Toby Mathis and Jeff Webb of Anderson Advisors help people do the best they can with what they’ve got and keep as much money in their pockets as possible by answering their tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- We inherited farmland real estate that we rent to tenants per a crop-share agreement. Do we get the 20% write-off? Yes. Rental income is subject to a 20% deduction
- I’m a realtor and make edible baskets for clients. Can I write off these expenses as advertising? Write off $25 per person per year for the baskets
- Are holding companies only for rental LLCs or can they hold an active business LLC? A holding LLC is for LLCs in different states/assets, and to make a single entity for taxation
- What taxes must revocable trust beneficiaries pay upon distribution? Grantor who funded trust owns the assets; income from the trust is taxable to them, not the beneficiary
- Which IRA with checking privileges do you recommend? IRA Club; if you want check writing privileges in an IRA, it’s better to do a 401(k) and not have a custodian
- If I open an account as a trader in a personal property trust, what’s the LLC’s role? The personal property trust is used because brokerage houses call you a professional trader and charge extra fees; LLC needs to be a partnership to write off expenses
- Are expenses (utilities, insurance, and homeowner’s dues) deductible for a C Corp? Business-related expenses are deductible to a C Corp under an accountable plan
- Can a S Corp shareholder deduct personal health insurance? You can’t reimburse your own health insurance, but you can deduct premiums as income on your W2
- Do most land easement syndications offer three-five deductions? Companies get together, buy a property, and give air rights/restrictions on buildings; you can get three-five times the investment – invest $1, get a $9 deduction, but that’s aggressive
- The standard deduction was basically doubled, will the tax burden lessen by 50%? No, the standard deduction is what you take or itemize; standard deduction went up, and took away all exemptions and exclusions
- I’m on research landscaping. If I’m not being taxed as an S Corp and my kids work for the business, should I issue each of them a 1099? Yes, hire them and give them a 1099
- What’s the benefit of parents doing IRS paperwork to declare a $15,000 annual gift exclusion? Don’t file it; $15,000 and under is what you can give without reporting it
- Clarify an accountable plan that includes corporation directors not taking a salary? Officers are considered employees by being around directors presumed to be employees; do an accountable plan with the director, but identify what they’re doing
- My C Corp didn’t do any business this year. Do I have to file a return? Yes, C and S Corps have to file a return every year of their own existence
- What are the top deductions eliminated for 2018, with the exception of the SALT limitation? Exclusions, personal exemptions, miscellaneous itemized deductions, and entertainment expenses
- What’s the best way to get precious metal holdings into an OJ retirement plan, meaning what entity is needed? Self-directed IRAs or self-directed 401(k) primarily because banks hate hard assets
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Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis and I’m joined by Jeff Webb. This is Tax Tuesday.... Read Full Transcript
Jeff: Good afternoon.
Toby: Bringing tax knowledge to the masses. I hope you guys are doing great. Let’s see. There’s a bunch of people already asking questions. I want to make sure you guys can hear us well and that we’re coming through loud and clear so if somebody could give me a confirmation on that, that’d be great. Otherwise, I’m going to crank this puppy up. It looks like it’s coming through good on my side loud and clear. Fantastic.
First off, happy holiday season. I hope you guys are done with your shopping. All right, maybe not.
Jeff: I write checks.
Toby: Yeah, you’re funny. That’s horrible. Let’s just jump in. This is Christmastime so we’re going to start giving the Christmas presents. First thing is ask lots of questions. We are going to answer your live questions as quickly as we can. We have a bunch that were sent into the email@example.com which we’ll go over those ones first.
If you need a detailed response, which some of you guys send in some crazy difficult–if you’re platinum, it’s free. If you’re not, then you’ve got to be Platinum. If it’s really crazy where we’re doing a bunch of analyses and we’re going back and forth, you’re going to have be a tax client.
All right, this is fast, fun and educational so we just want to give stuff back, help people do as best as they can with what they’ve got and keep as much in their pockets as humanly possible unless you like giving it away. In which case, bless you. I’m glad that you’re paying your taxes and overpaying your taxes.
Let’s get rolling. I see lots of people asking questions already, which is good, but we’re going to go with the ones that we already sent out. First and foremost, if I can get these slides to–there we go. Questions that we’re going to go through today is, “My wife is a dentist on W2, working for a private clinic that does not give any benefits.” That stinks. “Only this year of three years of service, she got a $10,000 SEP-IRA from her employer that was looking for more retirement options for her.” There are. They are out there. We’ll go over those.
Number two: “My siblings and I have inherited farmland real estate which we own in an LLC. We rent this farmland to tenants per a crop-share agreement where we just pay some of the expenses and profits on a 60:40 ratio. My questions are, since this is an LLC, is a pass-through entity publishing K1s for the year eligible for the 20% write-off?” We’ll go over that. “Does the fact that we share crop have any effect on this pass-through?” Yes, and I’ll go over that.
“My question pertains to health insurance reimbursements. I have a C Corp and an S Corp. I pay myself a modest income of $36,000 a year. I qualify for a subsidy of $125,000 per month leaving me to pay $386 per month on my health insurance. Can I reimburse myself from my C Corp for the $386 out-of-pocket premium I paid at Blue Cross Blue Shield and write it off on my C Corp?” We will go over that. You guys ask good questions. I’ll tell you that much.
“I am a realtor and I normally make edible baskets and take to my past clients around the holidays.” That’s really nice of you, first off. “I also cater lunches for businesses that I obtain clients from. Can I write off these expenses as advertising?” We’ll go over that. You’re thinking right because you’re getting tax-wise.
“Are holding companies only for rental LLCs or can they also hold active business LLCs?” We will go over that. “What taxes will revocable trust beneficiaries typically have to pay upon distribution?” We’ll go over that one, too. “From a tax perspective, would it be better to gift a beneficiary from trust assets while the grantors are still alive?”
I love those questions, and that’s going to come up as we’re going to have some options here. “Which IRA with checking privileges do you recommend?” Jeff, I’m just going to answer that one: mine. I’m just kidding. No, we’ll get into that. We definitely have some thoughts on that.
Let’s see. The first question that was asked–you guys, first off, thank you for asking the questions. Second off, here we go. “My wife is a dentist on W2, she’s a W2 employee and she’s not getting any benefits so we’re looking for retirement options.” First off, if you do not have another company, then you’re going to be stuck to the realm of IRAs. Frankly, if they’re already putting $10,000 in a SEP, really, what she’s looking at is whether she qualifies for a Roth IRA or a traditional IRA.
Jeff: Right, and I think, in this case, if she’s a dentist not knowing exactly what her W2 wages are, she could be running up against other limits because she’s eligible for an employer plan already.
Toby: Yeah, so let me throw some ideas at you. First off, if she’s W2 and she’s not getting any benefits, then it’s costing the employer money and it’s costing you money. Depending on how extensive that employer watches over her–and, in the case of professionals, she has to exercise independence–I would say she’d probably qualify to be an independent contractor.
Jeff: Yeah, I agree with that. We do that a lot especially in the medical profession.
Toby: Yeah, so if she’s an independent contractor, she can set up her own S Corp. If the S Corp is doing the service, then she can adopt a 401K and she can put the first–depending on how old she is–$18,500 or $24,000. Those are going up next year, by the way. $24,500 is going to jump to $25,000 and the $18,500 is going to go to $19,000 on a 401K. She could actually put her own money in.
Then, the other benefit is the employer or the S Corp could also deduct and contribute up to 25% of that amount directly into her retirement plan. The other benefit of it is that if she does that and she makes a bunch of her money go away out of the S Corp, any remaining profits in that S Corp can flow out to you as–at least it’s not subject to self-employment tax.
Jeff: Right, and it’s also going to be cheap. Let’s assume that she’s receiving $100,000 of W2 wages a year. If the company employer pays it to her company instead, she’s not required to pay all that out to herself.
Toby: No, she could actually sit there and let it sit.
Jeff: Let it sit in there, which would possibly entitle her to do some kind of what we’re going to talk about later, the 20% deduction.
Toby: Yeah. Now, here’s the cool part, the 20% and she would be a specified service business. That 20% is that 199A you’ve heard us talk about. It’s pass-through deduction. As an employee, you’re not eligible for it. It’s not eligible on wages. As an S Corp, she would be and so she could get a nice little deduction on that 199A if your total taxable income between the two of you is below $315,000 for the year.
Now, this is where it gets really crazy. We can get you down to that $315,000 because you can always give it away, you could put it in, but if she’s making good money and she’s been making good money, we could do what’s called a cash balance or defined benefit plan and perhaps write off the entire amount that she’s receiving and lower your guys’ total taxable income.
We get to some pretty crazy results here where you’re going to be–if we can change her from a W2–and, by the way, they’re going to look at this really close because they’re going to see whether there was a reason to be switched out, this would actually be a good reason to do retirement planning. Just for taxes isn’t going to do it, but when you say retirement planning, autonomy, et cetera, then there can be some pretty significant tax benefits.
Now, the drawback of no longer be an employee is she’s responsible for her own insurance, she’s responsible for herself and there would be no more SEP-IRA for her because she’s dumping a lot more into her own retirement plan. I’d be remiss if I didn’t point that out. Somebody else is responsible for her so this is something where it would be good to have a conversation with a professional. That’s what we do here. Reach out to us. We’ll match you up with somebody.
Number two, “My siblings and I have inherited farmland real estate which we own in an LLC.” First off, when you inherited it, it stepped up in bases so don’t forget that. “We rent this farmland to tenants per a crop-share agreement where we just pay some of the expenses and profits on a 60:40 ratio.”
Then, the questions are, “Since it’s an LLC passing through K1s, do you get the 20% write-off?” and then, “Does the fact that we share crops have any effect?” There’s rental income coming in from this and there’s active, and the regulations actually address this. I don’t know if you want to–have you played with this at all?
Jeff: From what I’ve seen, rental income is subject to just a 20% deduction just as every other business type and income is. One thing I want to clarify though is your first question, “Since this is in LLC…” You don’t have to be in an LLC.
Toby: You could be a sole proprietor. You could just be getting it on your Schedule E even through a disregarded entity or through nothing.
Jeff: While they call this a pass-through deduction, it needs to be named something else.
Toby: What they should say is something other than right onto your 1040. It has to go through one of the schedules, so Schedule E, Schedule C–I can’t think of anything else.
Jeff: Yeah, this is primarily a business deduction but rentals usually aren’t considered business income, which makes it a little strange.
Toby: All we have is proposed regs, and what they said is you aggregate it. For shared croppers, they net it out so you take a look and it’s the net profit off of both and, yes, you get your 20%.
Jeff: That was a long answer to get there.
Toby: Yeah, but I like it. You get a huge benefit and don’t forget: When you inherited that puppy, you’ve stepped up your bases. Don’t forget that. That’s a huge one. It means the new basis is the fair market value on the date of probably your parent passing or whatever it was.
All right. “My question pertains to health insurance reimbursement. I have a C Corp and an S Corp.” Right off the bat, we already know that we’re dealing with the difference between S Corp and C Corp when it comes to reimbursing. “I pay myself a modest income more than likely out of the S Corp. I qualify for subsidy of going 25 per month,” and I’m assuming that’s on the marketplace.
Jeff: That’s what I was thinking.
Toby: “Leaving me to pay 386 for my health insurance.” You may want to look at the faith-based plans. They’re even less than that. “Can I reimburse myself from my C Corp at a pocket premium? I pay Blue Cross Blue Shield and am able to write it off from the C Corp.” The answer is it depends.
First off, you can’t have any employees in any of these companies other than yourself and a partner so if it’s you and it’s just you, nobody else, then the answer is yes. If it’s you and a spouse, the answer is yes. If it’s you and a partner, the answer is yes because, technically, you don’t have to comply with the ACA.
If you go above that, then you’re in ACA territory and you’re going to have to provide minimum coverage although the Department of Labor and the IRS don’t agree on this and there’s a bunch of stuff going back and forth. They have this weird–you know the term for it–less than 50 employees. What do they call that?
Jeff: They call it the small business exception.
Toby: It’s some goofy thing where they actually–I thought it had like QWERTY. I always think of QWERTY because of the keyboard, but it’s some qualified this, that or the other. The point is that it’s really tough to get coverage if you have less than 10 employees and you’re supposed to be getting that coverage to qualify for ACA. If it’s just you, we don’t have to worry about that because you’re exempt.
Then, you can write off out of your C Corp. It can reimburse you anything that comes out of your pocket for premiums, copays, deductibles, non-covered, whatever. If it has to do with health and fixing your body or keeping your body healthy, then chances are it’s going to be deducted, especially if a doctor prescribes it or if you’re under the care of a medical professional. That’s really the only way I know you can write off club membership dues if they prescribe it.
Jeff: The only issue about writing off the out-of-pocket expense is we really don’t know what your credit’s going to be until we complete your 1040 so while you’re getting that $125-a-month subsidy, what your credit actually is could be more or could be less than that depending on your total income.
Toby: Yeah, but we can keep your total income pretty darn low if we’re reimbursing through a C Corp. You’re actually doing it right. C Corp probably manages the S Corp, have a management agreement, make sure it’s in writing, make sure you’re invoicing, and you could do some pretty amazing things here.
There’s not just the 386 but it’s anything that comes out of your pocket, including the deductibles and copays. If it’s dental, shoot, they only cover about half of the procedure so you could do some pretty amazing things with this one so the answer is it depends on your situation. Hopefully, it’s just you or you and a spouse and then you can do whatever you want.
If it’s not, then we just have to be cognizant of the fact that we have to comply with the ACA, in which case the answer is still yes but you may have to offer that benefit to other employees. Employees that you’d have to offer the benefit to are 30 hours or greater.
Toby: All right. “I am a realtor.” I love the way that they do it in all caps.
Jeff: I did it like that.
Toby: “I normally make edible baskets.” I like that part. You can send it right here to Anderson if it’s cookies. “And I send it to my past clients around the holidays.” That’s really nice of you. Is it past clients or even to your regular clients? “I also cater lunches for businesses that I obtain clients from. I can I write off these expenses as advertising?” This is awesome. Jeff, you know the rules.
Jeff: Okay, the edible baskets that you’re creating–you’re going to be able to write off your costs on those baskets up to $25.
Toby: They did an index for inflation. It’s been the same thing for 50 years or some ridiculous term or you make it as advertising. Either way, you’re going to be writing it off. You have a gift amount of $25 that you don’t have to report that you just write off per person per year. If you’re making edible baskets, it depends on what you’re using for the contents but my guess is you could write it off under either of those two sections.
Jeff: Now, the catered lunches are going to come under the meal rules so you’re going to be able to deduct half of what you’re actually paying for those catered lunches. There is a 100% exception but that’s got to be, one, just open to the public like open houses or things of that nature.
Toby: Now, what they’re saying is, “Can I do it as advertising?” I think what they’re saying is–I know that people try to do this and, technically, if you’re trying to generate business and it’s aggregated into one expense, what I’d be doing is seeing if you can’t–if you’re catering a lunch, it depends on how it’s being broken out. If it’s food that’s separate from the room, I think you’re going to have an issue.
Jeff: I agree.
Toby: If the food is included in a room fee and you have a basic–like, “Hey, you have to meet a minimum of food and beverage,” then I think you’re okay.
Jeff: Yeah, I completely agree with that.
Toby: The answer is it depends but, chances are, we’ll find a way for you to write it off. If you’re working with us, whoever your accountant may be, that’s where they get their pencils out, sharpen them up and make sure that they’re giving you good advice.
All right. “Are holding companies only for rental LLCs or can they hold an active business LLC?” This is where I get my handy-dandy pen out and we’re going to walk you through this. The reason that we typically have a holding LLC is because we’ll have a bunch of LLCs in different states or holding different assets.
Let’s say each one held a little house–pretend those are houses–and you have the holding LLC. Here’s you out here smiling. If somebody comes after you, then we want to stop them. Usually, we use a Wyoming holding entity or a Nevada entity because they cannot take the LLC away.
The other reason is it makes a single entity for taxation if you’re doing a 1065 or partnership so we only have one tax return. If this house down here has a horrible liability occurrence, it stays inside that box. It doesn’t infect the other boxes.
Now, what if I own shares in IBM and I own a bunch of IBM shares? Should I put that into the holding company, too? You could. The problem is, is let’s say that they make an argument that they should ignore. We have this piece of property and they make an argument that, somehow, you should ignore the LLC because you forgot to do some paperwork or they start trying to pick through it in court and they’re trying to get to this guy up here.
They don’t know about these. If you have a bunch of stock sitting in a Wyoming entity and they start doing discovery, you may put yourself at risk on losing that because if they break through and they get into the holding, then they could perhaps take it. Now, it’s highly unlikely so it’s always a facts-and-circumstances test as to how aggressive you want to be in your asset protection planning.
This, to me, looks like you have some assets. Is it worth putting your stock at risk? It depends on how much it’s worth. If it’s $50,000 of a private company or if it’s $5 million, I’m going to give you two different answers. If it’s just, “Hey, this is just my corporation and I have a C Corp,” it’s going to be a C Corp. It’s not going to be an S because an S Corp has to be owned by you.
Let’s say we have a C Corp that’s owned by you and you put it in there. Really, no harm, no foul because nobody’s going to want your corporation stock anyway. You’re probably keeping it fairly lean so you can do both. It’s just whether it’s prudent to do both is really up to you as to what you’re willing to risk. Anyway, Jeff?
Jeff: Nope, I’m good.
Toby: I’m sorry. I go crazy. All right, we could do this one. “What taxes will revocable trust beneficiaries typically have to pay upon distribution?”
Jeff: The whole point behind a revocable trust is the grantor or the person who actually funded that trust is still technically the owner of those assets so any income being generated under that trust is going to be taxable back to the grantor, not to the beneficiary.
Toby: That’s called a grantor trust. Whenever you hear somebody say ‘grantor trust versus non-grantor’, what they’re referring to is, “Does the grantor get the income?” and, if it’s a grantor trust, then they ignore it and it’s treated as you but now you’re saying a trust beneficiary upon distribution. I think they’re talking about when somebody dies.
Jeff: Once somebody dies, it’s no longer a revocable trust.
Toby: Now, it’s irrevocable which means, “Is it a grantor trust?” They have no power over it anymore.
Jeff: I’ve heard it’s called a credit trust, an AB trust, credit shelter. There’s a hundred names for what it is now.
Toby: It’s irrevocable. Nobody can change it and the grantor is now deceased, which means it’s a non-grantor trust which means it’s flowing to you. If the trust makes money, generally speaking, it’s distributing all the assets and the income to the beneficiaries and the beneficiaries pay tax in proportion to the amount that they receive. If it’s just sitting there as an irrevocable trust and it’s not distributing anything, then the trust would pay tax on it or it K1 out the beneficiaries.
Jeff: Right. Some trusts are required to distribute their earnings, whether they actually distribute it or not. At that point, what we call simple trust beneficiaries are being taxed on earnings. The one exception is capital gains remain with that irrevocable trust. It’s considered part of their corpus, the body of the trust, so until that is actually distributed out to the beneficiaries, the trust will continue to pay tax on it.
Toby: See, you guys a simple question. Unfortunately, there’s always facts and circumstances but, generally speaking, if you don’t want to pay tax on the trust level, distribute it out to the beneficiaries. It’s only going to be the beneficiaries who pay tax.
If it is a revocable trust and you are the grantor and you’re giving money to beneficiaries, that is called a gift. If you are the beneficiary during your lifetime and you’re just giving trust assets away, then you’re just gifting and you would pay tax on that. They wouldn’t pay anything on receiving that if it’s a grantor trust and it’s your grantor trust. Until it becomes irrevocable, until they become the beneficiaries, then we’re not worrying about tax to those recipients.
All right. Fun stuff, guys. “From a tax perspective, would it be better to gift a beneficiary from trust assets while the grantors are still alive?”
Jeff: Déjà vu?
Toby: Same thing?
Jeff: Would it be better to gift a beneficiary from the trust assets while the grantor’s still alive? I have mixed feelings on this because I’ve kind of dealt with this. If the grantor had more health–
Toby: I know what you’re talking about now. It took me a while but it’s slow today, guys. Jeff’s referring to something that we were talking about.
Jeff: If the grantor’s older and in poor health, then, no, you don’t want to distribute those assets if you can’t. There’s multiple reasons to distribute to the beneficiaries. You may want to be able to, if it’s your children, to benefit those children while you’re still alive. Maybe you’d rather see them get some while you’re still alive than after you pass. However, if you wait until you pass for them to obtain your assets, they do get that step-up in basis and that could be a considerable benefit to them.
Toby: I just dealt with this actually in a question that we couldn’t answer a few weeks ago. I’ve been going back and forth with a client. There were some Oregon clients who were talking about the inheritance tax, which Oregon still has an inheritance tax which is called the estate tax there. Basically, it’s an estate tax. They call it the inheritance tax. It’s on $1 million so anything above that, you’re getting hit pretty hard.
Here’s the competing interests: If you die with an asset, the basis steps up. Let’s talk about having a house and I give the house to Jeff during his lifetime. Let’s say I’m Jeff’s dad and I’m giving him the house then there’s no 121 exclusion. Jeff is getting my basis in that. Let’s say that I bought it 30 years ago for much, much less than what it’s worth now and he’s not getting taxed on it but he’s not getting any benefit and I’m not getting any benefit.
Now, if I pass away, Jeff owns the house. He gets no step-up in basis. I’ve already given it to him and he could do whatever he wants with it during his lifetime. If I give him the house and I say, “Here, Jeff, I’m going to give you the house,” and he says, “Great, Toby. You’re moving out tomorrow. I’m kicking you out,” there’s not much I could do about it unless I reserve a life estate or put it in a qualified personal interest trust, something like that, or QPRT, qualified personal residence trust, where I get to live it in for the rest of my life.
Now, we don’t want to lose that step-up in basis that you get so let’s make it in reality. I’ll give you a real-life situation of somebody who inherited. Dad put some buildings into a limited liability. It was actually a limited partnership but it could have just as easily been a limited liability company.
They give the interests to a bunch of siblings and they did not get a step-up in basis so when the sibling sold it, they ended up having tax obligations when they started selling off the buildings years later, and that kind of stunk. The reason they did it was because they were worried about the estate tax but there really wasn’t an estate tax to worry about; it was just–some advice are getting a little–jumping the gun, getting out over skis, getting worried about something and it caused tax harm.
The only time I would actually recommend that somebody starts gifting the asset is if we know for sure there is going to be a tax hit. Mom is getting older and I’m going to pay $140,000 in tax. I just did the numbers on one of these and this is about the scenario. Is that more than I’m giving up if I have a step-up in basis?
I look at it and say if I gave up the step-up in basis and just transferred it now and I sold it, what would my tax obligation be? If the random number was only less than $140,000, then I might do it, assuming that mom’s old and in poor health because I’d say, “Hey, I’d rather not get killed in taxes. It’s not worth it. I’d be better off.”
Here’s a thought, though: Whenever I see those situations, I always go to them and say, “What are you trying to accomplish? Why doesn’t Mom settle the house under install sale with the right to occupy and pay rent?” That way, we froze the value of it.It’s stepped up at that time, mom has an income stream and then you just gift the income stream when you pass.You kind of get the best of both worlds there. You’ve got it out your estate.You froze the value of it anyway. There’s some other little tricks up our sleeves, too, that we could use.
Jeff: As far as gifting to your beneficiaries or to whoever, one thing I would recommend based on what Toby just said is I don’t think it’s usually wise to gift greatly appreciated asset because you’re just transferring your tax liability to them.
Toby: Absolutely. 100%. The rules of anything tax or financial-related which is calculate, calculate, calculate is where we get our pencil up. In most states–I think there’s 14 states now that still have an estate tax. Most of the time, the federal taxes–unless you’re over $11 million it’s not even an issue. If it’s a married couple, once you’re over $22 million, we’re not even worried about it.
You may live in a state that still has that stupid estate tax like we had in Oregon. They’re at a million. Some states are still floating around out there so you need to always just get it out and say, “What would I be looking at? What am I giving up?” and you don’t make a trigger reaction.
All right. “Which IRA with checking privileges do you recommend?” Did we get through all the questions already?
Toby: Wow, it seems like just a blip in time. That’s crazy. We work with–somebody’s asking a question. We have a lot of questions. We’ll get to those now. Amir, you can ask questions. The route that we go is we answer the questions that we’re asked via email, we answer the questions that were emailed in during the week and then we go onto the live questions so we’re going to get to you. We’re not going to get off until we’ve answered all your guys’ questions.
“Which IRA with checking privileges do you recommend?” IRA Club is the one that we tend to refer to. That’s Dennis from Chicago, a super nice guy, and that’s probably where I would go. Hopefully, whoever’s looking–that’s not saying there’s good and bad. There’s good and bad everywhere. It’s wherever who you’re comfortable with.
Jeff: But it’s usually going to be somebody who helps you with self-directed IRA.
Toby: Yeah, you’re doing self-direct. Realistically, depending on what you’re trying to accomplish, if you want check writing privileges in an IRA, I’d probably say you’re better off going with a 401K and not having a custodian.
Jeff: You’re not going to be able to go the bank and ask for an IRA with your checking privileges.
Toby: No, what you do with an IRA is you have a checkbook LLC. You open up an LLC in the IRA and it has that or just do a 401K.
Jeff: Did you do a 401K?
Toby: Yeah, I think we could handle that one and then you get rid of the custodians if you want to buy things on a weekend. We have a bunch of questions. You could email in if you want your questions. We’re about to go through a whole bunch and then we’ll get to the live guys, and we have a bunch on the live ones, too. We’re going to bust through these. Questions, you send to Tax Tuesday real quick and then I’ll go back over this, too.
We did a year-end planning recording and you could still get that at andersonadvisors.com/year-end-tax-planning-2018. I’m going to shoot my guys. My tech guys love putting those dashes in there. I’m always like, “You’re making my head hurt, guys.” Email us or visit Anderson Advisors, but I did about an hour and a half–I want to say–on the year-end tax planning maybe.
Think right around there. A whole bunch of ideas. I think I hit over 20 strategies for the year end. There was an offer in there which I’m afraid is over. We are booked until the end of the year with our tax guys. Our tax guys are slam, bam, thank you, Ma’am. It is not even funny how packed these guys are. Jeff just keeps looking at me going, “Please don’t send me any more people.”
Jeff: They’re killing me.
Toby: Yeah, but you could always try to reach out to an advisor. I just don’t think you’re going to get a tax planner. We’ll do our best to help you and guys will ferry questions back and forth, but you’re not going to get a consult at this time of the year. That’s why we tell you to do it back in October.
All right, let’s go back to questions and let’s start doing this. “I have inherited a property in Virginia, a farm and a home, and it has a life estate of a 90-year-old. What is my risk?” This is kind of odd. You inherited property and you have the remainder interest. “The life estate says she has insurance to cover herself. Question: How should I address the issues in this case? She also owns 25% of a separate farm with buildings and other stuff in a corporation. I’ve also inherited 1/9th of another 25%. The one does not have a life estate. How should I structure these assets and how long does it take?”
Very, very interesting. Here’s the deal: Somebody’s got a real estate attorney and they’re going to town. What they basically said is, “You get some land but somebody has the right to it during their lifetime.” Now, that’s marketable, which means if she lives there, she probably has a right to stay there but if she doesn’t, you may just want to see what it would cost to buy out that interest.
If she has insurance probably to cover the property in her assets so she destroys the property, you’re not out of luck. I would still get insurance on it. Talk to an insurance company about insuring your interests and insuring the structure so that you don’t have to rely on somebody else covering it.
How would I address it? I would just talk to her and say, “Hey, what’s your intent? Do you want to stay there? Is there another way we can handle this?” “I also own 25% of a separate farm in a corporation.” It says 25% of the farm and then they got a piece of the other 25%.
If you’re in a corporation, there’s really not much I’d be doing except that I’d be worried that if it’s a farm and it’s land, I don’t particularly like it in a corp. I would at least drop the land into its own LLC. I don’t know. It’d be really tough to figure this one out because you have a taxable event if you take appreciative assets out of a corporation.
Jeff: Right, and I’m not sure if it’s an actively-farmed property.
Toby: Yeah, I would say we’d have a conversation because what we may do is I’d probably set up an outside LLC and buy the farm from the corporation on an installment sale just because I want to get that real estate out of it and set up a rental agreement. “What would I do with my other interests?” I’m assuming that it’s the other 25% so that’s going to give you some 27% or 28%. This one doesn’t have–
Jeff: I’m curious as to how this property is tied to wholesale.
Toby: Yeah, I’d want to take a look at a number of these things. I’m thinking that if it’s in a corporation, but we’ll have to take a look at it. It’s a great issue and I love the question but there’s a lot of moving pieces here. Either way, we’d be able to help probably next year. That’s what everybody wants to hear. “Yeah, we can help you but it’ll be in January.” We have 200 people that work here at Anderson and if it comes down to it, we’ll have an advisor working as the go-between but the accountants right now are up to their eyeballs.
“For a trader, if I open an account in a personal property trust, then what is the role of the LLC besides using LLC’s EIN, trustee or the personal property trust?” No, this is what’s beautiful. I know what you’re doing. The personal property trust–we have to use them because the brokerage houses try to call you a professional trader and want to charge you extra fees.
This way, it can be Toby Mathis, trustee of the Mathis personal property trust, but the beneficiary of that trust, I make the LLC and use its EIN so its taxes are reported to the LLC. Here’s why it’s important: That LLC needs to be a partnership.
If it’s not, then any of the expenses are just going to flow onto my return, me, Toby, and I don’t get to write off any expenses because there’s no more miscellaneous itemized expenses on the Schedule A so I literally lose 100% of my expenses if I had an LLC and wanted to be taxed as a partnership and I’d have a corporation be a partner and be the managing partner who would actually manage the whole account and everything else.
That’s why we do that. I hope that makes sense, and it has nothing to do with the trustee; we’re just trying to make the brokerage house happy without getting hit with extra fees and still allow us to have tax sections.
“Is it deductible to the C Corp for expenses like utilities, insurance and homeowners dues? Also, is it taxable income to W2 employees because home office is no longer deductible to them?” Richard, Richard, Richard, I love it. Do you want to whack away? I’m making you sit here and stare at me.
Expenses that are business-related would be deductible to the C Corp under an accountable plan. An accountable plan requires that there be an employee-employer relationship, and that can only exist in an S Corp or C Corp if you’re the owner.
If you have a C Corp and it’s reimbursing your expenses, it can do so if it’s a business expense, so like your cellphone, et cetera. If you have homeowners insurance, utilities, things like that and homeowner’s dues, then it could only deduct the portion that the business is getting the benefit of using.
Now, this is one of those weird areas where everybody seems to be off their rocker in the accounting world when it comes to home office deduction. There’s really four ways that you can have a home office deduction. You could have a cash register and, “This is where I do all my business. This is where I transact on my business.”
You could have an administrative office for where you do your administrative activities for the business. Then, that counts as a principal place of business for that business. A business can have multiple principal places of businesses under this standard.
There’s another one where you meet and greet customers and then, if you have a detached structure on your home that says “used for business”, then you can write off. Those are the four ways to do it. Everybody ignores that second one, which is the administrative office, because it’s only available to employees of S and C Corps or LLC is taxed, as you said.
Jeff: I think what’s so ground into the accountants that your principal place of business at one time had to be where you did your work. We have a fishermen that their boat was their principal place of business. They couldn’t have a home office. Those laws have changed.
Toby: Now, you could so that same guy–as long as he’s an employee, the boat would actually have to be in an LLC or corporation or the fishing enterprise would have to–the boat could be in an LLC and is being leased to the corporation. That corporation could have its principal place of business both on the boat and where he does his administrative services like invoicing. It’s not on the boat; it would have to be at his home and then the business can reimburse him the percentage of use of that space.
If you have a five-room home and one of those rooms is being used for business, get this: You get 20% of all those expenses that can be deducted by the company reimbursed to you and, under the rags, you do not report that anywhere; you just get the money. It’s deductible to the corporation, not taxable to you. That’s called tax-free money. I love that.
Somebody else: “Does a shareholder of an S or C Corp who has a principal base of business also work from home?” Yeah, we just talked about that. That’s exactly what we’re talking about. The answer is yes. Here’s the thing: It’s not just a shareholder–you should a shareholder of an S or C–it has to be an employee. They’d have to be a shareholder and be an officer or director’s employee. Do they have to receive wages? No. Actually, any compensation includes any fringe benefits or anything, whether it’s taxable or not.
“Can a shareholder of an S Corp deduct his personal health insurance if he is the only qualified employee? Does he need to establish health reimbursement planning?”
Jeff: For an S Corporation, no, you can’t reimburse your own health insurance. What you can do is it becomes a deduction to the S Corporation if you include those premiums as income to you, personally on your W2. Now, you’re saying, “What’s the benefit of that? That kind of washes itself out.”
Toby: Because you can write it off.
Jeff: Because you write it off on your 1040, not on Schedule A, right on the front page of your 1040.
Toby: Yeah, but that’s only for the insurance premiums. You don’t get to do the reimbursement plan.
Jeff: Right, so any other medical payments that you make whether you pay them or the S Corporation pays them, they’re not going to be deductible to the S Corporation.
Toby: Sammy, I would say you need a C Corp. You could still have a C Corp and an S Corp. You just have to establish a written relationship between them where you’re providing management to the S Corp, and that works, believe it or not.
Jeff: Make yourself an employee of that C Corporation.
Toby: Yup, and you don’t even have to take a wage. You could just be getting benefits, benefits, benefits and then park some money in the C Corp if you want to. There’s no reason you can’t especially if it needs it.
All right, here’s another one: “Land easement syndication. A lot of them offer three to five deductions, three times tax deduction based on professional appraisal on best use of land. What are the gotchas and things to look for? What percentage of those end up in an IRS audit?”
You’re actually talking about conservation easement. Land easement syndication means there’s companies that get together, they buy a property and then they give the air rights and restrictions on buildings and all this stuff to foundations and public charities like Ducks Unlimited. It’s one that always gets them because they like ducks so you need to have lots of land open for the ducks. Three to five times–the average last year was five times the investment. You invest a dollar, you get a nine-dollar-deduction, but that’s aggressive.
Jeff: Yeah, and it’s always kind of astonished me that they use the best use value.
Toby: Donald Trump, President Trump, does this with every golf course. You can go read up on Mar-a-Lago. I think it was either a $6 or a $9 million-deduction because they said, “Hey, we’re going to keep it as a golf course. You can’t subdivide that thing up.”
Jeff: You can have farmland that is usually valued fairly low, but that’s not its best use. Best use might be to develop it into residential real estate or warehousing where it’s much more valuable, and that’s the number that these conservation easements are based on.
Toby: Yes, but what percentage is going to get audited? If you’re really aggressive, probably almost all of them.
Jeff: These easements have a pretty high audit rate.
Toby: But you’re not dealing with the audit; you’re just sitting back and you’re getting a K1 on it. In my experience is they tend to win their audits as long as they’re using qualified appraisals. The IRS is looking for people really going crazy, doing 20 times. Even 9 times is too much. The ones that I’ve referred to people–and there’s only a couple–are 4 to 5 times.
Jeff: I can’t say how important those qualified appraisals are.
Toby: I’m not going to recommend online but if you send me an email, I’ll introduce you to people. I do not get a dime out of these things so I try to not expose myself to massive amounts of liability for nothing, but there’s clients that have used it and that’s all I’ll say, is I’ve had clients use these with success and executive-level people, C-level people, and publicly-traded companies that have used it.
If they’re doing it, then I feel comfortable saying you could talk to the same people they do. That’s about as far as I will go, and I will not recommend them as a great thing, but you could talk to them and I’d least put you in touch.
All right, “Seeing as though the standard deduction was basically doubled, will the tax burden basically lessen by 50% as well?” I love that. No, the standard deduction is what you take or you itemize. The standard deduction went up but they didn’t just do one thing; they also took away all the exemptions and exclusions.
Jeff: Right, so there’s no personal exemptions.
Toby: And they took away–
Jeff: Your state and local tax deduction’s capped now.
Toby: Yeah, state and local taxes are capped which means your property taxes and your income taxes are capped at $10,000 if you’re a married couple, $10,000 if you’re a single person. Weird. If you’re married filing separately, that’s the only one where it’s $5000 each, but that’s the most bizarre stuff.
They took away a bunch of, too. The miscellaneous, itemized deduction is obviously the big one. They capped the SALT, state and local taxes. Overall, many taxpayers are going to get a little extra money, but in plenty of states, the average actually went up.
If you’re in New York, Connecticut, California, estate tax, place, Oregon, your taxes probably went up. I hate to be the one that tells you that, but we actually started those. I called it taxmageddon earlier this year and then we said, “No, they gave us a big tax write-off.” They gave the businesses the tax write-off. If you didn’t set up a business, chances are, you’re not getting the best treatment.
Jeff: If you live in Silicon Valley, this is going to be a really big blow to you, that state and local cap.
Toby: It’s going to suck, and I have clients that pay property taxes in excess of $20,000 by themselves that, now, they just got that cut in half, and that’s everything. Fun stuff.
“I currently have a sole member LLC established for my real estate investments but my wife and I are starting another line of business selling and brokering life and health insurance. Should we establish a separate multi member LLC or partnership or is it better to pay our salary?” Luz, if you guys are going to make money out of it, then part of it’s going to be looking at your licensing and say what they’ll allow you to be.
Chances are, they’ll let you be an LLC and owned by the licensed individual. More than likely, I’m going to tell you to be an S Corp at least for tax purposes. That way, she can pay herself a salary, she can put it all into a 401K if she wants, she could defer up to $18.500 this year. Next year, it’s $19,000 if you’re under 50. If you’re over 50, you get a $6000 catch-up added on top of that plus 25% of any wages the company can contribute. We can get to a good chunk of money into her retirement plan, which is only available if we have a business.
Jeff: Anytime you’re licensed to do business like insurance brokers, real estate brokers, accountants, you really need to check what your state rules say that you can do where you can put the income.
Toby: Yup, and you guys are asking questions and I see them flowing in here. Don’t worry. We’re going to get to everybody before we get off so we have a few more to go through here. “I have a truck registered with disabled veteran plates and same with my house, which exempts all property tax fees. Would having systems support or hurt with the moving of a home into an LLC and land trust?” I would not do that.
If staying in my name, I save hundreds of my assets are known or creating coverage and showing no assets, property taxes, motor vehicle. There’s other choices, Eric. He’s basically saying, “Hey, I’m getting a bunch of benefits because I have disabled veteran’s plates.”
First off, thank you for your service and your sacrifice. That’s not an easy path. I’ve known a lot of disabled veterans and, sometimes, it’s not physical scars either; sometimes, it’s the other ones that are worse. I had two very, very close people to me that were on full medical disability that you would not know it walking around so I would not lose that benefit. I wouldn’t mess around by moving that into a trust other than perhaps a living trust for your estate planning.
Now, that said, it depends on the state in which you’re in. There are states where they can’t touch your house. If you’re in Texas or Florida, you have an unlimited homestead exclusion. If you’re in Nevada, it’s $575,000 so unless your house is worth more than that, they can’t touch it.
Anything else we do, we’re looking at making sure that there’s no income coming onto your return that would cause you to lose benefits. We’re very cognizant of that and we would make sure that we’re working around that so I would not ever put you in a situation where we would lose a benefit that you’ve earned or that you’ve had to sacrifice a cost. Just so you know, that would be a consideration that we’re looking at.
All right. “My S Corp is behind on paying the C Corp its monthly management fees due to some outstanding invoices. Would December 31st be the cutoff date to pay the C Corp in order to capture the tax deduction for 2018?” Yes. Then, it says, “If so, can we carry this over to 2019? S Corp year is December 31st. C Corp year-end is September 30th.” Yeah, so what you need to do is make sure you’re making a payment before the end of the year to the C Corp to get it out of this tax year for you individually.
If you need to borrow money, do it. Just make sure the payment is done. If you need the money back out, you could pay yourself out of the C Corp. It could reimburse. Technically, it could loan although Jeff would probably give me a stink eye here.
Your audit risk is super-low and I’m not going to put you in something that would but, technically, I think if you document the loan and you pay a fair market rate, you could technically borrow the money back out as long as you pay it back. Make sure that this is arm’s length and that you are paying that sucker back. Yeah, Steven, you could absolutely do that.
The other thing we’d be looking at, by the way, is other assets where we could borrow money from. Sometimes, we borrow from our 401K for nothing else but to make a payment. That’s deductible this year. Yep. Sorry, we do it and then you’d just have to pay back the 401K, but you’re paying yourself the interest and you’d get the big tax write-off. I would do that in a heartbeat, too. All right, anything you want to add?
Jeff: In regard to that, I would not suggest that you borrow from your IRA, which means taking a distribution.
Toby: Don’t take it from an IRA.
Jeff: Even though you have 60 days to put that money back into another IRA, it’s just a bad idea.
Toby: Yeah, it’s only the 401K that we’re borrowing. We can borrow up to $50,000 per participant capped at 50% so it’s whatever is less. If you have $100,000 in there, you can borrow $50,000 tomorrow and you can pay it back over five years at federal rates which are around 4% right now. All right, I think they’re around 4%. I haven’t looked at it.
Jeff: I think they’re a little lower than that.
Toby: Interests have been going up. All right. “How much of our travel expenses, flight, hotel, gas, et cetera can we claim our taxes or should we reimburse ourselves from our business?” That one. You can’t write off any of it and your business can reimburse you with if it’s business-related so you always do the accountable plan. I always talk about the accountable plan. Everybody says, “What the hell is an accountable plan?”
I’ve been doing this for 20 years. Every time I talk about it, they used to say, “What’s 280A?” Now, everybody knows what that is because of Airbnb but it’s like you get the recurring theme. An accountable plan–you have to be an employee. You get to write off all your business expenses by reimbursing employees, and you’re an employee.
“What is the best way to determine if a property to qualify is for QBID but does qualify? Is it no longer passive income and I would have to pay self-employment tax?” Do you know what that means?
Toby: Qualified business interest deduction? I’m thinking that you’re talking about 199A. As long as it’s rental, you’re going to get the 20% deduction. This is the 199A, I’m pretty sure, qualified business income. Rental right now under the proposed regs they’re saying qualifies with the sole exception of if you are a landlord of a commercial building with a triple net lease where you have zero skin in the game. That’s the only way. That’s the only one that I know of where it wouldn’t qualify. Everything else, you do so as long as you manage the manager, you’re fine.
Holy crud. Somebody just emailed me a book. Oh my goodness. All right. “My questions are regarding the subject of hiring the kids to do work for real estate family business. I’m on research landscaping where the residential real estate business is a single member currently on a 1040 Schedule E. Question 1: If I’m not being taxed as an S Corp and my kids work for the business, should I issue each of them a 1099 form reporting their income?” The answer is yeah. You can just hire them. They’re not an employee so you can 1099 them straight.
“Where and how do I report that my son’s worked in my business in 2018 and got paid?” That’s that 1099. You’re actually hitting it on the head. You’re reporting it as payments to contractors. You’re not going to report it on their tax return.
“If or once they get their 1099 form, do they need to file their own taxes?” Yes.
“If each of their income was below $7500, do they still need to file their separate return?”
Jeff: If their income is anything, they’d have to file their own return because they’re subject to self-employment taxes.
Toby: Yeah, so they’re going to have a little bit–like 14% tax–and that’s the self-employment old age, death and survivors in Medicare, and they will have zero taxes on their income because they’re below the standard deduction for themselves and so they’re not going to pay any tax, which means put it in a Roth. Please put it in a Roth IRA, in case you’re wondering.
“What other formal documents to the IRS do I need to provide?” You don’t have to provide them anything but I would have a statement of their work, and if they do time sheets, that would be great. Some sort of invoicing would be awesome, just something that spells out what they’re doing and how much time they’re spending so that if you do get audited, you have easy backup, but I don’t see these things getting audited that much.
“What’s the benefit of the parents doing paperwork for the IRS to declare the $15,000 annual gift exclusion?” There isn’t. The annual gift exclusion gives you no benefit. You don’t even have to file anything for the gift exclusion. That’s the amount you can give somebody without reporting it.
Jeff: Right, so once you go over that annual exclusion, then you have to file a gift tax return which just reports your gifts for the year.
Toby: Yeah, so if you’re under $15,000, you just don’t report anything. If you go above that, then you have to count it against your lifetime exclusion, which is like $11 million right now.
Jeff: Yeah, and that’s the whole purpose of it, is just to see what you gifted over your lifetime and how it affects your exclusion.
Toby: All right. Somebody says, “Can you touch on LPs versus LLCs and the current trend away from LPs?” Yeah. Jason, LLCs didn’t come around until the ‘70s. They weren’t really universally accepted until, I think, it was 2003 by all states, and we didn’t really have uniformity in the courts.
I used to use LPs. When I first got into this business, it was LPs because we knew exactly how they were treated. An LP has two types of partners: a limited partner who has no control and a general partner who has control. It’s still worthwhile doing if you want to make sure somebody does not have any control.
There’s no reason to put that restriction in place unless you have a reason so we tend to go with LLCs where we have managers and members. Even then, 95% of the time, I’m a manager-managed LLC where I keep my management separate from my membership so a lot of members really have nothing to do with the business, and that’s pretty much the same as an LP so we’re able to accomplish with one entity what used to take two or three.
That’s why everybody uses LLCs. They’re not recognized by the IRS. The IRS says, “You tell us how you want it to be taxed.” An LP is really for state law and, unless we have a compelling reason to use it, we don’t just because everybody’s getting used to working with LLCs.
It’s like a Swiss army knife. Your LP is a spoon and the LLC is a Swiss army knife that has a spoon feature. Unless you really need a big spoon, you’re always going to use the one that has the knife and the screwdriver, too. That’s a horrible analogy but I’m making it. I hope that makes sense.
Wow, somebody says–I’m just going to answer a quick question. Somebody did this in all caps so I actually read it. “Could you clarify an accountable plan that also includes corporation directors not taking a salary? Technically, officers are considered employees by virtue of just being around directors who are presumed to be employees so, yeah, you can do an accountable plan with the director just as long as you’re spelling out what they’re doing. Yeah, you could have one and make it easy for you.
“I have a 401K with my current employer and I’m also leaving the job in the next few months. My family also has a recently-formed C Corp. I’d like to ask if I could somehow transfer or roll my 401K to fund their C Corp so I don’t have to pay the hefty tax penalty if I simply withdraw the money. We intend to use the C Corp in both trading and real estate activities.” Do you want to play with that one?
Jeff: This sounds like ROBS potential.
Toby: Yeah, so here’s the deal: You’re leaving a job with a 401K with a current 401K sponsor. They’re not going to let you just take over your own 401K on their plan so you’re going to have to set up your own plan, first off, if you want to avoid tax. You can do this in two ways. You could either have your parents establish 401K and you become an employee of it and roll it over or you could do an IRA and you roll the 401K into the IRA. Either one will work.
Now, if you want to use it in a C Corp, you do what’s called a ROBS transaction. My partner, Clint, likes to do these. He’s the only one here that will touch them. What it is, is you set up a company, a C Corp, and then you buy the shares with the qualified plan. Usually, we’re using a 401K but you can actually use an IRA.
Jeff: You need to establish a corporation first and you need to establish a 401K plan, roll your money into the 401K plan–
Toby: And then the initial issue of stock is going to be partially to a 401K and then you could be the other shareholder. That’s it.
Jeff: That’s awesome.
Toby: That’s ROBS, rollover something.
Jeff: Rollover business startup.
Toby: Rollover business startup. That’s what ROBS stands for. Anyway, I hope that makes sense. You can do it, yes, and I would do it with Clint who is my partner because he loves those, and don’t fall for all the internet junk out there. You want to make sure you have somebody–the IRS gave us precise rules to follow so it’s not like anybody out there knows anything more than anybody else. The IRS says, “Here’s how you do it and that’s how you do it.”
All right. “Can my C Corp reimburse me for my health insurance premiums and long-term healthcare real easy?” Yes, long-term healthcare premiums would be long-term care and, as long as it’s qualified long-term clear and not replacements of income but it’s for activities of daily living like if you have two out of seven activities of daily living, washing, being able to clothe yourself, cooking, cleaning, all those stuff, if you need help with that, then, yes, the premiums are 100% tax-deductible.
“Can C Corp pay salaries after close of tax year to be included in that current year?” No. “In essence, could a C Corp with a tax year in September 30th pay salary in December that would be deducted in its current tax year?” No.
Jeff: No, it would be deductible in the corporations and it’s kind of backwards of what you want to happen because you’re creating an expense in the next year for a corporation for creating income for yourself and the current year.
Toby: “Other than the usual tax deductions, is there any other big spending items for a C Corp that is tax-deductible or tax-deferrable?” Jenny, that’s a crazy question. You got a whole bunch of tax deductions and then other big spending items for a C Corp.
You get your 179 deduction, you get your bonus depreciation but, realistically, the secret sauce of a C Corp is that it can reimburse all your medical, dental and vision expenses 100% as long as you don’t have a bunch of employees rolling around out there and it has a 21% tax bracket.
If you end up with a bunch of income in the C Corp, it may be better than having it land on you especially if you’re in the 37% tax bracket or have state income taxes, too. We have clients right now that are in the 50% tax bracket and I’d rather be at the 21% so we’ll find a way to get it in there.
“Can C Corp pay salaries”–somebody already asked that. “For a brokerage investment account opened with personal property trusts, how can I use the EIN in my LLC?” Somebody already asked that, too. It’s a different person, different version. “What is the role of the LLC?” It’s just a beneficiary of a personal property trust and you use EIN so that when the brokerage house issues its 1099B, it’s to the LLC. That’s all we’re doing it for.
“For a 501C3, non-profit org”–I love them–“Can one person’s name be listed in multiple roles: president, secretary and treasurer?” The answer is yes and we’re going to look at the state as to whether you can have a one-person director.
For example, Texas requires three people to be directors and Nevada requires one. If you’re just one person, then you may want to look at jurisdictions that allow that. If you have other people that you’re involved with, then you can go to other states. Yeah, one person can be the president, secretary and treasurer.
They’re run by their boards. There’s no shareholders so, usually, if there’s going to be a restriction, there’s multiple board members. By the way, we do that for our non-profit clients. We offer to be an outside director so if you need directors, I can give you two years, $1500, nothing like it because we love non-profits and we work with about $3000 of them.
“In the event your C Corp made 0 profits due to inactivity in any year but accrued significant expenses, are you eligible for any tax benefits?” You carry forward the tax losses–actually, I’m hogging this.
Jeff: Yeah, there are really no benefits to–other than like you said, carrying forward losses and all, IRS isn’t going to rebate or refund you anything.
Toby: 1244 is our friend. The only way you’re going to get a personal benefit is you eventually kill the corporation and you write off the losses personally. You can write that off only for C Corps, $50,000 per person, up to $100,000 per family.
Jeff: Yeah $50,000, single; $100,000, married.
Toby: If you have losses in a C Corp, sometimes, we say it’s time to kill it and you’re like, “No, I don’t want to kill it,” but you’re like, “Hey, there’s $60,000 in losses and this married couple are in a high-income bracket. Let’s take the money now. We’ll take it as a loss.”
Jeff: Something else that comes up: “My entity, my C Corp, my S Corp didn’t do any business this year. Do I have to file a return?” Yes, C Corps and S Corps have to file a return every year of their own existence.
Toby: Yep. Now, there’s not a lot of penalties if you don’t know but, technically, you can get slapped for not filing a zero return so you always file a zero return no matter what. Even if you lose money, you file it and that 1244 is against your active income just so you know. We actually had a client where the accountant refused to do it. It was 60-something thousand dollars, a high-income client. We did it knowing that it was going to trigger the audit.
They released what they call a correspondence audit where they send you a letter saying, “Hey, please explain this.” We explained it and they said, “No problem.” It ended up being a 30-something thousand dollar tax benefit to them and it took us all about five minutes.
Let’s see. “I have an LLC that owned and sold one property and holds some notes with others for wages. Are there any payroll taxes due?” Oh, boy. Owned and sold one property. It depends on what your intent was when you bought it but I would say no. If you flipped that thing and you intended to flip it, then you’d have what are called self-employment taxes, not payroll.
Holding a note, that’s interest. That’s not subject to old age, death and survivors, and selling a capital asset, technically, even if it’s short-term, as long as you weren’t intending to flip it, it would not be subject to old age, death and survivors or Medicaid or Medicare which is also known as self-employment taxes so don’t worry about it.
“I have two separate unrelated businesses. One has full-time employees. The other has no employees. Can I have a solo 401K?” Off the cuff, no if you own them both. If you have greater than 50% ownership, if you have a commonality of two of six, even if it’s a Brother-and-Sister Corp and there’s all these little things where they wrap them in together, then the answer would be you cannot do it.
If it’s completely unrelated businesses, then you may be able to find somebody who would say yes but they would have to be completely separate lines of businesses and then there might be a way. The answer is, off the cuff, no but, depending on whether they are completely different business classes, you might be able to, but we’d want to make sure that we’re not inviting the IRS into the intent if you know what I’m saying so we may want to restructure ownership a little if there’s spouses or anything else going on.
“I’m 59 ½ years old and I have a Roth IRA that is past its five-year wait period. I also have a traditional IRA with another advisor. If I convert my traditional IRA to a Roth IRA, will I have a new five-year wait period on the nearly-converted funds?”
Jeff: The answer to that is no. The five-year period starts with your first contribution to the Roth.
Toby: Yeah. I think they’re rolling it into the existing Roth IRA.
Jeff: Right, so you don’t even restart that clock.
Toby: Yup. See, it’s good to have Jeff around here. He kicks butt. Jeff, honestly, I was blanking on that one. I was like, “I know there’s a rule out there but my brain has got cobwebs when it comes to some of the conversions.” I don’t know. That’s really cool. I forgot all about that because somebody used to always say, “Why do you have a Roth IRA and you don’t get rid of it?” It’s because you don’t want to restart your five-year period.
Jeff: That’s exactly that.
Toby: Shoot, I totally blanked on that one. “I’m pretty new to real estate investing and I’m a bit nervous with tax season coming up. I currently have two C Corps but I have not had any activity yet, so no flips, no money to use to help with all the expenses. Is it hurtful or harmful in the long run to claim a losses here?” You’re fine in claiming a loss. That’s why we have Amazon. They did it for a decade.
“Any benefit to doing so?” You’re carrying forward your losses and you’re capturing them and, more importantly, if you have startup expenses, we have to capture them in the first year. Otherwise, they are added to your bases, which may not sound like much but it’s pain in the butt if you try to get the money out.
“I purchased an LLC for a single-family home that I have been renting for the last 11 months.” No, that’s perfect. “The only name that’s on the property title is this LLC. Only my name is in the LLC. Should I look at addressing the lease option?” I’m not sure I’m following her question. We’d have to take a look at it, but you’re fine. First off, go ahead and grab your losses in the corp. If you have profit in the single-family residence that’s in an LLC, we may want to pay some of that to the corp to offset the loss.
Okay. “I have not closed our first real estate deal yet as an S Corp. How should I file our taxes?” You’re going to grab all your expenses that you possibly can and you are going to file 1120S with those losses. It’s going to flow down to your personal return and, more than likely, offset your personal taxes, assuming you have bases.
Here’s one: “Toby mentioned conservation easements.” I’ll have to send you those, Aziz. I’ll absolutely do that. There’s two that I’ve dealt with that seemed pretty much on the up and up. There’s lots out there if you want to just go and look around but my clients tell me they’ve had good success with a couple of these guys and they’ve been doing it for years so I don’t want to give you any flighty ones.
Deductibility of prepaid legal expenses? It sounds like an insurance. You’re going to be able to write it off if it’s in a business. If it’s personal, I don’t think you’re going to get to write that off anymore because there’s no longer miscellaneous itemized deductions. If it’s for a business, yes; if it’s you, no.
Any difference between my LLC that holds rental property or my S Corp and/or C Corp?” I see what you’re saying. Yes, make sure that your S Corp or C Corp is paying the prepaid legal expense. There. Easy.
“Is the $35 a month fee to Anderson Advisors for platinum membership? Is it tax-deductible?” To a business, it is. It can reimburse you for it, too. “How about deductibility or the upfront cost?” It’s deductible. “Can the initial upfront cost be paid partially by my LLC and partially by my C Corp?” Yes.
Jeff: I’d rather you didn’t do that but, yes, you can.
Toby: Yeah, do the C Corp. “Can it be paid in both December and January so as to split any deduction over two years?” You’re a cash-based taxpayer. It’s when you pay it. Anyway, that’s all crazy stuff. Somebody’s talking about platinum. Let’s see. “Can the benefits be passed down?” That’s not really what we want to go over here.
“Can you provide the top three deductions that have been eliminated for 2018 with the exception of the SALT limitation?” The deductions that have been eliminated that stink the worst: Exclusions, personal exemptions, miscellaneous itemized deductions and entertainment expenses are gone so you’re no longer able to tax-deductibly entertain yourself.
“I have health insurance through COBRA. Can I have my new C Corp set up either as an HSA or something similar? Pros and cons?” Health reimbursement is all you need and it can reimburse you anything you pay to your COBRA. Then, Stacy, I would recommend that you really look at doing–I’m not just saying faith-based but they have some plans where I don’t know how faith-based they are but Medi-Share and some of these others are significantly cheaper than COBRA.
Everybody I’ve looked at–quite literally, it’s about a 50% shaving and you couple them with–there’s a faith-based plan or their Medi-Share plan and then they have a high deductible plan so that it covers everything. You may want to look at that. You’re going to save yourself a lot of money. If you need somebody, I have a fiduciary that does that type of work. I don’t do it.
Here’s a long one: “If a real estate sales business is not getting enough sales and rental properties are losing every year, will they define my real estate business as a hobby?”
Toby: Yeah, so as long as you’re trying to make a profit, you’re good. There’s this thing–rental properties, there you can lose money all the time. It’s an active business and it says in the event of a person or an S Corp in a business for profit, if they don’t make money three out of five years, then there’s a presumption that they’re a hobby but it’s a rebuttable presumption and you show that you’re trying to make a profit.
Jeff: Yeah, there’s a whole list of what makes a business a hobby, and that’s just one of the rules of thumb.
Toby: Yup, and get this: There was a guy who had 23 years of losses as an individual and he won.
Jeff: Yeah, what they’re really aiming at if you read all of these exceptions or what causes it is, “Are you really trying to make a profit or not?”
Toby: Yup. All right. “I am starting a holistic assisted living care facility in the foothills of the Blue Ridge Mountains to stop and reverse Alzheimer’s using latest science-based health protocols. I’ll be operating under private membership association similar to Boys and Girls Scouts of America and a bunch of others. Generally, allow owner rules and public laws. Since a PMA is not a public entity or a public collective entity of any kind whatsoever created by or under any government authority”–there’s a bunch of stuff–“What taxes would it pay? If it will be operating as an unincorporated entity, would it not be exempt? What forms would I fill out?”
Jim, if you’re opening up a non-religious organization and if you’re helping people reverse Alzheimer’s or you’re doing any of those activities, that would be 501C3.
Jeff: You have to file for exemption.
Toby: You’d have to file for the exemption. There’s a 1023 application and you need to set up a corporation in the state where it’s operating. It would be exempt from state, federal and local property taxes more than likely but you’d have to apply for each of those. You’ll more than likely be granted if it’s actually operating. I’m just telling you: I would actually jump through the hoops. The only place, the only type of organization, that does not have to do all the hoops is a church, and this doesn’t sound like a church.
Jeff: Now, would you keep the real estate out of the exempt organization or would you leave it in?
Toby: It depends. If I have lots of depreciation to capture and I’m not going to have much–maybe it’s kicking me a little bit of loss, I may keep the real estate out and rent it.
Jeff: Rent it to the holistic agency?
Toby: Yeah, and as long as it’s arm’s length, I can actually get paid and I can actually get money. If I want to give it the rent, then it’s treated as a contribution. Every one of my rent payments is treated as a gift so I could still keep it outside so that if a slip and fall happens, it doesn’t go inside my 501C3.
“I have my own S Corp business. Can I deduct my own children’s college tuitions as professional development costs?” Glen, it depends. Technically, the way I hear it, you can probably not unless they’re doing something that is helping them in your business. Otherwise, you just pay them and let them pay their own tuition.
I have kids basically paying their own tuition at their own tax bracket. We already know we can pay them $12,000 a year and not pay any tax other than payroll tax so it’s still a really good deal. Pay your kids and, while you’re paying your kids, have them start a Roth IRA so that they never pay tax on that ever again. They don’t pay tax the first time; they don’t pay tax when they take it out and do that.
We already answered this one. This is the last one. Now, these guys–now, we’re jumping at all the live ones. “I just turned 70 and must begin taking R&Ds from a couple of IRAs next year. Do I also need to take R&Ds from our qualified retirement plan?” Yes, and somebody just said, “Pay the kids more and let them take the tuition credits.” Yes. See? You guys are good. You guys are thinking about this and there’s a bunch of you chiming in. I love that.
All right. Now, let’s start jumping into these. “Can you use a ROBS C Corp to operate as a realtor?” Jeff, you’ve been patient. The answer is yes. If you do a ROBS transaction, you can do anything. Now, here’s the one catch: Your realtor association may not let you operate as a C Corp so it always depends on the state and whether or not they’ll let you do it. As a broker, chances are, they probably wouldn’t care. As a real estate agent, they probably do.
“Can you claim medical expenses already paid with spending funds?” No.
Jeff: No, because those are pre-taxed.
Toby: Our rule is always, “Did I pay tax on the money that was spent and then I can get it back?” “How much does it typically cost to start a new S Corporation in Illinois?” That’s depending on what type of organization it is. I would actually talk to somebody here. If it’s just plain vanilla, they’re not horribly expensive. If it’s a ROBS transaction, they get crazy.
“Do you do Puerto Rico tax returns? If not, do you do referrals?”
Jeff: We can do all the territorials. They use the same forms as the IRS does.
Toby: It’s like a 4% tax down there, right? I’m going to live there for 183 days and, somehow, I magically don’t pay much. It’s crazy. This guy’s flying in there for one minute. That’s a day. “Is there any advantage of bundling charity given one year for personal filing?” Yes, that’s exactly what you do. There is a huge benefit depending on how much you give and whether or not you’re above your threshold.
If you are itemizing no matter what, it doesn’t really matter that much. If you are really close to that $24,000-limit and you’re really close like your charitable deductions are pushing you up over but you’re missing a lot of them, then I’m going to tell you to do two or three years at a pop. You do not donate money out of a C Corp because it’s limited to 10% of its net income.
“I am selling an investment house that I own with a partner 50-50. Do we have to break the partnership before doing a 1031 exchange?” You have to go house to house. If you’re selling a house, you technically have to take it in the same names that you own the house in.
The only exception that I know of is I believe that you could perhaps break it into tenants-in-common, in which case I’m not sure whether they would have you could exchange your tenant-in-common because most of the buyers are going to say, “I’m not going to play that game. I just want to buy the damn property.”
Otherwise, you guys buy the property and you do what’s called a swap and drop where you agree to buy out, you buy the new property and then you buy off their interest either through a payout or some methodology.
Jeff: Yeah, there’s a section–I want to say 721–where you’re actually swapping your property for an interest in a real estate partnership or something like that.
Toby: Yup, it gets kind of–in other words, here’s the easy answer to make it easy for me and easy for you: You need to have a qualified intermediary that really understands, and they can advise you because they’re the ones who have to put their name on the transaction.
Jeff: That’s what I tell clients when they first start talking about 1031. The first question they ask is, “Are you a qualified intermediary?” because you need to talk to them. They can answer a lot of your questions.
Toby: All right. “I want to make sure I understand about deductibility broker fees. I created an LLC which holds the account. I created a C Corp which is a member of the LLC. The LLC pays a guaranteed payment to the C Corp. The C Corp pays the brokerage fees of those. Is this correct?” Yes. “How is this the C Corp’s expense?” The C Corp is just writing off the fees to the broker as an ordinary and necessary business expense for its management entity.
It’s receiving the payment as a guaranteed payment to partner, and that causes the flow-through to be a net amount that goes to the individual’s K1s off of the LLC. The LLC is a partnership. For federal tax purposes, we’re talking about a partnership and a corporation. The corporation’s receiving guaranteed payments from that LLC as a partner managing the LLC. You’re allowed to do that.
Instead of flowing onto your Schedule A, it’s netting out the amount that flows onto your tax return so whatever amount goes under your Schedule D is the amount that you pay tax on. We’re just making sure that we’re getting it before it goes to your Schedule D. If you let it go to your Schedule D and then you try to write off the management fees, that involves your Schedule A and you will not get to write that off. That’s why we do what we do.
All right. “Can you offset holding expenses/preparation for rental expense on five properties against income received for flipping and two other properties?” The flipping sounds like a profit. I’m not sure I’m following that question. Maybe I’m misreading it.
Jeff: Yeah, I’m not sure that I would want all of those in the same entity anyway.
Toby: You wouldn’t want it in the same entity. I’m just thinking of–you’d want to make sure that they’re separated out. Your rental properties don’t combine with your flipping, but it’s all going to flow down–it depends on how it’s taxed. If it’s an S Corp, it’s all flowing under your return anyway.
With your real estate losses, could they offset? The answer is yes if you’re a real estate professional, if you’re actively participating and you meet the income thresholds or if they just offset each other. We’d need a little bit more information, Nina. I would actually email us in.
“My wife works as an independent contractor. Can we have wages paid to our C Corp or LLC?” Actually, yeah. It just depends. You want to make sure it’s in your state or it depends on the type of work they’re doing, and you make sure that there’s no licensing issues. If they’re a professional, they may be required to be an S Corp or an LLC–anyway, I’m talking too fast–or you make it an LLC that’s taxed as either disregarded or as an S Corp.
All right. “Is Anderson offering a tax package special right now?”
Jeff: We’re kind of revamping our pricing right now.
Toby: We’re so busy right now but, that said, if you want to become a client, you’re going to be talking in January for your initial consult because, right now, we are until the end of the year just too jammed. They do have a $2500 investor package. You can talk to them about that. It has a lot of units and a lot of benefits that goes along with it. Now, it makes sense when you’re saying, “Why are you guys so busy at the end of the year?” It’s because we’re trying to get with everybody and save them money before the end of the year.
“Do you have to have an entity to get the 20% deduction?”
Toby: Yeah, so the answer is no, what Jeff says. “We set up a QRP for a new psych practice that flows to our corp. They may not take any pay this year, only reimbursement.” In order to make a contribution to the QRP, I believe you need to do it via payroll. “What is the time limit for getting this done?” End of the calendar year to make a deferral. If you have a 401K and in order to make a tax deferral, you have to do it before the end of the year and it has to go directly into the 401K through payroll.
You can still make contributions after the year-end that the company matches but it’s also based off of your income so if you have no income, it can’t do a match, but if it pays you before the end of the year $20,000, you could either defer the whole thing pretty much or you have the ability to put 25% of that. Let’s say you paid yourself $20,000 and you took it all because you needed the money.
The company could make a $5000-deduction next year. You could still do an IRA. If I use bigger numbers, those numbers go up. If I paid you $100,000 before the end of the year, you could make a $25,000-deduction next year up until when it files its tax return. It’s when it actually files the tax return.
“What if one of the lower boxes of the development company or the management company should be outside the holding company?” That was back when we were talking about the entities flowing around. I wouldn’t have one of the lower boxes be the management company. Actually, it could be and flow back up so, hopefully, they’re still listening, John. Most of you guys are still on. 97% of you guys are still on. You guys are troopers because it’s 4:30 but I told you we’d get through these.
“If we have four LLCs under a Wyoming holding LLC, we purchased property under one LLC, however, we want to dissolve three and the holding, is that possible?” Yes, if you just want to have one entity holding the real estate, you can certainly do that.
“I thought the revocable trust was how you transferred your assets at death without probate.” That is true. “Can the trust elect to distribute the capital gains to beneficiaries?” Yes, we’re talking about the revocable trust. A revocable trust becomes irrevocable when you pass and then everything goes to the beneficiaries. If it’s distributing to the beneficiaries, they pay tax.
Here’s how it works: Jeff passes away. Sorry, Jeff. I’m killing you off. He passes away in September. Let’s say he passed away on September 1st and then we distribute on January 1st so there was three months of income. As long that’s distributed to the beneficiaries, they pay tax on that income. That’s all that means. Usually, you don’t distribute the next day.
“What is the best entity for flipping properties in S or a C Corp or an LLC taxed as an S or a C Corp? Can you sell the house and take the residence exclusion?” I think they’re referring to the issue we had earlier. The answer is yes. That’s how you do it. You use your 121 exclusion and way to think.
“We have two Wyoming LLCs in Florida. We are attempting to set up a checking account for LLCs. However, our bank says the LLCs have to be listed.” Tom and Barbara, you are trying to open them up in Florida. You need to open up the bank accounts either online and use the Wyoming address or you’re going to have to let them know that it’s a Wyoming entity.
Any Florida bank is going to make you registered in Florida and, yes, it negates the purpose. If you need somebody, just contact your rep here and they’ll put you in touch with the banks that we use.
“Anderson set us up with a revocable living trust. Summarize the specific steps that beneficiaries need to take to get the assets after the grantor’s assume room temperature or if they pass away.” Kevin, you’re the trustee during their lifetime which means you hold legal titles to everything on behalf of the trust.
When you pass, they become–their successor trustees would step into the shoes of you. They’d put themselves on the account and, literally, if it’s cashed, they just give it to themselves or they follow the trust agreement.
I use my dad as an example. When he passed away, everything was already set up with my mom on all the accounts as a co-trustee so that we didn’t have to do anything. The only thing that was tough there was the pension that my dad had. She had to contact them as the beneficiary. You need to be careful with this in terms of divorce. Grantors have been forced out of their homes.
We’re talking about the house and making sure that you cover–wow, I’m really behind here. Here we go. Let’s see. How was it mentioned here? I’m also a platinum member so maybe it would be better to submit it through the portal. Yes, Casey Buckland. I’m going to write this down here real quick and make sure that I take a look at this question, if she thinks it wasn’t answered. It may have been last week. Who knows? It probably was gotten to at some point.
“How do I transfer funds from unsecured credit from LLC 1 to fund real estate where LLC 1 will hold the asset?” I see what you’re saying: to fund real estate. Basically, Ruben, if you have an LLC that has unsecured credit and you own it, you could borrow that money, take it out and put it another LLC just as easy. You may want to loan it to the other LLC. If it’s just you, you’re not going to end up paying yourself interest on that because it would be an expense and income of the same amount so it would wash.
“If our rental LLCs do not have enough to pay some expenses, can the C Corp pay these expenses if it’s the management entity?” Yes, and then you would be entitled to be reimbursed.
“Merry Christmas and Happy New Year’s, guys. Thanks for what you do.” Thank you, Bill. I really appreciate that. Sadly, this is another one: “Parents really passed.” I’m very sorry to hear that. That’s always rough.
“They had a living trust and owned several rental properties. One will be transferred to me. One other term is my brother currently manages the properties but very poorly. Will I be responsible for the taxes on the property and can I take over their rental altogether?”
Eli, if it’s in the living trust and you’re a beneficiary, then I would be making sure that you’re in contact with your brother, and you may want to swap them out. You probably have the right to remove the trustee as long as you appoint another.
You’d want to see the documents. If you are not happy with the way a trustee’s actions are, it doesn’t mean that you can go in there and assume the role yourself but, usually, you could move to remove the trustee and have a professional trustee assume the position.
This one says, “Anderson formed a Nevada C Corp with a March year-end. I have a Nevada LLC as the checkbook for the C Corp with a December year-end. I also have Minnesota LLC for rental property with a December year-end for the C Corp. Do I report income expenses for LLCs with December year-ends or do I slide them within June?” Steve, basically, what he has is a couple of LLCs and a C Corp that’s managing.
If the LLCs move the expense to the C Corp regardless of whether the C Corp does anything with it, it’s out of this tax year. It’s no longer going to be in 2018. As long as the C Corp pays that expense at some point before its tax year, you’re going to have zero income showing up in anybody’s return. I hope that makes sense. If you already paid the expense or if the C Corp already paid the expense or if the C Corp already paid their expense, then it’s getting reimbursed.
The most important thing is that, to get it out of a tax year, you actually have to pay that expense from the entity whose tax year it is. If it’s one of the LLCs, December year-end, the LLCs have to pay that C Corp before the year-end. Otherwise, you don’t get to write it off for 2018 so I hope that makes sense.
“Are regular businesses expenses deductible to an LLC taxed as a pass-through entity?” It depends on the business and it depends on what’s going on inside it. The LLC won’t make any difference if it’s a pass-through. It’s going to be dependent on the recipient.
“What is the best way to get precious metal holdings into an OJ retirement plan, meaning what entity is needed?” You guys are killing me.
Jeff: I’m going to say self-directed IRAs or self-directed 401K primarily because banks hate hard assets.
Toby: I’ll tell you this so I’m going to change it one bit on a legal standpoint. An IRA is still subject to state law. They can come and get it. In OJ’s case, he was a beneficiary under the NFL Players Union pension, which is an ERISA plan so they can’t take the distribution. I can take the distribution from an IRA. That’s the only difference between those two. If OJ had an IRA, then the Goldmans could step in and take his distributions.
They cannot touch those distributions out of the NFL players pension so how do you get precious metals into a 401K? You have to have another employee participant and it needs to be a 401K. Then, it would qualify as ERISA. Even if you do get another employee, you could literally just give somebody $500 into an IRA and so you roll that into the 401K if you don’t want to have them as an employee. You just want it to be a multi-employee.
“I’ll be receiving employment settlements under an unlawful indiscrimination claim.” Congratulations. “On the new 1040, if I include these fees, where do I get the–to present it on the 1040 form if I convince my employer, which is very likely, to get the 20%?” Here’s the deal: If you have an employment claim, you’re not going to get to do the 20% 199A deduction period because you’re an employee.
Anytime you have unlawful discrimination, it’s pretty much going to be W2, and if you have lawyers, egad, I don’t know how the miscellaneous itemized deductions affect that. I think you’re going to get the net, but this would really stink. You’re going to have to make sure your settlement is specifying whether this is a return of wages, whether you’re recovering back wages or whether or not this is pain and suffering or something else. You are going to want to talk to your attorneys about this like yesterday to make sure that they’re addressing the taxes on it.
Jeff: And the attorney’s fees themselves are kind of a big deal as how they’re reported, whether they’re reported as part of your return or your settlement so if you get $100,000 but $40,000 of that goes to the attorney, you don’t want to pay tax on $100,000.
Toby: Yup. All right. “I am a W2”–I hope that that helped you. “Can more than one of your home be used for corporate tax expense? My wife uses our study for business and I conduct work in our master bedroom so can we claim both?” The answer is yes you can but it has to be exclusive. Your master bedroom–you better make sure that the portion that you’re using for your business, in other words, is not the bed, that the portion that you use for business is the only portion that you’re counting.
Jeff: Yeah. If it’s a master bedroom, that’s going to be a very small portion.
Toby: Right. Now, I have seen bedrooms qualify. You actually put files on the bed and you take pictures of them. Here, you’re using that bed for something else so that square footage would not work, but you could still take a portion of your master bedroom. It must be a huge bedroom.
Somebody said, “What about New Jersey? New Jersey has both an inheritance and an estate tax.” That’s what they’re referring to. “If my C Corp incorporated in 2017, do I need to file now before January 2019?” It depends on your year-end. Chances are you can have a return due.
Jeff: I’m guessing you probably have a September year-end for 2018.
Toby: Which would be due 12/15.
Jeff: 1/15 now because they changed the dates.
Toby: Yeah, right, so you have one due in January.
Jeff: Which can be extended.
Toby: Yeah, and then you get a six-month extension. God bless him. My little brain sometimes–too many of these numbers. “Should I request an extension on my personal taxes until my non-profit has been officially recognized? We made a significant contribution.” The answer is I would request extension. It’s better to have the exemption approved. That doesn’t mean you won’t get it but it may get it kicked out and it won’t be if you’re not filing the return so I would file an extension.
“Do you advise relating to SALT deduction workarounds used in the charitable deduction credit?” You don’t get to do that. They already got rid of that in the regs so that was a bunch of states being dumb.
Jeff: But one thing you can do is, if you’re reimbursing for home office or transferring some of your real estate taxes into the home office–
Toby: Yeah. John, you’re not going to get a workaround with the charitable deduction credit but what you will do–and, no, they will not win that. I would give that about the same chances as Buster Douglas had against Mike Tyson. “Whoops!” I just watched that fight again. 1990. Can you believe that Buster won? I’m going to say that I’d give it about the same chance. It means they have a puncher’s chance, but one law professor wrote that they must have written it in crayon, the states, because it made about that much sense. Yeah, they’re not going to get it as a charitable deduction.
“In Oregon, does home property tax cap mean that if a property tax is 4K, will it still be deducted? What does the cap mean?” The cap means that you’re limited to the amount that you can deduct on your personal return for all state and local taxes. The other cap that’s used is when you have property tax caps, is that you can’t go up more than a fixed percentage on an annual basis. At highly appreciating places, they don’t completely hose you. I hope that makes sense.
All right. “My wife has a realtor and has a single person LLC. Is there any benefit to having an LLC assigned to a Nevada C Corp?” No, but you could, Steve, have a management agreement to allow the Nevada C Corp to manage what I would probably say is–I’m thinking about the ABA and what they say on this, the American Bar Association. They talk about, for professionals, with any licensing, it’s better to use marketing via agreements, so to have the C Corp do all of her marketing and social media and stuff like that. That way, they can’t mess around with it.
I may want to look at her being taxed as an S Corp because, chances are, she’s going to reduce her self-employment tax and it’s usually pretty significant. It’s usually $6000, $7000 or $8000-savings as a minimum and then you also get the accountable plan as a result so there’s a huge benefit. There we are again. I can’t get through a single one of these without talking about it.
“I’m now a contractor attorney with no benefit. Should I create a corporation? Which one to pay for benefits, to reduce taxes and pay for benefits?” I recognize this name and, if you’re an attorney and you’re in California, you have some other hoops to jump through. They don’t let you–I don’t think they let you be–I don’t remember if they don’t let you be an LLC. I think they let you.
Jeff: I know doctors aren’t allowed to have corporations.
Toby: Yeah, the bar association has some funky stuff. I always get mixed up. I just did one, too, and I just can’t remember off the top of my head. The way that you do it is either you have your practice–you as an individual with the sole proprietorship and you have–this is going to sound weird, but then you have a C Corp set up that you pay money to or an S Corp that you pay money to for everything that’s not legal, and then you pay a little bit of self-employment tax and you have an entity that probably is handling all your reimbursements and benefits, but it’s always a question we can have.
There is a way to be an entity. It depends on the state that you’re licensed in and what you’re practicing so I’m always going to say, yes, you want a corporation in your life because that makes life so much easier to have an accountable plan where we don’t have to report stuff and it’s plain vanilla.
Just to give you guys an idea, S Corps are audited 0.3% of the time versus individual sole proprietors that are making $100,000 to $200,000. It’s 2.2%. It was 2.4% so you’re talking about 700% increase and likelihood to be audited if you’re a sole proprietor and they lose 94% of the time versus about 67% of the time of an S or C Corp so it’s not even close.
From a tax standpoint, I would say, “Hey, 1/7th”–or, actually, it’s more than that. It’s quite literally like 1/8th. “I’m looking to start a business. Don’t know whether to do a profit or non-profit. Doing research, non-profit would be best.” It would depend on what your new business is. I like non-profits but, remember, the benefits can inure to you as the shareholder.
Wow, there’s still some questions here. “Please, my wife has a C Corp that is choosing to file as an S Corp,” which means they made an S selection so she has an S Corp. “This S Corp pays a very minimal amount. It’s a 1099 to my mom who now files her own return as tax law since there’s no point claiming more dependents under a joint return. Of course, I’m receiving some nominal income-splitting. Should I make my mom a shareholder?”
No. For what you’re doing, it’s probably fine and, chances are, you’re going to want an accountant to get some eyeballs on that. It sounds like he’s paying mom to do some income-splitting. Make sure she’s doing some work but you can also get benefits. The reason that mom is a dependent’s a good thing is, especially if they’re elderly, is that you can cover their medical, dental and vision if you have a C Corp. Jeff, you have some people that’s pretty high-expense. What are some of the big ones?
Jeff: I’ve seen some of these policies that run in tens of thousands of dollars just for a single.
Toby: Yup, and they’re paying for something that might not be covered. I know that we’ve had a few clients that run the $30,000-range of reimbursement just for mom as long as she’s a dependent but you may not be there yet so that’s why we just look at it, calculate it out and see what’s best for you.
“I will be inheriting a home that we’ll never live in and we want to purchase a home in 2019. Do you know if I would still be eligible for the first-time homebuyer?” You can sell that house. You stepped up in basis, Eli, so the inherited home, you will not pay tax on, and you should still be eligible for the first-time homebuyer’s credit because you did not buy a house.
Jeff: It really has to do with what was your principal residence.
Toby: Yup, so if you inherited a piece of property and you’re just selling it, it’s not even going to show up on your return as income.
Jeff: And sometimes, first-time homebuyer doesn’t mean the first time you bought a home.
Toby: All right. Somebody else says, “How do I become an employee of an LLC that is owned by my husband?” It has to be an S Corp or a C Corp, Diana, so we just have to make sure that we classify it. It’s as simple as filing a one-page tax form if it’s not already taxed as an S or a C Corp. Thank you, guys. There’s some nice ones.
“Rolled over an old 401K and a 401K Roth through a brokerage account. The brokerage receives all in one lump and placed it in a traditional IRA.” Oh my, gosh. Holy crud. They mixed up a Roth and a traditional IRA. Doug, I would switch that brokerage. I’m sorry. If they mix this up, I don’t agree with them that they can’t separate it out. I’d be looking at something.
Jeff: They definitely need to fix this.
Toby: “Is the 1244 only passive?” No, you can offset active. I think I answered that one earlier. “Can I transfer money from my personal account to my C Corp to pay for business credit card?” Yes, and you can do it whenever you want. It’s just part of your–you’re either loaning it money, Julia, or you’re contributing it. Either way, it’s not taxable to you.
“Does an S Corp have a $200-per-month penalty for not filing?”
Jeff: It is $195 per month, per partner or S Corp shareholder.
Toby: Yep, so don’t be late.
Jeff: Up to 12 months, so it’s expensive.
Toby: If you did it–if you mess up your first year, they’ll give you a pass but, after that–
Jeff: Yeah, once they’ve decided that you misbehaved in the past, they’re not so forgiving.
Toby: Wow, it looks like here’s a cool one. “I am a government attorney W2 income. My wife is an attorney consultant and real estate agent and providing services as a sole proprietor with income under $100,000. We have a corp set up that manages LLCs from investments. I also set up an eBay business. What’s the most advantageous entity structure to minimize tax and increase retirement? We also have a solo 401K.”
I love it. I would probably be looking at getting the attorney consultant and real estate agent–probably, they’re going to have to be in their own separate boxes for licensing purposes, and I’d probably have those as S Corps then I’d have a management entity doing your eBay as a C Corp and seeing whether it’s going to pencil out. Without getting into too much structure here, chances are, you’re not benefiting yourself.
Even with the income under $100,000, that’s still self-employment tax at 14.1% so we could at least get that down to the $4000 or $5000-mark if not even farther so we could probably save $10,000 just on the self-employment tax. If you already have a 401K, that’s awesome. You could probably not have much tax.
“How can I mitigate cash-out received from a home in my name?” Put it in a 401K and then take a loan out of that. “I do not have a large C Corp.” If I have money that I’m getting out of my house, chances are, if you’re just getting the money out of your house, you’re not going to get to write off its interests because, right now, the only type of deduction you get on mortgage is if it is acquisition indebtedness. Of course, if you’re not going to itemize, it’s a new point. You could put that into a 401K and take a deduction on it.
Jeff: Yeah. If it’s not for acquisition or improvement, then you may have other issues.
Toby: Yeah, so we’d have to–I wish I could give you a simple answer on that. There’s a couple of moving pieces. What you want to do is see whether or not you’re actually losing a deduction or whether you’re under the standard deduction and then what’s the amount of deduction you’re going to get if you put it into a retirement plan. It could be that it saves you a few thousand bucks and you say, “Yeah, I want to do that.”
“Is it better to create a C Corp or S Corp when you’re a new fix-and-flip?” It’s always going to be–that’s a loaded question. It depends on facts and circumstances. You’re always going to look at your income and how much money is being made. You can always take a C and make an S, but if you make an S and then go back to C, you have a five-year waiting period before you can go back so I tend to start with a C and stick there until I need an S.
“If I have my daughters do some online research and pay them $599 or less, do I need to 1099 them?”
Jeff: You do not need to 1099 them if it’s under $600.
Toby: Yup. “I own a rental house 50-50 with my brother and had the gutters replaced, paid the contractor a sole proprietor and he said his account would send me his W9 but he won’t and he won’t answer his phone. I’m going to have a property. Am I going to have a problem when I file my return?” Not having a W9 so no 1099 can be issued. It depends on how much you pay them. If it’s over $600, the IRS is not too nice about this.
Jeff: Which is why we preach don’t pay anybody that you don’t have a W9 for.
Toby: Yeah, now he’s talking to a guy who had two contractors denied deduction-wise. We were part of a super audit years ago and they went through over 700 vendors, and only two of them didn’t have W9s on them. They made me pay $750, which I did gladly to get them out of my office, but it was annoying because the two vendors was a landscape company and a magician.
The magician ended up on America’s Got Talent and went all the way to the finals. He’s still rolling around out there, and the landscape company went out of business. It was one of those things where to get the W9 just was a pain.
“We are currently repairing our rental properties. Can we claim that as losses?” If you’re repairing, yes. If you’re improving, no. If you’re doing a whole roof, that’s added to bases. If you’re repairing stuff like fixing the roof, then you can write it off. The safe harbor is $2500 per invoice so make sure that if your contractor’s invoicing you, that they don’t give you anything above $2500 and then it’s automatically going to be repaired.
“Do you ever recommend a single-member LLC or is it always a poor choice?” It depends. I like single-member LLCs especially for real estate. I don’t like it for active businesses unless it’s owned by a corporation or, sometimes, if it’s an LLC owned by a 401K disregard, it’s fine.
“Do we still have time to hire your services as our tax company? We are platinum members already.” End of the year is tough but, again, it depends on how quickly you need it. We’re not going to be able to get you an accountant before the end of the year but you can always send something in and we’ll see whether an attorney or somebody else may be able to fit that role and how much of it we need to do this year versus–you could always start off as a client next year.
Just know we have a very busy tax practice. I wish I could say that we had tons and tons of people waiting for work but we’re the opposite. We just slaughter our people and we ask a lot of them. Jeff is just looking at me like, “Yup, you’re killing us all. We’re all turning pink,” so I’m going to say go ahead and contact us and I’d probably have you go through one of the attorneys first and then make sure that we’re adequately servicing you.
“We are looking to cancel our employer health insurance”–the fiduciary. Yeah, email me, Maggie, and I’ll get you. It’s going to be–David McShane is the one who does all the health plans. His company’s very good at it.
“What is meant by non-cash component depreciation regarding LLC?” That’s funny. I’m thinking that you’re talking about component depreciation. You’re talking about a cost segregation and you’re probably talking about separating out 1250 property from 1245 property which means, in English, 27.5-year property versus stuff we can bonus depreciate and take all in one year and you have to separate it out as non-cash so it’s the actual pieces.
How do I post–yeah, I answered all these questions. Wow, we’re getting close to the end. Somebody has emotional distress. Good. Amir, that means that that’s good for you. That’s non-taxable. You want to make sure it’s all that and then you don’t have to worry about the attorney’s fees.
All right. “Thank you for the tax-learning sessions. Merry Christmas. Hey, this is a Joe and David father-and-son business.” I’m touched. All right. You’ve got to go. “I have two C Corps, you guys, and two LLCs or I have a C Corp and two LLCs, one LLC attached to a QRP. Those are from a tax team business. I haven’t made any money in either business. Let’s see. Should I link–for tax purposes, I want my business tax to be dealt with so I can save money.”
Sheryl, just chill out on the LLC. Chances are, they’re not going to have to do anything because they’re disregarded. The only one we’d have is the C Corp, and you roll over any losses for 20 years. “Would you recommend additional after-tax contribution to reach the $55,000-max?” Sometimes. It depends, Eva. It’s a great point. What they’re saying is that, “I have a $55,000-max on my 401K and profit-sharing plan or solo 401K,” for those who aren’t familiar.
“I can make an employee deferral of $18,500”–and, again, if you’re older than 50, you can put an extra $6000 in there–“But the company can match up to 25% and deduct it of my salary so if I took salary of $60,000, I could defer $18,500 but my employer could match 25% of that into the plan.” Now, if it paid me $60,000, the company could, in theory, put in $55,000 but you’d have to have over $111,500 to put it in and it would write off only 25% of the $60,000 so I’d get a $15,000 write-off. I would be deferring $18,500. I would have $55,000 in my plan, which I would pay tax on eventually.
The question is: Does that make sense? Only if you’re going to do a backdoor Roth IRA, and that one is tax-wise. Come watch it because it’s one of our strategies or you can read up about backdoor IRA contributions. We can probably get that whole thing into a Roth since you don’t want a deduction.
“I maxed out my annual gifting exclusion for the year for one of my children. Do I need to be careful not to give them non-cash gifts at Christmas?” No, I wouldn’t worry about that. Amazing job.
“Which retirement plan has 12/31 deadline for contribution?” Anything you do so if you’re doing employee deferral 401K, then you have to make the employee deferral by 12/31 because it has to be through payroll during this year. Everything else can be done after the year-end before they return files.
Jeff: Right, so your IRAs are going to have a deadline of April 15th of the following year. Your qualified retirement plans, the employer portion, is going to be the due date of that return which could be as late as September 15th and October 15th.
Toby: Here’s a good one: “Can you eliminate the tax on the discrimination settlement by designating that the attorney’s fees are paid separately by the payor?” That’s interesting. I don’t know the answer to that. I would have to look at it but my guess is that, as long as it wasn’t part of your settlement but you said, “Hey, you’re getting paid,” and then you also agree that they’re paying it on your behalf, so I think that you’re going to–
Jeff: I think that court cases have gone both ways on that primarily depending on what circuit you may be in.
Toby: Right. I think that the easiest way is to make sure it’s not compensation for past wages and, that way, it’s not taxable wages to you because, again, I think under the miscellaneous itemized deduction elimination, I know it took away all of the accounting fees. I think they probably took that away, too.
I’d have to read up. I haven’t really looked at it so it’d be something where if you guys want to email that one in, we could do the research on it. Do we have any more Tax Tuesdays for the end of the year or is this it?
Jeff: No, this is it.
Toby: All right. We’re going a little longer just because this is the last one of the year. I’m going to throw something else out there on the screen to go back. Here we go, do the year-end recording, make sure that you watch that. This is going to give you a bunch of ideas to do stuff before the end of the year.
“Can I buy a permanent residence with my 401K loan?” Yes. To ensure protection, a solo 401K with one year–pay them, ask them of the rule. “Does that compromise the solo status?” I don’t think so as long as you have another contributor. What she’s saying is, “If I have a solo 401K but I roll another participant in there, does that void out the solo 401K?” I don’t believe so because they’re not entitled to make contributions; you’re just making them a participant by rolling their IRA into it so they could even be a non-full time employee.
It makes it easy but, before we get into anything like that, I’d have you talk to somebody who that’s all that they do so I’d probably have you talk to one of our financial guys. Let’s see. “I got started as a trader in 2017 but not live trade until late this year without any profits. I have filed for the LP and S Corp. Is the LP return due in March 19th or January 9th?” The LP would be due next year and not in January.
Jeff: An LP return would be due March 15th, 2019.
Toby: Good. She asked a couple of questions. Let me grab a couple of ones. We’re getting to the end here, guys. I thought we were. “If I make profits as a trader and transfer money from LP to S Corp, do I just withdraw from the S Corp to pay myself and do I need any special specific documentation?”
Arlene, the reason you’d be doing that–and, chances are, it’s a C Corp, but if it is an S Corp, the reason you’re doing that is to get you the reimbursable plan. You just want to make sure if we did the documents, you’re good. You just pay yourself back and then it’s an expense to the S Corp and not reportable income to you.
“I formed an LLC and I flipped it. A few months later, I formed a C Corporation to better manage. Should I move the LLC used for the joint venture wholesaling flipping to holding company of the C Corp? Pros and Cons?” Rodney, it really depends on what it is. If you’re flipping inside that, I would say yes even if it was a JV.
I might kill it if it was a JV LLC. In other words, I don’t want to have other members involved but if you have an interest in it and that’s where you do your flips with the partner, your ownership of your portion could always just be in the C Corp like the LLC could be taxed as a partnership but the partner could be your C Corp instead of you so it doesn’t hit your personal return.
Somebody just asked, “By the way, I have an LLC taxed as a C Corp. My girlfriend lives with me and has no health insurance. If I claim it on my taxes, can my C Corp cover her medical expenses? She is also a 10% member,” so she’s an owner/operator. You could do the medical reimbursement to the two of you guys. You don’t even have to cover her.
As long as she’s involved as an employee of your C Corp, you’re fine. Otherwise, if she makes money, it might be a little touch of cohabitating adults to make her a dependent of yours. I don’t see that happening so I would just make sure she’s participating. If she’s already an owner, then, chances are, that one.
“I have a large commission, more than $1 million. How do I turn this into passive income?”
Toby: You’ll have a tax problem, but I don’t think it’s going to be–how are you going to turn that into passive? You’re not, really, unless you’re paying a lot in rent or something out there.
Jeff: Yeah, because the whole idea of a commission is that you did something to earn that commission.
Toby: Right, so here’s how you do it: If you have a company and Company A is doing activities which generates lots of income, you could have Company B doing services for Company A, and it could be entitled to a portion of the money. In your case, you might have the commission going into an S Corp and the distribution out of the S Corp would be non-active so it would be passive to a certain extent. It would just be a non-earned income so it won’t be subject to old age, death and survivors.
Company 2 that’s doing management–you could pay it and, if it’s a C Corp, it’s just going to be taxed at 21%. If you dump a bunch of money into a retirement plan, obviously, like a cash–if you’re making that much money, then a cash balance or a defined benefit might be appropriate depending on how much we can get in there, a couple of $100,000 maybe depending on your age and whether this is consistent.
I have plans where we’re putting it over $600,000 a year tax-deferred so we could get that a lot of that gone so there’s still things we could do. If that’s still bad for you and you’re saying, “Geez, I’m still having to pay tax on it,” then you look at a 501C3, maybe set up your own, dump a bunch of money into that with the idea that you’re going to do some good with it and you’re spreading out–you’re getting a nice tax benefit now to keep or control that money and give it out over time or do your charitable activity. I just gave you a few options. That’s something I would reach out and get one of our advisors to walk you through your choices.
Somebody says, “I absolutely love Tax Tuesdays.” Yeah, we do, too. “My grandmother wants to give undeveloped property to my mother. The property title has my deceased uncle in her name with the signature of the uncle’s widow.” No, unfortunately, we have real estate and you have somebody who’s a decedent. You’re going to actually have to probate that. That really stinks. Unless they are joint tenants with right of survivorship, then you would need his signature at all because if it was joint tenants, then it would flow to your grand mom so I’m sorry.
“No questions. I really learned a lot from you. Thanks for spending so much time.” Virginia, you’re welcome. Thank you so much. See? These are the types of questions we like. It’s when it’s not a question. “Hey, you guys are pretty cool.”
“We have a C Corp, just got it last month, retired 6/30, received Year seven, sold one property, second property, total income 4/15 and then retired. Is there any way to minimize my tax liability?” Yes. If you own the property, here’s what I would be thinking of: I’d be thinking that you want to reduce any amount of tax that you have so I might be looking at cost segregation and trying to maximize the depreciation on that one property.
I’d also be looking at possibly making a contribution to a non-profit either by making–if you’re going to be giving, get five years in one shot or four years or three years and try to get the tax deduction this year. You can write off up to 60% of your gross income if you’re charitable because you’re retiring and you want to do good.
You could actually fund your own non-profit before the end of the year and you can get the write-off–you’ve got to move the money into it but you could write off up to 60% of your adjusted gross income or, if you don’t want to move the money into it, you transfer the property or your interests in the second property and you can write off its fair market value. Depending on how long you’ve owned that property, up to 30% or 60% of your income can be wiped out.
Then, if you just get to the end of your rope and say, “Toby, I don’t want to do any of that,” I’d run the numbers real quick and see whether or not it makes sense to perhaps invest in a charitable conservation easement where maybe you put in $20,000 and get an $80,000 deduction. At 4/15, you’re getting hit pretty hard with the tax dick. If you have state income tax as well, that would really suck. Since this is your last year and you have a year of severance, then you’re getting hammered with the tax all in one year.
“Sorry if you answered this. Got interrupted. I want to make sure I understand about deductible broker fees. I created an LLC which holds the account, created C Corp which is a member of the LLC and the C Corp pays a guaranteed payment. The C Corp pays brokerage fees. Is this correct?” Yes, very good. You just nailed it.
“Can a 69-year-old contribute to a Roth IRA and enjoy its earnings tax-free in five years?”
Jeff: A 79-year-old can contribute to a Roth IRA.
Toby: Yeah, there’s no age limit on a Roth. It’s only the traditional IRA. You can even contribute to a pension or a 401K even. “Holy buckets. You guys are dedicated. Go home and be with your families.” Very good. See, I like that. It’s 5:09. Sorry, Jeff. I always tell them it’s going to be an hour and then it’s not but he falls for it every Tax Tuesday. Whose fault is it?
Jeff: I was supposed to call you today. Blame Toby.
Toby: Yeah. That’s right. We have a couple of ones to go over. Anyway, thank you and Merry Christmas. Happy Holidays and don’t spend too much time worrying about taxes. Taxes are because you’re making money, which you should be very happy and blessed and give a lot of it to those who have trouble making it. Millionaires are trustees of the poor. If you’re good at making it, then you better take care of those who aren’t so good at making it.
Don’t of course just say that tongue in cheek and also because partially I believe it. Don’t give it to those who don’t deserve it; give it to the poor people that are really suffering through no fault of their own. Gosh, we’ve had people washed out of their houses, burned out of their houses, shot out of their houses. There’s so much going on so just do your part. If you reach any of those people, do what you can. Merry Christmas otherwise and we’ll see you next year for the next Tax Tuesday.
Jeff: Have a good New Year’s and a good Christmas.
Toby: All right, catch you guys.
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