In this episode of Anderson Business Advisors, Toby Mathis speaks with Eliot Thomas, Managing Tax Advisor at Anderson Business Advisors. There are lots of people helping to answer questions online – Patti, Ander, Matthew, Troy, Jared, Piao, Ian, Dutch, and Dana are on. There are so many people here. You have a whole bunch of tax professionals that are here to answer your questions. You can just go into the Q&A and put in a question.
You’ll hear Toby and Eliot discuss several listener questions around how to report capital losses in the stock market, a few questions on real estate and business LLCs vs. S-Corps, C-Corps, and Sole Proprietorships, disregarded entities, entertainment meals vs. business meal write-offs, and an in-depth discussion about a real estate contractor not filling out a W-9 and all the difficulties that might present. Submit your tax question to taxtuesday@andersonadvisors.
- “Hey, I’m looking to start a new business. I need to choose a correct business entity in order to maximize my tax benefits, so I need to know if starting the business as an LLC and potentially working the business out of my home would be the best option for me.” – by all means, you want the LLC for that asset protection, but the S-corp or the C-corporation—have those great reimbursements.
- “Can I write off my stock holding loss at the end of the year to reduce my W-2 earnings?” Yes, but we’re limited potentially just to $3000 of capital loss that will offset against ordinary income, that being your W-2.
- “What are the rules for HSAs for people over 62?” – For 2023, the amount is going to be $3850 if you’re single, and I guess it’d be $7750 for a family plan. If you are on Medicare, you can not contribute tax-free to an HSA.
- “I became a real estate professional in 2021 and have a significant net operating loss due to depreciation. What are the limitations of carrying the NOL backward in 2020 and 2019 to use that to lower taxes in the previous year?”– As of right now, we don’t get to carry back NOLs. We just carry them forward.
- “If my partnership LLC did not conduct any business this year, do I still need to file a Form 1065? — You don’t have to file 1065 for that first year.
- I’m in the process of setting up my real estate business. I already have a Wyoming LLC as a holding company. It’s treated as a disregarded entity, but I have no investment in real estate yet. If I file my taxes this year before I acquire an investment property, what is the process for changing the filing election of the LLC from disregarded to a partnership for the new property?” – You don’t have to do anything but file that return, or you could file the Form 8832 and declare it as a partnership.
- “I am new to real estate flipping and started my first flip last year. Construction was completed this year, and it closed this year. I asked my contractor if I need to complete a W-9 last year, and he told me not until the project was complete. Now, I’m realizing that I should have had him complete the form in 2021 for the amount I paid him and again this year. Can I now ask him to complete the W-9 and file the form for 2021 and 2022? The other issue is I had issues with this contractor for faulty workmanship he did on the flip and in the process of filing suit. What if he refuses to complete the W-9?” If you’re dealing with a contractor who’s organized as a business, chances are you still want that W-9 to prove that they’re a business.
- “What forms do I need to fill out for my accountant to show capital loss in the stock market?” – Usually, you’re going to get a 1099-B from your brokerage house. They can just use that, and that’s really all you need.
- “As an owner-operator trucking company designated as an LLC, can you write off 100% of the operating fuel costs?” – If the truck that was burning that fuel was used 100% for business, absolutely.
- “I am a lender on a note to an LLC. What are the best practices for collecting payments and tracking interest payments for reporting purposes; separate bank account for the payments or create an end-of-the-year interest statement for myself?” – I like the separate bank account. Keep it separate from your personal obviously.
- “I attended your Las Vegas event. Please confirm if we are to refrain from listing items as entertainment when filing taxes.” – They’re probably referring to the Tax Cuts and Jobs Act getting rid of entertainment. There is no deduction for entertainment. If you are getting a meal that is for entertainment purposes, you cannot write it off. Business meals only for 2022.
- “I’m looking to convert from an LLC-S to a C-corp in 2023. Should I stay on a calendar or fiscal year schedule? What are the pros and cons?” – I like the fiscal year for C-corp because it tends to give you more flexibility, especially when it comes to payroll items or contributing to, say, Solo 401(k)s or something like that.
- Visit us at andersonadvisors.com. Grab one of the free events. We’re going to do a ton of them this year.
Full Episode Transcript:
Toby: Good afternoon, and welcome to Tax Tuesday. My name is Toby Mathis, joined by…... Read Full Transcript
Eliot: Eliot Thomas, managing tax advisor here at Anderson.
Toby: Happy 2023. We made it through another year, so we should all give ourselves a hand. Let’s put 2022 in the rearview mirror. The only good thing about 2022 is it wasn’t 2020, 2019, and 2021. Let’s just throw them all in.
Eliot: And 100% bonus depreciation was good.
Toby: That was very good, but it’s gone. In case you’re wondering, where’s my bonus depreciation, you get 80% of it now. You get 80% of the pizza. You can’t eat the whole thing.
Let’s see who’s rolling around out there. Rules for the road. Ask your questions via the Q&A. There’s actually a whole team on. I see Patti, Ander, Matthew, Troy, and Jared. I know that Piao, Ian, and Dana are on. There are so many people here. Dutch is on. We got the whole team. You have a whole bunch of tax professionals that are here to answer your questions. You can just go into the Q&A and put in a question.
If you want to respond to me and Eliot on a quick question, here’s an easy one. What city and state are you sitting in? There you go. There’s Anacortes. I always see Don for Anacortes. That’s where my mom was.
We have a whole bunch of people. Boise, Idaho, Los Angeles, California, Stamford, Connecticut, Scottsdale, Concord, Vancouver, Washington, Lynnwood, Washington.
We have a lot of people now. They’re flying through. Atlanta, Sagle, Idaho, Turner, Oregon, Las Vegas, Madison, Alabama, Tampa, Newark, San Diego, Black Mountain, North Carolina, Hawaii. We always get some of our family over in Hawaii. Aloha.
All right, guys, you’re supposed to be putting that one in chat. Put where you’re at in chat. Q&A is where you put all your big questions so we’ll get all that fun stuff.
If you have questions during the weeks in between these since we do these every other Tuesday, feel free to send them in via taxtuesday@andersonadvisors. We do answer your questions. We get hundreds of questions every week, and we try to make sure that we get you guys some quick responses.
There’s ‘Minnesnowta.’ I saw some of the snow coming down with Krista. I was looking behind her at a video earlier today, and it was dumping. You guys are definitely getting hit.
Anyway, if you have a very detailed question on your situation, you do need to become a Platinum Client. It’s actually pretty simple. It’s $35 a month. It’s easy. But otherwise, just ask questions.
This is supposed to be fast, fun, and a little bit humorous. We try to take the edge off of taxes. If they kick 87,000 agents at us, we might not want to take that edge off. We might want to leave it there.
There are not 87,000 agents. Do not worry, that is propaganda. They’re trying to replace some of their staff, but man, they have been losing people. The IRS has been losing people for the last 12–13 years now, so they’re going to have to stem that flow and make sure that they have enough people to do their jobs.
Eliot: I was talking to an agent the other day for a client. She made a comment that it’d probably be three years until some of these new people will even be up to some of those spots that they’re being hired for, so we got a long road ahead of us.
Toby: Tough. All right, guys, let’s dive in. These are the opening questions. We’ll go over these today and answer all these questions. I’m just going to go over them now. Don’t yell at me and say, what’s the answer because we’re just going to go through these.
Today, we’re going to go over, “Hey, I’m looking to start a new business. I need to choose a correct business entity in order to maximize my tax benefits, so I need to know if starting the business as an LLC and potentially working the business out of my home would be the best option for me.” Good question. We’ll answer that.
“Can I write off my stock holding loss at the end of the year to reduce my W-2 earnings?” It’s why I brought Eliot, because he knows all these answers.
“What are the rules for HSAs for people over 62?” Great question. We’ll be answering that.
“I became a real estate professional in 2021″—probably under 469 which means they’re taking passive and turning it into active or ordinary loss—”and have a significant net operating loss due to depreciation. What are the limitations of carrying the NOL backward in 2020 and 2019 to use that to lower taxes in the previous year?” Good questions. Hopefully, you know the answers to these because I have no idea today.
“If my partnership LLC did not conduct any business this year, do I still need to file a Form 1065? I’m in the process of setting up my real estate business. I already have a Wyoming LLC as a holding company. It’s treated as a disregarded entity, but I have no investment in real estate yet. If I file my taxes this year before I acquire an investment property, what is the process for changing the filing election of the LLC from disregarded to a partnership for the new property?” We’ll go over that. Interesting question. I want to dig into that a little bit.
“I am new to real estate flipping and started my first flip last year. Construction was completed this year, and it closed this year. I asked my contractor if I need to complete a W-9 last year, and he told me not until the project was complete. Now, I’m realizing that I should have had him complete the form in 2021 for the amount I paid him and again this year. Can I now ask him to complete the W-9 and file the form for 2021 and 2022? The other issue is I had issues with this contractor for faulty workmanship he did on the flip and in the process of filing suit. What if he refuses to complete the W-9?”
“What forms do I need to fill out for my accountant to show capital loss in the stock market?” Good questions.
“As an owner-operator trucking company designated as an LLC, can you write off 100% of the operating fuel costs?” We have really good questions thus far.
“I am a lender on a note to an LLC. What are the best practices for collecting payments and tracking interest payments for reporting purposes; separate bank account for the payments or create an end-of-the-year interest statement for myself?” Good question.
“I attended your Las Vegas event. Please confirm if we are to refrain from listing items as entertainment when filing taxes.” Interesting way to put it. “I’m looking to convert from an LLC-S to a C-corp in 2023. Should I stay on a calendar or fiscal year schedule? What are the pros and cons?” Good questions thus far. I give everybody an A for asking really good questions. We’ll go through these.
Before you do that, if you like getting answers to these types of questions, I will invite you to do something free and easy. That is to go to my YouTube channel—which looks like this—and subscribe because I put all of our Tax Tuesday questions up and all the recordings of past episodes. We break them into pieces and put them up on the YouTube channel. Invite anybody who wants to join. It’s free. We like to give out lots of information.
All right, Eliot, let’s jump on our first question. “I’m looking to start a new business. I need to choose the correct business entity in order to maximize my tax benefits, so I need to know if starting the business as an LLC and potentially working the business out of my home would be the best option for me.” What say you?
Eliot: Great first question for the new year. New business, by all means, you want the LLC for that asset protection. You could go with the traditional S-corp or C-corp, but the LLC gives you more flexibility.
When we make the decision if we want S-election, C-election, or something like that when we go corporate, we’re usually looking for the dollar amounts that come in the profitability. I think you could probably be safe without much profit going C-corporation. The question is whether we want to go S—to me at least.
A lot of people will have different opinions, but I would like to see about maybe $40,000 of income before I go S. There are other considerations though. Sometimes, depending on the nature of the business, you just want to be a corporation for the asset protections in your particular state, et cetera. But the corporations—the S-corp or the C-corporation—have those great reimbursements, 280A and things like that. Definitely, for the LLC, it’s just a matter of how you want that LLC taxed.
Toby: You just saw Eliot hit a bunch of different areas. I would say we break it into four little things. We look at lawsuits, taxes, business planning, and our legacy planning a little bit.
The first thing you look at is, hey, I’m engaged in an activity. If I’m dealing with third parties, there’s liability to me. It’s virtually unlimited. From a liability standpoint, we need to have an entity. From a tax standpoint, we have a whole bunch of choices—disregarded, S-corp, C-corp. We can pick those later. From a business planning standpoint, if you want to be taken seriously, you don’t operate as a sole proprietor. You have to have an entity. From a legacy standpoint, your business dies with you if it’s not an entity. If you don’t have an LLC or corporation set up, you’re done. You limit yourself.
In four out of four of those, we are definitely looking at an entity of some sort. It’s just deciding which one’s best. From a tax standpoint, Eliot just nailed something, which is you’re probably going to be in the corporate realm because you get an accountable plan and you can get a whole bunch of deductions that are eligible if you are a corporation for tax purposes.
Can an LLC be a corporation for tax purposes? Yes. File with the state. The IRS goes like this and says, you tell me what it is. You could either make it ignored which is disregarded, or it could be a partnership, a C-corp, or an S-corp.
C-corps get a little bit better tax treatment from the accountable plan standpoint because they can reimburse 100% of your medical, dental, and vision. S-corporations get the nod if you’re taking all the money out because they do not have double tax, and it avoids self-employment tax on about ⅔ of the profit.
That’s where Eliot’s talking about needing to see about $30,000 or $40,000 before he really looks at the S-corp because of the number shift from being a sole proprietorship and not worrying about extra audit rate or that type of stuff to, hey, you know what, the expenses that you may have extra with an S-corp are really kind of identical.
Let’s just say you have an extra tax return. Right around that $25,000 line, you start saving, on average, $1500 a year, so all of a sudden, it’s like, hey, make sure you have that S-election.
A couple of other fun considerations. If you are going to sell that business, build up its value, and sell in five or six years, you may want to be just a corporation because you can qualify for qualified small business stock which is 100% excluded from capital gains if you’re $10 million at a minimum and goes on up. There are some criteria, but it’s called 1202.
Then, the other route is if you think you’re engaging in something where it’s going to be expensive and you want to be able to take the loss, you’re going to either be a flow-through entity from the get-go or if you’re going to be a C-corp, you’re going to be a proper C-corp. You’re not going to be an LLC taxed as a C-corp because losses from a C-corp can be treated as ordinary.
I just threw a whole bunch out at you to give you the here’s what you’re dealing with when deciding to plan. That’s why there’s really no simple answer to it. There are a lot of different considerations. We can give you the rules of thumb.
Let’s say you’re a traditional business, you’re going to make $100,000 a year, and you need the money. Chances are we’re all going to look at you. We’re going to say, hey, do you have any extraordinary medical expenses, a dependent that has $25,000 a year, or anything like that? Because if not, you’re probably going to be an S-corp for tax purposes, and then you just have to decide whether you want to be an LLC taxed as an S-corp or a proper S-corp. That’s generally what people like us are doing when we’re analyzing how you’re going to be set up. Did I miss?
Eliot: No, that’s it.
Toby: All right. We look at those four things: lawsuits, taxes, business planning—hey, I might want to get business credit for the thing, I want it to stand on its own, and maybe I’m looking for investors—and then there’s the legacy planning. Hey, I want it to live beyond me.
LLCs, corps, and all those things don’t die when you die. They become personal property that you can transfer to somebody else, and they keep running with your business. All that fun stuff gets thrown into the mix when we’re trying to make that decision. It was a good, open-ended question.
Number two, “Can I write off my stock holding loss at the end of the year to reduce my W-2 earnings?
Eliot: Yes, but we’re limited potentially just to $3000 of capital loss that will offset against ordinary income, that being your W-2. It doesn’t mean that you might not be able to use it for other things—against other capital gains perhaps—but only $3000 can be used against your W-2.
Toby: Eliot is giving you guys a very straightforward answer, but there is another one. If you are a stock trader and you qualify as a trader in stock—which means you don’t have over 750 trades a year, you’re spending about 70% of your working days trading, and you make a mark-to-market election—then that can be treated as ordinary loss. Otherwise, what you said is absolutely true. It’s capital loss.
Capital gains can be offset with capital loss, but other income cannot, except it will give you up to $3000 of capital loss against those types of income. Your W-2 active, ordinary income can be offset up to $3000 a year with capital loss, and then you carry it forward.
You always meet these people from 2008 that have that look in their eyes, and then they tell you they’re still carrying forward $200,000 of loss because somebody exited their position when the market was down. Please don’t do that.
This is one of the reasons why, because now they’re sitting on $200,000 a loss and they get to take $3000 a year. We’ll do it the Inglourious Basterds way. We do $3000 a year, and you just keep carrying it forward. If in year five, you make a huge killing in the stock market, have $200,000 of loss carry forward, and make 200,000 in the market, they offset. Use it all up because you had capital gain. Otherwise, you’re just using $3000 a year against your W-2.
Had to get the Inglourious Basterd reference in there at least once today.
“What are the rules for HSAs for people over 62?” First off, what is an HSA?
Eliot: Health savings account. These days, I always get messed up on those but they’re savings accounts. Basically, you can put money into it and get a deduction, or your employer can do it on behalf of you.
Toby: Is it health savings arrangement?
Eliot: I think it’s arrangement. That’s what it is.
Toby: They always just call it an HSA. They say health savings accounts.
Eliot: It’s arrangement, I’m almost certain.
Toby: IRAs are individual retirement arrangements too. Everybody calls IRAs as accounts, but technically, who cares? It’s an HSA, so stop it.
Eliot: Yeah. It’s still a deduction, what you put into it. The limits change from year to year. Basically, they only go up. I haven’t seen him ever drop. I was just looking for 2023. That amount is going to be $3850 if you’re single, and I guess it’d be $7750 for a family plan.
You do have to have a high deductible plan, and whoever contributes to this gets a deduction. Again, your employer could do it. If you have one of our C-corporations, it could contribute on your behalf, on behalf of the employees, or you as an individual component to it.
Toby: This is a triple threat. Number one, it’s a separate account. You get a deduction for putting money into it but up to the limits that Eliot was just talking about. If you’re over 55, it’s up to $4850 for 2023. Last year, it’s $4600 or something like that because you get an extra $1000 if you’re over 55.
But you get to write that off. Then, if the money is used for health expenses, you could be paying anything from co-pays to direct expenses. I think you can even cover some types of insurance premiums and things like that. It is non-taxable to you. You never pay tax on the growth. If it’s used for those purposes, you avoid tax entirely.
If you’re over 65, I think that you can take the money out for any reason and avoid a penalty, but you still pay tax on it when it comes out. The best thing to do is to use these monies for health expenses, you get a deduction and never have to recognize it as income, and all the growth is tax-free. It’s why it’s a triple threat. You get a deduction, growth is tax-free, you can use it, and you don’t have to recognize it as income.
Now, if you are on Medicare, you are not eligible for HSA. I believe that you’re taking Social Security, so you’re going to run into an issue that the second you start taking Medicare, you no longer can make contributions to an HSA in a tax-deductible method.
You can still have an HSA and use the money to even cover the premium, but you can’t continue to make tax-deductible contributions. I believe that it’s that. If you’re on Social Security, you’re going to have an issue. You have to be covered by a high deductible plan by an employer.
If you don’t qualify, you’re on Medicare and Social Security, and you don’t have a high deductible plan, then you would not qualify. Sixty-two is kind of a misnomer. You can still have one, but I think you might be looking at having it for about three years. Don’t quote me on it, but I believe that you’re required to start receiving those benefits.
Eliot: It’s very much like an IRA, only for medical.
Toby: If you could kick it off. I don’t know if you can go beyond 65, but if you cannot take the Social Security benefits, then you could continue to contribute.
Somebody says, “Do HSA contributions need to be made by December 31st or April 15th?” It’s April 15th. You can be making 2022, and you can actually be making 2023 now as well.
“I think one needs to have a high deductible plan working to be able to contribute to an HSA.” Yup. I think I just said that. If I didn’t, you do. You need to be covered by a high deductible plan, which means you need to be employed and be covered by a high deductible plan.
All right. Fun stuff. We’re rolling right along. “I became a real estate professional in 2021 and have a significant net operating loss due to depreciation. What are the limitations of carrying the NOL backward to 2020 and 2019 to use to lower taxes in previous years?”
Eliot: Well, we lost the ability to do that back when they came out with the Tax Cut and Jobs Act. We saw a little bit of it phase back into our day with the CARES Act from all the COVID legislation, but as of right now, we don’t get to carry back NOLs. We just carry them forward.
Toby: What about for previous years? Let’s say that somebody had a loss. Could we carry back in 2021? It was 2020. In 2020, we could, so you might be able to amend and carry back.
Eliot: You’re not going to be able to do anything from 2021 and move it back, but if in 2020 you knew you had losses, you might have a play there to go back and amend. The fact that we have these losses and now we became a real estate professional in 2021 tells me probably we have some suspended passive losses.
Toby: Here’s the deal. When you have a loss and determining whether it’s passive or non-passive, it matters that particular year for that particular loss. We don’t have net operating loss carrybacks right now, but let’s say that you had a loss in 2022 and you are a real estate professional. That just means it’s a non-passive loss. It doesn’t matter the following year, the next year, or whatever. That loss is locked in and is non-passive. It’s going to carry forward, offset, and be subject to the net operating loss limitations.
They do a percentage limitation. They do a few things, dollar limitations, et cetera, of how much you can use going forward. There are a few little restrictions. But if I’m a real estate professional in one year and I create the loss, it doesn’t magically become passive going forward. It doesn’t magically become passive being carried back. It is that type of loss for that particular time. I hope that makes sense. Anything else you want to throw in there?
Eliot: No, I think that’s it.
Toby: If you guys like this type of information and you want to learn more, we do our Tax & Asset Protection Workshops a couple of times a month. We have one coming up on January 6th. It’s a one-day virtual event. We go over LLCs, corporations, and land trusts.
Clint does a great job doing the asset protection and explaining how all these things work together, how you can make yourself invisible from a public record standpoint, and get your name off your real estate, which is very, very effective for preventing lawsuits, believe it or not. Just not letting people know what you have is probably one of the best things that you can do to avoid being hassled.
That’s a virtual event. It’s live-streamed. We also have one coming up on January 14th. If you miss January 6th, you can come and join us on January 14th absolutely free. Just go to our website, andersonadvisors.com.
I think Patti put the link up there. If you haven’t been through one, you might want to consider it. There’s a lot of good information, and it breaks it down. Clint is really good at making it understandable. I go over the tax and legacy planning. Some of that gets a little muddy, but we try to break it into pieces so you can understand it, and it’ll work great.
All right. Another question. “If my partnership LLC did not conduct any business this year, do I still need to file a Form 1065?” What say you?
Eliot: If we really—by any sense of the definition—did not conduct any business, correct, you don’t have to file 1065 for that first year. But when we say no business, we mean no business, not just that there wasn’t any income and we had expenses. We just want to make sure there wasn’t any activity whatsoever.
Toby: I would still file it because you’re going to have the expense of filing the state filing fee. I’m going to have a loss. In other words, you’re almost never going to have a partnership that just has zero because there’s always an expense for doing it. Then, the penalties aren’t on the tax amount, so usually, if I underpay my taxes, I have penalties and interest. When it’s a partnership, they penalize you a dollar amount. I forget how much it is per month. What is it per month for non-filing?
Eliot: It’s $205, I believe, per partner.
Toby: I think it’s $200-plus per partner per month that you don’t file. Just file it. It could just be like, here, just take my expenses and grab them. It’s going to save you money. If your accountant is giving you a hard time, just get a 1065, write it in, and file it yourself.
Don’t make it any more complicated than it has to be, but definitely file your return even if you didn’t really conduct business. When we say did not conduct business, it’s rarely what you think. Hey, I didn’t do any transactions. Was your LLC open and ready to do business? Did it incur any expenses? Because if the answer is yes, then it was doing business. Let’s make it easy and file the […] return. Make your life simple. Penalties are huge otherwise.
“I’m in the process of setting up my real estate business. I already have Wyoming LLC as the holding company and is treated as a disregarded entity.” Remember the whole can’t see the LLC, we have to tell it what it is. We told the IRS on this one, ignore the LLC. It doesn’t exist. It just automatically goes on your return.
“But I have no investment in real estate yet.” That’s fine. This is almost like the previous question. “If I file my taxes this year before I acquire an investment property,”—it doesn’t matter, if you didn’t do any activity last year, that’s what we care about—”what is the process for changing the filing election of the LLC from disregarded to a partnership for the new property?”
Eliot: The first thing is you have to have another partner. If it’s disregarded, typically, we’re talking to one person unless we’re in a community property state. It could be husband and wife in a community property state, but by the definition of the IRS, if you were an individual and you just added one partner, it automatically is a partnership. You don’t have to do anything but file that return, or you could file the Form 8832 and declare it as a partnership.
Toby: All right. Let me interpret what you just said. If you really just had a disregarded entity and there was no other owner, then you don’t file a tax return. If in the following year, you want to add another owner—and it could be a spouse, trust, corporation, or whatever—then you would file a tax Form 8832 to change it from disregarded to a partnership. Do some accountants just start filing a partnership return?
Eliot: In my understanding, you can just file that because by definition, it already is a partnership.
Toby: There are certain things where we make elections and we have to make the election to treat it. If I want to be an S-corp, I have to make the S-election. I have to make an election to be treated as a corp. But the defaults are, hey, if it’s two or more people and Eliot and I started an LLC, by default, it’s a partnership.
We can call it a disregarded entity all we want. The IRS says, it’s not what it is. It’s a partnership because it’s the default. Two people are going to be a partnership or a corp, and we didn’t make a corporate election, so you’re a partnership.
If it’s just Eliot, he’s waiting to do business, and he says he might bring me in as a partner, for year one, it’s just him. It’s a disregarded entity. It just goes on to his tax return on Schedule E. If the following year, we do a project together and we own a property together with that LLC, now we’re a partnership. It doesn’t even matter what we say. It’s a partnership. I’m filing a partnership return because it’s two or more people. That’s the default.
It might be wise to possibly do an 8832 if you want to make sure that the other party is somehow listed or whatnot, but otherwise, you just would do it when it comes tax time.
Somebody says, “What is a disregarded entity?” A disregarded entity means that the IRS ignores it. I have an LLC. It does not file a tax return. If I am a plumber, I do Toby’s Plumbing, I set up an LLC, Toby’s Plumbing LLC, and it’s just me, then that’s a sole proprietorship. I’m going to file a Schedule C on my 1040. I don’t have to file a separate tax return. It’s going to go on my 1040, but it’s a sole proprietorship.
The problem with sole proprietorships is they get audited anywhere from 800%–1600% more often than their corporate counterparts, and they lose those audits 94%–95% of the time for that precise reason because people go, oh, I’m an entity. Therefore, I don’t have to do anything. The IRS says, no, you got to keep track of each expense, what it was for, who, what, when, where, and all that fun stuff. You got to have books and records.
Sole proprietors never do it. Why? Because they get told they didn’t have to. Their accountant is pretty bad at saying, hey, you don’t have to do anything with a sole proprietorship. That’s not true. They have to keep the same records that a corporation keeps. It’s the same identical books and records. There is no exception to being a sole proprietorship. It’s just easy for tax filing. It automatically goes onto your return.
Eliot: I think you’ve talked about it in the past. Even though they get audited more, they lose more. They typically statistically have to pay more because they lose more in audits.
Toby: That’s a triple threat. You tend to get messed with more. You also don’t get the same amount of deductions. If I am a sole proprietorship and use my phone, I have to track between business use and personal use.
If I am a corporation, let’s say I work for Eliot’s corporation, Eliot Inc, and he says, Toby, if you use your phone for my benefit, I’m just going to pay the whole bill, he can do that. But I only used it 10% of the time for business. It doesn’t matter. You can reimburse 100%. In a sole proprietorship, you’re only getting a partial write-up. Treated very, very differently.
“I am new to real estate flipping and started my first flip last year. Construction was completed this year, and it closed this year.” Last year must be 2021, and this year must be 2022. “I asked my contractor if I needed him to complete a W-9, and he said not until it’s complete.” Do contractors do things like that?
Eliot: I can’t imagine.
Toby: Here’s the deal. A W-9 is just getting somebody’s tax status and tax identification number. What you’re trying to do is say, hey, I don’t have to withhold for you because you are a separate business.
A W-9 is what you give when it’s a contractor. If that contractor is an S-corp or a C-corp, you do not need to 1099 them. If they are anything else, you get that W-9, so you can 1099. Send them a form in January. Right now, you’d be sending them a form for what you paid them saying to the IRS, I didn’t withhold. They’re a contractor. Make sure you look to them for that income. It takes it off of your plate setting the table with that.
“Now, I am realizing that I should have had him complete the form in 2021 for the amount I paid him and again this year. I can ask him to complete the W-9 now and file the form for 2021 and 2022.” Let’s deal with the other issues first. Can you do that and get the W-9 now?
Eliot: It’s a little bit late, but you could get it for your own files because it’s only an informational thing for your personal records. I used to be in this position at a company. We had 700 vendors. Every year, we had to get them. If I didn’t have them in there, I would go back and see if they kindly signed it from a previous year, but it’s just going to get you out of jail with the IRS if something goes awry.
Toby: If you didn’t have that W-9 when you pay them, they could say you’re required to withhold. The exception again is if you don’t have to 1099 them because they’re a C-corp, an S-corp, or an LLC tax as an S-corp or C-corp.
If you’re dealing with a contractor who’s organized as a business, chances are you still want that W-9 to prove that they’re a business, but if you don’t have it, it’s the thing that would cause you to have it filed.
Here’s what does happen. I’m literally in the middle of this right now. If you 1099 somebody without their social security number or tax ID, you have to withhold. What some people will do is they’ll send to the contractor a 1099, but they won’t have the tax ID.
The IRS is going to say you needed to withhold. It’s 28% plus penalties. You’re going to end up getting hit hard. Then, when you say, but wait, it was a contractor, they’re going to say, you filed a 1099 without a social security number. You were required to have that W-9 before you filed and paid them. Did you have that? Because if not, we’re going to hit you with the withholding. You actually cut your own throat in that situation.
Here’s what you do. Hey, I haven’t done it. If he’s a business, don’t give them anything. If they are willing to do the W-9, you can get the tax ID from them. Even if you can call them up and get it, just get it and file your late 1099 for last year and then this year.
What are the penalties for filing a late 1099?
Eliot: It’s $50, I think.
Toby: It’s not huge. Pay it and say, all right, I learned my lesson. I should have had that W-9. Pay it and just be done. If they’re a corp, don’t worry about it at all. If they’re not a corp and it’s just some guy, Eliot the contractor, that’s number one. You can go back and get it. We’re in the midst of that on something from three years ago.
The issue is if I had issues with the contractor. He said, let’s talk about the faulty workmanship. You’re in the process of filing suit. “What if he refuses to complete the W-9?”
Eliot: There isn’t a gun-to-your-head law that says you have to fill out a W-9. There is never a good reason not to fill out a W-9 when asked.
Toby: I suppose you could compel them to. You could probably go to court.
Eliot: If you’re already in a lawsuit and you’re suing him, I wouldn’t want to be on the judge’s bad side. I’m doing everything I can to look like a good citizen, so I’m filling out that W-9 upon request.
Toby: You’re just saying, hey, we want the tax. We want to enforce his cooperation on tax matters. Then, they could hold him in contempt if he doesn’t. That’s the relief you’re seeking from the court. I’ve never actually seen that have to happen. Most people are decent.
Sometimes, they disappear. I’ll tell you another real story. It’s probably 10–15 years ago. We were one of the random payroll audits with one of the entities down here. Remember, […]? Sara Winter had to deal with it.
What they did is in 50,000 companies nationwide, they would go through every one of your W-2s, W-4s, and W-9s. They would go through everything. For a week, we had an agent out there.
At the end of the day, there were two taxpayers. One was Seth Grabel. He was a magician. He was on America’s Got Talent. We hired him for a Christmas party. Like a good magician, he disappeared when we tried to get the W-9 from him. It was $2500 for a Christmas party. We’re like, hey, Seth, could you sign this? Sure. We’d send him the form, and he would disappear.
Then, the other one was a landscaping company for which we had paid a couple of thousands of dollars that had since gone bankrupt. We couldn’t prove to the IRS’s satisfaction that it was a corporation. I think we wrote a check for $700 and called it a day, but it was thousands of forms that they went through. I can just tell you from experience, get that W-9 or you might end up paying the withholding on it.
Eliot: We can see why they need another 87,000 agents.
Toby: Yes. Oh my God, that guy was so much fun. He was a caricature from the IRS. He came in in his black pants and his short-sleeved white shirt. I was like, is that what you can afford? I was not allowed to talk to the IRS guy from that point forward. He did not think it was funny.
Somebody says, “Always get the W-9 before you issue any money to a contractor.” That usually helps them fill out the W-9. Robert is 100% right. Before you pay is much easier than after you pay because you have no juice.
Eliot: Before they start working too.
Toby: Yeah, get them to do it. Just say, hey, I need this for my records before you start or before I pay you. Before you pay for sure.
How about this? “What forms do I need to fill out from my accountant to show capital loss in the stock market?”
Eliot: Usually, you’re going to get a 1099-B from your brokerage house. They can just use that, and that’s really all you need. What’s going on information-wise is that it has the date you bought the stock, the price, when you sold it, the date you sold it so we know how long it was, and the type of stock. That is what the accountant will use to determine the taxes on it.
Toby: I don’t even think you need a form. You just need to have some record of it. Your brokerage accounts now have to report your transaction. Again, you’re going to have a 1099-B or something like that. In the end, if your accountant needs the backup of spreadsheets, it’s fine. Usually, you have the tax forms now.
Eliot: Yeah, that’s all you really need.
Toby: It’s nothing magic. You don’t have to do anything special. It just shows up as a capital loss and you’re offsetting your capital gains. Sometimes, you have more capital loss and gain, in which case you use up to $3000 against your other income and we carry the rest forward, or if you use it all up, c’est la vie. You’re good.
“As an owner-operator of a trucking company designated as an LLC, can you write off 100% of the operating fuel costs?”
Eliot: If the truck that was burning that fuel was used 100% for business, absolutely.
Toby: Yup. You can always write off. Here’s what you can’t do. If this would be a non-personal use vehicle and it’s a common carrier, so it’s a big truck, you’re not using that for personal use. It’s going to be 100% business use. You can even write off mileage under that circumstance. You have to write off the actual expenses. One of those actual expenses would be an oil change, tires, fuel, and anything you’re putting on that vehicle to keep it running. You can write off 100%. That’s all you need to know.
When can you write off mileage is if you have a personal car that you’re using to do trucking business like you go to get parts, or you’re driving around to go meet with a licensing agency or with the company that you work with and you want to reimburse miles, then you could do on a personal vehicle. Otherwise, 100% of the expenses you just track for your trucking company. I would just say yes. Can you write off 100% of the operating fuel costs? Yes, you can.
All right. Again, if you like this type of stuff, you’re getting a little gist of what we got going on, or you have lots of other questions, I see a lot of them that are popping in.
“Can a person be a trader without the MTM election?” Yes, actually, you can. You just don’t get the ordinary loss unless you make the mark-to-market election.
There are so many questions popping in. They’ve already answered over 160. If you like those and you’re just thinking, oh my gosh, there are so many other questions, go to the YouTube channel and start searching around. Chances are since we’ve been doing this channel thing since 2014, we have hundreds of videos on lots of different topics.
Then, if you have a topic that you want us to hit, just subscribe and put it in one of the comments. Say, hey, could you hit on this? Where we get our ideas is from you guys. Or just email in at taxtuesday@andersonadvisors, and say, I would really love to see a video on this. I’ll do a video on it because we want to create what you will find useful, believe it or not.
“I am the lender on a note to an LLC. What are the best practices for collecting payments and tracking interest payments for reporting purposes; separate bank accounts for payments or create an end-of-the-year interest statement for myself? What do I do?”
Eliot: I like the separate bank account. Keep it separate from your personal obviously. I think you would want to have an amortization schedule showing the payments, et cetera, and the amount of interest. Yes, I would have an end-of-year interest statement. I would do it anyway. I don’t know that you really need to, but I would.
Toby: You don’t need a separate bank account. If this is a note to your LLC—for example, it’s a related party—then if it’s under $10,000, I don’t think you have to charge interest. If it’s more, you’re going to have imputed interest. You want to make sure that there’s a note and that if no money’s going back and forth, at least you’re imputing the interest to yourself. Maybe you pay just that small amount, but you don’t need a separate bank account.
You do need to keep track of the transaction. Excel spreadsheets work great. It’s all you need. If you’re like, oh, man, that’s too much work, then go online. You can just do a note calculator and put in the numbers. That will give you the amortization schedule payment. There’s a way.
If you’re a Platinum Member, we have plenty of notes and all that stuff. We’ll give it to you. Fun stuff. We’re actually doing really well timewise. You don’t talk a lot. Eliot is so quiet. I’m sitting here like, how far behind are we? We’re actually on time. That’s weird.
Eliot: Never miss an opportunity to keep your mouth shut.
Toby: I never learned that one. Patti is like, perfect, I’m having dinner with our kid. That sounds great. Patti, we will end early just for you. “Ahead of time?” I think so. Maybe.
“I attended your Las Vegas event. Please confirm if we’re able to refrain from listing items as entertainment when filing taxes. I’m looking to convert from an LLC-S to a C-corp in 2023. Should I stay on a calendar or fiscal year schedule? What are the pros and cons?” Let’s break those into pieces.
First off, we did do a Vegas event last month. It’s been about a month. We have 500 or something people out here. It was a lot of fun. When we first said, hey, let’s do a live event again, we thought maybe we’d get 50 people, and then it just […], so we had a limitation for space and stopped at right around 500. But what a cool event.
If you were there, thanks for coming out. If you weren’t there, you should come to one. Hopefully, we’ll do more because it’s great to see you people eyeball to eyeball, meet you, shake your hand, or give you a fist bump if you’re one of those. But whatever the case, it was great.
While we were there, we had four days of teaching and did a lot on tax. They’re probably referring to the Tax Cuts and Jobs Act getting rid of entertainment. There is no deduction for entertainment. If you are getting a meal that is for entertainment purposes, you cannot write it off. If I get a meal and it’s for business purposes, I can write it off.
Here’s the rule, your business meals, their business meals, not entertainment. You’re not entertaining clients. You’re trying to get business. You are to refrain from listing items as entertainment unless you don’t want to write them off. That’s number one.
Entertainment went the way of the dinosaur under the Tax Cuts and Jobs Act, although you did get to write off 100% of meals last year. I’m not sure if that’s true this year for 2023. I think it’s back to 50%.
Eliot: Yeah. I think we lost that.
Toby: You got to write off 100% of business meals for 2022. If you haven’t done your taxes, obviously, make sure you’re tracking those. If it was at a restaurant or ordered from a restaurant, that’s all that’s required. If you went on a business meal with somebody and you went to McDonald’s or Joël Robuchon, it doesn’t matter. It’s 100%.
“I’m looking to convert from an LLC-S to a C-corp in 2023.” Let me just put a timeout here. I’m assuming you mean an LLC taxed as an S-corp, and you want to revoke its status to an LLC taxed as a C-corp because you’d have to convert the actual state entity from an LLC to a corp. You’d probably do a reverse merger if that was the case. Set up a new C-corp, transfer the LLC into it, and then dissolve it.
I’m assuming you’re keeping it as an LLC and converting it to a C, which is really easy to do. You’re just going to revoke your S status. You have until March 15th to do that for 2023. That’s really easy.
The bigger question is should I change my calendar year and go from a fiscal year or a calendar year? A calendar year is a fancy way of saying your tax year ends on December 31st. Should we pick some other year-end like September? What do you think?
Eliot: I like the fiscal year for C-corp because it tends to give you more flexibility, especially when it comes to payroll items or contributing to, say, Solo 401(k)s or something like that.
Toby: When Elliott says fiscal year, he means something other than 12/31. Typical fiscal years would be…
Eliot: We got March 31st, June 30th, and then September 30th.
Toby: You’re just looking at when does my year end? You don’t really have to do anything special that first year. Let’s say I revoke my S. S-corps have to have a tax year, and that is 12/31. Once I’m no longer an S-corp, I could literally file my tax return anytime during 2023 for a period of time that ends during 2023. I could just choose September. What I would do is file my tax return after September saying my year ended in September.
I don’t think we actually have to do anything on 8832 or anything like that. I just filed it, and that’s letting the IRS know that your year-end is now something other than December 31st. Then, you would just continue to file quarterly thereon after and file your annual return using that as your year-end.
Eliot: We actually ran into this quite a bit in the last probably four weeks, especially since we had a lot of tax planning for year-end. This was an issue with some of our clients. […] should be paid this year or that year. Because they were in the fiscal year, we were able to give that flexibility.
Toby: Yup. That is that. I’m trying to think if there are any other pros and cons of the fiscal year-end versus using the calendar year-end. It’s really just shifting things one year. You get a get-out-of-jail card for the first year where you’re like, hey, maybe I have a bunch of income that I’m going to pay into the corp, I close out the corp’s year, and then I pay it. It’s not in my year, and I don’t have to report it for another 14 months or 15 months on the corp, that type of thing.
Eliot: Some clients get a little confused with the fiscal year-end. We understand that. You certainly could go with just your calendar year-end if it makes your life a lot simpler. That can be done if you wanted to.
Toby: It moves your tax. Your tax return technically is due the 15th day of the fourth month or the third month following the end of the tax year.
Eliot: For a C-corp, it’s going to fall just like an individual.
Toby: So it’ll be the fourth month after the end of the tax year. If your year-end is in September, then it would be January, and then you could file an extension. You could still push it way out. All you’re doing is maybe spreading out your taxes so that it’s not a big fire drill one time a year like we’re about to go through.
Most accountants are starting to have nervous breakdowns thinking about tax season. It’s been hell for the last three years since they decided to pass huge legislation every few months during COVID. You have no idea what they did. They shut the IRS down, and then they started passing legislation like it was going out of business. I think they were just trying to kill off all the accountants because they gave them all stress cases.
Eliot: Or they’re just throwing documents away.
Toby: Thousands of them. They just did another one, Secure Act 2.0. Here are 4000 pages you guys need to know.
Eliot: I would just say also for this client who put this question through that S-election revocation is what we have here. Going from the S to the C is a very precise procedure. The IRS has it on its website. It says you have to send an actual letter to the proper department, which will be where you’ve been sending it typically. The directions will tell you where, but you have to specifically request the revocation, sign it, and then they have to receive it in the mail by March 15th, so you don’t want to wait too long on that.
Toby: Somebody asked a good question in the chat. I’m just going to repeat it. Patti is going to make them put it into the Q&A. It’s regarding business meals. If you’re self-managed, you do landlording outside of the proximity where your property is, and it’s away from home, anytime you’re driving away from home, you can business meals. It’s not just for convenience. It’s because it’s a long way away.
I forget the exact test. Anytime I’m outside my geographical proximity and I’m running out, then even if I’m just getting a meal for myself, as long as it’s at a restaurant, it’s 100% deductible. Otherwise, I need to have a business purpose.
If your meeting with other landlords or investors is part of your business or you’re a real estate agent or wholesaler, you’d be able to write those off 100%. Just remember also that a little nuance here is that if it’s under $75, technically, you don’t have to keep a receipt. You still have to have a record which could be on your phone. Just go into your phone and say, hey, I met with Eliot at Starbucks, and we spent $23 on whatever the hell you drink.
Eliot: Like the time you caught me there and came sneaking up behind me. He caught me at Starbucks one time, and I had no idea who this crazy guy was behind me.
Toby: What did I do? I don’t even want to know. Let’s just leave it at that. It depends on what you’re drinking. If it was big, a venti, and it was some frilly drink, then I’d probably be like, what the hell? You never do that.
You could go into Starbucks and spend a lot more than $23. Let’s just say we did $23. Then technically, you don’t have to keep the receipt. You still have to keep the who, what, where, when, and why. Who was it? Hey, it was Eliot. Where? Starbucks. What do we spend? Why did we spend it? We met to discuss the tax return or whatever blah, blah, blah. All that fun stuff. That is a prompt to add.
They have answered over 200 questions while we are on, which is pretty good for Troy, Jared, Dana, Piao, and Dutch. Thank you for being on all of you guys. Patti’s been chomping away in the chat, and then Ander and Matthew are running things.
If you have questions during the weeks that pop up, just email us at firstname.lastname@example.org. The general questions are really easy.
“Please answer my question.” I have no idea where your question is. There are about 50 questions that you’re getting an answer to.
Eliot: It’s getting answered right now.
Toby: It is quite literally half the page. I just love people sometimes. “Please address each point.” We’re going to have to have a chat and ask. Please just email in. It might be easier.
If it’s something very specific to you, again, we’ll probably say you need to become a client. We can’t just sit here and answer questions all day long for nothing. We like to answer general questions because they’re general and fairly easy to answer. We can pop those things out.
But if it requires research and there’s a liability on us, then you’re going to have to be a client. Send it in. We’ll make sure that we get you a response if it’s something that’s pretty straightforward. We do grab them.
“Please answer my questions.” At least he’s saying please. We will answer your question, but be kind. These guys are doing this for nothing.
Email us, and we will get you a response. Again, if it’s something that’s super, super complicated or it’s very specific to you, then we might have to make it via a client before we can answer. We will make sure that we get you decent responses. We grab the questions every week. This week, we grabbed I think 11. Usually, I grab 10, but it looks like we’re perfectly on time.
Visit us at andersonadvisors.com. Grab one of the free events. We’re going to do a ton of them this year. I’m really active this year in Infinity Investing. I think that the economy is doing a little bit of a pivot as we speak, which means that they’re done raising interest rates. As fast as they have been, they’re still going to keep doing it, but they’re doing their best to smash our economy.
Don’t fight the Fed, but go where it is smart. What you see right now is there’s still really good cash flow real estate out there. Interest rates aren’t bonkers. They’re still pretty decent, and there are still some good places to get them. There are still good investments, and it’s better than cash because inflation is eating cash’s lunch.
Don’t sit on the sidelines hoping that things get better. Continue to do everything you can to build up that investment portfolio so that you’ll have success because guess what’s going to happen. It slows down, stops, and then they start lowering. We know that’s going to happen probably in the next year.
That’s what the Fed is saying. You know that when it starts to slow down—which is now it’s doing—we always have this big breath. When they stop those interest rates, it’s usually 6–9 months when you see the market start to catch fire again. We’re in that weird pivot phase where there are good deals.
Don’t be one of those naysayers that just sit on the sidelines, and then talk about how they missed an opportunity. Be putting your money into good investments because interest rates are just like gravity. All they’re doing is forcing a little bit of weight onto people. Good companies can handle it, and bad companies can’t. Good investments can handle it, and bad investments cannot, so you’re going to see a lot of bad investments get squished and a lot of really solid investments carrying that load.
Be on the lookout for those great investments. They’re out there, guys. 2023 should be a fun year for those of you who really love investing. We’ll do everything we can to help you keep more of your money in your pocket. Anything?
Eliot: No. Thanks for letting me have some time here.
Toby: All right, we’ll see you next time at Tax Tuesday.