Confusion continues with the CARES Act and related tax relief programs due to COVID-19. Toby Mathis and Jeff Webb of Anderson Advisors provide clarity by answering tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- I’ve had my work hours cut due to COVID. Under the CARES Act, can I access my 401(k) from work or solo 401(k)? You can access the solo 401(k) through a distribution or loan, but access to a work 401(k) must be approved by the plan administrator
- How should I handle sales tax within my eCommerce store? Do I follow my state use tax or do I need to get the buyer’s? Depends on various factors, but sales tax is tax on things you sell, and use tax is tax on things you buy
- Do we have to pay taxes on an SBA loan? No, unless loan is not repaid
- Can you accept the EIDL, if you’ve already accepted the PPP loan? Yes
- Will there be any issues with PPP forgiveness, if you accept EIDL? Depends on whether you received the emergency cash grant
- Am I able to purchase real estate with my solo 401(k) account and rent the house to my brother? Yes, your brother isn’t a disqualified party, but you must charge him a fair rent
- Did the deadline for Roth conversions get extended? No, it’s still Dec. 31
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Resources:
Tax-Wise Business Ownership by Toby Mathis
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP) Flexibility Act
Economic Injury Disaster Loan (EIDL)
Capital Gains Exclusion/Section 121
Applicable Federal Rates (AFR)
Real Estate Professional Requirements
Individual Retirement Arrangements (IRAs)
Internal Revenue Service (IRS)
Small Business Administration (SBA)
U.S. Department of the Treasury
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript
Toby: Hey, guys. You’re listening to Tax Tuesday. This is Toby Mathis.
Jeff: And Jeff Webb.
Toby: We’re going to be on board for the next hour or so. I would say an hour. We’re going to hit it this time, dang it. We have already received a ton of questions and I think you guys broke my question and answer feature. No, I’m just kidding. We have a couple of guys on to answer questions. Please do not type in really long questions. It kills my screen. It seems like some of you guys decided that it was a good time to write a book, don’t. Simple questions and then we’ll jump through and answer them. This is pretty funny. I’ve never seen this many big really long questions come right out at the beginning.
Jeff: He’s not kidding.
Toby: No, they’re auditioning for something special today. A bunch of you, you guys are verbose today. Let’s jump in. We have a lot to do in a limited time. First off, we have lots of social media places you can go to learn things if you want to learn. Somebody says, “I’m so sorry.” Somebody must have felt bad that they’re put in long. No, it’s not your fault, guys. It’s that GoToMeeting has decided to give us a very small window that won’t get dragged bigger. They’re having a little issue. When you write three or four lines it ends up being really huge, it’s hard to read. It’s not you guys. I’m just giving you a hard time.
Tax Tuesday rules. Ask all your questions. You can send them in via taxtuesday@andersonadvisors.com. We are getting hundreds a week right now. We are trying to get through them. We have Piao, Eliot, Susan, and […], Katie is on. We have a whole bunch of people there to help you. We’re going to be answering your questions live.
Also, we have a lot of horsepower there to answer your questions. We have everybody from tax attorneys to CPAs to really fantastic bookkeepers. We are going to jump through this. Don’t worry guys, we will get through it. I think that GoToMeetings is having issues right now on some of their technology. We’ll just roll with it. Fun stuff.
Opening questions, “I have had my work hours cut due to COVID. Under the CARES Act, can I access my 401(k) from work? I also have a separate Solo 401(k).” We’ll go over that.
“I have an LLC and a nonprofit, could they go together?” Remember when they used to say let’s go together?
Jeff: Yeah.
Toby: I immediately thought of that from fourth grade.
Let’s see. “How should I handle sales tax within my ecommerce store? Do I follow my state use tax or do I need to get the buyer’s?” We’ll go over that.
“Do we need to pay taxes on an SBA loan?” Good question. We’ll get that.
“Recently, my mother passed away and now both of my parents are gone.” I’m very sorry to hear that, first off. “They set up a revocable living trust, which their primary home was held. My brother and I are listed as successor trustees. The trust document says that it is a grantor trust. My brother and I are in agreement that the house that is owned by the trust will need to be sold. What are the tax ramifications?” We’ll go over that and you’ll be very happy, by the way.
“Can you accept the EIDL loan if you have already received the PPP loan? Will there be any issues with PPP forgiveness if you accept EIDL?” We’ll go over what those are and how they interact.
“Am I able to purchase real estate with my Solo 401(k) account and rent the house out to my brother?” I’m not sure you really like your brother, but we’ll answer that. I like watching Jeff start to lose his mind, but the answer’s kind of surprising.
“I have a property owned by an LLC, which is owned by an S Corp. I’m selling this property and want to make a charitable contribution during the closing. Can I do a close and sell the property to the charity and have the charity sell the property to the final buyer?” Now they’re thinking like an accountant. We’ll go over that.
“Do I have to have an LLC or a corporation listed on my W-9 form or can I just use my traditional IRA and use that information to purchase tax liens?”
“Did the deadline for Roth conversions get extended also?” That’s a really good question. I don’t know. Hopefully, Jeff knows these answers. I’m batting a zero right.
“What is the best way to handle a deceased parent’s 401(k) and pension benefit to minimize tax burden? I was wondering if opening a Solo 401(k) would be a good option.”
“Would it be better to have an S Corp or C Corp and when should I think about converting? As in how much revenue should I be making before I even start thinking about that?” That’s really a good one.
“Established a C Corp in September 2019. Up to that point, we had significant educational expenses over $40,000; since then no registered income. How long (in terms of 1120 tax years) can I carry start-up expenses to include education prior to formation?”
“Can I take a $100,000 distribution from my 457 and contribute it to my housing non-profit under the 2020 CARES 100% AGI charity contributor?” We’ll go over what that means. You guys are wicked today. You guys are smart because you guys are starting to think. I imagine that in 20 years I hadn’t seen these types of questions even though theirs is a lot longer than me, it’s pretty impressive. You guys are rocking it.
Hey, guys. Giveaway. All right. Coming up on Saturday, we have our free live stream event for Infinity Investing. If you have not done one, I would recommend that you do. They’re a lot of fun. First off, it gives you a reason to hang out with your kids or anybody else that likes investing. We mess around quite a bit with a lot of numbers. We do some calculators. We go over a bunch of different types of investments. I usually bring in at least two or three people to talk about certain types of investments.
What we’re really looking for is cash flow forever. You can come and do it; it’s free. I’ve been teaching it now for a few years. The results are amazing to watch people who really get into something that they can’t hurt themselves on and they do very, very well. It’s Saturday, June 27th.
You can get the recording as well. Just register, it’s absolutely free. It’s really cool. It’s working really well. If you had been listening to us back in March you’d be way ahead right now. Not tooting our own horn, but you could see things that we’re in the markets that were happening. Our guys did pretty well. There was a great opportunity to buy. Buy they did and benefit they did. It’s kind of fun.
All right, questions. You guys have a lot of questions. “I’m trying to decide whether to repay an independent contractor PPP loan, which is under $15,000. Could you clarify the current criteria that I need to justify asking for loan forgiveness? What level of income drop did I need to justify the loan? Question 46 from the SBA states any borrower, that together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification. Does that mean I automatically meet the safe harbor criteria?”
John, the answer is yes, you automatically are going to be deemed to have a need for it. The $15,000 can be used on whatever your net monthly income. If you have $15,000 and you’re an independent contractor, then I’m going to assume that 2½ months was $6000 a month. You now have 24 weeks to spend your money. It was for eight weeks. You’re going to use up and you’re not going to have to pay any of it back, John. It’s going to be free money to you. You could use it for utilities, rents, and things like that, but you’re not even going to have to worry about it. As long as you pay yourself in the next 24 weeks $15,000 you’re good. Yeah, you’re in the safe harbor. Under $2 million, then you don’t have to worry about justifying it. You’re deemed to be justified.
“I got a new rental property. My first property ever.” Fantastic. “It will close on October 16.” First off, congratulations. “I don’t even have my primary home yet. I want inside and outside protection. My first question is, am I debating because I put it in a Wyoming LLC and then register in Georgia, or should I put it in a trust to make George LLC its beneficiary?”
Number one, it depends on whether you have a loan on it. It really comes down to if you’re buying it and it’s a rental property, by all means, if you can buy it for cash then you just put it in a Georgia LLC. That’s where I would leave it for you right now. Honestly, I just do an LLC. If you don’t have much else for them to take, I’m not terribly worried about Wyoming. Wyoming is an outside liability unless I’m misreading this and you’re in a high-income category. Really, what we’re trying to do is make sure that property won’t have a liability problem that follows you around the rest of your life.
The second question is, “Will there be any complications when I sell the property down the road if it’s an LLC or a trust?” No, the way the LLC and the trust work together it’s quite often I’ll make them disregarded so there isn’t even a tax return. As you grow and if you need funding like if you’re doing commercial properties, we’re going to put them in a partnership LLC and it still flows down to your page two of your Schedule E on your 1040. It still flows on your return.
“What about piercing the veil?” Do not worry about that at this point. If you have a loan on it, I’m using a land trust with the Georgia LLC. If you don’t have a loan, I’m just putting it in a Georgia LLC.
“I have had my work hours cut due to COVID. Under the CARES Act, can I access my 401(k) from work? I also have a separate Solo 401(k).” Jeff.
Jeff: You can access your 401(k). There are two ways to do it, either through a distribution or a loan. With a 401(k), I’d say that’s the better way to go. You’re going to have to repay that 401(k) but you’re not going to pick up any income from it.
Toby: Absolutely.
Jeff: With the 401(k) from work, your only issue is getting you a pass the plan administrator. Probably somebody at your work who oversees it you’re going to have to justify pulling that money out.
Toby: There’s a certification that you file under the CARES Act to avoid the 10% early withdrawal penalty or any tax. In that, saying that you’ve been affected by COVID, which you have. They just relaxed that rule, was it today or yesterday that the Treasury came out and actually relaxed it further saying that even if you live with somebody who’s been affected by COVID, that you could still claim it. Anybody in your household that’s been affected, you’ve been affected, or you’ve had an adverse effect because of COVID, which is, again, my work hours got cut, then you can pull it out early like Jeff said, and you don’t have to worry about the 10% penalty or tax as long as you pay that back within three years; the end of the third tax year, which is December 31, 2022.
The other side of it is can I borrow the money out of my 401(k)? If you borrow the money out of your 401(k), you can go up to $100,000 total loans from qualified plans. The weird thing is if you have a separate Solo 401(k), you can borrow up to $100,000 out of it and leave your work out of it. If it’s your work, they can choose whether or not they’re going to follow the new CARES Act rule for the $100,000. The benefit of borrowing the money is that you’re paying yourself back interest, but also, you have a six-year payback. The first year is deferred. You wouldn’t be paying that thing back until 2026.
Jeff: When we’re talking about taking money out of 401(k)s or IRAs, you really have to have a plan in place before you pull that money out. Am I going to be able to repay this or if not, am I going to be able to pay the taxes and so forth. Just don’t go pull out $100,000 and spend it all with no plan on how to repay it.
Toby: What Jeff is saying is absolutely 100% accurate. You want to make sure that you’re still going to pay it back. If you don’t, then at least it’s a 401(k) and you’re going to have income inclusion over a period of time. If you don’t pay it, you could have the whole loan dumped back to you. If you don’t pay back the other one, you’re going to void the 10% penalty, but you’d have a taxable event on the entire amount. Either way, you’re going to get hit if you don’t pay it back.
A question that’s online here. “I submitted a question by email 15 minutes ago.” This may be a duplicate. They will get to you, Chad, on the other email but you have a good question. These were the people that I was making fun of having really long questions. You could kind of see. I’m literally reading the first three questions. They’re all paragraphs. I’m just giving you a hard time. I would do it. I can’t imagine writing anything in less than three lines.
“I received a $25,000 loan for my PPP, which I have used completely towards payroll. My understanding is that we will not include this amount as gross taxable income for my business.” Correct. “However, I still need to deduct and pay my normal payroll tax responsibility on the portion of the loan. For example, federal withholding, social security, medicare, state unemployment, is that correct, or do I include that amount as if I am paying the employee taxes as part of the PPP loan amount? I hope this makes sense.”
Jeff: You can always use the funds to pay those taxes. It’s just that when you’re paying the medicare and social security portion for the employer and the federal unemployment, that’s not going to go into the calculation of the forgiveness. The only taxes that do are usually the state unemployment tax.
Toby: There is state unemployment in your deal but federal withholding, social security, and medicare are not part of the forgiveness calculation. You would still write those off.
Jeff: Yeah, absolutely.
Toby: The IRS or the Treasury came out and said well we’re not going to let you write off the payroll, and we think they’re all wet. Congress thinks they’re all wet. In fact, Greal got really ticked and said no, we wanted you to be able to write it off. As of right now, the law is ambiguous. The IRS has said our position is going to be you can’t write it off. Jeff and I said our position is going to be yeah, you can. The clear language of the statute is that it wouldn’t say that it wasn’t included in income and then make it non-deductible. It doesn’t make any sense.
Jeff: It’s really strange. They say that if you got a $50,000 PPP loan, that’s not taxable income, but anything you spend it on you can’t deduct.
Toby: You may as well just deduct it. They intended to give you that benefit. We think that this next legislation, the next one that comes out, which will be here pretty quick.
Jeff: I think they’re going to have to go back in the session. They’re on a staycation right now.
Toby: They like to make messes. Let’s see. I’m going to jump ahead here. Looks like Piao and those guys are nailing it. Somebody says, “My home is in my revocable living trust. If I put it into a land trust with Toby as trustee and then assign my beneficial interest to my Wyoming LLC, will this affect my existing HELOC where my parent-child exclusion California property 19 realtor, which is Prop 13 real estate taxes?”
The first thing is a revocable trust or a land trust is considered grantor trusts and they’re ignored. It’s still you. When you have an LLC and you’re the owner of it, assuming that you’re the owner or that the living trust is the owner, then it’s not included. It will not affect your California Prop 13 because you’re still the beneficiary of the trust. You’re still the beneficiary of the entity. It has not changed your tax forms at all or anything else.
Will it affect your HELOC? No, that’s why we use the land trust. If you explain to them, hey, by the way, I assigned my land trust to Wyoming LLC, they may look at you and say you transferred ownership. You’re running the risk that the HELOCs going to get all mad. No, the banks are used to dealing with trust. That’s why whenever there’s debt on a property, we tend to like using a trust if it’s traditional banking financing. If it’s commercial, then they’re used to using LLCs.
In fact, every transaction I’ve done in the last bunch of years, I can’t remember the last time they let me close outside of an LLC if I had a loan on it. They wanted it an LLC because they don’t want to deal with all your other stuff like when you’re driving down the road and if you hit a busload of nuns, they don’t have to worry about their building getting foreclosed on.
“I have an LLC in a non-profit. Could they go together?”
Jeff: My question on this is what is your intent of putting the LLC and non-profit together? If you want to contribute whatever’s in the LLC to the non-profit, you could do that. But if the LLC has a for-profit purpose and the non-profit, of course, does not, you can’t put them together.
Toby: Au contraire, mon frère.
Jeff: You’re going to contradict me. Okay, go ahead.
Toby: If it’s a foundation, then they’re disqualified, they can’t. If I have, for example, you know Frank and Sherry and they have their non-profit that goes out and gets housing for non-violent women offenders. Their LLCs are all for-profit and they rent to their nonprofit, they rent to the state, or they rent to whatever organization. You can do it but it has to be an operating non-profit. If that confuses you, the difference between a foundation and operating non-profit, the question is is it doing anything? When I set up a non-profit, 99% of the time it’s doing something. It’s housing, it’s education, it’s helping veterans with PTSD. It’s all these things.
“Can I have an outside for-profit entity working with it?” Yeah, absolutely. As long as it’s arm’s length. What you’re going to want to do in that situation is to make sure you have outside directors who are saying it’s reasonable. Anyway. You do all that. Sorry, Jeff.
Jeff: No, I was just confused by the could they go together. I didn’t know if they meant merging them together.
Toby: You can have an LLC owned by the non-profit and all that.
“We applied for an EIDL with our Wyoming holding company. Our rejection letter stated business activity is not eligible. EIDL assistance is available only to a small business engaged in eligible business activity.” Leslie, what I’m imagining is that whatever the… what’s the number that we use? I forget the term that they have but they actually have a business activity number. You were using something as a classification and that’s probably something where they said it’s not actually doing anything.
We would tend to grab a business because the way EIDL loans work is it’s anything you own. Anything you even have control of or more than 20% of, any of those you pick one. You pick the one that’s doing whatever is the most active business then you get the loan under that or the one that’s in the greatest need. They give the loan to that particular one. You may own four businesses but you’re only getting one EIDL loan. PPP is different but the EIDL loan is definitely there.
Look at this. Somebody wrote to me, it’s actually taking up an entire page. I’m going to say, Eliott, can you answer that one? Because somebody wrote a 7–8-prong question.
“How should I handle sales tax within my ecommerce store? Do I follow my state use tax (Michigan) or do I need to get the buyers?”
Jeff: If only it were that easy.
Toby: You still have a lot of merchants out there, though.
Jeff: First, to clarify, there is a difference between sales tax and use tax. Sales tax is on tax on things you sell, and use tax is on things you buy. For example, if you bought something across the border in Illinois or Indiana, you would pay sales tax in that state, but Michigan wants their sales tax also once you bring that back.
Toby: Wouldn’t it be usually if you didn’t pay it?
Jeff: I think it’s more likely if you didn’t pay it.
Toby: In Washington State where I live for a lot of years, people would go down to Oregon. They didn’t pay sales tax in Oregon, and they bring it home in Washington says you’re using it in my state and if you didn’t pay sales tax, then you have to pay us the use tax. But I think what these guys are looking at is let’s say I’m in California and I’m selling merchandise T-shirts. I’m selling them from Michigan and somebody in Nevada buys my T-shirt. The question is do I have to charge sales tax?
They changed the rule. There’s still a lot of fighting going on but the answer is yes, Nevada has the right to charge sales tax no matter where you’re at. It used to be nobody would because they’d say it’s an online sale, and then you had the merchants screaming hey why am I being punished for having a physical store?
Jeff: Now the states are a little desperate for money and they’re going to be looking for it, too. If you shipped something to California, you’re going to have to pay California that sales tax. Actually, the buyer’s going to be the one paying up but through you.
Toby: Yeah, technically, you’re receiving it, charging it, accepting it, and dispersing it on behalf of the purchaser.
Jeff: If you send it to someplace like Alaska or New Hampshire where they don’t have a sales tax, Michigan likely has what’s called a throwback rule, which means if another state’s not charging the sales tax, they’re going to charge a sales tax. It gets a little complicated when you’re doing interstate commerce.
Toby: Then the question is whether you’re dropshipping. The California company, in fact, there was a big company, I think it was Barnes and Noble, that kept a big huge warehouse right around Carson City. Big warehouse in California, it was still trying to get the tax saying hey you’re just trying to get around my tax. They said, yeah, we did. It’s okay because they were shipping out of Nevada. At the time, the issue was do I have to pay any tax? The answer was no on merchandise. This is a somewhat evolving area.
What I would say is you may end up paying Michigan, most people don’t. Most people are only going to pay the tax in the area where somebody received it. Depending on what type of services you’re doing or what you’re selling on your ecommerce store. If it’s physical merchandise, that’s one thing. If it’s services, then it’s going to really depend on whether you’re in the area with that individual when you’re conducting the service. If you go to that state, then the state may have a claim, otherwise no, there’s not going to be that state tax.
Jeff: I believe a lot of the larger internet sales companies Amazon, eBay, and things like that will offer help with the sales tax process.
Toby: There’s also some sales tax, it’s such a niche that a lot of people are doing it. I think that there are basically services that cater just to sales tax.
Jeff: Yup.
Toby: “I understand that the CARES Act allows me to borrow up to $100,000 or 100% of my vested interest in my 401(k) account. Although 180 days from the CARES Act enactment date of March 27. That won’t owe any penalties or interest if I pay back the loan within five years.” No, you’re going to pay back. If it’s paid back within five years, you’re going to pay interest on those five years. You’re going to have deferral for one of those five years. There’s a bunch of stuff getting run in here that’s kind of odd, so I’m just not going to keep reading it.
I’m going to have someone say we actually need to do that. You can withdraw $100,000 under an early withdrawal and take a loan out for up to $100,000 of the remaining balance if that’s the question. It’s a little bit hard for me. We’re going to have to break that down. Sometimes the tax code gets a little convoluted.
Here’s a good one, “Do we have to pay taxes on SBA loans?”
Jeff: Normally, you never had to pay taxes on loan proceeds including the EIDL loan. I’ll give you the one exception is if you don’t repay that loan. Somebody’s going to write it off as bad debt and you’re going to pay taxes on it.
Toby: Unless there’s a statute.
Jeff: Unless there’s a statute. The one weirdness that we talked about, the EIDL loan it doesn’t apply to but the PPP loan. Our position and Senator Chuck Grassley’s position on the PPP loans, there’s not going to be a tax on it.
Toby: The statue says you don’t have to recognize the forgiveness as income, but then the Treasury says you can’t write it off because you don’t have to recognize it as income.
Jeff: They think they found an old backdoor from an old rag that had nothing to do with this.
Toby: Yeah, that is true. They’re messing around. It was something that was a grant. It was for an airline pilot and it was a reimbursement, and this is not a reimbursement. They were doing something else very different. You were getting reimbursed for something and they said you can’t write that off if you get reimbursed for it, which is absolutely true. We always say, you can’t double-dip on reimbursement, but that’s not what this is.
This is we’re giving you a loan, we’re going to forgive it, and you don’t have to recognize that as income. Full stop, zero, boom. That income is not income. Now I have deductions. It doesn’t say anything except that the money you spend this loan on now you can deduct. That would be stupid. Again, they just wrote some stuff in there and they’re knuckleheads.
Jeff: The only way an SBA loan could be taxable is if you defaulted on it.
Toby: If you default and they forgive it. The only one that would actually apply is if you have a PPP loan, none of it is forgiven, and you don’t pay it back. They say forget it, we’re not going to collect against you. We’re going to give you a 1099-C (cancellation of indebtedness) or you will get your EIDL loan, which is a portion of that you don’t have to pay back if you get the emergency grant up to $10,000. You don’t have to pay that back. That lowers the amount of your PPP. That’s actually a question later on that somebody asked. Your PPP forgiveness by whatever amount they give you in the grant.
Let’s say that you don’t pay back the EIDL loan and they forgive it, which they probably would. SBA is probably pretty easy to deal with if you go through financial hardship. That’s really what they’re for in a funny way. They’re a lender of last resort and they’re there to help you if disasters hit. It’s almost like the small business’ sister assistance program or SBAP. What is it, SBAP? Small business assistance program? SBAP instead of the SBA.
All right. We have lots of questions coming in. Piao and Eliot are kicking butts. Somebody says about a DUNS number and Piao already got it. Your DUNS number you will need to have if you are bidding on government contracts, for sure. But if you get a DUNS number, don’t buy anything from Dun & Bradstreet. They will follow you around and try to get you to buy things forever.
Toby: “Recently my mother passed away and now both of my parents are gone. They set up a revocable living trust in which their primary home was held. My brother and I are listed as the successor trustees. The trust document says that it is a grantor trust. My brother and I are in agreement that the house that is owned by the trust will need to be sold. What are the tax ramifications?”
Jeff: Everything you say is true about the trust up until the day your mother died. At that point, it became an irrevocable trust and was no longer a guarantor trust. It actually turned into a survivor trust, or a credit trust, or beneficiary trust.
Toby: When the first parent passed away, it became an irrevocable trust. The remaining trust remained grantor. A grantor trust is a fancy way of saying it’s taxed the grantor, we ignore it so it doesn’t have to file a tax return.
Jeff: At that point, the trust actually owns the home. You and your brother are beneficiaries. I want to see if Toby agrees with me on this, I think I would try to distribute it to the beneficiaries before I sell it.
Toby: I don’t think it really matters.
Jeff: Are they going to see the same step up no matter what?
Toby: They’re going to see the same step up. What happens when a spouse passes and this really depends whether you’re in a separate property state, community property state, do owners as there’s a trust, own it 100%. Is there a provision in the trust that gives it to the surviving spouse so that there’s a partial step up on the passing of the first spouse.
Jeff: No spouse here.
Toby: There’s recently, now both of my parents.
Jeff: Oh, okay. Got you.
Toby: Dad had passed away at some point in the past. When he passed away, the question is a separate property state than half of the basis of the home stepped up. Unless dad passed away and they were joint tenants, went to mom, mom put it in a trust which I doubt. It sounds like they had everything tied up, or unless they gifted it over to mom which in case half the basis step-up and now mom, the survivor’s trust owns the home which is how we draft them.
All of these are a fancy way of saying you won’t owe any tax when you sell it no matter what you do because the basis of that property is more likely than not stepped up to the fair market value when mom passed. If they are in a separate property state and if the trust did not address the issue of the home, then the worst-case scenario is half of the property stepped up when your dad passed, so whatever half of the value is.
Let’s say the house is worth $400,000 when dad passed, then his half will be worth $200,000, and let’s say it went up to $500,000, there’s an extra hundred. Mom’s half stepped up to half of the hundred too or actually the entire rest. It wouldn’t matter.
No, no, I guess it would be $200,000. His steps up. Her part which remains the same, then hers would step up to half of the value of that or $500,000. There’ll be a $50,000 gain, but your mom lived in it so she’ll be entitled to a $250,000 capital gain exclusion which you get if somebody lived in it when they passed.
I think you have to use it within six months, I’m not 100% certain on that. You want to talk to an accountant pretty quick to make sure you get the benefit of the step-up, but either way, I really doubt you’re going to have any tax.
Jeff: If your mother and father lived in that house for 50 some years, you’re not going to have a basis of what they originally paid for. Your basis is going to be stepped up to current value pretty much.
Toby: What Jeff said is absolutely 100% correct. When you’re dealing with properties, it’s not just homes, by the way. It’s any capital gains and stock. When somebody passes, the basis steps up. Fair market value when they pass. It’s a bad situation personally, but there is a silver lining. The tax treatment is good.
“How do you treat the installment sale with a progressive interest over a period of ten years?” If you have progressive interest, I’m not 100% certain what that means, but you have interest that may be growing?
Jeff: I’m assuming that the interest rate goes up.
Toby: That’s what I think, too.
Jeff: You have your installment sale and you figure out what the capital gain is on that installment sale. Now your payments say you have $100,000, you sold some forfeiture payments are $1100, $1200, $1300 a year. Part of that is interest and that is peeled off separately on your tax return. It really has nothing to do with the installment sale itself. It’s just the interest income you’re earning from the outstanding debt.
Toby: You’re paying tax on income. You’re paying tax on capital gains. You do not pay tax on the return of your basis and if you don’t make an election to treat it as an installment sale, don’t you get to elect?
Jeff: Yeah, you usually do that by following the Form 6252 for the installment sale.
Toby: You could choose not to and say I’m going to pay the capital gains this year, even though you’re not getting the money yet then your capital gains requirement is done. You paid it even though you haven’t received the money for the capital gains. The interest, however, is going to play out upon receipt and as you receive it over the years. A lot of people assume that the installment sale is just automatic. You have to file that form.
Jeff mentions it because he does it all the time. You still have to remember to say I’m carrying a note. Then Jeff’s going to say I need to know what your basis is, and they’re going to say why do I care? It’s a $100,000 note. You’re going to have to calculate what the capital gains are, what the depreciation recapture is, what return basis is, what the interest is, and we’re going to put it on a spreadsheet, and we’re going to figure out what they’re paying you every year. We’ll have to do that calculation. Isn’t that fun?
Somebody says, “Any updates on the withdrawal loans of the Thrift Savings Plan?” I have not seen them say anything.
Jeff: TSP has been very quiet about that.
Toby: They said they were following the CARES Act. I haven’t looked at TSP this week.
Jeff: If you have a TSP, you really need to be talking to your plan administrator.
Toby: I think that they’re allowing them, but it wouldn’t take too long to look it up. They usually put it right in front of their website. We have lots of questions.
“Can you accept the EIDL loan if you have already received the PPP loan?” Full stop, yes. “Will there be any issues with PPP forgiveness if you accept EIDL?” It depends on if you receive the emergency cash grant. If you receive the emergency cash grant, then that portion, because you never have to pay back the grant, whatever amount that is, let’s say it’s $5000, you would subtract off of your forgivable PPP amount. You would have to pay back.
It’s basically, hey I gave you two dollars but only one of it is free. The other one you have to pay back. That EIDL emergency cash grant, the max that you can get is $10,000. The max they’re giving on that loan right now says $2 million, but it’s $150,000.
They just reopened EIDL loans last week after a two-month hiatus because they we’re so backlogged from April. We’re just starting to get them rolling again, but we got millions of them for our clients. It’s kind of fun.
Jeff: I know you could get the EIDL loan, and then you can apply for the PPP loan, and roll an EIDL into it.
Toby: If it was before March 27, you’ll roll it in the PPP.
Jeff: What’s the advantage of that? I know EIDL has a higher interest rate, but it’s got a much longer payback period.
Toby: First of, you could apply for both but the previous EIDL was a 30-year loan at 3.75. If you roll it to the PPP, you can get it forgiven. The PPP did not exist prior to March 27. They said if you were in early March and you were shut down, in quarantine, and all this stuff, then we gave you a loan. You can apply again. You can roll that existing loan into a PPP if you use it to pay your people. You can come back and apply for an EIDL loan.
Jeff: But that was only if you got the EIDL before March 27.
Toby: Correct, otherwise it’s just the emergency advance that they interact with. I hope that makes sense to you all. I know that we tend to use verbiage quickly like EIDL. It just means Economic Injury Disaster Loan and PPP means Paycheck Protection Program. If anybody’s worried about that, then I apologize.
“What if Edward Jones said I’ll have to pay my Roth and traditional IRA back with interest even if I’m being affected by COVID?” If somebody is borrowing money, you can’t borrow money from a Roth or a traditional.
Jeff: […] IRAs.
Toby: Yeah. If you’re taking money back, then Edward Jones is wrong. You don’t pay interest. You can’t take a loan from an IRA so sorry, but they’re absolutely 100% incorrect.
You can take an early distribution and you avoid the 10% penalty and you avoid tax on it if you pay it back within three years. There is no interest. It is treated as a trustee-to-trustee transfer so Bernadette, they are wrong there. I like to say Edward Jones is wrong sometimes. They have really great mutual funds for them.
“What is the paperwork that needs to be filed when withdrawing from an IRA so you can avoid the 10% penalty if you pay it back within three years?” Joyce, it’s a certification of need and they have to accept it. That’s all you have to do. The rest of it, you pay it back.
I’ll tell you what the treasury says. The treasury says you need to recognize that income over the three years. You should recognize a third of it. If you take $100,000 out, you recognize $33,000 this year and $33,000 next year. You pay it back before the end of 2022 and you go back and amend your 2020 and 2021 which we think is crazy. We’re not going to do it.
The Treasury can say what they want, that’s not law. They’re trying to interpret it and they’re using the Katrina language that was done in that particular case in 2005. They’re different, but again they’re treasury. Congress tries to fix things then the bureaucrats try to destroy it. I’m not going to go there. I get mad.
We still have here in Nevada people who are entitled to federal unemployment. They still haven’t received it. That was authorized three months ago and it was an emergency and they still haven’t received it. Our governor’s marching around like he’s the savior of all people and is really going to shoot you down and mess with you if you’re trying to reopen. Man, they just really left some people out to dry and they get a pass for some reason. I don’t get it.
“Am I able to purchase real estate with my Solo 401(k) account?” Fantastic, 401(k) is just a 401(k) owned by a couple, or one party, or two partners. “And rent the house out to my brother?” Jeff?
Jeff: Sure.
Toby: I love that you said that.
Jeff: You buy within the 401(k) and one important caveat, you got to charge fair rent to your brother.
Toby: A lot of you guys are probably thinking that’s a disqualified party. “Hey, you can’t do that. You’re brothers, uncles, and friends, and in-laws.” You can rent too. You loan them money. It’s just like Jeff says, it has to be a fair market value otherwise they’ll tax them on that low fair market value. By the way, federal AFR rates is where you say friends and family. The rates right now is about one percent. You can charge them a small interest, but if it’s my brother I’m jacking it up.
Jeff: Yeah, if it’s a half a million-dollar house, you can’t charge them $100 a month.
Toby: No. Don’t charge them 18 either, that’s just mean.
Jeff: I don’t know. My brother I might.
Toby: Depends on whether he beat you up when you we’re a kid then you jack it up. Anyway, that’s the answer that nobody expects. You actually have to read the rules and you’ll see that lineal descendants going up and down, so your parents are disqualified, your kids are disqualified, your spouse’s parents are disqualified, your grandparents are disqualified, your grandkids are disqualified, but you can go horizontal all day long.
“Do you know what are special circumstances to qualify for an increase in EIDL? We have collateral assets for $2.5 million. I request an increase to $1.8 million as a small loan received.” Here’s what I would say. This would be special (first off) if you’re being affected. But here’s what’s going on. The EIDL loans are being capped right now at $150,000 no matter what and they have millions of them that they are stuck on so I would go outside of the EIDL and look at other financing.
I hate to say that, but the SBA is focus 100% solely on these EIDL loans and they’re trying to get as many of them out and they can’t mess around with anything large […] we’re seeing. The banks themselves just put out $600 billion of cash under the PPPs and they’re getting paid back every day. The federal reserves set up a special purpose entity to buy more loans from banks under the main street programs so there’s another $600 billion.
If you can do the math there, we’re talking about over $1.4 trillion of cash that’s being out there in the banks that they’re going to have access to loan, and the interest rates they’re paying right now on that money is 0-25 basis points, so a quarter of a percent. There’s going to be other opportunities for you especially if you’re hurting.
The main street, you’d have to have EBITDA (earnings before income tax, depreciation, and amortization). I’d be four times or six times that amount depending on what program it is but there are opportunities for you. I would really recommend if you’re not in the CARES program, you talk to our people, and we do have a funding community and talk to somebody about seeing whether there’s anybody there.
Give me your scenario and see whether we have lenders in there or just talk to your local banker and see if they have anything else. SBA, as far as I’m concerned, right now they are so far behind. They are two or three months behind, guys.
Jeff: The collateral is going to make no difference with the SBA, but it may make a difference with the banks.
Toby: Well, the SBA collateralized the EIDLs.
Jeff: Oh, I did not know that.
Toby: Yeah, they don’t have a personal guarantee or on any of the EIDL. They don’t do a personal guarantee or on any of the EIDL’s but they do collateral anything over $25,000 they have their right to put collateral. What they’re doing is filling UCCs and they make you pay $100 to file the UCC. It’s not horrible.
Somebody asks, “Is a land trust an irrevocable trust?” Yes, it is. Trust, or trust, or trust, it’s a grantor trustee and a beneficiary. When you have an irrevocable one, it’s just basically saying, hey we gave the asset to the trust I can’t have it back. Chances are you have to be careful whether you’re a trustee and you’re making somebody else a beneficiary. If it’s revocable, it means I can change it at any time I want. I can also make it defective which means it doesn’t follow tax returns. It’s treated as though it was revocable for tax purposes, but it’s irrevocable. There are all sorts of fun stuff.
Trusts are trusts. Some people call it dynasty trust, charitable remainder trust, land trust, personal property trust, living trust. All of these are descriptive language for a trust.
Jeff: Like the survivor trust, I’ve heard at least a dozen of different terms just for that one.
Toby: Yeah, you have […]. You have all sorts of fun stuff. Usually, I used to […] and survivor so the [….04] the person passed, then the survivor is the person who survives. But the marital exclusion trust, you used to have to mess around with these things a lot more than you do now because the federal estate tax exclusion is so high, but expect that to come into play here again.
Let’s see what else we have. “Any thoughts on question two?” I have no idea because I’m so sorry. “Avoiding Schedule C makes life easier?” somebody’s asking. I’ll ask Jeff. Jeff, is a Schedule C harder than an 1120-S to do a corporate tax return? Which one is harder? The S return or Schedule C?
Jeff: They’ll both have the same exact information on them. The Schedule C is going to be easier simply because it’s a schedule on your 1040. It’s not a complete return in itself.
Toby: All right. As far as the data on it?
Jeff: On the data on it, it’s one’s no harder than the other. Most of the work is actually not in the return. A lot of it is just in the accumulation of information.
Toby: I’ll ask you in a little bit different way. If I was going to say which is going to take longer? Doing Francis’ personal return or doing a corporate return? Which one on average is going to be longer than the other?
Jeff: That depends. If it’s the same business in both of them, I think the 1040 is going to take longer in total than that business return.
Toby: Yeah. What we see is that the personal returns at least according to our data is about four times as long. That they’re on average four times as long as a corporate return. But that’s your really complicated personal returns, too, but that’s also your really complicated corporate returns.
A really big and million-dollar corporation shouldn’t take, if you have good data, it’s going to take much longer than a $100,000 corporation. If somebody is doing a Schedule C and they’re not keeping good books and records. You’re going to have a mess no matter what.
Jeff: That’s a good point because we see a lot of our smaller entities take a lot more work just because of poor books and records.
Toby: Francis says, “Avoiding Schedule C makes life easier. It’s a relief that I don’t have to follow Schedule C if I use a single-member LLC.” That’s not exactly true. If you are a business, you’re going to have to file tax returns for that business no matter what.
I’m just going to go to the next question to make it easier. “I have a property owned by an LLC which is owned by an S Corp,” pretty basic structure. I have an LLC that is owned by an S Corp so that LLC is probably disregarded to the S Corp. “I’m selling this property and want to make a charitable contribution during the closing. Can I dual close and sell the property to the charity and have the charity sell the property to the final buyer?”
Jeff: I understand what we’re doing here, but I would almost rather donate the property of the LLC, the whole LLC, to the nonprofit.
Toby: I’m with you. I’d put the LLC in the nonprofit and what you’d end up with is you have to get an appraisal on the LLC if it’s over $5000. If you have a piece of property, unless it’s a really tiny piece of property worth less than $5000, you’d get an appraisal on it. That gives you a value so you have a value so you have a value on that LLC and that’s going to be your charitable deduction. It’s fair market value. It doesn’t matter whether you sell it to the charity. You don’t want to sell it to the charity, first off.
Jeff: Yeah, absolutely not.
Toby: You want to give it to the charity and let the charity sell it to the final buyer because you’re going to get a deduction based on the fair market value and the charity is not going to recognize any income. We see this quite often.
I actually had a highly appreciated stock that was annoying and I was like, all right, this was an overnight success in 20 years type talk that I was getting out of finally and it wasn’t paying anything.
It was valuable and it went public and had a decent value. I just sat on it for a lot of years and I said I’d rather have the charitable deduction, so I gave it to charity. Sold it out of the charity. Charity now has the money, but my deduction was the value, the stock on that day.
Jeff: As far as doing a close and selling the property, and contributing to the charity at the same moment, we wouldn’t want to do that. At best in that case, you would sell a property, recognize a gain, get a return, and then contribute what you want to the charity with the cash proceeds.
Toby: You lose so much benefit.
Jeff: Yeah, you do.
Toby: It’s like this, if I sell my stock and I know I’m going to treat it as long term capital gains and I sell l$10,000 with the stock. Let’s say my long term capital gains is 15% so I have to pay $1500. We’ll pretend I don’t have state tax or anything else. I pay $1500 in tax, that gives me $8500 left to give to charity.
I now get a deduction for $8500. Congratulations. I have taxable long term capital gains of $10,000 and I have a tax deduction of any 500. If I just give the stock to the charity, I now have $10,000 tax deduction and I have zero capital gains. So way better off.
Before we answer this next question, we’re going to go back to the Q&A online just to knock a couple of these out.
“With the CARES Act, can I use up to $100,000 of my self directed IRA to make this more interesting?” Yeah, you could use up to $100,000 as an early withdrawal of your self-directed IRA. If it’s a Roth, you don’t have to worry about it at all because there’s no penalty or tax on a Roth. I think it’s five years, but the 10% penalty is only on traditional.
The 401(k), you could take $100,000 out and you can also borrow money. Martin, you can get $200,000 out of a 401(k) if you have $200,000 in it. If you have $200,000 sitting in there, literally you can take the whole thing up and not pay anything right now.
You got to get half of it back within three years to avoid any penalty. The rest of it, you pay back over the six years, so you’d start paying it back after the first year, and then over five years you’d pay it back, and you pay it back with a little bit of interest to about four percent interest. So yeah, you can absolutely get it.
Somebody asks, “If the loans are forgiven, PPP and EIDL, isn’t that income?” The EIDL isn’t forgiven but the PPP is and no, it is not taxable income. The congress and the CARES Act says it’s not taxable income. They actually wrote you don’t have to pay tax on that.
Somebody says, “So GAAP doesn’t matter with these loans?” I see what you’re saying. Generally Accepted Accounting Principles, they do matter. I don’t know which loans. Jeff, […].
Jeff: With a forgiven loan like the PPP, say you take out $100,000 loans, […] for GAAP purposes or actually for any accounting purposes, you’re going to recognize that as income for financial statement purposes because you’re going to put the loan on your books then you’re going to move it to income. For tax purposes, it’s not included. It’s separated.
Toby: Absolutely. Here’s a good one. “If you’re a 50/50 partnership, you don’t have employees, just distribution members, can we use 100% of the PPP received from member distributions?” Yeah, the amount of forgiveness is capped. When you’re applying for the loan, they’re going to use your net income and they’re going to cap it at $100,000 a year per partner so you have a cap for each person of about $8000 a month.
Jeff: It’s generally a good idea to just distribute it at regular intervals.
Toby: Yeah, it’s about $25,000 per member so if you got a $50,000 PPP loan, yeah you can distribute it all to yourselves, and over that 24 weeks, you’re going to usually get that full forgiveness. So, yay Marco.
This is a follow-up on the financing. “I am financing. Is a trust better?” Sam, you would actually finance it in your individual name and put it in a trust. You finance once you’re done even with the same closing part, you can say can you put it in a trust for me? They’re going to make you close on your individual name solely because the banks don’t want to deal with somebody who is a trustee for somebody else and they just did a loan.
You can play games with a trust. It’s almost always going to be an LLC that you close in individually. In a traditional bank, it is only going to do with individuals. If you’re doing portfolio lending, they will do it straight to the LLC, but they’re not going to do anything less than a million dollars either so it’s a little different.
“Do I have to have an LLC or a corporation listed on W-9 form or can I just use my traditional IRa and use that information to purchase tax liens?”
Jeff: Short answer is you don’t have to have an LLC or corporation. You can buy and sell tax liens through your IRA. Have you seen the same where they usually need to be self-directed?
Toby: Yeah, they’re going to have to be self-directed. You’re not going to be able to get TD Ameritrade to buy tax liens for you. You’re going to have to go through a self-directed IRA company like IRA Club or one of those. Dennis is really cool. That’s IRA Club and he’s up in Chicago, but—
Jeff: I kind of like the idea of having the LLC within the IRA. It has its own EIN and so forth.
Toby: That’s called a Checkbook IRA. You could do that especially if you’re going to possibly own the properties where the IRA sets up an LLC underneath it or if you want checkbook control and you want to avoid the LLC entirely, use a 401(k). You just make a 401(k) as part of any of your business, roll your traditional IRA into that 401(k), and now you don’t need a custodian. You’re just your own trustee.
Jeff: On the W-9, if it’s an IRA, most IRA’s do not have an EIN so you’re going to use the EIN for the custodian. You’re going to mark the W-9 as an exempt entity. That’s pretty straight forward. A 401(k), I agree works a lot better that way.
Toby: Good question that didn’t just come in. We’re still behind by about 30 minutes on the questions.
Jeff: It just came up on our screen.
Toby: “I’m a sole proprietor providing services and if I file for a PPP loan using Schedule C, will I have to pay taxes on those funds in 2021 even if those funds are used to pay income?” The answer is no. The whole idea of the PPP is you received it and by the way, there’s about $100 billion left. I’m convinced it’s going to be gone within days at the second tranche.
What it was is all these big companies hobarted all the money on the first part, and gave a bunch of it back. Now, they’re scared because they don’t want to be called to the carpet for taking all of the money. There’s already a whole bunch that did. Harvard did, Pen did, Lakers did. But yeah, Nadine, you’ll get that money and you’ll never have to pay it back. That’s free money to you. I would actually recommend that you do it.
“My siblings are rewriting a trust to protect about seven low-value rental homes in California. Should the LLC be filed in California and the holding company in Nevada/Wyoming?” It depends on what you guys are shooting for. That’s generally the way you do it. What I might do just to make it easier for you guys because it sounds like the trust might be just running it to you guys. I don’t know if you’re filling a trust return. It sounds like they may. The seven low-value rentals, I’m wondering how they’re owned.
Jeff: Yeah, I’m wondering what kind of trust they’re in.
Toby: If they are in a trust, there’s a way to minimize the tax in California. Whenever I see a trust, I’m wondering if it’s irrevocable trust. It might make sense to take it out of the state or have the state have grantor trust pointed to a parent trust.
Jeff: Would you say California is an exception because they get a little quirky when there are trustees?
Toby: When there are trustees out of the state, they can’t tax it unless it gets distributed to the beneficiaries. If it’s an irrevocable trust, we might be able to avoid it entirely.
“Did the deadline for Roth conversions get extended also?”
Jeff: No. The deadline for Roth conversions is December 31st.
Toby: You have to have it done during the year.
Jeff: If we’re talking about the deadline for Roth contributions and traditional IRA contributions, those were extended to July 15th.
Toby: July 15th for HSAs, for IRAs. The 401(k), the employer can contribute up to it files its tax return. Those could go all the way to September 15th right?
Jeff: Corporation could go to October 15.
Toby: That’s corporate. That’s Corporate B.
Jeff: That’s corporate and partnerships are September.
Toby: Yeah, September. But a C Corp?
Jeff: It’s October 15. They switched things around a couple of years ago. They have weird deadlines now.
Toby: They’re messing around with us. You could go out quite away. I always tell the story of a guy that was yelling at me to file his S Corp on time. He’s like I’ve never been late. He wanted it done on March 15. I said I understand you’ve never been late. You’re not actually late, your tax return isn’t due until September 15.
They’re asking if you can do it now or they’ll give you an automatic extension. But if you give us that time, we can fix things or we can look to see depending on how bad the tax hit is going to be on the individual, but I would determine what your individual taxes are first before I file the S Corp. Let’s just prepare it. File an extension. Your taxes are due technically on April 15th. Your tax payments are due. They extended that to July 15th as well, but your tax return is not due until October 15th as an individual, for example.
He forced us to file the S Corp and then sure enough, during the summer, he came up and said my income was higher. I have cash now. What can I do? I said if we could get in a time machine and go back before March 15th and you could listen to me when I say don’t file it. I said we can still make contributions to that 401(k) right now for a quarter of your salary.
It wasn’t just small. It was $17,000–$18,000 that we could have contributed and had another deduction. After that, guess who filed an extension every year? Anyway…
Jeff: The other nice thing they did in regards to the qualified retirement plan, it really doesn’t take effect until 2021 but allows employers to start a plan after the year is already over.
Toby: That’s going to be huge. That’s going to allow us to get some of these monies back. You can do a […] now, but I’m a big believer. […] you have unrelated debt, finance income, you have to have a custodian, you can’t borrow money out of it. There are things that are limitations and if you just did a 401(k), then you don’t have all those headaches. I like the 401(k)s.
Somebody says, “I run my real estate realtor business as an S Corp.” Congratulations. That’s good. “I’m considering entering the real estate investor arena to invest, have my clients invest in rehab properties, and list those properties for sale as their listed agent. I would use a local REA mentorship program to gain hands-on knowledge. Will I be able to deduct the cost of this program as an expense to my S Corp?”
Eduardo, it’s interesting. […] 95 and is giving you a new business or are you using it to generate more business for your existing business? I’d say if you’re joining a REA and doing their mentorship program so you can get more clients, so you can sell them properties, that is clearly deductible.
Jeff: I don’t disagree with that.
Toby: You’ll be able to run it through there. If I was worried at all that then I would just set up a separate company to do the rehabs. Frankly, if you are working with clients, you’re going to have to disclose. If you’re going to participate in the deal, I would always set those deals up to separate JVs and make sure they’re separate, either LLCs or corporations. If I’m flipping, I’m probably making a parent corporation. You guys […] and have the LLC in each flip to keep the liability at bay.
“Can owners take draws from an SBA and apply the forgiveness on an SBA loan?” Yes. It’s exactly what they’re giving them. The […] to the small guys too. In fact, under the PPP program, almost 90% now are smaller, less than 10 employees, they finally came and gave those guys money, which was part of the frustration at the beginning. It took about a month before they would actually give the smaller guys money.
“Can you take a distribution in the loan at the same time in a 401(k), and if so, how much?” Yeah, you can, it’s up to $200,000.
“What is the best way to handle a deceased parent’s 401(k) and pension benefit to minimize the tax burden?” I was wondering if opening a Solo 401(k) would be a good option?
Jeff: The answer to that is no, you can’t do that.
Toby: Nope, you’re going to have to keep it in the IRA or whatever. I think they have a 401(k), they’re probably going to convert.
Jeff: Can they still leave it in the 401(k)?
Toby: I think you’ll have to roll it out.
Jeff: One time, even when they have to stretch IRA’s, you could leave it into the 401(k) and have the money taken out over your lifetime. Most plans are not going to want to do that.
Toby: I think they’ll do it for a spouse, so if it’s a child, a deceased parent’s 401(k), they’re going to end up rolling that into an IRA and it’s going to be the deceased parent’s IRA for your benefit. The SECURE Act that passed at the end of the year says you have to take that over 10 years as a max. You could take it in five. Is that the parent’s life expectancy? You have a couple of different drop-down options.
Jeff: Yeah, but the options are really narrow now since the SECURE Act.
Toby: It’s maxed 10 years but I think you could go up if the parent was younger and they had more than 10 years of life expectancy. I believe you could take it over the life expectancy if it was longer, but I think 10 years is going to be the max.
Jeff: Yeah. What you’re normally going to do is you’re going to take this distribution and roll it into an IRA, but you’re going to have to pull all that money and it will be designated as an inherited IRA, which they can’t go anywhere else.
Toby: Right, and I think it actually has the parent’s name on it.
Jeff: Yeah and you’ll have to have all that money distributed to you over the next 10 years.
Toby: Somebody says, “What can I use the EIDL money for, and what not? Say I was going to invest in a real estate mentorship program.” Eduardo, the EIDL money is supposed to be to cover your damages as a result of the national disaster. If I have $2 I can spend and one of them came from EIDL, then I’m saying that money is being used for my overhead, my expenses, my operating costs.
If I ended up having additional cost, cleaning, et cetera as a result of the pandemic, that would cover those and I would use my other money that I’m making and I’d use that for the mentorship. What you can’t use the EIDL money for is distributions to yourself, bonuses. If you have a PPP, you’re not even supposed to use it on payroll. If you do not have a PPP loan, then you could use it for your payroll, your utilities, your rent, all those things.
You’re not supposed to use it to pay off a bunch of debts. It’s basically, hey, we just got hit with this COVID, it really made a mess on my business, I really need this money and I’m using it to continue to keep my business above water, as a result. There’s lots of expenses I have to pay every month and if I didn’t have this money, I’m laying people off and I’m closing down parts of my business.
Jeff: It’s fair to say that I can make payments with that money on my equipment loan on the regular schedule payment, but I couldn’t pay that loan off.
Toby: No, you can’t pay the principal down. But remember, the EIDL you’re paying back over 30 years at 3.75%. They just want to make sure that you don’t take the money and go buy a Rolex and a Rolls Royce. There was a guy who did that. He took the PPP around, bought himself a new car, and some other things, and they’re prosecuting him.
Jeff: Yeah, I think there’s a waiting line now for people going to court to be prosecuted.
Toby: David asked, “Any thoughts on the current discussion in the Senate to change the charitable contribution?” They already made it 100% and they made the amount of the above-the-line charitable contribution for cash at $300. You can do the standard deduction and still write off a charitable donation up to $300. It’s actually pretty potent. I can write off 100% of my AGI with charitable contributions, so I can really give myself some benefit.
Somebody asked, “If we get an EIDL loan, will it lower our FICO score and our credit?” The credit pull might, but they don’t report it to you because you’re not a guarantor. The EIDL loan, they do pull your credit to determine eligibility, to make sure that they’re going to get paid back. That’s the only impact, but it’s not listed on your credit. It’s a collateralized loan only.
“Would it be better to have an S Corp or C Corp, and when should I think about converting? How much revenue should I be making before I even start thinking about that?” Do you have a rule of thumb to use?
Jeff: I look at it a little differently from how much am I making as to when I’m using them for. I like the S Corporations for businesses with operations especially if they have employees and such. The C Corp I kind of like for my real estate flipping or for management companies and things of that nature. If you’re making substantial money and you want a way to give key employees ownership and all, I think the C Corp’s a good way to do that.
Toby: S Corps are allowed to have 100 shareholders and they have to have the same flavor of shares, ordinary shares, you’re not able to common stock. You’re not going to have a whole bunch of shares, they have preferred payouts and things like that. You can’t do it with an S Corp. An S Corp has to be owned by people. You could potentially have an LLC that’s disregarded on it, but I think you’re playing with fire. An S Corp’s supposed to be a person and they’re supposed to be a US resident. It could be a, what do they call when you’re a resident?
Jeff: Green card?
Toby: Yeah. As long as you’re here in the US, you could actually be a foreigner, so what is that called? A resident alien. You could still own an S Corp, but otherwise that foreigners can’t own it if they’re outside the country, so it gets kind of ticky-tacky there, but let’s just say it’s you, then the only thing I’m going to ask somebody is, do you need the money? If you need the money out of it, an S Corp is the easiest way to go, because you don’t have to write yourself a paycheck every time. You write yourself a paycheck once a quarter, once a year, once a month, whatever you want and then the rest of the money, you just take. Whether you take it out of the company or not, it’s still taxed to you. It is going to go on your 1040. Technically, it’s going to go on your schedule E, your second page, to your schedule E.
C Corp, on the other hand, pays its own tax at 21%, and if you take money out of the C Corp, you’re taxed on it. Unless it’s returning money that you loaned, or it’s returning your contribution. Otherwise, you’re paying wages or it’s a dividend, and dividends are taxed at long-term capital gains rates.
The C Corp does get the nudge with regards to the ability to write off health, dental, and vision expenses 100%, whereas an S Corp, the only deduction you’re going to get is the insurance premium and that’s actually going to come off of your 1040, for self-insurance premiums.
Jeff: The only thing I’m not a fan of is when converting from a C Corp to an S Corporation, if that C Corp’s been in existence for a little while, and it’s captured a lot of losses.
Toby: You’re stuck.
Jeff: You’re kind of stuck. If you really think that corporation’s going to be profitable, I think I’ve burned out my old losses first.
Toby: When we teach the classes, I sometimes use a slide with a bunch of guys in unitards that are running around and it’s pretty nasty. It’s gnarly. It’s a bunch of dudes in these really tight, looks like swimsuit models, and these guys are not in shape. It’s one of those things that’s going to etch in your mind. We always say one size doesn’t fit all.
Jeff: It’s not me.
Toby: Yeah, we actually superimposed Michael Bowman’s face on one of the guys. He realized that in an event, he did not think it was funny, but it looks just like Michael. The reason I bring that up is you really need to do the math on your situation. I wouldn’t give you a general. What I would say is if you’re making less than $30,000 and you’re not in a high-risk profession, use an LLC that’s disregarded. You could probably get by as a sole proprietor. Anything above that, you’re probably going to be better off, because you’re going to save money as an S Corp because you can stay on the self-employment tax.
If you’re over, probably $250,000 where you don’t need the money anymore, then I’m not saying convert an S Corp to a C Corp, I’m saying maybe ass a C Corp and use two. I make my money in my S Corp and my C Corp manages and runs it, does all my accounting, does my marketing, whatever, and now I can play ‘split the income,’ if I need. Rather than have me all that money hitting my tax return and me going, what should I do with it to lower my tax bill, I just make sure I’m moving money into the C Corp, then I have a mechanism to do it.
Somebody mentioned the TSP that is going to start in late July. Thank you, Lyn, for doing that. I’m assuming that somebody just went on the website and checked it out, but they’ve said they were going to do it. They just haven’t told us when. It sounds like next month.
Jeff: It’s the government.
Toby: Yeah, it’s the government.
“If we do get an EIDL loan and pay interest on it, will the interest be tax-deductible?” Yes.
“Established a C Corp in September, up to that point, we had significant educational expenses over $40,000. Since there is no registered income, how long in terms of tax years can I carry these startup expenses? How far can I carry them for, basically?”
Jeff: You’re going to amortize those expenses over 15 years. You’re going to get a deduction for the first $5000 in most cases and then we’re supposing $40,000 is your total startup costs.
Toby: What if they contributed $40,000 and the company paid the educational expenses, where’s the deduction?
Jeff: I see what you’re saying.
Toby: There’s no limitation to carrying them for. It used to be 20 years that you can carry them for, right?
Jeff: Yes, for the NOL, but that went away.
Toby: Now you can carry them forward forever?
Jeff: Yes.
Toby: How long can you carry them forward? Forever. Easy answer. You can carry them forward. You don’t have to worry about losing your startup expenses. What Jeff is saying is…
Jeff: I was reading it differently.
Toby: It’s if you had pre-incorporation expenses and you were writing it off, you take the deduction if you incurred it before you set up your company. You take that over 15 years. That creates a loss that you can carry it forward forever.
Jeff: And there are no hobby loss rules on corporations. They don’t care. You can’t deduct losses.
Toby: I’m looking at a question I came up online. “Can a real estate rental property owner with Schedule E but no Schedule C apply for an SBA PPP loan?” You cannot, but you can do an EIDL. You can’t do the PPP for sure. I just saw that.
“Can a partial EIDL be rolled into a PPP before 327?” Yup. I think we answered that one a long time ago.
“Does the rent income stay in the 401(k)?” They’re obviously talking about if you rented to your brother, yes, the income would have to stay inside the 401(k) if you rent the house to your brother.
“Where can I get a copy of the self-certification form for the IRA withdrawal?” We have one. We can obviously give it to you if you need it, Joyce. We have one. All you’re doing is you’re certifying that, hey, this is hurting me, blah, blah, blah. There’s some magic language and we just basically have a certification. They have to accept your certification.
“Can I buy a $100,000 house inside a 401(k) with leverage, then distribute the house to myself for three years under CARES? In other words, you don’t give yourself $100,000 cash, you give yourself the house. Live in it and then put it back in 2022 with no tax.”
Jeff: I can answer the last question. You cannot put it back because there are contribution limits.
Toby: Well, he’s paying back the $100,000 loan.
Jeff: I don’t think you can loan in kind, though. I think you can only loan in cash.
Toby: We have to look into that. That’s interesting.
Jeff: I’ve never run across this, so I really don’t know the answer to that.
Toby: All right John, you’re our type of guy. That’s a good one.
Jeff: Go ahead, stretch your brains, we can take it.
Toby: I’m going to look that up because if you can do it in kind, that’s pretty cool. That’s great. Catherine, your EIDL loan will not show up on your credit report because it’s not a personal guarantee. It’s not going to affect you. We’ve seen the EIDL loans pop up with people that have commercial loans on their properties and they applied for a PPP or EIDL. The hard money lender says, hey, you can’t have seconds and you can’t have anybody else coming here in and attaching anything that’s in these properties. They get all cranky about it.
Look at this one. Another creative person out there. “Can I take $100,000 distribution from my 457 plans,” it looks like a 401(k), “and contribute it to my housing nonprofit under the current percent AGI charity contribution loan?” Technically, you can, but when you take the money out, the $100,000 distribution, you’re certifying that you’ve been damaged…
Jeff: I was going to say that.
Toby: What you’re going to have to say is, hey, I’ve been hurt, and I’m using the $100,000 for my hurt, and then I happen to make another $100,000 contribution. I would just make sure that they’re not anywhere near each other, but technically you could. You’re certifying that I’ve been financially imperiled so you’re going to have a little bit of an issue.
The better route would be, instead of taking the distribution, borrow the money, make the contribution, and then pay back the loan, because they don’t care what you do with the loan proceeds, but if you want to avoid the 10% penalty, you’ve got to show that you needed it. Great, great questions.
Jeff: Look at that.
Toby: You guys are smart. There are some really good questions. I’m going to leave it at that because we’re beyond an hour and a half. Hi Sherry. I see a whole bunch of people. A disregarded entity, by the way, just means an LLC that we ignore for tax purposes. I see people are answering all these questions. This is really great. You guys have done a fantastic job. Thank you for coming on and sharing with us.
By the way, you can always get replays in your platinum portal. I think the last 3–4 we always keep up for you guys to grab. I’m not sure if we put restrictions on it or not. We have a lot. We’ve done well over 100 of these. You can go find them on our podcast. Don’t forget that you still can come and do our infinity investing on Saturday, June 27, all day, fun day. Learn how to make money.
For those of you guys who don’t know, all the principals here at Anderson, we all invest. I myself have over 200 properties. I always forget what we have. We have a bunch of apartments and commercial, and then Patty has to deal with my nonsense because I’m like, hey, we’re buying 20 properties here. She has to deal with it.
Jeff: You don’t know the number but Patty does.
Toby: Yeah. We have a list somewhere. You guys know how it is. You have these properties. I just look at the cash flow, but we teach you how to do all that fun stuff. By the way, we’re picking our properties in the $50,000 range that are making $750 a month in rent. If you want to play along, come along and learn how to do that. I have a great group that you can go out to. They will teach you the stuff, ins and outs. They do not charge even for it. If you want to do it, you have to be part of our little infinity network.
It’s free to be in the Infinity Investing Workshop. If you want to be part of our little network, it’s less than $10 a month, but all we do is we goof around and look at investments. We invest in a very particular way. Jeff and I both get to have these conversations all the time where we sit there and say, hey, who makes money? And you have a lot of people that say they make money but they don’t make money. Well, doing returns, we do our $5000 a year. We can see who actually makes money.
Guess what? It’s not the people that say they’re making money, it’s the people that won’t tell you what they’re doing. They’re all doing the same stuff in which cash flow is king. Please, come on in and join us for that. It’s kind of fun. Other than that, play with us on social media. If you have questions, I understand we are getting inundated with questions, we are getting hundreds of questions a week. Our guys are doing their best to get through them. I know not every question was able to get on live, but we’re doing our best that we can for you guys.
You can always ask questions taxtuesday@andersonadvisors.com and that’s where I draw the questions that we answer. I literally went in there last night. It’s when I grabbed a bunch. There’s so many that I just try to grab the ones that seem interesting. If I don’t know the answer right off the top of my head, I usually grab it, and then I say, Jeff, I hope you know. Usually, about an hour before we go on, I say, did you read them? And then we make sure that we have a pretty good idea of what would help the group. I tend to not get into the very individually-focused stuff just because I really care about stuff that everybody can learn from.
Anyway, that’s it for this version of Tax Tuesday. Thanks, Jeff.
Jeff: Thank you, and thanks to all those that helped answer the questions. It’s a great help. […] ask even more questions.
Toby: Eliot, Piao, Tabea, Susan, and Patty, you guys rock. Thank you and everybody seems to really appreciate you guys, so thanks, guys. Until next time. We’ll see you.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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