Toby Mathis and Jeff Webb of Anderson Advisors like to spread tax knowledge to the masses. So, here they go again. Do you have a tax question? Submit it to taxtuesday@andersonadvisors
- My parents own two homes and willing one each to me and my sister. What’s the best way to transfer the properties? Transfer inherited appreciated property through will/ trust
- If I offer a small-term life insurance policy for my employees, will tax benefits outweigh costs? Yes, but tax benefit of deducting premiums won’t equate to premiums you pay
- What is an accountable plan? How is it formed, described, executed? Plan must be between employer and employee; you account for certain expenses, we reimburse you
- How would I be taxed, if I get a loan on a 401K to use toward buying real estate investment properties? A loan isn’t a taxable event; you repay the loan through the 401K
- What’s a DB plan? Defined benefit; defined contribution (DC) defines amount you put in
- As a sole proprietor, can I write off life insurance premiums as a business expense? You can’t write off insurance premiums unless you’re an employee; you don’t get deductions
- I’ve invested money into tech startups that have failed. How can I write off these losses? It’s capital loss, and you need capital gains to offset it; can deduct up to $3,000 a year
- Can C Corp losses be applied to a personal 1040? Depends. Losses can be applied, if corp is liquidated, it’s a traditional corp, and 1244 stock election was made
- Does Anderson Advisors have a favorite app to track mileage? Anderson Advisors doesn’t, but Toby Mathis recommends MileIQ
- Can I get advice on how to save money from your company? Yes. We’re happy to help, just contact us to talk to any of our representatives
- Can I get the $500 credit for my 17-year-old son? Child tax rate cuts off, if they’re 17 at the end of the year
- If my child earned $11,000 in 2018 and no tax, does he have to file his own tax return? Yes. If you don’t have a tax liability, you still have to file a tax return to claim it
- If my C Corp didn’t make money its first year and all the expenses I had were for education, will I end up paying money to the IRS or receive refunds? The corporation would have the $40,000 deduction; it can reimburse $40,000 as a loss, not a deduction
- How do I structure, if I’m working for another company as a day job? Doesn’t matter. You can work for multiple employers and set up your own companies
- Do I have to hire my wife as an employee to give her a pension? If you want to put money aside for her, she needs to work; you can’t just give her a salary for doing nothing
- Can I invest directly into real estate in an opportunity zone or only in an opportunity zone fund? Put money into the qualified opportunity zone and invest through a qualified opportunity fund via an entity, not individually; you can take capital gains
- What’s the best accounting software to use to run an S Corp? QuickBooks is the most used and people are familiar with it; also have a good bookkeeper
- I’ll be 59 1/2 in March. Can I use my 401K to purchase real estate investments without penalty? How is the tax handled? If you pull money out, it has to be after you’re 59 ½, not a day before; you can make a 72T election when you’re 55 to spread out contributions
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Full Episode Transcript:
Toby: Hi, guys. This is Toby Mathis and…... Read Full Transcript
Jeff: Jeff Webb.
Toby: Hey, we’re here for Tax Tuesday. Before we get started, let’s just do a quick sound check. Are we coming through loud and clear? If you can hear us, just let us know. Go into that little question and answer and, there we go, we’ve got a ton of people saying, “Yes.” You guys are fast today. All right, so typical disclaimer. Tax Tuesday rules: We ask live questions all throughout. Now, we just asked a whole bunch of people that now say “yes” as their question. I’m just teasing.
We have a whole bunch of questions that are going to be asked, and then we have ones that we bring in that we actually send out to you guys ahead of time, a bunch of them that we answer. We get emails all the time at this firstname.lastname@example.org, and today is no different. We have pages of them. It’ll be interesting. If you need a detailed response, like if you have something that’s very specific to you, then just make sure that you’re sending that in via the platinum portal.
If you are not platinum, give us a call so we can make sure that you are part of the platinum portal or, if it’s really detailed and you’re needing to consult, make sure that you’re a member of our tax department, that you are a tax client, that we’re handling your return and things like that. All right, that said, this is fast, fun and educational. We like spreading tax knowledge to the masses, so let’s do that again.
If my slide would actually advance, that would be really cool. It’s been thinking all day. My computer’s been thinking. Have you guys ever had a computer that sits there, and you’re always thinking about it’s ready to crap out on you then it comes through at the last second. Let’s see. I’m going to back this one up and go back to the web. All right. Perfect. Our questions that we’re going to be answering–and we’ll go through these one at a time.
“My parents own two homes and are willing one each to my sister and myself,” so it sounds like siblings. They’re each going to get a house. “They went to a local attorney to write up the request. I don’t know exactly how the attorney is planning to make the transaction upon their death, but wanted to ask how best to have these properties transferred before bringing the subject up to my parents.” It’ll be helpful to know where you’re at from a state standpoint because that’s going to dictate some of the answers.
All right. Another one is, “If I am to retire from selling real estate and I have built up an income stream of commissions 10 times higher than the ‘average’ agent, I would like to sell my business and the rights to use my team name for several years to another agent team. Since capital gains tax is much lower than my income tax bracket, I would like to value a large portion of the sale as ‘good will’ so that it could be taxed at a lower rate than the commission splits that I have been receiving for several years. How do I value the goodwill component of the sale, and can I spread it over a number of years for tax purposes instead of realizing it all in the first year of the transaction?”
We’re going to answer that one, too. “If I offer a small term life insurance policy for my employees, will the tax relief benefits outweigh the cost?” What’s next? “You repeatedly mentioned having an ‘accountable plan’ but I didn’t understand what that meant. Exactly what is this? How is it formed, described, executed? What should the plan address?” I’ll answer that one. “How would I be taxed if I get a loan on a 401K to use towards buying real estate investment properties?” And then, last but not least, “I’m interested in learning about DB plan to maximize the retirement contribution for a one owner/employee C Corporation (medical practice).”
First off, great questions and keep them coming. We’re going to go through these. Second off, let’s just start diving into them. There’s no time like the present. I didn’t even give you guys niceties and say, “Happy Thanksgiving,” and all of that stuff. I’m just horrible today.
Jeff: You were just thinking and unsure.
Toby: Yeah, Happy Thanksgiving and all that good stuff. I don’t know. I dream of turkey at this point. “My parents own two homes and are willing one each my sister and myself. They went to a local attorney to write up the request. I don’t know exactly how the attorney is planning to make the transaction upon their death but wanted to know how best to have these properties transferred before bringing the subject up to my parents.” Jeff, do you have anything on the tax side that you want to talk about there?
Jeff: From my point of view, inheriting the property is going to be the best way to go, especially if it’s appreciated property.
Toby: Somebody just responded. “It sounds like it’s in Ohio.” Actually, I can give you a great Ohio example because this is real life. The parent wanted to get everything to the kids, and this is when the estate tax exclusion, which is now at $11.2 million and about to go up per spouse–this was when it was about $11 million and everybody’s freaking out like, “Oh my goodness, your state’s going to be too big and you’re going to get clubbed with this estate tax.” This attorney set up a limited partnership and transferred the properties into this limited partnership and then started giving the kids an interest in the limited partnership.
Jeff: Increasing it every year?
Toby: Increasing the contribution every year as he would gift them, and you can give $15,000 per recipient per year without even going against your lifetime exclusion. The reason that he did this was to avoid this tax that ended up being a non-issue. It actually passed and this estate would have been much smaller, but as Jeff just noted, what they gave up was something called a step-up in basis. Number one, the value of these properties will be its basis when they die, which means you want to make sure that this is transferred via either a will or a living trust. Somehow, it’s transferred to the two of you.
I’m assuming that there’s no other kids and that you’re the primary beneficiaries of the estate, but the easiest route would be to use a trust so that you don’t have to wait for the state and you don’t have to wait for the court to do its thing. I’m not familiar with Ohio off the top of my head, but most states have a cool-down period where they don’t allow the transfer of assets, especially real estate for many months after somebody passes.
The reason they do that is they leave the estate open for creditor claims. You could actually petition the court to perhaps sell the asset but it would be still part of the estate. On average–and I can only give you averages–these estates take somewhere between 18 months and 24 months to complete. Now, that’s an average. Somebody’s always going to say, “Well, if you have no assets, it’s really easy.” I’m like, “Okay, that’s really easy.” That’s on the low end, then there’s the really difficult where it takes years, and years, and years like Prince, where you’re going to be in court for many years or Michael Jackson, all these things where their big assets are going to take a while, but the average means 18.
Realistically with real estate, the minimum is about six months so I would tell your parents to save time and money to not give you the asset before they have passed but to leave it to you and to draft a living trust to do the transfer. That would be the simplest. Somebody else may say a paid-on-death or this, that or the other. That does not address all the issues that could creep up in the meantime, and so I would caution against those types of things and I’ll just give you a couple.
This is a tax webinar, but let me just give you the freight of horrible-s. Your sister has a creditor, or going through a divorce, or has special needs, is older in life and has a whole bunch of medical bills. They would just end up taking the house. With a living trust, you can protect that with creditor protection and special needs provision automatically in the trust, which you could use a good estate-planning attorney. They do that automatically.
If you use us, for example, I put it in every single document I draft, but regardless, you go to the lawyer and say, “Hey, we want to make sure that these things are protected and kept separate,” et cetera or, if somebody predeceases you, it already covers, “Here’s who gets it afterwards.” We use fun language like per stirpes and things like that, which is not a disease. If your past goes to your children, your portion only, so it makes it really easy instead of doing some craziness. All right, people are asking lots of questions. Holy cow. We’re going to get to them, but I can’t help but look at all these questions coming in and thinking, “We’re going to be here until midnight, Jeff.”
Jeff: He’s going to keep me here over the night.
Toby: All right, which will be fun. Anyway, I hope that answers that question. From a tax standpoint, the best thing is to get that step-up in basis when you pass, which means you could sell those properties and pay zero tax on it. Maybe the transfer tax, but that’s it. Okay. “If I am to retire from selling real estate,” so you’re going to retire and you want to sell your business, let’s just cut out all this good will and all this jazz. Goodwill is intangible assets like your customer list. Then, there’s the physical stuff like your printers, and your computers, and your chairs.
Really, what we’re talking about when you’re selling a business is, more than likely, going to be a lot of–it’s going to be good will if it’s your name and things like that. You have a couple of choices here. The first thing you do is you decide what it is you want to own. If you’re selling the name of your business, its customer base, all of its contacts, you may want to just sell your company, and your company should be an LLC or a corporation, depending on the stage and depending on what you’re doing.
If you’re a broker, it should never be a problem. If you’re a broker salesperson or a sales agent and you’re not the broker, then there’s going to be restrictions on your state as to how your company could be set up. The marketing should always be allowed to be set up in an entity 100% of the time. Even if the commissions don’t go in there, you could still have a marketing company, and that’s what you sell, which is, “Hey, I have all this value in having been in this business for a long time.”
If you sell that business, that is a capital asset and, frankly, you don’t care what they’re allocated as because you could just sell the capital asset. They’re buying it. It’s like buying Microsoft stock. They’re not writing it off. You’re getting long-term capital gains and, yes, you could do that on an installment sale and spread that out over many, many years if you want to. Option #2 is something called a 338 H8 or H10 elections. 338. That’s all I know, and the sub-section is H. You’re going to want to write that down in this case is this you.
Under this, if you sell an S Corp–and I can say it’s possibly even a C Corp but I think it’s almost always going to be an S Corp–to another S Corp, so somebody sets up an S Corp to buy your S Corp, you treat as capital gains; they treat it as an asset sale. Under that circumstance, now they’re going to want to allocate the purchase price, and it’s not your problem because it’s capital gains to you. It’s their problem as to how they allocate it. Goodwill is amortized over, what, Jeff? 15 years?
Jeff: 15 years.
Toby: Yeah, 15 years, so you’re spreading it out over 15 years. They get to write it off. You get long-term capital gains. Everybody’s a winner. 338 is the Everybody’s a Winner Provision. The last thing you could do is if you just have your name and you want to license it, you could do like version does and you just sit and you own the license, and you license it out and you receive income based off that license to use your name. It sounds kind of weird, but if you have a trade name, this would work.
I don’t think it works with a proper name because they’d probably say, “That’s false and deceptive advertising,” but if you have a name for your company, you may say, “Hey, I’m just going to license it off,” and, in that case, it’s ordinary income but it is not subject to self-employment tax. When you pay taxes, you receive it. In all of those situations, the best one for me is the sale of your company. That’s the best thing to do, is to sell your company.
Again, there’s always a licensing consideration because they say clients aren’t chattels so you can’t sell a client but you could sell the file. It’s kind of weird. Anyway, I hope that makes sense. If you’re ever selling a business, the seller always wants it to be the sale of the business because it has liabilities in it and all sorts of stuff, and you get long-term capital gains. The buyer always wants to buy the assets. The Everybody’s a Winner Provision–that nobody seems to know about there in the accounting world because I do this stuff every day and I’m always shocked–is 338, and that’s an J8 or H10. I always forget which one it is. See, I don’t even know.
Jeff: We know where to find it.
Toby: We know where to find it. He has this big book sitting on my shelf. All right. “If I offer a small term life insurance policy for my employees, will the tax benefits outweigh the costs?” Jeff, do you want to play with this one?
Jeff: Yeah. This is a situation where these term life policies are going to have a certain cost, so I kind of look at this as more of a benefit for my employees rather than for myself. The cost is usually relatively low. Mostly, these policies are under $50,000. While you do get the tax benefit of deducting those term life policy premiums, it’s, of course, not going to equate to what you’re actually paying for these premiums.
Toby: Yeah, you’re not going to get a huge benefit. I tend to not see too many term policies. Sometimes, you’ll get it as part of a benefits plan. They’ll come in and they’ll say, “Hey, we have these great things for your employees. They could elect to have insurance,” unless you’re Walmart and you insure your people without letting them know and then you get their death benefit. You’ve heard about that, right?
Jeff: Yeah, I’ve seen that.
Toby: Sometimes, I know why they do it. They want to make sure that they get made whole in case they lose something. The answer to your question is if you’re going to do term life policy, it’s probably–you’re going to be limited to $50,000-death benefit to be deductible as part of a group plan, and is it really going to be worth it? It’s better than nothing, and it’s a great employee benefit. Is the tax benefit going to get you anything? No, you may as well be paying them.
Jeff: It may be a situation where you have employees who are not making a lot of money on payroll and, for them, this is a nice benefit because they may not have life insurance.
Toby: Now, keep in mind: They’re not paying tax on the benefit and you’re deducting it. Again, I tend to be crass about this stuff. You’re better off just buying them computers or something, but it’s a benefit and it’s something that you would want to talk to your benefits administrator, whoever you’re buying your insurance through, for group health and see if they have that life as an add-on for really inexpensive. It might be $40 or something so it can sometimes be cheaper.
All right. “You repeatedly mentioned having an accountable plan, but I didn’t understand what that meant. Exactly what is this, how is it formed, described, executed? What should the plan address?” Okay, an accountable plan in a nutshell has to be entered into between an employer and an employee. The accountable plan is going to say, “You account for certain expenses and we’re going to reimburse you for them.”
Jeff: Whereas a non-accountable plan is usually some kind of allowance that you’re giving your employee. “I’ll give you $1000 a month for a car.”
Toby: Yeah, that’s a great example, but the accountable plan is not taxable to the recipient. If I give you $1000 for a car and I say, “Hey, we’re going to give you a $1000-car allowance,” that’s taxable to you. It’s still deductible to the employer but it’s taxable to the recipient, and the employer feels really benevolent but, really, what they did is they gave you $1000. In an accountable plan, we say, “Hey, turn in your mileage and we’re going to reimburse you 54.5 cents a mile. You don’t pay tax on it and we get to write it off.”
Jeff: It’s the same for almost any reimbursement that you’re going to do between yourself and your employee or between a company and an employee. Your medical reimbursements, they need to show you evidence of their medical expenses for it to be an accountable plan.
Toby: Yeah. Now, here’s where it gets really fun. This is really important, by the way, guys. The reason I talk about accountable plans is because they’re only available. If you’re the owner/operator, you’ve got to be an S Corp or a C Corp. It does not work if you’re a sole proprietor or a partnership, and I say that until I’m blue in the face, but accountants sometimes just refuse to get this. An accountable plan has to be an employer-employee relationship. You cannot be an employee of your own sole proprietorship. You cannot be an employee of your own partnership. You’re either the proprietor or you’re a partner in those situations. If you want to be an employee, you’re an S Corp, or a C Corp, or an LLC taxed as an S Corp or a C Corp.
That out of the way, now, the accountable plan could do things like reimburse you for your cellphone and you don’t have to pay any tax on it as long as it’s at the convenience of the employer. It can do things like reimburse you and say, “Hey, we need you to have a computer so we’ll reimburse you the computer.” “We need you to have a home office,” so they reimburse you for the use of your home. There’s lots of little things that become deductible when you have an accountable plan, and it does have to be in writing, and it has to be something that can’t discriminate. It has to be for people that are doing certain activities.
I can’t decide to be willy-nilly and just give myself a huge amount of benefits and hose everybody else. No, you’re giving it to your employees and you’re saying, “Hey, if you’re in this category, like if you’re somebody who travels, then I’m going to reimburse your cellphone and your computer and reasonable internet and any of your expenses while you’re out on the road. If you have to get meals and lodging, then we’ll reimburse you for those. If you have to use your car, we’ll reimburse you for that. If you have to rent a car, we’ll reimburse you for that. If you need to get plane tickets, we’ll reimburse you for that.” All those things become reimbursable. Isn’t that fun?
By the way, somebody says, “Is it available on the portal?” No, it’s actually in our documents. When I create a plan, when I actually create the entity, that’s part of your organizational meeting almost always. I always do it for you guys if you’re one of our clients. Now, if you want to take advantage of these things, I’m going to let slip the fact that we had that meeting. We had a wonderful live cast yesterday of 2018 Year-End Tax Planning. I went over a bunch of those.
We also go over this tax-wise and, in that meeting, if I could figure out how to get my right screen, I’ll tell you what the website is because one of my computer guys actually told me what it was. It is Anderson Advisors. I’ll write this out because god knows I’ll goof it up otherwise. This is my computer guys. They love doing dashes. I have a bunch of boxes in front of it so I’m trying to see if I can read those, too. I’ll give you this at the end as well. If you go to that, you can watch the entire recording. I know you obviously love webinars so you should really love live cast. In fact, we had a lot of fun. We will repeat that one again because, again, a little bit of tax knowledge goes a long ways.
All right, let’s go to the next one. Cue the next slide. “How would I be taxed if I get a loan on a 401K to use towards buying real estate investment properties?” Jeff, I know you’re dying to answer this one.
Jeff: I am dying to answer this one. Here’s the thing with a loan: A loan is not a taxable event. The stipulation is that you have to repay the loan through your 401K plan. Let’s say you take the maximum amount allowed of $50,000. You’re going to need to repay that over a period of five years.
Toby: Here’s the deal: You have a 401K you can borrow up to $50,000 per person limited to 50%. It’s whatever’s less, 50% or $50,000. If you’re a husband and wife, then you could borrow $100,000 out of your 401K. Now, you say, “That’s great. I got an IRA,” then you roll it into a 401K. You set up a company and you set up a 401K to have it sponsored, roll those funds in and then you get it. Now, that is not taxable, too. Now, Jeff, the big one is let’s say that I’m paying interest. Could I use that as investment expense, the interest that I’m paying back, because it is on a loan that is being used for the purchase of real estate?
Jeff: I would want to say yes.
Toby: Yeah, I think so. How do you get taxed on it? You don’t get taxed anything on the money that you borrow and you write off the interest because you’re using it for your investment properties.
Jeff: Here’s a nice thing about the interest: You’re repaying the interest to yourself.
Toby: Yeah, you’re getting it back into that plan. You’re going to have to pay tax on it when you take it out after you turn 70 and a half unless it’s a raw Roth.
Jeff: No. One caveat on this: If you fail to make your loan payments as scheduled, then this no longer is a loan; it’s a distribution to you, and then there are tax consequences.
Toby: Yeah, the amount that you fail to pay back becomes a distribution, which means you get penalties and you get to pay tax on it, so don’t miss your payments. If you borrow money out of a 401K, just make sure that you pay that back.
Jeff: It’s really cheap money if it’s a loan. It’s expensive if it’s just distribution.
Toby: Isn’t that fun? That’s why 401Ks rock, guys. If you can use them, you can use them as a little bank, paying yourself back reasonable interest. Before you say, “Well, I’m going to pay back 20% interest,” you can’t. You have to use the (FR) federal rates so it’s usually around 4% or 5%. It was down at 3%. Now, it’s going up. I wish they would quit raising interest rates. All right. “I am interested in learning about a DB plan to maximize the retirement contribution–” how did we get so fast? It seems like we just came right on through these today. “I’m interested in learning about DB plans,” basically, “So, I’m a one-owner/employee of a C Corporation (medical practice).” Fantastic question. By the way, what is a DB plan?
Jeff: A defined benefit.
Toby: Yeah. All right, here’s how it works. Conceptually, in a defined contribution–I’m going to call that a DC–we define the amount that you get to put in. For example, let’s say that we’re putting money into a 401K and I’m deferring it. I know I can defer if I’m under 50 18,500. That’s a defined contribution. I’m defining the contribution. In a defined benefit, we define what comes out of the plan, and you’re allowed to max that out at about $220,000 a year.
Before you get all excited and say, “Great, I can just immediately say that I need to take $200,000 out a year,” it’s based on what a licensed actuary does, is they look at your salary. I think it’s three out of five years, and they do this average amount. They say, “Hey, basically, you’re making $150,000 a year,” and they average that out and then they calculate how many years you have until retirement, how much interest’s it’s going to make, what inflation’s going to be, what your income would keep going up to and all these things. They come up with a dollar amount, and that’s the dollar amount that you can put in.
Now, I’m going to freak some of you guys out. You could quite literally–and I do have clients that put in over $600,000 a year into their defined benefit plan. It is a tax-deductible contribution. They do pay tax when they take it out. Let’s say you have somebody who’s 50 who’s making a couple of hundred thousand dollars a year. They’re going to be able to put away a ton into that plan and defer their taxes. Let’s say you’re making $1 million a year and you’re like, “Oh, goodness, I need to get some tax relief.”
You may be putting half a million dollars a year into a plan and you just cut your tax bill by more than 50% because that $500,000 that you just put in there was at the highest bracket. The first 500 you make has all sorts of deductions against it and lower tax brackets. I’ve just cut my taxes significantly and then when I take it out, I’ll be retired so hopefully my taxes are lower. I hope that makes sense. If you’re in a medical practice and especially if you’re in a C Corp, I’m going to run some numbers.
I’d be looking at saying, “Hey, first off, in a professional practice as a C Corp, you’re going to be at 21%.” Now, you’re probably used to having your profits taxed at the 35%. Now, it’s going to be 21% so you got a huge tax cut this year so there’s a bonus. Everybody else is walking around, going, “We don’t care about that. This doctor got a 14% decrease in the tax rate. What!?” Yeah, it’s pretty big, but we’re going to look at it and say, “Is it still better off to dump this money into a DB plan?” because if you could dump a few hundred thousand dollars a year into a DB plan, they’re like magic.
Even if it’s only a couple of hundred thousands, who cares? It’s a tremendous tax break. If you’re in California, that couple of hundred thousands just save you a hundred grand in taxes. Then, you move to Texas when you retire. I think I’m funny.
Jeff: You are hilarious.
Toby: Everybody from Texas goes, “Why would you move here?” “I’m living in homestead, no-income tax.” Questions, you can always send them in to Tax Tuesday. I have a whole bunch to go through. Jeff, I’ll be popping those up here in a second. Then, before we get too far ahead of ourselves, we’re going to answer a whole bunch of questions. Here’s the 2018 Year-End Tax Planning Recording. It’s Anderson Advisors. I went there. It works, and then you can always email us. Now, I’m going to start answering a whole bunch of questions. Jeff and I are. I’m going to pull over a bunch of questions to you, Jeff.
Jeff: Because I’m old and can’t see.
Toby: I can barely see. Are you kidding me? Actually, I went to Metallica last night. I could barely hear at this point. I was like, “Wow, I did something to myself.” All right. “As a sole proprietor, can I write off life insurance premiums as a business expense?” Jeff?
Jeff: I usually don’t suggest that you write off life insurance premiums because it can create issues when you pass and the proceeds are paid out. What are your thoughts on this?
Toby: You’re not going to be writing off the insurance premiums, period, as a sole proprietor.
Jeff: That’s true.
Toby: You just can’t because the only way you could get is if you’re an employee.
Jeff: With a Schedule C, it’s a personal expense.
Toby: Yep, so you’re not getting any deductions. Can you write off premiums? No. Next. That’s just horrible but that’s the answer. The good news is the death benefits are tax-free. What I like to do with insurance is you use it as almost like an investment vehicle which all of your insurance guys are going, “You can’t say investment.” Yeah, I can. I’m going to say you use it because the cash value can compound tax-free, and I can use it for long-term care, and I can use it as my own old piggy bank.
Jeff: What I often see is professional businesses using insurance as a retirement means…
Toby: Yep, that’s what we do. I have three policies. I use indexed universal life partly because you can’t lose money when the market goes crazy, and that’s the whole–we wrote a book on it called The Private Vault, and you can get that on our website and you can ask your advisor for it. All it is, is how to use these products for your benefit, but you can’t write it off. Here, somebody says, “I’ve invested a good deal of money into tech startups in the past that have failed. What do I need to provide your tax team as they prepare may past taxes to write these losses off?” All right, that’s going to be your favorite.
Jeff: I’m curious as to whether he was actually buying stock, or loaning money, or what means he was using to invest.
Toby: All these pesky accountants and their questions, right? Let’s assume that you loaned the money and you said, “Here’s a loan.” Actually, he said “invest” so let’s just do what it is. You invested money. You bought equity. You bought shares of a company. What kind of loss is it?
Jeff: It’s capital loss.
Toby: You need capital gains to offset, and if you didn’t participate in it, what’s your limitation, Jeff? Let’s say you lose $1 million. How much would we get to write off?
Jeff: You get to deduct as much as $3000 a year.
Toby: $3000 a year against your active income.
Jeff: For the next 3000 years.
Toby: Yep, and that’s the joys of investing in startups. That’s why people like to do weird things like loaning the money because maybe you can try to do a bad debt or something like that.
Jeff: Yeah, and when we’re talking about loaning the money, if you’re loaning it through an entity whose business is lending, then that’s an ordinary loss and you can deduct that all day long.
Toby: Yep. See? You’re supposed to talk to us before you do these things, and then you’d view convertible debt and you make it seek and convert it into equity if the company takes off and does really well.
Toby: Otherwise, you can write it off. This is why you need accountants. This is why you should immediately contact Jeff, and he can say, “Let’s go back in time and fix it.” All right. “I have multiple companies. Can I take money from one company I own (construction) that is a limited partnership as a loan rather than a partnership distribution so that I can loan it to other LLCs that have properties real estate? I have cash available on one company and need it in another. I don’t want to be taxed as I’m receiving it.”
First off, if you’re a partner, you could take money out if you have basis, so you don’t have to worry about distribution. You’re just taking it out because it’s your money. Technically, if you have basis, you could take it out up to your basis, and basis means how much you put in or how much you’re personally at risk for that partnership. A construction company, you put in some money to get it started or maybe it’s made a bunch of profit and it owes you money, you just take it.
Jeff: If you’re a general partner, you probably have basis.
Toby: Because you’re probably on the hook for everything.
Jeff: Right, exactly.
Toby: You don’t have to worry about tax on that, but let’s just say that you’re in a situation where you have a bunch of other people in it and they say, “Hey, we’ll loan it to you.” Now, you’re loaning it and, yeah, you would document that as a loan so that you wouldn’t have any tax on that. Let’s say you didn’t have basis. You’re a guy that put in no money, you have no risk and they give you a bunch of money out of it. You’d be taxed as long-term capital gains if they just gave it to you. That’s how distributions in excess of your basis works. Otherwise, they’re just loaning it to you, documenting it as a loan, and you pay back interest. Then, you could put it into another entity.
Jeff: They could also loan directly to that entity, correct?
Toby: Yeah, you could do that, too. You can say, “Hey, you know what? I have Company A. Let’s loan it to Company B at a reasonable interest rate so you can move money from the company that’s making money to the company that’s maybe not making money.” Anyway, there’s ways to get it out tax-free. Again, if you have questions like this, it’s great. You could always submit it to the platinum portal or become a tax client so that they can give you some personal attention on those things.
“Spring 2018, I filed a personal 1040 for 2017, owed and paid money. That’s for the July. Anderson did C Corp tax. I did not owe as this was my first year. Are the C Corp losses ever applied to a personal 1040?” Great question, Jessica, and the answer is it depends. That’s my favorite answer. I spent hundreds of thousands of dollars on legal education so I could use that whenever I feel like it. The C Corp losses can be applied to a personal 1040 if you liquidate the corporation, if it is a traditional corporation and if you made a 1244 stock election, which if you used Anderson to set it up, which it sounds like, then we automatically make that election so you would get to write it off against your personal 1040. Otherwise, they stay in that corporation and roll forward. How long can you carry forward losses in a Corp?
Jeff: I believe it’s indefinitely, no, under the 2018 law?
Toby: It used to be 20 years. Now, it’s forever, I think. Don’t quote me on that. If you’re losing money and you’re carrying it forward for more than 20 years, there’s something wrong with it anyway so we’d have to have a little chat. All right. “Does Anderson Advisors have a favorite mileage app that they recommend to their clients who need to track mileage?” Anderson Advisors does not, but Toby Mathis does, and that would be MileIQ.
Jeff: He’s looking on his phone.
Toby: My arms aren’t long enough. This stinks. Sometimes, I can see it but I think it’s MileIQ. I’m usually looking at it and it’s always beeping at me. There we go. MileIQ. There it is. I have 98 entries that I have to assign. It’ll sit there and tell you. It tracks you via GPS so they’re stalking you wherever you go so the deep states knows exactly what you’re doing, but you can save some money. What you can do is you can actually program it to say, “These particular trips are always business, and these different trips are always commute.” “Is there any postings from the IRS regarding taxes on currency revaluations for the year 2018?” I’m not sure of that. You’re talking about currency, like when currency dies in value?
Jeff: I’m not sure if you mean revaluations like Venezuela just did on the Super Bowl bar.
Toby: You may not want to email that one on in. You did email us, but you put it into the platinum portal so somebody can research it because there’s two types. I’m going to say the revalue of it. I’m not familiar of anything that’s come out from the IRS this year. Let’s see what else. Usually, you have to liquidate the currency, right?
Jeff: My gut wants to say that it’s just going to be treated as capital losses if that’s what their revaluation is, but my gut is usually just hungry.
Toby: “If I have rent income, can I form a company to manage those homes and only that be my business if I can do other odd jobs? If not, what will my income from business only? Can I take the new 20% deductions?” My goodness, you’re killing me. This one’s a little bit tough to follow but here’s the answers: If you have houses that are rentals, you will get the new 20% deduction on that income from everything that we are seeing and according to the proposed rates, so you’re going to get a 20% deduction on your rental income.
Jeff: Yeah, so they don’t have to be an LLC, or Corp, or anything like that.
Toby: “Can you set up a company to manage that?” Yes, you can always set up a property management company, and that is a business in and of itself. You can always set up a LLC to own the rentals. Usually, we’re going to have a holding LLC and you’re going to have sub-LLCs for each property. There’s a lot of asset protection reasons of why we do that to minimize risk and to mitigate damages when they happening.
I noticed I didn’t say “if” because there’s no such thing as “if”. There’s “when” if you’re in real estate because it will happen to you. You’ll get your tenant that sues. You’ll have something happen, like if somebody falls down the stairs and they always try to take your stuff. This mitigates that, but you can always have your corporation manage that. Then, your real estate–he says Schedule E or C–it’s always going to be going onto E if it’s real estate. For Schedule C, I guess if you’re a dealer, you may fall under C, but we wouldn’t let you do that. We would pushing you into a corporation no matter what if that was the case. Makes sense?
Jeff: The only time I see rentals on a Schedule C is if it’s short-term rentals with what they call substantial–you do housekeeping for them; you’re replacing towels and beddings; you’re doing the hotel-type stuff.
Toby: If you’re doing Airbnb by the way and you’re less than seven days–I’ll just freak you out–you’re a hotel, and you’re an active income, and you’re a commercial business. You need to have commercial insurance, so they won’t cover you. I just want to throw that out. There’s stuff on our YouTube channel about Airbnb. All right. “With exceptional liability protection, what other advantage do I get from having an LLC as a sole proprietor to manage my rental homes?”
The LLC wouldn’t manage it. It would just hole the rental homes. That big one is inside liability protection and outside liability protection from you. If my kid goes and gets into a car accident, they don’t take my rental homes if they’re in the right type of LLC. They also provide a nice vehicle–no pun intended because I just said my kid’s driving–but you could also have a company manage it pull money off the rental and create active deductions and expenses.
There’s other things. There’s LLCs. Other things from an estate-planning standpoint, you can avoid multiple probates, multiple states if you have LLCs as opposed to real estate because it counts a personal property. From a tax standpoint, there’s a possibility of getting what’s called a discount valuation because if the state taxes ever come back. There’s all sorts of little things and then, of course, it’s a nice little handy basket to hand to.
If you own these things in your personal name, then I get to say that, “Hey, you’re probating in every state where you own them. You’re going to be tied up for a while when you pass because you’re going to own them individually, and you’re basically just leaving your hiney hanging out there, so we advise strongly against it.” From a tax standpoint, there’s just so much more we can do once we use a vehicle.
“Do you think I can get help from a company like yours to get advice to save money?” Of course, we’re happy to help you, so just contact us. You can absolutely talk to any of our representatives or one of our folks and they’ll just reach out to you. “Hi, I have a 401K which I must take distributions with my pension and choosing a family home. Can I form a company and set up a new IRA for taxes and my income will just be rental income and no other business? I’m retired and no other job.”
It sounds like you have a 401K and you have to take distributions so you’re over 70 and a half which means you’re not going to be able to set up an IRA. You can still make more contributions.
Jeff: To a Roth, but not a traditional.
Toby: You can still give to a Roth even after 70? That’s cool.
Toby: Yeah, I guess, and in a 401K, you can still make contributions to a 401K as long as you’re working for the company. If you set up your own company and you roll your old 401K into it, you can still make contributions. All right. “Can I get the credit of $500 for my 17-year-old son?” Is that the child tax rate?
Jeff: It cuts off at 17.
Toby: Yes or no?
Jeff: No. You would think it will be 18 but it’s 17. It cuts of.
Toby: Anytime during the year?
Jeff: Yes, if they’re 17 at the end of the year.
Toby: If they’re 17 at the end of the year. That stinks. All right. “If my child earned $11,000 in 2018 and no tax, does he have to file his own tax return?” You’re less than the standard deduction, is what you’re saying, and the answer is yes. Even if you don’t have a tax liability, you still have to file a tax return. You have to claim it. Otherwise, the IRS is just going to do a tax return for you, showing that he made $11,000 and not giving him any benefits.
“If I or my single-member LLC paid my child for helping my passive rental houses, do I or my LLC need to file 1099 miscellaneous, Box 7, the amount I paid my child?” Somebody’s working for an LLC that owns rental real estate. Do they have to do a 1099?
Jeff: Yes, and if you paid your child more than $600 during the year in cash, then you should issue them a 1099.
Toby: The answer is yes, you should always 1099 anybody you paid more than $600 to. If you paid less than $600, no. “If my C Corp didn’t make any money during my first year and all the expenses I had were education fee, will I still end up paying money to the IRS or will I receive some refunds?” The corporation, then, would have the deduction of the $40,000. It can reimburse you that $40,000 but you’re not getting that as a loss, so you’re not going to get a deduction for that $40,000. You’re going to have a loss carry-forward of $40,000 in your corporation which means, when it makes money, you’re not going to pay tax on the first $40,000 and it can hand that to you, and you don’t pay tax on it.
Jeff: In regards to the refunds–and we hear this a lot. I’m not sure why–but IRS only refunds money that you pay them to start with. Just because you have a loss, it doesn’t create any kind of credit like the individuals have an earned income credit if you don’t make a lot of money. There is no corporate charity in this case.
Toby: Yup. “How do I structure if you’re still working for another company as a day job?” It doesn’t matter. You can work for multiple employers. You could set up your own companies. It always depends. If you have W2 income that you can’t do anything about, we may go with a C Corp or something that’s going to keep the money off your tax return. The way I look at it is like this: If I have a job and I’m making good money and I’m in the higher tax brackets, anything above 24% or whatever it is–let’s just say that I’m starting to feel the pain of a higher tax bracket and then I put a C Corp in place where I’m making other money. Then, that C Corp maximum tax on it is going to be 21%. I’m going to be better off paying 21% on that whereas, if it flowed into my personal tax, I may find myself in that 37% tax bracket plus state taxes and other things.
Jeff: A C Corp is going to allow you to deduct some expenses that may not be available to you on your 1040.
Toby: Absolutely. For example, you can reimburse 100% of your co-pays, your deductibles, uncovered expenses. When you get a crown, they only cover half of it, then you can have the corporation reimburse you for that other half, and it gets to deduct it. You don’t have to pay it. That’s an accountable plan. I keep hearing about these things. That’s the whole reimbursement arrangement. All right. “Do I have to hire my wife as an employee so I can give her a pension?” If you want to put money aside for her, she needs to work.
Jeff: I’m not aware of any pension plans that will allow you to give money to them based on some kind of salary.
Toby: No, they have to be taken as salaries. They have to work and they actually have to work. You can’t just give them a salary for nothing.
Jeff: I had a client recently that we were talking about setting up a DB plan and actually suggested that we have the spouse to their company payroll so we can add them to the pension plan.
Toby: Yep, and there’s two reasons to do that in a DB, is if you have a bunch of other employees, you make one spouse an administrative employee and one spouse is a management employee and then you make sure all the benefits go to the management, so there’s ways to do it. It’s kind of mean. “I have purchased rehab and then sold. How much should I keep in the account to cover the dissolvement of the LLC? How much are the fees to the state of California?”
What you usually do is you dissolve the company. Once that’s all done, then you transfer the cash out of the account to your name. It’s hard to cover–again, if there’s money and the company has been dissolved, it’s hard to deposit or to do things with that account. I tend to look at it and dissolve the company, pay for everything and then drain the rest of the account. “How much are the fees to the state of California?” I really think dissolution is going to be less. It’s a small amount, less than $100.
Jeff: It’d be small.
Toby: “Anderson Advisors set up my C Corp and corresponding retirement plan, a profit-sharing plan that I manage. I’m a solopreneur with a plan that’s less than $250,000. I prepared a Form 5500 for tax years 2016 and 2017. I was told that the forms don’t have to be filed.” Yeah, if you’re less than $250,000, then you don’t technically have to file a tax return but then your audit is always wide open. If you want to close the door on IRS audits, you file the form and then they have three years to audit you. If you don’t file, then they can come back at any time.
Let’s see. “Please confirm the deductibility of trading-related expenses now encouraged as the C Corp-managed LLC to file Form 1120, neither LLC-related disregarded in our partnership tax. Brokers still seem to demand info for an LLC trading account. That conflict was supposedly resolved with a personal property trust.” Boy, we’ve got to unpack this one. First off, if you are in the business of trading in the stock market, then you’re going to be either an investor or you have this imaginary thing called a trader where they take expenses.
You don’t treat the income as active but you take active expenses, so you have a whole bunch of deductions on a Schedule C with no income, which means you get audited all the time, or you want to make sure that you get to write things off. You need to have C Corp that manages the entity that owns the account, so the C Corp’s now a manager, which is a legitimate activity for the C Corp. Now, here’s what happened in 2018: They changed the law.
It used to be you could write off the management fees and it was a miscellaneous itemized deduction that went on your Schedule A and you wrote it off. That went away at the end of 2017. The Congress changed that law and said, “No more miscellaneous itemized deductions. Your schedule A has been decimated.” In order to write it off, it needs to actually be a guaranteed payment to partner, which means the LLC needs to be taxed as a partnership, the corporation needs to be a partner–at least a 1% owner–and then it gets a guaranteed payment to cover all of its expenses and everything else. At the end of the day, it means that you’re having less income flow onto your personal 1040 and more income flowing onto the corporation, but it has the expenses to offset it and pays their own tax. That’s that.
Now, the brokers issue is another issue. When you set up a brokers account in an LLC, a lot of times, people say when they’re filling it out, they lead the broker to believe that they’re trading on behalf of somebody else, so it’s an LLC and, “Is it yours?” and you say something like “no”. “Is this being managed by somebody else?” “Yes.” They start thinking you’re a professional company, that you’re managing a portfolio and then they try to hit you with extra fees.
If you ever find yourself in that situation, you just use a personal property trust to open up the brokers account. You make the LLCs, EIN, the tax identification number for the personal property trust, make the beneficiary the LLC. The reason you do that is so you’re not fighting with the broker’s house. They just want to charge you more money. You don’t want to pay it. This is the way to not pay it. From a tax standpoint, it doesn’t matter. Either way works.
Jeff: Now, I’ve got a question. We see a lot of these accredited investors. Can they put those assets that they’re investing in as accredited investors? Are they usually allowed to put those in an LLC or another type of entity?
Toby: Yeah, so the rules of accredited investors is–that’s a Securities and Exchange Commission, fun stuff. That means assets of over $1 million excluding your home or you’re making 250 as individual–I think 350 married filing jointly for the last three years and with the belief that you’re going to continue to do that–then you can become an accredited investor and you get certain types of investments you can invest in.
The way it works is if an entity is going to be the accredited investor, then they look at the owner and make sure the owner is the accredited investor. For your retirement plan, it says–whatever it is–the participant is the one who certifies for it, saying, “I am an accredited investor,” so you’re doing it for them. Yes, you can use an LLC that you own, but I couldn’t do it where I own it and then I give it to you and say, “I’m going to do this accredited investor thing and I’m the owner, ha-ha,” and then I give it over to you and you’re not an accredited investor.
I’m not saying you’re not an accredited investor, but I give it to somebody who’s not and say, “Ha, I tricked the investment company.” No, you just committed some fraud on some people because accredited investor works two ways, my friends. It’s for the person who’s doing the placements and the person who’s investing this for both your protections so you can’t just make that decision for them.
“I’m in the process of purchasing four rental units. They were purchased in my name. After all financing is secure, I plan to claim to my LLC. If this is not completed by the end of the year when it’s time I file my taxes, would I put these properties on my return using Schedule E?” Let me make sure I understand. “I’m in the process of purchasing four rental units. They were purchased in my name.” Fantastic. “After all the financing is secured, I plan to claim to my LLC.” That’s still probably a warranty deed so you don’t void out your title insurance. “If this is not completed by the end of the year when it’s time to file my taxes, would I put these properties on my return using Schedule E?” Yes.
“Once they belong to the LLC, how is the rental income treated?” On your Schedule E unless that LLC is taxed as a partnership. It depends on the LLC. If it’s just you and it’s disregarded, then there’s going to be zero difference between the way that you report it. If it’s taxed as a 1065, a partnership, it’s going on Page 2 of the Schedule E as a K1.
Jeff: Right, it still ends up on your 1040.
Toby: Yeah, it’s going to end up on your 1040 no matter what. “Inception date of my corporate entity was January 29th. My fiscal year ended December 30th, 2018. What is the filing year for the federal Form 1120 that is due now to be filed by January?” That would be the 2018 return.
Jeff: The 2018 return for September year end is due January 15th of 2019.
Toby: I think they’re saying what’s the filing year of the federal Form 1120.
Jeff: The filing year would be the filing year of inception to September 30th.
Toby: If you would actually set this thing up in 2017, then, technically, you would use the 2017 tax form. Since this is 2018, the first day of the tax year was in 2018. That’s the year you’re using. Crazy questions. “Can an individual invest directly into real estate in an opportunity zone or can I only invest in an opportunity zone fund?” Great question, David, and you’re talking about something that’s really cool, which is the qualified opportunity zone.
Here’s how it works: You put money into the qualified opportunity zone. You have to invest through a qualified opportunity fund. You cannot do it just individually; you have to use an entity that is a partnership or a corporation that then meets the test of investing in opportunity zone assets. I believe it’s 90%-plus have to be assets that are opportunity zone assets, and they’re all–in every state, there are opportunity zones, which are economically-disadvantaged areas.
The reason this is cool is because you can take capital gains that you would have paid capital gains tax on–and it could be Bitcoin, it could be stocks, it could be real estate–and you can reinvest it within 180 days and pay zero tax on that. It defers it for up to seven years. It’s 2026 that now you’re going to have to pay tax on, but you don’t pay tax on the full amount. You pay tax on a percentage of it depending on how long you held it before you sold it or, if you didn’t sell it, you automatically have to pay it in 2026, and it’ll be 85% of the total amount if you held it that long.
If you held it for only five years, then, in Year 5, you’re going to pay 90% of it. If you made $1 million, you’re only paying $900,000. Now, that doesn’t sound great. “I’ve been deferring my tax for a long time for seven years.” That sounds cool–or eight years as of right now, technically–but the gain on the asset–so, the opportunity fund. Let’s say that it was investing in real estate and it’s improving real estate, that, you pay zero tax on if you hold it over 10 years.
You invest. Let’s say it’s a shopping mall and you put $1 million that you deferred through some more money. You’ve got to spend at least whatever the improvement is on it. Let’s say you bought a shopping mall with $100,000 of land, $900,000 of improvement. You’ve got to spend another $900,000 on the improvement, which you could actually defer taxes on that you stick a bunch of cash in there, too, but you’ve got to do that within 30 months.
If you do that, you pay zero capital gains when you sell that thing on its gain. Let’s say that your basis was $1 million plus you put $900,000 into it to improve it so you have 1.9. You’re depreciating it and it goes up to $10 million over the years. Let’s say you hold it for 20 years. You pay zero capital gains on the improvement. That’s why people like the opportunity zone. “If I just buy a property in an LLC, does that qualify?” No, it has to be a fund.
You can self-certify. We know how to set up the funds. I can tell you that. We set up an LLC in the right way, certified it as a KOF and treat it as a partnership, then you get the benefit. It doesn’t just have to be real estate, by the way. You can invest in any business there. Lots of folks are going out there creating funds that are doing this thing, but we tend to like the real estate side. “I own California single-family homes in a land trust and a beneficiary or Wyoming LLCs. These LLCs are owned by a Wyoming holding company. The Wyoming holding company is owned by my trust. If I die, will my children receive step-up basis?”
Yes, they will receive a step-up in basis. You will not get Prop 13 their team because if you read the rules, you’ll see that they look through the LLC to the end beneficiary and end owner. Yeah, you’re going to get step-up in basis, just to make it easy for you. “I formed an LLC for my real estate business for buying and holding.” Somebody set up an LLC to hold rentals. “If I was to deposit $20,000 cash into my business account, will the IRS flag me for the deposit?” No.
Jeff: I think the issue here was the bank rolls, about depositing more than $10,000.
Toby: IRS doesn’t flag you.
Jeff: The bank may.
Toby: What the rule is–and this is oftentimes misunderstood–if you do any cash deposit of $10,000 or more, they just have to put a note of it. They call reporting, but what they’re doing is they’re noting the cash deposit. It’s not just $10,000. These people think, “Oh, I’ll put a $500 a day.” If they see any pattern of deposits that’s going to exceed $10,000, they’re going to report it, period, but the reporting doesn’t do anything; it just lets them know that there’s a bunch of cash. What they do with that information, I’ve never seen any, but I know a lot of companies that were cash businesses that deposited way more than $10,000 a day in cash and never had any IRS issues. All they’re doing is they’re usually using it for a pattern to see whether you’re probably a terrorist or whether you’re money-laundering or something.
Jeff: A one-time $20,000-deposit isn’t going to trigger anything.
Toby: You don’t get flagged, period. It’s just the bank that says, “Hey, this person’s putting cash in.” If they see you putting millions of dollars a week, they’re probably going to want to ask you, “What other businesses are you associated with?” and if you say something like a carwash because you watch Breaking Bad – I digress. We have holdings, fun ones. ” I think I’m running my current property but I have a mortgage. Should I run it under my LLC so I can offset the profit if any repairs pop up or can I already do repairs deduction as a sole owner?”
If you live in that property, you don’t get to write off any repairs. If you have a house and you’re thinking about making it into a rental and you make it into a rental, then, irregardless–I like that world even though people say it’s not a word–you get to write off the repair expenses, period, if it’s an investment property, as long as it’s a repair and not an improvement. Then, you do have loss limitations on that. If you have too many repairs, then you’re going to have to deal with the PALs passive activity loss rules. “What’s the best accounting software to use to run the S Corp? Also, that’s easier on my accountant.” Jeff?
Jeff: Typically, I’m going to recommend QuickBooks. It’s the most used. There are some higher-end ones like JD Edwards and SaaS and Great Planes. Unless you have a big need for that, you’re running a lot of inventory, you’re doing manufacturing, you don’t need something like that. QuickBooks is a software that lots and lots of people are familiar with. If you get a bookkeeper, I’m sure they’re going to be familiar with it. There are some lower-end accounting packages.
Toby: QuickBooks make it easy. Everybody knows QuickBooks. If they don’t know QuickBooks, they can learn QuickBooks. Anything else that they’re using that’s legit is going to be–QuickBooks is going to be easier. Still, it’s a bear. You’d want to make sure you have a good bookkeeper. I thought Jeff was going to say an abacus.
Toby: “If I received 1099 income, what is the best way to structure so I can have that money paid to my corporation? How could I pay the corporation or how can I pay of the corporation if I need any money?” I think I see what you’re saying. You have 1099 income. You’ve got to make sure that your business is the one doing the activity. You’ve got to make sure that they’re paying it to the corporation or that they should have paid it to the corporation. There is a way to get 1099 income into a corporation even if they pay it to you, but I don’t want to make your head spin too much, but there is a way to do it. Your best bet is always to have the 1099 income actually issued to the corporation. You cannot assign income to somebody else. Otherwise, I would just assign my income to lots of people that have lower tax brackets than me.
Jeff: Ideally, you fill out a new W9 that says who the income is supposed to be paid to, and most people will accept that.
Toby: All right. We got so many questions. You guys are a chatty bunch today. “How do I tax my duplex? One side is long-term rental and the other is Airbnb and they’re under the same LLC. How do I get the 20% deduction from rental income? Can you say more?” The first thing is you have two different types of activities on the same property so this is going to be a little bit bizarre. Part of it is passive income. The Airbnb, if it’s less than seven days, is actually active income so you’re going to have two types of income coming onto your return.
Depending on that LLC and how it’s taxed, this is either going to go on your Schedule E on Page 2 or it’s going to go on your C and your E, Page 1, which is kind of bizarre. If they are longer than seven days, then it’s easy; it’s all investment. You’re going to get the 20%, period, unless you do not meet the income level test, which means if you’re single and you exceed $207,500 or, if you’re married filing jointly and you exceed $415,000, then you’re under a different test where you have to worry about W2 income and everything else. I don’t want to get too crazy complicated, but you’re still going to get that 20% more than likely if you’re a normal person.
Now, we’re going to dive into some more. Here, Jeff, I’m going to pull these over so you can see them, too. “Hi there. I’ll be 59 and a half in March. Can I use my 401K to purchase real estate investments without penalty, and how is the tax handled?”
Jeff: Something really important to remember: If you do pull money out of your 401K, it has to be after you’re 59 and a half, not a day before. When they audit these things, they look at what day you turn 59 and a half.
Toby: Actually, you can make a 72T election when you’re 55 and spread out the contributions. Here’s the rule: You can do a 72T election which says once you’re 55, you can avoid the 10% penalty if you take equal distributions over a minimum of five years and over a longer period of time. If you just say, “Yeah, I’m going to take that equal distributions for the next 20 years,” you set that up, you can do that. If you’re paying taxes, you take it up. If you need a lump sum, then you either borrow it or you pay the penalty. If there’s a hardship, you might be able to find an exception on paying the 10% penalty. If you’re 59 and a half, you could actually start taking distributions, so you could just say, “Hey, if I need money, how much you have to get out?”
Jeff: You are going to be taxed at your ordinary tax rate. If you’re on the 22% bracket, you’re going to pay 22%. If you’re over 59 and a half, then you’re not going to pay the 10% penalty.
Toby: All right. Here’s another one: “If I own or finance a property to a seller and I double-close, I own it for a few minutes, how is the short-term capital gains taxed?” Here’s the rule. I always forget what’s the election for the installment method.
Toby: Yeah, something like that. Here’s the deal: If you buy property with the intent to sell it, which you’re doing, you don’t get installment sales. If you own or finance, it’s taxed as though you sold it and got all the money on the same day.
Jeff: Also, it’s not taxed the capital gains rate. It’s taxed with ordinary rates.
Toby: Yeah, you’re going to pay self-employment tax on it. “Tell us about the charitable deduction with donations to conservative easements. What are the pros and cons?” That’s a loaded question. Here’s how conservation easement works: I own real estate and I restrict its value by giving certain rights to it to government agencies or charities. For example, I give it to Historical Society. Let’s say I have a golf course in Mar-a-Lago, the other White House.
I go down to Mar-a-Lago–because this is what he actually did, guys. You can actually go look this up. He said, “I have this golf course,” and he does this to all his golf courses by the way. “I had this golf course and I’m going to say I am not going to build on this golf course. I’m not going to subdivide it. I’m not going to do all this stuff. In fact, this golf course has a wonderful clubhouse and I’m going to keep all these original artifacts and antiques in it, and this is going to cause my value of this golf course to go from $25 million to $19 million.” You get a $6 million-deduction. Now, you know how he doesn’t pay taxes. Class dismissed. That’s fun stuff about conservation easements. Now, in all reality, usually, you’re buying into a fund that is investing in property that is going to put restrictions on it.
Jeff: I usually see these in trusts where you have to put so much money into that trust to fund the severance.
Toby: Land trusts, like the other type of land trust, usually, is where you’re putting it. The average last year was 9:1, meaning that for every dollar you put in, you got a $9-deduction which, if you’re in the highest tax brackets, that’s pretty good return on your money, but that’s really aggressive. The more conservative ones I’ve seen–and I looked at two in the last few weeks, we’re at 4 ½ to 6 ½ which means I put $10,000 in, I’m getting a $40,000 to $65,000-deduction. They’re still pretty powerful.
“How do we move seed money credit debt under the corporation business?” The corporation can’t have it. They could just pay you back. If you have debt, it’s just going to reimburse you for it. It can reimburse your interest that you’re paying on it, too.
Jeff: Yeah, so you’ll usually it set up as a shareholder loan, money that you lent personally to the corporation.
Toby: Yeah, so you could do that and say, “Hey, this money that’s on this balance on this credit card–” I think, is what they’re saying, is, “I have $50,000 in this credit card.” The corporation says, “Great, you’re loaning that to me,” and then it’s paying all the interest and it’s offsetting. “I have purchased a house under my QRP, qualified retirement plan, where I’m thinking of trading this house purchased as a rental. We are trading this, my wife, and I use a residence via trade–” Oh, boy. Jim, don’t.
Basically, they bought a house in a qualified retirement plan and they’re thinking of it using as a residence. You are a disqualified person. You cannot do that. What you could do is go to another non-disqualified person, sell it to them and then perhaps you could go and buy it from them. Again, the IRS looks at these things and says, “Straw man.” Boy, that just scares me. If you did it, what is the tax consequence? You have a deemed distribution. If it’s QRP, just the value of the house would be taxed to you. If it’s an IRA, the whole thing’s disqualified.
“If you have an LLC that is a C Corp and have 1099 income coming to the Corp, can you change it to an S Corp and take a larger distribution versus full income, or is this a bad idea?” C Corp/S Corp. C Corp, you pay tax at the Corp level and then it distributes it out to you. It could either reimburse you tax-free. It could buy things for you, which is taxable as wages for you. They could pay you a wage or it could pay tax on the profit and pay it out to you as a dividend, which would be taxed as long-term capital gains to you, taxed at a flat 21% to the Corp. We put all those things into play when we have a C Corp.
When you go to an S Corp, you have a small salary, and the rest of it is all ordinary income taxed at your bracket. You don’t have a 21%. You don’t have to worry about that stuff. It always tend to be a little bit of analysis, crunching the numbers. I wish I could give you an absolute answer. Generally speaking, if you cannot control the income in an entity, I’m going to go with something that flows onto my return, like an S Corp. If it’s a safety-valve entity, meaning I’m paying them a management fee, then that’s almost always going to be a C Corp because I can control how much I put into it and I have a great degree of control of how much I actually pay it.
Then, worst-case scenario, if I have a ton of money and I’m on a high tax bracket and I have a C Corp, congratulations, it’s really not going to hurt you. Even if you pay tax at the corporate level and it issues out as a dividend, you’re still right around 38% so it’s still going to be significantly–it’s going to be right there. Worst-case scenario is you would be at about what you would have been paying anyway, so it’s within a couple of percent. Best-case is it’s if they do 15%/
“When transferring a 401K from a previous job to a Roth solo 401K, when are the taxes due?” It sounds like this person is taking a 401K, rolling it into another 401K and then converting a portion of it to the Roth portion of the 401K, which I don’t think, necessarily, you can do. I think you actually convert it to a Roth IRA, but I’d have to look at that. It’s something I don’t know just off the top of my head. What do you think?
Jeff: As far as the tax, let’s say that you’ve done it in a way that you converted your traditional 401K into some kind of Roth product.
Toby: It’s taxable that year that you do it, and you can do it in bits and pieces. They used to have this thing where, if you converted it, you could pay it over a couple of years and stuff.
Jeff: You used to be able to pay it over two years, and that’s gone.
Toby: They do weird things like that, though. What you do is you roll it into the 401K and then you sit back and you say, “Hey, accountant, should I take a portion of this and convert it into a Roth?” If you’re in a really–if you have a bunch of losses that year or some tax maneuvering that you did really well on, you have some–”Hey, we want to convert some of this into taxable income this year just for the heck of it because we’re in such a low tax bracket,” then you do that.
Jeff: Here’s something that I like to do: roll it into an IRA, convert it to a Roth, and let’s say the market heads south. You can always re-characterize that Roth conversion as though it never happened and then maybe do it again later if the market goes back up or vice versa.
Toby: Cool. I like it. All right. “What is the best way to set up your entities for maximum benefit if you are an independent insurance agent and also do wholesale deals?” As an insurance agent, you are licensed, which means you’re more than likely going to be stuck either in LLC taxes in an S Corp or a traditional S Corp. It’s up to your licensing board. They generally don’t like you to be a C Corp because they can’t see that it’s you, and you’re the one who has the license.
Generally speaking, you’re going to go there. That does not mean that’s where you stop. Quite often, we’ll see somebody who has a high income. In my experience, the difference between a sole proprietor and an S Corp is going to be about an extra 10% to 15% in your pocket on an annual basis by being an S Corp. If you throw a 401K into the mix, it goes up. If you add a C Corp, then we can get another 10% to 15% savings on top of that just by having the money not hit you. If you are really a high earner, then we’re going to throw a DB plan into the mix. If you’re maxing insane money, then we’re going to throw a 501C3 and continue to show off and push money into a vehicle that we control that allows us deductions.
All right. Somebody says, “Following up on the first question, if I have two properties overseas, total value about 1.5, what would happen regarding inheritance tax when I die? Can I put overseas properties in a living trust?” This is kind of interesting. The answer is kind of a “no” because the country where those properties are located is what’s going to control that particular side of tax. The state in which you reside is going to control–actually, no, it’ll be the state where the individual who passed reside my control some of the inheritance.
I’m not sure if it’s going to be the state of the recipient or the state where the estate’s held, though we have to be careful of–it’s like there are some states with inheritance tax. I think there’s four but, if you’re a direct descendant, I’m not aware of anything where they would tax you on it. The bigger one is this overseas and whether or not it’s real estate or whether or not it’s an overseas LLC or Corp where it’s personal property because then, there’s some things that we might be able to do where it could be controlled by a US living trust. If not, then your living trust is not going to control that real estate because it can’t be overseas; it’s only going to be in the US.
Jeff: I’ve seen where some of the foreign countries–China, in particular–can be very particular about what you do with property.
Toby: Yup. “Do you have any recommendations on transferring assets, succession planning in the state of Oregon?” I’m not sure if an estate tax is applicable. Yes, you still have it as state tax in Oregon. “I am only the beneficiary. I also live and take care of my mom. My mom has a couple of million assets held in trusts. How do I employ the inheritance tax?” We’ve got to take a look at it. This is something where–go through the platinum portal or we could flag that one. Susan, if you’re listening, we’ll maybe flag that one.
Actually, there’s no way she can flag that. Email that one on in so that very question, Charlotte, email it into us so I can get that assigned to somebody to do a little bit of research on it, but it’s going to be–I don’t think you’re going to get hit by your mom’s right on the line. I think it’s 2 million in Oregon just off the top of my head, and that’s for the estate tax, and then there’s the inheritance tax. I don’t think you’re going to have to pay it.
“Are CamaPlan forms available on the portal?” There are some reimbursement plans, but for a true accountable plan, all it is, is basically saying that you agree to reimburse employees and so they’re in our documents for sure. “I paid premium for medical through my W2 pre-taxed. I can’t be reimbursed for it through my C Corp. Can you confirm? However, I have long-term disability insurance premiums through W2. Can I deduct the premium through my C Corp’s CamaPlan?”
The answer is, yes, you can always reimburse something that came out of your pocket post-tax, so if your employer pays your medical pre-tax, you can’t reimburse that because that’ll be double-dipping. If they don’t pay for the long-term disability but they still provide it available to you–in other words, there’s two types of things. I get the insurance benefit, but then I can add my spouse and it costs me $500 and they take out of that my paycheck post-tax, I can reimburse the $500 post-tax. I can also reimburse myself for qualified long-term care and disability. I can reimburse those. I can also reimburse–and I’m going to say that I’m not aware if we have a restriction on the disability insurance premium, but I’m pretty sure you can write that off, too, but also the copays, and the deductibles, and anything else. Yes, you can write off a ton.
Wow, look at this one. This is a long one. “My mother would like to transfer ownership of property to her three children and, as those children pass on, have their property transferred to their children. She calls this approach keeping her property with the bloodline. For the non-bloodline spouses, they are prevented from receiving the direct benefit, largely to keep the spouse’s attempt to remarriage,” blah, blah, blah. “The property is a large family farm. What might be more preferable?”
Jeff: Haven’t the courts mainly ruled against these types of wills?
Toby: No, you can’t do it in a will. You’d have to do it in a trust. What you’re doing is you’re saying, “This property is to be held for the benefit of my descendants, and we define descendants as direct descendants of my blood, so blood of my blood,” and it could be–sometimes, we use maternal and paternal parents and grandparents or whatnot. When I do an asset protection trust, it’s a little bit of a different vehicle, then I’m going to expand it out if I’m just doing a living trust that’s going to be for many, many years, then I’m going to put a restriction.
Then, she could say, “I’m directing my trustee not to sell or distribute this.” You don’t want to put an absolute restriction in case there’s a problem in the area and, all of a sudden, the property’s going to become worthless and they’re stuck holding it because they don’t have the authority to sell. What you say is, “It’s my wish to keep this in here,” but they still have the ability to sell it if there’s just no other alternative, and that’s just so you don’t hamstring them, but you just get to say, “I want to keep this.”
Yes, this is a very common type of trust. It’s what I recommend, actually, and some people call them bloodline trusts. I just call it a non-distribution trust. “I want to have access to the asset but I don’t want them to be able to take the asset and sell it nor do I want their ex-spouses or spouses to be able to get it nor do I want to get creditors to get it,” or, if they have a grandchild or a great grandchild that has special needs, “I don’t want the state to get it nor do I want to disqualify that child from state assistance.” It’s held in trust, and the beneficiaries get the right to use it, things like that.
All right. This is funny. I wish I could display the questions. It’s a gotowebinar issue. “Taxbot is good, too.” Hey, Steve, that’s a good one. When we were talking about the MileIQ, Taxbot is another one that people use. I’ve just never used it. Let’s see. “How is a DB plan taxed differently than an IRA?” My goodness, they’ve taken off so I’m not going to answer. A DB means I could stick a ton in there. In IRA, I’m always going to be limited on how much I could put in. In IRA, if I’m 60, I can put in $6500. In a DB plan, I could probably put in $200,000.
Jeff: If you’re talking about distributions, they’re all taxed the same. There’s no difference.
Toby: If you’re in a qualified plan, that’s going to have the ability to do lots of other stuff like you can even have debt. If you push something out of it that you do something wrong, you don’t disqualify the whole plan whereas, in IRA, you disqualify the whole thing if you do anything wrong. “How do I get the 20% deduction?” We already talked about that. “If I have some fund that says BTS into brokerage, if I want to do tax loss harvesting in Vanguard account, does buying–” I don’t know if that quite works.
This is a very difficult question for me to answer. As a group, I’m going to ask Matt that you actually email that one because we’re going to get into the VTSAX. I think it’s the VAT tax, what he’s talking about, but I want to make sure. You know what that is?
Toby: Yeah, I’m thinking that you’re using the wrong term, but it’s the VAT tax, probably for overseas investments. Matt, just email that question on in via the email@example.com. “Is your platinum service eligible for carry-over deduction every year? My C Corp hasn’t earned enough money.” Yes, you could absolutely run that through the Corp. “Is there a problem with keeping a whole bunch of money in my C Corp at the end of the year instead of taking it as W2 income? It would be more than corporation’s expenses for the next several years.”
The rule comes down to the use of the income. If it’s underneath $250,000 of profit–the issue is, “Hey, I have a corporation that made a bunch of money, and I’m going to start stockpiling cash.” The IRS says, “We don’t necessarily want you to stockpile cash so you better have a good reason to stockpile. Otherwise, we’re going to do a retained earnings tax and we’re gonna tax you on the money that you keep.” Under the facts as you present them–and this is why it’s so important as to how we document things–I would have to say I need that money and therefore I have a reason to stockpile it. A good reason to stockpile cash is, “I’m going to make investments,” or, “I’m going to loan the money out.”
Jeff: Additional real estate?
Toby: I could justify keeping billions of dollars in a company as they do because they’re saying, “Hey, I need to be able to do these types of transactions.” For an individual, it just becomes on the narrative that you create for yourself. I would keep it in the Corp and I would just say, “Here’s what I’m planning on doing with it,” and all we care about is what your intent is, not what you actually do. “I am opening a trading account under my C Corp just to make sure it’s not huge. When I start to move some money, should I move the account to an LLC or just leave it?”
I would actually open up the account in an LLC and have the C Corp manage the LLC or, if it’s a small account, less than $50,000–let’s just say you put it right in the C Corp. I’m not to worried about that unless you’re making huge gains. “How do I get personal property trust?” Let us know, Chaz. We can help you out if you’re having issues with a broker. “I was told by another CPA that if I am set up as a cash method accounting, I could expense my inventory for each line item under $2500 as a first-time deduction.”
Jeff: No, the $2500 rule is for repairs and maintenance.
Toby: Yep. That’s a safe harbor for when you have rental property, and it doesn’t matter the type of accounting. Cash or cruel doesn’t make a lick of difference.
Jeff: Now, do you think he’s talking about maybe flipping property, that type of inventory?
Toby: No, I can’t even think of it. The only number that I know that works the $2500 is the repair.
Jeff: That safe harbor does not apply to flipping property.
Toby: Yup, because when you’re fixing a flip, that’s adding the basis. “If you buy a commercial property, A, in an opportunity zone, can you sell it within three to four years and buy a new one; B, is then held for the same OZ fund for the full 10 years to get the full benefit?” They’re talking about it. Clark, I wish I could give you a great answer but, right now, there’s letters in the Congress saying, “Please make that the rule,” but as of right now, no.
What you could do is 1031 exchange it, perhaps, and just do it that way, and then the basis flows over but you lose the benefit of the opportunity zone when you sell it before the 10 years is out. You don’t lose it. You’re still deferring the original transaction, the original investment, the gain of the original investment. You’re deferring that out for seven to eight years.
Jeff: You’re going to lose the 10% or 15%.
Toby: Yeah, you’re going to lose that if you did it for five years. If you’re less than five years, you’re going to pay it 100% and then you’re not going to get the benefit of the gain. It would probably be bad to sell it within three to four years, but they’re talking about allowing you to do it. “I rent out a few of my rooms to exchange students. What regular expenses can I write off? Do they issue rent to my C Corp? Thank you.” If you’re renting out rooms in your personal home–now, we have a personal house–what do you do, Jeff? Because this sounds like investment property, all of a sudden.
Jeff: I don’t like these, but I know people do it so we have to answer them.
Toby: He sounds like I’m pulling teeth. Jeff is angry with you right now. He’s like, “You’re making me answer this.”
Jeff: No, I’m just hungry. The problem with these boarding-out rooms is you have to be able to segregate what costs belong to what. Are you boarding out one room out of five rooms total, or how many square footage? You have common area issues. You have your tenants stealing groceries out of your refrigerator. It all comes down to a mix of how you’re going to allocate expenses for utilities, your mortgage interest, taxes, things of that nature.
Toby: How would you do it? If you’re renting out a bunch of your house to a bunch of other people, your house has now become a rental home, correct? Are you depreciating part of it?
Jeff: Part of your house has become rental.
Toby: You’re bifurcating out your house? It’s kind of like a duplex.
Jeff: I was just going to say that.
Toby: What you’re doing–hold on. You’re still going to keep it in your name, I think. I don’t think that there’s a situation where I necessarily–unless you have a bunch of other assets, I’m probably going to keep this in my name but I’m going to do a Schedule E. Depending on how much you’re making and how aggressive you want to be, you could throw a C Corp into the mix to manage it if you really wanted to, but I would probably say you better have other properties. You don’t want to do this just on one.
The easiest route for you with the least headache in your life is to treat that as a duplex and declare that on Schedule E right after your expenses, and I’m probably not carving it off. It might depend on your state and it might depend on the other assets you have. If you have a bunch of other assets, then I’ll probably put an LLC around it just in case something bad happens with the student that you don’t find yourself losing all your other assets. Firsts do not harm. It’s probably just you.
“At 59 and a half, how much is required to take out?” I think they’re referring to the RMD, the requirement minimum distribution out of an IRA or out of a 401K or a DB fund. If you’re 59 and a half and you start taking money out, then it’s based off your life expectancy and you just divide up the balance, the first day’s amount. I can’t remember. I think it’s the first day amount, and then that’s the amount you have to take by the end of the year.
Jeff: You’re not required to take required minimum distribution. It’s 70 and a half.
Toby: If you start taking it at 59 and a half, you’d still do that same number. What it ends up being is a lot less because I might live for 25 years or whatever it is.
Jeff: There’s the whole whether it’s over your life or the joint life–say, you have a much younger spouse. Your RMDs could be much smaller than that.
Toby: All right. We got some cool questions. “Is life insurance premium deductible through an accountable plan on a C Corp?” No, it is not. If it’s your insurance, if you’re doing a life insurance plan like we talked at the very beginning–it was $50,000 death benefit–then that amount is deductible, but, for you, it wouldn’t be. “Aside from piercing the corporate veil, what are the potential tax consequences of not having proper corporate meetings, minutes for C Corp?”
It’s not really piercing the veil. The potential tax consequences is that the IRS says you didn’t run it in a business-like manner. Now, it doesn’t matter whether you’re a C Corp, a partnership or a sole proprietor. If you don’t keep books and records, they’ll disallow the deduction. It’s seldom that that happens at a C Corp especially one that has its own bank account because there’s no question that that’s not your account.
If they disallow a deduction, it’s still taxable to the C Corp. If you have wily attorneys like us, then what we’re doing is we are putting in a section. One of the things we do on our accountable plan is say, “Hey, if there’s ever a payment out that is a reimbursement that is disallowed, we treat it as a loan to use so you can pay it back,” and loans, of course, are non-taxable.
Jeff: Something that I’ve seen that, at a minimum, I would recommend is let’s say you don’t have any meetings so let’s document that at your end, that the board of directors decided not to.
Toby: You could have one meeting a year. There’s nothing that says that’s not reasonable. In fact, it’s very reasonable. Let’s see. “I just checked my C Corp returns due January 15th,” yes, you can do an extension, a six-month extension. “How about all of the expenses that incurred since March that I have not reimbursed yet? Can I still deduct them?” What they’re saying is, “Hey, I set up a company. I didn’t reimburse myself. What do I do?”
There’s a couple of ways. If this is an IOU, the company can pay you back or you treat it as a loan to the company and you’re carrying it on the books as a shareholder loan. Either way, you’re going to get the benefit of the deduction when you decide to pay yourself back. Mac actually responded to us. It was the symbol, my little brain fart. “Let’s say I have the same fund in two brokerage accounts. If I want to do tax loss harvesting in the Vanguard account, does buying the same thing infidelity during the 30-day period cause the wash sale period to apply?”
Yes. What you do is if I lose money and then I buy the stock back within 30 days, you have a wash sale rule. Yeah, it would apply. I’m sorry. I didn’t understand the question from the very beginning. All right, guys. Boy, we pounded through a bunch. I know it’s 4:40 just because I finally looked at the clock and I thought we were at about an hour in and I guess we’re an hour and 40 minutes in, but we went through all the questions. Thanks, Jeff, for joining us.
Jeff: Thank you.
Toby: Again, thank you guys. Hopefully, you guys enjoy this. It looks like Susan put the link up about an hour ago. It’s good for me to actually pay attention for that, the link. Everybody loves Tax Tuesday. Steve loves Tax Tuesday because he’s a glutton for pain. No, we love Tax Tuesday. It’s always fun. There are lots of good questions, and I always learn a lot just hanging out with Jeff. Jeff, you’re a smart guy.
Jeff: I try to be.
Toby: All right, guys. Next Tax Tuesday, we will see you. Bring your questions. Email them on in. If you have a whole bunch, we’d have to love a ton so we’re going to jam through it. It makes time go so fast. Thanks, guys.
Jeff: Thank you.
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