How Do I Pay Myself From My LLC Taxed As A Partnership?

Scott: Apparently it is. How many of these have we done, Toby? A lot of Tuesdays.

Toby: I am joined by none other than Scott Estill. If you’ve never met Scott Estill, Scott, I’ve known you for a while now.

Scott: Yeah, a few decades now. Hate to admit it, but it’s true.

Toby: Decades?

Scott: Yeah. Not centuries, decades.

Toby: You know Sherry?

Scott: There you go. I do.

Toby: Hey, Sherry. She’s saying hi to you, Scott.

Scott: Yeah. No, she’s not saying hi to you, Toby. She just says, hi, Scott.

Toby: All right. Scott Estill is a former IRS trial attorney who has been recovering ever since. Sometimes I do wear a tie, guy. I booted you out too. All right. We brought Scott on just to…

Scott: Just to make everything crash, I guess.

Toby: Just to make it suck for him. Let me share this out. There’s that. If you can’t have a technical difficulty, then you’re not trying hard enough. There’s Q&A. I don’t even see Q&A. Anyway, guys, we just had a power surge or something knock us out for a second. We are back. Wait. Yes, it does.

What happened? You are back. Sherry, we were just hiding from you for a second. Hopefully everybody is still out there. It’s very exciting. All right, we’re supposed to be talking about taxes. One of the things that we do at Tax Tuesday is answer your questions. You can ask questions live in the Q&A.

Actually I’ll go to the next slide because that will actually give you the instructions. The Q&A feature is where you can get your questions answered by our staff, where we have a bunch of tax attorneys, accountants, EAs, and other staff that are there to answer your questions.

I’m looking at it. We got Eliot, Kate, Lisa, Summer, Trisha, Jared, Dutch, Troy, Arash, Matthew, a whole bunch of folks that are there to answer your questions. They love it when you ask them lots of questions, so go into the Q&A and answer it. I think we booted everybody, Matthew, because we’re about a half the participants as we usually are. I think we nixed them there for a while, so hopefully everybody’s back in.

If you have comments, you just throw it into the chat. It’s actually really simple. If you have something that’s a quick qualifier, put it into chat. If you have a question that you need answered by a professional, you put it in the Q&A. If you have questions in the two weeks when we’re not doing Tax Tuesday, send it in to taxtuesday@andersonadvisors.com. We actually answer all those, and it’s a lot of fun. 

Somebody’s asking, can you go over amortization of a vehicle bought for cash? I’m going to say, Adrian, put that into the Q&A and somebody will go over it.

Anyway, we have a whole bunch of questions. Scott, we’re not going to answer them yet. I’m just going to go over the questions that we’re going to answer today. This will be fun. There are about 10 of them. Have you ever done a Tax Tuesday before?

Scott: I have not, so it’d be my first experience here, but let’s see what questions we have. Hopefully one of us can answer.

Toby: We’ll go over this, Actually, I should get here. I’m going to go back here and just let you introduce yourself a little bit since not everybody knows who you are.

Scott: Yeah, absolutely. Toby introduced me as a former senior trial attorney for the IRS. I left actually 30 years ago. I hate to admit that, but back in 1994. I’m a Chicago boy, worked for the IRS, and has left as a senior trial attorney. For the last 30 years or so, I’ve been representing taxpayers. I’m pretty much retired now.

Toby: Scott was a trial attorney and has been practicing in the area of controversy work ever since. If you have controversy questions, you’ve been audited, or you just want to know how it actually works, we will open it up for that, but you can throw it into chat at some point. In between the other questions we’re answering, we might weave in some of those if you have some good questions. It’s always fun.

I am not going to touch any more stuff because every time I do, it seems to crash. All right, 1031 exchange. “What are the other options besides investing in one single property and how do I find them?” We’ll answer that.

“Will you be able to say a word or two on reverse 1031s?” We’ll answer that. “We are likely to buy before we sell and would like to figure out how to do a 1031 exchange in this case.” It looks like first two questions are going to be 1031 exchange questions. We’ll dive into those in a second.

“As a 1099, what is the best way to leverage my LLC to save money on taxes? How can I save on self-employment taxes?” Qualifies as taxes and we’ll answer that.

“I have a C-corp that allows reimbursements for medical expenses. Is there a limit to the scope of the type of medical expenses eligible for reimbursement? I plan to reimburse for monthly premiums plus out-of-pocket copays for annual procedures, checkup, et cetera. 

1. I love the YouTube video where Toby touches on how an HSA is great for immediate tax avoidance that allows investment funds to grow tax free. What a great summary that was.” I like that.

Scott: Way to go, Toby. You got a compliment.

Toby: You guys should have more of those. 

“I think we were going over the C-corp and reimbursements for medical expenses. Is there any limit to the scope or the type of medical expenses eligible for reimbursement? I plan to reimburse for monthly premiums plus out of pocket copays for annual procedures.” 

“I’ve just set up my entity with you guys, but I’ve already been doing business. Will I be able to write off startup costs that predate the actual formation of my entity?” We will answer that one too.

“Question: How do I pay myself from my LLC if it is taxed as a partnership? In other words, what tax forms do I fill out to show the IRS that my LLC paid me for my work? Can you use credit card statements as proof of expenditures?” We’ll answer that.

“When calculating employer contribution to Solo 401(k), how does bonus depreciation affect the number? What if I do cost seg and wipe out most of my income? Can I make an employer contribution?” Fantastic.

“Would I be able to donate a property to a nonprofit organization and get the tax write-off the sale year if the property was purchased in the same year?” Get the tax write-off. I see what you’re saying.

“What tax implications inefficiencies do I need to keep in mind when doing a fix and flip?” Talk about an open question. All right. I am going to speak directly because guys, I’m having technical difficulties all over the place. I’m going to speak to my friend, Troy Butler, if you’re rolling around.

Troy: Hello.

Toby: Hey, I cannot open up the chat or Q&A. If you get good questions for Scott, and there are opportune times or there’s something we need clarifying, just jump in, my friend.

Troy: And do buckaroo.

Toby: All right. I don’t want to touch that chat because it seems to be the source of all ill. Hey, if you like glitches, here’s YouTube. If you guys like this type of information, you want more, by all means there’s YouTube. Also we teach the Tax and Asset Protection Workshop just about every week.

We have a live one coming up that is in–person in Dallas. It’s very inexpensive to go to, and it’s a lot of fun to get together. That will be the 27th through the 29th. We need to get you out to some of these, Scott.

Scott: Absolutely.

Toby: You can absolutely pop in. The virtual events are on Saturdays and fully staffed with a whole bunch of folks to answer your questions. Also we do a great job. Clint teaches them, Brent, Maggie’s been teaching them, which is really cool because he’s been a client forever. Different perspective. It’s just fun.

If you want to learn about land trust, LLCs, corporations, living trust, Wyoming Statutory Trust, land trust, personal privacy trust, residence privacy trust, the Tax and Asset Protection Workshop is a great place to start. You don’t need to click on that. Let’s just dive in.

All right. “We want to dump in and do 1031 exchanges. What are other options besides investing in one single property?” Then we can answer, how do you find them?

Scott: I think first of all, you’d have to say, well, what’s a 1031 exchange? What does that mean? It’s section 1031 of the Internal Revenue Code. It’s a way for real estate investors to be able to sell their real estate investments, exchange into another one, and push off or delay the capital gains. 

It’s basically just a way to defer taxes. With proper planning, you can actually eliminate them with estate planning, but that’s what a 1031 exchange is.

What you’re doing here is saying, I’ve got a property. Let’s say I got $100,000 of profit, I don’t want to pay the tax on it. Instead of selling that, I’m going to exchange it for another piece of real estate. When I do that exchange and I comply with all of the requirements, and as I’m sure you can state, Toby, there’s a lot of them as far as different time requirements, who can handle the money, and do the transactions, but if you comply with that, then you have a lot of opportunities to postpone the capital gain.

If you’ve got a property that’s worth $200,000 and you want to sell it, and now you want to invest in other properties, you’re allowed to go out and identify up to three properties that you want to replace it with or as many as you can, as long as it doesn’t exceed (I think) 200%.

Toby: The ones you actually purchased.

Scott: Yeah. If you’ve got some of these limitations, but if I’ve got a $200,000 property that I’m going to sell, I can go out there and identify as many properties as I want as long as it doesn’t exceed that $400,000 of value. There are different ways to go about this, but one of the things I like about the 1031s is it allows you to change the type of real estate that you’re doing, that you’re investing in.

I have a lot of clients that maybe are going through and they have multiple single family residences, and they want to get into commercial, get into a retail spot, or get into farmland, vacant land or something. As long as the properties are in the US, you’re good to go.

Toby: Perfect. You were actually 100% correct. It’s 200% value of it. As long as you acquire 100% of the value, then you have no capital gain or recapture. 

What can you invest in? I think the calling of the question is really, you don’t have to buy just one property. You can buy multiple properties, like Scott’s laying out, including farmland, just land, timber, land, multifamily, commercial, residential. The only restriction is that it has to be US or US territory if you’re selling US property.

If you’re a US citizen and you’re selling property abroad, then it’s anywhere other than in a US territory. It’s anywhere else. If I sell a property in France and I want to buy one in Spain, I could do that and still 1031 it for purposes of US taxation. I still have to deal with French taxation.

Scott: Right, the local tax you always have to deal with.

Toby: Where do I find them? Anywhere. There’s nothing special about the property. It’s not designated 1031 exchange property. You’re using a qualified intermediary to buy those properties. The less people that know that it’s a 1031 exchange, the better. You don’t want to advertise that it’s a 1031 exchange because what you’ll have is a mean guy like Scott might say, hey, yeah, I’ll sell that to you. I push your closing, closing, closing. Hey, you better pay me an extra $25,000 or we’re not going to close on time.

Scott: And then you’ve got this 180 day rule that says you have to close on the new property within 180 days of the sale of the old property. Those dates are absolute, too, so you close on the 181st day.

Toby: You’re toast. There are people that play games with that. If they find out you’re in a 1031 exchange, so just make sure you’re not dealing with one of those knuckleheads, and that you have some fallback. 

Reverse exchange is actually the next question. I would say for the previous question, you may want to consider reverse exchange depending on your scenario, how liquid you are, because a reverse exchange is just the opposite. I’ll let Scott go into it.

Scott: The reverse exchange is the opposite in the sense that a typical 1031 exchange, you sell your property, and then you have the time to go out and get the replacement property or properties. In a reverse situation, you’re going out and you’re buying the replacement property first, and then you’ve got 180 days to sell your current property.

The scenario works basically the same way. It’s just a question of which property are you buying or selling first. Are you selling your current property? In which case you have a 1031. Or are you buying the replacement property, in which case you have a reverse 1031.

Toby: Just remember, in a reverse exchange, when I say you have to be liquid, you need to be able to come up with the funds to buy the replacement property without selling the first property. You need to work through a qualified intermediary who acquires the property and holds title for you, and then you sell your property. As long as you sell it and close within 180 days of closing on the first property, you’re good. You want to make sure you’re coordinating both.

If you know you’re going to sell and you’re like, hey, I’m going to sell, I’d probably like, hey, if I’m probably pushing the date of my closing as far back as I can on the reverse on the initial acquisition so that I can give myself as much time to sell as humanly possible. If something does come up, if you do have inspection issues or you have your buyer fall out, it doesn’t take you beyond the 180 days.

Scott: That’s absolutely critical that you meet those time requirements. I think on the 1031s, what I’ve seen is that the sooner you get your QI (qualified intermediary) in place and the sooner you get tax counsel, the better here, because you’ve got a lot of different options as far as which property you’re going to buy or sell. 

First, what order is it going to go in? Who’s going to keep the proceeds? The 45-day requirement on identification or the 180 day requirement on closing, who’s going to make sure that those dates are met so that we have everything?

Also, there are a lot of nuances that come into play. You have this issue of boot, which can be mortgage boot or it’s cash you receive back. A lot of these exchanges, you’re not necessarily going a $200,000 property for $200,000. It’s not going to be exact. You may have to throw in some extra cash to make the deal work. Or if you get cash out of the deal, then you’ll pay tax on what they call the boot or the cash that you receive.

Toby: You sell a property that got $100,000 loan on it, you buy another property of equal value, and you take $150,000 loan, you walked away with $50,000 of boot that they’re going to tax you. You could solve that by waiting to do your refi. I think you get around it.

Scott: There are always workarounds on a lot of this stuff, but you need to know about it in advance. I’ve seen people list their property for sale, get a buyer, and then they’re scrambling to find a QI, because if you go close on that property and you take possession of the money at closing, which would normally happen in a normal real estate deal, you have no 1031 exchange. Once you take the money, it’s done.

Toby: You can’t touch it.

Scott: This is all stuff that needs to be planned. It’s not something that we can do, then retroactively undo stuff or manipulate some numbers, and maybe get you into it. Either you do it or you don’t.

Toby: You’re like MC Hammer. Can’t touch this. Scott keeps talking about a qualified intermediary. Where do you find them? You look at 1031 exchange companies, that’s what they are. Nine times out of 10, 99 times out of 100, they’re qualified intermediary.

Troy: Toby, real quick. We’ve had a question come up in the chat that I think might help the entire group. If during the identifying process, you find four investment properties and identify those, do you have to buy all four?

Scott: Your identification basically identifies the properties that you can buy, but you don’t have to buy it. If you don’t buy any of the identification ones, then you just have a failed 1031 and you’ve got a taxable event. But if you identify (say) 3 or 4 properties, 10, or whatever the number is that you’re allowed to identify, as long as you close on one or more of those and you don’t take any cash out of the deal, you should be good to go.

Toby: The rules are I think up to three. If you’re doing a traditional starker exchange which is when you sell and then buy, you could do a swap that follows on that same category, though you almost never see a swap, you almost always see the starker exchange where you sell a property, and then you’re trying to buy one within 180 days.

That 45-day period is to identify a property or properties that you’re going to use in the exchange to cover the relinquished property value. You could go up to three. As long as you close on one, that value is going to be used against the dispositive property. 

If you sell a property worth $500,000 and you identify three properties, each of which are worth $300,000, you need to close on two of them to avoid tax. If you closed on one of them, then you’re going to pay tax on two-fifths of the profit.

Scott: You’d have a partial 1031 in that situation.

Toby: You only bought $300,000 for a replacement property against the $500,000 dispositive property. If you close on two of them, then you have $600,000 of replacement properties to cover $500,000 of dispositive property and you’re fine.

Scott: You just have to put in the other $100,000 there in that. The one thing I was talking about before was the 200% rule in this. The situation that I had in California where I had a client that had rental property in the Bay Area that was worth about $2 million, they wanted to 1031 it because they had over $1 million of cap gains.

We looked at it, and they were going into a different place. They were going to South Carolina. I think it was 40-some properties that we identified because we had a $2 million property that we could go up to $4 million.

Toby: It’s 200% of a dispositive property. That’s the amount of replacement properties you can identify. By the way, it’s just something you’re doing with your qualified intermediary. They’re filling that out. I forget if it actually has a form number.

Scott: It doesn’t have an IRS form that I’m aware of, but what I recommend there is that you give them the identification. You give them two copies of it, have them date stamp them both, and give you one of them back. In that way, you’ve got proof that you satisfied the 45-day identification.

The closing, obviously, is going to be easy because you’re going to have the settlement statement, HUD ones, or whatever it is, the title statements to be able to show that this closing was here, this one was here, and then it becomes a math problem.

Toby: They identified $4 million worth of property. As long as they close on $2 million of the $4 million, it doesn’t matter which properties, It could be half of them, it could be more than that. It does not matter the number, it matters the value.

Scott: Right. This client ended up closing, and I think it was 22 properties. They did a 22-for-1 exchange because they’re $2 million in the Bay Area. It was worth 22 properties at $90,000 a piece or whatever they were back then in South Carolina.

Again, you have a lot of flexibility here, and it works really well if you want to have some geographic diversification. Maybe I get out of California because that’s where I live. Or maybe I’ve got a lot of rental properties that are single family residences and I want to do commercial. It allows you to stay in real estate, but change the dynamics of what you’re investing in, or give you a little bit of diversification in your portfolio.

Toby: Yup, 100%. All right, next one. “As a 1099,” that’s a fancy way of saying an independent contractor, “what is the best way to leverage my LLC to save money on taxes? How can I save on self employment taxes?”

Scott: You started looking at this one. He’s telling us in here, how can I save on self-employment taxes? He’s telling us here that he’s a sole proprietorship. Your LLC, that doesn’t really tell us anything. Your LLC can be disregarded for taxes, which it sounds like it is in this case. He’d file a Schedule C, but we could have an LLC and tax it as an S-corp, tax it as a C-corp, tax it as a partnership if we have at least two members in the LLC. There are lots of different ways to go about this. My first thought here is, let’s just get rid of the self-employment taxes and make this an S-corp.

Toby: That’s what I would think.

Scott: It’s something where you can take distributions in lieu of the self-employment taxes, where you’re paying that on 100% of the net profit, as long as you’re taking a reasonable salary. The reasonable salary then is going to pay the employment taxes, which the self-employment taxes and employment taxes are basically the same thing.

Toby: The only thing I would say, Scott, is we’re assuming that there’s profit. They’re getting 1099. Let’s just say that in this particular case, they’re getting 1099 for $20,000, but they have $30,000 worth of expenses. They’re running at a slight loss. I probably wouldn’t do anything.

Flip that around. They’re making $50,000 net profit after all their expenses, then it’s going to likely make a big difference for them tax-wise to make that S election. Under those circumstances, they could probably save a minimum of $4500–$5000 just by making that one election and running a payroll once a year.

Scott: I think so because you look at a $50,000 profit on a Schedule C, which is what this is, a sole proprietorship LLC, a disregarded entity. You’re paying a little bit over 15.3% on that $50,000. You’ve got a $7500 bill immediately before you even get to the income tax component of it.

What we’re looking at here is while you get the $7500, if I paid myself a reasonable salary, maybe I’d pay $3000 or $4000 in taxes for employment purposes, and I’ll save the rest of the $7500. We’re not talking about zeroing this out, but we’re talking about reducing it. This is also assuming, I think, that this person is deducting all of their expenses.

This LLC is claiming every single ordinary, reasonable, and necessary tax deduction to begin with. We would look at ways to bring that down. Do you have a retirement plan? Are you contributing to a 401, a SEP, a simple, or whatever it happens to be? Then once we get that down to the absolute lowest number, that’s where the self-employment taxes come in. Obviously the higher your profit is, the higher the self-employment taxes, and the more likely converting to an S-corp would make a whole lot of sense in my opinion.

Toby: Absolutely. I would say again, S or C, depending on what you’re doing. One of the things we like about S- and C-corps is accountable plans. The ability to do the administrative office in the home, 100% deductions for things like your cell phone, your data. You’re able to get a lot more money out. If it’s a C-corp, you can do medical reimbursements. You’re always weighing these things.

I’ll just say this. A lot of times you just get your pencil out, get with somebody who knows what they’re doing, and say, all right, here’s my expenses, what’s the best way to structure it? We use software on that.

We do something called the tax saver pro program, where we run returns through software, and it runs 1500 different scenarios. It get crazy. It’s looking for what’s the best way under these facts and circumstances, what would be the best outcome for you as a taxpayer. You’re doing that type of stuff, and you’re trying to figure out what’s the best outcome. That’s the best thing you could do.

Scott: I agree with that. A lot of this is just a math problem. You’ve got $100,000 coming in, you spend $40,000 of expenses. You got a $60,000 net, and we figure out what’s the taxes with the self-employment and with the income. For me, maybe not using the software, I’ll just have a piece of paper that’ll say C and S, two different columns, and say, all right, what if this guy here made this same $60,000 profit and was in the C-corp or had an S-corp designation? What would be the ultimate taxes?

A lot of times, it answers itself. It’s like, oh, you’re going to pay $10,000 here, $8000 here, and $6000 here. They’re all legal. Whichever way you do it, the IRS is going to process the return, and there’s no problem with it. Do you want to pay $10,000, $8000, or $6000?

Toby: Does the IRS make you pick the one that gets them the most money?

Scott: They’d like to say yes. You have to pick the entity that’s going to require you to pay the most amount of taxes, but it’s up to you. You get to structure that. Notice the default here. You set up a single member LLC. The default is a schedule C, which is the worst position you can have from a tax perspective. You’re going to pay the most amount of taxes, and you’re going to have an audit perspective of at least 10 times higher. Why subject yourself to an IRS audit, pay more tax, when you have what I consider to be a pretty simple solution.

Toby: Preach into the choir, man. I’m always like, you’re 1000% more likely to be audited as that sole proprietor, and you get to pay more tax.

Scott: You think about the IRS. If they have 100 auditors, how many of those auditors are trained to audit a 1040? The answer is 100. They may not all be very good, but 100% of the auditors are trained on a 1040. When you go to an 1120 or an 1120S with a C- or an S-corp files, that 100 auditors may be down to 20, because you’re now getting into a more complicated area that requires more education, more training, so they just don’t have the resources.

A lot of people that are just starting out, they don’t really know what they’re doing. They file a Schedule C, and the IRS knows, hey, this is somebody that really doesn’t know what they’re doing. Or maybe it’s just beginning, so I’ll bet we can catch them on not having a mileage log, not writing down who or what the business purpose of a meal was.

Toby: Somebody said, hey, there are less formalities if you do it this way. You don’t have to jump through all the hoops.

Scott: You don’t have to hire a lawyer.

Toby: You’re like, it doesn’t work that way. The IRS doesn’t care what you are, they’re going to make you track your expenses.

Scott: That’s right.

Toby: And you have to track them. They don’t have to. They just say, no.

Scott: Remember too, in an audit, who has the burden of proof? It’s not the government, it’s us. It’s not guilty beyond a reasonable doubt, we can keep our mouth shut, and they’ve got to produce all the evidence. In this situation, you don’t produce any of the evidence, the IRS is going to disallow whatever they want, and you’re going to owe a lot of additional tax. There’s none of this stuff where, oh, I don’t have to give them any of the information. It’s like, yeah, actually you do have to.

Toby: Hey guys, real quick out there. Give me a thumbs up if you already have the tax toolbox, if you’re an Anderson client, and you’ve done the business there. We got a whole bunch. There’s a bunch, yay. All right. We just cut a big section on audits, collections, and going through. You’ll like that. You get that absolutely free. We did tax-free income sources.

Scott: Did the IRS dirty dozen? We were looking at tax scams. I think that’s the thing that you and I have talked about over the last year or whatever, just having this ability to update the toolbox when new stuff comes out, or maybe we get a couple of questions. Toby may get five questions on the same area. It’s like, all right, maybe we should do that as a topic. We’ll keep adding to this as either the law changes or some new topics come into play.

Toby: One of the things that we did that for was because I wanted you to see, before you ever get to tax court, how many chances you have to settle with somebody other than that initial auditor who sometimes is a nincompoop?

Because 20 of them are trained to look at 1031s, 1120s, or 1120-Ses, and they may not know what they’re doing. We went through it painstaking. We had boxes all over the place. We mapped out the whole process from the dispute and the whole audit process to collections. I think it was six or seven different ways we could handle collections, but it was a lot of fun.

The whole reason we did it guys is because knowledge is a power when it comes to taxes and also it alleviates fear. One of the things that you got to realize is right now the audit rate is in the toilet. You have about a one in a thousand chance if you’re one of our clients to get audited. It’s really, really low.

Scott: A lot of it is just total random, and they don’t have the staff to be able to do it. Just to give you an example, my first audit that I handled after I left the government was a guy that had a whole lot of revenue on there, and it all came from an S-corp. I started looking at the S-corp, and there was massive fraud in the S-corp.

They’re looking at the 1040, the Schedule E, the K-1, and I gave them a copy of the K-1. In a normal audit there, they would have said, okay, let’s open the S-corp, which at that point my client was done. I was like I was going to have to get totally lucky, which I did because he said, what’s an S-corp? It was like, oh, thank you so much because guess who gets to educate him on what an S-corp is? I educated him, showed the K-1. Obviously, the number on line one of the K-1 matched the Schedule E.

Toby: Did he pay it?

Scott: Yeah, everything cleared perfectly.

Toby: Did the auditor pay you? You just took him to school.

Scott: I thought you meant did my client pay me. My client paid me, he was thrilled.

Toby: He better not have been there.

Scott: No, because we had a three-year fraud case that would’ve been horrific, that we ended up with owing like $1000 on. I’ve never seen a person more happy to write a check to the IRS than that guy was.

Toby: Thanks, Scott, for screwing us all.

Scott: There you go. You’re all paying more taxes because of that one audit that I handled.

Toby: We could have some better roads, except for Scott. The case is in point though.

Scott: Yeah, you just don’t know what the IRS knows, who’s auditing you. We make these assumptions that these are real jerks that are going to come in. It’s like most of the auditors that I worked with are just good people. It just happens to be their job.

Toby: Just to be annoying, you’re walking in to see your client. After you’ve had this meeting and you say, here’s the check you write, and he’s like, I had to get that out.

Scott: You got it.

Toby: I had to get that out. It gave me chills. All right. Let’s keep going. We’ve gotten through one question.

Scott: Let’s go through the C-corp here.

Toby: All right. “I have a C-corp that allows reimbursement for medical expenses. Is there any limit to the scope of the type of medical expenses eligible for reimbursement? I plan to reimburse for monthly premiums plus out-of-pocket copays good for annual procedures, checkup, et cetera.”

Scott: Are you going to read the PS again since it says how much they love the video?

Toby: I think I’ll just leave it up.

Scott: Okay. We’ll just leave it up there, but let’s look at the medical expenses. He’s got a C-corp, which is what you need for what’s called a Section 105 medical reimbursement plan or health savings account, whatever. We’re looking at the medical reimbursement plan though. Basically, yes, you are limited to whatever medical expenses are listed in the IRS publication. Do you remember what that is?

Toby: The 502.

Scott: There’s publication 502 that has all these medical expenses out there. They’re what you would think they would be as far as anything to diagnose, treat, or cure some medical diagnosis here. Really, there’s not a whole lot of limitations on it.

Toby: It’s medical, dental, vision. It’s anything that’s the cure, prevention, mitigation of disease or overall health. It does have to be legal. You can’t go get a prescription for weed and write it off. All you potheads out there, I’m looking at you.

Scott: That’s right, you can’t do it.

Toby: Can’t write off the weed.

Scott: Not yet anyway. We’ll see what happens in the future there. There are other things, too.

Toby: Yeah, I can write off the weed. That’s all they heard. You can’t write off the weed. You can not.

Scott: There’s a lot of cosmetic surgery you can’t write off typically as a medical expense. There are a bunch of things you can’t do, but for the most part, I think when you look at that publication, it’s page after page of things you can write off. If it’s in there, your 105 plan and your C-corp can certainly cover it.

Toby: Yup. It’s extensive. The one thing I would say here because they’re talking about reimbursing their monthly premiums is it can’t be a previously reimbursed premium. If you have an employer plan where they’re paying for your premiums for your health insurance, you can’t go in and double dip. That’s all. If it comes out of your pocket though, you can get it. Just to reiterate, Sherry can’t write off the weed.

Scott: You have to single her out. I forget what she lives. I think in the don’t say, I won’t say what state it is because I don’t want the you know, the coming in there. But yes, you can’t write it off.

Toby: We don’t know what Sherry did. I’m just kidding.

Scott: There you go.

Toby: I don’t even know what weed is.

Scott: We’re good there.

Toby: It’s legal out here. All I know is that you can smell it all over.

Scott: That’s the thing. It’s legal in Nevada, it’s legal in Colorado, but that’s still even for medical purposes.

Toby: Federally, it’s still illegal.

Scott: Federally, it’s illegal. Until they change it, they want to move it from Schedule 1 to Schedule 3 as a drug, once they do that, it’s going to open up that as a deduction. But until that happens and until it’s formalized in writing, statutory, and whatever…

Toby: I think there are guys that try to write it off through a nonprofit. I think they have a church of weed or something like that.

Scott: There might be in California because of the…

Toby: Colorado is your backyard.

Scott: The dispensaries in Colorado are for profit though, the ones in California are not.

Toby: Not the dispensary, but they created a church.

Scott: A church, yeah, maybe.

Toby: Yeah, because then they have to have it in their church.

Scott: The next Tax Tuesday that I do, I will report back on that church that’s in Colorado.

Toby: You go check it out.

Scott: I will check it out as a research project. There you go.

Toby: Come back here with a little slits of eyes.

Scott: At least I’ll know what’s going on then.

Toby: Maybe you start forgetting my name.

Scott: That could happen anyway just on my age. Anyway, what does this one look like? This is a startup.

Toby: “I’ve just set up my entity with you guys.” I think they’re talking about Anderson. “But have already been doing business. Will I be able to write off startup costs that predate the actual formation of my entity?” That sounds like a startup cost question.

Scott: Yeah. What do they do with startup costs? Overall, you’ve got this $5000 limit on your startup costs, your education costs, and whatever on that. You’ve got all these other expenses. You may be paying rent, you may be paying wages, salaries to people before you actually open up your business to get it started. I don’t know how you look at that, but pretty much if it’s a deductible expense if you were already in business as a startup expense, I’m pretty comfortable taking it as a startup.

Toby: Yeah. You have startup and organizational expenses, both at $5000. There’s a phase out if it goes over $50,000, I believe. Otherwise you’re writing it off over 15 years. You can do your first $5000, then if you have $10,000 worth of startup expense, for example, you’d write out $5000 in the first year and $5000, you’d amortize over the 15 years, which is pretty brutal, right?

Scott: The 15-year range, yeah. Unless you shut the business down before that, you’re going to have to wait out the whole period.

Toby: You don’t lose it though. I guess the punchline is you don’t lose it.

Scott: Yeah, it’s a timing issue more than anything else. If you do have a lot of startup expenses, like Toby said, you just amortize them over 15 years.

Toby: I’m going to say this. Most accountants are going to say, we can go back a year. There’s no actual rule on it. Conservatively, most people are like, oh, we’ll go back for one year and we’ll grab those as startup expenses. If you could show that you were on your trajectory to open your business and that you were intending to make a profit from day one, then I would say you can go back as far as you want. There are cases where they go back many years.

Scott: Those are typical facts and circumstances cases that Toby could go back two years, I could go back two years, and the IRS would allow his but disallow mine. You say, well, wait, they’re both two years. You have to look at the specific facts. This is what Toby was doing. He was on this path where maybe I started it, then I gave up for awhile, then I did this, and I did this.

Toby: Or you’re thinking around losing money in.

Scott: Right. I’m not serious about my profit motive, really.

Toby: The easy rule of thumb is if you could have deducted it, had you been in business, you can deduct it when you do start your business if you go back. It’s just how you were operating.

All right. “How do I pay myself for my LLC if it’s taxed as a partnership? In other words, what tax forms do I fill out to show the IRS that my LLC paid me for my work?”

Scott: Again, here it gets back to what I was saying before with the LLC. That’s a weird animal in the sense of, we don’t know how it’s going to be taxed, that you’ve got to make that election. In this case, for whatever reason, we have partnership taxation. Now we have one of the partners that is receiving some compensation going along.

In a partnership, we don’t typically wouldn’t issue a W-2 to the person, but we’d have what’s called a guaranteed payment. I think that’s the way I’ll use it as a guaranteed payment. You can use the line one of the K-1. I think that’s the ordinary income component. I’m trying to think of what else.

Toby: Would you be allocating the guaranteed payment on the form because it’s not the profit then? There’s an additional amount. You’re not having to 1099, I mean you’re going to get it all to them on the K-1?

Scott: That’s right.

Toby: What’s the form? It’s the K-1 off the 1099. The reality though is that you should have an agreement for the guaranteed payment, and it can’t be related to the percentage or to profit. In other words, I can’t say, hey, pay me 10% of profit, and that’s a guaranteed payment. That is not a guaranteed payment. That is just an allocation of profit to you. And it’s non deductible to the partnership. A guaranteed payment has nothing to do with the profitability of the company. It needs to be a set amount.

Scott: I look at the guaranteed payment as compensation for services and not as a return on my investment.

Toby: Exactly.

Scott: I think that’s really the way you have to look at it. Your K-1 is going to show you both. It’s going to show you your guaranteed payment for working for the partnership. It’s also going to show you your portion of the actual profits as well. Obviously both of those numbers go on your personal tax return then.

Toby: You do a partnership file that’s what’s called a 1065 partnership return, and it gives K-1s to all the partners for their share of the profits, losses, or other income. When this particular client is going to get their K-1, it’s going to have guaranteed payment on it for any work that they did, plus it’s going to have their allocation of the profit or loss. They would attach that to page two of their Schedule E of their 1040.

Scott: It all just comes out in the wash on the 1040 then.

Toby: “Can you use credit card statements as proof of expenditures?”

Scott: Again, when we look at the proof, remember in an audit, we have the proof. We have the burden of proof. If I claim $5000 of office supplies, if the IRS wants to know, I’ve got to show them where that $5000 went. Now this went to office depot, this one here, this one here, whatever. The IRS wants a piece of paper to see that.

The question here is if I get my Amex statement and it shows office depot $100, is the IRS going to allow that? Or are they going to want to see more additional documents?

Toby: They’re going to say, what was that for? How was that item used?

Scott: Right. One of the reasons why I like having a dedicated business credit card here, where I can say to the IRS, here’s my MasterCard, it’s only used for business, not once in a while, but it’s never used for personal. If I go to an office supply store and buy stuff for my kids for school, I put it on this credit card. If I buy it for my business, it goes on my business credit card.

A lot of times the IRS will accept that and go, but be prepared though that the credit card statement itself is not going to be sufficient. You want to have the backup. Where’s the receipt? Where’s the statement that shows the 10 reams of paper that you bought or whatever?

Toby: I’ll say this. What about for a lot of folks may not realize that for, I think it’s lodging and meals, $75 and below, you don’t have to have a receipt for it? I don’t think this would necessarily qualify as a receipt. It would definitely prove the amount, but you’d still have to say the who, what, where, and why. I still have to be able to say, hey, I met with Scott. We discussed business. Where’d we go?

Scott: Right. The restaurant would be on there and the date and the amount, but it doesn’t say, Toby and I go out. Did we go out after we played around with golf?

Toby: Or that we actually went out. It doesn’t say, Scott and I…

Scott: That’s right. Maybe I went out with my wife and that’s a personal meal.

Toby: That’s where you get your phone, and you keep your calendar so that you can create this. If you’re running fast and you don’t want to sit here and go through it all, I get that. But if you get audited, you’re going to have to go back and say, all right, what were these expenses for? If they asked for that. Have you seen them really dig into that?

Scott: If it’s something silly like office supplies or whatever, no, I haven’t unless it’s a really absurd number, really high relative to the growth. They don’t get into a lot of those expenses. They do like the meals and what used to be entertainment, the M and E, we don’t have entertainment anymore, but the meals and travel, things like automobile, things that either you may not have the documentation, or there’s a personal component in it.

When I paid for this airfare to come here, was I coming here to go play in Las Vegas, or was I coming here to work? Obviously, if I don’t write it down as my day planner, oh, I’m coming here to record for the toolkit, I’m coming here for tax Tuesday, or whatever it happens to be, I’ve got to write it down though.

Let’s say the IRS wants to challenge my expenses from this trip. This trip is going to get reported somewhere in 2025 when I file that return. Somewhere within 3 years from that, maybe in 2027 I get audited, and they’re going to ask me about a Las Vegas trip that I had today. I barely have a memory of what I did yesterday, let alone three years ago or something. If I don’t write this stuff down, I’m not going to really remember.

Toby: It’s not just me.

Scott: No, it’s not just you. I think there are probably a lot of other folks that… Write it down.

Toby: Write it down. Again, use your little phone, just get used to putting notes into your meetings, and jotting down your expenses so that you’d go.

Scott: Yeah. Think about it. If I write it on the receipt, put it in a day plan, or whatever that I had lunch with Toby today to discuss business and everything matches up, what is the auditor going to do? You’re going to say, what? They’re going to give that to you, which they will.

Toby: Do you have a recording of the conversation?

Scott: I don’t think you met with Toby, or I don’t think that was business. How would you know?

Toby: You don’t have to prove that. Usually what happens if you’re going to have an issue at all is because you’re extremely far outside the norm. There was a doctor. I think he wrote off meals every single day. The IRS came through and nailed him because it was not very expensive. They said, it’s not more than if you just personally had lunch.

He was going to a chamber every day. It was some St. Louis Chamber of Commerce or something, and he was buying lunch every day. They just said, it wasn’t more than you would have expended personally. They got him on it. The thing that raised the flag was just that there was literally a lot of meals for the type of business it was and what was going on.

Scott: Sure. You got to look at the totality of the business. If you’ve got somebody that’s in sales, they may have a couple of meals every day that they’re writing off other ones and maybe once a month. You just have to look and see where you’re going.

Toby: All right. If you guys like this type of information, again, join us for the Tax and Asset Protection event. Clint does a great job of speaking, Brent Nagy. I’m on sometimes, Amanda is on quite often. If you want to learn about LLCs, corporations, living trusts, land trusts, personal privacy, residence trusts, all those fun things, Wyoming Statutory Trust, we go over it, and we show you guys how to structure real estate investing for sure.

All right, another one. “When calculating employer contributions to Solo 401(k)s, how does bonus depreciation affect the number? What if I do cost seg and wipe out most of my income? Can I make an employer contribution?”

Scott: Okay, we have a Solo 401(k). We have a one person company here. You have to look at, how is the compensation being figured for purposes of the 401(k). We also have an employer component and an employee component too.

Toby: This is weird because a cost seg implies real estate, but a Solo 401(k) implies an active business.

Scott: Right. Yeah, I’m not sure how those two work.

Toby: Maybe it’s an Airbnb, maybe it’s a flipping business. I don’t know. Actually, it wouldn’t be a flipping business if they’re doing a cost seg, Airbnb, or something like that.

Scott: It would almost have to be something like that where you’re going to do it. You have to look at the type of business. A lot of times, especially if you have a Solo 401(k) in a sole proprietorship, you have to look at what’s the net profit of the business to be able to calculate how much you can put into a 401(k).

If you’re using cost segregation, which is a type of depreciation or this bonus depreciation, which in years past it’s been 100%, 80%, or whatever the number, think about that. Whatever you’re taking there is reducing your net profit, which is the goal of it, but it’s also reducing the amount that you can contribute to the Solo 401(k).

Toby: Yup. The 401(k), the easiest way to think about this is there are two sides. There’s the employee contribution, which is $23,000 this year. There’s a makeup provision that could get you to closer to $30,000. That’s not what they’re talking about here. They’re talking about the employer portion.

The employer portion is the employer could contribute up to whatever you got as wages. If they paid you $40,000 in wages, I could put $40,000 into your 401(k), but they’re limited to deducting 25% of that amount of whatever you received as wages. Again, if you receive $40,000 as wages, I could put $40,000 into your 401(k), but the company can only write off $10,000. 

What does that do? What does it have to do with the profitability of the company? Zero, nothing. You could still contribute. What matters is that I paid Scott or the employee, then I can make contributions and deduct it, even if it creates a loss. Fun stuff.

Scott: Absolutely.

Toby: All right. “Would I be able to donate a property to a nonprofit organization and get the tax write-off the sale year if the property was purchased the same year?”

Scott: All right. I’m going to buy something today, and I’m going to donate it in one month. I pay $10,000 for it and I donate it. What’s my donation? What’s my value? You have to look at any donation. The calculation here is fair market value on the date of the donation. It would seem to me that whatever you paid for the item there would be the amount that you would donate, unless something happened in the time that you owned it to increase or decrease the value.

Toby: It’s going to be the basis of the property within a year. If you go over a year, then it’s the fair market value or it’s basis, I believe.

Scott: If the basis is lower.

Toby: I believe. I want to say that it’s going to be the lower of the two.

Scott: I think it is. I’m not positive about that though.

Toby: Yeah, but the IRS isn’t going to let you buy something and donate it at what you paid for it if it’s not worth that anymore. If I bought a piece of property for $50,000, but it’s worth $20,000, I bought it, and then the market crashed, I’m only getting the fair market value. I’m going to get whatever’s less. In most cases, I’m limited to my basis.

Scott: Most of the time. The only thing I can think of here is let’s say you bought a piece of artwork for $10,000 and the artist died or something, something happened in it, and that jacked the value up, you still got that year holding period.

Toby: Yeah. They say for appreciated assets held under a year, it’s the basis. Or the fair market value, whichever is less. In the case of over a year, I think it’s the basis or fair market value, whichever is, I still think it’s less. I think it’s whichever one’s higher.

Scott: If it’s over a year and the fair market value is higher, I think you get it as long as you can show why the fair market value is higher.

Toby: You get the appraisal. You have to attach the whatever that form is, 8283.

Scott: I think it’s attached to the Schedule A on that.

Toby: I think I butchered it. I don’t know what number the form is.

Scott: I think it’s an 8283. I think you’re right. It’s the form that you would put in for the appraisal information. I think it’s $500 on some and some is $5000, assuming it’s not cash. It’s something where you’re coming up with a value that you’re taking as a deduction.

Toby: Sizeable, you’re going to get an appraisal.

Scott: You will. Yeah, you better.

Toby: All right, including crypto, which is weird. You actually have to get appraisal on crypto. They’ll do it for about $300.

Scott: I bet they will.

Toby: It’s weird. Let me just look, oh, this was the day. Yeah. “What tax implications or efficiencies do I need to keep in mind when doing a fix and flip?”

Scott: We’ve got somebody who is buying a piece of property, fixing it up, and selling it in hopefully the shortest period of time possible. What tax implications do I have on that? If I’m doing this as a business, this is my business to fix and flip, I’m a real estate dealer, and I’ve got some pretty serious tax implications if I don’t structure my business properly, I think we have to look at the fix and flips. Is this a one-off?

I got 30 rentals, and I’m going to do one fix and flip type of situation, or am I doing this as a career or as a job? The more fix and flips you’re doing, the more likely you’re going to be a dealer. The more likely it is that the IRS is going to want a lot more tax. 

They’re going to want self employment taxes on the sales, which you think, well, real estate sales, they don’t have self employment tax. That’s generally true, they don’t. But if you’re a dealer, you will get hit with that tax. We need to look at, all right, if I’m going to be a real estate dealer, what am I going to do?

Toby: Dealer, you’re treated as though you have inventory, so you don’t have depreciation. You don’t have installment sales. You don’t have 1031 exchanges. The purchase of the property does not get to be depreciated. It’s literally just sitting there on the shelf. Whatever costs you put into it, if you’re fixing it up, all that’s doing is increasing the basis of the asset so that when you sell it, you pay less income on the gain.

I say gain, but it’s actually ordinary income. It’s taxed. Whether you held it a year or not, it’s going to be taxed as ordinary income at your normal tax bracket. You’re 0%–37%, plus if you materially participated, which invariably you’re going to have to if you’re fixing and flipping this, then it’s also employment taxes on it as well.

Scott: Yeah. It can get to be pretty, pretty ugly as far as that goes. When you’re looking at potentially a 37% income tax rate, 15% self employment tax, and then if you live where I live, you’ve got to 4.5% state tax. You put all that together, and you’re into the mid- to high-50% range if you are doing these flips and you have no tax plan.

Toby: The tax plan would be for employment taxes, it’s the S-corp. For overall would be a C-corp. In either case, you could be an LLC taxed as an S-corp, LLC taxed as a C-corp. It’s going to make a difference from your tax standpoint. The inefficiencies of fix and flips is stark. It is basically a car dealership.

You’re buying cars, putting them on your lot to sell them. You’re buying properties, putting them on your lot to sell them. Even though they didn’t  physically go to a parking lot, they’re sitting in a lot as far as the IRS is concerned of your inventory waiting to be sold. There are really very few deductions until you toss that thing, until you sell it.

Scott: Once you sell it, then you can match the expenses and claim them all. But until you do that, it’s very limited.

Toby: Corporate entity, accountable plans, 401(k)’s help so you can defer it. There are some ways to offset income, everything from charitable deductions, oil and gas, real estate professional, active participation in real estate, short-term rental loophole. There are a whole bunch of different strategies you could use to reduce the tax. But I guess for this one, the big one is just understanding that fix and flip, I may as well be a pizza shop.

Scott: You have to look at this as the real estate is not an investment. You’re not an investor. The real estate is inventory, and that changes everything if you’re a dealer. Actually, I think we did an entire presentation toolbox on real estate dealers and real estate professionals. We go into a lot more detail there as to what’s a dealer, and if you are a dealer, what are the remedies? How can you fix it so that you don’t end up paying 55% or some ungodly number?

Toby: If you have the toolbox, you really should go in there and explore it. There’s a lot in there. I think we did 20 hours.

Scott: At least. There are 40 some videos in there.

Toby: We just did three more hours.

Scott: Yeah, three more hours a day on that. These subject, it takes a while to get through it. It’s not like we can say, well, if you’re a dealer, a dealer is XYZ and you need to be a C-corp. Okay, there’s a two minute presentation, we’re done. No, there are a lot of nuances as to what that label really means. It’s not just dealer, there’s real estate professional.

We have a lot of real estate agents that say, oh, I’m a licensed real estate agent so I’m a real estate professional for tax purposes. It’s like, not necessarily. You have to look at all of these labels and, and how the IRS throws us all into these categories. If we’re going to be put into one of these categories, I’m making a lot of money doing fix and flips, why would I want to change? It’s like, there’s nothing wrong with doing that, but you don’t want to give half your profits away to the government.

I think what we have to look at is, what am I doing with my business? How can I structure it? What tax rules are in play that I can use for my benefit? It all comes down to education, knowing what you can do and maybe more importantly, what you can’t do.

Toby: Educate yourself. Knowledge is power. It also reduces fear so you’re more aggressive. Dovetailing back to where we started, the audit rates are really low right now. There are discussions of 87,000 agents being hired. I think they managed to get 13,000 hired this year, and they’re losing them just as quickly as they’re bringing them in. I think we were 79,000 agents.

Put this in perspective, it wasn’t that long ago we were over 100,000 agents. It’s not that they’re dying off, it’s that they’re retiring, and people aren’t entering the profession. We really are in a weird place as a country. Congress has given the budget for them to go out and hire, but there’s nobody to hire.

Scott: I suppose here’s the deal. Do you want to work for the IRS? Go to irs.gov and you can probably get a job.

Toby: Scott did.

Scott: I did. Let me just say there’s nothing wrong with it, but you can probably do better. Just think about an accountant that’s coming out of college now, it’s going to go in, and the IRS is going to hire him or a CPA firm can hire him.

Toby: Scott wins the money. He went to the IRS thinking for the riches.

Scott: I was probably making a good $45,000 a year when I went to them too. Of course it was back in 1800s.

Toby: You get that at In-N-Out Burger now.

Scott: Yeah, that’s right.

Toby: They’re going to give you $21.

Scott: A lot of the auditors, you think, oh, these are all accountants. No, they may be a philosophy major that can’t get a job. You don’t know who’s going to be auditing.

Toby: Philosophy major.

Scott: I did.

Toby: I would love to have an auditor who was a philosophy major as long as they weren’t knuckle dragging it in liquid paste. I’d be excited. I’d be like, this is awesome. Philosophy major, I actually start thinking for a second, but some of them are just like, my job is to collect revenue.

Scott: Right. I need to find some tax revenue here and I’m going to find it.

Toby: No, you can’t write that off. Some of the quotes we have from the notes are just mind numbing at this point. I can’t make fun. Actually I could, but we’re not going to make fun of the IRS. We love them. They’re necessary. I just said that out loud.

Scott: You did, and it’s being recorded. It will be used against you.

Toby: I know. Maybe some point though, they’ll be like, you’re mean to the IRS. We look like I said, I love you.

Scott: That’s right.

Toby: You guys can’t be mad. I also said you eat paste. All right. If you guys have questions in the meantime, first off, thank you, Scott, for coming.

Scott: Of course. Yeah, it’s fun. It’s always fun.

Toby: He comes in to do a tax toolbox and I’m like, you should do a Tax Tuesday with lots of glitches where it crashes three times.

Scott: I will never, ever be invited back again because I’m going to be blamed now for all the technical issues. We never had a problem until I would…

Toby: As soon as I figured out, I used my deductive reasoning. But if you have questions, send it in for taxtuesday@andersonadvisors.com. We do answer those. We do respond. We also take the questions that we answered from that.

For Eliot picking the questions, great job. You could always go to Tax Tuesday, or you go to Anderson Advisors and take a look at what we have there. Of course there’s the Tax and Asset Protection Workshop and YouTube, you can always go to. Scott, I have to give you a big…

Scott: Thank you.

Toby: We should have Scott back.

Scott: Thank you very much. I appreciate it.

Toby: Anyway, everybody’s thanking you. We have hundreds of people on every time.

Scott: Thank you for taking time out of your schedule, everybody, to listen to us. Hopefully you got some good education, some good information here that you can use to reduce your tax bill. That’s ultimately our goal. Let’s come up with a tax plan and let’s execute it. Let’s make it happen.

Toby: 100%. Guys, we’ll see you in a couple of weeks.