have an LLC. The Roth IRA actually sets up the LLC.
Now, you’re not going to be able to do this at TD Ameritrade or Schwab or any of those, you’d have to go to a self-directed IRA custodian. We recommend IRA Club, Dennis over there is really awesome, but there’s plenty of others, and you can make sure that you’re covering it.
Jeff: But the only place that I wouldn’t do trading in a corporation if that’s it’s primary source of income. It can cause issues but other than that, I don’t see any place that you couldn’t trade.
Toby: Somebody asked, and I just have to answer this because I know there’s anxiety when there’s a question like this. “I had a solo 401(k) with approximately $90,000. Do I have to file taxes on this?” No, you’re good, John. See, we’re reducing stress one person at a time.
“What deductions can I take a s aW2 contractor?” It means you’re an employee.
Jeff: Most of those were wiped out with the tax level change beginning in 2018.
Toby: Miscellaneous, itemized deductions is what’s […] side.
Jeff: Yeah, if you use to do those, what was the 21-06 called? The employee reimburse expenses…
Toby: All reimburse expenses are gone which is why—boy, it sucks to be a teacher right now.
Jeff: Now, if you’re in a state that still taxes you like California rather than Nevada, you still want to tell us about any of those expenses because your state may still allow those deductions but yeah, most of the other deductions are gone. I think the school teacher deduction is the only one I can think of that’s left, the $250,000…
Toby: The what?
Jeff: The $250,000 educator expense.
Toby: Is that still there?
Jeff: I think it’s still there. If I’m wrong, I’m sorry.
Toby: […] thing about a contractor and they’re running around, they’re driving their car, they’re buying tools, and all this stuff. Can they write it off? No. They are completely toast. You’re taking the standard deduction, or you’re itemized but when you’re itemizing, you do not get the benefit of those reimburse expenses.
[…] says, “Teacher is under adjustments.”
Jeff: Yeah, that’s where it used to be. I thought they had retroactively…
Toby: Yeah, somebody else is saying that, “Teacher 250 is still there.” We’ve got all these smart people out there. Are you part of the 93% that said, “Hmm?” Now, we’re going to have a question, “What is this man?”
Jeff: In this case, if I’m like the contractor guy…
Toby: Everybody is saying it’s still available. They’re like jumping on, Jeff.
Jeff: Hey, I said I thought it was still available. If you’re a W2 employee that has substantial expenses you’re incurring, you think going independent or working something different with your…
Toby: Yeah, I would actually be looking and see whether I could be an independent contractor if that’s the case. If I’m having to incur a bunch of expenses, then there’s two things that I’m going to do. I’m either going to go to my employer and say, “Hey, you need to reimburse me.” Or I’m going to say, “You need to pay me as an independent contractor but don’t hire me as an employee and make me incur my costs on my own.”
Jeff: Because your employee can reimburse you and deduct its cost.
Toby: Right. The employer can do an account that’ll apply and write off all those expenses. Say, “Hey, do that. Don’t give me a bonus. Write off my expenses instead.” It sounds funny but if you walk up to your employer and say, “Look, I’m incurring next to $3000 a year, instead of giving me bonuses or anything else, how about you just reimburse this?” It’s tax deductible to the company. It doesn’t have to go through payroll so there’s no FICA, there’s no […] workman’s comp and all that garbage that gets added onto these things. It’s just flat out, cash only in your pocket.
I always call it Krispy Kreme money. If your employer says, “Bring in Krispy Kreme,” and you’re bringing all those Krispy Kremes—those are tasty donuts by the way if you don’t know what those are. We’re talking about tacos and Krispy Kreme. Let’s say you’re bringing the Krispy Kremes, your company can just hand you a check for that amount. You don’t have to report it anywhere; it doesn’t go anywhere on your return. That’s the beautiful part of accountable plan is, if your employer does it, great.
Now, somebody says that, “As an independent contractor, you may lose your bennies which may cost you more to get them to reimburse you.” Robert, I agree but when you say bennies, your benefits, you’re always going to factor that in. The employer is paying whatever your W2, I use 20% as a rule of thumb of what it’s costing your employer to have you with a form of benefits, and so they’re going to save that. I’d be looking at them and saying, “Hey, pay me that extra 20%.” Then you can go get your own benefits. If you’re set up right, say you’re building it as a C-Corp and you want to be able to expense all your medical, dental, vision, and everything, 100% deductible, 100% all of your copays, everything. “Health insurance is the biggest.” Absolutely.
Here’s the thing is also when you’re on your own, right now, it’s cost me about $500 for primary employee and with the family, it cost about another $1000 to cover. If I went to Medi-Share or some of those outside sources that are not big health insurance, but they still work under the Affordable Care Act but they’re not typical insurance—high deductible plans—I can knock that down to about $600 total. I can’t do that as a big employer. I have to use certain types of plans to cover group plans.
We’ve got a lot of questions coming in. I’m going to keep jumping through this. The long and short of this is the best scenario for you is to get your employer to reimburse you. If they want, you may want to consider becoming a contractor—independent contractor I should say—and setting up your business separately depending on how much you’re making. You could actually save yourself quite a bit of money.
If you’re an S-Corp, you could have the 20% 199A deductions against all of your income which could knock your income way low. You could avoid the self-employment tax, which is when you’re getting W2, you’re paying FICA on all of it; your employer’s paying half, you’re paying half. You could avoid a big chunk of that. You could do your own 401(k) and put deferred $19,500 of your first amount of money you make into your plan. You can hire your spouse, you can hire your kids, you could do all sorts of fun stuff. I tend to giggle and […] on this but you need a lot of things.
“Where do I get more information on that low-cost health plan?” Go to Medi-Share. I don’t know how to spell it, but I can look it up. What they are is they’re usually religious groups that get together and say, “Hey, we’re exempt from the ACA,” and they’re pooling the risk pools. They’re very different and a lot less expensive. What you do is, you do one of those and then you do a high deductible. When I say a high deductible, it might be a $10,000 deductible health insurance plan which cost you very little because there’s very little chance you’re going to use it but if you have a catastrophic injury, cancer, what not, they’ll come and pick you up.
“What type of moving expenses are tax deductible?”
Jeff: Oh, that sounds like the last question.
Toby: It’s literally the same and I got rid of it. Unless, you’re what, military.
Jeff: You have to be in the military with permanent change of station orders to be able to […]. Usually when you have a permanent change of station, the government’s already paying for your move or the vast majority of it. Virtually nobody can deduct moving expenses anymore and employers can no longer reimbursed and deduct those expenses, either. They can always reimburse but they can’t deduct them.
Toby: Yup. Somebody asked a really funky question. I love funky questions, so I have to answer this. I apologize guys. You can’t write off those moving expenses. Maybe your state will let you write off something, right?
Jeff: I haven’t looked into that, whether the states are in compliance or not.
Toby: It doesn’t matter because your state, the local taxes, the cap, you’re just toast. You’re toast if your employer reimburse it.
Here’s one and they said, “I have an S-Corp,” and they said, “I have no reason to have a C-Corp after some calculations. Can I start another sole proprietorship, hire my spouse as the only employee of the sole proprietorship, and have a one-person 105 HRA plan?” That’s a health reimbursement. I love the way you’re thinking, but the answer is no because you’re a 2% greater shareholder than your spouse. You’re toast. But I love the way you’re thinking, you’re trying to get there. What you can do, though, is have a C-Corp, and pay the C-Corp. Have your spouse work for the C-Corp, pay the reasonable amount, and then get the money out of the C-Corp by having them get the health coverage and cover you as well.
Jeff: Unfortunately, the C-Corp is the only place to do that 105 plan.
Toby: Yes and, “Are measured type premium tax deductible in a C-Corp?” Yes. In fact, you can reimburse yourself any medical expense out of a C-Corp including copays, including your deductibles, including non-covered procedures. These are going to sound really weird but these are actual cases. Pools, we’ve had spas for different types of medical conditions. If your doctor says you need it, your insurance company is not going to cover it, your corporation can technically reimburse it, so yes. You can even put a limit on it.
Jeff: The other thing with the high deductible plans, it makes you eligible for an HSA, a health savings account if you just so desire.
Toby: Yeah. If you have a high deductible plan. How much you can stick in that HSA?
Jeff: A single, last I heard was $3300, family is like $6500.
Toby: Yeah. That’s fantastic. By the way, that’s deductible money that you don’t have to perhaps pay tax on. You can do the HSA and still have the Medi-Share. These are things that are not inclusive.
“Can I reimburse health insurance from the S-Corp I own?” Yeah, Christine, but you’re paying tax on it. Even though your health is covered by the S-Corp, the way the rules are is you have to account that as wages. In some cases, an extra thousand if you’re an old fart. Yes, Stacey, if you’re an old fart.
Jeff: He is singing my premium.
Toby: Out of all the words that are coming up, I got gravitated right to the fart. I don’t know what it is. I think I’m just a juvenile.
Next one, and we have lots of questions we’re going to, don’t worry. “How do you report and issue a 1099 MISC?” which is the 1099 miscellaneous? And then, “Is it too late for 2018?” Jeff, you love these things.
Jeff: How do you report? Well, you’re just reporting payments made to others that are not corporations.
Toby: Non-corporations over $600.
Jeff: Over $600 for services, not for materials purchased. You would actually report that on a form 1099 with that vendor or whoever’s name on there.
Toby: Now, you’re a little late for 2018. January 31st was the first due date?
Jeff: Yeah, the non-employee compensation we call it, your independent contractors, those had to be filed by January 31st. The rest of the 1099 MISC had to be filed by yesterday.
Toby: Oh, so we can go back in time a day? What happens if you file late?
Jeff: If you file late, that’s usually a penalty of $50 per 1099.
Toby: What if you just don’t file?
Jeff: And they catch you?
Toby: Yeah.
Jeff: That’s a much bigger penalty of $50.
Toby: No, I’m not going to say don’t file. I’m not going to say don’t file.
Jeff: Here’s the thing. If it’s a 1099 between you and your kids, or somebody you know, it’s maybe a little more important when you need to report that income to a third party who has to have that information.
Toby: I’m going to give you guys my 1099 story. We were one of 50,000 companies when they did these mid-sized company audits. What they did is they went after everybody looking at their payrolls and independent contractors. They want to make sure that they weren’t classifying employees and the independent contractors. You’re going to see this is a pattern with the IRS. They did 50,000 companies. We are one of 50,000 companies. I want to say it was about 10 years ago. They go through all of your payrolls, they go through all of your contractors, and you have to have either W4 for your employer, or a W9 for your contractors.
We had a couple that we didn’t have W9s on, they were corporations, but they had since expired. So, this is kind of the rub. You look at it and go, “Wait a second. These companies, one was a landscape company and the other one was a magician,” ended up being number two on America’s Got Talent. We were watching him and we were cursing his name because he cost us $700 and here’s how. If you don’t 1099 or you don’t have your W9, you’re not in compliance, then you have to pay a withholding.
Even though they probably paid the tax, it doesn’t matter if they paid the tax. The IRS will come and say, “You have to pay your 28%.” We ended up paying $700. We looked at it and said, “It’s cheaper just to pay it than to try to track these guys down and get all the stuff,” because they weren’t answering phone calls and it’s kind of annoying.
Jeff: This is one reason why we often say that before you pay any of your vendors, make sure you have a W9, because if you pay me and then ask me for tax reporting information later, there’s a good chance I’m not going to give you that information.
Toby: You better do it.
Jeff: Better do it before you give them the money.
Toby: Yup. That’s what we do is like, “Here, W9 and all, then I’ll send you a check.”
Somebody’s asking about Michael Avenatti. You guys are horrible. “How do you get away with not filing for 10 years?” Did he not file for 10 years?
Jeff: I’m not aware of that.
Toby: All I know is that you’re assuming he got away with it because the last time I checked, he’s under indictment. He’s being charged with tax fraud and with all sorts of heinous style, like he messed with Nike. You don’t mess with gorillas, guys. Here’s a hint, don’t poke the bear. Nike is a huge company and they said “Oh, Avenatti.” Within a week, he was being arrested, which is bizarre because you can’t get the Feds to do anything in a week but all of a sudden, you just woke up the bear and the bear is going to take a bite out of you.
Jeff: I was shocked. He always seemed like such a nice guy.
Toby: That’s creepy going there. I know that’s what you guys are all thinking. He was really doing a nice thing by helping somebody blackmail. I’m not going to get into that. Lawyers bug me. You guys are horrible. We uncorked something here, you guys are all being ornery.
“What is the advantages of becoming an opportunity zone business?” You want to hit this or I? This is crazy. Here’s the deal. With the opportunity zone, the Tax Cutting Jobs Act, the TCJA, I just call it the Trump tax act.
“Is it too late to issue with 1099 or not?” It’s not too late but I probably wouldn’t for 2018. You are late, you’re going to pay a penalty, and it depends on who it is too. If it’s a large amount, I would pay the penalty and just go ahead and do it. If it’s a small amount, then I probably wouldn’t, I’ll take my chances.
“What are the advantages of getting an opportunity zone business?” Here’s how it works, the Tax Cuts and Jobs Act created these economically disadvantaged areas where they want people to invest in the businesses and in the properties there. All states came up with a list of the zip codes that were their areas, what they call opportunity zones. Disadvantaged areas that need investment.
What is good for the investor is that you can defer your capital gains, any capital gains if you invest in what’s called an opportunity zone fund. Let’s say, LLC taxed as a partnership, LLC taxed as a corporation, or a corporation. Those are your opportunity zone funds. As long as you invest those funds within 180 days of the taxable event, you sell some Bitcoin, or you sell stock, or you sell property, within 180 days of the sale, you put it in an opportunity zone fund, and that opportunity zone fund invests 90% of its assets in the opportunity zone. If it has $1 million, it needs to buy a $900,000 of opportunity zone property or businesses.
The reason people do this is two fold. The number one reason is because you’re deferring that gain. You do not eliminate that gain that you have. Let’s say Jeff sells $1 million of Bitcoin, let’s say it’s long term, he’s held it for over a year, he owes long term capital gains in 2019. He just sold it. He puts it into an opportunity zone fund that’s buying Dairy Queens in opportunity zones. I’ll just use that as an example instead of real estate. I know all you guys want to talk about real estate, but these can be businesses too.
This is going to make sense here in a second and how it’s different than a 1031 exchange. Jeff puts the money into this thing, Jeff’s $1 million. He doesn’t pay tax on it in 2019. He doesn’t pay tax on it in 2020. He doesn’t pay tax on it in 2021, 2022, 2023, 2024, and then comes 2026. He will pay tax on that money in 2026, but he will also get what’s called a step-up in basis on a portion of it, and that portion of it is 15%.
If Jeff has that $1 million he would owe tax on, when are the taxes due? April 15th of next year if you sold it this year. He’d owe tax on $1 million. He’d owe 20% on $1 million, plus the state where in Nevada solution of state income tax, so he’d owe $200,000. What he gets to do is not only does he not have to pay that $200,000, but he gets a step down or step up. He’s going to not have to pay tax on 15% of it. He’s going to pay tax on $850,000. Let’s say, it’s still 20% and it’s $850,000, he’s going to pay $170,000 not $200,000 in 2026. That’s benefit number one.
Benefit number two is the investment. He put $1 million into an opportunity zone and let’s say that $1 million becomes worth $5 million, so long as Jeff holds that property for 10 years—he has these Dairy Queens and he owns them for 10 years—he pays zero tax on that growth. At the end of 10 years, Jeff sells all these Dairy Queens and he gets to keep $5 million in his pocket.
Jeff paid, instead of $200,000 of tax if he had done this without using the opportunity zone, he would have paid $170,000 plus if he had done his own money, he would have had to pay on all that gain, $4 million worth of gain, he would have paid another $800,000. He would have paid basically $1 million of taxes. He instead is paying $170,000. He lowered his tax bill by $830,000 under that scenario and I just pulled that up out of my ear.
“How long can you park the money before reinvesting?” Somebody asked about this. When you put your money into an opportunity zone fund, there’s a testing period every six months or at the end of the year, where 90% needs to be invested within the opportunity zone. You literally have to put that money, I would say, within six months. I was talking about it with Clint today, one of my partners, and we’re not aware of anything that accelerates that, but if Jeff sells his Bitcoin, puts it in a fund, and that fund deploys those resources three months later, technically Jeff could be nine months after the sale date and still be in compliance.
How do you find those opportunity zone funds? They’re out there, or you make your own. You can become your own opportunity zone fund by creating your own opportunity zone, the LLC taxed as a partnership, or Corp, and we have to do a special filing. I think it’s an 8996 that we’re filing, and you’re deferring it with an 8949 on your 1040. See, I love tax forms. I only know that because Jeff already knows the tax forms.
“What is required to move an existing business to opportunities own?” I don’t I don’t think you can take something that you already own and make it into an opportunity zone property unless somebody’s investing in it that’s not related to you. “Is it possible to create an LLC fund for unrelated third party investors and not be a broker-dealer?” Yes, that would be called Reg D offering or a private placement. Yeah, you don’t have to be a broker-dealer to do that. You can get carried interest. You could get all these good things, and those, but that’s security stuff.
“Are there any self-dealing issues investing in opportunity zone, which I have an interest in, or doesn’t have to be someone else’s business?” Technically, I think it has to be somebody else’s business, but I’m just going to give you this, all I can tell you is, from a tax standpoint, this is how the rules work. You always want to look. This is kind of complicated stuff guys. There’s somebody just asked a really good question which is, “What’s the difference between opportunity zone and 1031 exchange?” A 1031 exchange is for real estate only and you have to exchange property for more real estate. When I say property, real property, real estate for more real estate.
Jeff, let’s say I sell my mobile home park. Can I buy a commercial building?
Jeff: Yes.
Toby: I sell my condo can I buy six single family residences?
Jeff: You can.
Toby: What are the rules regarding a 1031 exchange?
Jeff: 1031 exchange, you have to identify your replacement properties within 45 days of selling your property. Everything has to go through a qualified intermediary. This is basically somebody who’s going hold the cash for you from the sale. The exchange of properties actually has to happen within 180 days, but it has to be one or more those properties you initially identified in the first 45 days. If you’re going to do one of these, you really needs to have your docs in a row before you start it.
Toby: Before you do a reverse exchange. If you already have property, get them to acquire property for you and then sell your properties and exchange it, but it has to be a greater or equal value to avoid the tax and then your basis just goes forward. The reason the opportunity zone is so hot is because people are like “Hey, I’ll dump a bunch of money into real estate there.” The rule on the real estate is you have to double the improved value, or if it’s land, you just have to double the value. Meaning, if you buy a piece of land for $500,000, you have to invest $500,000 in improvements. If you buy a piece of a property like a building for $1 million, and the land is worth $200,000 and $800,000 is that building, you have to invest $800,000 in that building.
If you put cash in there, you have 31 month, if you sell your Bitcoin for $1 million, you’re buying a piece of property for $600,000, and you have $400,000 sitting there in cash, if you put that $400,000 into that $600,000 property, assuming that, let’s say, the land value was $200,000 and improvement was $400,000, then you’re fine. As long as you do all the rehab within that 31 months. If you can’t do it, then a portion of it will be taxable back to the very beginning. It could actually be pretty nasty if don’t. You got to make sure that you’re taking when it’s real estate, and you’re doing it right.
God, I have a lot of question on this, this is fun. This is always a kick in the pants, these questions. “If I do a 1031 exchange, rental into a rental, and keep the new rental as a rental for two to four years, and then move in, and live there for 35 years, can I sell and take the home exclusion?” What’s the accumulated past depreciation of a rental accounted for at this point? Alyssa, you ask really good questions.
First off, we have investment property, then we’re going to make it into personal property. I think you have to hold it for five years, investment property to make it 121 exclusion, and then you have periods of disqualified use. Usually, we’re doing the opposite, you have a piece of property that you’ve lived in and owned and then you used to rent for few years and then sell it.
The rule is you have to live in it as your primary residence to the last five years, and then they’re going to disqualify a portion of it of the total amount of time you owned it for disqualified use, which is what that rental is going to be. Because it went rental and then became a personal residence. They’re going to say, “Alright, you’ve lived in it for five years, you rented it for four years, you’re going to get 4/5 or whatever they call that, yeah, it’s about 4/5, whatever that ratio is of the $500,000 exclusion, if you’re married or if it’s two of you, it’s $250,000. Here’s the most important thing for you to take away from this Alyssa the 121 exclusion is only for capital gains. It will have zero effect on your depreciation. Your depreciation will have to recapture all of it when it goes up to 25%. What I usually do when I see these types of scenarios is I say, if it was a rental before, I’ll make it as rental again and then sell it under a 1031 exchange and then you can avoid a tax too.
Somebody says “Where do I find areas that are opportunity zones? Is there a website?” Yes, you Google Opportunity Zone Heat Map and you will find it. It’s one of the first things that pops up. “Can an existing property be classified into an LLC, if it is the designation…” I don’t know what that means. You just have to be in the opportunity zone which is on the zip code. Somebody says, “Would this work for exercising stock options?” Yes. When I exercise and they take taxes out the top and send me the balance. “I would like to use the funds for an LLC investment. What about the taxes paid upfront?” You will get them back Todd because you’re going to say, “I’m deferring all my tax,” right?
Jeff: I’m not sure about that because it’s usually a payroll withholding on the stock grants.
Toby: Well, it depends on what you’re doing with it. If you’re exercising the stock option and then is he selling the stock. It would have to be capital gains. I believe you’re going to work Todd but it would have to be capital gains.
Jeff: A lot of times with these stock options that you’re exercising that you’ve been granted options by your company, you’re already getting a step up in basis in that stock. There’s probably not going to be a whole lot of capital gains there.
Toby: Somebody asked and I thought it might be the opportunity zone related but there’s lots of questions.
Jeff: I’ve noticed with these opportunity zones…
Toby: “Is payroll withholding on capital gains?” As long as it’s capital gains Todd, then you’re going to do it. Someone say that, “If it’s an apartment building in the LLC area, can you benefit from the capital gain treatment?” Yes. If you invest in it for 10 years and it doubled, you would have paid zero tax. You’re hitting the nail in the head, that’s what they want you to do. They want you to go and there’s people that are doing it. We have clients that are doing it. Maureen is a great example.
Dumping a lot of money in there because they know that these properties are worth a ton after a while. What some people do is they target an apartment building with bad management or that have lots of money that needs to be put into them. Again, you have to put whatever that improved value is that’s sitting on that land, you have to double it.
Jeff: Yes, so you got to be a little judicious about the property you’re picking out. I like what you are saying, they’re good ideas. The rundown and more historical type buildings are gold mines for something like this. There’s just lots of opportunities here and it’s obvious that those credit was designed or this deduction to help these disadvantaged areas.
Toby: Somebody said, “We had the property and we are already trying to rent it. Does it qualify? If no, what will qualify?” Here’s what you do, now you know about it. You already know what you’re doing. Target another building in that opportunity zone, hold the money out of the existing property to invest in it, and then sell a bunch of something with a bunch of capital gains. It’s all just cash. You’re just designating him deferring that the cash or the capital gains that they had on investment X before putting it into this opportunity zone. It doesn’t matter where you get the money. I’d pull the money out of the existing and then I would defer like, “Hey, I have a big tax appetite. I’m going to sell a bunch of stuff that made money and I’m not going to pay tax on it. I’m going to put it into another building in the opportunity zone.” I hope that make sense.
Let’s look at fun stuff. I hope you guys like this stuff. If you do, then come to the Tax Wise Workshop or better yet, you can do this cool and Patty, if you’re rolling around out there, post to the chat, this website. We made it smaller. You’ll see that I griped two weeks ago about the way our tech guys like to do some fronts. They like to make really long ending. It’s andersonadvisors.com 3for1. “Are you familiar with the Delaware Statutory Trust for doing 1031 exchange?” Yes, I am familiar with those. They’re treated as—you cannot give and invest in the trust if it’s holding the other real estate they treated as owning real estate. Lots of questions being asked, I apologize if I sometimes just start answering them. We’re almost halfway through.
Jeff: Talk about some good stuff.
Toby: This is related to one of the other questions. “If I move into my row house for a number of years and turn it back into a rental for the remainder of my life and then let my children inherit it, do I avoid the recapture?” Yes. There’s a step up in basis. It steps up to its fair market value on the date of passing. I know that I avoid the capital gains because the step up but it’s all of it, everything. There’s no depreciation.
This is the beautiful part Shelley, you have a rental house—this is why I never sell anything by the way. I always say, why the heck would I sell something when all I have to do is hold on to it, and I depreciate it, and then when I die, my kids can depreciate it again. It’s like I get to write it off twice, or three times because then if they pass, they pass it on. I tend to be of the mindset you’d invest forever. That’s why I do infinity investing. If you guys never heard me talk about infinity investing.
“Can a 1031 exchange be used to obtain an opportunity zone property?” Yeah, but why would you? This is capital gains deferral. You’re going to have depreciation recapture if you take a 1031 exchange property and sell it and don’t exchange into something else. You’re still going to get hit.
First off, “We have a software business and want to know if there are any advantages to moving our existing business into a designated opportunity zone. Are there any special requirements to do so?” You would be a qualified opportunity zone asset. There’s two things, first off, if I have an existing business in an opportunity zone, then you’d need a fund that invests its assets into your business which means they’re buying it from you. If you have an existing business, you’re really not going to have much, unless you’re raising money for it through the outside investments, who are then owning opportunity zone property. They would just have to put their money in opportunity zone property. Scott, the answer is, yeah, you probably want to make that into a private placement, if you want to break your business, then you want to raise money for it, otherwise it wouldn’t be you.
Somebody else asked, “I borrowed $100,000 from my cash value life insurance policy at 5%, and they want to loan it to an LLC, taxes a partnership at 8%, and then they’re going to take that money, and invest in a bridge loan, that returns 12%. So the question is, can I write off the 5% on the loan from my life insurance policy?” Jeff, do you have a problem with somebody writing off personal interests that’s being used for business?
Jeff: Typically, no. If that loan is being used exclusively for that business, I usually don’t have a problem with that. So yeah, you can report that 5% as investment interest, because you’re going to be adding 8% of that interest to income, so one would offset at least partially the other.
Toby: Absolutely. You’re able to do it, because it’s not going to be going on your personal tax. You’re trying to write off on your personal tax return as personal tax, you’re writing it off as an investment expense. It would offset the income. The 12% comes back, your cost on it is that 5% so you’re only going to have to pay tax on the net.
Somebody says, “Although I believe the current tax cuts helped everyone, some might know it doesn’t.” Someone said, it actually doesn’t help small businesses like his friend. He is self-employed and said his tax refund this year was reduced by $5,000. What are the facts?
Jeff: Here’s part of the thing that is everybody is focusing on comparing this year is refund to last year’s refund. And what you really need to be comparing is this year’s tax to last year’s tax.
Toby: Yes, a refund is only as good as the money that you paid in, but my guess is that they’re looking at this from a standpoint of—maybe they didn’t get the 199A deduction, maybe they were structured incorrectly, maybe they phased out, so what happened was the Congress went off and when they did the tax cuts and jobs act, they slashed the corporate, the C-Corp tax rate by almost half. They cut from a high of 39% to 21%, which is pretty freaky. No bueno.
Obviously, they went and chopped that up, and then all the little guys were saying, “Hey that’s not fair. Why are we not getting this big tax cut, the corporations got a big tax cut?” And what they do and they said “Hey, for the little guy we’re going to give you this thing called a 199A deduction, which is 20% deduction on your qualified business income.” If you make $100,000 in your business, as a sole proprietor or as an S-Corp, or whatever, you’re only going to have to pay tax on 80% of it. If you made $100,000 you’re going to pay tax of $80000. That’s going to be a substantial tax cut.
However, certain types of businesses phase out, and if you’re making too much money, you individually, as the owner of the business, if you’re married, filed it jointly, you make over $315,000, or you’re single, and you make over 157,000, you start to phase out. In certain businesses, there is no coming back, which is called a specified service business.
Other businesses, they do another test, where they say, “Well, how much payroll did you have?” You can write up to 50% of it, or 25% of the payroll plus, I figured it’s 2.5% on adjusted basis of the assets that you own, so that’s for real estate investors. And yes, you can write off. This actually works against rents, and all that fun stuff. They gave you this big tax cut. Without knowing more, I’m going to look and say your friend shouldn’t be worse off, in fact, they’re probably much better off if their company is set up correctly to allow them to take advantage of that 20% haircut. But not all businesses get it, and lots of people phase out and then they get mad.
The other reason that people are getting slapped really hard, and when I say hard, I mean it’s really frustrating for them, is on the fact that we had removal of itemized business deductions, and we have a cap on your state and local tax deduction, which they call Salt. But it’s your property taxes plus your income taxes, you’d only get write off against your federal taxes up to $10,000, and you have to itemize your deductions.
Jeff: I’m seeing people losing tens of thousands of dollars of deductions just on the state and local tax loss.
Toby: It’s a lot. If you’re in New York, or Connecticut, Maryland, California, these taxes is kind of stinks, it’s not good, it’s really hurting them. “Hey, these tax cuts work for me.” Well, I used to do it and last year I was having fun with this. I called it tax-mageddon. When they removed the miscellaneous itemized deductions, where you couldn’t write off miscellaneous itemized deductions, there’s somebody saying the feeling the pain, too. They really hurt a lot of people, especially people with managed investment accounts. Pretty painful.
Somebody asked about investing inside of a C-Corp, or inside a corporation, I’m saying we cannot do it because it’s capital gains, and you’re hurting yourself. If you transfer out an appreciated asset stock to yourself, it’s considered wages. We tend to do that through something else. If you’re going to write off all the gain then we don’t really care. If you’re going to do it through corporation, small trading account, and make $10,000 a year and you’re going to write it all off, we don’t really care. That’s just as on the side. I forgot to answer their question. What ends up happening, I’ll use that as an example, if you have somebody who has a couple of $1 million sitting in that managed account, they can’t pay their advisor anymore, the guy who’s managing, or the girl who’s managing it, and write that off.
There’s only one way to do it, which is to hold that in a partnership, and have the NC-Corp more likely would be the manager of that. If you have an LLC, you have the corporation and be a partner in a manager, so normally you have the corporation on 20%, let’s just say for example. That corporation would get 20% of the income plus they could be paid a regional manager fee, which by the way was a question asked way back in the beginning by somebody who threw a question out there before we even started, “What is a reasonable management fee?” The answer is anything you would pay a third party. Whatever the market will bear, it could be $10,000, it could be $30,000, it could be more. It’s whatever adding on what they’re doing what you could hire a third party to actively look over all your assets and shepherd them.
Somebody says, “What portion of the deductions people are losing to the state deduction limit, or miscellaneous itemized — does not make sense, were lost 2 P’s or AMT previously. I don’t know, John. I think he’s asking how much of the itemized deductions or miscellaneous deductions where that piece limitation was the phase out or the AMT, how much we’re getting?
Jeff: Well, both state, and local taxes and miscellaneous deductions were add backs for AMT, but after the last correction that AMT, it was really hitting less people, unless they were paying a ton of state and local taxes and miscellaneous deductions. I don’t think I’ve really played in to the calculation of how much better it is because it didn’t affect everybody.
Toby: Questions you can always ask us at taxtuesday@andersonadvisors or visit andersonadvisors.com and make sure to subscribe to our podcast and say, “Hey, this doesn’t suck,” that means give us lots of stars. We always put these things up. We usually break them into two pieces and put them as a podcast. While you’re exercising or driving, you can listen to this. This answers lots of questions. They love to ask questions.
Here’s some more by the way, “If my only source of income is investment income capital gains and I receive a refund for my 2018 federal state return, should I be using the refund towards paying my quarterly taxes for 2019? Although, I don’t know what my investment gains are going to be or if I overpay my estimate, will I have to pay taxes on any refund I get next year?” in other words, is it better to pay estimated taxes or just pay a penalty.
Jeff: I’ll tell you what, I’m going to be in favor of the estimated taxes.
Toby: Such an accountant.
Jeff: Yeah. It’s still 4% or 5% a year of penalty until you make estimated taxes. There are those people who if they have a dollar in penalty, they’re going to be very upset.
Toby: I always kind of look at it and say, just keep the money in my pocket, so I’m not going to really worry. What you can do is pay what is 110% of the last year’s taxes and not care at all and then you don’t have to worry about it. What you can do is you can always apply it towards your last year’s taxes. If you receive the refund, it doesn’t mean that you didn’t pay tax, it just means that you paid too much tax. Look at what your actual tax amount is, pay 110% of that, and don’t worry about it anymore.
Jeff: Okay. I’m going to say what I think you were thinking is that if I’m investing this money and I can make more than I’m going to pay in penalty, why not do that.
Toby: I’ve done that exact thing. I remember sitting there were we had opportunities come through we were like, “Would we rather invest it towards putting a really cool workshop or do I want to pay my tax?” Well, in the beginning of our business which is 20 years ago by the way, we chose to keep our money in our pocket. I’d rather pay a little penalty on that and keep growing than worry about it.
Let’s see more fun stuff. “How are distributions from limited partners position in apartments syndication tax? That’s a pretty good question. Do you want to answer that Mr. Webb or do you want me to do it?
Jeff: I might be wrong, tell me, but you’re being taxed on the limited partnerships income. Your share of the limited partnership’s income, not your distribution.
Toby: That is exactly right. We just had this big old discussion with somebody who was like, “Hey, we’re going to give you back your money tax free. The first amount of money that you get back, you don’t pay tax up,” that’s not how it works. You’re putting an investment in, that’s your basis, but your income is being spread out to you no matter what. You can get cash back out of it because sometimes let’s say it’s an apartment, it might post zero income because you’re depreciating the apartment building, but you’re taking cash out.
You can take up to what you invested without having to worry about it. You take more than that out, that’s called receiving cash in excess of your basis and it’s taxed as capital gains. In an apartment complex usually, they’re depreciating against that income, and you’re receiving very little taxable income. Usually it’s next to none. If you are receiving taxable income you should say, “Why aren’t you guys doing cost segregation on this thing and wiping out our tax liability?” In fact, you could kick us down some losses and then we went won’t have to worry about paying tax for a long time because those losses will be offset by the future income from that endeavor.
Jeff: What I’ve seen on a lot of this syndications is beginning very early, they’re starting to return capital; they’re returning your investment to you. You may only get taxed on a few thousand dollar of income, but you may get $12,000 back in distributions because they’re giving you some of your money back.
Toby: That’s a perfect way to put it. Somebody asked a question about tax increment reinvestment zone that’s in Texas. I am not sure what it’s going to give you as far as benefits. I really don’t know a ton about it. Maybe that’s something that we should look at for next time. I’m not sure that that would only apply to—somebody’s asking about it. Susan, why don’t you email about that, it’s something to look at.
We have a ton of questions and if they’re really long, sometimes I ignore them just because I can’t read through them fast up and we’ll go really long. Here’s some, an S-Corp owner also having a sole proprietorship. This is a continuation of our medical reimbursement plan. “Does the 2% shareholder rule also apply to sole proprietorships?” No, it only applies to S-Corps. The 2% shareholder rule with regards to the 105 plan. You can actually have a spouse, so what you do is the sole proprietorship would enter into a 105 plan and then it would cover one spouse who would then cover the other. That spouse could be an employee and that could be their only compensation. There’s actually a case on the IRS on it.
I tend not to like sole proprietorships because you’re going to be paying more in self-employment tax than you would if it was an S-Corp. I take a look at these things and say, “Hey, let’s take a look at the total amount and calculate how much it’s actually going to save us depending on what type of structure.”
Let me see if I could find this other question. “I already filed my personal taxes, but we’re thinking about rolling over $5000 for traditional IRA into a Roth IRA, and I still do it for 2018. Can you do the rollover even after the end of the year?”
Jeff: That’s a good question. I think the rollover has to be done in the current year.
Toby: I think it has to be done in the current year too, so I don’t think he can go back. You can do it for 2019. “Is there a way to find out how much I would owe before doing it?” Not really. I can give you an estimate. Usually, your roll when you’re in a low tax year, or if you have a whole bunch of losses. “I started my tax liens last year. Some were regained but did not receive any tax form from the county. Do I still need to report these on my return?” Yes. Somebody paid you the tax, how was that taxed? When you get paid the tax on the taxed one? Is that just interest?
Jeff: I’m going to be more general and say I think it’s just ordinary income.
Toby: Well, it’s going to be ordinary income no matter what, right. Even if it’s interest, it’s still ordinary income. I just think it’s not subject to…
Jeff: You don’t think it’s subject to self-employment?
Toby: I don’t think so when I’m thinking about it off the top of my head. That’s another one, email it on here, and we’ll get you an actual answer. Here’s a fun one “Does my C-Corp that used to manage estate rental property have to pay the 1% gross receipts tax in my home state of Washington?” Craig…
Jeff: That’s the B&O tax, correct?
Toby: Yup, that’s the B&O tax and it’s 100% gross receipts tax on Washington businesses, but this not a Washington business. If it’s Wyoming, then the answer is no. If it is a Washington business, then the answer is yes, you would have to pay it. Which is why we sometimes park these things out of the state.
Somebody says, “Can I use accelerated depreciation on a new roof, AC, kitchen and bathroom models, so what’s the percentage of the timeframe? That investor owns 20 single family homes and an eight-unit complex in Florida all rented out.” The answer is without getting into all the new roof, AC, kitchen and bathroom stuff, you just use accelerated depreciation. It’s called cost segregation. What you’re doing is you’re taking 1450 property and 1445 property. You’re separating out the property that’s 27 ½ of your property from the property that’s in the lower or shorter period time to depreciate. Then you’re using the bonus depreciation, which is anything less than 20 years gets a 100% deduction, and you’re wiping out the tax. When you have accelerated depreciation, it usually ends up being about a 20% boost. When I say boost, I mean, 20% of the of the improved value in year one, would be deduction. If you have $1 million improvement on a piece of property, you’d get a $200,000 deduction in year one.
Jeff: And the thing with roofs in particular, they’re not going to qualify for accelerated depreciation, but what they may qualify as is a repair instead of a replacement.
Toby: Your roof that’s going to be stretched out over the life.
Jeff: Yeah, if you are talking about complete tear off and replace, that’s going to be 27 ½ year regular depreciation. If you’re talking about replacing shingles, or something of that nature, where you’re not going to complete tear off, then you may have an argument to go ahead expense at whole amount as repairs.
Toby: Right. Another question, “If you pay all estimated taxes due before the year ends, will there be a penalty? I mentioned that means somebody didn’t pick quarterly’s and they paid it all up before the end of the year.
Jeff: Here’s how estimated taxes work. You’re expected to pay a certain amount each quarter, and if you miss a quarter then you’re going to get some kind of penalty for that. Paying them all by the end of the fourth quarter doesn’t really help you as much, you’re still going have a penalty. Also, withholding on anything is considered to be taken out throughout the year, even if it all occurred in December. Withholding can be really helpful when you have these missed payments. What are you reading?
Toby: I am reading a really cool one. This is very complicated so I’m going to break it into pieces. They’re saying “Hey, you’re limited to the $10,000 salt deduction, can you break that into property taxes and income taxes?”
Jeff: No.
Toby: You can’t, […] disproportionate.
Jeff: The limitation is for the whole category taxes, which includes sales tax, state and local income taxes, personal property taxes, real estate taxes, and any other kind of tax you can think of, it’s deductible. What you can do is you can deduct it on a home office for your real estate taxes. Real estate taxes on rental property are separately reported. It’s not a death blow.
Toby: Hey, Robert there’s something cool you can do by the way. For example, if you have property taxes of $8,000, I would be looking at having a home office, and I don’t mean the traditional home office that you read about on books, we’re talking about an administrative office for a company. You actually have to have a C-Corporate or S-Corp, and let it reimburse you for your portion of that. On average, you’re going to be somewhere in the 15% to 20% range of the use of your home, if you have a home office, which means that you can reimburse of that $8,000, $1,600, so you’re not losing out all of it. You’re getting a deduction on part of it, you’re going to be running to your company as a deduction. That’s called an accountable plan. It requires that you have an S or C-Corp or LLC taxed as an S or C-Corp.
Somebody says “I bought a new multi-family in November of ‘18 and someone recently offered to buy it. Is it worth it for me to do a cost seg for 2018 part of selling it?” It’s depends, Janet. What we have to do is run the numbers. If you do a cost seg and you write off a whole bunch — like you rapidly depreciate it for last year, we’re going to have to look and say, “That’s 25% tops, only if you sell it,” versus if you sell it, and you owned it for 2018 and now it’s this year, so it’s over a year, and you didn’t intend to sell it you bought it with the intent of whole, then that’s tops, 20% long term capital gains.
Then, I’d have to say, “What am I offsetting it 2018 if I take that rapid depreciation?” Maybe I’m offsetting 37% property, not property but income. Maybe I’m offsetting $200,000 of 37%, then it might be worth it to sell it after doing the cost seg because that recapture will be at 25%. Does that makes sense?
Jeff: Yeah, I mean that does make sense, because I have the tendency to say it’s probably not worth doing the costs seg if you’re planning on selling, because also what’s it going to do is lower the basis of your property.
Toby: Yeah. But?
Jeff: But, if you’re in are extremely different tax brackets from your capital gain property it does make sense.
Toby: And then the other thing is, if you’re saying it is November of ‘18 and now this is less than a year, so you’re going to get hammered on the ordinary tax treatment. I’m going to take as much deduction as I can for last year carried into this year, and then at least my recapture’s at 25%. I’m not aware of recapture being classified as ordinary income sold less than a year.
Jeff: No.
Toby: Yeah, so usually if you’re buying and selling, they’re not going to let you do that the depreciation, but you bought for the purpose of holding it. I hope that makes sense.
Jake, “If I set up an S-Corp just for my self-employed trader status, do I need to segregate funds, or can I use my personal bank accounts to support my trading?” Well, you’d have to have the trading account inside of the corporation. You can still fund it with your personal accounts, there’s no problems with that, you’re a shareholder. You put money in and out of S-Corp whenever you need.
“Can we write off repair expenses like roof shingles for personal hall?” The answer is no, you cannot. It is personal property, you don’t get to write things off for repairing your house, it stinks. They should change that but they don’t let you.
Somebody said “We’ve had it for less than six months and it’s $480,000 that’s that same property and in general.” I’m going to say do the cost segregation on that, it might make sense. I like an $80,000 amount that’s going to be instead of being taxed by ordinary bracket, it’s going to be moved out and taxed at 25%. “Can cost segregation be used on existing rental property?” Yes, in fact, you can go back and grab, I think, six years.
Somebody then said “Totally, I do have a Nevada C-Corp. I live in Illinois but I don’t think Jeff understood my question on taxation of refund next year on state income taxes from prior year.” Robert, you have to email that in because I have hundreds of questions that just came in over this last little […]. But we’d be happy to answer it. This is a good time because it’s 04:30 PM. We’re a little bit over. Only 50% over. Yay.
Jeff: We’re still short.
Toby: Yeah, sometimes we go a little longer, but I’m going say this is a good break in time. Guys, I just want to thank you for hanging out with us, and making these things fun. Somebody said “What deductions is going to take as a W2 contractor in Washington?” If your W2 you can’t. We actually went over that one. Alex, if you didn’t hear it listen to the recording because we did a big section on that W2 contractor earlier on. That was one of the main questions that we answered, so I’d go back and listen to that portion, but unfortunately, the non-reimburse employee expenses is gone under the Tax Cuts and Jobs Act.
Alright guys, you know what, invite your friends next time. These are fun, we want to keep spreading the word, it’s always good. I think that every time I see questions where I know there’s anxiety behind the question, and it’s a big thing that someone’s going, “I’m afraid to ask.” I appreciate you asking, and I appreciate the opportunity to be able to answer it. Hopefully, not just ,but Jeff obviously, but it always helps us as people to be able to get some answers to questions. It’s always better when you’re not being built $300 an hour for it, right?
Jeff: Absolutely.
Toby: Jeff likes to bill. He starts writing invoices and he just doesn’t know how to bill for multiple questions asked. If he ever figures it out, we’re going to have to remove him from this because he’ll start sending everybody a bill. Jeff is one of the few accountants that I genuinely like because he has that spirit of sharing, and the first thing he says is always no. He’s usually a thinker, so I appreciate that. Alright guys, next time, two weeks, listen to the podcast, tell your friends and we’ll see you next time.
Jeff: Thank you.
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