Do you know all there is to know about the relief provisions in the CARES Act for accessing money due to the COVID-19 crisis? It absolutely has an impact on health and the economy. None of it is going as planned, but additional guidance is available. Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions during this challenging time. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- Updates on Tax Impact of COVID-19:
- Paycheck Protection Program (PPP) and Health Care Enhancement Act passed, signed into law
- Other than deadline to July 15, states not allowing deferred payments
- Economic Injury Disaster Loan (EIDL) is not a loan, but an emergency grant
- How do I file for unemployment payments if I’m an independent contractor? Independent contractors are now eligible, but most states aren’t set up yet to do distributions
- Do you know why some people received $1,200 in their account while others didn’t? Even when they use ACH? People using TurboTax, H&R Block, Jackson Hewitt, and Liberty Tax got or asked for an advance on their refund for a small fee
- Does the CARES Act allow me to deduct losses from W-2 income with prior year accumulated passive activity losses? No changes were made to passive activity loss rules; if you accumulated PAL, you cannot carry those back
- Can I apply for unemployment and the PPP? Yes, the two are completely separate
- Can I deduct my entire home cost since all of us are working from home? No, if working from home as an employee, it’s an employee/non-reimbursable expense
- I have not done my 2019 taxes. Can I still apply for CARES under government bailout programs? Yes, just use something as a backup
- Can I apply for PPP if I did with one bank that has not approved the loan? Yes
- How much EIDL can I qualify for? How is it calculated? Up to $2 million; half of your gross profit
- Any idea when money is deposited after signing the PPP loan? Yes, 10 days after receiving an E-tran number, bank has to provide funding
- Can passive losses from cost segregation be taken on W-2 income if spouse is a real estate professional? Yes, either spouse qualifies, as long as married and filing jointly
- Would getting my real estate license have more benefits for being a real estate professional? Depends if you’re using it
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Full Episode Transcript
Toby: Hey guys, it’s Toby Mathis.... Read Full Transcript
Jeff: And Jeff Webb.
Toby: This is Tax Tuesday, so it must be Tuesday, though the days are starting to blend together for some reason. We have a whole bunch of questions already flooding in, so you guys are Johnny-on-the-spot. You’re going to make us work today, I can tell.
Make sure that you guys can hear us loud and clear. Just go to the question and answer pane. I don’t think our chat function works on these. Let’s see. Yes. See all I need is one yes, and then I know. Let’s see if I can find my little thingy. Yup. Look at all that.
We’ll just jump right in and make it really easy. We got 100 yeses. First off take a look at the social media stuff, you can always jump on and grab all the good stuff that we send out. I know today we’re going to be sending out either during this event we’re trying to finish up some touches on a retirement under the CARES Act.
There are a few relief provisions there that not everybody’s aware of for accessing money, so we will talk about that a little later. As well as watching some of the wonderful videos we’ve done. This is how this goes. We go through about 20 to 25 questions that we picked out of the folks that have been emailing, and you can always send in questions TaxTuesday@AndersonAdvisors.
We grab those and use them as the fodder for the actual Tax Tuesday, and then we take questions live throughout. This is the first time I’ve ever had to do this but we’re getting so many questions that I put in little Q&A slides so that we actually know.
Jeff: When we’re not answering on screen questions.
Toby: It bugs me as I’m sitting there and I’m getting all these questions and somebody says, “Could you advance the slide?” I don’t know why that makes my eye twitch at this point like my eyes twitching.
I just figured, “Hey, there’s an easy way. I’ll just put a slide up.” I used to try to do that but it’s too tough. I’m going to try it again. You guys already have a bunch of questions, we’ll get to them here in a second. Real quick update, we have now had the Paycheck Protection Program and Health Care Enhancement act passed. That actually was signed into law, was it yesterday?
Jeff: I believe so.
Toby: Oh, my God, it seems like a week ago, but it was actually yesterday morning. That’s how fast this stuff’s moving. The PPP program is back underway. The banks are doing their best to screw the little guy, to process your loans. Did that come out? It’s really, really frustrating because we have been seeing this over and over again.
I don’t blame them. The sad part is this is really congress, but they really are going and taking care of their biggest clients first. Somebody says, “Do you know how to turn a cell down on a cell?” That’s funny, that’s an interesting question that came in.
If our signal is coming in too hot and maybe something you need to turn down on your end, I’m showing us perfect here to say something Jeff.
Jeff: That guy is a really good looking man, that Treasury Secretary.
Toby: Mnuchin? He is a good looking man. Anyway, let’s jump into some things that you might not have realized. First off, if you had somebody pass away in 2020, they actually are entitled to the stimulus check. The IRS is doing one better and it’s sending stimulus checks to decedents going back to 2018, and before you think, “Oh, that’s not a big deal.”
It’s about by calculations for them and individuals who passed who are under 17, who would be qualified as a child which is really getting morbid but it was $37,000 give or take. About 2.2 million others, it’s about $3.4 billion going out to people who have passed away. I don’t think they’re entitled to it, Jeff. Maybe for 2020 they would be but that’s weird, because it’s technically what is it, a tax credit for 2020?
Jeff: Yeah, an advance payment.
Toby: Advance payment?
Toby: I’m pretty sure, 100% sure that 2018 and 2019, folks ready fire aim. Let’s just give everybody a bunch of money, and then we’ll worry about how to pay for it later.
Jeff: I believe I was reading that the whole social security deal is not going as planned, the distributions to Social Security recipients.
Toby: None of this is going as planned.
Jeff: There’s been some additional guidance sent out.
Toby: We could bellyache all day long, but the states are having a heck of a time handling the onslaught of unemployment claims. In fact, if you are an independent contractor in the State of Nevada, where we’re at, they’re telling folks it will be mid-May, so you only have to somehow manage to find a way to stay alive.
You’ve been in lockdown for a little over a month and I guess you could eat your carpet or something. I don’t know. Eat your furniture, that’s going to be the new one. I don’t know what these folks are going to do. It’s really frustrating.
Anyway, we already have a bunch of questions coming in, so I’m not going to pontificate. What I will say is that the Paycheck Protection Program is back in full force. Yes, if you’re working with us, we have inside tracks on a few different lenders that we have great relationships with and we’ve submitted quite literally well over 1000 of the PPP apps just to our main lender, and then we work with people who are giving money.
It’s tough. There are some good questions on the stimulus, so we will be getting intermittent fasting times, force fasting, we’re going to put you on a diet. We’re going to starve you to death. I don’t think that was their idea, but there’s a bunch of good questions where I’m just going to zip on through and just do it.
This is one of the things that I forget where I stole this from but it was probably once upon a time in Mexico or something. I think somebody said, “Are you an AmeriCAN or AmeriCANT. I really do believe that we have optimists and pessimists right now and that ‘s feeding a lot of the anxiety. Before you guys say that this does not have an impact, it absolutely positively has an impact on health and on the economy.
I’m sorry, there’s two ways to look at everything, the glass is half full, it’s half empty, it really does. We’re seeing a huge difference between it at the end of the day. I’m one of those guys that says, “You always got to be on the optimistic side, even when stuff’s going on around you.” I’m getting some interesting things about where the AmeriCANTs should go.
It’s a free country, but I just say that we shouldn’t be living in fear. To give you guys a little bit, there’s a slide that I’m going to show you a little later on about what happens with our economy when we have health and epidemics and pandemics. Anyway, let’s jump into the questions.
“How do I file for unemployment payments if I’m an independent contractor?” We’ll answer that one.
“Explain loans for the new CARES Act. I heard you do not have to pay it back if you continue to pay employees,” that’s the PPP and I’ll explain how that works.
“Does the CARES Act allow me to deduct losses from W-2 income with prior year accumulated passive activity losses?” Jeff, I know, wants to answer that one.
“Can I deduct my entire home cost since all of us are working from home?” That’s amazing. We’ll answer that one.
“If my losses are less than $10,000, can I still apply for the $10,000 advance loan in the EIDL?” That’s actually an emergency grant, so it’s not even a loan, but we will answer that one.
“PPP is only for salaries below $100,000? I’m the sole owner/employee of an S Corp and my salary was a bit over. Is there a specific way to apply?” We’ll certainly answer that one.
“We have a loan for new construction which has been delayed due to Corona. Does that qualify under EIDL?” There are a lot of these that have to do with the CARES Act, they’re not all, but I’ll make sure that we get to a bunch of tax stuff too.
“What is the recommended way to file taxes for income property that is partially rented and partially used by the owner?” There’s a tax question, we’ll get that.
“Can I write off 100% of my loss due to the Coronavirus?”
“I am a W2 physician with an income over $300,000. I own rentals under an LLC and pay a property manager. Can I apply for the SBA loan and grant since both rental and W2 income will be affected?” I love the fact that he was affected. The arrow had the effect now. Was it the arrow had an effect on the aardvark?
“Is it a good time to convert traditional IRA to Roth IRA now since there is a loss in the stock market?” Really interesting question and I think there’s going to be another one like that down the road here.
“Just like everyone else, I want to know your thoughts of how we come out of this way ahead and thriving? That’s interesting. I grabbed that one just because, well, it must be my narcissism. Bigger that’d be something fun to hit on.
“If you take a distribution from a retirement account with the intent of paying it back within three years, as permitted under the new stimulus bill, do you ever have to report the distribution if it is timely paid back?” Great question. I think I picked a lot of questions again, Jeff.
Jeff: You may have.
Toby: “Suppose your traditional IRA was worth $100,000 on January 1st. If its value crashed along with the market, it’s now worth 17% less, or $83,000. Are taxes on the conversion based on the accounts value at the time of the conversion? Would you go over again why we do not want to convert a traditional to a ROTH?” Well, you always calculate so we’ll go over that.
By the way, if it went down 17% and went up 17%, is it back at $100,000? Don’t you love stuff like that? Jeff’s a numbers guy.
“I have a $500,000 IRA account with Schwab and I’m planning on taking a $100,000 distribution.” That’s fine like what I did. “With the $400,000 remaining, can I set up a QRP account and set up a $100,000 loan also?” Yeah, we’ll go over that. That’s actually one question asked twice. It was like a knock, knock joke.
“I own three LLCs. One of them was just formed in mid 2019 and has zero revenues. What operating and startup costs can I expense to carry the loss forward without sending up any red flags to the IRS?” We will go over that too.
“I’m inheriting my father’s investment portfolio. He died in October and we expect his financial advisor to transfer the stock out of the advisor’s firm and over to my new account. The value of the account has dropped dramatically since my dad’s death. What will be the basis of the assets when they come to me in this new account and what would they be?” That’s a really good question. Jeff loves those types of questions because he loves talking about basis.
“Would getting my real estate license have more benefits for being a real estate professional?” Go over that.
“If I open my Solo 401k/QRP, do I have to file a tax return for it? Wow, we got a few more, Toby went crazy. You guys send in a lot of emails. I’ll just say that. I don’t like leaving a lot on the bone. Let’s just put it that way.
“If I Airbnb my rental property, do I qualify for some type of employment?”
“We have to use the NOL in reverse order? Do we have to use it against the most recent year? Can we go back to 2014 and then come forward?”
For those of you guys who were on two weeks ago, we’re going to have a different answer because the IRS has given us guidance since we had that first question. It was about how you do the net operating loss and they put it back in conformity with the way we used to be. The way it was written was to bring it to the most recent year of the loss, and now it’s going back.
I’m just going to tell you that. That’s because the IRS likes to contradict the Congress and Congress can’t right. We’ll go over that and put that one to rest.
“In 2018 we put a new roof on a property in California that cost $30,000. If we sell this property in the next year, will we lose the depreciation?” Do we lose the depreciation? We’ll go over that.
We have a lot of them, so we have a bunch of questions already. This is my new Q&A sign. Here are a few questions that came in live and we’re just going to answer them real quick. Aloha. Aloha.
“My C Corp has a Solo 401k plan setup. I’m an officer, but my wife is not. I want to contribute as much salary as possible and have the corporate contribute the max as possible. I’m 38 years old. I don’t want to take any other form of compensation from the court. What would be taxable to me? What is the best way to do this?”
I think I’ll have to use a W2 salary. I’m just going to get into this. I’m not going to go, there’s a bunch of other questions, but here’s how it works. You can defer up to $19,500, so what is it this year? For 38, both you and your wife, so if you don’t want to pay any tax, then you defer that directly into the 401k. Then you can contribute 25% of any of your salary, any of your compensation into the plan as well.
Let’s say you took $30,000 in payment, you’d be able to defer $19,500 directly into the 401k, and then you’d be able to take 25% of 30,000, which would be $7500, and put it in there. You’re going to be in the ballpark. Probably closer to 26 or 27 where you’re not going to have to pay any tax on it, and that’s per person, but she has to provide services.
“My question, under the CARES Act, could a rental property, approximate value $85,000, be taken out of a traditional IRA and rolled into a ROTH? Paying taxes over a 2.5 year period.” No, Greg. I think that what he’s looking at is taking it out and then paying it back in, and this would actually be rolling over to a traditional and then you would pay tax, immediately. This isn’t like the CARES Act where they give you the ability to take an early withdrawal.
Jeff: So many years back, there used to be a two year that you paid the tax on the ROTH’s conversion. That’s been gone for several years now.
Toby: I think it will come back. The reason that it’ll come back is because congress needs the money. What you’re going to see is that we need to raise capital because we’re giving away so much flipping money. They’re going to say, “Hey, let’s give these people an incentive to do a taxable transaction that’s in their best interest.”
We’ll let you spread over several years or two years ROTH conversion because some tax is better than none, and we’d rather get that tax now.
“How can I file for unemployment payments if I’m an independent contractor?” You looked at this?
Jeff: I did. The independent contractors are going to be eligible for unemployment. However, the majority of the states are not yet prepared for this. The last I looked, only 10 states were giving independent contractors unemployment right now. I think Illinois started today and I think California starts next month. Nevada starts next month also, correct?
Toby: M-hm. What they did is they said that the Federal unemployment, which normally wouldn’t be eligible for unemployment if you’re an independent contractor, you have to be an employee. They dumped that on there and they said the states will distribute it according to how the state does, and the States aren’t set up to do distributions of unemployment to independent contractors. More importantly, they just had massive amounts of employment claims.
What is it three or four million people filing for unemployment or more? No, actually, it’s more. It’s probably 12 million. I forget, it was just a huge number. Just hear it was half a million. Imagine that it must be significantly higher all over the country, but we’re talking 12% unemployment right now and it’s probably going to be closer to 25 by the time we’re done curing ourselves which I say dubiously.
Jeff: This is a case where, as far as documentation, you’re going to have to contact your state unemployment office to see what they want for documentation. It’s most likely going to be any 1099 to receive or your 2019 income tax return.
Toby: Let’s see if this is relating. I think California started taking apps today for the unemployment of independent contractors.
Jeff: I think I got it backwards. It must be Illinois that’s next month.
Toby: David, I think you’re right. I’ve actually had some folks that were S Corps, and this is one of the questions, but that actually got their unemployment right away.
“Can I contribute to my 401k plan if the Corp runs a net operating loss for the year?” Yeah, of course you can. It’s a valid expense, we’ve done that years ago. I should remember this because somebody made a mistake and they made a $700,000 profit inside of a C Corp when it used to be bad to make profit in the C Corp. We managed to do a defined benefit plan the following year, carry it back. Between the two years, we were able to create the $700,000 loss and go back and get it. I know you still can.
“I’m a realtor and received 2 1099 Miscs. One under my name, and the other one under my corporate name. Which is the best for reducing my tax liability?” You’ll want them both under the corporation, but if they gave it to you personally, you’re going to have two choices. If you have that requisite paperwork that says that you are an agent of your S Corp, and that you’re under their exclusive control, then you literally just deposit into the S Corp and endorse it over. If not, then you’re probably… what would you do, a Schedule C, recognize the income and then just write it to the S Corp?
Toby: Assuming it’s an S Corp. But some states, it might be a C Corp, but it’s almost always better to not have it go as a sole proprietor. Your audit rate goes up about 1,000% to be a sole proprietor. I’m not saying that it’s bad, I’m just saying that it’s bad. You pay more tax and you don’t want to do an accountable plan, like all sorts of stuff.
Realistically, you’re supposed to pick one methodology.
“If I pull out some money equity from a rental property, how will it be taxed? Can I avoid it?
Jeff: It won’t be taxed at all, it’s a loan.
Toby: The only way that you’d have an issue is if you pull money out, and you’re not at risk for that loan. In which case, if it exceeds your basis, then you’d have capital gains. This sounds like, “Hey, I have a rental property and I’m going to pull some money out of it.” You’re never going to be worried about that if it’s just you, if you’re in something else where there are other people that are signing on the loan and you pull money out and they give it to you, you could have a taxable event. The easiest thing is just to shoot us the scenario, and we could tell you pretty quickly.
“Can you use money from a PPP loan to fund a ROTH? Will that make you ineligible for loan forgiveness?” John, that’s a really good question. The PPP could be used for payroll, it could be used for utilities, it could be used for rents. It could be used on interest on a mortgage on your property. If it’s used as compensation to you, then you could absolutely take that compensation and put it into a ROTH. It doesn’t make it non-taxable too.
Jeff: I’m not sure I’m going to agree with that, as far as the forgivable portion. If it’s going to be used for a QRP, yes but if it’s going to be used for any type of IRA, I’m not so sure.
Toby: No, because it’s compensation. He’s not taking a deduction for it. If I get a PPP loan, and I write you a check, let’s say it’s Jeff Webb, CPA and you write yourself a check and then you take some of that check and put it in a ROTH. The company is not going to contribute to it too.
Jeff: I’m recognizing compensation for it and then putting it in QRP or in the ROTH.
Toby: That’s all. See, Jeff and I, we get along well. What you were thinking though? You’re thinking that they’re putting it in a ROTH 401k?
Jeff: Just pull the money and then turn in ROTH.
Toby: Yeah, so you got to be a little careful. But realistically, you’re going to have a pot of money too, and you’re going to track that money, and then you get to make a certification. As long as it’s within the realm of, I don’t know how they’re going to audit these things. I’m just sure some people are going to do really nasty stuff.
I’m a sole member of a PLLC. I received $10,000 of PPP. How can the money be forgiven? I’m an independent contractor and the company pays myself. As you Shawn, it is really quite simple. You pay yourself out like you were before. If it’s $10,000, that means you’re probably receiving somewhere in the neighborhood of $4,000 a month in compensation.
Over an eight week period, you’d continue to pay yourself your $4000, which would get you to $8000, and then you’d spend the other $2000 on your utilities, on your rent, and that would all be forgiven. It’s over an eight week period it’s called the covered period, and then you’ll never have to pay it back.
Get this, this where Jeff and I get all sorts of geeked out. It’s forgiven, and then they said that it’s non-taxable. Which means you should also get to take the deduction. You’ll get a $10,000 deduction, and you’ll get forgiven for 10,000. Depending on what your tax bracket is, it’s like a double whammy. That’s cool.
Somebody says, “Can you share ideas on how to use IRC 139 in a C Corp?” Todd, that is a really good question. What it really boils down to is 139 is a section of the code for big disasters. Is that a national disaster?
Jeff: FEMA type disasters? Yeah.
Toby: What it allows an employer to do is reimburse any of the costs associated with that disaster of their employees. In English, it could pay for any of your Coronavirus related expenses, including having to go home and all of your employees. This is where it gets interesting because you can’t really do a home office for your employees, but you could technically start reimbursing them for anything that they had to incur by working at home.
You could buy their webcams, computer, their extra internet, or something like that. I imagine there’s some ways and if it’s just you then you want to go a little crazy. You want to push that to make sure that you’re getting as much money, chances are you’d be able to write it off anyway.
Here’s the stimulus, and then I’m going to move on. “Do you know why some people received the $1200 dollars in their account while others didn’t? Even when they use ACH.” Eduardo, here’s what’s happened. It seems like a lot of people would go to TurboTax, H&R Block, Jackson Hewitt, Liberty Tax, and they would get an advance on their refund, or they would go to their tax preparer who would give them advance on the refund, and a little fee was taken out. That can’t go into the tax repairs account, it’s illegal. They’d use an intermediary account that was a temporary trust account, and was actually on these tax returns.
What ended up happening is those accounts don’t exist anymore. You really have to look on your return and see what the account number was listed. There is a tool that the IRS has, what is it called? Find my Payment Tool?
Jeff: Yeah. Something like that.
Toby: Yeah. Just type in the IRS stimulus and see if you can get there, and then you could see the last four digits of the account, make sure it’s one you recognize. You’re not alone, a lot of people have had this happen. If it went to an intermediary account that doesn’t exist, the bank is going to return it and you’ll be issued a check, but those checks are scheduled to go out all through the summer, with some going all the way out I think into July and August. It’s going to be a while before you get it.
Jeff: IRS actually delayed sending out refund checks so they could get through some of the stimulus.
Toby: They had 30,000 employees that they sent home that now they’re going to bring back and they’re going to pay them an extra 25% if they’re in the touching mail, and 10% if they come in. God bless our federal government. But that way they’re getting through all these paper returns and are truly interesting. By the way, we are now through the questions that came in from 3:10.
“Explain loans from the new care bill. I heard you do not have to pay it back if you continue to pay employees.” You want to hit these?
Jeff: Oh, that’s mostly true for the PPP loans. I would not count on more than 80% of your PPP loan being forgiven, if it’s used for payroll to continue paying employees. The EIDL on the other hand is not a forgivable debt, it’s a 3.75% loan that you have to pay back over 10 years. What’s the difference for all of that, four years, or three years?
Toby: For which one?
Jeff: The EIDL.
Toby: The EIDL is actually a 3.75, it’s a 30 year loan. It’s deferred for one year. If you’re nonprofit, it’s 2.75. They do that emergency advance of up to $10,000.
Jeff: The advance is a grant that does not have to be paid.
Toby: It never has to be paid, but if you get the PPP, it goes against the forgiveness amount under the PPP. It’s weird. Other loan provisions under the CARES Act that you should be aware of as you can borrow from your qualified plan up to $100,000.
What that means in English is that if you have a 401k you can borrow against the 401k. If you have $100,000 in the account, you can borrow $100,000. You get a year deferral. It’s not you don’t have to pay interest on that year, it’s just that you don’t have to make any payments for that year, and then you pay it over a five year period after that.
This is a good one, actually. This is actually related to this question, so I’m not going to advance the screen. “For a PPP loan, can I hire my 14 year old to replace the employer laid off or can you hire a laid back employee and then lay him off after we run out of funds?” That’s the situation. Here’s where it gets weird, Susan, yes, you could actually hire your child labor as long as they’re related to you. As long as it’s not like working in a mine or something, you can hire young folks.
But if you bring somebody back, you’re really just paying them glorified unemployment. You’re almost better off not. The reason being is because unemployment now is up to about $30 an hour. In fact, we tried to hire three different people last week that we put in offers to, and all turned down because they were making more on unemployment than they would if they came here and worked.
Our government has now gone into competition with us willingly or unwillingly. I don’t know whether they thought about what they were doing, but they’ve made it really difficult for employers that still need people to get them because many of these people are paid more under their existing unemployment and they’re going to continue to receive that for 39 weeks. It’s ridiculous, stupid.
Jeff: The purpose of the PPP partly was to enable you to hire back people that you furloughed.
Toby: If you furlough them, bring them back, and then you’re just forced up, let them go again. All you did was give them money that’s being forgiven. Congratulations. I call that unemployment. A lot of people have realized this. There was a great article written about a gal up in Washington that had a couple of salons. Her people actually got mad because they made less working for her than they were getting on unemployment. They were like, “What the hell are you doing? You weren’t even thinking about us.” She’s like, “I thought this was a good thing.” That actually turns into a 2 year loan at 1% with a 6 month deferral. That’s the PPP.
The loans, the PPP, and the EIDL are the big ones. It’s not the Main Street loan but it’s the Express Loan. It’s up to a million dollars. It’s a standard loan under the SBA. They move from 350 to a million. You’re gonna have the ability to borrow from your own retirement account, qualified plans only, not your IRA for up to $100,000. I’m just going to plant the seed on the lookout for the mainstream program by the Fed. They’re going to buy back from banks about $600 billion with the loans. You’re going to see those coming out. Those are going to be somewhere around 2 ½% four year loans and the SBA is going to buy back 95% of them from your local lender. Those will be out here pretty quick.
Let me just zip on through this. I’m going to sneak through because I was already doing that. “Does the CARES Act allow me to deduct losses from W2 income with prior year accumulated passive activity losses?”
Jeff: No. There were no changes made to the passive activity loss rules. If you’ve accumulated PAL, Passive Activity Losses, you cannot carry those back. The only thing you can carry back is the net operating loss which is a business loss. If you’re a real estate professional, that’s a different story.
Toby: If you’re a real estate professional, then you don’t have passive losses, you have net operating losses. You can carry those back for 5 years and carry them forward 2 years. Or is it indefinite?
Jeff: I think it’s still indefinitely even with a 5-year carryback.
Toby: I thought it was 2 years. Maybe I’m making my brain scramble better. So 5 years back?
Jeff: Yeah. You used to be able to carry back 2 years and forward, 20. Now, it’s a carryback.
Toby: By an indefinite carry-forward?
Toby: You’re probably right. But you go back to the farthest year? That’s one thing I want to make sure that I screwed up. I don’t want to screw it up. I was reading the statute right but then the IRS realized that there was a half on the accountants. They were going, “We’re going to apply this to the closest tax year because that’s what they said.” What they really meant was the earliest tax year so the IRS rewrote the language and said, “It’s the earliest.” If you have a loss in 2019, you would carry it back to 2014. Use up any income from then and keep carrying it forward. For corporations it could be wonderful because corporate taxes were higher before the Tax Cuts and Jobs Act. You can go back and knock out. Some of them pay 39% taxes if you want. CARES, we already hit that.
Here we have a bunch of questions that have been coming in. I know I’m going to go over an hour. You guys don’t have to keep reminding me. If you guys want us to stop at an hour, what you do is you just stop at an hour. We’re not going to stop.
“Can one apply for unemployment and the PPP?” Yes, absolutely. They’re completely separate. In theory, you could be unemployed. You can get PPP for your company that then pays for other employees. “Can I use 165 to offset losses?” I don’t know. 165-IA, do you have any idea with that? I have no idea. I really appreciate it. I have something about this. Susan, I think we’re handled.
“Could you go over loan forgiveness for self-employed individuals?” It’s no different statute than for everybody else. When you have a PPP, they’re just basically saying… By the way, this is true for everybody here. If you’re a sole proprietor, you can apply for the PPP. You can apply for the EIDL. The way they calculate the PPP, if you’re a sole proprietor and it’s just you, is your net income divided by 12. Your net income for the year I should say, and then you divide it by 12 and multiply, whatever that is, by 2.5. If I make $100,000 a year, that’s the max that I could use, then I would have 8333, multiply that by 2 ½. I’d take 100 divided by 12, multiply it by 2 ½ which is somewhere around 22,000 or 24,000. As long as I used that on the qualified expenses, I wouldn’t have to pay it back. The qualified expenses are paying me and paying the qualified expenses of utilities, rents, and interest on mortgages that are on your business.
Somebody says, “In 2018, I received 2 years lump-sum pension payments. It significantly increased my income. Therefore, I am over the threshold. Any recommendations?” You file a 2019 tax return and all is good. They’re going to go off your 2019 if it’s filed. If that was 2017, 2018, then Tom, by all means, do your 2019 and get that. You’re still allowed to because technically, you could actually go all the way up until 2020 when you file this return to get the stimulus. Let’s go on. I thought you were going to say something. “Can I deduct my entire home cost since all of us are working from home?”
Jeff: That would be nice but no. If you’re working from home as an employee, it’s an employee expense, non-reimbursed expense, and that’s no longer deductible since the beginning of 2018. At best, you could try to get your employers to try to reimburse some of these costs because they could. Your employers can deduct it but you’re not going to be able to deduct your home cost.
Toby: That is absolutely 100% correct. I don’t know what else to say. It used to be that if you had expenses that your employer didn’t cover, that you would write off on your Schedule A but you can’t do that anymore. Miscellaneous itemized deductions including unreimbursed employee expenses are gone. This wouldn’t qualify as a home office. It’s not continuous regular use and exclusive use. The only thing you could do is possibly under 139. It wouldn’t be for the entire cost of your home but it would definitely be for any extra amounts that you had to incur for child care, things like that, as a result of the Coronavirus.
This is interesting. Somebody asked this. “Can section 139 be used to reimburse shareholders during COVID?” Yeah. It just depends on what the expenses are. Absolutely. Somebody then asks, “What professions are deemed real estate professionals other than realtor developers?” A real estate appraiser can be considered a real estate professional.
Jeff: I’m actually seeing court cases where they’ve decided that an appraiser is for both.
Toby: Both of the transactions?
Jeff: Yes. The only ones I’ve seen that definitely do not are usually on the financial side, the lenders and such.
Toby: You have to be involved in the purchase and sale of the property. If you are a mortgage broker and you’re just processing, they’ll probably say no, but if you were involved in the transaction as a real estate agent, developer, somebody in construction, anything like that, then yes. That is for ½ of the equation. That is 750 hours of being involved in the real estate profession.
Once you hit that, that doesn’t have to be on your properties. You shift over as an individual or if you’re married, both spouses, then you have a material participation. A little bit of a different test so there are two tests that you can actually use. If you get those, you pass those. That’s called 469c7. Your passive losses become active from real estate. You can offset all of your other income. It’s no longer passive. It’s a pretty powerful tool.
If my losses are less than $10,000, can I still apply for the $10,000 advance loan under the EIDL?
Jeff: The EIDL is not being based on your losses. It’s based more on your prior profit, gross profit, I believe. The calculation is actually done on how much you made in the prior year after removing the cost of goods sold and then it’s calculated on that. What you actually lost this year really doesn’t play into it.
Toby: Fair enough. The other thing you look at with the EIDL is it’s not actually based on true loss. It’s based on your operating expense. They use the cost of goods sold minus your gross income equaling your gross profit. They’re really just giving you a 30-year loan. The advance is just based on the number of employees and is completely normal. In either case, we don’t care about the loss of your business. We care about the gross profit of your business and how much it costs to operate. They even asked about loss rents and things like that in the application for some folks. What they’re trying to do is figure out how much they can loan you. Remember, this is a loan you’re paying back. The only part that’s not paid back is the advance. They’re anticipating that you’re going to get this in conjunction with the PPP. The advance may not be paid back but you can’t subtract it out of your forgiveness under your PPP.
Jeff: While they talk about it being a $10,000 advance, it’s not necessarily that. Like you said, it’s going to be based on the number of employees. Mainly, if you’re the employee, you and your wife, it may only be $2000 or $3000 and not the $10,000.
Toby: Cool. We have a bunch of questions that just came in. I don’t know what’s going on with everybody, they’re just tapping away, we’re way behind.
Jeff: It’s like they’re not at work or something.
Toby: I know. They’re not watching the press conferences. No, I think he’s done today. I’m not quite following this. “Do any of the states have filings and states were incorporated in a foreign field?” I’m assuming what they’re meaning is do you have to do the state taxes? Are these actually required to be paid right now? Are they on hold? I guess. I’m trying to read the tea leaves on this because there’s a whole bunch of this file.
Jeff: Other than the July 15th deadline change, I don’t know that any of the states have deferred payments.
Toby: Nope. They weren’t even being very nice about it but it’s up to the state. You would just check with your state. Go to your secretary of state and see if they put it or remove tax. “Does the court have to pay employment tax if I defer salary into a 401k?” The answer is yes. You’re going to run through payroll. I would actually run through a payroll company. It’s not worth it to mess around with all that stuff. It’s so much easier just to do it through somebody else. I will say this, depending on how big your company is, it was just a few people, look at using a PEO or Professional Employer Organization. You’re going to get better rates on everything from workman’s comp. You will actually be able to participate in a health plan and other things at a much reduced rate.
Jeff: Deferrals to QRPs reduce federal income but they do not reduce Medicare and Social Security.
Toby: You’re still going to have the employee in state and federal income taxes, all that fun stuff. “In order to withdraw $100,000 from my solo 401k penalty free, do I have to provide proof of eligibility requirements such as a COVID diagnosis, adverse financial consequences?” The answer is if you take an early withdrawal and you don’t want to be subject to withholding to the 10% penalty, if you’re under 59 ½, then yes. Otherwise, if it’s a loan, then no. Along with that question, it took a withdrawal from an IRA to make sure it could pay contractors. It sounds like you did an early withdrawal and all you do is you give your custodian, you self-certify those things.
“Hey, this is hurting me.” That’s it. That’s all you have to do. It’s a little letter that you give your custodian. Usually they’ll ask for it. We have them if you ever need it. I put one together for all the people that do our funding programs I give them.
“Can I file for PUA?” I want to hear back on PPP, that must be unemployment. The answer is yes. You can file for unemployment as an independent contractor. It only took me 4 hours to do it. Which state was that? John, you’re going to have to let us know that because a lot of people are having trouble.
Let’s keep jumping. “PPP is only for salaries below $100,000?” No, it actually isn’t. I just make this one really simple. You can only use up to $100,000 of salary to do the calculation. If you’re making 200,000, you’re the sole owner, and you’re paying yourself a salary of 200,000, you can’t base the PPP amount, 2 ½ times the average monthly salary. On your $200,000 salary, you reduce it to 100 which means your maximum loan is going to be $100,000 divided by 12 multiplied by 2 ½. I think you add in salary, retirement plans, and health insurance, things like that. But for a sole proprietor, you’re not going to have any of that that you’re able to do just because as a sole proprietor, you’re not going to get a health plan like that. It’s just not going to happen, it’s usually 10 or more employees.
Somebody says, “Is the picture of the guy in your Q&A slide Clint?” I should know. I was thinking of The Lion King picture I have with Clint. I should have put that up. I don’t know if I’ve done that to you guys yet, but Clint Coons is my partner. He’s got a really good picture out there with the lion.
“My wife and I are both on Social Security with no outside income and we’re not required to file a tax return. We are looking forward to the stimulus check of $1200 each. All websites said we automatically get Social Security directly deposited.” Do you know much about that? I think that they don’t have to file a return or there’s a special site with it.
Jeff: If you were on Social Security and receiving a Social Security direct deposit, which I think is the only way to get it, you were supposed to be receiving a stimulus check automatically.
Toby: Is it paper check or automatic? Which one?
Jeff: The automatic.
Toby: If they’re going to line it up with Social Security to go to the right.
Jeff: However, something has gone wrong with that. There was a notice that came out yesterday about if you’re a Social Security recipient, you may want to check this out. I think that was on the IRS website.
Toby: You’re going to want to look at that, David. Maybe Google IRS Social Security checks because apparently, something is going on with it. It was supposed to be automatic. Originally, they were going to make you file a small return and then they said, “Oh, we’re not going to make you do it if we have your data.” Now it sounds like you think they had a technical glitch?
Jeff: I’m not sure exactly what happened but something doesn’t smell right.
Toby: It doesn’t surprise me. They’re trying to do so much so fast with so few people.
Jeff: It’s hard to give away a couple trillion dollars of course.
Toby: Let’s just give it out regardless of need. Let’s just give the money away.
Toby: What could go wrong?
“I have my small business and I also own a few rental properties. I applied for EIDL for my business, and received an EIDL advance.” We’re about April 4th or 5th right now just so you know. “I applied for my EIDL for business, and received the EIDL advance. Can I now reapply for EIDL as rental properties owner? Do I qualify?” The answer is no. You’re not supposed to because it’s an affiliated business. You should have done one EIDL for all of those businesses because they have the affiliated rules. That said, I’ve seen people do it. They were supposed to be turned away as soon as they saw that you were on two or more applications, but the SBA again has been broken.
Here’s somebody saying, “Can you keep the questions up on the screen?” They’re always doing it to me, Jeff. They just want to test me.
Jeff: You can’t make everybody happy.
Toby: I know, you’re hurting my heart. I’m just teasing. I don’t show the questions that come in because the names are attached to them and I don’t want to have you guys seeing it. Nobody’s going to write it if everybody could see what you wrote. It’s just not going to happen so it’s just the way this works. I’m not going to show all their names. Some of these just don’t make any sense so I’m trying to make them into some version of something that I can understand.
“We have a loan for new construction which has been delayed due to Corona.” I assumed it’s the Coronavirus because they’ve been drinking too many six packs too. “Does that qualify under EIDL?” Yes, that does. You’ll be able to apply for that. Again, in EIDL, there’s going to be a weird word “gross profit” which just means your gross income minus your cost of goods sold, which is the cost of your employee, the people that are working on your job. If you have a good accountant, good bookkeeper, they’re keeping track of those things for you. If you don’t, then go back with a time machine and make sure you get one. You just gotta make sure that you do it right. We’ve been telling people for years but you got to do it.
They always look at us like, “Oh, I got somebody who can do it. I got a guy for that or I got a gal for that and she’s really good.” Again, this is why you have to keep it in a certain format. Otherwise, you just get nailed. It’s frustrating.
We have so many questions that have come in. “I have a trust I wanted to decant in Nevada, is there a tax advantage?” It depends on where the trust is located. If you’re decanting a trust that’s an irrevocable trust from California, then yes. You could actually move that trust to Nevada and there’s a huge tax benefit because if you have a Nevada trust, you have a Nevada trustee. That’s where the money is managed. You don’t owe California taxes until you distribute the money to a beneficiary.
Jeff: Isn’t there weirdness with California that if the trustees are in California, they can still say it’s a California trust?
Toby: Exactly. There’s actually a case on this where there’s a California trustee and a Nevada trustee, and half of the money now is taxed in California from the trust. But if both trustees were in Nevada, there’d be zero tax. When they distribute the money to the beneficiary, the beneficiary pays California tax if they’re in California. Not weird.
Jeff: It was weird.
Toby: Richard Oceans is killing it. Stockpiling billions of dollars here for all the rich folks in California saying, “Hey, I don’t want to pay California tax on all my growth and I’m putting it in a trust.” It works. It’s only funny because it’s true. All right, there’s a whole bunch.
“Is there a reason I only got $1300 for 2 adults and 1 kid. AGI was below the requirement.” The only thing I think of Elan, is that you were going to phase out. It isn’t a yes or no, but it’s a partial depending on what your income was. I would look at your income for 2018. If 2018 was above, if you’re married, or if it was over 150, you phased out. If it was below that, then that makes absolutely no sense because you would have been entitled to $2800 or $2900. It would have been $1200 per adult and 1 child. Assuming they’re under 17, then that would be $500. Is that right?
Jeff: That’s right.
Toby: You would have been at $2900.
“I made $50,000 as a 1099 and I received $10,400 for PPP. Can I just write myself a check for it and get the deduction? Is that too good to be true?” Zhi Shan, I don’t know if I should just write myself a check for $10,400. What I would do is I would pay it out over 8 weeks. You can’t do it all as income because you got 2 ½ times your monthly income. You would pay your expenses with it and then you would take your normal dry out. They’re not going to let you prepay money. They’re going to say, “What was your average monthly?” That’s what you can take out. In your scenario using reverse engineering, I think you’re pretty close to 4000 so I pay yourself 8000 for the 8-week period and I would pay other expenses.
Yes, it sounds too good to be true though the IRS tells us that you can’t do it the way that they wrote it and I’m telling you, the way the law is, which is this is not an exempt income. This is not a Muni Bond. This is not anything like this. This is a debt forgiveness that would normally be taxable that they then said is not taxable. It’s not included in your income. That’s all. It doesn’t say that you lose any of the deductions for the business, it just says that you don’t have to recognize that. Fun stuff, Jeff.
“What is the recommended way to file taxes for income property that is partially rented and partially used by the owner?”
Jeff: If it’s a duplex and used to split it based on square footage, one expense is personal, one expense is for business. Now, if it’s a property that’s a vacation home for you, you’re bringing it out half the time, and staying in it half the time, it gets a little funky. You’re actually computing the number of days. We use it personally versus the number of days it was used for a rental property. Some of your mortgage interests and real estate taxes are going to go through your Schedule A, some are going to go to Schedule E for the rental property. It gets a little weird.
Toby: It does get weird because if you’re there and you’re living there for 6 months, then you would get in. Let’s say you use half the property for 6 months and you rent it out the other half, you’d have half the year and then you’d have to take a look and say all right, I was there for another half of the year. If I rented it out then I would get another quarter of the year. You’d end up with 3 quarters being treated as a rental property in the best for this so your depreciation. That’s why you hire guys like Jeff but it is funky, though. I’m glad somebody asked a tax question because I was beginning to think today it was all about non-tax.
Toby: All the CARES. Somebody asked and this is a good one. They said something that had to do with the CARES Act but this is a tax question.
“Could a rental property’s approximate value of $85,000 be taken out of a traditional IRA and put into a regular business entity paying taxes over time?” In other words, “Can I take the money out of an IRA in the form of an asset?” What do you think?
Jeff: You can, it’s going to be kind of a pain.
Toby: I still think it’s cool.
Jeff: You have to get it appraised.
Toby: You get it appraised but you take it out right now. It’s probably beat up a little bit. It’s good. Nobody is paying any rents. That’s what they say. It’s not my experience. Let’s just say that it’s not 85,000 or whatever that value is. You took an early withdrawal and you wouldn’t have any penalty. Give them a little magic letter that says, “I’m suffering from Coronavirus.” Not that you have it but you’re experiencing hardship.
Instead of putting the property back, you put cash back or you don’t put anything back and you spread the tax over 3 years. You’d recognize $20,000 a year for 3 years or you could recognize it all and you’re one if you wanted to. I just think that stuff is fascinating.
Oh, look at this. We already did this. I had to put my little question and answer so people know that I’m answering questions. Let’s see. “I’m in the middle of a cash-out refi on my rental property. Do I have to wait for it to finish before I apply for unemployment?” No. That has nothing to do with it. You can go ahead and do your cash-out refund. What they’re doing now with the PPP because the LA Lakers got a PPP loan, Harvard, Pen, Shake Shack, Ruth’s Chris, along with a litany of others.
Jeff: Carnival did not but the Fed bailed them out.
Toby: Fed gave them. They raised a bunch of money. Anyway, there are all these big boys that weren’t small businesses. Small Business Administration, I think that some people forgot about the small part and they just said, “Hey, let’s get some of that free money.” The banks couldn’t help them fast enough. I don’t know, I want to go down that path. I just get crunchy on it. There’s one other thing here. Anyway, those things have nothing to do with whether you’re getting cash. Right now, they’re supposed to say that they need it.
“We have an LLC taxed as a partnership that sends K-1s to partners.” Subject to self-employment tax, so that’s interesting. They must be participating. “We applied for PPP but Chase auto-emailed said they need different docs. Do we get 949-41 as a partnership?” No. You’d use your K-1s and that’s exactly what they said. In a guidance by the SBA, they said that the partnership itself applies for the PPP. For the partners that materially participate, they use the K-1s. Am I saying that correctly?
Jeff: You are.
Toby: “Can you go over the payroll credit, if you don’t get the PPP loan?” There are two types of things that you can have underneath the CARES Act. One of them is that PPP loan where they give you 2 ½ times your payroll costs as a loan that can be forgiven either fully or partially. That partial forgiveness by the way is reduced by the percentage of employees that you no longer have. If I had 100 employees and now I have 50, then whatever my forgiveness is, I would subtract 50% of it as non-forgivable stays as alone.
You have an either or. If you get the PPP, you can’t do a tax credit. If you don’t get the PPP, you get a tax credit of about $5000 per employee. The way it works is, for any quarter—which you’ve been partially shutdown or shut down from the virus that quarter—you will get 50% of the payroll expenses including retirement plans, and yes, the DB plans, something like that, a part of the calculation, health insurance. You add all that up for somebody up to $10,000 and you divide it by 2, it’s up to $5000 per employee. You have all the way until the end of the year but obviously, if you get shut down, it’s only for that quarter.
If your income has gone down by 50%, then you get that quarter plus the quarter until you make over 80% of the previous year, quarter over quarter. I know that’s complicated. Basically, you’re going to get $5000 per employee if you’ve been nastily infected like you’re a restaurant or whatnot. I’ve actually done a number of calculations for retailers and for restaurateurs, they are almost always better off doing the tax credit than the PPP. Even though they keep on getting these PPP loans, I’m like, “Yeah. You’re not going to bring them back. You’re not going to open.”
“Have any of the franchise tax fees or the secretary state payments been delayed?” The answer is no, not that I’m aware of.
Jeff: No, not that I’m aware of.
Toby: Yeah. All right, let’s keep going on. Somebody says I can’t even read. You guys are killing me, you’re killing me, smalls. “Can I write off 100% of my loss due to the Coronavirus?”
Jeff: My first question would be, what kind of loss are we talking about?
Jeff: If it’s a loss on your rental property because you’ve lost renters or they’re not paying theirs, you do have a loss, but it’s probably a passive activity and you’re not going to be able to bite it off.
Toby: If it’s passive, you’re just going to never, unless you have passive income.
Jeff: All right. Capital losses aren’t going to be able to be written off, except $3000 a year.
Toby: Up to whatever your capital loss is.
Jeff: Right. I always forget to say that.
Toby: Yes. Let’s say that you lose a bunch of money in the stock market, you got freaked out, and you sold your stocks, and then a bunch of them come back and make some money. Well, you’re well-served to sell those at the end of the year, the ones that went up, to get full advantage of your losses and then just buy them right back again. This is not a loss-sale rule where you’re taking a loss, you’re actually doing the opposite. You’re taking the gain and buying them right back so that you get stepped up to the new purchase price. They just make life so much easier for you going forward because now you have a new higher basis.
Jeff: If you act as sole proprietor, corporation owner, or an active partner, those losses that flow through to you will all be deductible against other income you may earn. As we said before, if you have excess net operating losses, you can carry those back to prior years where you may have had more income.
Toby: Absolutely. And that’s what a lot of folks are looking to do, especially this year, real estate professionals, or if somebody took a hit and their sole proprietor, S Corp, or whatnot, they’re looking to take that loss and take it back. If he did it for 2020, you’d go back to 2015. Some of you guys still had that choice. We might make a change of accounting methodology, take an accelerated depreciation to a cost, selling on some property—if you know what that means—and we’re going to accelerate the depreciation on things so we can create a bigger loss. We can go back and get some of the money we’ve paid in the last five years and that’s one way of getting money under the CARES Act.
“Net operating loss, if you had loss in 2017 or 2018 and did not pay enough taxes to be able to use your net loss, can you now amend your taxes?”
Jeff: The ’17 loss can only be carried back for 2 years. The ’18 loss can be carried back for 5.
Toby: Five. Yes. Andy, the answer is yes. They took away that weird percentage thing.
Jeff: Oh, yes. The 80% limitation or 90%, whatever it was.
Toby: All right, let me keep going on. I don’t know what questions we’re on, but we have a whole bunch of these things.
“I received $2400, apparently, from my wife and should I still receive bank deposits as Social Security recipients?” Yeah, you received the stimulus. That has nothing to do with Social Security, doesn’t it?
Toby: Yes. People have asked about these recordings. Yeah, you’ll get a recording. I know sometimes the stuff gets deep and sometimes there’s pieces where you have to go back and relisten. Absolutely, you can come back. We make these into little podcasts too.
“As for the CARES Act, if a non-US citizen gets the thousand dollar economic impact payment by direct deposit, is that considered a public charge for immigration purposes?” I don’t think so, that’s a tax credit. Do you have anything on that?
Toby: Yeah. I don’t think so. This is a tax credit. This is only for people that are actually filing. If you’re a non-US, it sounds like you’re a resident alien. I don’t think it’s the public charge.
Somebody says, “I am a W-2 physician, income over $300,000. I own rentals under an LLC,” It’s a single member LLC, it’s going right on their Schedule E, “and pay a property manager.” They’re paying somebody else to run the property. “Can I apply for the SBA loan and grants since both rental and W-2 income will be affected?” Your W-2 income, no. That’s for somebody else, that’s for the employer. Whoever’s paying the W-2, they’re eligible for the PPP and EIDL, it has to be the business. As an employee, no, you get none of it. You do get access to retirement plans and things like that. “Can I apply for the SBA loan for the rental, though?” The EIDL, yes, absolutely.
Somebody says, “Is a property tax consultant a real estate professional?” I’m going to say no. You actually have to be involved in the purchase and sale, sorry. “What about wholesalers?” Yes, they could be. If you’re wholesaling properties, absolutely. That’s involved in the purchase and sale so you would absolutely be a real estate professional as long as you meet the time requirements. It’s similar to 50 hours and more than 50% of your work time.
“Is any of the EIDL loan balance forgivable if I have a 2020 operating loss?” They’re not referring to the emergency advance, and the answer is no. That’s just so long. How long is that long for? I have to take out a cheat sheet and have to look at it. I can’t even see it anymore. Let’s see. What is it? EIDL, I want to say it’s 30 years. I keep thinking it’s less but no it’s 30 years, it’s paid over a long period of time. So, you’re good.
“Do you get forgiveness for a Schedule C filer by paying distributions?” Yes, you absolutely do. If you’re getting the PPP and you’re a sole proprietor, that’s exactly how it is. It’s any of your distributions to yourself, which effectively is your net profit, but you file that little piece of paper saying what it was used for.
“If my S Corp was a loss in 2019, no salary is paid to be in 2019, can I still apply for EIDL?” Yes, absolutely. Technically, you could still do the PPP if you paid yourself any salaries in 2020 because it’s either you use the 12 months prior to January 30th, 2020 so it’d go January back to February or you’d use January, February to the end of February. So, January and February to do the calculation if you’re doing it because some people just set up in January. If you’re set up before February 15th, you’re actually qualified.
Let’s keep jumping through these. I think we’re on slide three. All right. “Is it a good time to convert a traditional IRA to a Roth IRA since there’s a loss in the stock market?” Jeff?
Jeff: What I’d say was March 23rd would have been a great time to convert because the market was down at 19,000 points. If you believe the market’s going to go back up and, hopefully, you do believe that, you’re going to make money. If you convert it on March 23rd, today, by now, you would already have a 28% profit in your Roth IRA.
Toby: It’s on the date that you convert. I know they asked another question about this farther down. The way it works is if your taxes are going to go up like if you’re going to let it sit there and cook for a good 20, 30 years, then if you are in a higher tax bracket now than when you retire, then it’s not worth it. If you’re in a lower tax bracket now than you will be when you retire, then it’s worth it. For young people, it’s almost always worth it to do a Roth. For middle aged people, it’s almost never worthwhile to do a Roth.
This is one of the few times where you might say, “Hey, I’m about to convert it when I’m down and I’m willing to take the hit because I know it’s going to bounce back,” but it takes a long time to recover and the easiest way to look at it is, if I had to pay tax on something, depending on what my tax rate is, that’s a pretty big hit. If I take a 20% tax, that’s essentially going to take me probably 4 or 5 years to even come close to makeup. That’s just to bring me back even, that’s not counting the fact that that money has been growing and the other deal.
Jeff: But if you’re also taking a hit in other income areas, whether it’s W-2 or your business has taken a hit, where like you said, your total income is down and you’re a lower bracket.
Toby: It’s not necessarily bad. I always just tell people, especially when I work with younger folks, I’m like, “If your taxes are going to go down like you’re in a high tax bracket, then when you retire, you’re going to go down. You’re almost always better off taking the deduction. If you are in a really low tax bracket and you’re not making much and you think your tax bracket is going to go up, you’re almost always better saying, ‘Let’s pay a little bit of tax now rather than a lot later.'” I have all those numbers, I’ve done the calculations numerous times, 20 and 30 years, and it’s identical. If the tax rate doesn’t change on a 30-year, 7%, the number is identical. Does it matter? Anybody who says, “No, it ain’t true.” I’d be too happy to show you the numbers, do it all the time. All right, that’s a really good question. Somebody gets a star on that one.
“Should a partner’s income and an LLC taxed as a partnership not be calculated the same pay as a sole proprietor?” No, you do the same thing even if you’re a partnership but you’re doing it for the partnership. You add them both together. Again, you’re looking at the net income for a partnership and people are asking a lot of questions about the sole proprietor. Here’s the sad thing about the sole proprietors. You guys could even apply for the first tranche until almost the last day. We didn’t have guidance. It’s really tough, really tough.
“If we just started our real estate business but have not flipped a home yet but have lots of training expenses, can we still apply for PPP to pay ourselves?” No, it’s based off of what you’ve passed on. You can still do an EIDL though, Mark. You can still do that EIDL and say how many employees you have. At minimum, you’re going to get a thousand bucks. That’s pretty much what they’re giving everybody that’s got one or none.
“Is a sole member LLC or a S Corp able to use the 139 deduction?” The S Corp can. The sole member LLC cannot for the proprietor, they could for another employee.
Somebody says, “For a net operating loss in 2019 for real estate professionals, did I hear it has to be done for 2014 and forward and backward is possible?” No. You go back to the five years, the earliest tax year, five years from the date of the loss.
I’ll just keep going on. Look at these things, Jeff. I’m scrolling through all of them. These people like to write books.
Jeff: Those are really long questions.
Toby: Those are really long questions. Now, it’s not or not. There’s good ones we will get to.
“Just like everybody else, I want to know your thoughts on how we come out of this way ahead thriving.” I use a little chart and I want people to know, they called it Black Swan Events and things like that. But if you want to take a look and say, “Hey, what do we have for history? What does history show us?” We’ve had lots of epidemics before and probably nothing like this. This is a really nasty pandemic. But if you look, even under Zika, Ebola, MERS, SARS, the only one where we had a loss six months later was in HIV, the AIDS crisis.
When you look at those little stretches of six months, you see that the S&P usually comes back. The reason I’m telling you this is because there’s a lot of doom and gloom. Again, there’s Americans out there all over the place and they’re going to say how everything sucks or this time we’re going to really face plants and all this other fun stuff. You just get it out of your head, it does nothing good for you, nothing good for you. In fact, all it does is cause anxiety.
The death rate, the real death rate has actually gone up in this society a lot more than the Coronavirus has impacted us, it’s almost twice as much. I think a lot of that has to do with stress and the number one killer in the United States. You’re hearing this probably on the news, some places are talking about it. The number one killer in the United States is actually poverty, and it kills about 800,000 people a year, and what we just did is we just cast a whole bunch of folks right into poverty. I think it’s horrible so I like to gripe.
I watched our mayor get hammered by Anderson Cooper, Miss Goodman, our Las Vegas mayor. Whether you like her or not, I looked at her as I would my mom and I wouldn’t want somebody talking to my mom that way. I didn’t like it. Whether they like what she said or not, I get all these, yes, we have to be careful and all that but oh, boy, oh, boy. People just seem really hell bent on making sure that everybody’s locked away, first time in society. I think that you’ve actually locked away the people that aren’t sick to protect them from themselves. I don’t know, everybody has their point of view. I believe that you do things prudently, but there are civil liberties that we may not want to trample on them so easily.
We’re not going to get into all that. All right, more stuff. Jeff looks at me and goes, “Stop it, Toby.” All right. Taxes, taxes. My mom would not take the interview to go into the firing range.
“I have not done my 2019 taxes. Can I still apply for CARES under government bailout programs?” Yes, we would just use something as a backup.
“Now that we’re in the first quarter or beyond the first quarter, what do we need to do as far as taxes are concerned?” No, we’re in the second quarter. Nothing. Let’s see. I don’t know what that question really meant. “Toby, you are the best.” That’s what I love. I love when people do that. During your CARES Act, there is an expiration of June. I think that you have the $10,000 up until about September, I want to say, and the PPP is actually June but it keeps running out of money. They can keep throwing more money at it.
“QRP partnered with a couple that are not using retirement funds. What’s the best way to cash out? Taken into consideration, I need a nonrecourse loan for my QRP. I don’t have a mix of IRA.” You’re not going to be able to do any sort of loans with an IRA but if you do a 401(k), then the 401(k), which is a QRP, can actually have debt. You don’t have to worry about unrelated debt, finance, income so that’s probably where there’s a little bit of a mix because when you talk to your IRA, people, they’re going to say, “Oh, no. We can’t do that. You can’t do that.”
Somebody is coming one hour and counting, we’re long past it.
“If taking $100,000 out of an IRA now with a plan to pay it back within 3 years, does this $100,000 need to be reported as income?” Jonathan, the answer right now, I would say no because it doesn’t make any sense that they make you pay tax on something that is a trustee to trustee transfer. But they haven’t given us guidance, they still may come back. It’s about 50/50 out there. But just using the black letter language of what they said, no.
Somebody says that, “The IRS website keeps saying, ‘Payment status not available.'”
Jeff: It’s probably overwhelmed.
Toby: It’s overwhelmed. All these systems were not built for this. We did more SBA loans in 14 days than they had done in 14 years combined, previous 14 years combined. All right.
“How does the stimulus affect taxes for property owners?”
Jeff: Very little except for the potential, they get the EIDL loan, for property owners or if they’re real estate professionals that allows them to carry their losses back.
Toby: Yeah, that’s the big one. If you are a real estate owner—I’m with you, Jeff—I’m like, it doesn’t really have much in there for you except that you can get the EIDL—you’re absolutely right—which is a loan.
But for taxes, it’s the net operating loss carry back. That’s only available to you if you’re a real estate professional. If you have passive losses, no benefit. If you have active losses, you do.
“Can a limited partnership distribute appreciated stocks to its partners? Are there tax implications? Will they pay tax or they eventually sell the shares?” Yes. You have inside basis, outside basis, all these fun things. If you give a share to the partnership, it receives your basis. When it gives it back to you, it’s still your basis. Nothing changed. It’s not a taxable event.
Jeff: Yeah. Partnerships distribute assets at the partnership’s cost basis, whereas S corporations, corporations distribute assets at fair market value and there’s gains on a whole bunch of other fun stuff on an appreciated property.
Toby: Somebody says, “My new tenant can’t pave the walkway because it’s considered a non-essential business. This, in turn, is causing a delay. Am I eligible for the EIDL?” Yes. “Is it worth it to apply?” Yes.
The EIDL is going to give you a loan for 30 years at 3.75% based on your gross profit, which is your gross income minus your cost of goods sold. Did I say that right?
Toby: There’s a beauty salon. I want to read that one but it looks like she left. Some of these people just got hammered away. I just feel so bad for them because they just got shut down and it’s just so not fair.
Jeff: We need these places to open back up to have a haircut.
Toby: Yeah, Jeff. I’ll give you a haircut.
“If you take a distribution from a retirement account with the intent of paying it back within three years. Do you ever have to report the distribution?” Right now, I would say no and I would say it defeats the purpose of it. The IRS may come back with guidance. If they don’t do a rev proc, I’m not going to do it. They can even come out with what they think and you still don’t listen to it because the clear letter of the law says that is treated as a trustee to trustee transfer. It’s not a 60-day roll, it is considered a trustee to trustee transfer, which means it never went into your pocket.
Jeff: Yeah. I look for more guidance near the end of the year before the 2020 forms come out.
Toby: They may want to change it. I don’t want to listen to them. If we have to, if it’s law, we listen to them. Otherwise, it’s an opinion. But, gosh, they said ratably over three years but if you pay it back for the end of the third year, it’s treated as a trustee trustee transfer. I could just select, I’ll pay it all in year three but if I pay it back before the end of the year, then I have no tax. I don’t know how they get around that.
Jeff: Stay tuned.
Toby: Yeah, it’s always fun. This got some huge. “How can you apply for EIDL that the site does not accept?” They’re going to reopen it. They’re getting new money so just hang tight, keep trying. It’s going to happen but they ran out of money. They shut it down actually before the PPP loans, we knew that was coming. We had staff entering transactions all night. It was brutal, brutal, those two weeks.
Somebody is making fun of us. We’re not even out an hour and a half yet, they’re not supposed to make fun of us. “I’m a new investor who operated as a sole proprietor in the last quarter of 2019, incorporated my entity around February 28. That entity was beyond February 15th. Can I apply for the EIDL and PPP?” Yes, because you were a business before. But I would apply under its previous form.
Jeff: Sure. I would probably document under its previous form. Yeah.
Toby: Make it easy for them because that’s going to be the way that they’re going to look at it. The documents that they ask, which is going to be your Schedule C from 2019, that’s what they’re going to want to see.
“I’m a small C Corp, pay myself $4000 a month.” You would qualify depending on what other things. If you do a retirement plan or anything like that, but you’re going to qualify for at least $10,000 under the PPP, you’ll get about a thousand bucks under the EIDL and have to take that thousand bucks off of the PPP. Realistically, I’m probably just going to do the PPP loan.
“Does owning one single family home make you an active participant in the eyes of the IRS even if the property management is in place?” Yeah, actually, it does. You’re the one who hires the property manager, you are an active participant. That means you’re entitled up to $25,000 passive loss against your income but it phases out after $100,000 adjusted gross income. It’s a phased out rule. If you’re making less than $100,000 a year, fantastic. You get to write off up to $25,000 of your passive losses.
“For my business, QRP went on a percentage loan. Can I choose the interest rate and term?” It’s a six-year term, it’s one year deferral, and the interest rate is going to be right around 4%. It’s going to be prime plus one, right around in there. It’s a reasonable interest rate and there’s not a hard and fast rule on it. There’s stuff going back and forth. I actually get into it with my partner once in a while. I always look at the federal and I always say, “They’re not the lowest.” Well, they change that.
Jeff: Yeah. IRS-1 is mainly concerned with those below market rates.
Toby: Yeah. Then, you have fairly high rates. If you loan to a family member, that’s what you’re doing.
Let’s see. “Can I apply again for a PPP if I already did one with the bank and it’s not been approved yet?” Yeah, you actually can. Absolutely.
Jeff: Until you sign the loan documents, you don’t get a PPP loan.
Toby: Yeah, they may not like that.
“Do you have somebody you know that helps with the setup of QRP for minor kids?” It’s going to have to be an AGMA and you got to set up an account for that minor. You’d have a custodial account, is what you have. You should reach out, Patty can grab that name. Give it over to Eric or somebody who does that stuff.
Somebody just wrote me this. A book, you’re killing me. “Suppose your traditional IRA was worth $100,000 on January 1st. If its value crashes along with the market, it’s now worth 17% less or just $83,000. Are taxes on a conversion-based on the accounts value at the time of conversion? Yes. “Would you go over again why we do not want to convert traditional to Roth?” Because it’s taxable. But you might be okay paying tax on the $83,000 if it’s going to immediately bounce back up to $100,000, but it’s really tough to make that up. I probably wouldn’t do anything with it if it’s me. What about you, Jeff?
Jeff: I have a lot of traditional stuff. I’m just going to leave it alone and start taking out eventually, paying the tax then.
Toby: Yup. This is Richard. I am going to try to answer this question. It is a long one, but it says, “One property is jointly owned by a married couple. There is a step-up in basis when the first spouse dies, another step-up in basis for inheritors when the final spouse passes in.” No, kind of, maybe. If you are in California, the property steps up. If you’re in a separate property state, then only half of the property steps up. If you’re in a community property state, you get a full step-up when the first spouse passes. They get to depreciate at a much higher amount.
Jeff: Aren’t there some community property states where the step-up is only 50%?
Toby: No, I think you’re stuck. “Is it possible to restart the depreciation if it’s owned by the LLC?” Yeah, it doesn’t matter because your step up is based on the property in that LLC when you own the LLC yourself. Remember that we were just talking about the stocks going in and out, you get that basis. The value of the LLC steps up, the out value of its assets is therefore stepped-up. If somebody passes, it doesn’t matter whether it’s an LLC, you’re still getting it.
They’re saying, “Hey, California held properties in property 13. As an example above, upon the death of the final spouse, inheritance will inherit the property 13th tax basis.” No, actually it’s the step-up in basis and California doesn’t adjust the basis of the shares when it’s inherited, they don’t. If the inheritors transfer, it doesn’t affect your 13th so don’t worry.
In fact, in all these situations, Richard, I’m just going to put your mind to rest. When you’re dealing with family members and closely held LLC is where there’s no other beneficiaries, they look at the documents and they say, “Oh, it’s still the same beneficiaries.” There is no resetting of the Prop 13 so you do not have to worry about it, makes your life a little easier.
“I have a $500,000 IRA account with Schwab and I’m planning on taking a $100,000 distribution. With $400,000 remaining, can I set up a QRP and set up a $100,000 loan?”
Jeff: Yes, you can if you have a business, they’ll set a QRP up then.
Toby: Yes. And you need to have a sponsor of that and then it goes right on over. I’m just going to go to the next question.
Jeff: Really? I’m sorry.
Toby: Have you ever seen me actually just do more […]?
Jeff: No. I know.
Toby: It’s because it’s 4:30 or something. “I own three LLCs. One of them was just formed in mid-2019 and has $0 in revenues. What operating and startup costs can I expense to carry the loss forward without setting up any red flags to the IRS?”
Jeff: Well, first, it depends on how well you’re being taxed. As we’ve talked about, an LLC is not a taxing entity. If you’re set up as a corp, any of your pre organization expenses will be startup fees, and then any normal operating expenses to keep that corporation going, it will be able to be expensed. If you’re operating as a personal or Schedule E, I’m a little more leery about taking certain startup calls because they tend to be a very large amount of expense against no income. That can sometimes draw the IRS’ attention.
Toby: Yeah, it’s always best not to have a big fat loss showing up somewhere on an active business. That’s why we tend to use the C Corps. The IRS doesn’t care, 80% of them zero out. They either zero out or have a loss because the individual doesn’t get that loss, it just stays in there. They’re not worried about you doing anything crazy when you’re doing that. What they’re looking for, for you individually, is that they’re looking to see if you’re doing something that’s essentially a hobby, that’s that really doesn’t have the expectation of making a profit and getting personal benefit by writing off your taxes with it. They get a little crunchy about that.
Here, you still take your startup costs. As long as you are actually in operation, which if it’s real estate, you have to actually have it rented. There’s no such thing as $0 revenues. You would just carry that until you actually have revenues. I hope that helps.
There’s a bunch of questions that came in. I’m going to go to the next one. “Can I apply for the PPP if I already did it with one bank that has not approved the loan?” Yes, you can.
“How much EIDL can I qualify for? How is it calculated?” You can go up to $2 million and it’s going to be half of your gross profit, which is the actual term.
“Any idea when money is deposited after signing the PPP loan?” Yes. Joe, it’s actually 10 days after they give you an E-tran number, the bank has to fund. The day that they get it through to the SBA and the SBA says, “Hey, we’re going to buy this loan from you, Mr. Bank.” They have 10 days to document it, get you a loan doc, and send it. I’ve actually seen it where they get the E-Tran and have it funded within a day.
“I have a corporation that started on November 19th and a sole owner, no employees. I was going to elect S status for 2019. I haven’t filed taxes yet. What am I eligible for?” They did it November 2019. This can be too late to do your S status. You would’ve had to have done that by the 15th of the third month following.
Jeff: Of March. They can do it for ’19 or ’20 without doing the late election.
Toby: Yeah. You could possibly do it, but you’re still going to qualify under the EIDL, the PPP it depends on whether you paid yourself payroll.
“Wouldn’t it be better to take the tax credit at the end of the year than to try to apply for a loan? Please explain.” In some cases, the reason people do the PPP is because they may not have to pay it back. The tax credit is limited to a certain dollar amount per employee. If you have 20 employees, you could get a $100,000 tax credit. If I have 20 employees, I might get a PPP that’s $180,000 and I have to pay it back. That’s it.
We’re getting to answer the question about the inherited stock portfolio and its basis.
Jeff: Did we forget to answer that? Did we skip that? I guess we did skip earlier.
Toby: No, we did say that. We didn’t dive deep enough.
Jeff: Your basis is determined upon the date of death. Now there is something called an alternative valuation method which picks the date six months later, you don’t want that date. Especially since it was October, so six months will be now.
Toby: Yeah. I’m sorry if we forget that. When somebody passes, the basis step-up is actually the date of passing. Usually, somebody is going in there saying, “Oh. Maybe later on, it’s gone up in value and you do get to use the alternative date.” But this is what happened in 2007 and 2008, you would have real estate fall off a cliff and they’re trying to sell it two years later. It’s half of what the value is for estate tax. They ended up with an estate tax that they owe and they’re selling off the property and getting pennies on the dollar for the property because they have this big tax bill and it wasn’t enough to pay the tax bill. I actually saw that more than once. It’s a pretty sad situation, but the IRS is really sympathetic. Sarcasm there.
Jeff: The other good thing about the inheritance is no matter when the person who passed away bought the securities, everything’s considered long term to you.
Toby: That is a good one. If you inherit, everything is long term automatically.
Jeff: Wait. We just got to it.
Toby: Oh, gosh. I remember seeing it. This is why I shouldn’t read the note, sometimes they go crazy. All right. We just answer that one.
“Can you expense a startup expense if you have an LLC taxes, a S and not a C?” Yeah. It would just go into the S Corp expense and that’s an interesting one because you get to write off the losses on an S Corp up to your base. If you put the money in, then technically you could write that off. But again, it comes down to when are you actually in business? If it’s investment real estate, it’s when you buy that real estate, you start generating income. It’s not even when it’s vacant, it’s when it’s actually making money. We can use C Corps just because we can capture that expense and just keep carrying it until we’re ready.
Let’s see. “Can passive losses from coast segregation be taken on W-2 income if your spouse is a real estate professional?” Yes. Either spouse qualifies for it, as long as you’re married filing jointly.
“Would getting my real estate license have more benefits for being a real estate professional?” It depends on if you’re using it.
Jeff: Right. If you’re just hoping to look more like a real estate professional, it’s not going to do anything for you.
Toby: It’s what you actually do, it’s 7 or 50 hours in real estate and real estate transactions. That could work. This certainly helps, as long as that’s what you’re doing, if you’re making money at it.
This is a really good one. Somebody asks about HOA, this is great. “Homeowners Association, nonprofit, 503 apply.” A 501(c)(3), if that’s what you’re asking. “Could they apply for an EIDL?” The answer is yes. Kind of cool. Love that stuff.
All right. “Can I open my solo QRP? Do I have to follow the tax return for it?”
Jeff: That depends. As long as the value of the assets is under $250,000, you do not have to file a tax return.
Toby: If it’s $250 grand and it’s a married filing or married couple, no return. Now, there’s a reason to file a return if you have real estate in there and that’s because it starts the audit clock ticking for three years. We’re not seeing audits of exempt organizations, I think I’ve seen one or two in 20 years but they do happen from time to time. If you want to shut that door, you just file the tax return on it, even if it’s $150,000.
Jeff: And I’ve heard that often for any kind of tax return that you may not be required to file because it starts the clock ticking on the statute of limitations and gets things set in stone, especially on these QRPs that have hard assets in them.
Toby: Yes. Sometimes that’s better. It’s just filing it, even though you don’t have to, it’s a 5500 and they’re not terribly difficult, trying to move a hand. There we go.
Somebody who says, “My husband is a sole proprietor and I own an LLC. Can we each apply for PDP and EIDL?” The answer is you can both apply, depending on the type of LLC that is, you would both technically be able to apply for the PPP. The EIDL, you have to look at the affiliation rules and see if you’re going to do one for multiple entities or two different ones. It depends on the ownership. If you’re married, I would generally say you’re an affiliated party and you would do one big return. The question is how you give that up when they approve it? These ones, if it’s under $200,000, they don’t even require collateral. The PPP or the EIDL, neither of those require a personal guarantee.
All right. Let’s see what we got left. “If I Airbnb my rental property, do I qualify for some type of unemployment?”
Jeff: You probably qualify for unemployment and possibly PPP and possibly EIDL, you qualify. You can think of everybody at Airbnb who wrote in to Congress to get this put.
Toby: The Airbnb, the big thing is it’s seven days or less average rental. If you do an Airbnb where it’s two weeks or you provide substantial services like you’re changing all the sheets and you’re going in there and cleaning it every day and you’re basically a hotel, that might work. Otherwise, if it’s more than seven days or it’s eight days average rental or bigger, then that’s passive. Then, you don’t. Airbnb average is about three days so you should.
Somebody said, “Hey, the pandemic slide, we didn’t shut anything down.” You are right. I’m cognizant of that. I’m just looking at it saying, ‘Hey, history being the best teacher.’ It’s as close as we can get. We always came back and bounced back globally. Is it going to happen this time?” I just think that never in history has it not recovered. Sometimes it takes a little longer, but our economy always has recovered. The graph of the S&P goes up over time. “Can you still qualify for unemployment if you have a 1099 by the way?” Yes, you can. That’s through your state but that was what was authorized under the CARES Act.
“Do we have to use NOL in reverse order? Do we have to use it against the most recent year first or can we go back to 2014 and then come forward?”
Jeff: As we said before, you have to go back to the earliest year. If it’s an 2018 NOL, you have to pick to take it back to 2013, 2019 to 2014, and 2020 to 2015.
Jeff: And if it’s a newer corporation, you just take it back to the earliest year you can.
Toby: Yup. Somebody said, “I own a condo that has a hotel rental program. Which is better, EIDL or PPP? You’re probably going to have to do the EIDL because if it’s a rental program, it’s probably passive. But it depends if you’re getting a salary, then you do both. The way they relate, the EIDL, they give you an emergency advance of up to $10,000 and it’s based on the number of employees. If you have 5 employees, you’re going to get $500,000 and that is subtracted from the forgiveness out of a paycheck protection program loan.
“I’ll be 59 ½ in three years. If I take a distribution from my inherited IRA, do I have to pay it back in three years?” Sure. The question is, do you inherit it from a spouse? Because if so, that’s a little different than you can roll into your own. And then, yes, you could do the three years. If it’s somebody else’s, then I don’t believe you can even take the early withdrawal, can you?
Jeff: They’ve changed some of the rules with the non-spousal.
Toby: I know you can’t roll it for sure. You might be able to take the hundred sitting here today. I don’t know the answer, but I know that if it’s a spouse, inherited it from dad, I am worried because that’s technically their IRA. It would still have their name on it and you’re the beneficiary.
Jeff: Yeah, I think the problem with me inheriting my dad’s IRA and then pulling $100,000 out, I can’t put it back anywhere.
Jeff: Yeah. I don’t think I can. Sherry, if this is something you should talk to your custodian about, I would say probably no. Anyway, that’s a really good question. Let me look that up just for my own sanity because I’ll start thinking about it.
“In 2018, we put a new roof on our property in California, it cost $30,000. If we sell this property in the next year or so, do we lose the depreciation?”
Jeff: That’s not exactly how it works. You buy and put a new roof on it, it increases your basis on that property by $30,000.
Toby: And you get a big loss.
Toby: Tell them about the loss count, you can’t screw this up all the time.
Jeff: You will depreciate it for the year so that you have a property. But that’s actually going to reduce the lead. When you sell, it’s going to reduce your gain on that property.
Toby: Yeah. But you also have the extinguished property. If I put a new roof, there was an old roof that I replaced. Let’s say that I had that old roof for 10 years—which is about any roof, depending where you’re at—in California, probably a little longer than that. Indiana seems like you’re always replacing roofs. Let’s just say that you had it for 10 years and it was a residential property, so it’s 27 and ½ year property. You’re going to get to take the 17.5 as a disposition of that asset. The 17 and ½ years that you didn’t take yet, you would take all and when you put the new roof on.
Jeff: Right. I think the big problem with that, why most accounts don’t do that is they don’t know what part of the purchase price was for—
Toby: Dorks. They’re missing out on so much.
Jeff: Like they should have done cost segregation?
Toby: They should do a cost segregation, it’s going to pay a ton.
Here’s kind of the fun part of when you’re looking at this. If you sell the property, do you lose the depreciation? Kind of. You’re going to get a big chunk of the depreciation, you’re going to be recapturing a big chunk of depreciation. Here’s what you’re going to do. You’re going to do that as a 1031 exchange and you’re just going to keep rolling forward your basis so that you don’t have to pay tax. It’s probably easiest. If you don’t care about that, then you’re just going to pay tax. What you’re going to end up with is you’re going to have disposed of an asset so you won’t even have depreciation recapture on that or would you?
Jeff: You would still have depreciation recapture.
Toby: You’re on the disposal amount. Let’s just say it was a $20,000 roof back when you would take and you had it for half the time. You had it for 13 something years, then you would just take a deduction of the half, which is half of the 20, $10,000. Now, you have a new asset that you’re depreciating at 30 and you’d have one year of the 127 and ½ of that. With that, if you do a 1031 exchange, would you do cost segregation, sometimes right before it. The big question, I think we lost them. I like it when they do question marks.
The way it works is kind of like this. Yes, you could do a cost segregation right before you sell and we’ve actually shown this before when you do a cost segregation right for yourself, sometimes you save $60,000, $70,000 because you do not pay recapture on assets that have no fair market value and they’re beyond their useful life.
Carpeting for example, if I have carpeting, it’s worth five years. But if I depreciate it over 27 and ½ years and I sell that property, I have to recapture that carpeting. Whatever I wrote up on that carpeting is now taxable up to 25%, even though that carpet is not worth a dollar. When you cost segregate it, as long as I own the property for more than five years, I’m not going to pay anything. That’ll become long term capital gains but I have no recapture, so it’s awesome.
Jeff: Yeah. I think the big point here is that $30,000 cost for the new roof, you’re not going to lose that. You’re either going to depreciate it or you’re going to deduct it from the sale or something.
Toby: Somebody says, “What about doing a 1031 exchange even on a cost seg?” The cost seg, you do so you can accelerate the depreciation. Your depreciation isn’t going to change when you do a 1031 exchange unless you buy a more expensive piece of property.
Jeff: Yeah. We’ve run into that recently, about doing cost segs on properties where the basis is because they’ve swapped several times, it’s so low, it’s not worth it.
Toby: Yeah. It’s not worth it. Yep, yep, yep, yep.
“Would you cost seg a single family costing $300,000?” Yeah. Let’s just say your land value is $75 grand, You got $225,000 and the average is going to be about $65,000 in year one as a deduction. If you’re a real estate professional, that’s going to be a lot of money in your pocket. If you’re not, you’re just not going to pay any tax and any of the gain, the real estate profits for a long time. It just depends on what your tax bracket is and what other types of income you have.
It’s always worth calculating and it’s free to calculate. I would say that in anything, financial, anything, tax, calculate, calculate, calculate. Jeff has gone way over. I can’t believe he did it again. Come in. I have to blame somebody because I have zero accountability.
Jeff: It’s not my fault but you’re going to blame me.
Toby: This hour just became an hour and 53 minutes, but give or take, 53 minutes.
andersonadvisers.com/podcasts. By all means, come on in and listen to some of the stuff that we put out. There’s so much going on, guys. What we care about is you guys stay in business. It’s not just because we’re benevolent, I root for small businesses because I am one. But also, because we want you guys to be really rich so you can hire us to do work.
It sucks when you have clients with no money, right? You want clients killing it and very happy. I hope that we’re getting you some good information. If you’re an accountant out there, fantastic that you’re joining us and we love our accounts, too. If you love replays, then you want to watch some of this stuff. For platinum, you get unlimited access, I think we always have three or four up there. It’s always rolling around. If you go to the podcast, you’re going to see lots and lots of stuff. We always put Tax Tuesdays up, if you like to listen to them.
Corey listens to them and he puts them on one and a half speed.
Jeff: They’re only done in an hour.
Toby: Yeah. That’s a ton faster. You can go and always see all of our stuff on YouTube. Clint speaks a lot slower than I. Jeff’s fantastic, and he’s always a good sport. Anyway, if you have any questions too, feel free to shoot them to Tax Tuesday. We get hundreds, we try to answer everything we can get our hands on.
If you’re a client, obviously go through your platinum portal. Don’t ever hesitate. If there’s good questions, we love to grab them and use them as part of our Tax Tuesday. We will see you in two weeks. By that time, the PPP money is going to be gone and they’ll be on the third or fourth tranche. Don’t worry, our grandkids will be paying this stuff. I hope they don’t try to make us pay the bill.
Jeff: You don’t have a bond drive.
Toby: I know. Anyway, we’re going to sign a lot of chocolate bars to pay that off. All right. Thanks, guys.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.