It’s time for Toby Mathis and Jeff Webb of Anderson Advisors to answer your questions about taxes, the IRS, and much more. Do you have a tax question for them? Submit it to Webinar@andersonadvisors.com.
- What is Nexus? Why do I care? Nexus is a state’s right to tax your income; different types (tax and physical), state laws, and throwback rule – how they affect you
- Does IRS reimburse me for corporate expenses? Misconception about reimbursement from the client’s company or IRS; IRS doesn’t give you money, but let’s you write it off
- How do I qualify for a real estate professional status? Requires 750 hours as #1 use of personal professional time; know importance of passive activity loss and logging time
- What are self-dealing rules for non-profits, IRAs, QRPs? Particular entities can’t interact with a disqualified person – can’t sell them anything; but self-dealing exceptions exist
- Am I dealer or investor? What’s the difference? Investor is passively involved, dealer is actively buying/selling real estate; can depend on the intent and timeframe
- Why set up an LLC that does flipping as a C or S Corp instead of a partnership? Because it’s taxed as ordinary income and subject to self-employment tax
- What is UBIT? Unrelated business income tax is when a plan/non-profit isn’t doing what it’s set up to do; can have passive activity until it competes with active businesses
- I hold rental property in a self-directed IRA. What can I do? There’s things you can/can’t do, especially add value to a property, so find a property manager and IRA custodian
- My wife’s previous employer’s stock options were exercised and have peaked. If we cash in, what’ll be the tax consequences/burden? Long-term capital gain and opportunity zone
- I’m helping a friend with a crowdfunding project. What are tax consequences with no deductions? Does he pay tax on donated money? No tax for less than $15,000 per donor
- How to aggregate all properties? Disadvantages? Election form that your print with your tax return to identify properties; doesn’t free up large losses tied up
- If real estate investing part time, are you considered a part-time investor? You’d be a part-time investor, not real estate professional; determining factor is to document time
- How do I get the 501(c)(3) tax-exempt? Use the 1023 application
- How do you create an LLC in an IRA? IRA custodian enters into a contract with a company to create an LLC, or set up a 401(k) to roll the IRA into it without a custodian
- Investing in LLC for holding rental property. How do you avail to a 1031 exchange? Need a 1031 exchange facilitator and LLC must buy or sell the next property within 180 days
- If I receive social security benefits at 62 and not currently employed, but do receive interest income. Will it affect my SS benefits? Can be isolated into its own taxable entity
- My wife and I are the only shareholders and both take a ⅓ salary. Is that the right amount? You should take a ⅓ of the net profit as salary instead
- How do you put an LLC on hold? Do nothing with it or pay the state; file non-activity return
- Will real estate holding LLC taxes partnership qualify for 20% pass-through deduction? Yes, if not triple net property
For all questions/answers discussed, sign up to be a Platinum member to view the replay!
Full Episode Transcript
Toby: Alright, welcome to Tax Tuesday, this is Toby Mathis joined by our tax manager Jeff Webb.... Read Full Transcript
Jeff: How do you do?
Toby: We’re going to get jumping on here. We’re just going to jump right in. no time like the present to just get business done. So first off, happy Tuesday. Second off, let’s jump into a bunch of questions that are giving us a steady feed from folks even before we got started. I’m sure I’ll be more happy than to answer your questions. I also got emails in from folks that I may be trying to make sure I answer all of those and we’ll just make sure that we’re getting through each and every question to the extent humanly possible within this hour.
So the first one is, what is Nexus and why do I care. Second one is going to be, does the IRS reimburse me for my corporate expenses. Third one is, how do I qualify for real estate professionals, technically real estate professional status. What are self doing rules for nonprofits in QRPs. I’m going to throw in IRAs in there as well. Am I a dealer or an investor, what difference does it make. Those are the ones that we’re going to hit one after the other in succession. I’m making sure that we’re getting through these.
So the first one is, what is nexus and why do I care. Jeff, do you want to hit tax nexus because there’s different types of nexus. There’s physical presence for lawsuits and there’s tax nexus for taxation. I’m going to have Jeff hit the tax and then I’ll touch base on the physical nexus.
Jeff: So when we’re talking about tax nexus what we’re primarily talking about is a state’s right to tax you on your income. For example, you may live in Nevada, have a rental property in California. California has a right to tax any income on that property because you’re doing business within California. There are different roles, there have been numerous cases on nexus.
Toby: Most recently, our Supreme Court reversed a physical presence test that the error that Amazon, everybody that was an online retailer use to avoid state sales tax and that was just changed.
Jeff: Yeah, on that one in particular the Supreme Court as Toby said, gave the states the right to tax online sales in their states. The thing is, the states now have to write tax walls to accomplish this. Most of the states don’t have anything that accomplishes this.
Toby: A lot of times, ignorance is bliss. People would avoid sales tax like for example, I live in Washington, Florida, Oregon and avoid the sales tax and they ignored Washington’s use tax. A lot of states have this. You don’t pay sales tax and you go someplace where there is no sales tax, you still owe sales tax on it but they call it use tax because you brought the physical item into your state and you never paid sales tax on it. So then they would say, “Aha.”
And the really interesting thing – there were actually some interesting cases that were popping up from the nexus, ones that came out of Washington, was Northwest Energetic Services too and that was a case in California where they tried to tax an organization that was registered to do business there that didn’t actually do any business in California but they wanted to tax its worldwide revenue.
The franchise tax board of the board of equalization lost that one and they had a few others but what you’ll find is that this is a continuously active in generating area of tax law and we tend to fall into the category of ask for forgiveness not for permission all the time because if you ask a state whether you should be paying tax, they will gladly say yes even if it’s not a legitimate tax. They’ll tell you that you have to pay it even though it’s made to be unconstitutional, unlawful, you fill in the blank.
Even if you don’t owe it, they’ll oftentimes just answer, “Yes, of course you should.” They can’t actually be giving you any tax advice anyway so it’s the wrong party to be asking. I’m sure Jeff you get to deal with that more than I do.
Jeff: Yeah, in a state like California, it used to be an old joke for the CPA’s that you could be flying over the state of California, make enough business phone call and California would want to so you have nexus and we can now tax you. They’re also a state that’s very difficult to leave if you’re a resident. We had a case where somebody, NBA player for the Sacramento Kings was traded to Seattle Sonics and moved there.
Toby: Yeah, now the Oklahoma City Thunder, I was there when they move, horrible.
Jeff: The state of California wanted to say, “No, you’re still resident of California, we’re still going to be taxing you because you got friends here and you have club ownership, some relationships. California in particular is very tenacious with Nexus.
Toby: Yeah, so you’re going to see things evolving over the next few years since the Supreme Court decision was literally this last, I think it was just months ago or end of the year last year. You’re going to see the states trying to fill in the blanks. So you have some states for example in drop shipping, Pennsylvania would tax you if you drop ship out of their state where it used to not be, other states did before. We were talking earlier before the webinar, Jeff and I were talking about what is like a claw back.
Jeff: Yeah, it’s called a throwback rule that says if your sales into a state that doesn’t have taxes then where it got shipped from can tax instead.
Toby: Somebody’s asked, what are the worst three states for nexus. It really depends on what you’re doing, but I would say just off the top of my head probably New York, Connecticut and California. They’re pretty heinous. Look at the states that just filed a lawsuit against the federal government under the SALT limitation which is the State and Local Tax Limitation.
You’ll see I think there was four states Maryland was one of them, where they try to hit you with so many different taxes. It’s not just business, it’s on your personal as well. It’s just for nexus, for a person, it’s really easy to figure out, “Hey, where do you live?” Because when I say it’s easy, it can be difficult if you have two residences that you spend time with equally. They’re going to add up things like how much utility you use, where your driver’s license is. Where your kids go to school, where your vehicles are registered, you’re going to look at those types of things.
There’s Hyatt v. Commissioner Case or what was it, Hyatt versus board of equalization I think is actually what it was. Where a gentleman moved to Nevada and the California franchise tax board sent agents to Nevada they climbed to his garage and break into his apartment to prove that he was actually residing more in California than he was in Nevada because his tax bill would’ve been so great and when they got caught, they said they’re immune.
Our Supreme Court and Scully I remember the opinion was scathing on them saying, “No, you’re immune in your jurisdiction. When you cross the state lines, don’t expect any immunity.” They just harassed that poor guy. They were climbing around his house. So let’s just narrow it down though. You asked a question what is nexus. There’s two sides, there’s tax nexus and then there’s physical nexus.
In the physical nexus again where you reside, it’s pretty easy. If you live there, then you have a physical nexus in that state, it’s where you have a house. In the business it’s no different. In a business, you have to decide where it’s going to have its main presence and the courts have held having a bare office and nothing more isn’t going to be sufficient. You actually have to do something there.
That’s when you actually have to have a physical office space. We use virtual office where it’s doing more than just maintaining a registered agent. There we’re actually giving conference facilities, phone answering, we’ll do document prep and things like that for the governance of the company so the company can actually have a physical presence. The reason that you do that is to make sure it has a home.
So if somebody’s coming after one of its shareholders or members, one of its owners that it does not draw that entity into the state where they’re located. So, if I have owners in a company and I have my company set up in Wyoming and they sue me in Nevada and they sue somebody else in Texas and somebody else in Florida, you don’t have a choice between the Nevada, Texas and Florida where the shareholder or where the members of the LLC are located, they would actually have to go to Wyoming where the actual entity is located.
That’s what you’re trying to do. So if Anderson does my meeting notes, that’s why that’s important. We’re not talking about Canadian, US the nexus pass. I could tell you a fun one. We had a client that just got nailed by California. It’s actually under the FBAR which is Foreign Bank Account Regulations. They had some interest on a bank account that was there for a condo they had in Whistler and they sold the condo in Whistler and they didn’t report, I think it was like $70 or $76 worth of interest. Jeff do you know these off the top of your head? How much the penalty is?
Toby: If the IRS catches you, it’s 50% of the account balance per year. But if you go under amnesty which they have taken an amnesty was a $38,000 fine which they paid for that $76. Canada is still offshore. Anyway, so what is nexus and why do I care. It gets a little convoluted but the reason you care is you don’t want to draw your company into your state, you want to make it very difficult for somebody to get a hold of your assets if they’re coming after you. From a tax standpoint, it matters because we want to keep our business activities to the extent possible in the lowest taxing jurisdiction as humanly possible. So that’s that one. Jeff this is one of your favorites, I know. Does the IRS reimburse me for my corporate expenses?
Jeff: Of course they do. IRS is really giving out money. We get this question more often than you would think. I think it’s a misconception that clients are being told that their companies can reimburse them for certain expenses which will reduce our taxes and sometimes the clients are hearing IRS is going to reimburse us. The only time you get back money from IRS is if you pay money into IRS for taxes and you don’t owe them any tax or maybe overpaid them.
Toby: Yeah. IRS is a policing agency. Your taxes when you pay it, they don’t even go to the IRS, it goes to the US treasury. So the IRS is merely, pay my boss, is all they are. So they don’t give any money out whatsoever so the IRS does not reimburse you for your corporate expenses. What the IRS does is it enforced the laws which is the United States code and issues regulations interpreting that code and is basically the enforcement arm for the US department of treasury.
What ends up happening for corporation is they’re allowed to reimburse shareholders many expenses that are not included on the shareholder’s personal tax returns. So it sometimes seems like they’re giving you money when in all reality, they’re allowing you to not pay tax on your expenses which is always the battle because there’s lots of rules out there that say things are not deductible.
Nothing more telling them what we just had happened in this tax change where they eliminated all miscellaneous itemized deductions. All of them are gone in case you’ve been sleeping. In 2018, you do not get to write them off anymore.
Jeff: Now that’s your union dues, your tax preparation fees.
Toby: Any unreimbursed business expense if you’re a teacher and you’re providing stuff for your classroom, you don’t get to write it off.
Jeff: If you’re paying substantial amounts to your broker for advisory fees.
Toby: That’s a huge one. We’re going to see that one come back and bite people in their touché.
Jeff: That’s no longer deductible.
Toby: So it’s horrible. So no, the IRS does not reimburse you for your corporate expenses. Your corporation reimburses you for your corporate expenses and the IRS lets you write it off. How do I qualify for real estate professional status. Jeff do you want to play with this one or do you want me to handle it?
Jeff: I’ll do a little and then you can correct me. So real estate professional has a hours commitment. I believe it’s 750 hours a year.
Toby: So it’s a minimum of 750 hours. There’s a second part to that too, you know that.
Jeff: And the 750 hours can be earned by you or your spouse. What’s your second one?
Toby: The second one is it has to be the number one use of your personal professional time.
Jeff: Oh, correct.
Toby: The way I always explain this is if you did 1001 hours doing bicycle repair and you did 1000 hours of real estate, you do not qualify as a real estate professional. But if it’s reversed and you did 1000 hours of bicycle repair you did 1001 hours of real estate activities, then you do. And the reason this is important is because ordinarily, your real estate expenses are offset your real estate income and you can only take losses from real estate. In other words, the excess depreciation, or repairs, or whatever, your losses are limited to $3000 a year against your other active income. So that’s called the passive activity loss rule.
Toby: If you materially participate and then you have $100,000 to $150,000 scale up. There’s some little nuances which don’t bring your head with. At the end of the day, there are restrictions on taking passive activity loss. Real estate professional status removes that restriction. The other thing that’s really important about real estate professional status is it is per property. So if you have three properties, you’d have to meet it for each of the three unless you elect to aggregate all your properties on your tax return. We have seen this missed by accountants who don’t do real estate.
They don’t aggregate and there are actually cases on the book where people had to fight and they literally had tons of properties they easily met the 750 if you aggregate it but their accountants miss the aggregation election.
Jeff: And the sum of 750 hours is not just for your rental properties.
Toby: Any real estate.
Jeff: Any real estate activity.
Toby: Yeah. Jeff was actually right when he said your spouse could qualify, either you or your spouse if you’re filing jointly.
Jeff: So if you have a full time job and you’re getting a W2, I can guarantee you that you will not legally qualify. Under audit, you’re going to lose. However, if you have a full time job and your wife does not or your husband does not, they can qualify to be that real estate professional.
Toby: We had a fun one. A good friend of ours and a colleague in Georgia was making somewhere between $2 million and $3 million a year in his professional practice. His wife qualified as a real estate professional and he quite literally bought enough commercial property and did something called cost segregation where you’re rapidly depreciating it where he generated enough loss off the real estate to offset his income.
The IRS audited it, he is self represented because he knew the rule. It withheld, he stood up. His wife just did their real estate activities and he did their practice and at the end of the day, she met the requirement for the real estate professional status and the rule is pretty straightforward. IRS didn’t like the outcome but that’s not their job. So they picked a fight and lost the audit which is not uncommon. All right, so how do I qualify for a real estate professional. Keep a log of your time and make sure that you’re aggregating all of your real estate activities. Even if it’s for a closely held company, it’s still going to match, it’s still going to work.
Next one, what are the self dealing rules for nonprofits in QRPs. I’m going to add in there IRAs as well since when we talk about a qualified retirement plan, we’re really talking about 401K and 401A. This is going to dovetail in with one of our other questions that came in off the internet as well. But here’s how it works. If you are in a particular type of entity where it says you cannot interact and engage in business with a disqualified person, you could not sell them a $1 million building for $1. It is an absolute prohibition against self dealing.
The most important first step is determining whether or not you’re within one of those rules. Then if you are, then you look and say are there any exceptions to that rule. So for nonprofits, nonprofits are going to fall into broad categories foundations, private foundations are one. These are nonprofits that aggregate money and give money to other nonprofits, they don’t do anything. And in that one, you have an absolute bar from self dealing.
The next one is an operating nonprofit that is doing something and in that case, you just have to use arm’s length transactions. So we look at that, that’s our step number one. So let’s go back to the first one, private foundations then you look and say, are there any exceptions. The only exception is reasonable compensation, it can always be reasonably compensated. But other than that, no more transactions. So for nonprofits 501(c)(3) you can enter into transactions as long as it’s an operating nonprofit.
It can give you benefits, it can pay you and it can engage in sales and other transactions between you and the agencies so long as they are arm’s length. And the way you make sure it is arm’s length is you have non-interested parties looking at it saying, “Hey, that looks okay to me.” somebody who doesn’t have a dog in the fight. Now we go to QRPs and IRAs. In either one of those, you have absolute prohibitions against self dealing with disqualified parties and disqualified parties are lineal descendants which would be grandparents, children and their spouses, great children and their spouses. It does not include your siblings.
So what’s interesting is you could actually engage in transactions with your IRA for example, loan money to your brother. You cannot loan money to your mother. You could not loan money to your kids or your grandkids, you could not do a second on their house, you could not do anything between the company. You could not buy a house from them. That is an absolute bar that’s called, disqualified party.
Jeff: The way I kind of look at it as to whether you may be violating self dealing rules is, are you benefitting from a transaction between you and the nonprofit or the QRP or the IRA. That’s really what they’re out to prevent. And unfortunately the rules are pretty severe for violations of the self dealing.
Toby: If you self-deal, you’re just going to disqualify your IRA. If you’re using a QRP and you’re using a 401K, then we have different rules, and in that particular case, it would just disqualify the money that you actually were utilizing. Their far more lenient.
Jeff: I had a client who had a QRP, it was actually defined benefit plan, who had a required minimum distribution to make and the plan was not funded at the time. The client had to make a loan to the QRP, which is a self-dealing but unfortunately there’s an exception for that that one was quickly repaid. There was no profit or interest earned on it.
Toby: Was it within the 60 days?
Jeff: I believe it was within 60 days.
Toby: There’s some more fun stuff. Then we go into the 401Ks and this is where you get into people acting on behalf of the company. I know that there were some questions, that were already posed in the chat feature here. You’re not supposed to be getting any personal benefit or using those funds at all when you have an IRA or a 401K. In an IRA, it’s much more severe because you have a custodian. So if a renter for example is paying you money and they pay it to you individually, technically you have a violation of the self dealing rules because you just received money.
Even if you go ahead and put it right back in the IRA, you’re going to have an issue because technically you weren’t supposed to receive the money, the custodian was supposed to be receiving the money. So you should actually have rental money going to your custodian if you’re using an IRA. If you’re using a 401K or 401A, which the profit sharing plan or 401K, then you are the trustee and you’re able to accept the money and endorse it right into the account and make sure that the money goes to the right place.
IRA’s are a little more difficult. To get around this, a lot of people with IRA’s will set up an LLC which you can be the manager of. Actually, the IRA is technically the member— you’re in non compensated role and we have to make sure that the LLC agreement says that if we drafted it, then we make sure that we’re putting in the non-prohibitionals. You cannot personally benefit from these activities. It has to all go back to the retirement plan.
People will do the LLC and they will be all right, now I can go ahead and accept the funds through the LLC, that’s how they do with an IRA. If you’re doing with the 401K, we’re going to suggest that you still set up an LLC anytime you have real estate, just because we don’t want the liability to flow through to you. But there, now, you don’t need the custodian. You could technically do it inside the 401K directly though you should still have the LLC and it’s the same scenario where you’re able to accept the proceeds. That’s not going to be a technical violation because you’re acting on behalf of the plan.
And that is not a violation of the self dealing rules. So the biggest takeaway from all this, is that you can act on behalf of the plan. The second a just qualified person starts to get personal benefit, you have violated the rules and if it’s an IRA, the whole thing is violating—considered a taxable event, which should be that 10% penalty plus income tax on it for the entire amount if it’s at 401K or 401A, it would just be the portion that you violated. We tend to be very bullish on using 401Ks and 401A’s, profit sharing plans around here also known as QRP. And this is why, because they’re far more forgiving and they have a less moving pieces. I hope that explains that.
We’re going to have—I know there’s a couple more questions that are in here, that are going to be relevant to this section as well. Let me jump on to something. The questions, this is something you can ask detailed questions via our email. I will answer them, Jeff or Tony, whoever’s from the tax department here. We will answer these on the tax Tuesday. We will also more likely be responding back out to you directly as well because we want to make sure you get your questions answered, but just jot down that address, firstname.lastname@example.org and feel free to shoot them in.
Since our last one, Tax Tuesday, we had a couple of questions and I want to go through these. Number one was from Karen out of Alaska, “I have a revocable trust in Alaska that owns and sells real property, does the trust to pay income taxes on the profit or does the profit end up on my personal tax return? Is it taxed at the same rate as everything else? So the most important word she used in her question was revocable, because trust come in two flavors, revocable are irrevocable. If they’re irrevocable, then we have two choices, we don’t have to worry about the irrevocable.. Since it’s revocable, it’s a grand tour trust is ignored, it’s you, for tax purposes until your dead. So you’re good, sorry, sometimes I’m blunt. So if you’re buying and selling real estate, real property it’s taxed no differently than if you’re on the real property.
Now here’s the rub, it also gives you know asset protection. So revocable trust is giving you know asset protection with that real property, so I would really strongly suggest that the revocable trust actually be the owner of an LLC that is buying and selling the real estate and depending on how quickly you are turning this, will depend on whether that say, S or a C-Corp., if it’s a flip versus if it is a long-term holds, then we just put it as an LLC. It would either be disregarded or taxed as a partnership. We want it to flow under our return. Those are kind of our choices.
There was a question, I don’t know if I got to that. I’m going to skip back to our slides. There’s something about—Am I a dealer or an investor? So I want to make sure that I’m getting this one right here. Because this is relevant to one of these questions. A dealer and an investor is something that we talk about in real estate, you want to hit on this?
Jeff: No, you’re doing fine.
Toby: An investor is someone who’s passively involved, a dealer is somebody who is actively buying and selling real estate. So if you buy real estate with the intent to hold it for its long term appreciation cash flow, then you are an investor. If you buy real estate with the intent to sell it, then you are a dealer. The easiest way to conceptualize this is if I am an investor, I am passive. If I am a dealer, then I am a supermarket with inventory.
And I’m putting my real estate on a shelf and it’s constantly for sale. Just like at your grocery store, it may take a couple years for something to sell. I’m just imagining the items that are on the shelf.
Jeff: Your durable goods.
Toby: Right, so you sell something, I used to do liquidation. We would grab all the expired items we would sell them but let’s say, it doesn’t matter how long you held them. A lot of people think, well if I held it over a year, I can’t be a dealer. That’s not the case, we actually have cases on the book where they held it over 10 years. What matters is what your intent was when you buy it. And the difference it makes is active income versus passive income. The difference is an investor can 1031 exchange and defer all other taxes. An investor can get long-term capital gains, an investor can do installment sales, an investor can spread out the tax liability over a long period of time.
Whereas a dealer is active. It’s subject to social security taxes, it’s taxable immediately even if you don’t receive the money. It is active ordinary income, it’s no difference than I just sold that box of Cheerios on the shelf that I’ve been waiting to sell. It makes a huge difference. Dealer activity we’re going to isolate inside of an S-Corp or a C-Corp. Investor activity, we’re going to make sure it flows on your personal return either by using a disregarded LLC or a partnership LLC, one of the two.
Jeff: Intent has really made a difference in a couple of cases. One, where somebody bought a property that they go allow their child to live in, something end up happening then they sold it after a short time. They were considered to be an investor not a dealer.
Toby: It doesn’t even matter. It does not matter whether you ever rented it, there’s plenty of cases where somebody tried to rent it and they were going to use it as a long term hold and then things change and they sold it. Just know that if you buy or sell within a year, the presumption is going to be that you’re a dealer. If you hold for over a year, the presumption is going to be that you’re an investor but it’s not a guarantee.
We’re going to get back to these questions. How does Flip LLC income flow into S-Corp and then what will be distributions of the seller? So, we talked a little bit about this last week but I’m going to go and we’re going to hit this. When you set up an LLC, it doesn’t exist to the IRS. So when you say how does the Flip LLC flow into S-Corp, it doesn’t.
A Flip LLC is an S-Corp if you elect to have it be treated that way with the IRS. The income is just going into an S-Corp. Then you have to decide what your salary will be because if you know anything about an escort S-Corp, you want to make sure you pay yourself a reasonable salary if it’s making money. The rule of thumb to use is, one third of your net income should be paid out as salary. That’s just a rule of thumb but it’s all in all reality the IRS has this funky test where you’re supposed to say, “Hey, what would it be? What could it be paid?” they never tell us exactly.
So I’ll just say this, pay a third, don’t worry about it. If you get too much money, if you start making over $300,000, then we’re going to have a chat but where you’re going to be on our radar anyway, we’re going to be making sure you’re paying a reasonable salary anyway. The reason this is important is because the salary is subject to old age death and survivors in Medicare also known as FICA or social security and the distributions are not. So what you would do is you’d be cutting your social security tax by about two thirds if you did it that way. I hope that explains it. So it makes its money and it pays it out. We do need to make sure that if you’re flipping, that the money goes into the LLC.
Jeff: A quick comment on distributions on an S-Corporation. Distributions are typically the money that’s already been taxed are in you’re just pulling the cash out. What you don’t want to do is go out and get a bank loan in S-Corporation and take distributions from that for several reasons. One, you don’t have basis in those distributions. Two, it gets into the whole finance distribution issues and things of that nature. So you really only want to be pulling money out of the company that you’ve already been taxed on.
Toby: Fair enough and then if you don’t pull any money out of an LLC that’s taxed as an S-Corp, you don’t technically have to pay yourself a salary. You just let it sit in there and keep growing which your accountant is not going to tell you because they don’t know that. The reason I know that is because I have spoken to probably 100 accountants that missed that one. It says, why do you want the LLC that does flipping set up as an S-Corp or C-Corp instead of a partnership? Mark, we were just talking about that because it’s taxed as ordinary income as subject to self employment tax.
So the reason we want that in an SRC is so that you do not get classified as a dealer because then all of your real estate is dealer real estate and you could lose all your long-term capital gains, you to lose your 1031, you could lose your installment sale. So we want it to be a separate taxpayer from you so the IRS notes clearly who the investor is and who the dealers is and then you can reduce the amount of tax hit by using the S-Corp that will reduce your self-employment tax significantly, if you add a 401K to it, you could eliminate your tax or defer it out into the future.
If you use a C-Corp, then depending on what your expenses are, we can also eliminate all your tax or at least reduce it significantly. So that’s why we use that. All right, we have a whole bunch of questions to go through so I’ll go through this. What is UBIT and UBITA. UBIT is unrelated business income tax and the easiest way to understand this is when you have a tax deferred entity or tax, it’s not actually a tax rates, it can be tax rate if it’s a Roth but when you have a qualified plan or a nonprofit and it is not doing what it’s set up to do, so let’s say in an IRA or a 401K or a 401A, or a nonprofit, they’re all set up to do certain things.
They’re allowed to have a passive activity which is rents, royalties, dividends, interest, even capital gains and it can have those and you don’t have to worry about it at all. But once it starts competing with other businesses, active businesses, now you have an issue and that’s what’s called—let’s say that you have these ordinary businesses. Then they would be taxed, generally speaking it’s going to be the highest rate at 37% I believe is what it’s going to be as kind of a disincentive to engage in traditional businesses inside those exempt organizations.
The easiest way to look at this, let’s say you set up an IRA and it runs a mini mart, you’re going to pay tax on those profits just like anybody else would. The exception is if that IRA owns a corporation that does not pay out the profits directly. It would have to own C-Corp and then it would only receive dividends and then those are considered passive. So it gets funny and a little bit difficult.
The other one is let’s say you set up a nonprofit, that’s for—what’s a good one? Helping Vet and then it sets up a pizza business on the side and starts competing, it buys a bunch a Domino’s franchises. It’s going to pay tax on the Domino’s franchise. It doesn’t get a big huge competitive advantage selling pizzas because it’s a nonprofit. It would have to be for its charitable purpose and that’s UBIT.
Jeff: One place we see a lot is like hospitals, they’re usually tax exempt but they may have a gift shop which they have to pay the business income tax on because it’s not directly supporting them but it is a business.
Toby: But you’re allowed to do that for like what is it, Salvation Army and some these other thrift stores. They’ll let you have one for a church and whatnot. If it’s ancillary, if it’s completely ancillary and it’s just being used like thrift stores I think are one of the few exceptions, gift shop absolutely, you’re head to head. Here’s another one and I think that this may be what Diane was looking at, it’s debt financed income.
What that is, is if I’m using the leverage, then there’s an exception for IRA’s where it cannot use loans to generate income, it’s considered an unrelated debt financed income. It will be taxable That is not the case for 401Ks and for 401As, which is what—if you’ve ever been to one of our events, you hear us railing on the idea that if you are going to finance real estate, real estate is considered passive and it’s considered okay not UBIT. The only way you make it taxable is if you leverage it inside of an IRA, so don’t do that.
If you’re going to leverage it, make sure your rolling that IRA into a 401K or profit sharing plan which is the 401A. So there, that’s my two cents. I figure that maybe they had a funky—UBITA, I have no idea what that is, but it looks neat. I think they were probably referring to get financed income, since those things usually go side by side. All right, we have a ton of questions that have been posed and this is so much fun, we have like literally a jillion questions, if that’s the number.
All right, so here’s the first one, if I cash out refinance or borrow an equity loan from my primary residence, use the money to do private lending by rental property, can I deduct the interest expense as an investment expense beyond $750,000 amount? They’re throwing some things in here. This is actually a really long question, I’m giving you the thumbnail sketch of it. Hey guys email those types of questions in, because nobody’s going to be out to follow this, but here’s what here’s what they’re saying, we now have a restriction on your mortgage interest, it’s $750,000. If you borrow on your house, and by the way it’s $750,000 now, if you had a loan on it up to $1 million, you’re grandfathered in, if those prior to what was it, 12/15/2017, you’re good or if you got your long before April 15th and you already started the process before December 15, don’t you make my head hurt.
Long and short of it is, let’s say $750,000, but your house is worth $1.5 million. You borrow money out of your house. You will not be writing that off personally, you are capped at $750,000 and that’s on your schedule A. Whether or not you’re getting any benefit out of that is to be seen because you have your standard deduction. I imagine it’s going to be above the standard deduction if you’re borrowing up to $750,000. Let’s just say we have our $750,000 and we borrowed an extra $500,000, it can’t go on your schedule A, but it can go someplace else. The someplace else would be, for example, if I put it into my schedule E, because I’m using it to buy rental property. Then I can use the income of the rental property and I can use the interest being paid as a separate expense, it’s just going on a different tax form.
The other route that you can go is, if I give that $500,000 and I loan it to a corporation and the corporation re-loans, in the words the corporation is going out loaning its money out and it’s reimbursing my interest, then in all reality the loan is really to the corp, and I’m not getting any tax benefit but the corporation is reducing its income by reimbursing me the right to use basically my line of credit. This is no different than if you do this with your credit card. It’s reimbursing you, so you make no money on it, but you don’t pay tax on it, it such a fancy work around. That’s number one.
Next question, I hold rental property in a self directed IRA. I do tenant screening, manage the rental, hire vendors to do the repair work and I don’t physically work on the house. Good, because you can’t physically work on the house, you can do everything else, you can hire, do screening. I would actually have a property manager on it. All income expenses come and goes to the same self directed IRA account, hopefully that’s with the custodian or you have an LLC, disregarded to the IRA. Somebody asked this, the IRA custodian sets up the LLC, you can’t do it. You shouldn’t be going out and doing it yourself, paying your money, you should actually have the IRA do it to keep it clean.
Is it allowed? Yes, some people say, “If only I don’t work on the house myself, that’s okay,” and they’re correct. Some people say, even screening, collecting rent is not allowed, can you please clarify? You should not receive the money, the IRA should receive the money, you can direct you to the custodian though. You can even get the check and hand it to the custodian, forward it to the custodian, whatever, as long as what you’re doing is not adding value to the property. That’s the big no, no. Don’t go get a paint brush and start painting the house because you’re increasing the value to your personal efforts.
Next question, my wife’s previous employer stock options were exercised and we feel have peaked, cost basis 132, market value 280, if we cash in, what will be the tax consequences and how can we reduce the tax burden? We need to pull the trigger shortly. Aziz, this is you, there’s two ways you can do this. First off, you’re going to end up with long term capital gains, so it’s not horrible. Secondly, there’s something called an opportunity zone which just enacted at the end of the year and the just published out all these zones.
If you reinvest the money in a opportunity zone, you defer to the tax. In the opportunity zones, there’s tons of them. It’s any neighborhood that is considered—that needs public support and there’s a laundry list. I would actually encourage you to go Google, opportunity zone, tax and you’ll find a big old list. But the communities in your area that are typically low to moderate income house. If you took your entire amount of increase, so let’s say that we have $150,000 of taxable capital gains, you could buy $150,000 of opportunity zone properties and pay zero tax.
Now, the question is, what happens when I sell? So there’s holding periods and the minimum holding period, I believe, is you’re going to be looking at five years, where then you’re going to not have to pay tax on 15%, I’m going off of memory. So you’ll have to excuse me if I’m not spot on, but it’s 15% then it jumps up. At 10 years, the entire $150,000 is no longer taxable. And I believe that you’re not going to be paying tax on the gain in the opportunity zone, it’s kind of a two pronged, are you familiar with that one, Jeff?
Jeff: Somewhat, I know that you replaced the old enterprise some number of years back.
Toby: Something to look at, but would be it. The last way to avoid tax is give them, before you exercise it, is give that to your non-profit, if you have one and you would get a $280,000 deduction. And then the nonprofit can sell it zero tax. You’d get a monster tax and you could have these too, you could say, “Hey, I really need to offset a bunch of the tax, so I’m going to make a contribution,” it doesn’t matter what your basis is, it only matters, the fair market value of those assets and if you transferred let’s say $140,000, half of it, let’s see transferred $140,000 worth of stock, you would get $140,000 tax deduction and it can offset your income up to 60%.
In either case, if you’re pretty confident that we can mitigate or eliminate that tax bill if you wanted to. If you keep it out of state, somebody says, if you keep it as state for 36 months, can it be avoided?
I am helping a friend with crowdfunding project and due to medical needs, we’ll need a large sum, maybe $100 million what would his tax consequences be if he has no deductions? Does he have to pay tax on donated money? Fred, generally speaking, if you’re getting these little gifts, as long as they’re less than $15,000 there’s no tax and when I say $15,000 that’s per donor. So if I do a crowdfunding and everybody gives $100, there’s no tax to the recipient. So go ahead and raise them a bunch of money.
Jeff: Keep in mind when you’re doing this crowdfunding, if you’re contributing to a crowd funding, it is a gift, it’s not a donation.
Toby: And it’s not a tax deductible donation. In 2017, I sold a rental house and took a $40,000 note. In 2017, I received $944 in interest but have not issued a 1099-INT. I did report the amount on my personal 2017. What should my next step be? Wait until 2019 or file now. So he’s the one who holds the note, he was paid interest. What do you have to say?
Jeff: This is kind of a darn if you do and darn if you don’t. There is a penalty for not issuing the 1099. You did the right thing by reporting the amount of interest. However, there’s a penalty for not following the 1099. There’s a penalty for filing them late.
Toby: What’s the penalty like?
Jeff: I think it’s $50 or $75. I think it’s $50 up to $99.
Toby: So what you’re saying is do it next year?
Jeff: I didn’t hear anything.
Toby: Hey do it next year unless they start digging in. I’ve had that, we actually went through a super audit here once and they went through every—they let you fix it. So I just wouldn’t do it. I would just do it next year and say, “Hey, oops.” How to aggregate all properties. What are the disadvantages to doing. You file an aggregation election, is it a form or you just check in the box?
Jeff: It’s an election. It prints out a form with your tax return. It says exactly what properties or investments you’re aggregating together. The only real disadvantage is. Once you aggregated these properties, let’s say you have two houses and one has significant passive losses. When you become a real estate professional, those passive losses gets stuck in there. Normally they get freed up when you sell that property but once you aggregator properties, it’s all considered one property. So it doesn’t free up those if you have a large losses tied up, it doesn’t free them up until you get rid of all your aggregated properties.
Toby: Cool. Nicely put. Are the purchase and sale of mortgage notes considered real estate for real estate professional status I’m assuming.
Jeff: This is my gut feeling, I would say no. it’s more of a lending, more of an investment in the notes.
Toby: Depends on whether you’re ending up with the properties. It depends on what your intent is and if your intent is just to buy and sell mortgage notes, then you’re dealing with lending. In order to be real estate, it’s really got to be focused in on the purchase and sale of real estate.
Jeff: So we kind of run into the same thing with construction companies and such that they meet the test for certain things but not for other test. There are some input to it so real estate broker is kind of the same thing.
Toby: Here’s the thing, so this is Dean. Dean, if I am in your shoes, I am documenting the time I’m spending in real estate. so even though I may be going after a note, if the reason that you’re going after the note is with the intent that possibly end up with that property and you do the research and you can back it up, then you add it into the real estate column as far as your time and you aggregate all your time.
The only time this is going to come up is if somebody audits you in goes through all of your records that thoroughly which is rare that that happens. But let’s say that it does, then you’re the one who’s tracking all of your expenses and your time. Then it would be up to the IRS to sit there and say, “Hey, that was actually for the mortgage.” and so the old adage is pigs get fat, hogs get slaughtered. You don’t take all of it but you aggregate that a little bit.
Jeff: Can I bring up a pet peeve? I hear on the radio frequently about all these auditors that IRS has hired and they haven’t had a real hiring since 2010.
Toby: They’re so toast right now.
Jeff: The last big hiring they did most recently was to deal with Obamacare for that audit purposes. But really, they’re dealing with almost a skeleton crew anymore.
Toby: We just got proposed tax forms for 2018. We don’t even know, we just had proposed regulations issued on the tax changes two weeks ago, three weeks ago. They’re way behind the eight ball and sometimes we put ourselves in a disadvantage. Don’t be crazy about it, but you can be pretty aggressive and especially if it’s the truth. If what you’re spending your time on is real estate, count it towards real estate.
So if you’re doing real estate investing part time, can you be considered a part time investor? Yeah, you’d be a part time investor but you wouldn’t be a real estate professional. So the biggest important thing and this is for Darlene and Ken, is to document your time and if you go over 750 hours and it’s more than you spend than anything else, then you’re going to be a real estate professional.
Otherwise, you’re just an investor, unless you are buying properties to sell. So when you say investing, that means you’re going to hold on to them, you’re letting them depreciate a little bit but you get the cash flow. Does time spent lending money on real estate for real estate qualifiers and real estate professional. No investing, didn’t we just answer that one? It depends on your real intent of investing in the note. A lot of people are buying notes to end up with a real estate in which case then I’d say probably.
Jeff: No, what if she’s gap funding?
Toby: If you’re gap funding then I would say no, then you’re lending. So you really have to take a look at the totality of the circumstances. I wish I could say yes or no. what we want is a yes and there’s a way to get there. So it’s making sure that you’re documenting things to support your position. We could dig into that a little bit more, if you want to shoot us the email then let us dig into it. Then the next tax Tuesday, I can answer that one and Jeff can answer that one with a little bit of research behind it.
Nexus question, “I’m a resident in California, I’m moving to Arizona. I plan to keep a single family rental in California. The California houses and the land trust is owned by Wyoming LLC, does California have the right to tax my pension income after I move in addition to my income in California rental.” Shelly the answer is, it depends on where the rental was earned and whether you’re taking out over a 10 year period then the answer is, no. and my guess is that you’re going to be a big no. They will be able to tax technically the rental income that is being derived from California but for the most part, that’s going to be zero.
Jeff: A really important number to remember when you have a property in more than one state is 183. That’s typically the number of days you need to spend in a state to be a resident in that state.
Toby: “How do I get the 501(c)(3) tax exempt?” Marie, that’s the 1023 application. Yes, it’s the 1023 application. So with a nonprofit, I always look at these things in threes, we file with the state which is a corporation. We document it to make sure there’s no shareholders which is for private parties, and then we file with the feds and we’re telling them we want to be an exempted organization and that exemption is done via 1023. So we go through that process. When we set them up, we set up about 3,000 of them successfully.
“How do you create an LLC and an IRA?” Darlene and Ken, what you do is you have the IRA custodian internal contract with a company like us and we create the LLC, or we set up a 401K, roll the IRA into it and then we’d let you do it so you don’t need a custodian. “Is this recorded and will a replay be sent out?” Robin, it’s made available to anybody who’s platinum and then I’m cutting out a bunch of the Q&As and will throw them all over the internet. The recording, yes we record them. Join platinum, it’s fun.
“If I sell a partial note to a family member from my QRP, is that disqualified?” it depends on the type of family members. When they’re your kids, yes. If it’s to a brother or sister, no. then you can do it. When you make a contribution and that’s just the whole disqualified person argument we had earlier. So you can always ask again, ask the question specific to your situation, we’ll give you a very specific answer.
But just know that if you sell a partial note out of your QRP, it depends on the relationship of the family member. If it’s lineal, you have a problem. Which means kids, parents, grandparents you have a problem. If it’s horizontal, siblings, not a problem. If it’s the spouses of the disqualified person, you’re going to have a problem. “Investing in LLC for holding rental property, how does one avail to a 1031 exchange?” Here’s how it works, so I’m not going to worry about this. The 1031 exchange, you have to have a 1031 exchange facilitator.
The LLC has to buy the next property. So you sell one and buy one within 180 days and there’s some other roles in there about when you identify it or you do a reverse exchange where you buy the replacement property then sell the other property within 180 days. But neither cases, in the name of the LLC, you don’t have to do anything else. “I should be able to still qualify as an investor and still be active in real estate by investing more than 750 hours.” yes, but in actually is a full time job. So if you have a full time job as a real estate professional, then you’re good. But remember, your activity as a real estate investor has to exceed your activities of any other profit making activity.
So if you work and you work 1,500 hours, even if you did 1400 hours as real estate, you are not a real estate professional, still below that 1,500. Investment in LLC for holding rental property, how does or somebody asked that. If you in invest funds to have an equity in a project, oh my god, this one’s going to kill me, built by someone else, I’m trying to think what this is. So you’re investing funds for a piece of an LLC in which you are passive and they are a builder, are you a dealer? So Judith, no, you are a passive investor in an active business, is what you are. I see what you’re saying, what she’s asking is, “Hey, I have Bob the builder come up to me and says, ‘Hey, we’re going to build this big apartment complex, we’re going to develop and everything. You put in $100,000 everybody else puts on $100,000.'” You are passive. You are not considered the dealer.
Here’s a fun one, did you already read this one?
Jeff: No, I haven’t read this one.
Toby: Okay, I am planning to receive social security benefits at 62, and currently not employed. I do private lending to real estate investors through promissory notes. So I do receive interest income in the amount of $40,000 to $50,000. Will this affect my social security benefits? At what point to social security benefits are taxable? So Joe, the answer is that there are certain types of income that are exempt from calculations, social security, Jeff you know off the top of your head?
Jeff: If you’re receiving earned income and that’s all social securities could ever know about, so we’re talking about self employment income, W-2 wages, that’s going to affect your social security benefits.
Toby: But if you’re just receiving interest income, is it going to affect it?
Jeff: Well, here’s the thing, if you’re in the business of lending money, we would typically set you up as a business, either on schedule C or through an S-Corp or something. That interest you receive wouldn’t be, interest income, it would be business income. You’d be able to deduct certain expenses from that income…
Toby: We got to look at it, because usually you’re going to want to be treated as active, in this particular case you’re not going to outdo yourself.
Jeff: The downside of this is, any money, any net income you have from this business of lending money is going to affect security until you’re 65, or 67, full retirement age.
Toby: Joe, the answer is, we may one isolated into its own taxable entity, so that it doesn’t affect you. We may.
Jeff: I kind of feel like this would be in a great place for an S-Corporation. It’s not earning income flowing through to them.
Toby: Would he have to take a salary?
Jeff: Yeah there we go.
Toby: I’m going to take a look. Joe, that’s a great question, could you submit it to the webinars at Anderson Advisors, so we can research it. In that way we can hit it in two weeks, to get you a much more thoroughly research, because you’re asking a very complicated question. That’s just not going to be at the top of our head. We’re going to make sure that we don’t step on a landmine.
Jeff: So the answer’s, maybe.
Toby: My wife and I are the only shareholders and we both take a one third salary. No, you should take about one third of the net profit as salary, total between the owners. So greater than 2% shareholders or you and your spouse, so you could each take, I’ll throw numbers out, let’s say you made $100,000, you could each take up to $18,500. If you’re under 50 and immediately dump it into a 401K and not pay any tax. So, “Hey we like that.”
We have a medical coding business, perfect, yeah, so that’s when we want to take a look at. “This is so much fun, really appreciate it,” I hope that’s not sarcastic, Al. “I opened a couple of LLC, I’m going to use to purchase flipping, can I put them on hold until I do? Do I have to do tax returns?” It all depends on what you’re doing with those, the answer is, yes you could put them on ice. “Thanks for the answer on UBIT.” Diane, no problem. See we actually do answer questions here.
“What are the legal benefits of incorporating in Puerto Rico, if any compared to Nevada?” If you live there, I think they give you 4% tax rate, but you actually have to reside there. There’s legal benefits, not really any, other than the tax benefits and the fact of the matter is Puerto Rico has Spanish law, which means they could probably take your company from you. But you can still go down there and Jeff…
Jeff: Well, I mean, there are certain industries that have great tax benefits pharmaceutical companies was always a big one. Some of those old laws have sunsetted but might be a good opportunity.
Toby: Cool, look at all these questions. All right, some people are saying nice things, great. I like nice things better than, “You guys are jerks.” In 2017, I was self employed under my LLC, I have not filed my taxes yet and not considering retirement. Would I still be able to do that? What is best options?” Casey, are you under—self employment under my LLC. So it depends on whether—it was an S-Corp. Did you file an extension because you would be able to do a retirement plan either a sub-IRA or if you already had the 401K then you can make a contribution from the company for it. It would either be a 401A or a 401K. or sub-IRA, I think those are going to be your…
Jeff: And if you do extension, you have 11 days to get it done.
Toby: Yeah, you have 11 days. Casey, get off your butt. All right, Brian wants advice with the start up pre revenue, he is offering 10% stock, “Not sure I want ownership that subject to capital calls, expectation, potential—is it better to take an offshore [inaudible 01:06:53] until there’s more value in the company?” It really depends, so Clark, nice to see you. Awesome. I know Clark’s brother very well, studs, nice family.
All right, friends, if I was going to have a piece, the whole thing is, if I’m putting money into an endeavor, it’s going to be, “What am I going to get out?” It would really depend on the agreement, I don’t want to be subject to having to put more money in, nor do I want my interest necessarily being diluted by somebody who is. So one of the one of the ways you can do it, is sometimes do it is a convertible note where you loan the money, so you know you can at least get it back, but it’s convertible into equity at the fair market value at that time.
You guys can actually agreed to this ahead of time. So that if you decide you want to contribute it, you see they’re doing what you want but then you convert it into equity. Otherwise it just remains a note that they pay you on. Clark, that’s probably the route I would go.
Jeff: But the assumption here is, this is a C-Corporation he’s talking about.
Toby: I don’t even care…
Jeff: Well if it’s an S-Corporation that we wouldn’t be able to have all these secondary notes and stuff.
Toby: If it’s an S, I could so convert it.
Jeff: Could you?
Jeff: As long as it converts into the same…
Toby: Yep. The risk is I don’t want to have a convertible debt to anything other than an individual that would qualify for S..
Toby: But I don’t see S-Corps raising money this way. It’s almost always C-Corps with partnerships. So the ones that I’ve been personally involved in, we did three levels of financing this exact way with Vegas Tax fund. That’s the little Tony Hseih group and they dumped a bunch of money to a company called Role Tech. You can look them up online, because we exited that wanted with the sale to Brunswick. In a way they did all their money was purely—that was a C-Corp, but it was purely through convertible notes.
All right, “What are the best tools you can recommend for tracking time mileage and expenses for real estate investors? My desire to be paperless and get everything out…” People use Taxbot for mileage, it’s mileage IQ, MileIQ, I think it’s the one that I use, but if you’re tracking time, it’s just using—sometimes is just using your calendar or spreadsheet. Let’s see, “Is full time realtor, a real estate professional?” Chances are, you’re going to aggregate and all that. “I understand and agree.” I’m not sure I understand that.
“I executed a 1031 exchange where trust all the owned property, sold it, and took title of the up leg property in the trust using 1031 exchange. But now I want to transfer up leg property into an LLC.” Diane, there is no time restriction that you have to hold it as long as you are the one and still the end beneficiary. If you extend loan through an LLC owned by Roth IRA, they want to transfer, sell the remainder, but then season it out to a lower interest rate. Can Roth continue to receive the full payment from the borrower and the relay the portion?” Yes, as lines is non-convertible, same as you do in an S-Corp.
“Is the answer the same best self administer S 401K? So what they’re asking is,” If you extend a loan through—we’re just going to call it the Roth IRA, because the LLC looks right into it from a tax standpoint. And then you sell the remainder of that then season notes. So you start collecting and then you sell the note because it’s doing really well and you say, “Hey does anybody want to pay me for this?” I know a guy that that’s what he does. He puts the notes together and he sells his notes out and so he can get the money to go to another one and he aggregates them altogether, they call it flying in flocks.
The lenders flock together and together they do a loan and he sells his portion. Yeah, you could sell it and then you can continue to receive it and keep a portion of it. the only issue you have is if it’s a convertible note then you wouldn’t want to do a convertible note because boom, that Roth IRA depending on the type of entity if it’s an S-Corp you’d kill the S-Corp’s status of it. How do you put an LLC on hold? You get quite literally do nothing with it or you just pay the state and then you file a non activity return. You say it’s not doing anything.
So you’re allowed to do that or you just do nothing. Which is what I tend to do. It just depends on your state. If there’s not much penalty then I just kind of sit it and then two years later I might reactivate it. Will real estate holding LLC taxes partnership qualify for the 20% passed through deduction? Yes, it will. Here’s the deal, as long as it’s not triple net property. What she’s asking is, “Hey, I have a whole bunch of LLCs and they all receive rental income and there’s a net income amount.” let’s say it comes through with $50,000 there’s something called a 199A deduction that was enacted by the 2017 tax cut and jobs act.
And it gives you a 20% deduction off that amount or 20% of your taxable income whichever one is less/ but if you earn over a certain amount so for individuals it’s over, $100,575 if it’s a married couple it’s $315,000 which is going to make your head hurt I’m going to suffer memory here. Then you scale up and then you have a new test it’s 50% of the W2 income that’s being paid on that particular business or 25% of its W2 income and 2.5% of its property. See we tax geeks love this stuff.
No, we don’t. Nobody likes this stuff. So the answer is yes, but you may have some phases that we’re going to be cognizant. We can control your income though, because at the end of the day it’s taxable income and not adjusted gross income, that’s the important part which means we can make contributions to retirement plans give to 501(c)(3), offset money through a C-Corp, there are tools that we have. Even it’s considered passed through income and yes it’s already been handled by the proposed rags.
The only type of rental income that’s not included is when you do a triple net lease on commercial property because you literally are doing nothing. That is it, we’ve gone way over again. Jeff you’re talking too much.
Jeff: I know, it shut me up.
Toby: I know. Anyway, shoot your questions to email@example.com these are fun and again, we’re going to break it into pieces and start sending them out. If you are a platinum, you can come in and listen again. If you’re pretty confident about this, there was a couple of you guys that asked some very unique questions that I would love it if you would email me so we can research them for the next one.
If you have any questions that come up in these long multi part questions, feel free to email them and if you’re okay with it, what we do is we’ll just pull your last name out of it and we will make sure that we are answering your questions so we’re not violating your privacy, but that we’re getting a benefit to the group. Thanks guys. Until next time. Thanks Jeff.
Jeff: Thank you.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
- Claim your FREE Strategy Session, and learn how Anderson Advisors can protect your assets.
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- For all things investing, check out the Infinity Investing YouTube channel
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates