With hundreds of tax questions to answer from thousands of people, Toby Mathis and Jeff Webb of Anderson Advisors requested backup. Additional team members include: Eliot Thomas, attorney and accountant; Piao Sam, tax supervisor, and Tavia Harter, bookkeeping services. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- If you lend money to your business, can it be interest-free? If there must be interest, then how much is required? Depends on loan amount; under $10,000, interest isn’t required
- What questions should be asked when interviewing a bookkeeper for a syndicated apartment investment? Ask for their real estate, multifamily syndication, and partnership experience to determine if they understand concept of accounting for such investments
- Is it possible to sell a piece of raw land to our real estate entity to have the entity pay taxes upon sale, instead of personally paying? Yes, but instead, consider contributing raw land to real estate entity rather than selling it to them
- My husband and I use our self-directed IRAs to loan hard money to real estate investors. We hold the note on the property and interest is paid back directly into the IRA at closing, when the note is paid off. What tax documents do we have to provide the borrower each year? Form 1098 and/or Form 1099-INT
- If I transfer my rental property that has a mortgage to a land trust that’s under an LLC, what happens to the depreciation that I’ve been using for the past years when I do my taxes? No difference; depreciation, basis, and more all stay the same
- If my job has been furloughed and I want to take money out of my work’s 401(k) and move it to a self-directed IRA, are there new rules to follow? Will it be counted as income? New laws allow you to do certain things, such as rollover money, but your 401(k) plan must also allow the transfer, but it won’t be considered income
- What is the best entity to use as a real estate agent? S Corp, if state allows it
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Full Episode Transcript:
Toby: You are listening to Tax Tuesday. This is Toby Mathis, and…... Read Full Transcript
Jeff: Jeff Webb.
Toby: You guys don’t see it, but Jeff actually has a really nice goatee. I was trying to fix it for him. I was trying to make it a little more accurate. I did a pretty good job; I put a little salt and pepper in there. Anyway, Jeff, you are looking dapper today, sir.
Jeff: Thank you, sir.
Toby: We have a lot to do today. I’m just going to jump right on it. Hopefully, everybody can hear. If you can hear, just say I can hear. Guys, we’re going to start a little something new because there are so many questions that come in. I’ve just been having a real heck of a time getting through them all, Jeff and I.
We’ve brought in Eliot Thomas who’s a very, very, capable, not only an attorney but an accountant and an amazing part of our professional program. He’s on the chat, piles on the chat […], and he is an amazing CPA and a fantastic tax professional, very knowledgeable. I probably should’ve kept it off of that because now he’s going to say hey, I’m very knowledgeable. He is an […] who works in our bookkeeping department.
What we’re trying to do is make sure that we are getting you guys as many answers as we possibly can so that you guys can save money. Nowadays, it’s really important. Joking aside, what I know right now is that our government has not helped us a ton.
Follow us on social media, please, if you can because we’re always putting out content. We will certainly […] for you. I already see a bunch of questions. Somebody says, “Happy birthday!” Thank you. It is my birthday. I am 30 years old again, today. I have anniversaries at this point. I’m catching up to Jeff, 2 years […].
There’s our social media. You can ask your questions. When you try to go through an answer live, I’d love to wrap with you guys; you throw a lot out there. You can always send in your questions to email@example.com. We are getting hundreds of questions a week so please bear with us as we get your responses. We don’t charge for this. If you need specific advice to your situation that’s not just a general question but it’s starting to get into hey, I did this, and this, and this and I need to know what I should do, then you need to be a Platinum member. That’s all we ask.
Every day is a day off for me. If you guys don’t know that, then I don’t have to work. I shouldn’t say that. That sounds conceited. Nobody really has to work. We can all just not work since we might be in precarious situations, but I have lots of real estate all over the country. I like doing this. Jeff likes to do it, believe it or not. Jeff is my senior. He’s way smarter than me and he still likes to do it. I just do whatever Jeff says, pretty much. Someday, he might give me a day off.
This is fast, fun, and educational. We want to give back and help educate. It’s tough times and if you can save money on tax, fantastic. You’re going to see there’s a lot of questions in here about everything from the EIDL loans (Economic Injury Disaster Loans) to the PPPs. You name it, so we’re going to get through it. Guys, we will get to your questions here in a second.
Here are the opening questions. “We received money from the sale of property not in an LLC. We have LLCs and a corporation.” Chances are the corporation is probably the manager. “Can we put these funds in our corporation?” I’ll answer that.
“If you lend money to your business, can it be interest-free? If there must be interest, then how much is required?” You’ll learn about Federal IRA rates today.
“What question should be asked when interviewing a bookkeeper for a syndicated apartment investment?”
“Is it possible to sell a piece of raw land to our real estate entity in order to have the entity pay taxes upon the sale instead of us personally paying?” I can already tell, Jeff is really going to enjoy today.
“Toby, when should I create an LLC? Just before starting to invest or after?” We’ll answer that.
“My husband and I use self-directed IRAs to loan hard money to real estate investors,” you’re going to have everybody ask who you are. Actually, that’s not a bad thing to do, guys. If you know people and their retirement’s scaring the heck out of them, you might want to say do I loan you some money? “We hold the note on the property and interest is paid back directly into the IRA at closing when the note is paid off. What tax documents do we have to provide the borrower each year?”
“If I transfer my rental property that has a mortgage to a land trust that’s under an LLC, what happens to the depreciation that I’ve been using for the past years when I do my taxes? It seems like a complete mess, tax-wise.” Tax-wise, one of my favorite words.
“If my job has been furloughed and I want to take money out of my work and move to a self-directed IRA, are there new rules to follow? Will it be counted as income?” We’ll certainly answer that. I know that’s a big thing for a lot of you guys.
“I’m in the city where they shut down our hospitality industry. We had 40% unemployment around the strip, really close to that.”
Let’s see. “My CPA tells me that putting a California property into a Wyoming LLC will trigger California taxes and fees. Is this correct?”
“What is the best entity to use as a real estate agent?”
“How do we claim taxes on a property in a partnership while keeping it separate from our personal assets?”
This is a really long question but this is a good one. We grabbed this one. It is usually one I wouldn’t grab because it’s so flipping long, but this has so many good nuggets in there that I felt like we should do it just because we have a lot of these people that are doing the PPP loans. “If I use the new PPP loan for payroll, rents, and utilities, it is forgivable. Since I can’t open my spa business now and all employees are getting unemployment, can I hire contractors to do repairs and have that count towards the forgivable part of the loan? Do they have to be employees or can I pay them as independent contractors? If my payroll was 40 people (with many of them part-timers) with a monthly payroll of $80,000 and I spend $40,000 per month on 10 workers, do I get 50% of the loan forgiven or only 25%? Does payment of utilities and rents count towards the forgivable part of the loan?”
That all changed last week. It all changed. Congress got together and changed things. We will go over that. […]. They gave us a different mix and a longer period of time to do the forgiveness.
Jeff: Oh, okay.
Toby: “Is preferred stock (with a preferred return and equity participation) considered debt in the context of triggering UDFI on IRA deals?”
“Do I have to pay taxes as a 501(c)(3) nonprofit employer on monetary or non-cash gifts given to employees, such as bonus checks?” Bonus checks being a gift, I just loved that.
“Since Arizona is the only state that requires the name and address of beneficiaries to show on deeds, how can one form a land trust in Arizona with a beneficiary as an Arizona LLC which will be owned by a Wyoming holding LLC? How can the trustee get around that?” The answer will shock you.
“The SBA website is not very clear on what rental home costs I am allowed to spend. SBA EIDL,” which are EIDL loans or Economic Injury Disaster Loans. If I say SBA EIDL loan, that’s what we’re referring to versus the PPP. So SBA loans out the EIDL funds directly. A PPP is through a bank. The SBA is doing these EIDL loans. They are still working on the first tranche, guys. I don’t think they’ve opened up the application process since April 16th since they’ve shut it down.
“I am allowed to spend the SBA EIDL loan funds on. I understand that I can use the EIDL funds to make monthly mortgage payments for my rental homes. Can I use the EIDL funds for capital improvements on my rental homes, such as installing a new roof? Can I use the EIDL funds for all of the following expenses: maintenance, repairs, utilities, property management fees, leasing fees, HOA dues? Am I allowed to include EIDL loan interest payments on my Schedule E as an expense of my rental homes? If yes, what are the guidelines for how the EIDL interest is assigned against my multiple rental homes?” We’ll go through all of these.
Again, I bit off a lot more for Jeff and I. Jeff is so kind. He comes in here and he goes, what are we answering? How many did you do? We’re supposed to do 10, but this one I might’ve gone one or over.
Jeff: I just tell my girlfriend that I’ll see her on Wednesday.
Toby: All right. I want to let you guys know how awesome you guys are. This is a personal thank you. You guys don’t know Dave Rafus and his group, but that’s 1 Veteran Foundation. We did a wonderful fundraising for them with you guys. You guys all get a star because they’ve exceeded the goal by over 300%. It’s up to you guys. I really appreciate that.
This is going to be a very real issue that you’re going to be reading about a lot. Suicide is a really bad problem in the United States. We are losing 22 veterans a day—on average—to suicide from PTSD and what I call nonvisible scars from being in nasty situations. They come home, it’s hard to deal with, and they don’t want to tell anybody. This is one of the groups that we work with to combat that and you guys raised a bunch of money for them. You guys are awesome. I’m not going to pitch this today. I’m not going to tell you guys to give them money. I’m just going to say thank you, today. I want to give you guys a quick thank you.
Last week, we did something that I’m going to do again this week. That is, I’m going to give you something. Anyway, these guys do a great job. What they do is train service animals to pair-up with veterans that are suffering from depression and PTSD. The success rate is virtually 100%. We do not see suicides when there’s a service animal that’s been trained to work with them. It gets their attention when they’re going down the dark hole or when they’re starting to become despondent. Anybody will tell you that’s had a dog, usually when you’re feeling the worst is when they come up and lick you.
If anybody wants to help one veteran, just let Patty know. She’ll give you their email directly. Dave is a super nice guy. He’s a marine who works with veterans and just does a fantastic job. They’re able to train service animals for a couple of thousand an animal, whereas if you went and did it professionally, it would be $50,000. They do a fantastic job.
Here’s my quick thank you. Get a free book. Get free Tax-Wise. You just use the offer code, same when we did last time. Just use ‘TUESDAY.’ You may have to do all caps, I don’t know. Feel free to do that. Patty is going to have to give them all the links. It’s a good one. I like to just throw things out there with no links. Patty will share out the link with you so you guys can go do a free book.
If you haven’t read Tax-Wise Business Ownership, there are about a hundred different tax deductions. I did this back in 2001 and 2002. This was the fourth version. I’ll get you guys all set up. That’s a big ol’ thank you. It goes to everybody, guys. It does come with a free consultation. By all means, get the book, read the book, and then decide whether you want a consultation. This is about putting money in your guys’ pockets.
We have a whole bunch of questions that were asked earlier. I want to benefit and I want to give credence to those people who ask lots of questions early. Somebody’s already answering these. This is so awesome. “Can you lease space in your house to your C Corporation as office space?” “You could with a price based on a proportionate fraction.” Yes, but I’d much rather you not lease space in your house to your C Corp. What I would say, Brian, is you want to do a reimbursement. You want your corporation to reimburse you for the administrative office in your house. I see that somebody already got some other answers on that too. I’ll make sure that you do that.
“What is the difference between Section 179 for automobiles with over 6000 pounds and bonus depreciation?”
Jeff: There’s not a whole lot of difference in it. Section 179 has a problem that it’s limited to the amount of income you have and the activity.
Toby: You can’t create losses from it.
Jeff: Whereas bonus can. You’re almost always going to take a bonus rather than 179. The only time I’ve seen that you don’t do that is some of the states don’t recognize bonus depreciation.
Toby: Right, 179 is a fancy way of saying if you have the equipment, you can write it all off in year one. Bonus depreciation is you can bonus depreciate assets that have a useful life under 20 years in a year of acquisition or any time. You can just choose to bonus depreciate it.
Under 179, if you fall below 50% usage in your business, you’re going to have a taxable event for the value that you wrote off, which can be […]. I don’t think that’s the case under bonus depreciation. It’s just losses. I guess you probably look at it, maybe it’s close.
Jeff: Yeah, 179 has got a lot more restrictions. It was better than the bonus when the bonus was only 50% but now it’s a 100% deduction.
Toby: Yup. By the way, where bonus depreciation really shines is when you have assets that are 15 years, 7, and 5. When you have real estate and you do a cost seg on it, that’s just a fancy way of breaking it down into its components. You can write off about 30% of your real estate in the first year if you want to. For a lot of you guys, it’s a big benefit.
“I have a C Corp for real estate investing. I’ve not yet started paying myself a salary. Can I use a QRP within a company and transfer to existing traditional IRA funds, then use the funds, take advantage of the CARES Act, and the ability to take a three-year $100,000 loan from it?” Kim, the answer is 100% yes. You just need a sponsor. You don’t have to contribute to the 401(k).
If anybody’s confused as to what the difference between the IRA and 401(k), in an IRA, you can’t borrow money from but you can take an early withdrawal of up to $100,000. If you pay it back in by the end of the third tax year which is December 31, 2022, you don’t have to pay tax. They treat it as a trustee-to-trustee rollover. The IRS has given us some bad guidance on recognizing that tax over the three years. They’ve applied it to an old statute in 2005 which I don’t think applies, but that’s the IRS’s position. Our position would be just don’t pay anything. If you put back in, you pay for anything.
Jeff: Yeah. Their position was this law was close.
Toby: Yeah. That was basically what they did. Then, they want you to amend all your returns which was stupid. They call them over-legislating or being bureaucrats. Congress definitely wanted to give you a benefit.
The other thing they gave out of QRPs, you can borrow 100% of the money up to $100,000 should your plan administrator allow it. You are your own plan administrator when you have your own 401(k) that’s being sponsored by your C Corp. You just roll your money in there. You can do a $100,000 loan. It’s a six-year payback on this. This is a big one. This is not a normal five-year. They’re giving you a year deferral for payments and then you pay it back over five years.
We’re going to jump into some of the questions. I see my guys, Piao and Eliot. I am shocked. These guys are rocking. I see answers all over the place. You guys are actually going to get your questions answered today. This is scary. Fantastic. We used to be able to do that when it was 100 of you guys. Now, it’s thousands and it’s driving us a little loco sometimes.
“We received money from the sale of property not in an LLC. We have LLCs and a corporation. Can we put these funds in our corporation?” What say you, Jeff?
Jeff: Well, the money received from the sale of your property, you’re going to recognize taxable gain or loss on that sale all by itself. What you do with the cash after that, you can put it in your LLC, you can contribute it to your corporation, or loan it to either one. You do that all day long. It’s not a taxable transaction.
Toby: I like to look at this like I sold the property, it’s not an LLC, so it’s just my personal property. Now, I have personal cash. Can I put my personal cash into a corporation? Yes. I can either loan it to the corporation or I can contribute it. Two choices.
Jeff: We do get a lot of questions like I got money from an inheritance, a gift, this or that. After that cash, assure as you can do with it what you want. You can put it into any of your entities.
Toby: Yup. Look at these guys just knocking these things up. I have a question on UBIT here. This is a bad Toby. I’m going to make my little Q&A slide so nobody yells at me.
“I have a question on UBIT. How was it calculated roughly? If I have a real estate syndication investment in a self-directed IRA, if K-1 has cost segregation, can the bonus depreciation be applied to UBIT? If the investment is in a self-directed IRA, can I move to a Solo 401(k) prior to exit? How much does the Solo 401 ( k ) cost?” Such a really good question. Do you want to hit it?
Jeff: No, you go ahead.
Toby: UBIT gets taxed at a flat rate, I believe. I forgot the percentage but it’s high. Is it 35% or something like that?
Jeff: We’ll say 35%. I think it’s 35%, the second-highest bracket.
Toby: Yeah. How was it calculated? UBIT is Unrelated Business Income Tax. What we’re talking here when we’re talking about debt is Unrelated Debt-Financed Income, which is taxed the same way, but it’s on the income that’s related to the debt. It will actually be in your K-1. It’s on your net income after all expenses and depreciation is an expense. You will not have UDFI most likely on this until you have the gain on it.
As to your other question, if you move it to your 401(k) then you don’t have it, but I believe you have to do some sort of analysis and what the value is on the day that you moved the investment in a Solo 401(k). If you just did it, it’s worth it to do a 401(k) right away and I would contact us to see what the cost would be on a 401(k).
Is it worth it? 401(k)s are not astronomically expensive, but you don’t have custodian fees from there on out. When you do a self-directed IRA, it’s 100-year, 200-year, another 100-year. That’s all gone if you have a 401(k). I wish you’d done it in a 401(k) in the beginning because then we can just say it wouldn’t matter because you don’t have Unrelated Debt-Financed Income.
We’re going to keep going since people are answering these questions. Here’s another one. “Repurchased a new truck under our names personally. We have two LLC companies, ATV parks company, and a real estate investment company. How do we determine which company takes the depreciation and does it matter? Hence, we purchased under our own personal names. Does that affect our ability to take depreciation or do we still need to track the miles? We’d like to get away from tracking the miles.”
Don, you’re always going to have to track the miles. That just sucks. You always have to track miles. The question is if you’re over 50% usage in your business, then it’s a business asset that you could potentially put in the business. It could potentially reimburse you. I don’t know. If you can imagine you can pop it in and get the depreciation.
Jeff: Yeah. I mean you could pop it into the company, but you’re going to have to register the car with the company.
Toby: What I’m doing 9 times out of 10 is reimbursing the mileage because that’s built-in depreciation. It’s all an expense and everything rolled into one. You don’t have to report it so when that company pays you, you just track the miles as to which company you want to assess the miles to or to both, and each one writes you a check.
If you have a management company, it’s really easy. You have a management corporation and life is simple because you have one company that is reimbursing you for everything. You don’t have to report it. The company just takes that as an expense. We don’t care about that company as what you’re using of that asset.
If you’re not using that truck at all for personal, it may be worth it to put it in the business. Just make sure you have the right insurance for it. A lot of folks will get personal insurance on a car that they put into their company. It’s not going to cover employees and things like that. You’ve got to make sure you have commercial insurance. Anything you wanted to add on that, Jeff?
Jeff: No, we’re good.
Toby: All right. “If you lend money to your business, can it be interest-free? If there must be interest, then how much is required?”
Jeff: Can I give that the first ‘it depends’ of the day?
Toby: Unless […] $10,000.
Jeff: Yeah. If the loan is under $10,000, you do not have to charge interest or recognize interest. Once it goes over $10,000, you have to give the lowest AFR rate. They refused the blended rate which in 2019 was 2.42%, so you can’t go below that. New rates should be coming out in July for the blended rate for 2020. Hopefully, it will be down in a little bit with all the interest cuts. But yes, you must charge interest if you have more than $10,000.
Toby: The lowest AFR rate, right? The lowest amount that you could do I think was 90 basis points or a little less than 1% that you’re going to be forced to do, right? If it’s long-term.
Jeff: If it is long-term, yeah.
Toby: Or you just contribute it and you don’t have to worry about it. If you contribute it to your business and you just say it could turn your capital at some point.
Jeff: Yeah. The only time this is really good should come into play is if you have a C corporation. If you have an S Corporation, it’s better just to contribute it as capital with a partnership contributed as capital.
Toby: Yeah. Even with the C Corp, you can contribute in exchange for shares.
Toby: Yeah. I’m still stuck in this UBIT thing. I’m going to go find out what that amount is now because it’s driving me crazy. Let’s see what else we have. Some more questions that are popped up here on the PPP loan. I’m seeing all these guys answering questions for you all.
“If you report as a 1099 self-employed for years, then you incorporate or set up an LLC, what is the right way of transferring assets, cars, equipment tools, others? Would it be better to sell to the corp or rent or lease to the corp or other?” If you’re taking a 1099 sole proprietorship and you’re putting it into an LLC, you could still technically operate as a sole proprietor. More than likely, I would just make that LLC taxed as an S Corp. I would just contribute those assets […]. I wouldn’t sell it because you get into things like sales tax, gain, all those other stuff. These are really business assets anyway. I would just bin it, put it in there.
Somebody asked a question, “PPP loan amount received 50% of the total amount that should’ve been disbursed. Can I take that part from EIDL and request approval to be forgiven?” Pilar, no. You want to go back to the bank and I believe you can apply for an additional fund for the PPP loan. I’m shocked that they only gave you 50%. You would’ve had an approval for a full dollar amount. I don’t know why they did that.
Somebody says, “Can we still use eight weeks or is it now 24 weeks?” It doesn’t matter. If you’re 8 weeks you’re fine, but it can go up to 24. If you knock it all out in eight weeks, go ahead. You have until 24.
Somebody’s asking about that 1 Veteran. We don’t have anything. The T-shirt drive is done. They’re all out of those. What we’ll do is I would contact Dave and see if they have some more T-shirts and stuff there. I’m probably going to run some of them, too. Or if you guys like, we’ll do another one here in a little while. We’ll do another one but we had to get some really cool designs. I hope it’s with somebody who’s a T-shirt guru.
All right. “What questions should be asked when interviewing a bookkeeper for a syndicated apartment investment?” For those of you who don’t know what a syndicated apartment investment is, that means you’re raising money in an entity with third parties, more than likely accredited investors or people who are putting money in together to pool money to buy an apartment. What would you do?
Jeff: What you really want to find out is what this person’s experience is. You want to find out if they have worked in real estate, specifically within an apartment complex-type accounting. Have they worked with syndications where you have that multiple tiers of partners involved? Are they familiar with the partnership? What you want them to do if they say yes to these questions is you can’t leave it there. You have to let them tell you what they’ve done and what their experience is. You’re not going to know all the answers, you’re not going to know the debits and credits, how to enter depreciation, and how to do QuickBooks necessarily, but you can get from what they’re telling you if they understand the whole concept of the accounting behind such an investment.
Toby: The easiest thing I always say is have you done it? Who did you do it for? And call them up.
Jeff: That’s a really good idea.
Toby: If they can give you the information. Sometimes, if they work with us, we can’t give out client information if there are attorneys involved and things like that. You can usually ask a client, hey, would you be willing to? Here’s the thing with syndications, quite often, they’ll have internal bookkeepers. You may not be working with a shop, you may be working with somebody. You may want to talk to the syndicators, say who does your books, and just do it that way. Hey, do you have anybody who’s really good? You can get your answer that way.
Our guys are knocking out the questions. I’ve been watching this thing go crazy. When I say this thing, it’s all these questions being asked. I’m watching our guys just knock through them, Jeff. This is weird to actually see this happen so fast. We’re actually going to get done somewhere close to being on time for the first time in forever. You couldn’t hear Patty but she’s cheering. If you get the book do you have to have a consultation though? I don’t care about that.
Somebody says, “Hey, I don’t see the questions being answered.” That’s because they’re live and they’re coming through. The way it works is I don’t want you to see their names if they’re asking questions, so I don’t show you guys all those. Some people are saying voting is going on. Yes, there is voting. We got to get you guys out of here so you can go vote.
Somebody says, “What if I have a 300 square foot area that I only use for business purposes?” Then, David, I would be reimbursing yourself, but here’s the deal. You could only reimburse if you are an employee. You can only be an employee of an S Corp or C Corp. You cannot be an employee of your own sole proprietorship, you cannot be an employee of your own partnership.
Get the book, get the free book. David, something tells me you’re the type of guy that would actually read it. I have emailed back and forth with David a few times, super nice guy. You’re going to see the difference between the various types of entities. This is always a big one for me is between 280A and reimbursement of the administrative office in the home, which you can actually have more than one office.
Somebody says, “If I already ordered the book, can I get the consultation?” Absolutely. Susan, if you can see that one, there’s Jennifer there.
Anyway, when you’re reimbursing those things that’s free money to you that you don’t have to report anywhere. It’s no different than as our firm, Anderson, if I said to somebody, hey I want you to do your work from home. I want to pay you to basically house yourself in the house. Ian, you may have a desk at the office, but I’m also going to pay you. You end up having an administrative office in the house. It’s only used for business. It’s your administrative services for the business in your home. Usually, it’s going to be an executive. The reimbursement amount is you add up the actual cost to the house including depreciation, including all of the costs you’re paying, and including if you have a house cleaner that comes in and cleans.
What you are looking for is what percentage of the usable square footage is being used by that or if you have fairly equal-sized rooms, you use the room method. Any reasonable methodology. It doesn’t have to be gross square footage. It’s none of this nonsense that they put you through as a sole proprietor. You can write yourself a check every month. You don’t have to have a lease, you don’t have to have any of that, and you don’t have to report it as the employee. If I reimburse somebody for a box of donuts that they brought in, they don’t have to report it. That’s what this is.
There’s a whole bunch of things that fall into that category. As a C Corp, you can actually reimburse 100% of your medical, dental, and vision. As an S Corp, it’s not quite the same there, but you could still reimburse for your premiums and write that off. It ends up flowing through on your personal return and you get a self-employed health insurance cost. There’s just a whole bunch of stuff.
If you guys are interested in that sort of thing, I’ll give you tickets. We’re going to be doing a one-day tax and asset protection online class. I will make sure that we give you guys, we send it out to this list so you guys can see it. It’s absolutely free. People are always asking, what’s the strings attached? Anderson’s been teaching for 23 years. We do not charge for our classes anymore. It used to be that when we first got into this, all these big companies. We did Rich Dad for about 17 years. They would charge $5000, some of them started to go down. We just don’t charge for it anymore. If you’re willing to do it online, we will give you tickets to come in and learn. There’s not a ‘gotcha.’ We just look at it that we have a tremendous client base that we enjoy working with.
Jeff: We don’t make them look at a bunch of timeshares before you […]?
Toby: No timeshares. Anyway. “Is it possible to sell a piece of raw land to a real estate entity in order to have the entity pay taxes upon sale instead of personally?”
Jeff: Yes, but I think we kind of mentioned this earlier. I would rather contribute that raw land to the real estate entity rather than sell it to them. It’s really no benefit to selling it to them. You’re still going to get basis and you’re still going to get that share of the property that you put in your business. I don’t know. What say you, Toby?
Toby: I look at it. Let’s say you have raw land. You can’t depreciate raw land so we don’t have to worry about recovery. We’re talking about capital gains. If I was worried about the capital gains, I would contribute the raw land to an entity and then sell it because the entity would get your basis in the raw land. Then now it’s in the entity and you have a chance to pull it out.
I have a feeling here that maybe they’re going to develop it, or maybe they want to keep the raw land and they just want to say can they sell it at a lower basis? You can contribute, you don’t have a taxable event. If this is appreciated somewhat and you’re going to develop it, and you know it’s going to become even worth more money, then I would literally sell it, capture your long-term capital gains on a portion of it, and then do the development. That’s going to be flipping.
Jeff: Yes, especially if you have capital losses you need to harvest. This may be an opportunity for that. The one caveat is if this is personal land—
Toby: You’re going to probably have to sell it to an S Corp, by the way.
Jeff: Yeah. I’m not sure you could sell it to your real estate entity if you’re still using it for personal purposes, like if you have a tract of land that’s attached to your home.
Toby: If you’re just doing land it’s not going to do anything else.
Jeff: I guess it can sit in one place or the other.
Toby: Absolutely. It doesn’t really matter. I wouldn’t be too worried if it’s part of your personal residence, obviously. You want to keep it as part of your personal residence because you’re going to get a chunk of no capital gains on it unless you really exceeded. What you do is you look at your different scenarios.
Somebody just asked a question, “What makes us different than other tax firms and stuff?” We’re a bunch of lawyers and accountants and we do exactly what most of our investors do. I have well over a couple of hundred pieces of the property now all over the country including apartments, commercial, real estate, and other things. That’s what I love to do and that’s what I love the clients to do.
You can’t learn it out of a book, that’s how it works. It always depends on how complicated you are, it’s who you work with. What we do is we move you up if you’re a very complicated or high net-worth person, you’re working directly with probably one of the partners. Let’s go through some of these others. This isn’t a pitch thing.
All right. “Is there depreciation recovery on inherited rental properties?” The basis steps up, Maria, on the date of passing. If somebody passes away, then the date of passing. The really cool part is you get to redepreciate it. Real estate is quite literally like the IRS. The tax code is telling you to buy more real estate and don’t ever sell it because you can redepreciate it.
Jeff: If you inherit your grandparent’s rental property and that’s fully depreciated because they’ve held it for 50 years, it does a complete reset. You start over at what it’s worth today.
Toby: Absolutely and you get to do it again.
Somebody says, “What’s a high net-worth person?” I say, usually, just generally speaking, anybody over $1 million or with probably more than 10 rentals. It depends. Some of you guys are really active. Or probably like a doctor. Some of these doctors make ridiculous amounts of money. They don’t know what to do from a tax standpoint.
“If the corporation reimburses the employee for donuts, how do they record the expense as an ordinary necessary business expense?” The corporation writes it off. Where do you classify it?
Jeff: For small expenses like that, it usually gets classified to supplies or things of that nature.
Toby: Yep, and then you don’t report it.
Jeff: No. Whoever’s reimbursing that, is not a 50% meal deduction, it’s 100% because it’s for the benefit of all your employees.
Toby: All right. “Toby, when should I create an LLC? Just before starting to invest or after?” Here’s the thing, I’m going to tell you as soon as you know you’re going to close on a deal you’re going to start investing. The way it works is you’re in business when you start doing something that’s an act of business.
Here’s the deal. If you’re going to buy a property and that’s going to be your starting point on a property, set up the LLC just before you’re going to close. I’d rather you close in the LLC unless there’s a loan, in which case it’s not going to matter. They’re not going to let you close in the LLC unless it’s commercial. They’re going to make you close individually and transfer into the LLC after. In fact, you probably shouldn’t even tell them because it freaks them out. I hate it when I fall out of a deal and I’ve named the entity after the property or something, then I’m just annoyed. I like to do it right on closing.
If it’s a business-business, again, I use the example of if I go out and I’m going to get education and stuff, you can’t write it off until you own the underlying real estate. There’s actually a guy that went through one of our classes in Orlando. He ended up being in a tax court case. He didn’t use us. He went someplace else and they told him he could write off the education without being a business. We said no that’s not true, but he listened to the other party. Again, this gets tough guys. I’m not going to argue. I just say this is our position, this is their position. He went all the way up to tax court and lost. It was painful because his business did not exist until he actually owned the real estate, which cost him most of it.
What you do in that case is you set up a corporation before you do the education or right after you do the education, then you reimburse yourself for the education expense, the corporation starts when it’s open, and it can start managing and doing other things. You make a corporation that does multiple things. It’s not an investing entity, it’s a management entity. Little things like that just come from having done it year after year after year and you start realizing. It ends up being pretty solid. I like stuff like that.
All right, Q&A. “My wife and I purchased a new primary home that we had to sell after a few months due to a job loss. We ended up making small improvements and selling the home for about $100,000 in profit. How should we report this?” If you had to move or you had extenuating circumstances, then you are going to get a partial capital gains exclusion under 121. Depending on what ratio that $100,000 profit is—I think it’s what it is—would be based off of you and your wife would be able to get a $500,000 capital gain exclusion if you lived in that house for two years as your primary residence. If you only lived in it for six months, you would get ¼ of the $500,000 or you’d get $125,000 exclusion.
Marco, if you’re out there, can you respond quickly as to how long you lived in that house because I would actually think this is worth it to go through this. If you guys don’t know, 121 is the type of exclusion that you get if you’ve lived in a house as your primary residence for two of the last five years. It’s not the last two years, it’s two of the last five years.
Jeff: I’m thinking, the way it’s going to work out is you’re probably going to get to exclude about 40%.
Toby: He goes, “Three months.” You literally go 3 out of 24. What is that, ⅛?
Toby: You’re going to get ⅛ of the $500,000. Assuming that you guys both lived in it for three months, this gets really ticky tacky. I’m not sure of another or this is the exclusion. Are you aware of any others?
Toby: I’m just going to say, I don’t know. What’s 8 divided 1?
Jeff: You can’t see this but we’re doing calculator wars.
Toby: It’s 12.5% so it’s 60 some odd thousand.
Jeff: It’s $62,000.
Toby: $62,500 that you’re going to get as an exclusion. Marco, you’re not going to get hit with a bunch of tax. You’re going to get a little bit but it’s going to be a little kiss. If you did improve on it, then you are going to add that to your basis and it’s going to lower your $100,000. Mr. Leo says $62,000. You guys are smart. Have I got a bunch of accountants out there or a bunch of smart people out there? You guys come to my rescue more often than I care to admit.
“My husband and I used our self-directed IRAs to loan hard money to real estate investors.” By the way, self-directed IRA is a fancy way of saying not with TD Ameritrade, not with a brokerage house. It’s with an independent custodian who doesn’t care what you invested. You can do real estate, you can do hard money loans, and you could do all this fun stuff. We like the IRA Club. They’re actually really good. There’s a bunch of others out there, though. They used their IRAs to do hard money loans. “We hold the note and the interest is paid directly to the IRA at closing. What tax documents do we have to provide the borrower each year?”
Jeff: There are two tax documents, the 1098 and the 1099-INT. The purpose of the 1098 is to report interest paid to the IRS on mortgage-backed loans where you actually secured the property. At that point, most of the information would be provided on the 1098. You’re going to show beginning balances, interest paid, and real estate taxes paid, if you paid any of those things. In this case, probably not. If these are not mortgage loans, they’re just hard money loans with no security, then a 1099-INT would be issued, not by you but by the person who is paying you that interest.
Toby: Yup. They’re paying you the interest. What Jeff just said is very clear. If you are the IRA and you are taking a secured interest in real estate when you’re doing the hard money—you’d be crazy not to—you’re going to get them a 1098. If they’re paying you they should 1099-INT.
Jeff: But you don’t do both.
Toby: You don’t do both? They don’t have to give it to you if you’ve done a—
Jeff: If it’s a mortgage they don’t have to deal with the 1099.
Toby: Then they don’t have to do the 1099, so you’re right. Jeff is 100% correct. If you’re doing a 1098 as the IRA and really, you should be going to your custodian making sure they file that because they’re not going to do it automatically because they’re a custodian. They never do. These things literally will take, what, 30 minutes to do?
Jeff: Yeah. They’re pretty simple.
Toby: They’re simple. Don’t be too […] You didn’t see, this actually was a really long question because then they were griping because one accountant told them they had to do one, the other one said the other.
Jeff: We said that depends.
Toby: Yeah, we said it depends. That’s going to be on your gravestone.
Jeff: Is he dead? That depends.
Toby: “We have an S Corp, can I use PPP to pay guaranteed payments?” You don’t have guaranteed payments in an S Corp, you have salary, Sal. You have guaranteed payments only in partnerships. If you have a partnership, then yes, actually you can.
Somebody says have a train guy. You guys do not want me to have any alcohol before I get on these, I just promise you that. Actually, I was doing one yesterday with Aaron Adams who’s hilarious. He just talks. There are always talks, dropping all sorts of lengths.
Jeff: He forgets there is an audience.
Toby: I was like ear muffs, ear muffs. That’s fun.
Somebody says, “Can a corporation fund an IUL?” Two answers to that. Corporations can’t. It can give you money, you pay tax on the money, it deducts it as compensation to you, and you put it into an IUL. You could do that. It cannot do just giving money into an IUL unless it’s corporate-owned life insurance, in which case it can’t deduct the premiums if it wants to have tax-free insurance payments, which would have to come back to the business. This gets kind of convoluted.
If you don’t deduct the IUL payments, then the money that comes back after somebody’s passing is tax-free. An IUL is an Indexed Universal Life. It’s a life insurance policy, basically. Can I have corporate-owned life insurance on an executive? Is usually the question.
Jeff: Have you seen any of these IULs be like split-dollar policies?
Toby: You can only do the split-dollar, nowadays. They did it away for the for-profit, but with the non-profits, you can. What you’re doing is you’re loaning the money out of the non-profit to the executive and the executives using those funds and it’s secured by the cash value of the projects. I think we lost about 50% of the people or more on that one. I’m not going to get into that any deeper. It’s a very, very powerful tool if you guys are not investing in insurance. Insurance people would never like to say investing in insurance. You want to address foreseeable risks.
Eric just says, “Just buy a term.” Actually, term, 99% of the time, the benefit doesn’t go to anybody but the insurance companies. If I’m going to have life insurance, unless I’m doing something like hey I have to secure performance under an agreement and I’m contracting with somebody for ten years and it’s going to cause me economic harm, what I’ll oftentimes do is I’ll put a term life on them if they pass, or I’ll get disability so that it pays me if they’re not going to be able to perform.
Jeff: There’s a reason term life is so cheap because the insurance companies usually don’t cost them hardly anything.
Toby: By the time you need it, they’re not going to reinsure you, so I just get the permanent insurance. Just do it, do it smartly, and do it through a fiduciary. If you don’t know what a fiduciary is you just ask the person are you a licensed fiduciary? Which means usually a certified financial planner or a 64. If you’re a 64, all that means is that they have to put your interest first. They’re not going to take you for a ride unless you have a really good one that you really trust. It’s possible to get some bad stuff like that.
“Is it possible to borrow against the term?” No. That’s why we don’t like them. We’re using the tax code, by the way. It’s 7-702 where you have the cash value grows tax-free. I get it, everybody should get it.
Jeff: The term you have no cash value, no equity. That’s only worth what it is if you die today.
Toby: We use them for a lot of different purposes. Maybe I’m skewed on it just because I’ve been using them for so long. I use them because I want to have the ability to have long-term care and I use the death benefit to get to long-term care.
Somebody says, “Series 7 and 66 should also be fiduciaries.” Yup, and it depends on your state. They got that. Anyway. We’ll get through this. Hey, Donna, we’ll get with you. If it says June 22, people are getting busy, busy, busy, we’ll get you in sooner. They’ll get you through. Patty, grab Donna and make sure she gets with somebody this week.
“If I transfer my rental property that has a mortgage to a land trust that’s not an LLC, what happens to the depreciation that I’ve been using for the past years when I do my taxes? It seems like a complete mess taxwise.”
Jeff: Actually, it’s just the opposite. When you contribute your rental property to an LLC or any other type of entity, it goes into an entity exactly the way it was in your hands. The depreciation stays the same and your basis stays the same. It just continues on the way it was only now it’s in this entity rather than in your hands personally.
Toby: To reiterate, I could put something in an LLC, and I could make that LLC disregarded for tax purposes if I want to. I could make it to where it’s literally no difference. When I say literally no difference, as in literally, it’s still on page one of your Schedule E on your 1040.
Jeff: You mean literally, literally?
Toby: Literally, literally. Literally, you said. Not used enough, right?
Jeff: No, it’s not.
Toby: I have no idea. That’s kind of sad. When somebody says let me be honest with you. I’m like are you lying to me? When somebody says literally. Okay. What it means is that if you want to avoid any tax mess you certainly can. Where people perceive a tax mess is when you have a partnership return because they’re difficult. If you want to have that extra tax return or if you’re required under your state, depending on who the owners are, all it’s doing is passing down that information on your return. If this was yours, you’re the spouse and you’re in a separate property state, you’re going to be a partnership. It’s going to pass it down on page 2 of your Schedule E, that’s all. It’s going to be the same type of information that you’re doing on your 1040. It’s just going to be on the 1065 and they pass it down. It’s all it is.
It sounds way more complicated than it is, but if you are going to be of any size, you need that 1065 because lenders that you are dealing with, you leave the personal arena then you start to go into commercial lenders. You start going into where they are lending on the asset and you might be a guarantor, but they don’t care about what you’re making. They may look at it but all they’re looking for is they don’t want to loan you money if they just have to foreclose on it. What they really care about is that piece of real estate that’s securing. If you do that, you need to have a partnership return anyway. They don’t want it to just go to you.
Usually, they’re going to make you set up a parent entity, they’re going to loan to that one, and it’s going to buy all the properties of the secondary entity, and then they’re securing the interest in the secondary entity plus the real estate, so they don’t have to go through a really horrific foreclosure process. What they’re trying to do is just be able to take it.
All right. I don’t want to get into that. There are too many IUL questions out here. Somebody else knows that stuff. “Close to purchasing in January, tried to close an LLC name, but bid at auction.com. Personally, I would have lost the property had I not done so, which is fine. How do I move to an LLC? I prepared a deed of trust. When I file is now in the LLC. Are my expenses to repair… incurred?” Literally, you’re pushing everything into the LLC. It’s taking everything that you had outside of the LLC into the LLC. The deed of trust is a little bit different.
The deed of trust is from somebody else that loaned money. It sounds like you bought this for cash, you don’t have to worry about a deed of trust. You don’t need it individually because you own the LLC. It’s just all going to flow through. Again, if we made this a disregarded LLC, meaning it doesn’t file a tax return, it’s no different than you owning it.
“If my job has been furloughed and I want to take money out of my 401(k) and move to a self-directed IRA, are there new rules to follow?” You’re going to have a difficult time, by the way, moving money out of your work 401(k). If you’ve been furloughed they may let you roll. If you move it into a self-directed IRA, then you can’t borrow money from it.
Jeff: The new laws allow you to do certain things. The loans, hardship distributions, and so forth, but you got to remember with these work 401(k)s. The plan also has to allow you to do this. Just because it’s in the CARES Act doesn’t necessarily mean that your plan has adopted it.
Toby: I think they’re looking if I roll it into a self-directed IRA—I just want to get it out of there and maybe I want to do some investments in the IRA—does it count as income? No. They may give you a 1099-R, which is a fancy way of saying that they gave you the money out of the retirement plan, and it’s going to say do I have to recognize that as income? On your 1040, it says 1099-R and how much of it is taxable. The question becomes, did you put that all into an IRA? If you did, then zero of it is taxable.
Jeff: And here’s where I see this, Toby. If he’s been furloughed but still considered an employee of the company, I don’t think they’re going to do a trustee-to-trustee transfer from that 401(k) to the self-directed IRA.
Toby: They may allow you; it depends on your company plan. Most don’t, but sometimes they allow in-service distributions. The other route is you have the CARES Act which allows $100,000 early withdrawal without penalty, which means you don’t have to worry about the 10%. And if you tell them that you’re going to put the money back into the plan, they shouldn’t do any withholding. As long as you put that money back into an IRA, you have until December 31st of 2022 because it’s an early withdrawal and you have until that period of time to put the money back in before you have any tax liability. As long as you pay it back into your IRA, any 401(k), or any qualified plan before that period of time you have no tax.
“If you are 65 or older the IRS will allow a transfer from an active 401(k)? As you said, the company plan must allow the transfer.” Yeah. It always depends.
“My CPA tells me that putting a California property into a Wyoming LLC will trigger California taxes and fees. Is this correct?” Your CPA is right in something. It’s going to trigger no taxes or no fees by itself, just the transfer. What is taxed is the LLC. The LLC will then be considered doing business in the State of California if you put real estate in California that was generating rents. Technically, if it’s not doing anything, it’s not doing business in the state. But if you ever ask California Franchise Tax Board if it’s doing business in the state, they’ll always tell you yes.
Let’s just assume that you’re putting a California property that is a rental property into a Wyoming LLC. Then yes, that Wyoming LLC is now doing business in the State of California, should register with the secretary of the state, and it would pay the $800 a year franchise tax. They’re correct there, but there’s nothing else that’s being triggered. It’s just no matter who you are, if you have California property and you’re putting it in an LLC, it’s going to be taxed there.
The workaround, we’ve won this on audit, I always get an accountant yelling at me and screaming. We actually won this on audit so I can just tell you what my experience is. You own the property in a trust in California. The trust makes its beneficiary an out-of-state LLC. If you don’t want to have the LLC sitting in California, you do that.
California is going to come around and say what if you own the LLC we think that’s doing business in the state? Make sure you don’t own it. Make sure that you’re a beneficiary of the trust and have another trust that owns it. It sounds stupid, but if you have multiple properties it’s worth doing.
You have either a living trust or a personal property trust that you are merely a beneficiary of and it’s even more fun when you have the trustee out-of-state because there are cases now that show that the trustee is […] where the income’s earn. Anyway, if you don’t want to mess around with that, there are some workarounds.
There are also some other trustees. You can do an asset-protection trust if you want to avoid the LLC completely, but that’s like bringing a bazooka to a gunfight. That’s a very big tool to use for that. But in this particular case, your CPA is giving you something that’s true. There are not taxes; it’s fees.
The reason we know it’s not taxes is because the Franchise Tax Board argues repeatedly that that LLC franchise tax is actually a fee because if it was tax it would have to be fairly apportioned, and will have to pass muster under the constitution, in which it would do and they always lose these things in the court cases. Just look at Northwest Energetic Services LLC. Read Franchise Tax Board and you’ll see what I mean. There’s a whole bunch. There’s Bakersfield mall, there’s Veritas One, there’s a bunch of fun stuff.
“What is the best entity to use as a real estate agent?”
Jeff: If your state will allow it, I would say the best entity would be an S Corporation.
Toby: That is correct, sir. Whether your state allows it is up to both your real estate board and your state legislature. It has to be an individual person. This is the trap people fall into. They will say that means I can’t put it into an S Corp. If you have $100,000 of income, this could cut about $10,000 of tax off just by running it through an S Corp without getting into a bunch of other stuff. It’s pretty much $10,000. About 10%–14% is what ends up putting in your pocket, thereabouts on an annual basis.
Jeff: And was it Texas you have to be a real estate broker to be able to do this, or…?
Toby: Yeah, it gets weird. In some states, you have to be the broker. You can’t be the salesperson. Texas contradicts. There are two places. I just say just go ahead and if you want to be an agent, run it through your S Corp or LLC taxed as an S Corp. If your broker has to pay you as an individual, then there are two pieces of paper that will make that S Corp income. That is an employment agreement with the S Corp with you, and a letter to your broker saying that you’re under the exclusive control of that S Corp.
That’s via a court case with the IRS and I always forget it. It begins with an F with that case. I was doing this with a bunch of real estate agents. They actually knew the case in Texas. I was cracked up. It was a CPA that was a real estate agent. He’s like, oh I know what case that is. It’s like Fleishman (I think it is) or something like that.
If you’re a Platinum member, by the way guys, we actually have those two documents sitting there and we actually do quarterly tax meetings, but we also have these documents in our regular, old minutes and resolution meetings that we do with our clients. We do those twice a year as a big group and you get those in your portal.
All you’re doing is saying I can’t assign income, period. So, I have to make sure that that income, even though it has been reported to me, that is going to the S Corp and that I have to back up so that it’s treated as the S Corp because it’s going to save me. Again, I’ll put $10,000 a year into my pocket if I do that right.
Somebody says, “What are series LLC? Does Texas have a Series LLC? Which is better?” Texas does have a Series LLC statute and what a series is, is you set up a series parent and all the additional LLCs underneath that parent or associated with that parent don’t have to pay the state filing fee.
The problem that we have, like the Texas statute, in particular, says to get the protection of an LLC you have to maintain good books and you have to treat it separately, do its own books, and a few other formalities I can’t remember the exact language in the statute. All I knew is that in a typical LLC statute, you pay it and you’re good. If somebody tries to pierce it they have to prove that you did or didn’t do X, Y, or Z. In a series situation, you have to do X, Y, or Z to show that you get the benefit.
What I tend to look at is I’ll use the Texas LLC if I’m only doing stuff in Texas and if it’s Texas real estate, I may use it. I still get a little weirded out that we don’t have a lot of history on the Texas series LLCs. I don’t know how the courts are going to treat them. There are some practitioners that are very comfortable with the courts enforcing it and some that, for $100 or whatever it is, I’d rather just know. Texas is a little more to file, but I don’t think you have an annual fee. I’d rather just know that I’m good.
Susan put up there, we have a bunch of stuff on our YouTube channel on it. Clint (my partner) does a lot of that and we have a Texas attorney on staff, Carl Zoellner, who you can always reach out to. Again, it’s always going to be your situation, so I want you to make sure that when you’re doing these, you’re actually having somebody look at your precise situation because the answer—like Jeff likes to say so often—is…
Jeff: It depends.
Toby: Yup. Facts and circumstances. There’s no one-size-fits-all.
“How can we claim taxes on a property in a partnership while keeping it separate from our personal assets?”
Jeff: Once it’s in the partnership, it basically is separate from your personal assets. With a partnership, while you technically own a portion of the assets of the partnership, it’s no longer your personal asset. If you put up a property, let’s say it’s an investment property, that is that partnership’s property. While you will retain a portion of that, the liability is out of your hands.
Toby: Yeah, and when you say claim tax is on a property, I think you’re looking at the depreciation and things. It’s still going to flow down to your partnership. It does not pay tax at the partnership level; it passes it down to the partners.
The bigger question here is, is it a general partnership where you have no liability protection? No difference between you, your partners, and all of your other personal assets? In other words, they can do something goofy. Not only are you exposing the partnership to it, you’re exposing yourself. They can come and get your other personal assets.
I would use an LLC at a minimum to make sure that that property is separated from anybody else. If it’s just you and your spouse, I would just keep that property separate just because I’ve seen enough where, in the last five years (me personally), I’ve had a tree fall in a house and the house burned down. It happens. That’s why we have insurance.
Thank God nobody was seriously injured, but if somebody had, there’s a good chance I would have been in a battle with my insurance to provide coverage or to provide enough coverage. So, you just want to make sure that they’re not creeping into your personal affairs, that it’s in a nice little box, and they don’t have anything to worry about.
The new PPP loan. Guys, I’m just going to give you the head’s up. You’re going to see this stuff on TV and probably half of what I’ve seen on TV is wrong. The other half tends to be right, but people don’t like the answers so they’ll say something is wrong over it, so we’ll go over this and we’ll break this piece down. It might seem like it’s complicated, but really it’s pretty straightforward once we boil into it.
“If I use the new PPP loan for payroll, rents, and utilities, that is forgivable?” That is correct. They said, “I can’t open my spa business now and all employees are getting unemployment. Can I hire contractors and do repairs? Can I have that count towards the forgivable part of the loan?” Here is where it gets interesting. What this individual is saying is their business is closed. I’m supposed to use the PPP money to pay for payroll, rents, and utilities.
They gave you what’s called a covered period. That covered period, initially, was eight weeks from the date of receipt of the money, and the SBA wasn’t helping us much. They weren’t giving us a lot of guidance. Then, they came out with this forgivable amount. They said since your payroll might not match, we don’t want you prepaying anything. It has to be incurred and paid during that covered period.
When you mean incur, rent, but you’re not paying it during the eight weeks. You’re paying it after, or you have 30 days to pay your utilities. So, they came up and said you can go beyond as long as you’re paying it on a normal cycle. Then, they said I may be in the middle of a payroll period, so they said we’ll start the eight weeks on the date you start your payroll.
They were messing around with it. Congress got involved and said forget that. Twenty-four weeks. You now have a long period of time. You have 24 weeks to use a sub, so hopefully, your spa is in business and you don’t have to worry about this.
“Can contractors in the repairs that they’re doing be part of the forgivable part of the loan?” The answer is no if they’re paid as contractors. “Do you have to do this as payroll? Is interest on assets, like if you have a mortgage or if you have equipment that has an interest that you pay on it, is something that’s attributed to that business?” You can cover your rent. You can recover your utilities. This is really important. You can’t prepay your utilities for the year. It has to be for that covered period which is now 24 weeks.
Jeff: And that’s where I kind of jumped at, was on the independent contractor part because I answered this question this morning asking about using independent contractors and how much they’re spending on them. The whole idea is that you can’t use PPP money for independent contractors because those independent contractors may also be requesting PPP for—
Toby: That’s exactly what the SBA said. All right, now we’re getting to the rest of this, but before I do that, Jim says, “Happy birthday.” Thank you, Jim. I have to say, Jim, and Jim’s really awesome, so I had to say that, and say […] because he’s usually cool, too.
“If my payroll was 40 people, with many of them part-timers, with a monthly payroll of $80,000 and I spend $40,000 per month on 10 workers, do I get 50% of the loan?” This is where it gets kind of muddy. The first calculation that you do is I get a loan and it’s basically 2½ times my average monthly payroll. If my monthly payroll is $80,000 I would be getting 2½ times that. It would be $200,000 is what kind of PPP loan I would get.
Now, let’s say they’re going to do $40,000 a month and ordinarily that would be eight weeks, so you have $80,000. Then, you also subtract from that the number of workers you did not keep. They had 40 people and you’re down to 10. You end up getting 25%, which would stink.
However, with your part-timers it’s two part-timers equals a full-timer. You have to calculate full-time equivalents. Your 40 people aren’t really 40 people. It’s 40 full-time and you have to lower that. If you have (let’s say) 20 part-timers, That’s 10 full-time. It sounds like we’re doing these calculations. That’s why Congress took the Flexibility Act. The Payroll Protection Program Flexibility Act was passed last week and it gave you 24 weeks so we could get away from this nonsense.
“Does payment of utilities and rents count towards the forgivable part of the loan?” Yes. We’ll leave it at that. Yes for that 24-week period. You are going to get your loan forgiven almost 100% guys.
Jeff: I thought it only covered 25% of the loan. Was that changed also?
Toby: 60% has to be payroll, 40% can be the rents and utilities. The SBA and Treasury came out and said 75% and 25%. If that sounds muddy, you guys, talk to us. We do this stuff for hundreds of people. I’m sure we can figure it out for you, so we would love to work with you. If you don’t, if you have your own accountant and they’re driving you crazy, by all means, use the firstname.lastname@example.org or become a Platinum client, a whopping $35 a month, and you don’t get billed.
Jeff: Yeah. If you thought getting the loan was ugly, the forgiveness part is going to be even worse, I think.
Toby: They made it a disaster. They’re just really being annoying.
“What about health insurance?” Company health insurance is included in the calculation for payroll cost. Also, company contributions to retirement plans are included in the payroll cost. Those things get added in.
“Is self-employment honor forgiveness eight weeks?” It’s now 24 weeks, yes. Catherine, it’s 24 weeks. The difference between the self-employment honor is you’re allowed to take your average net income from the previous year, what they call your monthly compensation round. If it’s up to $100,000 is what they give you credit for, that’s $8333, which would give you a loan for approximately $21,000–$22,000. The forgiveness potion was maxed out like $16,600-some. Now, it’s going to be a lot bigger, so you’re not going to have to worry about it. Reimburse self-insurance is not included in that calculation.
“I’ve got a $150,000 Economic Injury Disaster Loan, but the real estate business needed close to $1 million. Can I ask for an increase?” I know you, Dr. Pepper. I know exactly. You can. What’s going on is the maximum amount that the EIDL loans that they’re giving out now is $150,000, and they are so backlogged. I thought they were going to outsource it. I thought that they were going to send it to lending institutions because the SBA was ill-prepared to handle all this.
My prediction at the very beginning was there’s no way that the SBA’s going to be able to do this so they’re going to give it to somebody else to process all these SBA EIDL loans, but they’ve been trying to do it internally. The SBA, for those of you who don’t know, processed in the first two weeks of the PPP program more loans than they had in the previous 14 years combined. They’ve been absolutely hammered. They are still working on loans from early April. What they did is they said no matter what the size the loan, we’re going to cap it at $150,000. You can come back and ask again once we reopen. So, it’s annoying.
“Is preferred stock with a preferred return and equity participation considered debt in the context of triggering UDFI on IRA deals?”
Toby: Yeah. I’ll make it really easy. No…
Jeff: It’s an investment.
Toby: And UDFI also doesn’t apply to 401(k)s, so if you’re ever worried about stuff like that, move it to a 401(k). UDFI does not apply to 401(k)s.
Somebody says, “If the original PPP loan amount was less than the 10-week amount, is there any opportunity to increase the amount of the loan?” Yeah, you go back to the bank.
Jeff: For PPP?
Toby: Yeah for the PPP. You can go back. It’s 2½ times your average monthly compensation if you’re a sole proprietor or payroll if you’re running payroll. They’re going to actually use your payroll records. What’s this 10-week amount? I’m trying to think of what that is. I’m not sure what that means.
Somebody says, “EIDL loans available for rental properties or are just denied?” They’re really being difficult right now. Really, really difficult, so it’s getting tough. I don’t know what the 10 weeks is, approximately 10 weeks. Was that for the beginning of the year that you did the calculations, John? I’m trying to think what the 10 weeks that you’re referencing.
Jeff: The 10 weeks, I was wondering if they were referring to the 2½ months?
Toby: I see what you’re saying. Yes, 2½ months. Let me go back to your question. If it’s less than, yeah you go back in and increase it, John. Absolutely. You have up to 2½ times. Some people took less. They said, I don’t want to take it all, but now you can go back and get another one. There’s still money left, by the way. There’s probably another $50 billion waiting to be had.
“Do I have to pay taxes as a 501(c)(3) nonprofit employer on monetary on non-cash gifts given to employees such as bonus checks?”
Jeff: I’m going to take the 501(c)(3) out of it because it applies to all employers, including nonprofits. Any cash gifts given to all your employees, even if it’s just $1 is subject to withholding rules. It is income to that employee. Non-cash gifts, you give them a turkey for Christmas, each gift can be up to $75. I believe the total non-cash gifts you can give to an employee each year is limited to $1500 or $1600 in that range.
Gifts to non-employees are actually limited even further. They’re only limited to $25 each as far as being deductible. Cash gifts are always got to be reported on W-2. They’re always subject to tax. Non-cash gifts, if they’re de minimis, below $75 or not.
Toby: So, you’re paying tax on this. If you give any money to employees you got to put it in their paycheck.
Toby: Make it really simple. I know we love to give gifts, but if it’s a bonus check, it’s compensation for a job well-done, usually. Like Jeff says, a hilarious example of turkey as a gift, that’s what Costco gives its employees every November. Absolutely. There’s a reason we’re doing it. Or ham.
If you give reimbursements to employees, they don’t have to report and that’s not part of it. Sometimes, it’s better to have employee reimbursement where you reimburse everybody $500 towards their healthcare or something like that. I think you can still do that with some of these reimbursement plans.
Somebody says, “Hey, if it got $12,500 with a PPP and without getting in all the calculations, now I can get the whole thing forgiven?” Absolutely. Catherine, you’re not going to pay anything.
“About my loan amount, there was $2900.” This must be PPP. “Is it even worth the time and money to get the loan?” They can’t charge you anything, Vito, so it’s free $2900. You decide whether it’s worth it to do a little, pay for it for $3000. Absolutely, I’ll take that action, yeah. If you don’t want to, I’ll do it for you. You just give me the $3000, all right? No. Give it to charity. Do a little elbow grease. Use the money for your payroll and take the money that you wouldn’t have done by giving it to charity if you need it. There are people that really need it.
All right. “Since Arizona is the only state that requires the name and address of beneficiaries to show on deeds, how can one form a land trust in Arizona with a beneficiary as an Arizona LLC which can be owned by a Wyoming holding?” See? Some of you guys’ heads just popped. This is funny. “How can a trustee get around that?” Well, this is the beautiful part. This is where it’s funny.
Arizona has a statute that requires—I think it’s AZ 401 or 404, something like that—that you list the name of the beneficiaries on a deed. However, it’s never whether I can do something. It’s what’s the penalty for not doing it. The penalty is the trustee could void the transaction.
Let me ask you something. If you don’t want to list your name as a beneficiary because you want to keep your ownership of real estate private and you are the trustee, are you going to void your own transaction? No. All this means it’s a fancy way of saying Arizona has a statute. Yes, it does. We applaud them for passing a statute with absolutely no teeth in our situation where you want to keep your name out of the public record.
I will say this. If you want your names out there in the public record, I don’t want my name out there in the public record associated with properties. Sorry, I hate to say this because some lawyers get mad, but let me just […] this. There’s a certain portion of the attorney world that advertises on billboards and doesn’t have their heart in the right place. They would sue a ham sandwich if they thought it might get them a few slices. They’re just looking for victims is what they’re doing. They’re going to processing claims.
I don’t want to put a bullseye on myself because they see that I own 20 properties. You don’t want to do that. In fact, this is a great story because I have a friend that owns an insurance brokerage. She has to talk to doctors all the time. She says do not tell them that you are a doctor. You don’t say MD or DR or mention that you’re a doctor because the case that was worth $300, $400, $5000 worst-case scenario, now became a $50,000–$100,000 case because you have something to lose. They can tie up your time and they know that time is valuable. So, get away from this.
I saw some good questions. First off, on the EIDL amount, my friend Vito, if you get $2900 and you got it from the EIDL, that had to be the emergency grant. You don’t have to pay that back. It’s free money, so you keep it. If you get an additional amount, then you have to do these onerous documents. They seem draconian but they’re actually not. They’re actually simple. Basically, you’re giving them a secured interest in your stuff so that you can’t just liquidate your business, go out business, and not pay back the SBA. It’s basically a 30-year loan at 3.75%. So, I would still take it.
Somebody says, “Do you have a book on how to get started on all your rental properties? I’ll be interested.” Mark, I’m going to have Patty send you a really cool webinar I just did with Aaron Adams. Aaron and I talked everything about investing. It was just basic real estate investing for beginners or people who have lost money in real estate. A lot of people get told this is what I should invest in by their agents or by somebody who’s selling you stuff. They don’t know what cash flow real estate is, they don’t know how to calculate all the numbers, and it really stinks.
We actually go into it and we do a whole bunch in the cash flow world. Infinity Investing is built all-around cash flow. All we do is we look at the clients. Jeff, we do well over 5000 returns. Is that a fair statement?
Jeff: Oh yeah. We did 5500 last year.
Toby: All right, so 5500 returns. Do we do mostly real estate returns?
Toby: Do we see who makes money and who doesn’t?
Jeff: Oh absolutely.
Toby: And do the people that make money tend to do the same thing over and over and over?
Jeff: Yes, they do.
Toby: Right, so what we do is we look at who makes money. I get to look and see if somebody says I make a ton of money, then you look at their return and they don’t. A lot of the real estate gurus, a lot of the stock market folks out there don’t make money doing what they’re teaching you to do. They make money selling you the education, to teach you how to lose money.
It bugs me because I see these guys, you’re doing the returns of these people, and they’re like, if I did 100 returns for somebody of this group and 80% of them lost money, I’m probably losing faith in the guy or gal that’s teaching it. The people that make money are actually really boring how they do it. It’s all cash flow, cash flow, cash flow.
We’ll make sure we’ll get that out. You guys are always invited to do the Infinity Investing. Patty, if you have that link, throw it up. It’s aba.link/iiw. I do a class every month for free. I forget which month we’re doing just kids, so you have to be a Generation Z. That’s (I think) in August, but I think June and July we’re still doing regular investors. All we’re doing is teaching people how to make money because guess what? If you make a whole bunch of money, that’s good for everybody. We just ask that you have a purpose behind it, so make sure you’re giving a good chunk of it away.
All right. “The SBA is not very clear on what rental home cost I’m allowed to spend. SBA EIDL loans.” We just had somebody say they got denied their EIDL loan and reason being is because the SBA keeps moving the goalpost all over the place. Don’t lose faith. We will get these through, no matter who it is. In the first few weeks, they gave us a way to do things, and then they started changing that. Now, they’ve kind of gone purple circle.
“I understand that I can use EIDL funds to make monthly mortgage payments for my rental homes. Can I use the EIDL funds for capital improvements on my rental homes such as installing a new roof? Can I use EIDL funds for all the following expenses?” Without even getting to that, I’ll tell you what you can use EIDL funds for. Any damage that you suffered as a result of a national disaster which is COVID. If you lost rents as a result of this, then this is to replace those rents and use of any of the costs. The only restriction is taking it out personally and using it as dividends or distributions to the owner. You’re not supposed to do that.
I can also tell you that they are buried trying to make these loans go through and they’re two months behind. What do you think their compliance is going to be like? What I say is put the money aside and use it for regular expenses, maintenance, repairs, utilities, property management fees, leasing fees, […] all of those work. Not a problem. Just don’t distribute it to yourself and buy a Rolex.
Jeff: But what about the capital improvements?
Toby: I wouldn’t do it on capital improvements either.
Jeff: I would think for capital improvements you’re going to have to prove a need to do that capital improvement such as for the protection of the home.
Toby: All right, so EIDL loans think disasters, like a hurricane or a tornado. Tornado comes and tears your roof off. Then, you’re repairing the roof. Capital improvement denotes a betterment, which, I wouldn’t call it a capital improvement. I would just say I’m repairing or something like that. I thought I just wouldn’t use it as a capital improvement.
Jeff: But this isn’t the time to install a new kitchen or…
Toby: Correct, unless I’m using all the EIDL money on the maintenance, repair, utilities, property, and I have some other money so I can use that for the capital. That’s why you keep it separate. Literally, put it in a separate account, or just track it separately and say this is what I spent it on. If in the unlikely event they come through and say here’s where you spend it on, you’ll have it ready at your fingertips, then you run it through your accountant to make sure it says the right things.
“Am I allowed to include EIDL loan interest payments on my Schedule E as an expense to my rental homes? What are the guidelines for how EIDL interest is assigned against my multiple rental homes?”
Jeff: The easiest answer here is you would allocate interest based on how much of that EIDL you spent on each of the homes.
Toby: You decide what the loan is for on those properties. If you do it the way we teach it, you have a holding entity and I would be allocating it all to the holding entity, which then you’d be allocating it pro-rata to the various properties. And yes, the interest is deductible.
Hey Patty, throw up the link in the chat for whatever we did with Aaron if you can because Aaron’s really funny. Aaron has almost 3000 properties that he manages. He’s done over a quarter of a billion dollars of single-family transactions in the last 10 years or so and has 250 properties of his own. That is everything from mobile home parks to mostly single-family, and a couple of apartments. He’s awesome; you’ll see.
If you actually go through it, I’ll give you guys something at the very end of that that’s ridiculous and it’s free. I’ll just give you an idea. He will pay to have you come out to his course. It won’t cost you anything. You just have to pay for the plane ticket. He’ll feed you and put you in his hotel and everything. Some of you have got it. It’s just cash flow properties. You don’t have to do anything; just learn it. Share it with somebody else.
Last thing. There’s a free book. Again, no strings attached. It says you get a consultation. You just politely decline. Read the book. If you like Tax Tuesday, you’ll like Tax-Wise Business Ownership. You guys rock. You guys did a really good job today. Use the code TUESDAY in there to make sure you get the free book. Otherwise, it’s going to want to charge you $24.95 plus shipping, so it will be close to $30. If you don’t want to read it and you know somebody who runs a business, get it for them. I don’t care.
This is fun. I’m going to answer one more question before we go on. Somebody says, “My partner and I bought the house for investment and are currently using it as a short-term vacation home. We would like this to begin a new investment venture together and would like to treat it as its own asset where we pay taxes and keep it separated. Is the LLC entity still great?”
I would actually say is the house that you’re living in or is it a second house? I would probably put this off aside into a second home. What I’d end up doing with that one, quite frankly, honestly, is depending on how long the period of time is. There’s going to be an LLC and if you’re going to have longer than seven days on average, then it’s an investment. If it’s less than seven days on average, then it’s an active business. I’d be looking at the numbers to see if you’re going to have profit.
I would talk to one of our folks. By all means, Greg, Patty, or Susan can reach out to you, or Carl or Eliot if they’re still sticking with us. Somebody can reach out to you. Any of those guys will be great, probably Eliot, and have Eliot walk you through this, that, and the other.
Somebody says, “Are book allocations done on your website?” Yup. You guys are smart. You guys actually look up all this stuff. Speaking of smart, you can always come to our podcast.
Somebody says, “I’m sorry. Where do I get the book?” Patty will give it to you. I don’t know what the link is. I just throw stuff out sometimes; these poor people have to clean up after me. There it is; she just sent it to you.
I just did a really cool one with one of Patty’s favorites. Cal, big wave surfer who runs another veterans association. Next time we do a Tax Tuesday, I’ll introduce you to them because I have a podcast coming out with them. He’s a stud and what he does with our vets is amazing, you can’t tell. That’s going to be our theme for the year. We’re going to try to help a lot of people that won’t ask for it and we’re going to help them out.
If you go to our podcast, we’re going to share a really cool one with Operation Surf. That’s coming up. It’s not out yet, so you’re going to have to keep your eyes peeled. I think it’s going to be out this month or the next. Replays of these, generally speaking, you’re going to get the last couple if you register, but otherwise, it’s going to be in your Platinum portal.
If you’re not Platinum please reach out to us and find a way to become Platinum. It’s worth it. $35 a month. Again, you can ask any question you want. There is a sign-up fee but it’s usually waived if you do an entity, tax package, this, that, or the other. There are always ways to make it free. You can go on iTunes or Google Play, look at that, and I see a bunch of you guys doing stuff.
People are still asking for the book. Patty, you can actually do that with everybody. Oh, you already did it. It’s sitting there in the chat feature. She’ll share it out. If you have questions, shoot them to email@example.com. Visit our website. Thank you, guys. You guys rock for taking some time and learning the taxes. It’s not all bad. Of course, we throw a little bit of business into it, so I really appreciate you guys. Jeff, any final words before we run off?
Jeff: No. I’m glad to keep doing this. We learn quite a bit just like we all do.
Toby: It’s the only way I do any sort of continuing education at this point. I go through classes but I tell you, I learn more from you guys than I do from any lawyer or any accountant.
Jeff: Well, we know there are accountants and CPAs that listen and are going to bust us if we say something wrong.
Toby: I had a few fun emails. Patty, grab Eric and make sure that we’re supposed to ship something to him and he gets it. Susan, by all means, we will chat you up. Eric, you must be in Texas. I think I still remember you telling the Californians please don’t come out to Texas.
Jeff: Oh, is he the one?
Toby: Yeah. Anyway, we love Texas, we’re going to say, and we love California, too. The Texans are pleading with you. Maybe they could send some near to Texas. We’ll see you guys later. You guys have a good one.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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