Toby Mathis and Jeff Webb of Anderson Advisors strive to provide educational and accurate answers to your tax questions to prevent or minimize fees from piling up. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- If you sell a flip, can you put the gain into your residential mortgage and avoid the taxes? No, you take the gain to make principal payments that have no effect on taxation
- Is interest income from the performing notes considered ordinary income? Yes
- What is an opportunity zone? TCJA gives tax incentives and benefits to invest in economically disadvantaged areas in the country
- Can you deduct meals eaten at home while working from home? Technically, yes, if there’s a business purpose
- Will I be penalized for not making estimated tax payments quarterly? It depends, if you’re required to make estimated payments; penalties will be charged
- Personal property, if I transfer to an LLC, are there tax consequences? No, unless there’s a lot of debt against it
- Are premiums for long-term disability insurance deductible as a business expense in an LLC? Yes, they can be reimbursed, but they are limited to amount and C Corp
- What are the pros and cons of having a holding LLC? Not a huge tax impact on your bottom line, but can make it tough for others to take holding LLC from you
- What’s the best way to pay your child’s tuition, if you’re running a profitable business? Three code sections deal with tuition: 117A, 127, and 132D, but there are other options
- Are self-directed IRA fees tax-deductible? No, may prefer to have 401(k) over IRA
- Can I purchase and sell real estate without selling or dissolving the LLC? Yes
- Does a living trust provide liability protection? No, the purpose is to ease distribution of your estate upon your death; there’s instructions on who to give your belongings to
- How can I protect my house, if somebody slips and trips on my personal residence? There are ways to protect your house; some states have unlimited homestead exclusion
- If I fund my LLC checking account with funds from my self-directed IRA, do I earn income on the business or have to put profits back? There’s no benefit; goes back into IRA
- How can I write-off a car to an LLC or S Corp? Two choices: Actual expense or miles method, or company will own it
- Can I write-off income we pay our nanny from a business account? No, it’s a personal expense; will probably have to pay household employee taxes for nanny
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IRS issues guidance on Tax Cuts and Jobs Act changes on business expense deductions for meals, entertainment
Publication 505 (2019), Tax Withholding and Estimated Tax
Code Section 117A for Scholarships and Grants
Code Section 127 for Education Assistance Program
Code Section 132D for Working Condition Fringe Benefits
Full Episode Transcript:
Toby: Alright guys, this is Toby Mathis, and…... Read Full Transcript
Jeff: Jeff Webb.
Toby: This is Tax Tuesday. Welcome to another fun filled Tax Tuesday. We’re going to be going over a lot of stuff. We grabbed a lot of extra questions from the last week just to give us a lot more structure for you guys to see what’s coming out at a time. If you ask a very complicated question, then you better be a client or with platinum then we’ll answer it. If you ask like a basic question, we’re just going to either grab it and put it on the air, either one of the questions which I’ll go over here this week’s—all the stuff we’re going to answer.
The whole idea is to be fast, and fun, and educational. The whole idea here is to answer questions without having to incur a bunch of fees. We aren’t thinking on our fee here, guys. A lot of times, if you email one in and we gab it and put it as one of our featured questions, I’ve already looked at some of the answers. Other times if you’re just asking us, we’re answering the best we can. We try not to play hide the ball. Jeff is way smarter than me, that’s why I keep him here so he can answer your questions and I just guess.
The whole idea is we want to get back—taxes aren’t something that should be scary. They should be something where we look at and minimize to the best of our ability. It’s actually in the government’s best interest if you don’t pay your taxes on every dollar that you make. If I paid 100% tax, there’s no money left for me to invest. The old adage is for our first questions about the IRA and self directed IRAs and 401Ks is it’s better for the government for you to save that money and defer it because they’ll actually get more money in the long run.
As your wealth increases and they’re taxing it after a long period of time, the actual dollars they receive is actually significantly higher. I always say taxes should be something that you should feel kind of patriotic about deferring as long as possible, minimizing as long as possible, and taking advantage of the losses that are written because they’re incentivizing certain types of behavior. In many cases, that’s businesses. Alright, so let’s jump into some of the questions.
Here’s the ones we’re going to be going over today. “Can I roll over my 401K into a self directed IRA to invest in real estate?” We’ll answer that. “If you sell a flip, can you put the gain into your residential mortgage and avoid the taxes?” We’ll go over that, we’ll explain what flip is to some of you guys who don’t know.
“Can you deduct meals to eaten at home while working from home?” “Will I be penalized for not making estimated tax payments quarterly?” In some people’s minds, this is the first year they might be paying. “Are premiums for a long term disability insurance deductible as a business expense in LLC?” “How do I set up my entity’s bank account?” “What are the pros and cons of having a holding LLC?” I’ll explain what that is to those of you guys who don’t know. “What’s the best way to pay your child’s tuition if you’re running a profitable business?”
Last two, I told you we’re going to go over a lot more this time just because I want to really give you guys even more value. I love answering the questions off the top, but when you guys take the time to go all in, I’m going to grab them.
“What’s the best structure for both flipping and holding property at the same time?” “Are self directed IRA fees tax deductible?” That’s one of my favorites because the answer has changed in the last year.
Toby: Yeah. If you asked a year ago, we’d be giving you a different answer. Anyway, we’re going to go over all of these and more. Let’s get right on in. “Can I roll over my 401K to a self directed IRA to invest in real estate? The answer is absolutely. However, do you really want to? Because depending on the 401K, again, there’s two types. There’s multi employee plans where it’s an employer and they have lots of employees in it and there’s restrictions on what kind of investments you do. Then there’s the solo 401K that you control. Honestly, you’re better off using that 401K for the investment in real estate if that’s what you’re doing, because you don’t need a custodian. You can sign your own closing docs. You don’t have unrelated debt finance income issues, that way you can borrow money. Whereas in an IRA, you have to pay the tax on it.
IRAs are also single owners. If the spouses are buying a property in their IRAs, well there’s actually two owners on that property, or you’re setting up an LLC which is actually my preferred method. You’re setting up an LLC inside of the IRA, it’s called a checkbook IRA or an LLC inside of the 401K to make sure that you don’t have unlimited exposure to the liabilities that could come from that real estate.
If you own a real estate in a self directed IRA, as the individual retirement account holder, you’re personally liable for the activities. If you have a rental property or an IRA and there’s a slip and fall, you’re ultimately responsible. We always want to make sure that we’re cognizant of asset protection while we’re setting this up. But yes, you can absolutely roll it and use a self directed IRA, or you could just use a solo 401K, or if this is with an employer, a past employer and they allow you to roll the plan to make it a passive flow, you can absolutely roll the plan.
If it’s a current employer, they could say, “No, you can’t, until you leave service,” but if you have an old 401K and you want to roll it in, one of the best things you can do is set up a business and have a sponsored 401K. You just remove the issues, nothing against IRA custodians, but it don’t work on weekends. If you’re buying property and you’re there on a Saturday and it’s a bidding situation, you’re not closing, and you’re not able to even bid because you can’t get a signed offer from the custodian until they get back in the office. If you want to avoid that, you use the solo 401K.
We have lots of questions. I don’t see anything pertaining to that one so I’m going to skip through to the next one. Do you want to add anything?
Jeff: No, I’m good. I’m just watching.
Toby: Alright. Some of this stuff is more on a lawyer than accountant. In that particular case, as long as you go on plan to plan, you don’t have to worry. I could twist the words and we could play the Roth game and say, “It has to be a traditional IRA, 401K to a traditional, or a Roth 401K would have to go through a Roth IRA.” You cannot go back from a Roth IRA into a Roth 401K, a lot of people don’t know that. We can twist it, but we don’t. We’re not going to do that.
If you sell a flip, and a flip is when you buy a property to sell it. A lot of people think that’s within a year, there’s no actual time frame on it. It’s if you buy it and you intend to sell it, that’s a flip. “Can you put the gain into your residential mortgage and avoid the tax?” Jeff, what do you think?
Jeff: No, the answer is no, absolutely not. What you’re doing is you’re taking the gain from your flip and you’re just making principal payments. Principal payments have no effect on taxation.
Toby: That’s absolutely right. If you sell a flip, the tax implications on that, there’s only one thing I can really think of that you could do with that flip money and avoid tax, and that’s possibly putting it into a qualified opportunity zone. Is there any other way to defer it?
Jeff: Could you even do that since it’s not really a capital gain?
Toby: I guess what I assume you’re saying is short term capital gain. If it’s a typical flip you’re a dealer and that’s ordinary.
Jeff: That’s ordinary income. We have to offset it with ordinary expenses. That’s even tough. You still have to have an investment. I can’t really think of a way that you could defer it.
Anyway, when you’re doing a flip, think of it like you’re in Minimart and you’re selling cheerios, boxes of cheerios, or better yet, used car lot. You’re grabbing cars, you’re fixing them up and selling them on your car lot. You can’t depreciate it, you can’t do installment sales, you can’t do 1031 exchanges. You lose a lot of those stuff, so there’s not really anything where you can defer it.
Jeff: Right. You can do an installment sale, a little installment sale, sell it on installments. That still doesn’t defer your gain. You still have to pay tax on your gain.
Toby: Yup, you got to pay the tax even though you haven’t received the money yet. You can still do it in installments from a tax standpoint.
Jeff: That’s a good thing to keep in mind.
Toby: You are such a tax nerd.
Jeff: If you do a flip, you may not want to do it on an installment basis because you may not have the cash to pay your taxes.
Toby: Here we go, “Is interest income from the performing…” no, it’s considered ordinary income. Yes, it’s ordinary income. Good call. “Can you take capital gains that exceed the […] rules and put the funds into an opportunity zone to take the advantage of the benefit?” Nicola, no you cannot. You can put them into the opportunity zone, but you can’t take advantage of the 10 years. That’s only for deferred gain. For those of you who don’t know what the opportunity zone is, we’ll probably answer your question because I’ve been talking about it since they passed that law in December of 2017.
You can defer taxes for seven years now and pay only 85% of it and pay zero gain on the assets that are held for the qualified opportunity fund. The assets really that are held for 10 years or above. You can actually roll assets in each other. That just came out in the new rate. “What is an opportunity zone?” Jenny, that’s why you’re hanging out here. An opportunity zone are areas in the country that are economically disadvantaged where the Tax Cuts and Jobs Act gave these huge incentives for people to invest in them. Just for giggles, it’s 26 USC, 1400z-1 and 1400z-2.
The opportunity zone gives us two huge monstrous advantages. Number one, it’s available for any capital gains, as long as you invest in an opportunity fund which owns opportunity zoned property which an opportunity fund is an LLC taxes, or a partnership, or a corporation, or a plain vanilla corporation, or a plain vanilla partnership. It owns 90% of qualified opportunity zone property which could be the actual property itself or a business in that area. Then 70% of its income has to be in the opportunity zone. It gets all crazy.
When you get down to 63% of that money, it’s actually driving the opportunity zone and you still get this benefit. Let’s just use an example. If I sell some Bitcoin for $1 million and I put it in the opportunity zone. Again, these are geographic areas. You can heat map opportunity zone and they’ll pop up on the map. If you Google heat map opportunity zone, you’re going to see it. You’ll see all these different areas. All states have them. They proposed them in 2018 and they’re all approved.
You can see certain zip codes where it’s called an opportunity zone. If you invest in that and you invest in a fund that invests in opportunity zoned property, then you can get these benefits. The benefits are twofold. Number one, I can defer my gain that I rolled into an opportunity fund within 180 days of my sale date or 180 days from the end of the tax year, depending on the type of gain it was. I’m not going to get into all of this stuff today. If you sell your Bitcoin on January 1st, you have until the end of June to invest in an opportunity zone. It doesn’t have to be the same money either. It’s just anything.
The beautiful part is you do not have to pay tax on that until 2026. You only have to pay tax on 85% of it. It’s still long term capital gains if you owned it for long term capital gains, that’s number one.
Number two, whatever you invest it in, that gain, if you held it for 10 years, you never have to pay tax on them. A lot of you guys are real estate folks. You have to double the value of the improvement on the real estate. If I buy a tract of land with a building on it, the building is worth $500,000, the tract of land is worth $600,000, I have to put $500,000 into it.
It’s $500,000 for the improvement, $100,000 for the land. I don’t care about the land, I care about the improvement. I have to double that. I put $1.1 million into it. I defer $1.1 million, I only have to pay tax on 85% of that so about $900,000 in seven years. First off, I get a big deferral and I don’t have to pay 100% of the tax. Then I hold that $1.1 million building let’s say for 20 years, and it goes up to $5 million. I sell it for $5 million, guess how much tax I paid? Jeff how much tax do I pay?
Toby: Zero. I get a big, huge, fat tax benefit. That’s an opportunity zone and that’s why it’s a big deal. Anyway, I don’t even know how we got onto that.
Jeff: It’s good that if they look at that heat map, you’ll see the typical urban areas around big cities, but you also see a lot of areas that are in rural sections of the country that may be suffering from lower income and low values. They’re really all over the place.
Toby: Yeah. Now we have a whole bunch of questions. “How would you tie a private IRA to your corporations?” you don’t. They’re individual. What you do is you get a 401K and let’s say the opportunity zone besides your capital gains bound isn’t a requirement, but new dollars equating to gain amount and to rehab the property. Yes, you have to improve the—if you buy a land, you have to double it if it’s just land. You have to put in whatever you paid within 31 months. It’s not as bad as you guys think.
If you are fixing up a building, you have to double the improvement, just the improvement value. You can get the tax assessor and figure out what the land value is, any reasonable method. If you buy a regular business, then you don’t have to worry about any of that stuff. You’re just putting the money into the business as long as it’s been years. It’s really awesome.
“Can sales proceeds from property sold in personal and passive entities go to the same fund?” Yes, absolutely, or you can combine them. You can do multiple contributions to the same funds.
You can set up a fund like Anderson, we set up those funds all the time. It’s just an election that you make in the first tax year. You got a little bit of magic language in the LLC which is what I prefer to use. You could create your own fund. It is absolutely awesome. You can have mixed assets. You can use the gain, but you don’t just have to put in the cash really. You can put in other assets too. There’s other things you can do to get…
The next big question is, “Can you deduct meals eaten at home while working from home?” What do you think?
Jeff: I don’t think this is probably a wise thing to do. You may differ in opinion, but I’m not sure that I would want to do this. We talked about if you’re meeting with somebody in your home and you have a meal and it’s business related, then you have an argument.
Toby: The answer is yes, technically you can. Here’s the deal, if I’m traveling away from home, then I can write off my meals when I’m away from home. If I’m at home, then I have to have a business purpose for it. The business purpose is I have to be trying to make some money. The who, what, why, where, when, and all that finding out why becomes really important which means when you’re eating at home, you better have a darn good reason that’s business related.
The only business related reason I can see that you’re eating at home and calling it a business meal is if you are actually having clients over, or somebody that you intend to do business with, and you’re actually trying to get that future business while eating there. The other way you could do it to get it, now be 50% deductible. Twenty years of asset is a certain amount you can deduct for business meals, it’s just as long as it’s not lavish and that’s not a dollar amount that is.
Jeff: Have they ever said what they consider lavish?
Toby: No, $2,000 meals out there that they still do it. You guys are not going to be in that category. In 27 years I’ve not run across a single client that ever had to worry about lavish. A $10,000 bottle of wine maybe. As long as you have a reason why you’re doing it, and there’s a business reason, the IRS isn’t in the habit of second guessing if you make bad business decisions. Meals when you’re eating in business, they’re assuming that it’s more expensive than a personal meal so they let you write off half. If you want to get 100%, then a business meal at your home while you’re doing a presentation to the general public, you can write that off. Have that sucker punch, Jeff.
If you have a bunch of people over and you give them a presentation, we have clients who do this, that do MLMs or whatever else and maybe they’re bringing somebody up or they’re showing them materials and giving a presentation, write off the whole thing 100%, or there’s one other 100%. What is it Jeff, do you know?
Jeff: The other 100%.
Toby: Yeah, that 100%. There’s only one.
Jeff: The company picnic?
Toby: Company holiday party. You can have a big, order a pizza, write the whole thing off.
“How about a corporate meeting at home?” Yes, you can write that off 100%. Here’s what you have to do, you have to say that the meal is included with the structure, then you can write it off. Gio, you get a big gold star because that’s a great—you saw that while we were just sitting here thinking we’re smart, you got it and we didn’t.
Somebody asked a question about opportunity zone. We got a whole bunch. If you want to shoot me another question, because I didn’t get the actual question. It was evidently cut off. The question was cut off where it is. I just don’t see it. Send it again. There’s one, “In the opportunity zone fund, can you take the loans the same way against rental properties?” Asset protection rules still apply. If you have an opportunity zone, you can have LLCs held by that opportunity zone fund absolutely. There’s no guidance right now on the taxation of loans. The only guidance we have is that you can borrow money against the assets. It looks like you have a lot of leeway and they’re basically giving us—and the regulations that just came out with 180 pages about two weeks ago, they’re giving us way more than we anticipated.
Jeff: Do you know if the guidance actually says that the loan has to be reinvested into the…
Toby: If it has to be reinvested?
Toby: I didn’t see that in there.
Jeff: I’m not sure if it’s in there or not.
Toby: If you sell an asset in an opportunity zone they said, “Hey, it’s not fair that if you sell it, you have a taxable event when you should be able to reinvest it like a 1031,” and they said, “Yes, you can reinvest it as long as it’s reinvested within a year,” so you can buy properties technically. I guess you could be flipping inside the opportunity zone.
“Why can’t I put flip money into a 1031 exchange?” Because flip money is ordinary income, it’s not capital gains. A 1031 is for investment property. When you flip, you are no longer an investment.
Jeff: Yeah. Your property is considered inventory. By definition, inventory is not eligible for a 1031 treatment.
Toby: Your house is no different than a car on a car lot once you’re flipping. If you want to defer it, you can—the good news is, if I sell a house that’s an investment, I can’t put money into the 401K with that cash. That’s not active ordinary income. If I sell a flip, I can defer it in a 401K. We’ll get to that.
“How much can you write off for meals and travel?” As much as you want, 50% for meals, travel is 100%. If you’re over $75, you have to have a receipt for the transaction. If you’re less than $75, you don’t even have to have a receipt.
Jeff: Yeah. There’s no dollar limitation.
Toby: Yeah. What they do have is we call it the too many lunch rule. There’s other practitioners that I stole that from. They call it 100 lunch rule or whatever. If you keep meeting with the same people over and over again, and you do it over 100 times in a year, they’re going to say that’s no longer business, that’s personal. What we say is write off whatever you want, whatever you can justify, just make sure that it’s not you and your spouse every meal. Not that you would lose, but they would definitely question it.
Next one, will I be penalized for not making estimated tax payments quarterly? What do you say, Jeff?
Jeff: Well, it depends on if you’re required to make estimated payments, if your withholding is substantially less than your tax is, then you’re going to have been required to make estimated payments, and those penalties are actually calculated each quarter. There’s a penalty for your first quarter payment, your second quarter payment, your third quarter came. Some people think, “If I just pay all my estimated taxes in the fourth quarter, that’ll save me,” actually it won’t. You’ll still get penalties for the first three quarters.
Toby: Yeah, there’s a publication out there, 505, that you can look at for the estimated tax, it gets a little complicated. The general rule, 90% you’re okay.
Jeff: Yes, 90% of your current year liability or 110% of your prior year liability.
Toby: Yes, so whenever we see somebody — if you don’t expect to be making a profit more than $1,000, you don’t have to do withholding, period.
Jeff: When you file your return is less than $1,000…
Toby: Then don’t worry about it.
Toby: But if you had taxes before, and the previous year, you can use 110% of that amount and avoid penalties.
Jeff: Yeah, and typically, we always say 110% of the prior year, when the rule is actually I think if you made less than $150,000, it’s 100%.
Toby: But then somebody says, “What if the company is not making money?” Estimated taxes are for individuals, and partnerships, and S-Corporations, and if the company is not making any money, then you don’t have an estimated tax, so you don’t have to worry about it.
Jeff: For individuals, and corporations.
Toby: Individuals, not for partnerships too, would you say?
Jeff: No, because that passes through.
Toby: S-Corporation pass through. C-Corp, do they have quarterlies that they have to worry about, too?
Toby: Yeah, so…
Jeff: The problem with C-Corporations if you had no tax last year, that prior year of protection, safe harbor doesn’t exist.
Toby: Then you look at it saying, “Hey, if you anticipate that you’re going to be making money, then…” but these penalties aren’t monstrous.
Jeff: No. It’s probably a lower interest rate than you can get by getting a loan at the bank.
Toby: What is it? Six percent or something like that?
Jeff: Yeah, a half percent a month, or six percent.
Toby: Alright. Here’s a bunch of questions just because people are asking them, “Can I do a 1031 exchange with a stock I recently sold?” No, you cannot do a 1031. It has to be real estate to real estate. However, you can actually do a qualified opportunities on fund if you want to defer it. You have 180 days to do it.
“How can you properly structure living trust account to trade the market and be taxed not as employer, or self-employed?” You can’t do that with a living trust. What you’re going to do is if you’re trading in the market, you’re going to usually have an LLC tax as a partnership with the corporation as a partner — as one of the LLC members that have tax as a partner. You can pay guaranteed payments.
The reason you do that is because miscellaneous itemized deductions are gone, they took them away with the Tax Cut and Jobs Act so you can’t write stuff off. If you want to write off things against your trading, then you have two choices. You either do it that way, or you trade so much that your big source of income that you qualify as a trader. Most people don’t, they get hard just for doing it. I tend to be anti-trader.
Let’s see, personal property, if I trench through an LLC, are there tax consequences? No, generally speaking, unless you have a bunch of debt against it, or if it’s another partnership. If it’s just you own a car or something, and you put it in an LLC, there’s not a tax consequence for doing it.
“How can I lease company equipment back to my LLC?” You better do a lease agreement when you lease it. It’s just like anything else with another individual. I don’t like leases for the most part, because you have sales tax on them. I would look at it and say, “Hey, if I have really expensive equipment and I want to make sure it stays out of my business, then I’ll lease it, but there’s a reason I’m doing it, like I have a really good reason for doing it, which is my business may be subject to some liabilities.
Jeff: I’m just going to say that if you’re going to lease partially, you want to be an LLC also with that equipment. A good example is what just happened at San Francisco with the falling crane, not only is that company in trouble, it was using that crane, the company that they leased it from also has liability. You really want to protect yourself against stuff like that.
Toby: We draft up those agreements. I can just tell you that a few and far between, it’s rare that you see something that’s really worth that much. Even though, you’re still going to isolate. You’re going to isolate like crazy, you’re going to get insurance, you’re taking that big bulls eye off of your back.
Lots of questions are coming in, let’s see, I wanted to go over some of the ones and just ask. “Is allowed to do a 1031 exchange into existing real estate property for improvements?” Raju, the answer is typically no, but there is something called a reverse exchange but you have to have acquired the existing property through an intermediary. If that’s not something you did, then the answer is no. The intermediary appropriate guaranteed payment amount highest reasonable amount. There’s two ways to do it. Either say here’s the amount that I’m paying you as a guaranteed amount, or you have the corporation owned 20%, 30%, 40% of the actual partnership, and that automatically flows over to them.
Somebody else asked, “Can you identify the amounts for federal tax, Medicare, social security, etcetera, when you make your quarterly taxes?” There’s the damn question for self employment tax. When you’re paying an estimated tax or you’re saying, “Hey, this is not just my income, but this is for social security, this is my old age death and survivors to my Medicare.”
Jeff: Yes. The estimated taxes are calculated on your taxable income.
Toby: Yeah, your total tax. You don’t have to break it down, I don’t believe.
Toby: When you’re doing withholding, that’s different. I have the slide that you’re looking at right now as withholding and estimated tax. Withholding is against employees. If you’re paying a wage, then you automatically do the withholding. If you’re not, you’re paying the estimated tax but you’re not breaking it up.
Jeff: From my point of view, withholding is always a better choice than estimated taxes. If you’re still taking distributions from your retirement plan, go ahead and withhold on them. We can help with that calculation of how much you need. Because that withholding even if it’s with hell on December 31st, it’s considered to have been taken out the whole year.
Toby: Good point. Somebody said, “What’s an intermediary in a 1031 exchange?” Whenever you have a 1031 exchange, you cannot touch the money, you have to have a qualified intermediary touching the money. If I exchange to a 1031 exchange, I can’t actually receive the money from the sale, it goes into an account held by a third party and then it gets reinvested into more real estate. It can be multiple pieces of real estate, it could be a whole bunch of stuff, it doesn’t have to just be one piece of property, and it doesn’t have to be the exact same type of real estate.
Jeff: Right. It’s pretty wide open from what type of real estate.
Toby: In a reverse exchange, you’re identifying the property at the time you were acquiring it, which means you have to have the cash and you have 180 days once you acquired it to fix it up and sell the other property and roll its gain into it. If you’re doing a traditional 1031 exchange, yes, there’s a timeline, Roger. It’s 180 days from the date of closing. You have 45 days to identify a property, or properties. There’s some different rules there. Then you close it.
“Are premiums for long term disability insurance deductible as a business expense in an LLC?” Jeff, you live there.
Jeff: Yes, you can reimburse long term disability insurance but it’s limited.
Toby: Here’s the weird thing, when you say business expense and LLC, first off, an LLC is not a tax designated entity. Your LLC could be you as a sole proprietor in which cases, no. Your LLC could be you as a partner in a partnership, then the answer is no. The LLC could be an S-Corp, in which case the answer is no. It’s included as wages. It could be a corporation, a C-Corp, in which case the answer is yes.
Jeff: You know where my mind went straight, the C-Corp.
Toby: Yeah. You can go to be a C-Corp and you’re looking at saying my long-term disability insurance isn’t deductible as a business expense, only for a C-Corp unless it’s for a spouse and sole proprietorship in which case they’re working and they’re actually providing lots of time and value, stuff like that. They actually look at those pretty skeptically, but it is possible to do it. My thing is I always say, “Hey, LLC tax is a corporation or just flat out corporation.”
Now, I don’t want to be misleading to you guys. You could potentially deduct it as a medical expense on your personal but as all things on your schedule a, it’s crazy. This is maddening. If you’re 40 years or under, the maximum amount as a medical expense you can even try to write off for long term care is $420. If you’re 71 or older, that’s $5270 and what that is is that’s added on to your other medical expenses. If it exceeds 10% of your adjusted gross income, then you can write it off.
Jeff: That part that exceeded the 10%.
Toby: It has to exceed 10%. It really never lets you write it off unless you have a lot of stuff. “Is there an exemption on capital gains?” depending on the gross income for the year. My accountant said something about as long as you make less than $38,000 gross income, there’s no tax in capital gains, is that correct? No, he’s talking about long term capital gains and what they’re looking at is as long as the capital gains and your income, as long as when you add those up, you’re below $38,000, the long term capital gains rate is zero. If it’s above that, it goes to 15%, and if it’s above, I don’t know, like…
Jeff: About $400,000?
Toby: I have to look at it, I have it here somewhere. If it’s over married filing jointly for $479,000, then it’s 20%. RM, the answer to your question is as long as your gross if you add up the gain is less, then your long term capital gains are zero, but also any dividend out of a qualifying corporations are zero because they’re treated the same way.
First off, you threw a bunch of stuff out there. There’s only one that was actually a tax designation that’s a C-Corp. Assume that the LLC, and the holding companies, the partnership, and the individual—in any case, you’re not going to have a taxable event when you contribute it because you’re either going to call it a contribution, or buying stock, or a loan, or any number of things. But [inaudible 00:30:55] taxable under any of those. If it’s over $10,000 that you put in, like you write a big old fat check to a C-Corp, you’re going to have some imputed interest if it’s a loan. If it’s paid in capital, then there’s no tax implications and they can return the money to you at any time.
Jeff: Yeah. As far as the timing of deadlines of getting that checking account setup, the sooner the better. It’s a fail if you don’t get it setup right away. Just get it done and over with. This process, if you have one of those entity binders that we send you, just take that whole binder with you when you go to get your account setup. Everything they’re going to ask for is going to be in that binder.
Toby: Yup. If we did it.
Jeff: If we did it.
Toby: Yeah, if somebody else did it, then good luck, just kidding. Usually, they do one thing well like, they got the filing and then they’re like, “Where’s the operating agreement? You have to go get one of those.” And when they get the operating agreement, usually, they’re like, “All right, where are all the other members? They need to sign too.” They’re like, “Oh crap, I should have done a management.” There’s always these little gadgets, if you just go to somebody knows how to do it, and works with banks, that’s usually the easiest part.
The cool part about the holding company, and the LLC that’s basically a safe haven—it is basically a virtual safe, think of it like putting cash in your safe. If you walk over and you put money in your safe, do you have to do an IRS notice? No. Is there a tax implication? No. What if I take the money out of my safe? Yeah, there’s none. So I could be popping money in and out of there all day long. All you’re doing is just running an account. You’re supposed to keep track of what’s in there, is all.
Toby: How much should I put in? How much should I take out, but it’s not a tax loan. Would you recommend making a cash deposit, or a loan on a capital contribution? Do you like to put money in exchange for stock, or do you like making a loan?
Jeff: When I started my LLC, the initial money I put in, I put in, we call additional paid in capital. My company is an S-Corporation, professional, and liability company, but yeah, because I knew that if I need to, I could pull that money back out.
Toby: There’s people that like it. Now, I tell you what, without getting down too far a rabbit hole, if we do a paid in capital, or if we don’t, if we loan, and we ever decide we’re going to dissolve that company, and take a loss, we’re going to make it paid in capital anyway. We’re going to contribute to the loan actually through the company exchange for stock [inaudible 00:33:08] you’re not super stock.
Jeff: And here’s our general preferences for—if it’s tax as a partnership, we make a capital contribution, if it’s an S-Corporation, we prefer that it be additional paid in capital.
Toby: It’s easier, because you just […] just take it out.
Jeff: Right. If it’s a C-Corporation, we prefer it to be a shareholder loan.
Toby: That’s because you have a separate taxpayer, and there’s no tax—liability goes over $10,000, you got to have a little bit of imputed interest, or payable interest.
Toby: Let’s see, we have so many questions, but again, I have so many of these things to go through. I’m going to get your questions, hang tight. I know some of you guys are asking multi part questions, try to make your question on one line if possible, not one line, but just in one [inaudible 00:33:53], don’t send me three questions, because there’s three or four coming in every minute here right now. What are the pros and cons of having a holding LLC? Well this is interesting, from a tax standpoint, it’s not going to have a huge impact on your bottom line. In fact, the holding LLC really came about because you want to make everybody walk through a single gauntlet, if they’re going to try to take your properties. If they come after you personally, and we’re setting up LLC’s in different states, wherever real estate is, there’s a good chance they’re just going to take the LLC from you.
If you put it into a holding LLC in a state like Wyoming, they can’t take the LLC from you, makes it really though. From a tax standpoint, if you are going in for a loan, the holding LLC is your best friend. You make it taxed as a partnership more than likely, if it’s long term holds, you don’t really want to have long term hold properties in a corporation where there’s an S or a C, it’s usually bad, because if you take it out, it’s considered wages, appreciated property in the hands of the shareholders is treated as […] income. That’s really bad. You want to make sure that holding LLC is either you disregarded or a partnership to you and a spouse, or to you and maybe having a another party in there that can own it.
The whole idea is that, if you do a partnership then, if you are going in for a loan on those properties, they have a tax return to look at that is not just yours. It’s going to go on your Schedule E, it’s going to go on page two of your Schedule E, if it’s coming through a partnership. If it is not, it’s on your page one, which will end up being like, depending on how many properties you have, it would to be 20 pages. I’ve seen page ones that were 30 pages long because they’re just three properties for every page, and you end up with all these properties all over the place. .
The pros—there’s not really any cons to having a holding LLC, first off, if you do it right, it’s only pros, literally the only con I could think of is, if I have a partnership return, I have to pay to have a partnership return done. Depending on where I put it, I may have a couple of expenses, registered agent, or office suite in the state that I want to use, but again, you’re not doing that if there’s not a bunch of pro’s. You wouldn’t do that just because, “Hey, I think I’m going to do it.” I’m just looking at it saying, “I have no idea why a real property investor, like somebody who has multiple properties, why you would use a holding LLC.”
If they have a whole bunch of different partners, and they’re all different, varying things, and there all hodgepodge, then it might be a little tough, but I can still make an argument that all your holding should be in a single LLC to make it very easy for you to do your accounting, and for your tracking, and your business planning, and everything else, because otherwise, it’s like having a whole bunch of children. They’re all trying to get different loans, and things, it just makes a bit of a nightmare. I see you guys have lots of questions, but we’re still going to go through these last few, then we’ll get in to all your questions. What is the best way to pay your child’s tuition if you’re running a profitable business?
First off, it’s child’s tuition, Jeff, I know you I love that.
Jeff: Right, there are three different code sections that deal with this, it’s 117A, which deals with scholarships, and grants, code section 127, which is your education assistance program, and then 132D, which is your working condition fringe benefits.
Toby: Which is my favorite.
Jeff: I’ll tell you the problems with all these, the 117A, the scholarships usually doesn’t work, because IRS’s intention is that, it’s for you to help out other people.
Toby: If your greater than a 5% of share hold, you can do it?
Jeff: No, that’s on 127.
Toby: 127, so is there a way to even take it?
Jeff: The scholarships, and grants, first off, I’d want to run it through a non-profit, rather than through my company directly.
Toby: But if you’re benefiting only the…
Jeff: But if you’re benefiting—and one of big reasons [inaudible 00:37:35] make a taxable to the beneficiary is the company benefited from it. 127, the education assistance program, that’s where we get into any 5% shareholders can only benefit up to 5% of the total funds distributed.
Toby: Right, don’t do that unless you have a whole bunch of employees in your—benefiting there, it’s more than your own.
Jeff: Now what the code says in 27 is, the shareholder, their spouse, and their dependents.
Toby: Wow, so it’s like a big laundry list.
Jeff: Right, so I’m saying that possibly, I don’t know what you think about this, possibly, if I have my adult son, who comes to work for me, that maybe I can do this for him. He is no longer my dependent.
Toby: Yup, so I could probably do it there? But why do that? Why go through the whole rigmarole, when we have these other options>
Jeff: And again, you cannot discriminate, if you have more than one employee, you have to offer to everybody.
Toby: Number one, if you have a business reason, the business is benefiting, it can just pay the tuition. You don’t have to worry about all the percentages, and everything else.
Jeff: Right, you don’t have to have a plan, this is a working condition fringe benefit.
Toby: Yeah, and if it benefits the business by improving your skills, or if it’s required, like I’m an attorney, and I have to go do continuing education, the company can pay for my continuing education. Jeff’s a CPA, he has continuing education, company can pay for his continuing education. That’s number one, but if you have a child, so let’s just use it to your term, child. I’m assuming that they’re under 24, and that is it something where they’re going to college, and what’s the best way to get their tuition out of it? I would pay the child.
The reason I don’t pay the child, because once around your home, and they’re going to school, they have $12000 a year tax free. That’s our standard deduction, and their tax rate, even if they go above that, what is it, I’m going to look at single, you’re single in 2018 was—they were at 12% between 9,000-38,000. A, they had—the first 12,000 is tax free no matter what, they have a standard deduction, and anything above that is 12%. It’s better than yours, let’s just put it that way.
You’re better off having the kids do it and frankly, if you paying them, and they do an IRA and [inaudible 00:39:43] stuff, you could defer the heck out of it, I’m not going to worry about it. If you really want to get technical, here’s a real twisted way to do it, is you put your kid on your company and then pay them, defer, I had a 401K, pay them $19,000, stick it in there, 401K, first of. Number two, pay them $12,000 in addition to that, so that they have a standard deduction, their tax rate is now zero and of that $19,000, you could borrow $9500 of it. Now, you have almost $22,000 completely tax free. That’s […] that’s how we think here.
Jeff: If you can avoid getting student loans, you’re doing your child a favor.
Toby: Yeah, please don’t get them student loans especially if it’s an English degree. No offense in English majors but you’re subsidizing the engineers of some of these schools. I’m just teasing. My mom has taken English.
Jeff: I mean, student loans is a private industry now.
Toby: Just do a cost benefit analysis. Don’t spend $200,000 on a degree that is going to keep you in a $30,000 range.
Jeff: Right. It’s unfortunate that so many of our…
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Toby: Alright, so we’ve come over a few things and hey guys, as in all things tax, you can always come to Tax Wise and spend some time, subscribe to our podcast. I’ll give you all the details on how you can do that. […] someone said, Philosophy degree is a good investment. I have to think about that. Actually, you’ve got some great […]. “What’s the best structure for flipping and holding the property at the same time?” that’s an interesting one.
I’m going to map this out for you guys real quick just because there’s really two types of activity. The easiest way to look at it is I have active stuff and I have passive. We’ve talked about flipping a couple times tonight, it’s a business. Flipping is a business. Passive is investments. It’s the best structure for doing both. You’d want to make sure that you’re very clear to the IRS, which one is which. We do not want them confused because they tend to go with what’s worst.
If I am running and I am doing a flipping business, my structure is almost always going to be an S-Corp or a C-Corp for those flips. That could be in LLC taxes, an S-Corp, or a C-Corp too. If I am going to hold a property, I am almost always going to be an LLC and either taxes a partnership in a holding company or disregarded for tax purposes. They just go straight on to page one of my Schedule E. I’m going to do it to where I’m doing the least amount of harm and I’m being very clear to the IRS and to the world, “Here’s my active business, here’s my passive business.” that way, you can get the most benefit. If you’re in a passive investor and you’re paying tax, that’s a shocker. If you’re in real estate and you’re buying properties, there are so many ways to keep that from being taxable to you that you’re just not trying very hard if you’re paying tax on it.
There’s ways to do it. We can accelerate the depreciation. We could buy other real estate that creates more depreciation if we don’t have enough depreciation in the other properties. Borrow out, buy more if you need more depreciation. There’s ways to do it. There’s always ways. Last one, I think these are the last set of questions. “Are self-directed IRA fees tax deductible?” this is our favorite question because the answer is now a resounding…
Toby: You cannot. Self-directed IRA fees, you could pay them or the IRA could pay them but they are not tax deductible to you. If the IRA pays them, they’re not tax deductible to the IRA, but the IRA is not paying tax so it’s just lowering what your overall objective is. This is why IRAs, again, I tend to prefer 401Ks. The reason I do is because that’s a business retirement account where the business could pay it and write it off. “Are self-directed IRA fees tax deductible?” no. They used to be deductible on your Schedule E.
Jeff: If you pay them, not the IRA.
Toby: Yeah. If you pay them individually and you write it off on your Schedule E, now you cannot, because miscellaneous itemized deductions no longer exist. Somebody is saying, “I bought a house in an auction. It never got titled because the previous owner contested the sale in court. Instead of going to court litigation, I told him to write me a check for $50,000 profit as a fee, and I’m not going to get a 1099 for it. Plus, I’m getting my initial investment back from the auction company that I bought it from. Can I invest the $50,000 into a retirement plan and not pay tax on it even though the money didn’t come from there originally?” No.
Here’s how it works. Depending on what name you did the purchase in and what can you settle on these things, your name is somewhere on there, that’s how you’ve got the income, and it’s ordinary income under those circumstances. You’re basically the wholesaler. It’s kind of a weird thing. I guess what you could say, depending on your intent when you purchased it. I came to see that thing […] company, I think that’s just going to be ordinary income.
If it’s ordinary income and it’s your name, then what you could do is if it’s ordinary income, then yeah, you can do retirement plans against it in the name of whatever it is that you actually did it. If you did it through a corporation, then you’re in luck. If it is through your individual name, then you might not be, but we have plenty of time to try to offset.
Toby: Is there anything else that you can think of?
Jeff: No, I’m just so surprised that he was able to get $50,000 profit in addition to its original $50,000.
Toby: Hey, you tied up a property so you got your—it must be a pretty high end property. Way to go. “Individual name, how can I read it?” this is something where you’re going to need to email on into us or reach out. Patty, you might want to grab his information so you can have a consul with the tax adviser. We actually need to see the documents, but there’s always a way. Patty will get it from you. I don’t want to read your name online.
One of the things you can always do to get lots of answers to questions is go on—you’ll realize that we have quite literally hundreds and hundreds of hours of Q&A online. “How do you legally write off your cell phone?” I saw that question asked tonight, so if you could go right to it and watch the video on how to legally write off your cell phone, you don’t have to wait for me. Go on to Facebook and YouTube. Anderson has a great channel on YouTube and subscribe. You can see a whole bunch of fun stuff out there, it’s freebies. The other thing you can do is go to iTunes and sign up for the Anderson business adviser podcast. It is ROM stuff. It’s even getting better. Use somebody else’s IRA. Google Play, you can get in and you can watch these things for free.
The beautiful part on this podcast is myself, Clint Coons, Michael Bowman, Jeff here, we’re constantly spewing out material that is as timely and relevant. You can kind of just go in there and see all the fun stuff that we’re always putting out there. There’s everything from—I’m just looking at the Google Play, you can read it yourself. Business Deductions, there’s Tax Tuesday, […] living, how to step-up rents, importance of insurance, all these things, cost segregation how to do that, there’s so much fun stuff that you can get in and participate in and it’s free. Again, just go to Google Play or go to iTunes, it is free to sign up and then you get to access all this fun stuff. We’re still going to go through you guy’s questions. Don’t worry, I’m not getting rid of it.
Tax Wise workshop, this is over 30 strategies, we recorded one in January and we’re going to do another one in June, and another one in November. They’re all a little different because at different times of the year, we focus on different things. Tax planning is a big one in January and November. In June, we are just nailing anything that we can that we could possibly write off. The offer for anybody that comes on to a Tax Tuesday and this isn’t a—we’re going to take it away and hide it from you. We’re offering this, this year at andersonadvisors.com the three for one. You can see the little URL there. It’s $197 for all three. It’s the live streams where you’re not physically showing up, you’re watching via the live stream from home, and you get all the replays on all three.
Now you might say, “Why the heck would I do that to myself?” and I’m just saying, “Hey, if you spend a little bit of time one year of your life and you dedicate you spend some time early learning taxes, every time you watch a Tax Wise, you’re going to pick up two or three things. You watch it three times, you’re going to pick up close to 10 things. Those little 10 things will save you over $10,000 a year.” that’s what our stats shown us over and over again. Spend a little bit of time in one year and save yourself a lot of money. That’s always kind of fun.
Questions, ask your questions at Tax Tuesday at Anderson Advisors, visit andersonadvisors.com, that’s how you get your questions answered. Go to Google Play, go to the subscribe to our podcast, go to iTunes, there’s lots of ways to get in. anyway, so there’s lots of fun stuff. If you have a complicated question, shoot them into Tax Tuesday, we’ll get you routed to the right place. We love your complicated questions.
Now, I’m thinking of complicated questions. I got a lot of other questions that got asked. We’re going to start busting through them because as that’s what we do. We’re going to just answer a ton of questions so let’s see if we can find some. “With an LLC taxed as a C-Corp, how can I avoid paying unemployment on myself being the only person in the company?” you don’t have to pay unemployment on yourself if you are in a C-Corp. you’re paying yourself wages and you’re the officer.
Jeff: I think you have to be the owner also.
Toby: Yup. “Where do you find these opportunity zones?” has been asked. Patty will get you the stuff. The easiest way is to type in opportunity zones heat map. “Can I run a flip business in an opportunity zones through an LLC registered in the same state or is it required to have a fund?” the fund could be anywhere, but the fund in order to qualify as an opportunity zones fund, has to have 90% of its business property in opportunity zones. It doesn’t say any particular one, so you can set up one opportunity zones fund and it could be on a whole bunch of different properties, and investments, and all these other opportunity zones. Technically, an opportunity zone business by the way, their answers came out is that, if 50% of its wage is paid for the company as an opportunity zone, that’s an opportunity zone business.
If you are a coder, or you’re somebody who develop software, and things like that, you should really consider setting one up in opportunity zone, if you sell that company for $30,000,000 in 20 years you’re not paying any tax. Can I purchase and sell real estate without selling the LLC or dissolving the LLC? Yes, you can. What about additional cost of putting kids on payroll if the social security, Medicare tax is 15%? John, yes, if you run them through payroll on a corporation, if you run them through payroll on a sole proprietorship, or partnership with parents, then there is no withholding requirement, or there’s no social security on it, although they would still have to pay it, they’re going to be responsible for it, you just don’t have the withholding report. Anytime a kid is making money, just remember social security, Medicare are part of it, but if they are [inaudible 00:51:17].
Jeff: Right, it helps pay for my retirement, although they’ll never see a penny of it, but…
Toby: And they’re going towards the course, so don’t trip on pennies on the way to the dollars. The standard deduction is—they’re still going to have a little bit of social security tax, right?
Jeff: Yeah, they’re going to have a social security and Medicare tax, they just won’t have federal […].
Toby: You could actually have your kids set up an LLC, I actually did this, it’s horrible, when I set up an LLC and my daughter owned it, and I managed it, and we work really hard to make sure she made money in that thing, and that’s how she paid her tuition. She had the self employment tax, but it was like to pay your tuition is about $400, and it would’ve cost me close to $15,000, or something like that. In summary, it was ridiculous. Let’s see, any risk in starting up holding LLC, in moving an existing LLC to it? Not really, what you’re doing with the holding is, that’s an outside liability issue, you’re saying, “Hey, nobody can take all my stuff.” when you have inside liability, like, “Hey, I have a piece of property in LLC, I don’t want that property directly in the holding. I want that in a LLC underneath this.” I’m saying, I’m always willing to give up that one property or if I had two properties in LLC, that’s my exposure.
If I have three properties in LLC then I could lose all three, but if I have three LLCs each with one property, then my maximum exposure per incident is one property. If somebody comes after me, my maximum exposure is they take all my properties and the holding LLC cures that. That’s why we use the holding LLC.
Jeff: One of the LLC they’re wanting to move into another LLC may have existing issues.
Toby: You got to be a little careful if you have a liability that you don’t want to throw.
Jeff: Like I found out the house that I own is built on EPA Superfund site.
Toby: That’s always fantastic and it’s in an LLC?
Toby: Then I would just keep that out separate. I don’t want to move that thing around. The easiest way to look at is if you have existing liabilities, then the corps are like a cat and you’re the mouse. The mouse that runs across the floor is the one that gets pounced on, so you don’t move. That’s what I always tell people. They do crazy stuff and I’m like, “Dude, just don’t move. Maybe they won’t see you.” at that point, that’s your hope and then you deplete it. Over time you deplete it.
There are some things you can do, but you don’t move that mouse. Let’s just put it that way. “The holding LLC, the parent company, and the other LLCs create it for the house as purchase. Am I right?” Yes, that’s actually the way you do it. The sub LLCs own the actual real estate in the states where that real estate is owned, but holding LLCs usually own it in a state like Nevada or Wyoming and it just holds the LLCs, that’s called personal property. It owns the personal property which is the shares in the LLCs with the membership interest in the LLCs.
Here’s somebody says, “From what I understand, a living trust provides no liability protection. Its purpose is to ease the distribution of my state if that’s right.” Yes. First off, living trust brings into like—it’s there while you’re alive, but you can change it. It’s basically just—I always tell people, it’s a piece of luggage. It holds all your stuff. If you die, there’s instructions that says, “Here’s who to give my stuff to. I open up the living trust, I open up the suitcase, and I hand my shirts to so and so.” It’s just giving out specific things of what should happen. It’s not an asset protection tool, but it’s something everybody needs.
“How do I cover my butt if somebody slips and trips on my personal residence?” first off, there are ways to protect your personal residence. In some states, you don’t even have to like in Texas and Florida. You have unlimited homestead exclusion. That’s why OJ Simpson where do you reside after all the trials and tribulations, he went to Florida. Now, he’s out here in [inaudible 00:54:49] because we have a $575,000 exclusion, they just can’t take it. But if someone does get hurt on my property and seeks his lawyer after me and my LLCs take a loan out yet, that’s what they’re saying. “Are there ways to protect my house?” yes. “Are there ways to protect your house without doing anything crazy in causing it?” yes, absolutely.
Depending on your state, you have homestead exclusions. If you don’t have a big homestead exclusion, it may be wise to put a high equity property into an LLC or to encumber that property before a liability occurrence happens. If you go after, it’s too late. You have a fraudulent conveyance issue, but if you have to borrow against your house to pay the lawyers to defend yourself, you can actually do that. It just ends up becoming a pain. Kevin the answer is, you should probably talk to one of our folks here and see whether you actually have an issue. You might be surprised that you don’t even have to worry about it. It always depends, it’s always the equity that’s available or whether there’s some things we can do to protect that equity is usually a quick fix and it doesn’t cost anything.
“If I fund my LLC checking account with funds from myself-directed IRA, do I earn income on the business or do I have to put profits back in this self-directed IRA?” you cannot get any benefit out of it or whatsoever. If you have a LLC owned by a self-directed IRA, you cannot be charging a fee, you cannot be doing anything. It all goes back in the self-directed IRA or 401K. There is one exception which is if you open up a C-Corp and you partner on that C-Corp with your retirement plan, it’s called Robs Rollover as a Business Startup.
My partner Clint Coon has spoken on it considerably. If you Google or better yet go to the Anderson business advisors YouTube page and type in Rob’s or just type in Clint Coon’s ROBS and you’ll be able to see it. “How do I financially handle or handle cash, a $10,000 profit from wholesale transaction? For example, can I take a DBA 1099?” the answer is no. if you’ve already earned it, then you’re making it—if you made a wholesale profit, that’s ordinary income, that’s going on a Schedule C, it’s already left the barn. I would always do your wholesales to a corporation by the way. I want to write off things against it and I don’t want to have a taxable transaction until the end of the year.
Jeff: In this case, you’re going to put the property in the corporation before the sale.
Toby: Yeah, you can even do that. All you have to do is, it’s always the sale that’s the kicker. “How can I write off a car to an LLC or an S-Corp?” when you’re doing a car, we’ve talked about this before. You have two choices. If it’s a the actual expense method, or you’re doing miles, or the company’s going to own it. I tend to not want companies to own cars unless that’s a real essential part of it. It’s like, if you’re driving around and you have advertising on your car, and things like that, then maybe. It’s going to be greater than 50% or you have—or if it [inaudible 00:57:45] the problems.
I never had a problem if I’m just reimbursing miles. I tend to be the mileage reimbursement guy. The path of least resistance that gives me the biggest benefit. I don’t have to care about anything, about whether it’s 50%, or 51%, or anything like that. If you’re doing that, then the smartest thing to do is get a mileIQ and then just say when you’re doing business miles and when you’re doing personal miles. If you’re commuting between your home and an office, that is not a business mile. If you have a home office and you’re commuting between a home or an office, and by the way, if you’re using a corporation and you’ve heard me talk about this before, your rules are different. You don’t have to have the traditional home office you can have an administrative office in your home that reimburses you for it. Every time you drive, that’s a business mile. That’s my favorite obviously. It’s $0.58 a mile this year. If you do 10,000 miles, you can write yourself a check for $5800 and not having to pay tax on it. It ends up being quite a bit.
“How do you set up a health savings account?” TD Ameritrade has them. You can always do a health savings account with somebody. You have to have a high deductible insurance, that’s the only rub on it. You got to make sure your deductibles are really high. Off the top of my head, I don’t know if I have agencies.
Jeff: I don’t think it’s on there.
Toby: Yeah. I’m looking at a cheat sheet that I have. I don’t have my HSAs. I think it’s like $6700 or some…
Jeff: Yeah, it’s like I think $3450 for single and $6566 for married.
Toby: “I work with investors to purchase deeds. Can I use a personal property trust and have my LLC as the administrator and their entity as the beneficiary?” that’s interesting. You want to be the trustee is really what you want to be. If you get paid for it, you may have some licensing requirements, but you can do that if you wanted to. You just have to look at the state once you’re doing it and whether they have a requirement. If you’re acting as a paying trustee, you may have some issues.
Here we go, “I’m 60 years old, single, and self employed as a realtor. Can I borrow money for my self-directed 401K to do a rehab and then put it back in with the maximum yearly contribution?” Yeah, you can do both. Absolutely. If I have a 401K—the rules are, I can borrow $50,000 or 50% whichever one is less of my account. If you’re a realtor, you can borrow your money.
I guess I should be a little more exact. You can borrow up to $50,000, or you can always do the rehab inside of the 401K and not get paid for it, you just let all the benefit go into your 401K. If you need money, you borrow it out or you take it out and pay taxes. Can you still do your maximum yearly contribution? Absolutely. It’s secondary, it’s not tied to the law. I can always do my big payout, pay into it.
Jeff: If you took out $50,000 this year, there’s nothing keeping you from putting $74,000 in the following year.
Toby: Correct, you can jam a whole bunch in there.
If I buy a mobile home park, will I get the same tax benefits as buying and holding a stick brick residential real estate property with depreciation?
Jeff: Actually, the mobile home park, a lot of your expenses are going to be land improvement.
Toby: Yeah, that’s not depreciable.
Jeff: That is depreciable, 15 year life.
Toby: Oh, land improvement. The land itself is not depreciable.
Jeff: The land itself is not depreciable, but your paving and stuff like that.
Toby: If the mobile homes are stuck to the ground, every state has a little bit of a different definition but it seems like the universal rule is if it’s actually attached to the ground, then you depreciate it. Depending on how you’re handling these, part of it is if I have a mobile home and I’m able to depreciate that puppy and I’m renting it to people, I want that. If I’m selling it to somebody, then I’m going to do a lease option nine times out of ten I’m in a mobile home park. I’m still going to write it off, I’m going to depreciate it, and I’m not going to recognize that income until that option is either exercised or expires. There’s some definite ways to get some money in your pocket.
“Can I write off income we pay our nanny from the business account?” That’s kind of funny.
Jeff: I know somebody who tried that.
Toby: Yeah, I don’t think you can.
Jeff: You can not do that.
Toby: That’s a personal expense. What you can do on a nanny, let’s just make it real clear. If it’s a nanny, that’s personal, call it what it is. If you have a nanny that’s cleaning, that’s the only time where it gets different. I add that in to my calculation for the home office deduction, but that’s the only difference. I would say here’s the part that’s for the nanny. If your nanny is working in your office, like going in and helping out in your office, then some of that is potential business income but how they’re here, if they’re from another country, you may not be able to do that.
Jeff: I’d keep in mind with something like a nanny, they’re probably going to have to pay household employee taxes on them. Basically, social security and their unemployment, things like that.
Jeff: Not have those because the agency is paying for them.
Toby: You’re paying a third party who’s actually covering it as opposed to the individuals.
“If you have expenses to attend real estate related training events but no longer have properties and you haven’t bought or sold any real estate, can you still deduct the expenses? If you don’t have an entity set up, the answer is no. You got to have the real estate or they don’t let you write it off. You’d actually have to set up an entity and then they probably wrap it in as a startup expense to let you write it off over 15 years, or $5,000 first year, 15 years. As an individual, they don’t let you write off the training unless you’re actually doing it.
“My LLC is only owned by my C-Corp, why do they want an operating unit?” Because your LLC still has to have a body. You have a C-Corp and you have an LLC. Both are people as far as the courts are concerned, as far as banks are concerned, as far as liability is concerned. You have a disembodied LLC because it doesn’t have an operating unit. Your […] certificate is your certificate or certification of filing, your articles or whatever you want to call it. You file them with the state, that’s like a birth certificate.
The body is the operating agreements for the LLC or bylaws for a C-Corp. Its vitals is your books, and then every year it does a little checkup which is the tax return just like a normal person. Why are they asking for an operating agreement? Because it’s a person and they want to see its body.
“I feel like I’m asking this incorrectly, I bought a flip in my QRP. When the QRP sells, will I be required to buy another home inside the QRP to avoid taxation?” No, this is a tax exempt entity so it can just sit on that cash, it’s not like you and me where we have a capital gain event where we have to do something to avoid it.
Jeff: What happens in QRP stays in QRP.
Toby: Yeah, that’s a good one.
“If I were to have an online health coaching business where people can completely purchase transactions through a website, how will the income produced from this online business be taxed? Will it be taxed as passive income, or earned income?” Online health coaching sounds active. To me, that will be earned income. If you have intellectual property like you publish a book and they are still buying your book, you wouldn’t have a royalty, you’d have to have a third party selling your stuff and paying you to sell your stuff, then you can get some passive income. That would be a license for your royalty which is portfolio income, technically.
Toby: To make Jeff happy. If I call it passive, he’ll get all mad.
Jeff: No, I’m okay with passive because it goes on Schedule E Page 1, just like your rental property.
Toby: But if you’re doing something and you’re selling it, then it’s active.
“Can the holding LLC pay the bills for a subordinate without reaching the boundary between the two entities?” If there’s an agreement in place that says that it can, then yes. Usually, there is an agreement that says that the member may advance expenses on behalf of the other companies. Do you have a problem with that?
Toby: They’re all going to end up being on the same return anyway. It’s always best to have something in writing. If you’re with Anderson, we document a whole lot of everything.
“If you set up your entity but haven’t spent money on behalf of this entity, but have expenses for coaching out of your personal account…” That’s kind of a weird question. I don’t know what the question is, it’s just a concern. No, you can always reimburse yourself. The way to always look at it is if you spend money and you have… I guess I should say not all entities are created equally. There needs to be a corporation from a tax standpoint.
An LLC taxed as a C Corp or S Corp, then you can do a reimbursement on accountable plan. It can reimburse you anything, anything that comes out of your pocket. If you pay for something, if I buy donuts for the office, my employer can write me a cheque. If you are the employer as the Corp and you are also the individual, it can write you a cheque. If you incurred expenses for training and it’s for the benefit of the employer, they can reimburse you, we talked about that earlier, tuition for kids and stuff like that. This is one where if it’s benefitting the business, it can reimburse you.
Someone recommended either Capital One or Business for Wells Fargo because they work best with Anderson, how important is it to use one of those banks? It’s not important, you can use whoever you want. Wells Fargo, we’ve done well over 10,000 accounts with them and they understand nominee. Capital One is really aggressive right now, growing but whatever works for you, you don’t have to do what’s best for us. We don’t get paid a nickel, we don’t care, we just like it to work with banks that understand us. If you have anonymous ownership, most screw it up. We like the ones that don’t.
“What do we do to find those 180 pages of new opportunity zone regulations?” Oh, you want to go read […]. Opportunity Zone Fund Regulations, and you’ll see that there was some issued in October, and some issued two weeks ago. You literally just Google. I just picked a site that’s called […], I’m going to be mean and say it’s the greatest answer site on the planet.
“If I fund my LLC checking account with funds from my SDIRA and I earn income on the business, do I have to put the profits back in?” Yes, I think I already answered that.
“If you’re a quitting LLC taxed as an LLP, you’re going to acquire some real estate and sell some, should you name the entity something that has investment in it to make sure that you are an investor, not a flipper?” It doesn’t matter at all. If I name it 123 Property Investments LLC rather than 123 Property… You’re actually thinking really clearly, that’s really smart. I would call it what it is, but it’s not really going to affect your audit rate because for corporations, the audit rate is a peppercorn if you’re flipping. If you’re flipping right, you’re doing it through an S Corp or a C, your audit rate is between .03 and .07. If you’re doing it as a partnership or as an individual, your audit rate is still probably about .07.
It’s such a fractional percent, you have to really screw it up to get it audited. When you set these things up right, we just don’t see that many audits.
Jeff: No, we don’t.
Toby: How many audits did we have in the last year, you think?
Jeff: I don’t know that we had any.
Toby: Yeah, we do thousands of returns. When I say thousands, I’m saying thousands upon thousands of returns so we see almost no audits. The reason being is if you set it up, if you do it right, if you follow what the IRS tells you, you have to really do something screwed up to get audited. We won’t let you do that, we love you.
“If you set up an entity and you spent money on behalf of the entity, but you paid it out of a personal account, can you get the money back?” Yes, you can reimburse it. If it’s a startup expense or just ordinary, if you haven’t gotten a benefit out of it, then it’s just an ordinary expense that can be paid back.
“I bought a house […] did that one. Went across buying a single home to turn it into a residential assisted living for seniors.” You get a big star. “Once I hire an operating manager, I’ll also launch some residency caregivers. I’m planning on being the owner of it, not being involved.”
Here’s how you do this. Whenever you have residential assisted living, you have the real estate and you have the business; it’s real important that you understand that these are two very important things. The business is an active business, and the real estate is passive. I would put the house in an LLC, and I would lease it to the operating business. The way you get more money out of it is you jack the rent up. If you are an S Corp and you’re an operating business but you’re not participating, then you’re a passive owner and you’re not going to have social security income on it because you’re not participating. You’re not going to pay much tax, we’ll find a way to offset it on your real estate. Since you’re kind of on both sides, you can set up the rents right so you’re not getting killed in tax, you’re going to take advantage of your depreciation.
On the business side, you may still have a bunch of profit, but it’s going to be passive, it’s not going to be subject to […] medicare, it’s actually a good thing. You’re going to avoid the little sneaky Obama tax, the little 3.8% they get you when you make too much money. There’s ways to make sure.
“I need to build up my QRP, what’s the fastest way to build it up?” You sold a 401K and jam it full. But if you really want to go crazy, I’ll tell you what. If you’re making a lot of money, then instead of controlling the contribution and defining the contribution–which is what a defined contribution is, the 401K and IRAs, those are defined contributions. You define the benefit. You reverse engineer it and you say how much money have I been making and how much money would I have to have in my retirement plan to make that when I retire?
If I need $200,000 a year coming out of my retirement plan at 70.5 or 67 or whatever you designate as your year, you do what’s called a cash balance or a defined benefit plan. I have one client who put $615,000 into their defined benefit plan this year all tax deductible. Boom, they had a pretty big, fat retirement plan.
What you do, again, is talk to us and let somebody actually guide you in the right direction so that you’re getting the most benefit that you can.
“What’s the difference of an LLC and a Corp? What are the advantages of an LLC?” An LLC is a creature of state and they’re a little bit easier to operate. In some states, they have more protections than the corporations. Nevada for example is the only state where they actually have protection on corporate shares. If you want to protect your company from third parties coming in and taking your shares, you have to use an LLC. An LLC can be taxed in any way you select with the IRS. You could be a sole proprietorship, a partnership, an S Corp, or a C Corp.
The big difference between an LLC taxed as a corporation and corporation is if you lose money, what’s called the 1244 stock loss can only be applied against stock, not against membership interest. If you’re going to lose money, you might want to use a plain old vanilla corp. Otherwise, an LLC taxed as a corporation gets the job done just fine.
“I’m driving for Uber and Lyft, it’s not my primary job though. Is it better to do an LLC or file as an individual?” I can just tell you, Rodney, do not file as a sole proprietorship, period. It’s 700% more likely to get audited than an S Corp. The sole proprietors lose 95% of the time, 93% to 97% but an average of 95% of the time.
You’re so much better off from an audit standpoint and a tax standpoint at being an S Corp if you’re making around $30,000 a year. If you’re making nothing and you’re just not making a whole bunch, then maybe start off as the sole proprietor. You better be not making much, otherwise the numbers get pretty crazy pretty quick. In a sole proprietorship, you’re paying old age, death and survivors, and medicare on every dollar. Whereas in an S Corp, it’s only on what you distribute via a small salary. You pay the tax only on the small salary, everything else is not subject to it.
The math ends up being 14%. If you make $50,000, you’re going to save quite literally about $7,000 by being an S Corp. It’s not quite that clean, but it’s pretty darn close, and there’s some other benefits. You can do an accountable plan, and all sorts of things that you can’t do as an individual.
“My personal home is paid for, is there any benefit to put it in an S Corp, LLC, or passive LLC?” Not really. What’s kind of fun is if you’re going to rent it to somebody, you sell it to an S Corp and step up the bases. You get the money back down on the installment sale. Or, if you have your home and you’re going to stay in it, you just don’t want anybody to take it from you, then we look at your state homestead first and then we could slap up an LLC around it. It does not hurt you other than it could mix out your homestead if you’re in Florida. We just have to look to see where you’re at, how big your homestead is.
“Is there a minimum age for setting up an LLC with a minor, 10 year old lease.” The minimum age for contracting is 18 years.
Jeff: Yeah, that’s what I was going to say.
Toby: They could still be an owner. As long as they’re making active income, it’s not part of the kiddie tax. But if they’re going to be the member, it’s more likely you’re going to be on that thing signing on their behalf. Realistically if you have a 10 year old, you’re not going to have them own anything. You’re just going to pay them out of your sole proprietorship LLC, if that’s what you’re trying to accomplish. Or if they’re able to do work, you pay them and they just don’t pay much tax, as in next to anything. 12 year olds or 10 year olds are not able to make much. If you’re paying them more than $5,000, literally what you do is you pay them something small and you put it in a Roth IRA. They never pay tax on it, ever. That money in 60 years is going to be worth a ton. Just get it in there.
“I’m turning my residence into a rental, will updating my insurance coverage include my newly formed LLC raise suspicion?” Are you worried about somebody triggering the […] sale clause? No, just toss it. What I would do is I want to be really clear, what I would probably do is use a land trust and have the LLC be the beneficiary and just keep my name on as trustee. If you’ contact your insurance and you say I want an additional insured, that’s not going to trigger that. Usually, that’s not going to go straight back to the lender. But again, I’ve never seen the […] have to be used. I’ve just never seen […] sale, I think once back when the interest rates were rising. 15 years ago I saw one where they just said hey, we don’t want it in the LLC, could you please take it out? But I’ve never seen anyone actually get triggered.
Anyways, that’s fun stuff. I think that we’ve hit enough. If you have questions and you’re like dang it Toby and Jeff, you guys didn’t answer it, email it in and we’ll get to it. There’s a bunch of questions emailed in that I’m going to probably double up and even go over more questions next time.
Jeff: IRS finalized most of their tax forms about a month ago. Of course, congress has come in and decided they may extend some things, some credits, Sun said it in 2017 so IRS is extremely happy. Some of the credits like what’s called the Non-Business credit for the doors, windows, things like that. Right now, it doesn’t exist. If maybe you’re eligible for some of these credits, you may want to hang on to see if IRS makes these retroactive, which they’re kind of expecting to do. The non-resident energy credits, there’s the electric plug in credit…
Toby: We’re going to do those.
Jeff: Yeah, they’re working on them now. But right now they don’t exist.
The other item is there’s a change to distributions from qualified plans, what’s called the qualified retirement plan loan offset. Which means you left a job while you had a 401K loan. When you do that, they have to make that a distribution. They change the roll over rules just for those loan distributions. The typical rule is you have to reinvest those or roll those funds over for 60 days. For distributions from a qualified retirement plan loan, those distributions have to be rolled over by the extended due date of your tax return now. If you got the distribution on January 1 of ’18, you actually have until October 15th of 2019 to get that done. Something to be aware of if you run into that situation where you leave an employer with a loan distribution.
Toby: That’s interesting. I didn’t know you would go that far up. It is a deduction, you get a $30,000 deduction, Todd, that was on the 1244 stock loss. It’s just a loss, it’s proportion. I wish it was a tax credit. A tax credit offsets your tax liability, dollar for dollar. Tax deduction just offsets your income.
Hey, you know what, that guy that was doing the Uber and Lyft said they’re doing about $30,000 a year. This is how it gets fun. If you’re making $30,000 a year net, you would normally take about a $10,000 salary, $20,000 would avoid 14.1% which would be $2800. If you do an S Corp, I could take than $10,000 and put it all deferred into a 401K. The tax benefits we can get are pretty significant, unless you need to live off of every dollar.
We don’t have suggestion on what software to use for accounting purposes to help newbies in wholesaling and flipping. Don’t buy the software, Quickbooks is just going to be your best thing for books, but I would do the QuickBooks online and I would have a bookkeeper actually do it for you. I wouldn’t try to learn this stuff, just keep track in a spreadsheet or something. The best thing is just to have somebody to do it.
Alright guys, that’s good for today. Thanks for participating, thanks for all your questions, we have a ton to go over next time. I apologize to those of you guys who emailed in, we didn’t get to you. We just get inundated sometimes. If I show you guys, I don’t even know how many questions there are but there are quite literally 20 pages of questions. You guys are getting better and better at asking questions, which is awesome.
Jeff: But we need to answer about 5 every minute to get through them all.
Toby: Thank you for hanging out. Thanks for watching Steve, Jenny, Stephanie–yes it is recorded–Rodney, Todd. We have a whole bunch of people that are really awesome. Thanks for joining us, till next time. This is Toby and Jeff. Jeff, thanks for your time. You just got out of tax season. It’s within recent memory. Actually, you never stop. We’ll see you next time, guys.
Jeff: Thank you.
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.