Is it time for a fun and educational drinking game? It depends. Do you need clarification on different options in the CARES Act? You’re not alone, so does the Internal Revenue Service (IRS) and U.S. Department of the Treasury. Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- How do I go about researching business tax strategies? Where can I find a list of strategies? Get a free copy of Toby Mathis’s book, Tax-Wise Business Ownership
- With COVID-19, will the IRS grant forgiveness with arrears on payroll taxes? No
- Can I take the 10K advance from the Economic Injury Disaster Loan (EIDL), deny the loan, and roll it into the CARES Paycheck Protection Program (PPP)? An up to $10,000 advance is a grant that doesn’t need to be paid back and isn’t rolled into PPP
- As a flipper in VA, is it worth incorporating to avoid dealer status and is avoiding such actually possible? Yes, if you have the intent to rehab and sell a property, not rent/invest
- What are the basic benefits of the S-Corp? Limited liability, income not subject to self-employment income, and accountable plan
- If I haven’t yet filed a tax return for my corporation, can I still qualify for EIDL or PPP, as the sole owner/operator? Yes, you’ll qualify for EIDL, if in business on Feb. 15
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Tax-Wise Business Ownership by Toby Mathis (Promo Code for free copy/shipping: TUESDAY)
Internal Revenue Service (IRS)
U.S. Department of the Treasury
Paycheck Protection Program (PPP)
Economic Injury Disaster Loan (EIDL)
Real Estate Professional Requirements
Individual Retirement Arrangements (IRAs)
Families First Coronavirus Response Act
Unrelated Business Income Tax (UBIT)
Unrelated Business Taxable Income (UBTI)
Capital Gains Exclusion/Section 121
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Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis.... Read Full Transcript
Jeff: And Jeff Webb.
Toby: You’re listening to Tax Tuesday. Welcome to Tax Tuesday, guys. I want to make sure that you can hear us loud and clear. If you can go into the question and answer field and just say yes then I’ll know somebody is alive out there. That will help. Look at them, a bunch of yes, and a few questions.
Jeff: At least nobody replied, “No, I can’t hear you.”
Toby: I know. If you can hear me, press one. If you can’t hear me, press two. We’re going to have to jump into a bunch of stuff.
Jeff: […] ones.
Toby: “No drinking during Tax Tuesdays.” Actually the opposite. The tax code is something where you really do have to drink wine or something beforehand. I’m not condoning massive amounts of drinking, but a couple of glasses does not hurt when you’re trying to figure out what the heck these guys are writing.
Boy, that CARES Act is making our lives hard. They come out with clarifications on a daily basis of what they really meant. Of course, it’s not the lawmakers that are saying what they really meant, it’s a bureaucrat which I don’t know where these guys are, these men and women. I always think of a really dark place and they’re distracting us. They’re just angry and they’re taking it out on us because they never seem to be expanding it, helping it. They are limiting it.
Jeff: Yeah, it’s kind of backward from the way it usually is. Usually, it’s the IRS and Treasury trying to figure out what Congress said and now it’s the other way around.
Toby: Oh my God, it’s crazy. Anyway, we’re going to get into a bunch of those stuff today. I’m sure you guys have lots of lots of questions. That was our social media stuff. If you have questions, you can always send them in.
“How do you ask a question on Tax Tuesday?” It depends. It’s going to be an email or you can type it into the question and answer. If you need a detailed response, you’re supposed to be Platinum. We answer hundreds of these questions every week. You should see our wonderful spreadsheets of these.
We’re always trying to make sure that we’re staying up on things. Speaking of staying up on things we had yesterday, by the way, I had a wonderful Infinity Investing session on Saturday. One of the things we did is we raised some money for the 1 Veteran Foundation. You guys may have heard me say this before. This is an ex-marine who helps. Someone put the link up there if you guys want to get a T-shirt. I was just trying to help people that are doing good things. “There’s no such thing as a former marine.” I got it.
Jeff: I was going to tell him that, but thank you.
Toby: Yup. He’s a marine and since retired. What would you say, retired?
Toby: You wouldn’t say retired. He’s just a marine, but he’s not active.
Jeff: Inactive marine.
Toby: Inactive marine.
Jeff: Some days are more active than others.
Toby: Anyway, they do pet matching with veterans that are suffering from PTSD, and right now we’re still losing vets a day. It’s going to be up because of all of these fiascoes. Some people are saying, “Hey, the seminar was awesome.” Thank you guys for all the nice stuff. There are people saying some nice things.
This group here does a very good job. They’re able to train service animals for about $2500. We know that we already got one veteran matched up and I know it doesn’t sound great, but it’s pretty neat. We’re able to fund about, I think last year was 10 pets for vets. These are service dogs. It takes about six months to do these things. When you actually train a service animal, it could be up to $50,000 if you’re going to the marketplace. These guys were able to get it done for about $2500 a pet just because they have a fantastic volunteer network, so we try to help raise a little bit of money and if you want to help them, you can go get a T-shirt and it’s a lot of fun.
Anyway, I shot you guys the link. I hope somebody else has an even better link, probably somebody is more savvy than I am anyway. This isn’t live. We’re going to raise more than $3000 or $4000. We’re going to raise a whole bunch of money. What I’m not telling people is we’re going to give you guys something at the end of it. We’re going to give you guys a little gift. We don’t get anything out of it except the satisfaction of knowing that we’re trying to help some people that oftentimes go under the radar because they’re never going to ask some help.
All right, opening questions. Let’s see. We got a whole bunch today. We got a whole bunch of questions already coming in so we’ll go through all these questions that you guys are asking, but here’s the one we’re going to go through that were emailed in.
“If I have an LLC but treat it as a disregarded entity, do I lose any of my protection in a lien situation?” We’ll go over that.
“I have a corporation in California I took over from my parents. I wanted that particular entity because it was established with a good credit history. My plan is to use it as a property management entity to collect rents from our five single-family rental properties. I filed zero income tax returns for the year 2017 but not in 2018. Is there a time limit? I could have the corporation in and it not show income or would I have to dissolve it after so long? Is there a simple form to file for 2018 and 2019 showing zero income?” We will answer those. Jeff, sorry you’re excited because it’s tax questions. I have these little conversations sometimes, they’re a little more on the legal side and he’s like, eh.
“With COVID-19, will the IRS grant forgiveness with arrears on payroll taxes?” You forget who the IRS is. We’ll go over that. There are some things.
“Can I take the $10,000 advance from the EIDL (Economic Injury Disaster Loan), deny the loan, and roll it into the CARES PPP?” You guys are getting technical. We’ll answer that.
“As a flipper in Virginia, is it worth incorporating to avoid dealer status and is avoiding such actually possible?” Good question. We’ll answer it.
“How can I structure my real estate business entity so I can deduct mentoring fees from my W-2 income?” Another good question.
“In a divorce, when one spouse keeps the house, does that constitute a sale of the house and the spouse being removed from the title receiving cash?”
“How can I develop a nonprofit in real estate?” Some of your ears should be perking up on that one.
“Should all LLCs (or just my holding LLC) register as an S Corp, or is there a reason to leave them as a partnership taxation?”
“Can a withdrawal be made from a self-directed IRA? And if so, how is this documented to avoid any penalties or tax liability?”
“Those who work full-time and have rental income, should they have an LLC or an S Corporation?”
“If I have a choice, is it better to buy real estate inside a Roth IRA or QRP?”
“Can we use part of the PPP (Paycheck Protection Program) loan funding to fund my employees pensions/401(k) as well as my 401(k), sole proprietor, not an S Corp business?”
“What are the basic benefits of S Corp?”
“How would I go about researching tax strategies? Where could I find a list of strategies?” Interesting you ask.
“If I have not yet filed a tax return for my corporation, do I still qualify for EIDL or PPP as the sole owner-operator?” We’re going to go over that.
One of these questions that you guys just asked which is this, I’m just going to circle it. “How do I go about?” I’m going to give you guys something for free here and it is literally for free, which means I’m going to pay for shipping and everything. “Where do I get a list of tax strategies?” This is a COVID special because it’s been a hard couple of months so the least we could do is try to help you guys keep as much money as you can in your pocket when we get out of this. I think we’re going to be bouncing back. We’re already seeing positive signs.
If you listened to us before, I think it was early March, maybe mid-March, we were doing classes and everything else showing up there, some of you guys might have been in the Infinity classes. We were showing it. This thing was like a 9/11 where it’s short term. It’s going to be back up within six months pretty much certain. We’re getting way ahead of it. We’re seeing it just take off.
What I’m going to do is to give you guys a free book. This says $24.95 but what we’re going to do is we’re even going to pay for the shipping because we love you guys and we always get a good audience. You just use the code TUESDAY.
Patty will send you guys out the link and she even sent the promo code so I don’t have to tell you guys the promo code. I usually forget it anyway. It’s a hard one to remember. Use the code TUESDAY, give it to a friend if you want to get one for somebody else.
What it includes, though, is you get the book, but also if you want a blueprint we’ll do a blueprint for you guys, too, no cost. We just like seeing whether we can save people money.
Jeff: Yeah, and if you have an older edition of Tax-Wise, things have changed so much. You really need to get the new book.
Toby: Yeah. Somebody says—that’s not very nice—“Beware of the lawyer bearing gifts.” A long time ago I’ve been trying to make up for it ever since. Here’s the deal, this isn’t all benevolence. This is because if we’re good to you guys, someday you’ll say hey, you know what? I want to do business with you guys.
We have the fun stuff. I’ll throw that to you guys. You guys already have a whole bunch of questions out there so I’m going to go through and see if I can answer. Let’s see.
Jeff: If you see the screen Q&A, that means Toby is answering something that’s not on your screen.
Toby: Yes. “When the process of searching for my ex-property which will be a VA-owner occupied quadplex in Colorado, I’ll be living in it for a year or so, then refinance it out of Virginia and make it a 100% rental property. Currently, I have six units under my entity consisting of […].” You have a lot of units in a single entity owned Colorado. He says, “Hey, I’ve talked about setting up a holding entity, ideally. I’m understanding correctly, it may not make sense to put my future purchases in the same LLC.”
Let me just hit this real quick, Frank. Any box, just think of it like a cardboard box. When I do this on stage, I usually take some glasses and I’ll say these glasses are real estate because real estate is breakable. Just having people on your property, you’re not there. Bad things can happen.
If you put two glasses in the same box, or three, or four and then you shake it up really good, those glasses break all over the place and they get all over each other and they break each other. One bad event on one property means I end up with broken properties all over the place. It can take them all, any equity I have.
When you take those glasses and you put them in separate boxes, just think about when you pack something you see wine glasses packed up at IKEA or Costco or something like that, you could shake up that box and they’re not going to get broken because they’re not hitting each other. You may have one glass get broken once in a while, but it’s not going to affect the others.
That’s all LLCs are. They’re just a fancy way of saying a box. It protects the glass inside the box and then there’s also the outside protection. There’s at least one question I saw that’s going to address that tonight, but the holding entity is designed to protect all of those glasses from you.
Imagine that anything you hold, let’s say you’re walking down an aisle and you have four glasses of wine in your hands. Somebody comes up and you tick them off. They can just grab your four glasses because they’re just sitting out there. If you put them in boxes and you carry four glasses in a tray, they can just grab your tray and now they have all four glasses.
If it was in a non-takeaway-able box, I always say it’s safe out in the desert, and they don’t even know you have the glasses, there’s nothing for them to take away. There are certain entities in certain jurisdictions that nobody can take away from you. That’s where we stick our holding entities. I can just tell you right out the gate, it’s going to be Wyoming 99% of the time now because they don’t even list your name. So, nobody knows you have it and they can’t take it even if they did.
Jeff: We’re often asked how many glasses can I safely put in one box and that goes back to risk assessment and how many glasses are you willing to go up at one time.
Toby: Think of it like this. If you have a crystal and it’s $100 a glass, just think of it as if you’re home and you’re packing these up to take to a new house. Will you feel bad if you broke grandma’s crystal?
Jeff: Oh, yeah.
Toby: Versus I went to IKEA and—I actually did this—I had a whole bunch of IKEA glasses and I put them in a plastic carrying case, and I was carrying those around. Not a single one broke either, but I didn’t care. It wasn’t broke, cracked. I don’t think I would have cried.
“Let’s say if one day I want to cease being a California resident…” Really? Beautiful town but they’re just nutty and fruitcake right now. “I want to become a Nevada resident.” It’s not much better here. You may want to go to Texas. All the Texans are going to say no, we’re Californians, and you get yourself out of California. If you just move, then as long as you stayed here more than California that year, you would just list your office as a Nevada resident.
Jeff: You want to live in the middle of the night. Don’t tell any of your friends or family that you’re leaving. It does come down to a calculation of where did you spend more nights. It does say nights, not days.
Toby: Yup. It’s kind of weird because they just want to get you, but I don’t blame you. After that, you’re a Nevada resident. There’s actually cases, […] commissioner. It actually went to the Supreme Court twice. It was a tech guy and he tried to do exactly what you were doing. He had the sale of his company—I forget how many millions of dollars—but there were some taxes owed and California wanted to tax him. They sent agents into Nevada to break into his apartment and dig through his stuff, and then they were immune. The whole thing, they got nailed by Scalia and the Supreme Court. They went down for damages. They said we’re immune, $50,000 limit. You can’t do anything to us.
People of the Infinity. Hey, guys come out to our Infinity whenever you get the chance. If you want to do infinity, just shoot over on the taxtuesdays@andersonadvisers and let me know. We’ll get you set up for it. We’ll give you plenty of opportunities to register for the Infinity Investing Workshop. These things have been awesome and we’ve been dead on, so I feel very good about it. The people who are listening have done quite nicely over the last few years just because it’s not rocket science. We do the opposite of what everybody else is doing, and we tend to get pretty good results.
“I have three disregarded properties in three different states. Do I have to pay state taxes in each state?”
Jeff: Yes. If you have income from each of those properties, you’re going to have to give a portion to each of the states and probably turn in those states.
Toby: Only on that income, though?
Jeff: Yes. Most states say you’re required to file a return if you’re a non-resident, if you have at least one dollar of income.
Toby: The states want to see it, but if you don’t have any income, then most places you’re not going to owe any money.
Jeff: You’re not going to owe any money. It doesn’t hurt to file a return.
Toby: If you zero out your rental property, for example, most of you guys are going to have rental property. If you’ve been listening to us and you know how to do cost segregation, you should not be paying taxes on your rental income. If you are paying taxes on your rental income, reach out to us and say help. I’m paying taxes on my rental income, and you want us to make sure that you don’t unless you really like paying taxes.
There are ways to accelerate your depreciation and get rid of that, then you have to buy more property. If you run out of deductions and that’s when you have an appetite. It’s called a tax appetite and you go out and start buying things because you want even more. Man, we are getting inundated with…
Jeff: I see it just jumping and jumping.
Toby: Yeah. You guys don’t see this because it’s got people’s name on it and stuff, but literally the screen just keeps moving constantly with people shooting stuff at us. Hopefully, it’s about the book. Maybe we broke the site again. Sometimes we do that when we offer things. There’s a lot of you guys that register for these events, which is cool. We love having you guys on, but it’s free. It’s free day and I’ll give you guys that link before we’re done again so you can do more free.
The free Tax-Wise just came out. I finished writing it at the end of last year, it finally got printed, and their printing press broke. We had all sorts of drama with it, but I wouldn’t switch from our printer that we have been using for 20 years because there’s this whole loyalty thing. Maybe we should have done it faster.
“If I have an LLC but treat it as a disregarded entity, do I lose any of my protection in a lien situation?” There are two ways to look at this. Does somebody have a lien against you? Or do you have a lien against somebody else? In other words, does the disregarded entity own the note, and do you lose any protection? The answer is it’s going to depend. It’s going to depend on the state on which the LLC is created and who owns it.
For example, the home state case in Florida, that there are some cases where a single disregarded entity could get pierced if the individual and a husband and wife own it. But that is not the case when we put another entity on top of it. For example, that same situation will be very different if somebody has another LLC or had the Florida entity owned by Wyoming LLC, for example. You’re not going to lose your lien, period. The question is whether somebody could get to it if they were going to come after you.
Let’s use the Florida example. Let’s say Jeff lived in Florida and he had an LLC that loaned money to me and had a lien against my house, there’s a chance (depending on what Jeff did) that they’d be able to get in and take over his LLC, and then the individual that Jeff owes money to will then become the owner of the loan to me.
There is that chance which is why we usually put a holding entity in Wyoming, or Nevada, or someplace where they can’t do that. Yeah, you could lose some of your protection but the lien itself, no. It’s your ownership of the note that has the lien in security.
Somebody says, “Can we get it assigned to a bookkeeper?” Yes.
“A question on the CARES Act carrying loss from the previous years. Will that apply to real property investors? I started being a real estate investor this year, carrying losses back to previous years,” you must be a real estate professional, “will that apply to real estate investors?” It will if you are a real estate professional. I know what they’re asking.
What they’re asking is under the CARES Act, they unlocked the loss carryback for net operating losses. Operating losses are different from a passive loss, a capital loss. If you have a typical rental income, it is not an operating loss. You carry it forward unless you’re a real estate…
Jeff: Real estate professional. You turn your passive losses into non-passive losses.
Toby: Then it’s an ordinary loss, you can carry it back. In order to be a real estate professional, ask me more […] time. One spouse, so let’s assume it’s one person not married then they will have to be 750 hours in real estate activities. It doesn’t have to be on their property. Just have to be 750 hours and they’re more than 50% of their personal work time. Then they have to maturely participate in their properties. There are nine different tests to meet there. It could be as little as one hour if they’re just self-managing.
Jeff: And how these not operating losses work is you may have a real estate professional, you have $50,000 loss from real estate. That first goes against your other income for the current year. Then if you have any leftover, basically you have negative income for the year, that could get carried back to prior years.
Toby: And the worst-case scenario is you carry it forward.
Toby: All right. Somebody says—I’m going to say this to you because they say it for both of us. This will make it to Jeff—“With this Coronavirus environment, the family has opted to grant my daughter’s wishes for cash as a graduation gift. What is the limit? What are the tax ramifications?”
Jeff: The tax implications to her are zero. The limitation on the gift is they cannot give her more than $11.5 million this year? But I know what they’re asking.
Toby: How about the annual?
Jeff: The annual exclusion, if it’s more than $15,000, they will have to file a gift tax return, but that doesn’t mean there’s going to be any tax.
Toby: That’s per spouse. Again, it’s apparently the family.
Toby: Uncle, aunt, everybody gives $15,000, you could load your daughter up. They don’t get a deduction, that’s the only thing because this is just a gift.
Jeff: Let’s say she has four grandparents. They can each give her $15,000 for a total of $60,000 and none of them have to file a tax return.
Toby: Correct. They just have to recognize her.
“Do you have a recommended refinance lender that can lend to LLCs for several condos?” The one I tend to use, and Patty you can shoot this over to him, is CoreVest. It’s what I’ve used and our clients have used a whole bunch. There are tons out there. There’s Angel Oak. If you need hard money, if you’re looking for a traditional lender, the world is really weird right now because most of the traditional lenders got hammered doing the PPP loans. We’re talking about billions and billions of dollars. There are over $500 billion of loans all through lenders and it’s getting crazy.
Jeff: I did see where Citibank was buying up a lot of those smaller bank’s PPP and the EIDL loans because these smaller banks had no reserves left.
Toby: Yup. What ended up happening is they fronted the money and they knew they’re going to get it back, but they ran out of cash. They […] as much as they could so they need more money. The Feds came in were granting people exemptions from the liquidity requirements. It’s pretty funny, they were […].
“A lot of CPAs suggest that after business owners make more than $30,000 or $40,000, converting from an LLC to an S Corp. Right now my business partner and I are interested in buying an investment property. Would converting from an LLC to an S Corp make it harder to get a commissioned loan? The business’ net is about $60,000 and gross is about $80,000.” They’re in partnership right now.
Let me just say, when you’re lending, when you’re getting a traditional loan on a property, it’s going to be different than if you’re getting a non-traditional loan. If I’m going in for financing for me to buy a house, it’s very different than if I’m buying something with my business.
But I will tell you that they do not like partnerships. Nobody likes partnerships. It’s the most difficult return to prepare and the most difficult return to dissect. You’re going to be much better off either taxing your LLC as an S Corp or a C Corp. If you’re doing a loan for yourself, I would actually make it a C Corp because they’ll never even look at the S Corp. Pay yourself a salary. It doesn’t matter how profitable the business is. If you take a salary out of an S Corp, they’re still going to look at your S Corp paperwork because they want to see how successful the business is.
Jeff: I’ve seen that. Even with the S Corp, it still gets a little funky.
Toby: If I want to get a good loan on a house, the best thing you could do is just have W-2 income out of a C Corp and even if you borrowed money so they can pay you more salary for three months so you could look even stronger, you could do that. S Corp, partnerships, all bets are off, but there’s a bunch of reasons we’ll get into that.
“I have a corporation in California I took over from my parents. I wanted that particular entity because it established a good credit history.” A lot of you guys may not realize this, but businesses can’t have a separate credit profile from the owners if you have a corporation, assuming it says here it has a DUNS number, Experian Direct, Equifax business. Those are actually reporting agencies for businesses. There’s no TransUnion or anything like that. It’s Dun & Bradstreet, and then you actually get a separate credit history for your business.
“My plan is to use it as a property management company to collect rents, which is great. I filed zero income returns for the 2017 but did not have any in 2018. What limit?” There’s technically not a limit. You should file two 1120s with zero on both, but you need to have about two years of active history.
Jeff: You’d need to file a corporate return every year that it’s in existence, but like Toby was saying, there’s no hobby loss rule for corporations.
Toby: Assuming this isn’t an S Corp. If you have an S Corp, then you are in a special layer of hell right now because you have many, many months of penalty. If this is a C Corp, which I’m assuming it is because I’m making a big assumption, then there’s no harm no foul, there’s no penalty.
Jeff: Yeah. There’s a number of large corporations—Google, Lyft, Uber—who have been bleeding money for years.
Toby: Amazon lost money for seven years before it had a quarter where it was actually profitable. I always think that’s funny because my brother works for Amazon.
“What is the deadline to amend tax year 2016?”
Jeff: The deadline is three years from the due date of the original return—so that was in 2017—that would have been April 15, 2020. If that return was extended, you have until the date that that return was actually received by the IRS. If you mailed it on July 31st, you would have until July 31st of this year.
Toby: Because everything got pushed to July 15th this year would they get—
Jeff: We have some of that. Our assumption is that […] to July 15th.
Toby: It would have been due on April 15th so it would be pushed out.
Toby: You need to get hopping. That individual, you need to get hopping. I know you guys have been asking a lot of questions. We’re getting within 20 minutes of the questions. You should be able to see this soon.
“If an EIDL is declined by SBA, can we apply again and request reconsideration?” It’s more than likely if they’re declining it, it’s because either something was done in the application or your credit was not high enough. They are running credit on individuals to determine. Yes, there is an appeals process that you can go through an appeal. I don’t know if they’re doing any of them. It might be better to—how would you do it—find somebody else to apply them on.
Jeff: I think I probably would.
Toby: I’d bring somebody else who’s associated with your business that can put their credit on the line and reapply.
“How can I obtain a sales tax exemption for my 501(c)(3)?” That’s a state issue and you would actually go to your state taxing authority. There should be a sales tax exemption application where you file it with your 501(c)(3) letter from the IRS. If you do not have the exemption letter from the IRS, they may take the application because you have 27 months to get that completed from the date that you start your business or the date that you want it to be effective.
“Are you able to use margin to go short in a solo 401(k) use for trading?” Yes, but I wouldn’t recommend doing that—using a margin of 401(k)s—unless you’re a really good trader. That’s not something I would ever do just because I watch the ramifications that people are getting. Usually, somebody goes to a couple of classes, they know enough to be dangerous and they do something. But if you think that there’s something that you really have, like you’re a professional, then yeah, you could absolutely do that.
You cannot have loans in an IRA without having a ramification for taxes called Unrelated Debt-Financed Income, but you can inside of a 401(k). That’s actually going to come up in a future question today.
“With COVID-19, will the IRS grant forgiveness with arrears on payroll taxes?”
Jeff: For those who don’t know what this is, this is probably payroll taxes that were owed from a previous quarter or previous year that have not yet been paid. The IRS is not going to give forgiveness on this. The only relief you have right now is IRS collections are not happening at the moment […] July 15.
Toby: What Jeff said. Let me go over some of the benefits that are actually in the CARES Act and in its progeny before it. There’s an employee retention credit that came with the CARES Act, which is a $5,000 per employee refundable tax credit. If you have back taxes owed—employment taxes—what will end up happening is you’ll get a credit that you’ll apply to that, so you won’t actually have to pay it.
Employers pay tax deferrals. If you owe tax right now instead of paying it you could apply it to your back taxes and then you don’t have to pay what you’re incurring right now until December 31, 2021 or 2022. That’s actually half and half. You’re not going to be paying that tax for a long time.
If you have employees that you’re required to do sick leave, you get a refundable tax credit as well that you can apply to your back taxes, and there’s a payroll credit for a family leave, which is when you’re having to take care of somebody who had COVID. This comes back to you as a credit, which you can apply just like cash against your past tax liability. Does that make sense?
Toby: All right, more questions up here. “What do you think about cash value insurance under tax code 7-702? Would you recommend using it?” Yeah, absolutely. I’ve talked about this a number of times on this show, but I’m a big believer that if you get insurance it should be permanent because otherwise, they’re going to take it away.
Term insurance, statistically speaking, will payout to your beneficiaries 1% of the time. If you get a whole life policy that goes up over 40%, and if you fund your whole life policy or your index universal life policy with enough monies, then you never have to worry about it. It’s 100%. You can use the death benefit if you need to for long-term care, which is huge. I always look at it and say I want to cover a bunch of known threats, and I’m going to use insurance and specifically tax code 7-702, which allows the cash value to grow tax-free. If I need it I borrow it out.
The proceeds—the income tax proceeds—they’re non-taxable in the vast majority of situations unless you deducted a keyman policy, then that will be taxable. For individuals, that’s never the case. They’re absolutely fantastic. But not all policies are made the same. I would use a fiduciary, meaning I would use somebody who has to put your duties ahead of their own or your interest out of their own simply because there’s a lot of bad actors out there in the insurance field that loves to jack up their commissions and it comes out of your money.
Jeff: Keep in mind what these cash value policies are. The earlier you start, the cheaper they are. I hear a lot of young people say no, I don’t want to do that. I’ll wait until later. It’s amazing how much they go up.
Toby: Somebody’s asking for calculating hours towards real estate professional status. “Can I count the hours that were spent on properties we did not close?” No, you actually can’t use that. You’re looking at your actual involvement with your properties for material participation. When it comes to the 750 hours, it’s anything involved in real estate, whether it’s yours or not. You could be a real estate agent, you could be a developer, or whatever. You could not touch a single one of your properties and you still count those hours.
“Also, what about the hours finding a CPA?” No, that doesn’t count either. It’s got to be real estate, buy and sell, development, construction, et cetera.
“Can I take the $10,000 advance from the EIDL (Economic Injury Disaster Loan) under the SBA, deny the loan, and roll it into the CARES PPP?” All right, here’s the big thing. That $10,000 advance is a grant, you never have to pay it back.
Jeff: I was going to say that. Go ahead.
Toby: You take it.
Jeff: There’s a lot of confusion about that. It’s up to $10,000. It’s not a $10,000 grant.
Toby: You get $1,000 per employee.
Jeff: Correct. That is not a loan. If you did get a loan, you could roll that EIDL loan into the PPP, but the $10,000 grant is the $10,000 grant, meaning it doesn’t get repaid.
Toby: You’d never have to repay it and it doesn’t get rolled into your PPP. If you got the grant and you got a PPP, then you lose whatever the grant was. It comes off for the forgiveness of the PPP. You can deny the loan. If you get a PPP loan, that $10,000 you just never have to repay, but you’re not going to get to use it twice. You’re not going to get the forgiveness under the PPP for that $10,000. I hope that makes sense.
“Is there a benefit to getting a Better Business Bureau credit score for a real estate LLC?” No, you do not need that.
South Dakota trusts are awesome, by the way. They’re number two on the list of the best jurisdictions in the United States right behind Nevada for asset protection trust.
“I’m trading stocks. I moved my trading account into an LLC last month. If I set up a C Corp and move the LLC to a C Corp, is there a way for me to write off education membership items?” Technically, you don’t have to move it. You could actually retax your LLC and you just choose to treat it as a corporation. The other thing is you can always have an LLC that holds your account making a partnership with a corporation as one of the partners, and then you could pay up to the corporation to split income but also so it can pay its expenses.
“As a flipper in Virginia, is it worth incorporating to avoid dealer status, and is avoidance actually possible?” What say you, Jeff?
Jeff: I say absolutely. I think it is worth flipping inside of a corporation.
Toby: What is flipper anyway?
Jeff: A flipper is somebody who buys a property with the intent of rehabbing and selling it. Not renting it, not using it for an investment. The problem with the dealer status is that it can taint your other properties that you may have. It can taint your investment properties should you sell one and they decide no you’re a dealer. You don’t get capital gains treatment for that rental sale. You get treated as ordinary like everything else. There are some other issues with the dealer status, but I like keeping the flips in the corporation.
Toby: I do too. Again, the way to look at a dealer is when I buy something with the intent to sell it, it’s no different than a mini-mart buying Cheerios putting it on the shelf to sell it. You don’t get to treat it like you would normal investment properties. I do get some depreciation but it’s not the same.
Typically, in a dealer property, everything can get added to the basis. When I sell, it just reduces the sale price. I’m not able to do installment sales 1031 Exchange, and the income is all active, meaning it’s subject to self-employment tax.
I do not want myself to be tagged as a dealer. If you’re buying properties to sell, you just want to create somebody else to blame and that’s the corporation. You want to be able to point at the corporation and say that’s the dealer, not me. When I do anything, it goes on my Schedule E as an investment property. When that dang corporation does anything, it’s flipping. That’s what you do.
Jeff: What are your thoughts on wholesaling? Same thing?
Toby: Same thing because I don’t actually own the property, or if I’m doing a double close, I’m getting short-term income and it’s ordinary income. That’s subject to self-employment tax.
“I’d like to set up a foreign non-Nevada corporation for a Florida C Corp. Your advice?” You can do that. People do it. Think of the S&P 500. All those companies, for the most part, are Delaware corporations and then they register wherever they’re doing business. You could certainly do that the other way around. People always ask why not Delaware? It’s great if you’re going public because they have a strong history of rights for shareholders and directors. You know what we don’t want in a management entity? Strong rights for shareholders and directors.
We want to be all about the ability to self-deal in case they die, without restriction. I don’t want to have somebody that owns 1% come through and make a mockery of my family structure. I want to make sure that I have control until I want to pass it to somebody else, so it’s the opposite. If you want strong management, you go to Nevada and Wyoming. If you want to go and sell your entity to third parties and have strong rights for them so it adds more value, you go to Delaware.
“If I sell a rental property purchased two years ago but I didn’t place it in service until six months before I sold it, does the original purchase qualify for 1231 treatment?” Part of the remodel would have to be a short-term balance. It’s the date that you purchased it. It doesn’t matter how long it was actually in service as a rental. What matters is it was a capital asset that you bought, intended to hold, and you held it for two years. You’re going to get long-term capital gains and you could 1031 exchange that as well.
Somebody said, “I’m in Florida and I’m confused. I have four properties in my self-directed 401(k) LLC. I’ve been told to move them into a land trust. Should I? I want to protect my retirement.” Karen, the answer is I would just create LLCs underneath that 401(k) and just have them in separate LLCs. The land trusts aren’t going to provide you any asset protection at all, it just doesn’t, so you may as well just have them in your name.
By the way, if you’re doing the flipping in Virginia, these are the fees. What you want to make sure is that you don’t go online to somebody who’s going to give you one million shares because you’re going to pay $1700 a year to the state for that versus if you had somebody give you 1000 shares, you pay $100. Pay the $100.
“How can I structure my real estate business entity so I can deduct mentoring fees from my W-2 income?” This is so Jeff.
Jeff: I tell you, I sometimes struggle with this because the mentoring fees need to have something to do with the business you’re actually in.
Toby: I don’t think you can write them off on a W-2. If you have miscellaneous itemized deductions, gone.
Jeff: That’s true. I don’t know what type of real estate business they are, if they’re flipping or if they’re rentals. We usually like seeing these types of education mentoring fees in the corporation, especially a corporation that is managing the real estate business or the real estate business entity. Like you said, Toby, as far as writing them off against the W-2, you’re not going to be able to do that.
Toby: The only way you’re going to be able to do that is if you have an S Corp real estate entity that’s flipping and maybe creates a loss—and it’s an ordinary loss—and part of that loss is made up of the mentoring fees as an ordinary necessary business expense. But you’re not going to ever write it off on your W-2 as a mentoring fee, not anymore. They got rid of it. Unreimbursed business expenses, toast. They’re gone under the Tax Cuts and Jobs Act. Those things were gone two years ago. You’re either going to set that real estate business entity up so it can reimburse you perhaps if you paid those expenses, but that’s about the best you’re going to get.
Jeff: Yeah, you’re not going to be able to reduce your personal income with it.
Toby: “Anderson Advisors suggests the use of a Wyoming LLC for California land trust and California rental property. I can save $800 franchise tax. How does the law protect a Wyoming LLC in this scenario? Are there cases and terms and all this fun stuff?” All right. Here’s how it works. I know what you’re asking. A land trust is a fancy way of saying I’ve transferred the title into two pieces. The legal owner, which is the trustee, and the beneficial owner, which is the beneficiary. They call them Illinois style trust because this is how the Sears Tower was built, this is how Disney World was built. They didn’t want the world to know that they were coming in and buying these chunks of land, so they would buy it through a bunch of different names.
Once we know that we can take the beneficial interest, we can transfer that to anybody we want. If I transfer to a third party, that’s deemed a sale. If I keep it within myself and my control, then it’s not. I could put it in an LLC and voila, I just protected that beneficial interest. How will California treat it? The suit is actually going to be against the trustee and the land trust. They’re going to try to torpedo it and then they’re going to try to attach the beneficial interest, which means they got to go out of state.
Does California like that? No, because they have to go out of state. You got to go chase somebody that’s an out of state. This is no different than if I set up a trust in California and just imagine that it was set up for my grandkids. Technically, I could have a California trustee, I could have a Nevada trustee, my beneficiaries could be in 50 different states. California is just going to sit there and gripe. It doesn’t change their lawsuit against the trust. It just changes the lawsuit against the beneficiaries and how it’s going to have to proceed. It makes a nice mess, which means these things don’t go any farther than getting settled.
“Can an international real estate be put in a trust or an LLC? If yes, what are the advantages?” Look, if it’s out of our jurisdiction, you wouldn’t put it into something here unless the individual who owned it was here and you wanted to make a part of their estate. But if you had a Spanish real estate or something like that, the vehicle would be a Spanish entity. If you as an individual in the United States owned it and you want it to be covered by your estate, we would just denote it as an asset. Because the way the United States works is we tax anything no matter where it’s located. But you’d still have to handle the transfer of that interest in Spain or whatever jurisdiction it’s at. It’s a little bit of a sticky wicket there. You got to be dealing with both. Or Canada. We get to deal with Canada a lot, too.
“If you’re a W-2 earner and have rental property but don’t qualify as a real estate professional, what are your options?” The real estate would be passive with one exception. If you’re not a real estate professional, you could be an active participant in real estate. I hate to get this technical, but if your income was $100,000 or below you can write off $25,000 a year against your active income. That’s the only other exception. It phases out for every $2 above $100,000, you lose $1 of deduction. At $150,000, it’s gone.
If you have excess passive loss, you carry it forward, and then that passive loss is released when you sell the property, it becomes an ordinary loss and you can write it off then. I should have let you do that.
Jeff: You did fine.
Toby: It’s nerdy tax.
“Do all LLC’s have an operating agreement even if it’s not multi-member?” What say you?
Jeff: Do all LLCs have an operating agreement? Yes, they should.
Toby: That’s their body. You have to have a body.
Jeff: Of corpus?
Toby: Somebody says they got to have a body.
“Can a business buy a car every year with Section 179 and bonus depreciation?” Yeah, but you got to be using it for business. This can be taxable to you.
Jeff: Here’s part of the problem with that is if you buy a new car this year, take 179 and sell it, and then buy a new car next year, you’re going to have to pay all that back. You’re going to have to recognize all that 179.
Toby: You recognize it back and then you take another deduction, so it’s bad. Let’s just put it that way. I know people will do that but there’s a tax ramification. If that vehicle is not being used more than 50% in your business, you’re going to get tased under 179 because it’s going to be ordinary income to you.
Jeff: If you’re taking some type of construction entity, HVAC, or something like that and you’re buying a new vehicle every year—
Toby: Then that’s a different animal because you’re—
Jeff: You’re filling out your fleet.
Toby: Right, but if this is a car and I’m like, hey I own a gas station in Tallassee, Alabama. If anybody says Tallahassee, Tallahassee’s in Florida. Tallassee is outside, it’s Lake Martin in Alabama. He had a Gate gas station there and he would buy a new Cadillac every year. That was the biggest thing […]. He enjoyed his life and he’d get a new Sedan de Ville. This thing was a boat. You could put an outboard on it.
“In a divorce when one spouse keeps the house, does that constitute a sale of the house and the spouse being removed from title receiving cash?”
Jeff: No, this is just a property division as part of the divorce. Property divisions are never taxed. You’re getting the house and they’re getting cash. I’ve seen the retirement benefits divided up. There’s not going to be any tax involved here.
Toby: The only issue you have is you guys each have a $250,000 capital gains exclusion if you lived in the house two of the last five years. The second you take a spouse off the name, one of those $250,000 goes bye-bye. If you’re thinking of selling that house, you’re better off keeping both parties on it and selling it. As long as both spouses lived there two of the last five years and you both own it when it’s sold, you get a $500,000 capital gains exclusion. That’s the only time when I would fight against that. So, no tax implications there.
“Are you suggesting a term life is a no-no but you should only be looking at universal life due to payouts?” I am saying that if I am using term, it’s for a very limited period of time. I’m not using it for end-of-life decisions because chances are—99% of the time—it’s not going to give me anything, so I’m just giving my money away. People who love to get into it.
Jeff: I like it in very specific conditions where it is the payoff and asset loan or something like that.
Toby: I tell you guys, I sublet some space once to a guy. It was a really high-end space and it was too small for us. We took another floor and we sublet out the space that we originally had. The guy that took it over, I said hey, it’s got five years on this lease. You could extend it another five years. Why don’t you buy a 10-year term policy, I hate to say it, but if something happens to you, I don’t want to have to worry about my lease. I’ll sublet it to you, the landlord’s happy, but they want to keep us on the hook. The guy would never have qualified by himself. I was like hey, we can help you out. I just want to make sure that if something happens, then I’ll just do a cheap term.
When I’m creating a legacy plan, I want to know it’s there. There are people that will actually go out and get financing, just like I do a single premium payment. If you’re worried about […] we can even have a nonprofit to buy it, then we don’t have to worry about […].
“Should I create a separate LLC for each investment strategy engaging, for example, one for liens deeds, another one for fixing and flipping, another for retail business?” Actually yes, under all those scenarios, the only one I might put together is the tax liens and deeds inside the fixing and flipping, if I’m not going to keep the property. If I’m going to keep the property, then I would probably separate those out, but definitely the retail business is separate from the fixing and flipping.
“If you have an LLC in your state that is owned by a Wyoming LLC, your state has your information, how does Wyoming keep your anonymity?” You should come to our classes because we’ll show you how to do that. There’s actually a really easy way and it’s way easier than you realize it. You set up Wyoming first, then you set up a member-managed LLC in your home state, and you list the Wyoming entities’ information as a result. Then you don’t have your name listed anywhere anymore.
“We are working on a JV product set up as an LLC. We did not set up a checking account. What is the liability and can anything be done to rectify it?” I’d get a checking account for the LLC and then if your corporation’s been paying all the bills, make sure that you have an accurate accounting and treat that as probably either as a loan to your organization or an advance—same thing—and make sure that you get that handled. It’s not going to kill your entity. In fact, not having a checking account in your entity won’t kill your entity. It is a factor, but it is not even considered a dispositive factor, meaning it won’t torch you.
“How can I develop a nonprofit in real estate?”
Jeff: Are you looking at me?
Toby: You like these, I’ve been hobarting. I know I do.
Jeff: Well, I’m mixed on this, with the nonprofit, the-chicken-and-the-egg thing. Do you buy the real state first and then put it in a nonprofit, or do you put the cash in the nonprofit and…
Toby: Let’s talk about the nonprofit first. What is it doing?
Jeff: Well, you do have to have a plan for the nonprofit as to what its charitable purpose is. We talk about the RALs (Residential-Assisted Living).
Toby: The nonprofit activity.
Jeff: Yup. Low-income housing, homes for vets, and so forth.
Toby: Homes for people that need assisted any sort of living: adult, autistic children—they’re adults now, I should say; they’re not children—anybody that needs help with an activity of daily living, which could be cooking, cleaning, even just somebody to make sure that they’re dressed when they walk out the door, because there are situations where someone is just not paying attention to the same things everybody else is, due to a condition of some sort, or they just need assistance, or you’re trying to help a disadvantaged group. It could be anything from incarcerated individuals transitioning back into society. You can get very specific, like women leaving incarceration that were drug crimes. It could be veterans that have had PTSD, you could have veterans that are clean and sober in-house. All those qualify as a charitable activity if you want to run it in a nonprofit.
Low-to-moderate income housing is a nonprofit activity as long as you get either 60% or 75% of the receipts from those activities. You can even have some higher-end houses in there and all that. All you do is you create whatever it is going to be your focus and you set up the entity, it’s going to be a corporation, and you’re going to go through what’s called a 1023 application, which is pretty extensive. If you want us to do it for you, we’ve done well over 3000 of them, we’ve never had one denied, we’re very good at it, just reach out to us and we’ll walk you through it. We also teach a class if you want to. We invite all of our platinum folks, but we make exceptions if you’re truly charitably-minded, we’ll give you access to the Start, Fund, and Grow. You just reach out to Patty and she’ll get you set up there because we want people that are charitable to actually get all the help they need so that they can do that.
Somebody has a good question. Property sold at a $50,000 loss and they want to write it off, what do they have to do?
Jeff: If it’s personal property, meaning your residence or second home, you can’t write the loss off.
Toby: If it was an investment property?
Jeff: If it’s an investment property, it’s going to be a capital loss, so it’s going to take a while to recover that loss unless you have other capital gains to offset that.
Toby: When does it become a business property and will you get that ordinary loss.
Jeff: That’s usually going to be the recapture of any depreciation.
Toby: If I have passive losses, when I sell it, so let’s say the same property, they have a $50,000 in loss, but they have passive loss carryforwards and they would offset to ordinary coupled with that too, right?
Jeff: Yeah, and what I said was actually incorrect. There is no recapture when you have losses.
Toby: Correct. I also think that when you’re disposing of a business property that loss would be ordinary, wouldn’t it?
Jeff: There are cases where it was held for a short period of time, but most of it I think is going to end up as capital gain or loss.
Toby: Unless you have loss carryforwards, in which case it comes […].
Jeff: Loss carryforward?
Toby: I had a loss carryforward on that property, let’s say at $100,000 loss carryforward, then I sell the property and it’s at a loss, the loss carryforward gets released.
Jeff: The loss carryforward does get released and that is ordinary. You’re correct.
Toby: That’s ordinary, and then my capital loss would be whatever it is that you have the capital loss.
Jeff: Right, the actual loss when you sold the property.
Toby: It’s a little confusing, for all of us. That’s why for the drinkers out there, it depends on your situation. You got to look at it. I wish there was a cookie-cutter, here’s the answer for everybody. There isn’t.
“Should all LLCs or just by holding LLC register as an S Corp, or is there reason to leave them as a partnership?”
Jeff: I like this question a little bit differently and that I think about what kind of taxable entity I need for my entity. If I’m in an operational business while I’m buying and selling goods, I have employees, I probably want to put that in an S Corporation. We talked about flipping earlier, put it in the C Corporation and you can use the LLC to fill any of these different types of tax entities or you can use a limited partnership. For a partnership, you can use a regular corporation for both the S and the C Corporation.
Toby: I don’t know.
Jeff: Everybody drink.
Toby: Yep. It depends on what you’re doing, the entity. If this is a holding entity and it’s truly passive, like it’s just holding our shares, then the holding entity would normally be a partnership or disregarded. It would almost never be an S Corp, because if it’s an S Corp, then anything underneath it is going to be taxed under that S Corp. If you’re a real estate, for example, the second you pull the real estate out to refinance it, you get hit with ordinary income.
Jeff: We talked about partnership and S Corporation, but a lot of times these LLCs are disregarded.
Toby: They’re ignored for tax purposes. When you hear disregarded, it means the IRS disregards it and they look directly at the owner. Non-relevant. The only time that there’s something wrong with that, is when you have a whole bunch of real estate and you’re trying to get financing. In which case, especially if it’s an apartment complex or commercial real estate, good luck selling it without a partnership tax return. Even the sub-entities, even your little holding entities, you’d want that to be a partnership. You want to have you, or your entity, or something owning it, that’s another little piece to make sure it’s taxed as a partnership.
Jeffrey: Short answer, you’re going to put each LLC to what it needs to be taxed as.
Toby: There’s not a cookie-cutter. The only time there’s a cookie-cutter is when you’re doing the same transaction over and over again. If I’m buying lots of single-family houses, which I love to do by the way which I’ve been gorging myself lately—there are so many good deals out there—that might be a hand sticking each one in an LLC and that LLC is owned by my holding LLC. Patty has to deal with all those crap for me.
Then we say when we’re buying an apartment complex, do this. When we’re buying it with another party, do this. When it’s one that we’re not going to own for very long because we’re buying it, it’s burnout, we’re going to turn it and just make some money on it, do this. Then you’re just saying if it’s this scenario, but if we’re just constantly buying these little cash flow machines, it’s super easy because you just do the same thing over and over again. We’re talking 150 of that, you just keep doing it over and over again. It’s somewhat easy for Patty; she has to deal with it.
“I have an LLC that I never use, should I close it?” Not necessarily. It’s not doing anything but it may be useful for somebody that wants it. That’s called a shelf entity.
“I moved from California to Oregon at the end of last year, do I need to change my corporation to Oregon?” I’m just imagining these guys just getting snookered now because every time I say it depends, I’m imagining you guys all drinking way too much from.
Jeffrey: […] under the table.
Toby: Do I need to change my corporation? Not necessarily. If it’s an out of state entity like it was Wyoming, and it’s not doing business in your state other than you living there, then no.
“I loaned money from my IRA to an LLC. The loan matures and the owner of the LLC goes ghost. How do we proceed after maturity to recover the funds?” I hope you have security for that. If you don’t, then it’s time to get a retainer attorney to go after that individual. Hopefully, you have a personal guarantee of that too. Otherwise, it’s going to be really tough to get it.
“We applied for an EIDL but we were denied, processed the 401(k) loan, and received $1000 from that EIDL, then we were denied. Now I have an option to take a small loan from the SPA, how do I decline the loan?” You just don’t sign the documents. The $1000 is yours to keep. Sounds like they gave you an emergency grant. You get to keep that, you don’t have to do anything. Everything else you can just say, thanks, but no thanks. They’re going to give you a note, they’re going to ask you to sign that loan document.
“Can a withdrawal be made from a self-directed IRA? And if so, how is this documented to avoid any penalties or tax liabilities?”
Jeffrey: Anytime you have a withdrawal distribution from an IRA, you have to issue a 1099-R. You would issue a 1099-R to yourself. It would get mailed in to the IRS, that would be their evidence. As far as voiding penalties or tax liability, that’s going to be based on current law that any distributions taken out at this time are going to avoid any penalties.
Toby: They’re going to give you a 1099-R.
Jeffrey: Yeah, so this is self-directed. If he doesn’t have some kind of custodian, he’s got issues.
Toby: He has to have it. A self-directed IRA has to have a custodian. It’s when you have the 401(k) where you don’t have a custodian, there are issues. We do the loan docs. If you do an early withdrawal we just say, it’s up to you to report, you’re not going to get a penalty. You’ll more than likely be issuing yourself a 1099-R for retirement and then you’re going to say it’s nontaxable, and you’re going to pay it back. It’s no different than if you rolled over an account. In fact, the way the carriers treat it as a trustee-to-trustee transfer.
“The $10,000 grant, is it counted as income?”
Jeffrey: No. It is not income.
Toby: “When the grandparents make a $15,000 gift, does the grandkid have to declare it on his income tax?”
Jeffrey: No, it’s a gift. It’s not income.
Toby: Somebody is still mad about the insurance. I’m not an insurance person, but I’ll tell you, I have three IUL policies. I’ve been using them for years. I borrow against them whenever I need money quickly. It’s cheap. If I ever go a little bit nutty and for those of you guys who know my situation, if we did not have long term care for my dad, my dad had early onset of Alzheimer’s literally for eight years from the time that he started showing those. Six years or four, and if we did not have long term care, it would have really had a major effect on my mom or me. She needed to be able to stay in her house.
Well, you can’t get those policies anymore. You have to have something that covers it. I use the Index Universal Life and the whole life with the writers to have long-term care. The really cool part of them—I’m not telling you which way to go—is they’re great for legacy building because all you have to do to have a whole bunch of money come in and really find your plan is you just have to pass […], so if you do it right, it’s actually fantastic. Now, I’m not saying term is bad, I’m just saying it’s not the panacea no matter how you pretend like it is or you just say buy term and invest the rest, that’s not my experience. My experience is that, when you need it, you can get it. you better get something that you can absolutely lock-in.
Jeffrey: I’ve had a few term life policies and they’ve never paid off.
Toby: Yeah, you should sell it.
“Could you please discuss trademark for LLC enforcing this against entities?” Probably. It sounds like you have an LLC and that’s a state issue? A trademark is first used in interstate commerce. It sounds like somebody has a name on an LLC and they want to get somebody else to stop using it. If you use it across state lines and whether you registered it or not, you have a trademark. I’ll tell you, this was my weird thing, again, I just go off from my experience.
My experience was, I had clients that would want trademarks. I would file these trademarks and invariably, every time I would file a trademark—we’re talking about some pretty big trademarks—I would get hit with people saying that they used it first. Quite often, it was stuff that I knew was concocted and then they would offer to go away for $5000. I have to go to my client saying, look, it’s going to cost you a lot more to enforce this trademark.
I just finally got to the point where it’s like, look, you used it first, you just put a TM under it when you want to register it, and then when you register it, you use the R, but you can have abandonment issues. I’m probably just going to say unless it’s a super, super valuable piece of the actual property, just wait. If somebody pops up, then you show it first to use interstate commerce.
Nowadays, we can back all that stuff. We have the Wayback machine, and the internet, and all that stuff. I used to have people sending me their ideas in a sealed envelope and we would post-market it. I said I’ll just put it in my file and if we ever have to, you got this.
“Can you advise buying properties with your Roth IRA as a business?” Let’s go over that because I know that there’s a…
Jeffrey: We’ve got a question on that.
Toby: Yeah. I know there’s a question out there.
“Those who work full-time and have rental income, should they have an LLC or an S Corp?”
Jeffrey: I’d have the LLC.
Toby: You guys are funny because an LLC can be taxed as an S Corp.
Jeffrey: Yeah, so my answer is yes.
Toby: You don’t want to S Corp for investment properties. With very few exceptions, the reason you don’t is because if you take it out of the corporation, it’s treated as active ordinary income. It’s just like I paid you. It’s an appreciated asset that is now taxable to the shareholder. If you have rentals, you definitely want them to be a disregarded LLC or a partnership LLC. The only issue is, how many do you have? Do we want it on page one of your Schedule E or page two? Are you getting financing? Those types of things will sometimes change our analysis.
Somebody says, “Can you explain trading as an investor versus an active trader? We have about $3000 in losses.” I don’t mean to laugh at that, but I always say that. This is where it gets bad. I always know who the after traders are because you all have huge losses. You get rich slowly in this world. I’ve been doing this for over 27 years. Jeff and I look at returns all the time. When I see an active trader, 80% of the time you guys lose money.
Everybody will go out there and say you can make millions of dollars. Yeah, I can make millions of dollars playing basketball. If I learn how to dribble, I go to a few classes, I learn how to do a lay-up, then I go out there, and LeBron James is standing in the key, guess what’s going to happen when I go up against LeBron James? Whatever I throw out of him, he’s going to swat it and it’s going to go out of the stadium. It’s probably going to break the wall, and he’s going to say what the heck? I’ve been doing this my whole life, I’m a giant, and I have all the physical attributes.
That’s what the Wall Street guys are doing. They’re the traders. There are traders that have not had losses at all for 365 days in a row. Goldman Sachs had an automated program that just nailed everybody, does head fakes and all these things. So, we go out there and we think we’re going to compete with these guys. Stop it. Don’t compete against them. Say, hey LeBron James wins, so I’m going to bet with LeBron James and put him on your team. That’s what you do.
Jeff: And even one of the IRS’ requirements for a trader is that you look seeking to make a profit on the daily changes…
Toby: It’s frequency extent and volume.
Jeff: Yeah, and am I smarter than these arbitrage programs? I don’t think so.
Toby: And then, they will add new things to it. We’ve had people with 15,000 trades in a year denied trader status. You just don’t do it. In my world, you just don’t do it, unless that’s what you do and you’re trading every day. We’ve had people, and I shouldn’t say ‘we’ because Anderson doesn’t do trader status. Have we ever? Do we file any? I think we had one or two.
Jeff: We may have a couple.
Toby: That are actual. That’s what they do for a living and they do it every day. Against our advice, we’ll do it as a trader because there’s no such thing as a trader. It’s something that somebody concocted. What you’re doing is you’re taking your profits, you’re putting in your Schedule D, your losses, deduction, and Schedule C, which doesn’t make any sense. You’re going to end up with no income on a Schedule C and you’re going to get audited a long time. So, we don’t mess around with it.
Anyway, I’m not going to keep griping about traders. How do you do it? You have to be involved every day, even when you’re six months of activity in a year and then you take six months of vacation because you made a bunch, they still deny you trader status because you’re not doing it frequently enough. I escape all of that. I tell our clients to escape that. Use an LLC taxed as a partnership with a corporation as a general partner. You’re not going to get to take those losses.
What I’m going to do is encourage people to quit doing the active trade stuff and start doing the slow burn. You’re going to make a ton of money. We have clients that clear $400,000–$500,000 a year doing the dividend trading that we teach during Infinity. We make money in different ways, we teach you how to buy good companies that are picking up money, that have been doing it historically 25 years at a minimum, then we show you how to make profits off it.
You could trade every day, one of those companies. You could buy the company and then you could write 20 or 30 trades a day where you don’t have risk. That’s what we choose to do. I don’t like doing it the other way around. I hate betting.
Jeff: I see so many speculators. A few of them do it well, but the vast majority of them lose their bucks.
Toby: 80% I would say. I used to do the numbers. It was about 80%.
“If I have a choice, is it better to buy real estate inside a Roth IRA or QRP?”
Jeff: Well, with the assumption that the QRP does not have a Roth in it. I like the idea of buying and selling in a Roth.
Toby: The rub is always when you’re buying a plan that doesn’t have tax if you have real estate, there’s a good chance you’re never going to pay tax, so you can kind of lose all the coolness of real estate. But if you have a choice, like I have a Roth and I have some mutual funds to choose from, I’m probably going to run into real estate anyway.
Jeff: Now, here’s a problem with investing in real estate on an IRA of any kind. You cannot put enough money into it to do everything.
Toby: Because you can’t have debt. If you have debt, then you have something called Unrelated Debt-Financed Income.
Jeff: You can’t work on it yourself, you can’t give it money, you can’t pay for things, you can’t live in the property, so the Roth has to run this property like its own. You can’t help it out.
Toby: That’s right, and you can’t put yourself on the hook on the loan, you can’t pick up a hammer. QRP, you can actually have a loan in, and that QRP could be a Roth. The Roth just means you’re never going to pay tax again, but I don’t get a deduction putting it in.
By the way, there’s really no difference between a Roth IRA and a traditional IRA from a tax standpoint over about a 30-year horizon. If your tax level doesn’t go up or down and you’re at a medium tax level. For most people, there’s not a big difference. If you’re a young person and you don’t have much income, then the Roth is your friend. If you’re in your making money phases and it’s way up, like your income is high, then do a traditional if you can. Or do a QRP or a defined benefit because it’s really hard for the Roth to make up that first big chunk of deduction you get.
It’s always like, which one’s better? If I have to choose I’m always using a QRP. I am going to do the Roth or the traditional stock. Again, if we’re talking apples and apples. If you have the money, for example, hey I had a bunch of money from a previous employer. I rolled it out, put it in QRP where you can still leverage it, you can get great returns at a real estate, even if you’re not getting benefit from the depreciation. Especially if you’re buying cheapy little properties. like I buy a lot of little $40,000 paying me $700–$800 a month type things. That’s just cash flow.
When they came up with the 7702 provision in the tax code, rich folks were dumping a ton of money into these because they never had to pay tax on it again. If you overpay, like you put more in there than what would cover the cost of the insurance, then it becomes a modified endowment contract, and all the growth can be taxed to you. This is more than I know. I know that that exists and I don’t know the threshold of it, but it’s a mathematical computation.
If you own the life insurance policy inside of a nonprofit, like it’s a keyman policy inside of a nonprofit (which you can have), then it’s still taxable. But remember that the nonprofit is exempt, so you can dump a whole bunch of money into a life insurance product and you really don’t care because you’re not going to get taxed on it.
Somebody says, “Who would I send it to?” I’m going to send you to Eric Dodds just because he comes on and teaches in the Infinity program with me and he’s a fiduciary. I like Eric because he has to put your interest first. I like David McShane, he’s right there too. They’re both fantastic people, David is a 40-year CFP, but he is not so much on the insurance side. Eric knows his stuff and he’s a good dude.
Somebody says, “Can old withdrawals from IRAs now be repaired without penalty under the CARES Act?” No. The way that the withdrawal work is under the CARES Act, you get an exemption from the 10% penalty, and then so long as you pay it back within three years, which is really the end of the third tax year which is December 31 of 2022, then I don’t have to pay tax on it. It’s treated as a trustee-to-trustee transfer.
“Self-directed withdrawal due to COVID. What about the CARE Act?” You can take a self-directed withdrawal. We don’t care about the self-directed side. You can take a withdrawal out of any IRA or 401(k), 403(b), 457, any of the qualified plans.
Jeff: And that was after February 15 or was it at a later date?
Toby: I think it’s after March 27 that you can take that out. You have two choices, so you have two flavors. The early withdrawal you never have the 10%, pay it back within three years, you don’t have to worry about tax. The other side is you can’t borrow from an IRA, but you can borrow from a 401(k), 403(b), 457. You can borrow up to $100,000. Your administrator has to agree to do that. That the only thing that we’re seeing is that some of the administrators are being lazy and they said no. Frankly is because they want to keep control of your money.
Infinity workshop is online only so you don’t have to come out here. There’s no cost to it.
Somebody says, “I received the PPP loan and what increment should I disperse it? I’m an LLC taxed […] employees?” The way it works is you have to pay yourself the average, so whatever your average income was on a monthly basis you pay yourself two times that amount. That’s the most you can pay yourself. You’re not allowed to do health, you’re not allowed to do 401(k). You are allowed to do rent, you are allowed to do interest on secured property. If you have loans on property that are secured by UCC or even a mortgage, then you can write-off that interest you can write off (I think) utilities too.
They’re talking it’s supposed to be over the covered period, which is eight weeks, but they’re talking about extending that. In fact, there’s bipartisan support of extending that and they’re talking about making it something a lot longer like 26 weeks.
Jeff: […] Rubio said 16.
Toby: Again, it’s follow the bouncing ball.
Somebody says, “Did you ever get to my question?” Yeah. We talked about the tax extension and all the deadline stuff.
“Can we use part of the PPP loan funding to fund my employees’ pension 401(k) as well as my 401(k)? I’m a sole proprietor not an S Corp business.”
Jeff: You have to use the PPP in the entity that actually receives the PPP.
Toby: It sounds like he’s a sole proprietor, but he has employees.
Jeff: Okay. You can use it for the pension, right?
Toby: You can use it for the employees’ pension. This is actually a really good one. They keep giving us new guidance. You cannot use it for your pension contributions so you can write off what the company pays for your employees. You can write off what you pay your employees. You can write off any health benefits you give employees but not for yourself because you’re a sole proprietor. If you are an S Corp, then you could add all those other things. They completely hosed sole proprietors.
It’s probably last week or two weeks ago, I was griping, whining. I was mad because the sole proprietors completely got the short end of the stick. They couldn’t apply for PPP.
Jeff: They’ve made them wait.
Toby: They’ve made them wait and they’re not going to give them the same benefits as others. This is what really hosed you to be a sole proprietor. It’s a stinky pinky so it’s not good.
All right, Q&A. “What are the basic benefits of the S Corp?” You can answer this.
Jeff: Well, the first is (of course) you have a limited liability coming from the S Corp. Other than the one that I find, the big difference between the partnership in the S Corporation is that the S Corporation income is not subject to self-employment income.
Toby: That’s the big difference, and…
Jeff: Otherwise, they have a lot of the common characteristics.
Toby: Let me give you one benefit. The accountable plan is huge. The S Corp can enter an accountable plan with you and you can quite literally reimburse yourself, and on average is about $20,000 a year. You can’t do it as self-employed.
Jeff: And a lot of times, we see our professionals have S Corporations making lots of money. They can set up defined benefit plans.
Toby: We’ve done a few.
Jeff: And in a defined benefit plan, you can write-off a lot of—
Toby: The most we had as a deductible contribution last year was $615,000 into one DB Plan. That’s a deduction. If you don’t know what a DB Plan is we’ll have to chat about that next time. There’s a huge bunch of benefits of an S Corp besides taking the plan and the ability to receive the profits of your endeavors without being subjected to old age, death, survivors, and medicare. It also gives you a certain amount of protection. You want to have an entity around yourself.
Most sole proprietors just do it in their name and what they’re going to find out is their business fails because of this coronavirus, they’re not going to have insurance to cover it because viruses and pandemics are usually excluded, and it’s going to follow them into their personal […]. It gets really, really bad. We want to have a box around this one, too.
“How do I go about researching business tax strategies like work? Where can I find a list of strategies?” That’s the free book, guys. I’m just going to point you right there. Some of you guys are asking. I missed it the first time. Here you go. I know Patty has been giving everybody the book, but you can just go there. It’s free, it’s our gift to you, there are no strings attached.
Somebody says, “Who can I work with for passive rental income investments in North Carolina?” I buy there. I’ll send you to Travis Howard. He’s fantastic. He’s in our Infinity group and if you like the […] your properties because he’s probably right around that. He’s Charlotte 90 […]. Patty’s going to send you the link. It’s in the chat. She’ll send it to you Yup, there she goes. She’s quick. That’s Susan. Susan’s like Quick Draw McGraw.
Anyway, if you like the little cash flow properties, happy to share a few of them. Although I’ve had a few clients that came down there, the next thing you know I’m getting one out of five properties because they’re just buying them all, so I may be a little cagey with you guys. I don’t want to give you all of my stuff because I still accumulate.
“If you’re buying a property in an opportunity zone, what do we need to know about the benefits?” You’re deferring the tax and you do a special LLC not only for your money but also there’s an LLC that’s a fund. You’re deferring your money for about six years so the tax on it you’re still going to pay on the initial capital gains because it has to be capital gains that you’re rolling into it. It could be an active business, all sorts of stuff. Somebody’s going to send that to you so they’re going to send you a link.
Anyway, you have this deferral and if you own that investment down there for 10 years, you don’t pay any capital gains. You don’t pay anything until 2047. Then, you get a step-up in basis. You can choose to step-up the basis so you can get that.
“If I have not yet filed a tax return from my corporation, do I still qualify for EIDL or PPP as a sole owner-operator?”
Jeff: For EIDL, they’re going to accept your 2018 return. However, you’re probably going to be asked for financials for 2019.
Toby: What if they don’t file anything for the corporation at all?
Jeff: I don’t think you’re going to get an EIDL then.
Toby: You’re going to get it.
Jeff: Are you?
Toby: Yup. All you have to do is be in business on February 15. They’ll take bank. The EIDL is easy. The PPP is the harder one because you’re going to have a hard time proving the payroll. They’ll even take bank statements, but it depends on the bank and who you’re dealing with.
Jeff: For the PPP, they’re typically asking for payroll reports.
Toby: Yup, and if you’re a corporation and you didn’t take payroll, guess what you’re not getting? The PPP. And if you say, but I am a sole proprietor, it’s not going to work guys. You can still do the EIDL. Here’s the weird thing with the EIDLs. The only loans they’re processing is the first before they shut them down unless you’re an agricultural business. Since the CARES 2.0, they have not done a single ordinary EIDL loan for traditional business. They are still catching up. Stinkhole. We’re not happy about that.
Hey guys just throwing this back up. Promo code is TUESDAY. Now, for the 1 Veteran Foundation, if you guys could go out there and buy a T-shirt from these folks.
Somebody says, “How do you get any of the EIDL used…?” You have to wait until they reopen it. You can’t get one until they reopen it. Everybody applied before April 16.
Jeff: Yeah. Last I heard they were only taking agriculture applications.
Jeff: And I can tell you that I just did one where we got the money and they’re capped at $150,000. We just got $150,000 and that was April 6 one.
Jeff: April 6 application.
Toby: Right, and you guys were rock stars, by the way. Keep getting these guys. They’re really cool. Dave Rafus, you can look them up 1 Veteran Foundation. It’s a 501(c)(3) so you can go look them up and see what they do. They don’t spend anything on themselves. It’s all for the pets and here’s the deal. You get a service member who has PTSD a service animal. It’s very hard for that to go down the dark hole.
Jeff: Let me add one thing to that because we have a lot of these veterans with PTSD and have a lot of issues. Put on top of that the COVID-19, the shutdown, they may be unemployed for the time being.
Toby: It’s really bad right now.
Jeff: It’s really bad, so we need to get these people as much help as possible.
Toby: Yeah, not just the veterans. Yes, absolutely, but everybody. I actually went on to OneAmerica, the ledger report about it. I got it because of somebody. I don’t want to do a […] to steal it. We all knew the doctor. You’re not supposed to do it apparently. It’s frowned upon. You don’t get invited back but we know a doctor. The suicide rate goes up 1% every time the unemployment rate goes up 1%. We’re sitting in a city, Jeff. We’re talking about 40% unemployment in Vegas before this thing is over. That’s a lot of people. I’m not saying anything bad about COVID. I’m just saying there’s a lot of people suffering and are in some pretty dark places right now.
We will send you the 1 Veteran link. Patty’s got it. It’s also on the chat feature but we’ll send it out to you guys. Again, it’s not huge amounts of money. It’s a $20 T-shirt. Frankly, it’s pretty cool. We will send you the Facebook apps. We’ll get you anything you need. You just reach out to Patty, she’ll coordinate it. She knows Dave. He’s over there in the […] side of Phoenix. Good dude, really straightforward, so if you will help the vets I’ll be eternally grateful, and as I said, I’ll give you guys some reward. We’ll do something. We usually encourage people to give. We love to give and it feels good. We encourage that by incentivizing you guys in some weird way.
andersonadvisors.com/podcast by all means. All of our Tax Tuesdays get up there at some point. If you want to watch a whole bunch of replays, all the replays will be in your Platinum portal, but you can always go to iTunes. It’s free. Google Play it’s free. Go on to any of our social media and we would love to have you guys come in and continue to hang out with us. We love your banter back and forth. I wish I could get all of your questions.
“Where do you buy $40,000 houses?” I get them all over the place. They’re out there. My goodness. Somebody also asks the way that we trade. Patty will give you all of the classes that teach. I’m sure she’ll look for it. We’ve taught a bunch of them on webinars. You can test us because we were bored. We just used companies that have really good businesses, that payout consistently every year for 50 years. Yes, we go in there and cash, we’ll sell the option on it, we buy it back. If you want to sell the put to get the stock put to you, you can get that money too. There are all sorts of cool stuff.
We’ll get you Travis. Patty will give you guys Travis’ information. He’s in Charlotte, North Carolina. His houses are a little bit better. Then, Eric Dodds is for life insurance. Patty will get you that, too. Now at this point, we have like 10,000 people that send us questions and we don’t charge anybody to respond to basic questions. […] so just you know, don’t kill us. We get hundreds and we try our very best to get through. They grab and they distill these down to usually about 50 questions every week. We’re able to answer between 15 and 25. Those are the questions and then we answer them. We try, guys.
It used to be that I was able to get through all of them. I know some of you guys get a look of the stink eye where you’re like, hey you know my question. You can answer them. We’re trying, guys. If you really have a question that you’re having difficulty with, say a second request or something, we’ll grab it. Our people are seeing them and they’re trying to get to you folks.
If you ask something that’s really personal and you need to be involved, join our Platinum. It’s a whopping $35 a month, please, and we’ll get you. Hey, you know what you guys? If you want the $40,000 houses, I’m going to incentivize you. Come in and visit Infinity. Go through our Infinity stuff. We actually taught a few on housing.
Also, if you come and hang out with us at Infinity what I’ll do is I’ll buy about 20 or 30 of them and I’ll throw them at you guys during one of the courses as we go and we buy them in packages. We usually buy them en masse with a bunch of other folks and we peel off a bunch, so if you like them, we’ll just go buy them and you guys can just whatever I got them for we’ll just figure out how to get them over to you guys. I tend to buy the ones that aren’t going to require a lot of money, they’re easy to maintain, they’re always occupied, and it’s plenty easy.
Somebody says, “Are the new rounds of PPP that are coming for people who have not applied before?” There’s still $150 billion left under the PPP. You can still apply.
We’ll send you guys all out the Infinity information after the event. Susan, if you could tack on the next Infinity, maybe if they want to go in there and look at some of the videos we can do that. We’ll get you all set up. I didn’t mean to throw that at you, Susan, Patty. Sorry guys. They love it when we change things midstream and we don’t tell them because that makes life exciting.
Jeff: They thought we were done.
Toby: They were ready to go home. No, wait. Anyway, I hope you guys have a great one. We’ll see you in two weeks. In the meantime, we’ll get you guys out some more information, go out do some good things to help people, and call the folks that are still afraid to go out. I have an 87-year-old mom that goes a little stir crazy. She keeps telling me she’ll go to the grocery store and I have to convince her to stay put for a little while longer.
Anyway, most financial institutions are […]. Reach out to us, Don, we’ll get you guys. There are some that are, but there’s a lot that aren’t, we’ll be able to tell you what to do. So, just reach on out to us, we’ll get you squared away. All right, guys.
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