Where’s the cash, and what will give you the most bang for your buck? As you learn more about COVID-19 and related tax relief options, you probably have more questions. Toby Mathis and Jeff Webb of Anderson Advisors offer clarification on how and when to consider early distribution, loans, and paycheck protection. Time is of the essence. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- COVID-19 Tax Impact Updates:
- Paycheck Protection Program (PPP)
- Economic Injury Disaster Loan (EIDL)
- July 15, not April 15: Deadline to file and pay income taxes
- If I don’t have W-2 income, how do I qualify as a real estate professional as LP investor in real estate deals? It’s about time, not income, but there are restrictions
- Are you qualified for a PPP as a sole member LLC? Yes
- How did the SECURE Act change treatment of spousal-inherited IRAs and required minimum distributions from those IRAs? SECURE Act didn’t change anything that had anything to do with spousal-inherited IRAs
- Can I still file 2019 taxes to qualify for the COVID relief funds? Yes, if you didn’t make too much money in 2018
- How does the stimulus affect taxes for property owners? CARES Act doesn’t impact taxes for property owners
- I didn’t file in 2018 or 2019, will I still get the stimulus, if I qualify? Depends, if you are on social security and/or you’re required to file a tax return or not
- Does the bill have provisions for unemployment compensation for those self-employed? Yes, federal government requires states to pay unemployment
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Go to iTunes to leave a review of the Tax Tuesday podcast.
Resources:
Tax-Wise Business Ownership by Toby Mathis
Unlock Free Money from the New Stimulus Bill – CARES Act with Clint Coons and Toby Mathis
Paycheck Protection Program (PPP)
Economic Injury Disaster Loan (EIDL)
COVID-19 and the Family and Medical Leave Act Questions and Answers
Small Business Administration (SBA)
Individual Retirement Arrangements (IRAs)
Real Estate Professional Requirements
Capital Gains Exclusion/Section 121
Employer Identification Number (EIN)
Non-Filers: Enter Payment Info Here
Full Episode Transcript
Toby: Hey guys, this is Toby Mathis.
Jeff: And Jeff Webb.
Toby: And this is Tax Tuesday. First off, welcome. Thanks for joining us. I know there’s lots of other options right now. I’m sure there’s lots of things, you’ll be watching Tiger King or whatever else. Did you see the special announcement?
Jeff: No, I didn’t know.
Toby: Oh my gosh.
Jeff: I had to come into the office so I wouldn’t have to watch Gilmore Girls again.
Toby: Oh, boy, all right. Hey, we have a lot to get through. I think that’s probably a good thing. First off, can you guys hear this loud and clear? Let us know if we’re coming through. If you need us to adjust volumes or whatever else, we can certainly do that. We have lots and lots of questions already coming in. I’m just going to answer a couple of them just because this is going to be lots of questions, I’m sure.
Number one, somebody says, “Hey, I have a 2018 net operating loss, I want to carry it back. Do I have to carry it back to 2013 or just back to 2015?” It’s as far back as it takes to use up your loss, using each year. If you have a 2018 NOL, you can carry it to 2017, 2016, 2015, 2014, 2013, in that order, you have to use up all the losses. Or you could elect not to carry it back at all and you could just carry it forward. How many years?
Jeff: Yeah, and definitely now.
Toby: Yeah, definitely. You could wipe out 2019. It depends on what’s better for you. The net operating loss, that’s a business loss, there’s no such thing. “Is there a NOL for an individual?” I don’t know how you would do it.
Jeff: Yeah, but would still have to be business related.
Toby: It’s got to be business related, yes. “I just sent in two questions via email.” Diane, you still should ask him here because we have hundreds of emails that come in.
“Most of our business income is considered passive income from real estate. I do not take a paycheck. Also, our rents have been coming in. Do I qualify for a PPP or EIDL?” Great question, it depends. For the PPP, you got to have payroll or active business. It’s going to be something on a Schedule C or it’s going to be a W-2.
If all you’re doing is passive real estate, chances are that’s not going to qualify. For the EIDL, it’s a loan, it’s not like it’s the PPP where there’s a big chunk of forgiveness, it’s just a loan. You have to be damaged by the Coronavirus, which means a lot of folks are waiting for the other shoe to foot.
Jeff: Shoe to drop.
Toby: Shoe to drop, there we go. I’ve been drinking a lot today. You’ve got to make sure that you actually have damages. A lot of folks, they believe they’re going to be late. I looked at the stats from the National Multifamily Organization yesterday. I forget the last two letters to it, or it’s a four letter […]. What they did is polling their folks, they collected 83% of their rents. That’s not low, that’s actually right on to the first week of each month. If they’re going to have a drop, it’s going to be next month. What they did have a spike in is working out payment plans for people. They collected quite a bit, but might be pushing some of the rents in the future.
“Do we have to use NOL in reverse order?” Yes. Lee, we were literally just having that conversation. NOL is used to take it back to the farthest year, and then carry it forward. Now, you use it the most recent year and you go take it back. All right, we have lots and lots and lots.
“I opened my solo 401(k) QRP, do I have to file a tax return for it?” Keith, only if it’s over $250,000 and you’re married. Is it $125,000 or is it always $250,000?
Jeff: It’s always $250,000 because it’s plan-related.
Toby: You’re right, I’m sorry. Thank God Jeff is here. Unless you have over $250,000. If you do have $250,000, then you file the 5500. That just got extended too.
Jeff: July 15th.
Toby: July 15th. If it was last year, we advocate that if you have $100,000 or so in it, it’s not a bad idea to file it even if you’re not required to just because it starts the tolling of the statute limitations for them to audit. All right, let’s go on. Here’s all our social media, all of our Facebook page, YouTube, if you like this sort of information. You’re a glutton for punishment, jump on and then absorb to your heart’s content. There’s actually a lot of really good information on these sites. We put out quite literally hundreds of hours of content on an annual basis, all of it free for you. You can go to these sites and get a lot of questions answered, get a lot of answers to your questions.
Tax Tuesdays rules. You can ask your questions live as you could see. Here’s the deal. If somebody sends me and you start trolling me because I’m not advancing the slides because I’m answering questions, then I’m going to make fun of you and I’m going to make fun of you live. I’ll probably call you out. The deal is we answer questions as they come in.
I do not show you guys the question coming in because there are names attached to it, and I am not going to violate somebody’s privacy. I want to make sure that nobody goes out and says something that could get them in hot water right on a webinar that’s been recorded. We read them out, we take out any personally identifying information. You may use some names once in a while, like a Lisa, like a Keith, like a Johnny, but that’s about it.
“Can I delay paying quarterly year 2019 estimated tax payments since tax returns are now due July 15th instead of being due tomorrow? I believe if I pay my estimated 2019 based on my 2018, I would be overpaying 2019 since my business has been damaged.”
Jeff: First and second quarters are going to be delayed, we’ll talk about that in a minute. I think they’re going to be delayed until July 15th.
Toby: Hang tight. The estimated payments you do not have to pay, everything’s been delayed.
“If I find a traditional IRA over the year, am I able to move those funds into a QRP?” Yes. In fact, under the CARES Act, you guys are realizing that you can get about $200,000 out of a plan if you have a QRP because you could take $100,000 as an early withdrawal, as long as you pay it back by December 31st, 2022. It’s this 3-year period, it’s actually tax years, so it’s the end of the 3rd tax year which is 2022.
As long as you pay it back, you pay no penalty, interest, or anything. You can do that with the first hundred but to get a second hundred out, you have to have a Qualified Retirement Plan. You have to have a 401(k), 403(b), 457. An IRA will not work and you take a loan out of it up to $100,000. You can literally get $200,000 out of an IRA if you want, […] into a 401(k). We’ll look into this stuff.
I’m just going to start jumping in because you know what? We have so much going on. You guys aren’t asking so many questions. I can already tell we’re going to be here till midnight. Jeff’s agreed to stay on until 1:00 A.M. We’re going to be done. We always say an hour, but it never seems to happen.
Updates on tax impact to COVID-19. We have a ton of tax stuff going on. More importantly, we have all these Paycheck Protection Programs, EIDLs, and all that fun stuff. Yes, David, they make fun of me in real time and they send me mean things, and it’s just not nice. Almost a quick slide. See, see, and he’s just sitting there going, “Why is that reporter asking me that question?” With disdain in his eyes, thinking of another $250 billion to dump into the Paycheck Protection Program.
Here’s the reality of the Paycheck Protection Program. If you don’t have a great relationship with your bank or know somebody who has a relationship with the lender, you’re not going to get a loan. If you do get the loan, chances are a big chunk of it’s not going to be forgiven unless you bring back all your employees. If it’s just you, fantastic. I just don’t think they’re going to give you a loan because the banks are picking and choosing.
We have a fantastic lender that we use and even though they are, still you could just see it. It’s like there’s a set number of dollars, and they want to be very comfortable that they’re not going to give money to somebody that they never get the money from the SBA. They are being very cagey. We have $160 billion that’s been approved which is different. I’ve heard of $160 or $220 billion that’s been authorized by the SBA.
People keep saying, “Where’s the cash?” They authorized the loan. The lender puts loan docs out and gives the money. We’ve had several people get their money but the SBA authorizes it before the lender gives you that money. They have 10 days, the lender has 10 days so your bank has 10 days from the authorization to give you the money. In the Act, it was 5 days and then the Treasury came out and SBA came out and said 10. They gave out guidance, written guidance.
Somebody says, “Is filing Form 1045 the best method for getting a Net Operating Loss carry back?”
Jeff: Yeah, I would say so, or the 1139 if it’s a corporation.
Toby: Yeah. And Jason, we definitely want to look because if you’re grabbing a loss in 2019, then we might be wise to really take a look and see what are the tax rates. The tax rates came down in 2018. They passed the law at the end of the year and it came down. Your best bank for your buck is actually to go back and wipe out 2018, 2017, and 2016.
Anyway, we have a whole bunch of fun stuff in the COVID-19 CARES Act, they’re going to add more. A lot of folks are paying attention just to the loan programs but the ability to access your retirement plan, the tax credits for employers, the payroll tax holiday, where they’re deferring until 2021. Those are all pretty potent too and can be very, very effective.
Let’s jump into our questions and then I’ll answer a bunch of life questions. Let’s see. “If I don’t have W-2 income, how do I qualify as a real estate professional, as an LP investor in real estate deals?” We’ll answer that.
“What are the tax implications of purchasing a primary residence? Then, also as a small business at the same address?”
“In 2017, I sold property and bought new property with the 1031 exchange. Can I sell the new property and move the gain from the original property into a qualified opportunity zone? How exactly is that handled?” Interesting question, by the way. That one’s kind of funky and it has to be interesting to dive into.
“If I want to sell my stocks as a person with long term profit, therefore large taxes, and then to invest these monies into my C-Corp to buy property for a flip, what is the best way of action to reduce taxes?”
“How did the SECURE Act change treatment of spousal inherited IRAs and require random distributions from those IRAs?” Gosh, there were two questions that ran. I think that one they’re funnelling this out. Sometimes they put them side by side, always why I should spread them out because they are similar.
“I inherited an IRA from my wife who is five years younger than me under the SECURE Act. When do I need to start withdrawing required minimum distributions from the inherited account? Do I need to start RMDs when she would have been 70 and a half or 72?” Good question, I’m sorry for the loss.
“Last year was a very lucrative year and many people have a very large capital gains burden. Now, with the current market conditions, these gains have disappeared and it may cause taxpayers the inability to pay the 2019 tax bill.” Yes, it’s happened plenty of times. “Do you have suggestions for tax management given these unusual circumstances?” Absolutely, we’ll dive into those. I should have removed it.
“My name is Bartolome and I am from Argentina. My country doesn’t have a double taxation treaty with the US. I want to invest in commercial real estate in the United States and live there. I already have a Social Security number. Is there any legal way to avoid being taxed in both countries and only be in the US?” This is Jeff’s favorite question. Why do you give me the look?
Jeff: That’s awesome.
Toby: Poor Jeff. I hit these up. I throw them to him sometimes at a time, sometimes I don’t.
Somebody says, “Do you need to file a personal extension by April 15th or July 15th?” By July 15th. You can relax, Greg. You don’t have to do anything. April 15th became July 15th. Any time you think, “I needed to do something by April 15th,” it’s really July 15th.
Jeff: Actually, everything between April 15th and July 15th became July 15th.
Toby: Everything got pushed. So, you’re good. All right.
“Can my IRA LLC invest into another JV LLC,” for those guys who don’t know this lingo, that means the IRA owns an LLC, probably to do real estate. JV is a Joint Venture LLC, “to purchase a single family home with the intention to sell once it has been remodeled?” Why is there a question mark? I guess it’s because it says can my invest.
“The other investor in the JV LLC is an individual, not a prohibited individual.” What is he talking about? There’s prohibitive people, disqualified people that you can’t work with like parents, kids, grandkids, and stuff. “The JV LLC will be dissolved after the sale is final. There will be no debt involved.” I will answer that.
“If a person gets a substantial insurance settlement, is it taxable?” I love that question. It’s always an interesting answer. “If it is not, can it be contributed to a Roth IRA? If it can, what are the restrictions for contributing it?” All right. We’ll get into that.
“Our employer would be willing to change part of our gross income to 1099 income.” I can already hear Jeff’s stomach gurgling over that sentence.
“We currently earn $100,000 a year gross income. If I were to set up $40,000 to $50,000 gross of that to be set up as 1099 income deposited straight into real estate or a thing entity to fund a future, hopefully in 2019, real estate purchase, what would be our tax advantage?”
“Can I still file 2019 taxes to qualify for the COVID relief funds?”
“How does this stimulus affect taxes for property owners?” Good stuff.
“How do we apply for relief COVID-19 through our corporation? We’re one of our LLC since we do business in our LLC name.”
“With 401(k) withdrawal penalties waived under the stimulus package says you need to have adverse financial consequences. What qualifies?”
“I manage Airbnb properties under my LLC but I don’t technically pay myself. I just take distributions up. Will I qualify?” I’m assuming they’re talking about the CARES Act, so I’ll figure out whether they’re talking about loans and I will go over that.
“I didn’t file 2018 or 2019,” assuming taxes. “I’m worried I won’t get the stimulus even though I qualify. Filling out an economic injury disaster loan has questions on the cost of goods sold. Is that just products or all of my expenses, including payroll?” As you guys can see, I take these questions literally as people write them. Sometimes we edit them up, sometimes we don’t.
“Does the bill have provisions for unemployment compensation for those who are self-employed?” These are really good questions.
“What are the tax implications of taking the latest COVID loan or grant from the SBA?” If they forgive part of it, I wasn’t taxed and curious how the stimulus package can help flippers. Then, you guys have a gajillion questions.
Before we do that, on Saturday, I’m teaching Infinity Investing. If you’ve never done that workshop, come and join us. It’s free because it’s free and we always go over it. It’s a lot of fun. If you like taxes, then you will love Infinity Investing because it’s all numbers-based and a little checkup from the neck up. We had a little fun. I use a lot of history and a lot of number analysis of the most successful Americans who file taxes because they have to file in order for me to calculate their data.
Jeff here and his team well over 5000 returns a year and we look and see who’s making money and what they do. We do a little calculator and we figure out how you can finally retire. Now, we don’t even say retire, just how do you live without having to work and that’s the goal. How do you give that on? We raise a whole bunch of companies and we have lots of fun with that. You’ll learn what dividend kings or dividend aristocrats and how to write and how to become a stock market landlord. There’s all sorts of fun stuff, it is absolutely free. On Saturday, please join.
If you feel like you’re too good for it, which I get it, some of you guys are really good, have somebody young do it. Especially if they’re 16, 17, 18, 19, 20, before they get into crazy debt buying liabilities. We’ll teach them the difference between them and make sure it happens. We’ll make sure that they don’t do anything crazy and that their eyes are open and that they live a wonderful, prosperous life buying some assets.
Let’s jump into this and then we’ll answer a bunch of live questions. “If I don’t have W-2 income, how do I qualify as a real estate professional as an LP investor in real estate deals?” Jeff?
Jeff: The W-2 really doesn’t have anything to do with being a real estate professional. Being a real estate professional is how much time you’re spending working with your real estate activities. If your real estate professional has a limited partner, I think by definition, a limited partner is not going to be able to be a real estate professional.
Toby: Yeah. Here’s the deal. There’s the regs and I got to leg up on Jeff on this because we are digging into this about a month ago. What it is, the regs say that if you get more than 10% of your gross rents as a limited partner, you cannot be a real estate professional. There’s an exception. You are not an LP investor if you are also a GP in that same LP.
If you guys are following, it means you’d have to be the manager of that limited partnership or on the management team. Otherwise, that LP interest is probably going to disqualify because it’s considered passive. Regardless, you could have that. If there’s losses being kicked out of that LP and you are a GP, then they would just treat it all as GP and then those losses. You could still be a real estate professional but you’re playing with fire if all you are is an investor. You can literally disqualify all of your properties and remember, this is 10% of your gross rents from all rents that end up on your tax return. Look at everything. We’ve done this with doctors and other folks where you’re actually getting down to the nitty gritty saying here’s the ones.
If you don’t want that LP investor, sometimes we recommend people just make sure they’re investing in LLCs because the LP is what ruins you, the LLC doesn’t. It’s kind of weird and you should be talking to your syndicators and saying, “Hey, why are you doing this LP. You’re messing me up, stop doing that.”
Hey, let’s answer some live questions because I’m literally onto two pages now that I’ve not answered so I have to look at this. All right. Somebody says, “Are you qualified for a PPP—that’s a Paycheck Protection Program—as a solo member LLC taxed as a sole proprietor?” You’re doing flips. What do you think?
Jeff: I think the answer is yes.
Toby: It is a resounding yes. Get in there and apply because by my calculation, about 4½% of the businesses are going to get one unless they throw a bunch more money in it. Time’s a wastin. You can also do an EIDL, an Economic Injury Disaster Loan. If you want us to help you, we do have a package where we will go through the ends of the earth trying to find you money under the CARES Act if you feel like it. We did a wonderful Webinar on that, I’m sure there’s a replay that we did on Saturday but time is of the essence.
“I’m in the middle of a 1031 exchange and my 80-day got extended to July 15th from IRS notice.” I see what you’re saying. I guess it affected 1031. I had looked at that earlier and they were saying it doesn’t affect 1031s.
Jeff: Yeah. I wasn’t aware of that.
Toby: Yeah. If you got an extension, that’s kind of news for me. You got to be a little careful. I would actually check with your 1031 exchange facilitator but if you are in the middle of one, I know that you have the 180-day, maybe that’s what he means. Got extended, I don’t know about that.
Jeff: I haven’t heard that.
Toby: Yeah. Everything I’ve seen says the 1031 exchange were not brought in. James, I’d be really checking on that because everything I’m seeing, it says bad, bad for 1031 exchanges and I would actually be saying, we need to go park your money, do a Delaware statutory trust or something with somebody who has investments off the shelf where you can put your money and make sure you don’t have an individual.
Jeff: I was thinking just because you’re in the middle of a 1031 exchange with things being the way they are and you’re expecting your income to be substantially lower, if you’re expecting, maybe reconsider that 1031 and maybe go ahead and pay the taxes now.
Toby: And because you might have some losses from something else. If you have capital gain on your real estate and you have capital losses in the stock market, it might be time to dump some of those losers and offset your gain, right?
Jeff: Yeah.
Toby: Yes. Talk to your accountant. All right.
“Having S-Corps individually and putting them together in a C-Corp, will that save me from being double taxed?”
Jeff: No, you can’t do that.
Toby: C-Corp cannot own an S-Corp. It violates the S-Corp election and makes it a C-Corp. You just have one big fat C-Corp and yes, double taxed. That may not be a bad thing.
Jeff: But you can combine your S-Corps and make them Qsubs.
Jeff: Yes, you can. You do have to have one parent. If you have two, you could have one big in the Qsub but the other, that just means Qualified S Subsidiary, it’s an honor.
“I have a QRP profit sharing plan. I want to move it from my current broker to do investing. Can I still take loans out against this? If we move it over to our solo 401(k), can we take loans against up to 50% like the QRP?” Sherri, you want to answer that? You can give really good news.
100%, yes, you can. You can borrow up to 100% capped at $100,000 per participant. Just for giggles, the CARES Act says you could pull out $100,000 as an early distribution per participant. As long as you pay it back by December 31st of 2022, you do not have to pay tax on that, nor do you have to pay interest. You’re welcome. See, I get to feel special. I feel special now. All right. I’m on state taxes, I have no idea what. There’s some random questions here.
“I have a Roth IRA, but my income has increased over $100,000. How can I contribute to it now?” He has a Roth IRA. He makes too much money, I think, is what he’s saying.
Jeff: It’s possible you could do a backdoor IRA.
Toby: Jeff, explain that.
Jeff: What happens is you make a non-deductible Traditional IRA contribution. By making it non-deductible, you get bases in that contribution and then you roll it right into a Roth IRA.
Jeff: Yes, or if you really want to get twisted. If you have your own business, you do a Roth 401(k) and then you don’t have the income limitations.
“Confused on section 139,” that’s 26 USC 139 to be exact. “Specifically, must I apply through a government channel to claim relief reimbursements? Should I stop administrative office deduction so I don’t double dip? I’m still considered an employee of my C-Corp and I am not drawing a salary.” Jeff, do you want to enlighten them on section 139?
Jeff: For section 139, that’s the reimbursement for disaster relief. You should have a plan document of some type, but you don’t have to contact the government or anything. It just has to be a presidential declared disaster, which it is for the entire nation. Then, of course, document your reimbursements.
Toby: Great. Which means you can do it.
“Given first quarter 2020 tax estimate payment is delayed until July, will quarter one and quarter two be due essentially at the same time?”
Jeff: Correct.
Toby: Yes. “Early withdrawal from the QRP requires that you pay the income taxes during the three-year period, is that correct?” No. There’s an argument over this. I say that it says ratably over a three-year period and ratably does not mean pro-rata. Ratably means over some time over that. Technically you could say, “I want to pay it in year one, two or three or all of them,” and I would say, “Elect to pay it in year three, but then give it back,” which means you have a trustee to trustee transfer in year three, which means there’s no tax. See? Jeff is going to give me the sly look.
Jeff: No, I honestly don’t know what the answer to that is.
Toby: I say it’s stupid for them to require that you pay tax pro-rata is what they’re trying to say it is. Some people are saying, “You spread it out evenly over three years.” That’s not what it says.
Jeff: I think we’re going to see further guidance but it may be months before we see.
Toby: If you intend to pay it back, it’s treated as a trustee transfer. There is no such thing as taxation on a trust. It’s not a 60-day rollover. It’s a trustee to trustee transfer, which is not taxable. If you pay it back within three years and that’s how they treat it, there can’t be a tax implication.
Jeff: Right. I think that’s what makes it confusing. I have three years to pay back so I might have to start paying taxes on it in the first year?
Toby: Yeah, I would say that. Let’s just say that we took some people’s position and say, “We’ll spread it out over three years, so we’ll take $33,000 a year.” Then you’re going to have to file an amendment on the two years that you paid the tax to give it back.
Somebody says, “You haven’t heard the call, say, 8:30, Eastern Time.” Yes, I do. Toby does podcasts and these webinars all day long because nobody knows these CARES Act and they keep grabbing us.
“Does a withdrawal from a 457 deferred compensation count towards the $100,000? I want to take out $100 from a 403(b) and $70 from a 457.” It does count. But what you can do, if you can take the early withdrawal and a loan, you can get up to $200,000. We’ll start answering some of the questions.
Jeff: Assuming it’s an employer plan, when you’re a W-2 employee, does the employer have any say on these distributions or loans?
Toby: You have to give them a document—and we have that in our little loan portal—that says, “Here’s the reasons why I need it. It’s COVID-related, that I’ve been damaged from the COVID virus. It’s either I’m caring for someone, I have it myself, or I have been adversely affected.” Once you do that, they have to take your certification. Then they withdraw without the 20% withholding and without the 10% penalty. Does that mean that they’re going to do what they’re supposed to do? Quite often these folks are hoarding your money. I just get mad at them.
Let’s answer the ones over here. I’m actually going to make my little spotlights so you guys know when I’m actually answering a question that’s in, right? “What are the tax implications of purchasing a primary residence that also has a small business at the same address?” Jeff, what say you?
Jeff: Oh, it’s going to depend on what kind of small business you’re operating out of your home. If it’s just a home office or something like that, you’re probably being reimbursed by your company. I work with an accountant who had a large area in his home, such a loss. That was his accounting office, he was probably depreciating that. That actually becomes two different properties with the same property. You have your personal residence.
Toby: It’s like having business.
Jeff: Yeah.
Toby: It’s like a duplex when you’re doing the depreciation. Don’t do the depreciation.
Jeff: Yeah. If you do have a separate operation, whatever it is, you’re probably going to be depreciating part of your property, taking separate expenses for that part of the property.
Toby: Yup. More annoyingly, if you are a sole proprietor and you’re taking a home office, you have depreciation recapture when you sell it.
Jeff: Yeah.
Toby: Yeah. Here’s the right way to do it. Like always, have an accountable plan, that becomes your biggest friend. You have to have a business and it reimburses you, you don’t have to report it anywhere and you don’t have to worry about it. It’s just a primary residence that way. You don’t have to worry about it. But if you do anything else, you have lease agreements or you have a home office deduction as the sole proprietor, then you’re going to have tax consequences. It’s bad.
I’m going to answer some more live questions because you guys are hammering us tonight. Look at this. All right, I’m trying to stay ahead of it. It’s like an avalanche coming through. You guys are all Chatty Cathy’s today.
“Do I need to file a personal tax extension?” Oh, I already answered that. No, you don’t have to worry about that.
“Even before this whole virus hit, we have a few tenants who skipped town early on their lease. The total amount of this case, for example, including a two-month penalty for breaking the lease is $3300. What do we do in order to have to be a claimant as a loss in our taxes?” We never recognized it as income.
Jeff: Right. You can expense that portion of the money that you pay to try to collect it but lost revenue is not deductible.
Toby: Yes. “For real estate professionals, should the flipping rehab S-Corp be aggregated with the rental LLC for purposes of meeting the hours test?” You’re flipping properties in the LLC. The aggregation is actually for material participation. The hours test is a different test. It’s still under 469(c)(7) but you don’t have to worry about the aggregation affecting. What they look at for your hours is do you own at least 5% of the business and are you engaged? Technically, if I am spending the time doing the activity, construction, development or et cetera, then I meet the 7 or 50 hours, then whether I materially participate on my properties is a whole separate test.
Jeff: Right. You don’t want to aggravate your flips in with your rental properties.
Toby: Because then you’d have a bad situation, but you would never do that. It is just your investment properties, your flips are an active trader business.
“For an additional amount that can be taken out of a solo 401(k), do you have to prove you’ve been affected?” On the loan, you don’t have to prove that you’ve been affected by the Coronavirus to take the loan, only on the early distribution.
Somebody says, “How do we check on the SBA website to see if we’ve been approved?” It depends on what you’re looking for. On the EIDL, there should actually be a link there that says the status of your loan, here’s your loan number.
Somebody says, “Not hearing much from Jeff. At least he’s funny and interesting.” See, they troll me.
“I’ve been a beginning real estate investor since late last year. I have not closed the deal but I spent marketing dollars and money on software tools to help me research properties. I do not have an entity established. Can I still qualify for EIDL since seller appointments and the like have significantly followed off or fallen off?” He hasn’t closed a deal and he’s not an entity.
Jeff: I don’t think he’s got any interest.
Toby: Yeah, I don’t think you have anything yet. You’re not even a business yet. You have to be a small business, I don’t see how you’d qualify. Sorry. That’s almost always why we’re setting up a business.
“Have they promulgated the rules for Qualified Retirement Plan loans? Where can I find the rules and terms they issued in the CARES Act?” All they did is they changed the 50% to 100% and they changed the 50% of your achieving the $50,000 to $100,000. They literally just edited the existing law.
“Saw you whether on this CARES Act was available, it looks like there is nothing a trading business structured LP managed by a corp can do. Do you agree?” It’s tough. There’s some things out there, like if you wanted to go for regular financing, but if you have a trading account, I’m just going to give you one that I’ve used successfully in the past. That’s called a Security-Backed Line of Credit.
If you have a blue chip account or like you have a good sized amount in there of blue chip companies, they will loan you on that as security and give you a line of credit that you can use. It’s usually LIBOR plus a small like a half of a percent, 75 basis points, thereabouts. It’s pretty cheap money. You may want to talk to your brokerage firm about that. Do you have anything on that?
Jeff: No. I was just wondering if they’re paying a management fee, a guarantee payment to a corporate member, or a partner. If they stop making those payments, could the corporation have any kind of argument?
Toby: I know what you’re saying. We had that discussion with the bunch apartment and they said the managers, the one who has the claim of right and then they could pass it down to the assets that are being managed by the LLC. I guess technically, you could say, “Hey, we’re struggling and we’re going to lose our revenue.” But it’s not a payroll. It’s not payroll, it’d be the EIDL.
EIDL is the loan. Even though they say there’s $10,000 that could be free, at the end of the day, it’s a 30-year loan to 3.75%.
“Can I transfer the deed of my timeshare as a gift to a nonprofit?” Yes. Let’s jump on.
“In 2017, I sold property and bought new property with the 1031 exchange. Can I sell the new property and move the gain from the original property into a qualified opportunity zone? How exactly is that handled?”
Jeff: You bought a new property with a 1031 exchange. Yeah, you could turn around and sell that property.
Toby: Here’s the deal, this is where it gets weird. Qualified opportunity zone requires capital gains to fund it.
Jeff: And it’s going to be a long term capital gain, correct?
Toby: It just has to be qualified. It just has to be a capital gain, so it can be short term or long term. The qualified opportunity zone is where you invest in something. You defer your taxes, you pay your taxes on that gain, on the original amount after six years because I think that’s the longest period of time we have before they make you pay it. You’re going to have a step up in basis, 10%. You’re going to pay 90% of that gain. Long as you own the property in the qualified opportunity zone, you meet all their little tests, you pay no tax until 2047, something like that, where you’ll have a step up in 2047.
You don’t pay any tax, any of that gain anytime soon. The problem is, is you need to have capital gains. If you 1031 exchange, the only amount is if you sell that, you’re going to have to pay tax on the gain of the original property that you sold in 1031 exchange. The first property you sold rolls into the 1031. That basis is now your new basis. You’re going to pay tax on whatever that gain is and you’ve got to make sure. It gets crazy.
Jeff: Yeah, I hadn’t even thought about that.
Toby: In a while. I love these types of questions where you start digging into them and it makes you go, “Hmm. I’d have to run the numbers on it,” but I’d be looking at it saying, “What was the original property bought something in 2017?” If it’s like pretty much, not much huge amounts of gain, maybe we do it. If it’s a lot of gain, maybe we don’t. The other thing is do you have a bunch of losses in the stock market right now? Thump your stocks, don’t pay any tax. You could roll your capital gains on that other one and push it out farther, I imagine.
“If I want to sell my stocks as a person with long term profit, therefore large taxes, it’s up to 20% plus net investment income tax, the 3.8 plus your state tax, that be the max.” The maximum I think you’d ever pay is about 38%. Otherwise, you’re probably talking, it could be as low as 0, 15, 20. But anyway, “He sells this and then invests into a C-Corp to buy property for a flip. What is the best way to reduce taxes?”
Jeff: This one really stumped me because if he wants to sell a portfolio of stock and put all of that proceeds into the C-Corporation, he’s going to have to pay tax. You can’t carry back losses. I could not come up with a way to do this.
Toby: The only way you’re going to be to do it and avoid taxes if you sell something that has losses to offset the gain. Let’s say you’re married, filing jointly, and you’re keeping below the $80,000, what’s your standard deduction or whatever your deductions are, your long term capital gains rate would be zero. If you are putting that C-Corp in a qualified opportunity zone and it qualifies, then you’re going to get at least a six year deferral and then you won’t be taxed on any of that growth. If you’re buying properties for a flip and you’re in an opportunity zone, that you might be out to avoid it.
The only other thing is if you’re depending on the type of activity you’re doing, if this is for low to moderate income housing, then maybe a setup. Instead of doing a C-Corp, you do a 501(c)(3). If that’s what you’re going to do, you’re going to help out people who are moderate income doesn’t mean low income, but it’s low to moderate, normal families. Then I could give the stocks to my non-profit right off the fair market value and sell the stocks, pay zero tax, and have all the money in there. But then, to get the money out, I’m going to be paying myself a salary or something like that. There’s ways. But the simplest way is going to cost you tax. That’s the thing. That’s how taxes usually are.
Let’s go to some live questions. “I have a JV LLC with two other partners for the purpose of fixing and flipping a house. Each partner is listed as an individual. Should I sign my piece to my C-Corp. I want the profit and loss to go through the C-Corp rather than me.” If you’re flipping, you don’t want that hitting you personally.
“I have a 401(k) with my W-2 job and do not see the $200,000 load cash distribution, two options from the CARES Act. Are employers legally obligated to provide these for the CARES ACT or is that optional?” Technically, it’s your money. It’s up to your plan documents but I believe what they’re looking for is a hardship loan. When I look at the documents and I was looking at TD Ameritrades yesterday, they have a hardship where that’s where you’d put it. You say, “Here’s the reason I want the distribution.” Then you take it out. But that’s your money, you’re allowed to take the money out if you want. It’s just the administrator, the folks that are managing that money are the ones that have requirements to do withholdings unless you tell them, “It’s under the CARES Act and here’s why I need it.”
“Is there a relation between taking an EIDL loan, an Economic Injury Disaster Loan, for business while on the other, investing other personal money in real estate deals or syndication?” Do you want to?
Jeff: Yeah. I’m not sure that they’re really related. I don’t think anybody’s going back and looking at what you have personally and why aren’t you contributing that to your business?
Toby: Jeff is 100% correct. What you use the EIDL for is very different. You have to use it for your operations. You cannot pay yourself a distribution or give yourself a bunch of money out of the EIDL loan. You can’t use it for the same reason you have a PPP loan, if you have that too. Your other money is your money so you can do whatever you want with it.
“The deadline for Roth IRA contributions is April 15th through July 15th. It is July 15th. Can a real estate broker pay commissions directly to a C-Corp or does it have to be written out to the agent first?”
Jeff: I think that’s going to be dependent upon state law. A lot of states will not let you pay commissions directly to a non-license broker.
Toby: It’s up to your state. There is a case that came out, the… I’m blanking out on it. He was a broker, a financial broker, did securities and he wanted it to go to his S-Corp. He would just deposit the checks, he’d endorse them and deposit in the S-Corp. The IRS said, “No, you can’t do that.” They were right for him because he didn’t have a contract and he never let the employer know.
When they came out of it, they said, “If you let your employer know and say that you are working on behalf of a company and all of your actions with this particular company where you’re getting the check, you’re a broker, all of that is on behalf of the company. Then, you have an agreement with the company, you get to keep it inside the corporation.” The answer is even if your state laws say, “Hey, I can’t pay an entity, you could still get it in there and treat it as tax to the entity if you want to,” then you don’t have to ask permission.
“I did a refi with a cash out and then I used the house for a business purpose. Is short term rentals still a good way down the road?” Susie, pull the money out of the house. Just know that that is no longer a permissible use for your home finance. If this is your personal residence, you’re going to have to make sure that you’re running the expense off the interest as an investment loan.
If you’re doing it for short term, the Airbnb stuff, there’s still a market for it. I think that all the hotels and everybody is going to suffer for a while. But could you still do it? Absolutely. I’m not going to tell you not to. Just know that when you rent for seven days or less, it’s active income. We suggest you use a corporation as the host like with Airbnb and that you rent the house long to the host.
Generally speaking, I’d have rental properties in an LLC and I would lease it on a monthly basis to my corporation, which will, in turn, lease it on a two- or three-day period and pay me rent. I am an investor and I can take all that depreciation and offset all my income. I don’t have to worry about active income, Social Security.
“What time is the Webinar on Saturday?” It’s a wonderful livestream at 9:00 to 5:00 Pacific Standard Time. That’s the Infinity Investing. If nobody knows what that is, Pettier or Susan can maybe put that in the chat so everybody has access to it. It’s really fun. I’ve been teaching it for years. It is at the Hawaii Convention Center. We were in Bourbon Street or right off of Bourbon Street, New Orleans. We’ve tied up in a bunch of cool places and it’s fun.
“FYI, I received EIDL today.” Wow, $1000. You got the money. If you don’t mind, what day did you apply for that disaster loan? Just let me know so we could help because I have people that we did the EIDL even before the passage of the CARES Act, we didn’t request and they were all ready. We sat on it until it passed and then we did the request and we did the paper application and then electronically, we went in and applied it even on that Saturday and Sunday. We still haven’t seen those moneys. It’s always interesting. If you’re willing to share that, could you let us know what date it was that you filed for the EIDL?
“If you have a C-Corp and LLCs, however, no expense. How do we still qualify for the COVID fund?”
Somebody says, “If I have an LLC and a corporation, could I still apply for the EIDL?” It’s what it really comes down to and it can be tough to prove your expenses. But if you’re in the middle of a rehab, for example, and you have a postponement, then you would just show them that the month before, whatever it was that you were trying to do the rehab and how much it was costing and your projections, and you could make an argument. Just remember, in that case, no employees, you’re not going to get the emergency advance, but you’ll get a loan and it’s a 30-year loan at 3.75%.
There’s also, “What if we’re behind filing our personal taxes for 2017 and 2018?”
Somebody says, “I heard Social Security will still get their $1200.”
Jeff: Social Security, they’ve decided to mine the Social Security files and everybody who signed up for Social Security is going to get a stimulus check. They should be drug deposits in that same account.
Toby: They don’t have to file the 1040 because a lot of people are below, they don’t have any income.
“I have an LLC setup as a C-Corp that issues W-2 payroll. I need the PPP to do it, I’m only one employee.” Yes, Autumn, you would actually qualify. It would be two and a half times your average monthly payroll with the payroll amount capped. By the way, the payroll itself is capped at $100,000 of annual income so $8333 a month. But also, you’d add on health benefits or retirement plans too.
We got a client with a DB that actually became very relevant for, it’s not part of the hundred. They’ve put in $150, $200,000 a year to their DB plan and it became, “Hey, we could still get you a pretty sizable amount so you can continue to make contributions to payroll and things.”
“Can I purchase a fourplex property and being owned by an LLC after the purchase of the property?” Yes.
Let’s see. “How did the SECURE Act change treatment of spousal inherited IRAs and required minimum distributions from those IRAs?”
Jeff: Those questions are actually really easy. It didn’t secure and didn’t change anything that had anything to do with spousal inheritance IRAs.
Jeff: Correct. You are an exception to all these new rules under the SECURE Act. The only thing that affected you was your required minimum distributions, which by the way, you don’t have to take for 2020, but they don’t start until you’re 72. Here’s another question on that.
“I inherited an IRA from my wife who is five years younger than me under the SECURE Act. When do I need to start withdrawing required minimum distributions from the inherited account? Do I need to start withdrawing RMDs when she would have been 70 and a half or 72?
Jeff: No, I’m probably going to get those wrong but I’m thinking if she does not start collecting, it’s going to be based on his age, not hers.
Toby: Correct, that’s actually right. It’s based on his age. If he had started, then it’s going to be the longer, I believe, of her life expectancy or his, right?
Jeff: Correct. As far as computing what those RMDs are.
Toby: Yeah. This is where it is beneficial for you if you’re younger and you’re below 59 and a half and your wife, before she passed, was over that age, then you could actually qualify for early distributions too without the penalty. That gets really fun.
Somebody is already asking, “Did your slide stop or did my screen freeze?” See, they weren’t giving me heat. But we’re going to make fun of you anyway. Whenever I get the live questions, I tend to just read. See, Jeff? It’s really interesting. They’re still trolling me. Oh, my goodness. You’re not the only one. They’re just not very nice.
I hope you share that, by the way. There’s some people really suffering right now. “Last year was a very lucrative year and many people have very large capital gains burdens.” Yes because the market was doing great and then it crashed. “Now, with all the current market conditions, those gains have disappeared and may cause taxpayers the inability to pay the 2019 tax bills. Do you have suggestions for tax management given these unusual circumstances?”
Jeff: Yikes.
Toby: That’s great advice, Jeff.
Jeff: Yeah, we were talking about earlier.
Toby: When the CPA says, “Yikes,” you’re hosed.
Jeff: If you have gains in ’19, losses in ’20, those losses in ’20 don’t help you at all for ’19, you can’t carry them back. You can offset other losses.
Toby: Just carry them forward and then hope you make money in the future then don’t have to pay tax. Here’s what you do though, don’t sell your stock. Every step, every step that we’ve seen other than the AIDS epidemic, within six months, the S&P is in positive territory. Zika, Ebola, Swine flu, Hong Kong flu—all of them. Within six months, the S&P was up. Here’s what you do, nothing.
Jeff: I had a client in 2001 after 9/11. The market is closed for what? Three weeks?
Toby: It wasn’t quite well.
Jeff: But it was a long time. But the day the market reopened, she sold everything and took a whoopin.
Toby: I shouldn’t say this is funny, but when the tech bubble hit, we had all these people that were going out there and there was a CPA, Pied Piper of Traders saying, “Everybody file for trader status and make a market-to-market election. What that means is that you get to pay tax whether you sell your stock or not. I remember this like yesterday, all these people coming in going, “My stocks are worth less than the tax on them,” because they were forced to pay tax on these companies that ran up in December and then popped in March, right before tax season.
Jeff: I’m going to get on my soapbox about this, because what we saw, especially in 2001 with the tech bubble crash, a lot of people, especially older people in totally wrong asset allocations, lost a great portion of their retirement money.
Toby: And we’re still battling the fiduciary. If you’ve ever seen me talk at a convention, you’ve seen me real on this, the fiduciary responsibility. I live in a state in Nevada where you cannot be a financial adviser without being a fiduciary. It’s very different in most states. Most states that people wouldn’t think about it for Nevada but you want to have a fiduciary. These brokers will just allocate your stuff. It just has to be suitable when they get away with really hosing people over. It makes me very upset. They’re the same ones that bought all this stuff. Anyway, you won’t get into it. I get all cranky.
“I am from Argentina. Diego Maradona.” The Phantom Punch or whatever that is. “My country doesn’t have a double taxation treaty with the US,” it basically doesn’t have a tax treaty with the US. “I want to invest in commercial real estate and I want to live there. I already have a Social Security number. Is there any legal way to avoid being taxed in both countries?” Yes, you move to the US. There’s two countries on the planet that tax you based off of where you’re a citizen of, the US is one of them. The other one is some little island someplace. Anyplace else, it’s where you’re a resident of. If you live here, you don’t have to pay taxes in Argentina.
Jeff: He says he has a Social Security number. I know it might be a TIN, a taxpayer identification number, but if he’s got a Social Security number, then he’s a resident, he’s a green card holder.
Toby: He is a green card holder. He came here either on a visa or something else. Am I getting that, by the way, you are taxed even when you live in Argentina on all the Argentina money? Like the US says, “Hey, you’re a resident here. We’re going to tax you on all of it.” The other way is to use a C-Corp and you don’t pay the tax, you let the corporation pay the tax. It depends, use the numbers and we calculate it.
There’s a few times like Canadians like the C-Corp because Canada just hammers the hell out of them. If you’ve ever seen TaxWise, you’ve seen me too. Every time you’re mad about taxes, just remember Canada. That makes you smile. Their Tax Freedom Day is June 15th, which means they work half the year to pay their government. We love Canadians. Trudeau, he’s a nice guy. Oh, I have to get on to something here. Somebody is reminding me that I have other obligations.
“Can my IRA LLC invest in another JV LLC to purchase a single family home with the intention to sell once it’s been remodeled? The other investor in the JV LLC is an individual, not a prohibited person so we know that we don’t we’re not dealing with disqualified people. We have an IRA, flipping house with somebody else. There’s no debt involved. Is it a prohibited transaction? What are the tax implications?”
Jeff: It’s not a prohibited transaction, you can certainly do this. The only problem with this is you’re flipping and flipping as business income. Your IRA is going to end up paying tax on any profits under the UBIT.
Toby: You’re not going to pay any, right? You don’t think you would hit an IRA when they’re just a passive person like they can’t participate in the remote. I’ve never seen a hit. When the IRA is passive, I think you’re okay. If you, as the owner, pick up a hammer, you’re toast. You just violated the IRA even if it’s on behalf of the JV LLC. As long as you’re just sitting back there, it’s just non-tax to you. You’re getting a K-1 and I would make sure I clipped a passive, wouldn’t you?
Jeff: Yeah. I mean, you want to make this look as much as investment income as possible and not business income.
Toby: We’ve looked everywhere for any case lost on UBIT for flipping and we’ve still never seen one. Doesn’t mean it won’t happen, but we would love it if the IRS would someday take that and just know because some people say, “Oh, it’s fixed. It’s five, it’s four, it’s three.” Basically, nobody’s ever looked at it.
Here’s a good one. “If a person gets a substantial insurance settlement, is it taxable?”
Jeff: Assuming that it’s life insurance, no, it’s never taxable.
Toby: If it is not, can it be contributed to a Roth IRA?
Jeff: It can not be contributed directly to a Roth IRA. It doesn’t even qualify as earned income to make you eligible to contribute to an IRA. If you are eligible to contribute to any kind of IRA, a part of that money, up to some thousand dollars can be contributed. But you’re not going to get a half million dollars into that Roth IRA.
Toby: But you’d also have to be active income, isn’t it?
Jeff: Yeah. You’re going to have to have active income.
Toby: Yeah. Even if you get the money from the insurance and it’s in a life insurance settlement for example, then you wouldn’t put the insurance money and you’re putting in other money and you’re just covering your expenses with the insurance money, yet they have active income to do the Roth. But let’s assume that it’s not life insurance, let’s say that it is an insurance settlement because you sued somebody because you got hit by a car. These are the ones I love.
Jeff: I know what you’re getting at, especially if it has to do with lost wages due to the accident. Can that be classified as earned income?
Toby: Yes. It gets even worse. If you have attorneys fees, you have to sue somebody, they’re taxable too. You have to pay tax and then you have to give it to your lawyer who also has to pay tax on it. They try to get creative in some of these settlements now. If you receive money for anything other than bodily harm, chances are it’s taxable. Monetary awards, any interest that you get, punitive damages—those are taxable.
Lost wages, taxable. Lost profits, taxable. Emotional distress, taxable. Civil rights damages, taxable. Patent, taxable. Copyright, taxable. Attorney’s fees, taxable. Settlement of pension rights, you sue under a […], “Hey, I’ve got a bunch of money,” taxable. But if I break my leg, it is not taxable. Bodily harm, not taxable. those are the only ones I know. If you’re going to settle somehow with your insurance, it better be for some serious pain that you suffer.
Jeff: Hurt yourself first.
Toby: Yeah. Let’s see. “W-2 income is a federal employee with the thrift savings plan. Can I borrow or withdraw those funds under COVID? I’m 57 years old.” Yes, you can. A thrift savings plan, what is that?
Jeff: That’s the government. That’s the federal government.
Toby: Is that a forfeit?
Jeff: More like a 401(k) than anything or 457.
Toby: It is a 457?
Jeff: Yeah.
Toby: I believe it is. I want to say a 403(b) or 457, I can’t remember. I’m going to say that, yes, but check with your administrator because I believe that is falling into categories and it’s much broader than what I laid out. It’s actually any qualified plan underneath the specific chapter in the code. When you go in there, it’s pretty much anything that’s not an IRA.
Jeff: I try to be careful with federal plans because you often see carve outs for these plans that they’re not included in certain definitions.
Toby: That’s why I would talk to the administrator.
Somebody says, “Can I pay a high interest personal loan with a low interest EIDL loan?” Not a personal loan, but for the business you can’t, normal operating expenses. If you have expenses that are related to that business on a high-interest rate, yes.
“Is there a credit score problem with the EIDL loan?” Yeah, they can look at your personal credit, but they cannot—under the EIDL under $200,000, they can’t do collateral or personal guarantees.
All right, let’s go back to the live one. Where’s my little dot? There it is. “Our employer would be willing to change part of our gross income to 1099 income.” This is why I said you were having stomach issues. “We currently earn $100,000.” What are you having stomach issues right here, by the way?
Jeff: I’m not sure why we want to do this.
Toby: If you’re an employee, you’re an employee. If you’re getting paid as an employee for X, and then they say, “I’m going to split it up.” You can’t do that. You can’t get paid as an employee and a 1099 for the same work. If you are an employee and they say, “Hey, I want you to do some work after hours building cabinets here, or doing carpet, or cleaning, or fill in the blanks,” something that is not part of your job title, then they can 1099 you.
What they can’t do is say, “Hey, how about I just 1099 you on part of this and others?” You have so many issues there, but not the least of which is something called 199A where they specifically said you cannot change income from W2 to 1099 unless you have a valid reason to do that.
Jeff: Actually, the employer is at risk here because there’s a good chance that the IRS is going to come back, reclassify as an employee. They’re hot on that trail.
Toby: Yup, and then they would assess both of you guys. Even if the 1099 paid their self-employment tax, they still hit the employer, so it’s always fun. “Can I still file 2019 taxes to qualify for the COVID relief funds?” Maybe you made too much in 2018.
Jeff: If you didn’t file 2019 and you filed 2018 and you—
Toby: I have too much money in 2018 so I’m not going to qualify, correct?
Jeff: And you’re just looking for the stimulus check, you’re fine.
Toby: Yup, you could file it.
Jeff: I’m not sure exactly how this is going to look. The stimulus checks aren’t set to expire until the end of the year, so I think they’re going to be looking at this as ongoing.
Toby: Yeah, and it’s an advance rebate to 2019, so it’s this weird tax credit thing where no, you’re not paying tax on it, no, you don’t pay more or pay less.
Jeff: I think that there’s a number of years ago they gave everybody an extra of $400, was it?
Toby: Tax credit so it’s not taxable.
Jeff: Right. Then decided the next year whether or not you should’ve gotten it.
Toby: Somebody says, “Can you clarify a backdoor IRA? Do you pay taxes on that?” You pay taxes when it goes to the IRA. Then since you didn’t pay taxes on it, you can roll that right into a 401(k).
Jeff: Right, so you’re not going to be deducting this IRA anywhere.
Toby: Let’s see, where is that? “My exchange 45-day window has extended through July 15, but my 180-day close window is still the same.” Thank you very much. All right, the 45-day under a 1031 exchange.
Jeff: The identification.
Toby: Thank you so much for giving that. I didn’t know that the 45-day was extended. I knew the 180, I knew that wasn’t, and that was freaking me out.
Jeff: That makes sense. They don’t want people going out looking for properties.
Toby: You can’t. They pretty much have you toast. “1031s got extended through July 15th was from a California official.” You got to be a little careful because that’s California, and that’s not federal law. “IRS notice 2020-23 as influent in 31.” We’ll take a look at that so maybe we have it. If we find something it says, “Although the annuity looks like it’s written into where this knows extends the 45 or 180-day deadline.”
All right. We’ll take a look at it. It looks like they may have extended it. There are a few people saying that they extended it under the 1031. What we need to do is email that in that way we can read over the notice. There’s a few of them that came out in the last couple of days. We can look at it.
“Are stock market losses still limited to $3000 a year?” No. The $3000 is against active income. If you have other losses and you have other income, then it offsets the income. Capital losses offset capital gains first, then your ordinary active income up to $3000.
Jeff: I think it’s been that way since the early 60s.
Toby: Yup. “I am 59 and a half and I’m eligible for a 401(k), which we’re all. I take the $100,000 loan out before under the COVID rules, how would that be treated to pay back or should I wait to withdraw and pay taxes? What is the best strategy?” Being 59 and a half, it just means you don’t have the 10% penalty, which it would still be taxable, so I’d borrow the money out, and I don’t have to pay tax on it.
If you want to pay taxes you go. You could just distribute the money back out. You pay it back, distribute the money out as you go. You could pay it back and then just take that money out—pay tax on it whenever you take it out. That might be the best way.
“I have an old pension parked at the county I used to work for. I never became invested so I’d like to move it somewhere. If I want to move it, could I be a self-directed IRA?” Sharon, yes. You could either do it into a solo 401(k) or self-directed IRA. If you’re going to do real estate I’d tell you, “It’s much easier to be the administrator under your plan and not have a custodian.”
Depending on how much it is and how active you’re going to be, I’d probably do a 401(k), plus it is not subject to unrelated debt financed income. IRAs cannot borrow money and not pay tax. A 401(k) can borrow money on real estate and not pay tax. “How does the stimulus affect taxes for property owners?” It doesn’t really.
Jeff: No.
Toby: Not that I’ve seen. There’s nothing in the CARES Act that really seems to affect taxes for property owners that I’ve seen. Really nothing more. It didn’t touch SALT limitations. The only thing that affected is the technical correction of qualified improvement property. If you fixed up a property that was a part of a leaseholder—you just improved it—you could actually do the accelerated depreciation on that portion. It’s classified as 15-year property.
Jeff: We’ve been waiting on that correction for over two years. The other thing that does affect is—we talk about that NOL carryback. If you’re a real estate professional, you would have active losses that you might be able to carry back now. If you have substantial losses in a 19-year or 18-year real estate professional, you may want to take a look at carrying those losses back to earlier years.
Toby: “How do we apply for relief (COVID-19) through our corporation or one of our LLCs since we do business in our LLCs name?” There are two major plans under the CARES Act. There’s paycheck protection programs and EIDLs—economic injury disaster loans. Under the paycheck protection program, they waived affiliation rules. Under the EIDL, they did not. If you were to apply for relief under the PPP, you’re looking for wherever you pay a payroll.
If you do not have the payroll but you do have the properties themselves, then I would have each LLC that owns property—actually, a PPP would make no sense unless you have active income. It would have to be something where you actually paid a salary or if it was a sole proprietor like an infinite contractor or where I was getting paid and it was going under the Schedule C.
I don’t see that is the situation, although it could be one of your LLCs depending on what it does. But the EIDL, you would just literally pick one. This is an area for confusion because you have one entity pick up all of the revenue. You treat it as one big consolidated unit because you are the owner in all of them. It doesn’t have to be 50%. You don’t have to be an owner. If you control or you have veto rights, then you are part of an affiliated group and they lump them all together.
Under this scenario, you have a corporation, you have other LLCs. If you have control over those—even through the corporation—if it’s you at the end of the day that’s pulling the trigger on things or can veto things, then you do one EIDL, and you list one business there, and you list yourself as the owner, and they’re going to track it by your social. That’s what they told us. We’ve confirmed that with several SBA agents.
At the end of the day, if you are on multiple applications as a 20% grader, they toss the applications. They literally said they would pull them and toss them because you are an affiliated group, you’re on multiple entities. You should be doing one filing.
Jeff: To your point, if I have a partnership, and an S Corp, and a Schedule C, and a—
Toby: You got to be careful. Any owner that’s greater than 20% or has the ability to have veto power needs to do their own and only show up on only one application. They said they’d go by the owners and you if you show up on two, they yank them both. Don’t shoot the messenger, guys. We asked this by multiple people.
Let’s see. “With 401(k) withdrawal penalties waived under the stimulus package, it says you need to have adverse financial consequences. What qualifies?”
Jeff: That’s everything from, “I have COVID, aiding somebody with COVID.” The big one that’s going to affect most people is, “I need financial relief because of COVID because I’ve suffered damages.”
Toby: It’s a certification that you say, “Hey, it’s hurt me,” and they take your word for it. They have to. Has everybody been impacted by it pretty much adversely? Yeah. If you need the money, chances are you’re adversely impacted by it. If you don’t need the money then don’t take it, and don’t lie either. If you’ve been profiting as a result of this then this isn’t for you. This is for people that need funds, and the government created a little law that says, “Hey, if you’ve been hurt, then don’t worry.”
EIDLs also happen to be impacted. It’s the same thing. You’re in a disaster area and you’ve suffered adverse consequences. It’s not just, “Hey, I feel like getting it.”
Let’s see. “I manage Airbnb properties under my LLC but I don’t technically pay myself, I just take distributions. Will I qualify?” The answer is if you manage Airbnb and you’re getting Schedule C income, it matters where this goes. If it’s Schedule C income, then you would qualify for both the EIDL and the PPP loans under the CARES Act.
If you’re taking that money and you’re misclassifying it—let’s say you manage the properties, you don’t own them, then there’s only one way to be doing that and that’s as a Schedule C. If you don’t, you’re just taking it somehow someway as a Schedule E and you’re treating it like, “Hey, I own the house. Even though I manage it I own it so I’m treating it as a passive activity,” you may want to go back in and refile your previous year’s return. Because if you are seven days or less, you’re an active business.
If you’re Airbnbing it, the average is about four days, chances are you are an active. I know I’m way over. Bad, Toby. “I didn’t file 2018 or 2019, I’m worried I won’t get the stimulus even though I qualify.”
Jeff: As we talked about before, if you’re on social security, you’re going to get it. It’s probably going to be slightly longer but you’ll get it. If you don’t have to file a tax return, there is a website—IRS website—I believe it’s called non-filers. Look up non-filers stimulus checks and you’ll see where you can enter your information. It asks for some basic information: banking information, your address, your name, social security number, stuff like that.
If you are required to file a tax return and have not filed 2018 or 2019, I suggest you get something filed.
Toby: If you need to, jump on it. They even have a simple return, right?
Jeff: That’s what they’re doing for the non-filers is a simple return. I’m not sure that you can do it if you have other filing requirements and just have not filed your tax return.
Toby: Gosh, there’s a bunch of questions coming in. You guys are just crazy. Somebody says, “Can a QRP be a Roth?” Yeah, it can be a Roth 401(k). “Could you roll a traditional into a Roth to take advantage of some of the bad stuff that’s going on?” Yeah, absolutely. If you think that your taxes are going to lower this year than when you retire that’s what you do.
“I had my first employee on January 1, 2020. Do I qualify for PPP?” The answer is yes. Wendy, they have a special deal for you. As long as you’re in business by February 15 you qualify. They would use the average income between January and February that you paid that employee. “Took a loan, I want to convert it to a distribution.” I believe that you just classify the amount as distributions by not paying them.
Jeff: Right, and have a 1099R issued to you.
Toby: Yup, you’d want to make sure that if you are the person that you’re letting the accountant issue that out. “Do I have to be the trustee in order to transit my money without taxation?” No. You can go right to the administrator, you can go right to the trustee. If you are the trustee, it’s easy. If you have your own 401(k) it’s really easy.
Jeff: They are considering these distributions and rollovers as trustee-to-trustee, correct?
Toby: If you pay it back within three years, it’s treated as a trustee-to-trustee transfer so it’s not considered a 60-day rollover. For example, if you’ve done a rollover this year and your accountant says, “No, you can’t do that early withdrawal because you can’t have more than one in a year,” they’re missing it. It’s a trustee-to-trustee transfer, it’s not underneath that. The IRS actually gave us some guidance on that. I remember reading that somewhere. I know that that’s what the rule is too.
Filling out the EIDL under the CARES Act, which the EIDL that’s normal is SBA—again, a hurricane hits your house, messes you up, and you have a disaster. You’d still do an EIDL with the SBA. Here, it’s a special program where they’re giving you that $10,000 emergency grant. It says, “It has a question on cost of goods sold. Is that just products or all of my expenses including my payroll?”
Jeff: Cost of goods sold—by its real definition—is any cost incurred to produce goods or services. For example, in my accounting firm, my cost of goods sold is just payroll. If you’re producing a product, it’s going to be the cost to produce that product. We talked about rentals—short-term rentals and all—your cost of goods sold would be most of your expenses in those cases.
Toby: Your payroll can be part of cost of goods sold if you’re doing a service like you’re doing construction and things like that. I know we’re lumping a lot in with the rental folks. Would you lump in payroll, if you were doing flips?
Jeff: It would depend on what that payroll is for. If it’s more of an administrative person probably not. If it was somebody who is actually putting sweat into the project, yeah, I probably would.
Toby: Here’s another one, and by the way, I’m looking at the times that the questions were coming in, we’re at 3:34 right now. There are so many questions so we’re not going to be able to get to any more of that you guys are asking tonight. “If I utilize section 121 via S Corp structure to save $500,000 capital gain, is it worth it if you are not going to sell your house?” Absolutely. What he’s talking about here is under section 121, I can avoid taxation—if I’m married—up to $500,000 of capital gains. If I lived in it as my primary residence two of the last five years.
What you do is if I’m going to take that primary residence and make it into a rental property, I can do that and I can step up the basis by selling it to my S Corp that I own. Those of you guys who know that everybody says, “Oh, don’t ever own property in an S Corp,” unless you’re going to keep it until you’re dead. If you don’t plan to sell it then that’s the exception. What you’re doing is you’re selling it there so you get your exclusions.
Let’s say I bought it for $200,000 and now it’s worth $700,000. If ordinarily, you would just turn it into a rental, you’re going to have $200,000 minus the land, you’d have depreciable asset of maybe $150,000. We want to step up that basis because we may sell it some other time inside the S Corp and buy something else, but we want the $700,000 basis. We sell it to the S Corp for up to $700,000, I’d have zero tax. I’d take an installment note back. The S Corp is going to pay me back as it rents it, but I’m not going to elect. I’m going to opt-out of the installment method.
I’m just going to treat it as a taxable event year one, and I’m going to take the 121 exclusion. I have zero tax that way. Zero, and I have a new basis of $700,000 minus the land. Let’s say the land is up to $100,000 now. I now am depreciating $600,000. There’s a good chance that I’m not going to pay any tax on any of the rents for a long time. If I really know my stuff, I might segregate that house, and bonus depreciate some of it, and take a $200,000 loss in year one. If you didn’t follow me, do Tax-Wise. I teach that very deal.
Jeff: Have you had anybody ask you, “Can I do that, but have the S Corporation want the house back with me so I can still live there?”
Toby: You’d have to pay it. I always look at that going, “Why are you doing that? That’s weird.” I suppose you could. “Does the bill have provisions for unemployed compensation for those that are self-employed?”
Jeff: Yes, it does.
Toby: Yup. It’s the federal, and then they say, “Hey states, you dole it out. It’s $600 a week.” What I’ve been telling my clients is, “Hey, if you’re paying your people less than $30 an hour and you don’t need them because you’ve been shut down, let them get unemployment. They’re getting the same amount that you’d be paying them.” It was a big thing on the news. “Oh, they’re still paying their employees.” I’d be looking at them like, “Why? Why are you doing that?”
You pay in the FUDA and SUDA all these years, and then when you need it you don’t use it? Come on. The federal government is on top of your state adding $600 a week. Some of the states are giving out $200, $300, $400. Anyway. It drives me crazy. They’re making it like you have to fall on the sword. It’s like no, stay in business. Give those people a job when they come back. Don’t beat yourself up because the press is telling you to do it, somehow rewarding you for doing things that don’t make sense.
We pay for these things. It’s our tax dollars. This is not congress doing us a favor, guys. We pay that money, and they’re giving it to people because there’s going to be huge unemployment because they shut us all down. I don’t even want to get into the constitutionality but we have a governor here—that a doctor couldn’t even prescribe certain medications because they said, “Oh, they’re not tested enough.” FDA-approved them but they wanted them in the hospitals only. It’s like, “You’ve got to be kidding me.” These guys are just gone—psycho power-hungry. Anyway. Not to get into that.
Jeff is setting me off. We got to get rolling through this. “What are the tax implications of taking the latest COVID grants from the SBA? If they forgive parts of it, how is it taxed?” That’s the good news, it’s not. It’s forgiven but you don’t have to pay tax on it. It’s specifically excluded under the CARES Act, so you can relax.
Guys, we have a whole bunch of questions and I’m just going to tell you right now, Susan and Patty, I want to make sure that we grab these and we can email this folks answers because there are so many people asking so many good questions. I don’t want to die and you guys but I have to jump onto another one.
“Curious about the stimulus package on helping flippers.” Flippers are somebody who buys and sells property. Do you think there’s anything in there for him?
Jeff: The EIDL would be in there for them.
Toby: The EIDL would be a good one plus here’s the deal, if you’re paying anybody 1099—your contractors, they can do a PPP loan. They can also do an EIDL. If you’re doing flips and you’ve been shut down, what I tell people is, “Go to your contractors and tell them to file the EIDL. You file a PPP if you’re taking a salary out and also an EIDL.” You can absolutely do that.
Somebody is asking, “Will we receive copies of the remaining Q&As?” No. I know you love them. We will go through stuff like that. Somebody wants to solve the questions. You guys are killing me. My little heart is going to pop. All right, we are way over time. Aren’t this fun?
Jeff: They are.
Toby: I hope you guys enjoy them just as much as we do. I know that poor Jeff sits here and says, “Toby, stop it. You’re talking too much.” Did you just do the loser sign on your forehead?
Jeff: No, no. I did not do that.
Toby: I think Jeff is throwing me shade.
Jeff: I’d like to take a screenshot to send to everybody this tiny little bar that’s on these questions chat to show how many questions there are.
Toby: We could do that. I’m going to do it. I’m going to take all the names off that way you see that we literally have about 50 questions since 4:16. Yes, I’m fun. “It’s up to you guys. You’re funny.” We enjoy talking to you guys. We enjoy doing this. If you ask questions, we love to grab them. We’re not going to send everybody else these questions out.
What you have to do is come and visit us, we’ll get through them. Go to andersonadvisors.com/podcast, and you can listen to some of the other ones. The replays are always in your Platinum portal. If you are a Platinum we have them all. You could always go and do the iTunes and Google Play. We have lots of content. I’ve had some really good podcasts recently. We’ve had all these COVID stuff, but I have some geniuses on there doing tangible property regs and some other really cool stuff.
I feel bad because man, there’s some cool stuff in the taxes right now that are really set to benefit some people. Anyway, somebody sent us a link that says, “irs.gov coronavirus non-filers enter payment info here.” If you haven’t filed your taxes we can get that out. Maybe, Patty, you can grab that. It’s the question at 4:23, somebody actually gave us the link and we can share it out.
Also, we put all of our stuff on Youtube, Facebook, Linkedin, Instagram, Twitter. If you have questions, email them on taxtuesday@andersonadvisors.com. We do try to respond to everything. It’s always fun, we try to do this. People aren’t getting paid for this so don’t abuse it. We have a full staff that goes in and they all spend time answering these questions. We just try to make sure that we’re sharing as much as humanly possible.
Invite your friends because at the end of the day, if they’re going to get through this in their small business, they’re going to need every bit of help they can get. Some people are like, “Why taxes and stuff?” Because it’s some 30% of the amount of your income. It’s more than your housing, and your food, and your clothing combined on average as an American. Yes, we are going to work like crazy to make sure that we are saving.
“Couldn’t find that up and the place,” we’ll send you out some stuff. The non-filer link, Patty, if you can get it out to people. She might not be able to hear me right now. We’ll make sure we get it out to everybody. I’ll remember. We’ll get that and we’ll make sure that we get it. Thank you guys.
I’m going to jump on another really cool group to go over the stimulus package. Just keep your eyes out, help your local businesses. For all your restaurants that are in your local area, some of these may never reopen so if you can, buy stuff, buy gift cards from them, and help them out. Thanks, guys.
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