Despite delays, closures, and quarantines due to the Coronavirus (COVID-19), you still need to file your taxes. So, Toby Mathis and Jeff Webb of Anderson Advisors spent St. Patrick’s Day answering tax questions to help you through this difficult time. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- What are the updates on the tax impact of COVID-19?
- April 15: Deadline to file your taxes still applies, but individuals that owe less than $1 million and businesses that owe less than $10 million can file a 90-day grace period extension to pay their taxes without being charged penalties and interest
- Families First Act: Passed by House of Representatives, but still under review by Senate because major mistakes need to be corrected to address Family and Medical Leave Act (FMLA) and other payments
- If I get married while owning a property in an LLC, will my spouse also be protected under the same LLC? LLC is not necessarily protecting you and your spouse, but the property in the LLC and whatever happens to it
- If I purchase a business from someone, how does the entity transfer over? Two types of business purchases: Stock purchases or asset acquisitions
- My business started in 2019, and we don’t have money for a CPA. Can I submit a 1065 partnership form for my small business myself? Yes, you can, but it’s not recommended because failing to file a 1065 on time has a $205 penalty per month/per partner
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Go to iTunes to leave a review of the Tax Tuesday podcast.
Anderson’s Guide to Creating Your Private Vault by Greg Boots (Coupon Code: PV2020 for $20 off)
Tax-Wise Business Ownership by Toby Mathis
Family and Medical Leave Act (FMLA)
Individual Retirement Arrangements (IRAs)
Real Estate Professional Requirements
Capital Gains Exclusion/Section 121
Rollovers as Business Startups (ROBS)
Employer Identification Number (EIN)
Full Episode Transcript
Toby: Hey guys. Welcome to Tax Tuesday. This is Toby Mathis.... Read Full Transcript
Jeff: And Jeff Webb.
Toby: And you’ve got the St. Patrick’s Day edition. We got a lot of us here. We are not really quarantined here but I know a lot of folks are doing that right now. So, first off, I hope you guys are all doing great and if you have anybody out there that’s living by themselves, older, just reach out to him periodically. It’s going to be tough most especially if you are isolating yourself. Otherwise, I’m pretty that they have figured out what the cure was for this thing.
Jeff: And that was?
Toby: Toilet paper.
Jeff: Toilet paper, yeah.
Toby: Must be, it’s all gone. All right so let’s not go on that. It is St Patrick’s Day and somebody addressed Jeff up here. Jeff, I have learned how to use the computer and it’s not in a certainly good thing. You look good. You look good. Top of the morning to you.
Jeff: I did miss you lately.
Toby: All right. This is fun, fast, and educational. There are some things that we want to go over specifically with the coronavirus, COVID-19 and there are going to be some things that will pop up. They are going to come out and definitely going to impact you, so I want to kind of go over those so let’s just jump right in. There were some things today and this is for somebody who is listening to this on the podcast, obviously, some things probably have changed by the time I record this and get it out versus what is actually going on.
The first one is a 90-day grace period on the payment of tax. It’s not about an extension. Your taxes are due on April 15th. Your tax return technically is not due until October 15th on the individual side; that is because the early due date is April 15th, but you have an automatic extension. What you have by right another six months, which will put you into October. What they did is they did not change the due date. You still have to follow the extension. What they said is that if you have tax liability as an individual of less than a million dollars, you don’t have to pay penalties and interests until you go beyond July 15th. If you are a business, you owe less than $10 million, then for whatever the due date is you would have an extra 90 days.
Do they just give you 90 days even if you’re not due or is it only for those people that are due on April 15th?
Jeff: It is just an extension of time to pay your taxes, so if you’re getting a refund, of course, you want to get your return as early as possible.
Toby: That is actually what you said, so obviously you said all. All you have to do is file your taxes. You will automatically not get charged interest and penalties. We encouraged those Americans who can’t file their taxes to continue to file on April 15th because for many, you will get refunds and you don’t want to lose out on those refunds. It’s not that you will lose the refund, it’s that you may as well get the money now and expect that you’re going to be happy that you have some cash in your pocket. This is a crazy market and there’s a lot of things going on.
Here we go. There’s the 90-day grace. We just went over a Family First Act which is not passed yet. It has been passed by the House, but there are lots of problems in it, some sneaky politician stuff, some major mistakes. They call them technical corrections. Just call them mistakes. The things that they are really trying to address is Family Medical Leave Act stuff giving you ⅔ of pay over 10 weeks if you are required to use family medical leave. If you are tested or treated for coronavirus you can get up to ⅔ of pay up to $511 a day. If you are full-time you get up to 80 hours which means 2 weeks. If you are part-time and you are working 20 hours a week, for example, it would be 40 hours. It will be whatever your weekly is.
Then somebody says, “No benefit for the self-employed?” No. That’s punishing the self-employed, which is why the Senate is still looking at this thing because it is a hell of a thing to put on somebody when you said your revenue cut. You are dealing with staff being sick and now you are being told you get to pay for it because the Family Medical Leave Act is typically unpaid leave. Now, you are going to pay for it. They will try by giving you a tax credit for that but originally they said there isn’t much for very small businesses because after all let’s kick somebody when they are down.
This is politicians being stupid. It seems like somebody has caught it and at least he did pass the senate. There is somebody who is actually briefing it before they actually pass it. If an employee has to go home to care for somebody or for kids where their school shutdown they get up to $200 a day up to $10,000 an aggregate. This is for employers with less than 500 employees. This is really hitting the little guy. The bigger guys, I do not know why they did get hit. Do you have any idea why they are not forcing them to do this?
Jeff: I really don’t know. I guess it’s because they already have certain laws in place. I don’t have a good idea.
Toby: Yeah. A question that just came through says, “I’m 70½, so I cannot contribute to an IRA anymore?” That just changed. You now can. The SECURE Act changed that so you can do it.
“We have a QRP in an S Corp. There’s nothing […] yet. Can I contribute through this S Corp?” Yeah after 70½. Yes, you can contribute to any retirement plan now after 70½. They took away that rule. The SECURE Act was passed at the very end of the year, Lee, so congratulations. You get a little bonus. Yeah, you can cut your taxes back. Love the QRPs. The only thing you can’t do in a QRP is the employee deferral, but you can do up to 25% of your wages. You can get through that all the way up until you file your tax return and the business tax return. You are up until about usually on September 15th if it is an S Corp.
Jeff: So there is a 90-day grace period as expected to put $200 billion back into the economy over the next 90 days. Of course that money will all have to be paid after 90 days back to the government.
Toby: Yeah, it is a joke.
Jeff: Right. The Families First bill I think right now the cost is right around a trillion dollars so a lot of money going through this sucker.
Toby: Yeah. What are they doing with it?
Jeff: Well one of the big hold ups is they want the payroll and the argument against doing that is we have a number of people […] in Las Vegas. That won’t help those people.
Toby: No. What they really need to do is boost up the employment where people are going to be laid off from this. I am fine with the Family Medical Leave Act. We are getting credit for it. You are just going to push short-term burden onto the employer. I wouldn’t beat the heck out of the employer and what they are doing is loosening up the money from the SBA, but I have never seen that happen fast. I have never seen an SBA loan go fast, so it is just kind of nutty.
All right. Enough on that, so just keep posted. We are going to post this stuff out on social media as it comes in. Frankly, the news media is all over this. You are probably going to hear about it within five minutes. While the president, in his task force, were giving their comments today and part of ListServ and there are accountants emailing all accounts. I’m merely emailing my account and it is like, “Yeah, he said this.” You are going to get it quick, so I don’t see this stuff is being secret unlike the SECURE Act that is going to pass through unnoticed.
Opening questions and we have a whole bunch of stuff. “In Florida, Series LLCs are not recognized for real estate investments.” Actually, they are just not recognized. “Do you have any suggestions for alternate entity organizations?” Yeah, we will go over that.
“If I get married while owning a property in an LLC, will my new married spouse also be protected under the same LLC?”
“If I purchased a business from someone, how does the entity transfer over? What actions would I need to make if I need to do this?”
“Can I submit a 1065,” that is a partnership form, “from my small business myself? The business started in 2019 and we don’t really have money for a CPA.” I always think of people that are put in jail for that. Whenever I see, “I do not have the money for it,” nobody sits in jail because they do not have […]. If something is important, you have a phone, you probably have six TVs in your house, and probably (from what has been going on) 36 rolls of toilet paper. You have money for things that are not important. I’m just teasing.
“A C Corp with multiple LLCs only files one tax return. Can this pierce the corporate veil when we must give the corporate return to the lender for the LLC credit applications?” Good question.
“They need separate bank accounts for Series LLCs in Illinois. Can I deduct the expenses for the start-up costs and education for a 501(c)(3) that I created in 2019 as a charitable donation?” Great question. I love stuff like that.
“Can a realtor write off realtor fees and classes that must be taken? How do you record the money due between companies on the companies’ books?” I am assuming that there is Company A and Company B, Company A owes Company B, maybe Company B owes Company A.
“I have two parent LLCs taxed as C Corp that owns them. How do I roll up the income expenses for each LLC to the 1120?” It’s almost the same question as the other one but they were completely different people asking kind of shy.
“If I hire a property manager company that collects funds from my tenants and they disperse the rents to me, are they required to send me a 1099? And independent contractors have the same deductions as an LLC? Or is it better to create an entity? I’m a fitness trainer.” Some of you guys already know what the answer is or we are not necessarily going to make fun of somebody, but it’s fun to make fun of somebody.
“Do contract labor and home material such as cabinets, vanity lighting, tile, go into the cost of goods sold out of a 1065? And if I sell a house for profit, can I put the profit into another rental without paying taxes?” Great questions.
Now, I am going to switch gears here just for a second to annoy the heck out of your guys. No, actually this was really important. Give me your attention just for a second because we have watched the stock market, do crazy stuff, and there are a lot of you all who are going to like some people are in pain, not everybody, but some people know people that lost big chunks of their wealth and they are not feeling so good right now. We had a partner here who has since left our firm but he is still a great member of our team. He still goes out there and works with us because he wanted to do financial planning only.
His name is Greg Boots. He wrote a book called The Private Vault. You can call Anderson’s guide to creating your private vaut. Here is the deal. If you were invested the way Greg had taught you, in the way that we advocate here, you would not have lost a dollar in this market. In other words the type of investment vehicles he uses cannot go below zero. This is why you do that.
The last couple of years, we have heard everybody saying the market is going up. It’s not about that. It’s when the market goes down that you want to make sure that you are not stuck and particular types of investments you can do that do not subject you to the laws, and you still get the upside. Now your upside is capped and it is usually between 11% and 13%. The market is up 30% and you are going to get a chunk of it but if the market is down 30% you are going to get none of that negatively, you are going to be at zero. So, I strongly recommended you look at this book.
To give you an incentive to do it, we are giving you $20 off. These books are $24 and it includes the shipping. We are just going to give you a coupon code, PB2020, and $20 off. It’s going to give you $20 off, so you are just going to end up being like $4.95 for a hardbound book shipped to you, feel free to grab it. I had the link there on the other page, right there firstname.lastname@example.org or shop.andersonadvisors.com. If you feel like grabbing it, grab it. We got them into the warehouse where we shipped them out to. Really, it is for those folks that want to make sure that they don’t ride this roller-coaster.
Somebody says, “I have an IUO, the process is super easy, that’s one of the vehicles you can certainly use. It’s what we do here and we advocate to our clients. Absolutely. Anyway let’s move on to the questions.
“In Florida, Series LLCs are not recognized as real estate investments. Do you have any suggestions for alternate entity organization?” You feel like jumping on this.
Toby: Somebody is reading me. My new book is out, Tax-Wise. Literally, we’re supposed to have it any day into our warehouse. We’ll ship as soon as we get it. The printer (and this is just blind loyalty) had their print machine—one of their big pieces of equipment—go down and he is like, “Oh, it is going to be delayed.” But I chose to stick with the guy we have been working with for 20 years as opposed to switching over something like that. You haven’t much control over it, so we are a little delayed. It is there and you can absolutely get a copy of the electronic version. Somebody is asking, yes.
Somebody says, “What’s the code?” Go back, it’s PB2020. We are trying to do it for free. You guys can pay their shipping and it ends up being $3 or $4 anyway, so I say just make the shipping included, so it is $4.95 that includes shipping, so we are just trying not to lose money on it.
Jeff: So what do you think about an alternative entity organization?
Toby: I think that Series LLCs have not been around very long. They exist in about 14 different states and they are not my favorite. There are a lot of attorneys out there that love them, but they haven’t really been tested in Florida, for example. Yet the homestead case where they appear to stay single on LLC. They let somebody come in and take it for husband and wife. They consider that as a single LLC. I tend to like tried and true. I like my structuring in the way that I would structure it. There are actually two choices you have. Choice number one, I love Series LLCs and I am in a state that has on a hell of a bunch of Florida property.
What you can do is set up the Series LLC in your home state and for the Florida properties. Let’s say you are in Texas. A Series LLC is a fancy way of saying I have a master, what is called a submaster, and then I have little cells. Let’s say the master is one, two, three LLC, then I would just say cell one of one, two, three LLC. I just create cells and I don’t have to file them with the Secretary of State.
The idea is that you are not spending money on Secretary of State fees, but I want you to have the protection of the entity. The only way I normally get protection is from paying LUCA to protect me. The Secretary of State is LUCA. I say LUCA because I like godfather. I am looking at the stuff going. I want somebody who is bigger than me to protect me. If I am not paying somebody, I do not know if I am going to get the protection. I tend to really believe and file LLCs. There are lots of other stuff out there that you could try, but this is what I would use.
Now, in Florida they have land trust. I would probably put the property in a land trust and transfer the beneficial interest into one of the series outside of the state that I felt like it. Or cells in Florida are considered separate LLCs. I would just register each one as a foreign LLC doing business in the state of Florida. Or just to make it easier, I would just say if I have property one, let just say real estate one, real estate two, and real estate three, I would stick those each in an LLC, and more likely than not, I am going to have a Wyoming holding company LLC just holding all three filing a partnership return.
The reason I do that is because nobody can take that Wyoming LLC away from me. It’s really tough and it protects each piece of property from the other property. I know how this is going to be treated. I do not have to guess. The Series is still a bit of a guess work because we don’t have a lot of cases that have gone up to the Supreme Court, we have not seen it get cracked and a lot of people screw them up. And good luck banking with the Series LLC.
Everybody that loves Series LLCs right now is probably hating on me. I am just saying in all reality it is really tough. It is tough to open bank accounts for the cells. You have bookkeeping requirements on them and they are really easy to screw up like. Even in Texas, there is a prerequisite to having it be enforced and that you have to set up and keep separate books. It’s really easy to pierce one. I just say let me see your books and records and if you do not get them over, boom, you’re toast. I tend to like the tried and true.
“What difference would it make to have a Wyoming entity as a regular corporation?” It makes a difference, Elizabeth, just because the statutes aren’t the same for corporations versus LLCs. In Nevada, they actually have statutory protections for shareholders of corporations, too, but it is the only one. The other thing is I could set up an LLC and have it taxed as a corporation. I do not need to be a regular corporation, so I can get the best of both worlds.
“Do you provide a reservation service and I only need to set up and maintain an empty space there?” Absolutely, John. Not only do we have the reservation business, but you have to have a physical office. It can’t be a bare office. They actually say an office with one person with a desk is not enough. You actually have to have a commercial office there. So, the way that […] court said is, “If I walked in what I think it’s a place of business.” So we use and maintain an office with conference rooms that you can use. If you are using that, you have access to all of them. We have Washington and Nevada as well.
Somebody says, “Do you have to register a Wyoming LLC in California.?” It depends on whether that Wyoming LLC is doing business in California.
Somebody else asked, “Does Maryland allow land trust?” All states have land trust. We have very few states that have statutes, but they all recognize it under something called common law.
Somebody says, “Hey, did you go over the stimulus?” Yes, that was the first thing we did, but what we can do is you will have the recording of this tomorrow. You can absolutely listen to it.
Let’s see other questions. “I am mentoring a client who is the owner of 129-unit class C property secured by a Freddie-Mae loan, which prohibits any additional lien other than theirs. The client would like to take advantage of the SBA emergency loan, let’s say for at least $350,000. Any suggestions?”
Freddie, as long as they are in first position they are usually not going to scream about it and if you are in need of the cash and you are just going to plunge it as additional collateral, I would just be really honest with them and see whether they have any intent. My belief is that SBA is guaranteeing that and that chances are they are not going to have a care about it. That is a technical term. They are not going to be too upset about it.
“We have been trying to get checking accounts for our newly formed LLC holding corp and C Corp. Bank is telling us that we are shown as 50-50 owners plus the LLC to be shown in the corporate minutes. Should we just be looking at another bank for any suggestion?” Michael, what they are talking about is they want to see you on 50-50 owners. That’s actually operating in the LLC operating agreement, not on a Secretary of State’s website, in fact. You can just show them and the bank secrecy act prevents banks from sharing all that information. It’s not public record.
It does not mean you have to switch the bank, it just means that you have to give them the right document that they want to see. It’s not a big deal to make minutes, so if you need any help, if it’s something that we are working with you just reach out to Patty and they’ll help you out. We’ve set these things up all the time, we’ve done over 50,000 bank set-ups and all that stuff. We’ve learned a few things over the last few decades.
“Can I contribute to my Solo 401(k) by transferring from my regular or Roth IRA? Or do I have to pick what you contribute to?” Danielle, you can absolutely roll a traditional IRA into a Solo 401(k). You cannot roll a Roth IRA into a Roth 401(k). You can roll a Roth 401(k) into a Roth IRA. It is going to be the weird one. Just know that Roth IRA is an endpoint that sits there.
Here’s another one. “I have an LP trading the stock market that generates substantial losses over the past several years. This year I am on track to make up for all the past year losses. Do the past year losses carry over and apply?” The answer is its passive loss carries forward, absolutely. You are not going to pay tax, so congratulations on kicking butt and you’re not going to pay tax on it, so congratulations. That’s why we carry forward our losses.
Somebody says, “The Federal Reserve is adding another program to aid lending in the businesses and households?” Absolutely.
“If I get married while owning a property in an LLC, will my new married spouse also be protected by the same LLC.” What do you think Jeff?
Jeff: Well the LLC is actually not protecting you and your spouse so much as it is protecting that property that is in the LLC. It does protect you from anything that happens with that property, but I would not say that it necessarily protects the spouse also.
Toby: Here is the thing. You are absolutely right. Inside liability we do not care about it. There is a piece of real estate in an LLC and somebody trips down the stairs, they are going to sue the LLC. It’s going to protect you and your new spouse. Really, that is what we care about. They’re going to say, “Hey, who’s the owner?” Well it protects anybody that’s […]. Now, if you own it, depending on the state that you got married in, you are either in a community property state or a separate property state.
If you are in a community property state, then there is the increase in value that your new spouse would immediately start to generate based on the increase in value of that LLC. The LLC would give them the same protection. Somebody coming after them would say, “Oh, you have an interest now on this LLC and it is the same protection she would have,” so you guys would be protected. You would also be protected. I guess the answer is to the extent that there are statutory protections, you can anticipate that both spouses would end up with a certain degree. To the extent that you are in a separate property state, it’s yours. They do not even own any piece of it. If somebody goes after the new spouse for something, it’s not like they own the LLC would say, “Hey it is my separate property,” to the extent something happens in the LLC stays in the LLC.
Toby: Isn’t it exciting?
Jeff: It is.
Toby: All right. “If I purchased a business from someone, how does the entity transfer over? What actions would I need to make if I need to do this?”
Jeff: There are two types of business purchases. There’s a stock purchase if they do have stock, if it’s a corporation or there’s an asset purchase. Normally, if you are the seller you want to do a stock purchase because it releases you of liability and everything. The business you are handling an entire business over.
Toby: And work […]
Toby: How was the tax?
Jeff: It’s taxed as capital gains or losses. It’s a capital transaction.
Toby: Which means if I have owned for more than a year, I am either in the 0%, 15%, or 20% tax bracket or a combination thereof.
Jeff: Now, if it’s an asset sale, it’s exactly what you’re hearing. You’re buying the assets of that company and in the process (you correct me on this) you sign over what assets you’re buying and how much you’re paying for them.
Toby: Yup. Let’s say I have ABC LLC and it runs a dog grooming business. In the last six months, I kept dropping a lot of losses and people are mad because their dogs are getting injured. I say I am going to sell it to Jeff and I sell to him ABC LLC. ABC LLC still exists. It still has all the liability from me dropping the lost […] all over the place. My mom had the lost option going on.
Jeff: Did you drop it?
Toby: I should but she bite my fingers. It’s one of those dogs where if she saw a finger, it was like a dog bone. I got some issues to work out. Anyway, the liability stays with that LLC. I bought the LLC. When I sell to Jeff the LLC, let’s say I’ve owned this dog business for years, call it Doggy Day Care. They do really well. Let’s say that I have a basis in it. Whatever I put into it, $1000 now it’s worth $100,000. That $100,000 is going to be taxed at my ordinary rate. Based on my tax bracket, it’s going to be either 0%, 15%, or 20%. The maximum I would pay on that $100,000 is 20% federal income tax. There might be some state income tax then you also have the net business income tax, but for federal taxes, I have long-term capital gains.
Let’s say instead of doing that, I sell Jeff all of my assets in the location. So ABC LLC sells Jeff, here’s my customer list, here are my trademarks, here are all the cages, their play areas and everything. I sell him all that, a bunch of those fire hydrants, and I sell them for $100,000. That’s income to me as ABC LLC and that’s going to be ordinary income more likely than not. It’s going to be dependent on the asset that I sold.
If I sell a certain capital asset, it’s going to be long-term. But for the most part, for example if I sold my intellectual property, that’s going to be ordinary income, too, and I still have the liability of dropping all the loss […]. Those are two very different transactions. If you’re buying and selling a business, if you’re the seller, you always want to sell ABC LLC; you want to do that.
If I buy Microsoft stock I cannot deduct it. If I buy the stock of company ABC LLC, I can’t deduct it. But if I buy the assets of ABC LLC, yes I can deduct those, I can depreciate them, customer list like 15-year property, the other assets I can rewrite off, and it’s up to our list. There becomes a very, very different transaction, extremely different transaction.
Now, there’s one little nuance. I can treat the sale of an S Corp. I think it’s an S Corp only. Otherwise, the buyer has to be an S Corp. But if I sell ABC LLC to Jeff and we elect a 338(h)(10) election, he can treat it as an asset purchase and I have to treat it as an asset purchase for tax purposes, but from a liability standpoint, he gets ABC LLC. That’s so much cleaner. If I am telling you what’s the easiest, it’s the stock purchase agreement. That’s the easiest.
Jeff: But if I am buying your ABC and I am buying the LLC, I am not responsible for all of them drop—
Toby: Drop loss options. So you better factor it in. That’s why you always ask, “Are there any known liabilities?” and you might want to have a hold back. You might want to have an indemnification agreement. You may like, “Hey I know I drop the doc, but what if I am not there everyday and I don’t know that we have an issue? Everybody has concealed it and Jeff buys it. All of a sudden, we’re in deep dudu (no pun intended).
Poor Jefferson, they are like, “Hey I did not know that you had horrible employees.” That’s part of the contingent. Or let’s say that I sell the assets to Jeff and he takes over my lease. But he sublets the lease and then Jeff keels over. […] he’s so stressed from all these dogs and he has a heart attack. He’s disabled or he passes away.
Those are the things that we actually have to mitigate, so if you are going to sublet property, get the person who’s subletting it for you to get term life insurance. Even if you have to pay the coverage, do it so that if something happens to him, you’re not worried about them making the payment because you are still on the hook.
Somebody says, “Can I submit a 1065 form for my small business myself?” That’s a partnership, guys. “The business started in 2019 and we really don’t have money for a CPA.”
Jeff: You absolutely can submit a 1065 for your small business. I would not necessarily suggest it. While you may not want to go to a CPA or may not be able to afford a CPA, there’s certainly somebody out there who can do a decent job on your tax returns. Just a key from falling in some of these pitfalls.
Toby: How much is the penalty for failing to file a 1065 on time?
Jeff: That’s $205 per month per partner.
Toby: Please make sure that you are getting an extension. You get an automatic extension. Is it six months or five months now?
Jeff: It is six months until September 15th.
Toby: September 15th, so please make sure. We’re already past the deadline.
Jeff: Yes, the deadline was yesterday.
Toby: So, you are toast. That’s why you should use a CPA. If you haven’t done much business, you want to capture startup expenses. If you do not have any startup expenses you literally just set something up online and you almost like $200 or something cheapy-cheapy, you do not have any documents, then you will just file a no activity return. At worst, you just do not want the penalties.
Somebody says, “If I started and LLC in late 2019 with no revenue, can I file business taxes this year?” It depends on the type of business. You guys hear me say this probably every few weeks, an LLC is not a tax treatment. An LLC is either going to be disregarded, ignored for tax purposes so the owner will pay the tax. An LLC will be a partnership if there are two or more or an S Corp, C Corp, potentially even a trust (depending), but the IRS does not know what an LLC is. They just go mumbling, don’t know what it is. We have to tell it what it is.
Jeff: Yeah. If you created your LLC on December 31st and said it’s a corporation or S Corporation, you have a filing requirement. That’s not necessarily true as it’s a partnership or a disregarded entity.
Toby: Again, if he has a 1065 he’s definitely in the category of a partnership?
Toby: Partnerships are probably the most difficult entity to file as far as complexity. It sounds weird, way more than a corporation must speak about it.
Jeff: No. They got that weird combination of flexibility that makes things even worse.
Toby: Let’s go back to […]. I do not want to leave him hanging. If he filed it late 2019 and really did not do anything, are we going to file in 2019 or are we just going to file the […].
Jeff: If he had it in 2019 and there was a partnership, and he had no activity, I would not follow a return and I would declare 2020 my first year.
Toby: Yup did you hear that, Bernard? I wouldn’t be filing anything if you did not have any activity, especially if you do not have a bank account or anything like that. If it’s a disregarded single member, you do not have to worry about it at all. We just solve it for you. You don’t have to file a tax return. With the possible exception of your state, like if you are in California, then they just love you to death by charging you lots and lots of money.
Here’s a question from our line. “If I have more than one property in an LLC, is it better to […] LLC and transfer one of the properties into a different LLC? Mina, that’sa great question and the answer is maybe. I’m not even going to say, “It depends.” It’s going to be a big maybe because it depends on your risk tolerance. If you have $2 million properties that you own outright, don’t put them in the same LLC. If I have two $40,000 properties that would cost more to foreclose on them than they’re worth, then I might put them in the same LLC.
The best practice is one property, one LLC, and the answer would be yes, but if you have little, I would call crappy homes but […] I don’t want to offend people. I have a lot of little homes all over the place, like in North Carolina, Indianapolis area, Houston, and some things where they’re not the most expensive, it’s some of those weird things.
Somebody says, “Bank is […] Nicholas my accountant […] LLC?” I am going to reach Patty , that’s just depending on who the bank is, they are looking at the address. Sometimes banks do stupid things.
“I have a C Corp that sponsors a Solo 401(k), which is a great thing. All investments are made using the funds in the 401(k). How long can the C Corp operate with no income or losses without causing audits or other problems?” Forever. You don’t even need the C Corp to continue that 401(k), by the way. It’s as if you’re adding more funds into the 401(k). You have to have the C Corp, but once you sponsored the 401(k) and get it going, you’re good.
Somebody else asked a follow-up on that LLC question. “Are there tax consequences to moving from one LLC to the other.” Well, if it’s just disregarded or partnerships, no. If they are LLCs taxed as a corporation it could be. We always just want to look at it. If you are going with an LLC, let’s say you own the LLC or is it a holding company and it goes from one LLC to the other. There’s no tax consequence.
“Is there a thing about members associated with the LLC in the original startup?” I don’t know what that means, but no. Depending on who you’re dealing with, if it’s a bank they are going to have different rules. Someone will look at the Secretary of State, but the Secretary of State doesn’t really tell anything. He’s just an organizer in most states. It doesn’t tell us who the owners are and the owners are public record in most states.
They may look at your business license like in the State of Washington, there might be something like that, or if it’s owned by another entity, there’s no way they’re going to be able to see that in a Secretary of State filing. They’re usually going to ask you who the owners are, we need documents which are from all the owners signing on and agreeing to open up this account, usually it’s in the form of a minute resolution and who can transact business.
Jeff: I have seen where they have issues, where if you are using that address or like a UPS store or any other mass mailbox, they are going to have issues that are not a physical address for the business.
Toby: And that’s what all of this we are looking at? It’s because you have too many names of entities at a non-physical address. They want to see that it’s a separate business location or commercial location.
“I have an LLC registered in Texas, so I’ll be operating in Texas. Is there at risk of exposure? Should I claim as an LLC?” Aimee, no. The LLC is designed to work. Texas is actually a really good state and it depends on when you are looking at inside or outside liability. If I am a rental property, the LLC will keep that property off of you. You pay the state, you keep good books and records, you are going to be fine. The issue is when they sue you. You are driving on the road, you cause a car accident, and they start trying to take your LLC away. That’s when we like to put a second layer. Depending on how assets you have and what your risk tolerance is will oftentimes put a second layer out of state so that the local judge can’t just make a decision and do something silly just to teach you a lesson and take it outside of their reach and put it into another state.
“Can you still convert a 401(k) to a Roth this year? You can move the 401(k) asset that was in a Roth 401(k) into a Roth anytime.
All right. “A C Corp with multiple LLCs only files one tax return.” That’s if the LLCs are all owned 100% by the C Corp. “Can this pierce the corporate veil when we must give the corporate return to the lender for the LLC credit applications?” The answer is no. Those LLCs are separate entities. Even though they all roll and file one tax return, that’s not part of their veil. The veil is always going to be, “Do you recognize its separateness? Does it keep separate books and records?”
When you pay the state, all of these things are almost always going to defer to the states and say, “Hey, the state says you get this right. You pay the state, you get those rights,” which is why the Series LLCs still trick me out a little bit. I don’t know how they are going to be treated necessarily when push comes to shove. But no, you don’t have to worry and the credit applications (by the way) are not public record. That’s not something someone’s going to pull and get access to during a lawsuit. In fact, I would drag my heels on turning over financially.
Every time I see somebody sue them for a personal injury, defamation, something in their business or what not, and they say, “Give me all of your financial information,” your lawyer should not be handing that over unless it’s relevant to your case. Some of these guys will immediately go, “No […] we have to do it […] be fighting it.” So, plenty of time. If it’s not relevant you don’t turn it over.
Jeff: Yeah. There’s only one reason they want that information. See how deep those pockets are.
Toby: Yeah you’re going to give over the insurance information. Of course you would.
Somebody says, “I will be a real estate professional here but I have passive losses. Are they frozen now?
Jeff: Yes, they are.
Toby: It depends.
Jeff: Well, okay. I know where you’re—
Toby: If it’s this year. The passive losses will be ordinary lawsuits. They are no longer passive but if you are a real estate professional. If they were previous, for years that you were not a real professional, then yes, they carry forward. I understand you’re saying that they’re frozen but you no longer have passive activities in your real estate.
Jeff: Right. Like you said, the prior year ones stay suspended.
Toby: “What are the advantages of rolling your IRA into a Solo 401(k)?” Oh my gosh. You could spend an hour on that one. I will just give you the highlights. IRAs you can’t borrow from, IRAs you need a custodian. IRAs have unrelated debt financed income. IRAs don’t get the same protections as a qualified retirement plan.
The Solo 401(k) you don’t need a custodian, you can manage it yourself, and you can write the checks, so if you are doing real estate, it’s a night and day difference. You’re actually the one executing the contract rather than going to your custodian asking them to sign things to transfer money. You can write the check. You can hold physical gold. The 401(k)s are quite a […]. You could borrow money up to $50,000 or half the asset for participants. So, husband and wife could borrow $100,000. The FR rates are so low right now. There must be like 2% or 3% then you pay them back for five years. It can debt and you ought to pay tax unlike the IRA. There are just a lot of differences.
Somebody says, “I’m looking to refinance. I am an owner-occupied commercial building. No cash out just refi with rates being lowered. Chase has asked for personal financial statements on all owned properties, et cetera. What’s the best way to approach this? I have a holding company for my rentals, best […] how would you approach filling this out. Information given.” Mike you’re going to be giving them all of that. I have a ton of these. They always want to look at you.
Whenever you’re doing a loan, it’s cash, collateral, or credibility. The collateral is the commercial building, but they want to know that you’re credible, too, so they are going to ask for some information on you since you must have buildings in that LLC for a long time. It’s really hard to get them to let go of that. If you want a good lending company I love CoreVest. I closed three pretty large deals during there and some of the clients have done it too. They went under 5% and I expect that to continue to fall, that’s for commercial property, that’s fantastic.
“Do you need separate bank accounts for Series LLCs in Illinois?” A very specific question. What do you say?
Jeff: I think we’ve talked about where you can have the master LLC do the banking for the other entities without violating the see-through between the LLCs. Again, the problem with the Series LLC is opening an account, closing accounts, opening accounts, closing accounts if you continue to have this series.
Toby: […] write something down. We could keep going over that. A whole bunch of people just ask me for that lender name. It’s CoreVest. They are in New York, and if you want me to, just shoot me an email at my email. That’s my name and that at any of our websites. That’s an at sign, so alglaw.com works. If you shoot that, […] do a golden handshake or you just tell them that you know us. They’re usually pretty easy to work with. They generally are doing asset-based financing, more than five or six properties (usually). I think the lowest one I’ve seen them do is about $1.5 million decent-sized deals. If not, there’s some other groups we can kick you over to.
Jeff, you’re actually right. You could do this. The main master count is not a killer not to have the bank account, although it is a factor that could be used against you. If you don’t have separate bank accounts just make sure that you have each cell documented and that you are keeping good books. That will take you out of trouble. Send them my email. It’s email@example.com or @alglaw.com.
“Can I deduct the expenses for startup cost and education for a 501(c)(3) that I created in 2019 this is a charitable donation.” What say you, Jeff?
Jeff: Well the startup expenses and education is either going to be the 501(c)(3)s expense or yours. If it’s yours, I’m not sure how you can deduct that.
Toby: Whenever you have a start up, they treat it as a charitable donation. If you spend your money setting up a 501(c)(3), you can treat that because it’s not a contribution. It’s going to be a charitable donation. You write it off as a charitable donation. If it’s going to pay you back, then you don’t. It’s kind of weird.
If I loan money to a charity, it’s treated as a contribution, and when they pay me back it’s treated as income. Some weird rules, but if we go through and set-up startup costs and education, more than likely if you’re going to take that expense personally, you are not being reimbursed, but you are just going to take that expense personally it’s going to be a charitable donation.
Somebody says, “Did you say it’s too late to file an extension?” No. For an individual, you can file your extension up until April 15 and they’re giving you a 90-day holiday on having to pay your tax. I always say, “When are taxes due?” and people always give me these weird answers. I’m going to say, “Well, your taxes are due on April 15. You’re tax return is due on October 15.” If you don’t pay your taxes on April 15th they like to penalize you. It’s not the end of the world, but it’s a good 6% interest per year, unless the penalties […]. It’s usually 1% a month what you can pretty much bank on.
What about businesses? If you have an S Corp, it was due on the 15th of March. You just missed the extension deadline. If you have a C Corp it’s the 15th day of the fourth month following […] so that would be April 15th, if they have a fiscal year. If they had another year end or—
Jeff: The due on the year-end is the only weird one because that’s actually due on September 15th.
Toby: Yeah, they do some weird stuff. Just ask our tax folks, send it in on your platinum, we will look it up and tell you what your tax due date is, or look at whatever the IRS sent you, and get confirmation on your EIN. They usually tell when your tax return is due.
Next one. “Can a realtor write-off realtor fees in classes that must be taken?” I know you want this one.
Jeff: If you are in a business as a realtor, whether it’s self-employed or something like that, then yes you can certainly write off these realtor fees and the classes that you have to take. The problem is if you are working for somebody else, if you’re a W-2 employee, and you have the same fees and classes that you are paying for, there’s no place to write them off anymore. It was considered a miscellaneous deduction. I reimburse employee expenses and that was eliminated in 2018.
Toby: What Jeff’s saying is if you’re a realtor working for somebody else, they’ll reimburse you, and you’re an employee, your toast. You don’t get to write it off. If you have your own realtor company, your S Corp, even a sole proprietorship, yes you can write off your classes that are realtor classes because it’s a requirement to maintain your license. If you weren’t a realtor and you weren’t in the business of real estate, you were just coming off the street and decided to take realtor classes, chances are that wouldn’t be deductible because it’s preparing you for a new trade or business, right?
Toby: I simply love this stuff.
“In California, all of my assets are in my Solo 401(k). Are they protected by a risk or are they at risk?” A risk is when you have other employees. What I would do is make a contribution for somebody else in your 401(k) if you really want to get the risk of protection. But you’re not horribly at risk, Jay. I wouldn’t necessarily worry about it unless you have something that’s coming down the pike. It’s just adding another participant. I could actually take an employee, make the contribution myself on their behalf or roll an IRA. Put $500 in an IRA, roll it into my planner. Now, I have two or more that would qualify me for a risk […]. I could do that. […] was still asking about CoreVest. We will send you that information.
Judith, asks your question away and I will see if I can answer it. When you send in questions, it might be a week or two before we talked about it. We will get back to you, though, so if you sent a question this week, our folks will absolutely reach out to you.
“Does a Roth IRA have the same drawback […] in comparison with the Solo 401(k)?” Yes. “Can a Roth IRA be a Solo 401(k)?” No. You could have a Roth Solo 401(k). Once you get it into the IRA, though, just know this. Please don’t borrow. You can’t get that in that IRA without having to worry about unrelated business income tax, unrelated debt financed income tax, and it can’t loan you money.
“Regarding the comment, too many entities with the same address, I also own LLCs using the same PO box with a platinum member. […] must the physical address be used?” The physical address is for the state, the physical address that you are looking up for an LLC. You don’t want to just have an RA asset or address that’s a PO box or a UPS box. That’s never going to be sufficient. You almost always want a physical address.
I would invest in one of the services we provide. It’s $695 a year, it’s a corporate assistance program, too. It’s really straightforward. It provides you with the physical address for all of your entities and we do the minutes for you to make sure that we are keeping good access with those other states.
“I am filing a C Corp with multiple LLCs but since I’m doing business just under one LLC, I plan to close the C Corp and continue paying taxes on this. Was that okay to do?” If you have a C Corp that has an LLC and you want to close the C Corp, you’ve got to give home designations for those LLCs. If they’re disregarded, it’s going to flow to you. You would need to make (I think it’s) an 8832 to change the election, to make it a corporation.
Let’s jump to the next written question. I’m sorry Jeff I’m sitting here having a smorgasbord of all these questions, I can see them, Jeff is too far away. He can’t read all these. They are small so this is fun.
“How do you record the money due between companies on the company’s books?”
Jeff: That’s really simple. I assume Company A has books, Company B has a set of books. Company A loans $1000 to Company B. That would come in as a debit to cash on Company B’s books. The other side of that entry would be due to Company A for $1000. The reverse would be true of the company that lent the money. Company A would put the […] in. They would take $1000 out of cash and they would now be owed $1000 by company B.
Toby: Do they have to charge interest?
Jeff: Not necessarily. The IRS usually doesn’t prescribe interest between related parties until the amount exceeds $10,000.
Toby: Somebody says, “What if Company B is a personal account?” Unless Company B is a sole proprietorship.
Jeff: It would either be a loan from or to the shareholder, or partner, or whoever it may be.
Toby: It’s still documented.
Somebody says, “Is there a coupon code for the purchase of Toby’s Tax-Wise Business Ownership book?” No, not right now. Unfortunately, when we first sent it out for final edit, we thought it would be done in November. Here we are rolling it out a few months later, I think we […]. Until I actually have it in my hot hands, we’re not going to do coupons on that one.
Jeff: We’re letting the excitement build.
Toby: Yeah, that’s right.
Somebody was asking about, “What if I want to move an LLC from Nevada to Wyoming? Can I do that?” Yeah. You have a conversion. It’s about $100. It’s cheaper than keeping it just in Nevada. You guys know us. We used to just love Nevada when it was a $25 business license. Now, they’ve jacked up the filing fees and the business license is a couple of hundred dollars a year. Wyoming’s done the opposite, so we tend to use Wyoming now. But we could do either state.
“Is it really true that UBIT applies to stock margin and trading performance more than a solo 401(k)? Bartow versus US.” I’d have to look at that, correct?
Jeff: I could see that being counted as UDFI but not UBIT.
Toby: Yeah. That would be Unrelated Debt Financed Income. Usually on real estate it’s not, but I think if you have a stock margin that is going to say that you’re making money on. Will they treat the real estate differently than the stock?
Jeff: Not true.
Toby: I’m going to save that and look at that because that’s funky. Let me see if I can grab that. Those at the market down from myself. Bartow sounds like a Washington case. Craig, I’ll see if I can get that. You can email that over to me, too, we’ll take a look. There may be a difference. It wouldn’t be if it was for real estate. It might be for when you’re doing margin or a stock account. I do remember something in the recesses of my brain.
“You have two LLCs and a parent LLC taxed as C Corp that owns them. You have disregarded LLCs, owned by an LLC that is taxed as a C Corp. How do I roll up the income expenses for each LLC to the 1120?”
Jeff: I’m going to give you the quite easy answer. You’re going to have a trial balance or set up accounts for each set of books. What you’re actually going to do is just add them all together for purposes of your 1120. The disregarded LLCs do not show up anywhere on the 11-20. Everything is combined.
Toby: When you do the books, would you just do the LLCs as classes?
Jeff: I’d probably would. If I’m doing it in QuickBooks, I would have a class 5 income statement, so I can much easier combine things. There are maybe a few things like money owed between the LLCs and C Corp, things of that nature, which should just eliminate each other.
Toby: Yeah. Just because we are doing, the UBIT applies to margin trading accounts. It’s not UDFI. It could be UBIT. This is much where it is. Whenever you’re dealing with 401(k)s, it’s the same thing when you’re looking at 501(c)(3). Even when you have passive options in the stock market, UBIT doesn’t apply. But if you start doing it like a business, they’re saying, “So you do the margin account, they’re going to treat you like a regular.”
Jeff: Okay. It has nothing new with it. It’s borrowed money. That’s the […] thing there. You become a business.
Toby: Yeah. The Court of Appeals, which is Bartow Trust case, even though the trust was not engaged in a business, the income from the security’s […] margin would still be subject to UBITs that says, “Rules are the same regardless if you invest in a traditional or alternative plan.” That’s just the way to look at it is that UBIT applies to any except organization. IRA, 501(c)(3), 401(k), solo 401(k), and UDFI is something that is just for IRAs and the different sections.
“If I hire a property management company to collect funds from my tenants and they disbursed the rents to me, are they required to send me a 1099?”
Jeff: When you fill your W-9, which is what authorizes them to pay you, you’re going to be required to list the name of the LLC and the name of the owner of the LLC if it’s a disregarded entity. If it’s disregarded to you, then yes, you’re probably going to be getting 1099s in your name for those rents.
Toby: I’m always getting a 1099. What they’re going to do is they’re going to give me the 1099 minus, they’re going to break out the repairs and the management fees, et cetera.
Jeff: In the recent years, the IRS has really made a big push to uncover who actually reports the income and expenses on these disregarded entities. […], it’s still not public information, but they want to know who the ultimate owners of these disregarded LLCs are, so they know where to expect to see the income and expenses flow to.
Toby: This is a good question, “We recently wrote over ½ of our solo 401(k) to an IRA. We want to use all the money through real estate […] investing. After hearing your thoughts, was this not a good idea? Can we buy real estate with our IRA without issues?” You can buy without issues if you don’t use debt. You can buy real estate and IRA, no problem, but you have to use the custodian; they have to sign up. Depending on the type of inventory […]. If I go on a weekend and I’m trying to buy a piece of property and […] totally sought after. Even with all the craziness going on, there’s still a hot market out there.
I don’t want to say, “Hey, I’ll ask my custodian to sign the offer letter on Monday.” They have 48 hours; they might do it at once. I know it’s a few […]. I do it quickly. Just mix that, write it in the 401(k). I don’t need the IRA. The only reason I need to keep that IRA is if it’s a Roth, but if it’s a traditional, roll back into a 401(k). I have all of my accounts grouped in.
If it’s a husband and wife, if it’s an IRA, I’m probably setting up an LLC that’s going to be a partnership owned by the two IRAs. If it’s just a 401(k), I’m either going to set up a disregarded LLC that doesn’t have to file a tax return in the 401(k) to go buy the property or I’m just going to put the offer in that, make sure that I close it in the 401(k), and then set up the LLC when we’re closing.
Here’s another one, “In January, I turned a home into a rental. I now have a C Corp and LLC.” This is going to be too long, too specific, I’ll have to answer that. Judith, email in that question.
“What if we forgot to 1099 someone?” Jeff, what would you do? To send them a 1099?
Jeff: I would send them a 1099, especially if it’s a third party.
Toby: Technically it’s not due to the end of the month, right? To March?
Jeff: For non-employee compensations, they’re now all due January 31st.
Toby: Somebody says, “Can a solo 401(k) purchase property?” It depends on the plan documents. Yes, it can absolutely, unless you do a 401(k) through a stock company that only says you can buy securities. There’s no prohibition. We do it all the time.
“If the LLC is a disregarded partnership LLC like a Wyoming holding, should I be getting the 1099?” I’m assuming that’s on the collecting the management company, yes, you should still be getting a 1099.
“Can you own a property in an LLC and still take advantage of principal residence exclusion if you live there […] otherwise satisfy all the requirements?” If you have an LLC that is disregarded for tax purposes, yes. Then you still get the personal residence exemption under 121. It’s 26 USC 121. That’s the $250,000 for an individual or $500,000 capital gain exclusion.
Let’s keep jumping on, I know we were a little bit over. “Can independent contractors have the same deductions as an LLC? Or is it better to create an entity? I’m a fitness trainer.” This is all about you.
Jeff: I’m not sure what deductions an LLC gets.
Toby: LLCs don’t exist to the IRS. Just remember, Charlie and the Chocolate Factory mumbling. Every time somebody says LLC to the IRS, they go, “I didn’t hear that.” “No, LLC.” “What?” “LLC.” Mumbling, “We don’t know what you’re saying. You need to tell us what it is,” and you have some different flavors. “Hey, it’s a sole proprietorship.” If you’re a fitness trainer, you still get the same deductions.
The independent contractor is a fancy way of saying you are not an employee. So your company can be either disregarded, in which we’d go on to your schedule C as a sole proprietor, and if you’re making less than $30,000, you’re probably okay in there. You’re leaving a little bit of money on the table, but it’s not horrific. If you’re making over $30,000, you’re probably going to want to tax that LLC as an S Corp.
Jeff: Right. I agree.
Toby: It’s going to start saving your money, you get to do an accountable plan. It’s going to to put you’re […] right off most of it. There’s just so many ways to get money out of an LLC taxed as an S Corp or LLC taxed as a C Corp.
“Do contract labor and whole materials such as cabinets, vanity, lighting, tile go into the cost of goods sold on the form 1065?”
Jeff: If we’re flipping property, the answer is yes. Any cost going into that property that you’re going to turn around and sell is going to be the cost of goods sold. If this is an investment property, the answer is, maybe, depending on how much it is, what type of materials are going in. We might be able to expense some of them, we might be able to depreciate some of them.
Toby: But it wouldn’t necessarily be the cost of goods sold. This looks like it’s a flip.
Jeff: Yeah, I agree.
Toby: That’s just going on the basis of it.
Toby: If I’m doing cost of goods sold, it’s usually, I’m selling cabinets, vanity, lighting, and tiles as a company. I’m a retailer, I have this inventory, I’m selling it, then I have the cost of goods sold on my 1065. Is that right?
Jeff: Yeah, that would be.
Toby: Whenever I see the real estate stuff and I see COGS, I’m like, it’s not really. Not really.
Jeff: We call it cost of goods sold, but—
Toby: When you’re adding it to the basis?
Jeff: Yes. When they sell that property, their basis and everything they put into it.
Toby: Would you report it as the cost of goods sold or would you report it as basis?
Jeff: We would report it as the cost of goods sold because it goes in as ordinary income for that business.
Toby: That’s what you’re saying, they’re flipping?
Jeff: If they’re flipping, they would have gross sales or whatever they apply for.
Toby: But if I’m doing a buy-and-hold?
Jeff: If you’re doing a buy-and-hold, no, it would not. It’s a whole different set of circumstances.
Toby: There it is. That’s why you have a CPA. You’re treating it as COGS on a flip.
Toby: In a flip is a fancy way of saying, “I’m buying it to sell it. I’m buying real estate to sell the real estate.” It doesn’t matter how long you own it. You can have a flip in 10 years. If I’m buying a property to hold it for long-term, then I can get long-term capital gains, but I don’t have the cost of goods sold. I’m going to have that added into my basis. Thank you for that. Haven’t really thought that hard on that one. It’s a surprising answer that’s cool.
“If I sell a house for profit, can I put that profit into another rental without paying taxes?”
Jeff: You can if you do 1031 exchange, which means you need a qualified intermediary. Between your sell and your buy, there’s QI. The qualified intermediary is going to actually be the person selling your property and will also be the person buying the property. To avoid taxes in a 1031 scenario, you can’t touch the cash. That’s really key to this.
Toby: Yeah. There’s some interesting things. Whenever you say for a profit, the profit’s really not a big thing for us. We’re looking at the gain. Is there something on it that is going to gained? Also, we have the depreciation recapture if we depreciate it. I have a house that I’ve held for a while. I’m selling it and I made money on it. I’m going to have depreciation recapture, I’m going to potentially have long-term capital gains. Can I put that into another rental without paying taxes? Just like Jeff said, on both accounts, on depreciation recapture and long-term capital gains, you can roll it. We have something called a 1031 exchange, which is only for real estate.
You could also do qualified opportunity zones if you’re going to put that in and you’re going to defer it. You’re not going to pay tax and you’re going to defer right now in six years. If you sell a personal house, let’s say that I had my house that I lived in for 10 years, I rented it for two and then I sold it and I make a big gain, I can offset the capital gains only under 121 for up to $500,000, married, filing jointly. I’d still have to recapture their depreciation, my ordinary income capped to 25%. Is there anything else?
Jeff: The one thing I think about is people who want to do a 1031 exchange when that is not the best strategy, they have a large carry-over, capital losses, or they’re in a low bracket. This is a case where we want to figure out if we want to do this or not, or just treat it as a sale.
Toby: Yeah. Let’s take a look at it, it’s going to depend on what type of property. Also, if I sold a house for a profit, I’d own it for two months, I’d fix it up and sell it, that’s ordinary income. How do I defer that? I’m going to want to offset it with other expenses. Maybe I’m putting it in a 401(k) to avoid, maybe I’m expensing it out. There are ways to avoid the tax.
Jeff: If you’re flipping the house, you’re going to pay taxes on any profit.
Toby: “Who would facilitate a 1031 exchange?” Mina, there are some really good folks out there, there are a bunch of 1031 exchange companies, but it’s called a 1031 intermediary. Technically it’s a qualified intermediary, that’s all they do generally.
Jeff: If you look up 1031, you’ll get a dozen ads. Easy.
Toby: Yup. If you want somebody specific, email me. I have some good ones. I know one gal out of Idaho that’s fantastic, that has worked on some really complicated transactions, does a good job.
Somebody says, “Resident alien in the USA with an H-1B Visa. What company structure is advisable for real estate?” If you’re here, you’re probably doing an LLC and it’s going to be disregarded or taxed as a partnership depending on how many owners. Generally speaking, if you’re not going to be in the United States, you don’t want to do an S Corp. As a non-US citizen who lives here, as a resident, you can actually own an S Corp interest, but the second you leave you just disqualify […].
Jeff: Yeah. A resident alien is going to be treated the same for tax purposes as a US citizen.
Toby: Yup, and you’re going to file a 1040. Even if you lived out of the country, you’re going to file a 1040-NR (non-resident). We still tax here and then hopefully you get a tax credit overseas where you reside.
Somebody says, “Can a solo 401(k) purchase real estate?” Yes, it can.
Somebody says, “What about we set up a 401(k) with a Schwab account?” That Schwab saying, “Hey you can’t buy it in our account.” Your 401(k) can still own it. The money can come from Schwab, it’s just Schwab’s not going to hold tight.
“Is it possible to roll over a Roth to a Solo 401(k)?” No. A Roth IRA back to a Solo 401(k). No, you’re not allowed to do that. It can go a Roth Solo to a Roth IRA, but not the other way around.
“Can I lend 50% of my deemed Roth IRA sponsored QRP to an LLC, not the sponsoring one or to myself?” My Roth IRA sponsored, I don’t understand that.
Jeff: I would say, if it’s going to your LLC, the answer is going to be no.
Toby: No, it has to be the individual participant and it’s only if it’s the Roth QRP, the 401(k) Roth. The Roth IRA can never loan you money. But if you need money, you put the money in there, and you kept it in there for five years, you could take out whatever you put into a Roth IRA.
What I tell kids to use it as their savings account, if they have to take it out, there’s no penalty in taking the money that you put into the Roth IRA out because you pay tax out there already. The only money you ever have to worry about paying a penalty on is the growth in the Roth IRA. If I put in $50,000 over the years into a Roth IRA, because there’s a pandemic going on and I need cash, I’m taking money out of my Roth. I don’t have to pay tax on it if it’s $50,000. That $50,000 became $75,000 and I touch the $25,000 of gain, then I don’t have to worry about it.
“Can you deduct education travel business expenses if your entity is an LLC taxed an S or simply disregarded?” Tax, travel, business, research. All of those you’d be able to write them off whether it’s an S Corp or you’re a sole proprietor. The only question is the education expense. When it was incurred, where there would be needed to be treated as a startup and then the type of business. The answer could be no, depending.
“If the LLC owns the property, can you also do a 1031 exchange to avoid paying taxes?” Yes. Name the name. It has to be LLC. That’s where you go from LLC to LLC.
We have a bunch of stuff on ROBS. “I have a C Corp 401(k) from a ROBS transaction.” If you guys don’t know what that is, it’s a Rollover for Business Startup. That is when you set up a C Corp, your 401(k) and you’re basically partnered together on it. You’re allowed to do that just on the initial setup. “If I’m using those funds as a down payment for an SBA loan, who is the guarantor for the loan? So far, my husband and I have signed. Does the custodian need to sign?” No. Generally not unless they’re going to require that, it becomes a guarantor and they want to be able to get into your 401(k). But usually your 401(k) just dump all of its money into the C Corp.
“What user audits do you see for people claiming real estate professional status in taxes?” There’s huge benefits and I’m not seeing audits on them. Have you seen any audits then?
Toby: What you’re saying is that I’m documenting it and I’m meeting the requirements of 469(c)(7). Basically it’s the exception to real estate losses being passive. They have the right to audit you and check you, but we’re not seeing it triggering any.
Jeff: The two keys are aggregating your properties and documenting your hours, and you should be fine.
Toby: Somebody is asking a question, “How do I tell if my entity is set up as an S or a C Corp?” You look at your EIN. If you’re an S Corp, you file something they call the 2553. There would actually be a confirmation letter from the IRS saying, “We earn receipt and you have been granted S Corp status.” Otherwise, you’re a C Corp.
“How do I file a tax return for a married couple with children dependent if one spouse is not a citizen and does not have SS and/or ITIN?” John, you’re going to do your ITIN application when you file your tax return. You just attach to the return and they’ll assign an individual tax identification number for your non-citizen spouse.
Jeff: This is a case where you may actually have to file separately. You would file 1040 and she would file 1040-NR.
Toby: Yup, and then when you file a return they request her ITIN, you give them her ITIN.
Jeff: Yes, you could request ITIN with a 1040-NR.
Toby: Yeah. It’s hard to get the ITIN without.
Somebody asked about health reimbursement. “I have individual health insurance and I’m only the officer in my C Corp. Do you have to have the C Corp reimburse my premium payments?” Yes. If you have individual health insurance, you would reimburse yourself under the C Corp. Absolutely, and if that came out of pocket that is not being covered somewhere else.
I didn’t get this one. “If we own rentals in another state, but those properties are being managed by a management company in those states, do we have to foreign files in every state?” No. Usually if you own the property, you’re going to own an LLC in that particular state. If you have an out of state entity that owns the property, then technically you would be required. If you’re renting it to register it, regardless of who manages it, it’s the rental income that triggers the filing. I would file that as a foreign file, but it has nothing to do with the management company, how you’re doing the activity.
Let’s see. Somebody says, “I gave a $500 finders fee to someone who found a property. I have a C Corp. Is it tax deductible?” Yes.
“Clarification for travel, education expenses. I’m confused about which expenses are professional by a C Corp versus an LLC.” Do not worry, because an LLC is not taxed. You have to tell it what it is. They’re identical for C Corp or an LLC taxed as a C Corp. You can always talk to somebody in our firm, we’re more than happy to help you clarify anything.
“Do I have to set a special structure in the C Corp to reimburse health premiums?” No. You just have to have a medical reimbursement plan or a 105 plan. If Anderson set you up, we already did it. If we did not, then we have those documents. If you’re platinum, we’re happy to give them to you. Platinum is a whopping $35/month.
Let’s jump into social media. Feel free to follow us and join us. There’s so much stuff going on out there and I know I want to put more. Somebody’s asking about the Tax-Wise. I’m so bad. Any day now it’s going to be in the warehouse. We’ll give you the electronic copy, but we’re going to ship them out as soon as we get them.
We have a wonderful printer that we’ve been using (Bookmasters) for over 20 years, and they broke their big piece of equipment that puts all the bindings together. These are hard bound books. This is a huge printer and we just stuck with them. It took them a little bit to fix it, so we’re a little delayed. Everything that could delay that thing seems to go on, but we’ll get that out to you and I’ll try to make it up to you. Give you guys some cool stuff here in the future.
“Do you have to fill out a 1099?” Not for $500, it’s only a few […] $600.
“I do not have electronics.” I assure you we’ll get you the electronic version, everybody is entitled to the electronic version if you want it, we’ll send it out to you as we can […]. Hey, go onto our social media, follow us, and then ask questions. If you ask questions, a lot of folks are answering those questions. We grab the ones from Tax Tuesday Anderson Advisers and we make them part of these podcasts, for these shows, the Tax Tuesdays.
Somebody’s asking about choosing a trust data residency. You got 50 flavors. A lot of people just automatically go straight to their own state. We don’t. I’m looking and saying what’s the later time that they’re automatically honored. For example, Nevada has a 365 year real perpetuities versus some states where it’s 21 years. If you want to have a long legacy trust, you’re going to want to do it in a different state. Nevada’s my favorite, personally, not just because I live here. That’s why we came here.
Anyways, there’s your question. Lots of things […], where do we follow on Facebook. You just log on to Facebook and you’ll like us. That’s it. We’re 4:30, so we’re only half an hour.
Jeff: Right on time.
Toby: See, we’re getting good at not going an hour over anymore.
Jeff: You can’t get me to shut up, right?
Toby: Dang it, Jeff. You’re just such a chatty catty. All right guys, be safe out there, be kind to your fellow human beings, don’t buy a million rolls of toilet paper. I always think of my mom. She’s 87 years old, going to the store, needing something if she was sick and it all being gone. You don’t have to buy everything that’s not nailed down. You don’t need to hoard everything. There’s being prepared and being kind to your neighbor.
If you see somebody who’s having trouble, especially our older communities, a lot of them are scared because there’s so much stuff out in the media. Drop off something for them, give your mom a call, do all that stuff, make sure that you’re reaching out to people. Some of these folks are in areas that are hunkered down. Whatever we can do to help each other. That’s horrible, “My mom said you use corn cobs.” That’s what she used when she was growing up.
Jeff: That’s right.
Toby: People learning all sorts of weird stuff […] years. Until next time, you guys all be good. Love all the community and all their comments and everything you guys are doing. It’s all obviously really, really cool. We’ll stay up on what’s been going on with the senate and as soon as we hear some things, we’ll be reaching out too. Hope all you guys stay safe and that nobody’s affected physically by this virus. Hopefully. we’ll get out of this thing with a little bit of […]. Thanks guys!
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