In this episode, Anderson CPA Barley Bowler and attorney Eliot Thomas, Esq., tackle year-end tax planning strategies and answer listener questions on a variety of critical topics. They explain the new rules for research and development cost deductions following recent legislation, including the choice between immediate 100% deduction or five-year amortization for domestic R&D. Barley and Eliot cover the 72T procedure for penalty-free early IRA withdrawals, the strategic benefits of qualified opportunity zone investments for deferring capital gains, and how to use IRA funds without penalty for first-time home purchases. They discuss the complex rules for deducting expenses on mixed-use vacation homes, calculating tax-free administrative office reimbursements, and essential year-end action items including payroll, bonus depreciation, solo 401K contributions, and charitable giving strategies. Tune in for expert advice on maximizing deductions before December 31st!
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “What are research and development costs? How are they deducted?” – Domestic R&D costs can now be 100% deducted immediately.
- “What expenses that I incur on behalf of my employer can I deduct on my personal 1040 tax return?” – Very limited options exist; reimbursement from employer is best approach.
- “Can you please explain what a 72T procedure is?” – Take equal IRA distributions before 59.5 without 10% penalty.
- “I am considering investing in an opportunity zone fund to defer capital gains. What are some top items I should be thinking about?” – Consider fund structure, compliance requirements, and ten-year holding period benefits.
- [33:35] Title Question “How can I be exempt from paying the IRS the penalty of using my retirement money to buy a condo?” – First-time homebuyers can withdraw $10,000 from IRA penalty-free.
- “Are expenses such as real estate property taxes and home improvements deductible on vacation homes that are used both for personal and rental purposes?” – Personal use over 14 days limits deductions to rental income.
- “I’m attempting to calculate the reimbursements for our administrative office. How do I calculate, how much can I reimburse myself for tax-free every year?” – Calculate square footage percentage times home expenses for reimbursement amount.
Resources:
Schedule Your Free Consultation
Tax and Asset Protection Events
Full Episode Transcript:
Barley:  Hey, everybody. Welcome back to Tax Tuesday. We’re live on YouTube. Welcome back. We’re officially at the two-minute warning of 2025, so less than 30 days, less than the year. We’re live here talking about your tax questions. Welcome back everyone to Tax Tuesday.
Eliot: Great to have you.
Barley: My name is Barley Bowler, CPA, tax advisor here at Anderson. Great to have you all back in the chat. As you all know, this is for everyone on YouTube. We’re going to go through some of our services, but this is open on YouTube, answering your tax questions, bringing tax knowledge to the masses, and that’s every other Tuesday. Here we are.
Eliot: I’m Eliot Thomas, manager of the Tax Advisors. Just so thankful we have you here.
Barley: Anyone here for their first time, big welcome to you. Welcome from all of us here at Anderson Business Advisors, again, every other Tuesday. We do this Tax Tuesday live webinar answering your tax questions. Submit your questions. Here’s the email address, taxtuesday@andersonadvisors. We go over your questions, sort them out, go over them live, try to have some fun doing it, and bring you some knowledge.
In the meantime, this is meant to expose you to a myriad of different concepts, and we’ll go in the weeds sometimes too. We’ll dig a little bit as well, but we got a Q&A feature in the Zoom. Post any questions that you have. Also we got a live chat in there if you got any questions about the service, the presentation, or anything, if you have any audio or video trouble there.
Eliot: We have Troy handling the chat today.
Barley: We do? Good.
Eliot: Yeah, we got Patty out on the road today, so Troy’s taking over.
Barley: Thank you, Troy. Most of you guys met and know Troy, Mr. Troy Butler. Submit questions as we go. We’re going to answer your questions live as we go as well. Of course, if you’re one of our clients here, you can submit questions anytime you want to the Platinum Portal, plus we have a live ongoing Zoom meeting five days a week, five hours a day. You can come in there and ask questions as well. We’ll go over the service as well. If you guys want to become tax clients, we’ll certainly provide that option today. Fast, fun, and educational.
Eliot: Yeah, and Troy’s saying he’s the best.
Barley: Yeah. I’m sorry I hadn’t mentioned that yet. Troy’s the best. He really is.
Eliot: He’s prettier than Patty with the beard, so we’ll take that. In the background answering questions, we got Dutch, Jared, Jeffrey, and Rachel. They’ll answer all your questions that you throw in there. Usually we get about over a hundred, one of these sessions. We’re so thankful to have their efforts.
Barley: Yeah, we got some heavy tax hitters in the background guys, so hit them up with your questions. Anytime you guys have a question related to the topic here, we’ll certainly try to pull that up live as well. Yeah, let’s hop right in. We’re going to run through the questions real quick here just to give you an idea of what we’re going to be going into and then hop right in. Anything you want to announce before we get started?
Eliot: We got the live event that’s coming up this weekend down in Dallas, Thursday, Friday, Saturday. Like I said, it’s weekend. If you’re near Dallas, come in to this live event. I’m sure we have some promo in our slide deck here today.
Barley: Right. I’m sure we’ll be talking about at some point in time. Absolutely. Yes, a live event this weekend. We will be giving you more information on the live and virtual events. More upcoming, lots of events upcoming. Just trying to get you guys this information, tell you about these services, and let’s hop right in.
Eliot: Let’s do it.
Barley: All right, we’re going to go through the questions here. “What are research and development costs?” For some of you, that actually may be an issue, maybe not for a lot of us but for some of us, the R&D costs, some new rules there. “How are they deducted?” Great question.
Eliot: “What expenses that I incur on behalf of my employer can I deduct on my personal 1040 tax return?”
Barley: “Can you please explain what a 72(t) procedure is?” Hopefully Eliot can.
Eliot: Yeah. “I am considering investing in an opportunity zone fund to defer capital gains. What are some top items that I should be thinking about?”
Barley: Good. “How can I be a tax exempt from paying the IRS the penalty of using my retirement money to buy a condo?” More real estate questions. Great.
Eliot: “Are expenses such as real estate property taxes and home improvements deductible on vacation homes that are used both for personal and rental purposes?”
Barley: Yup. Another very common question. “I’m attempting to calculate the reimbursements for our administrative office. How do I calculate how much can I reimburse myself for tax free every year?” We’re going to go into that as well.
Eliot: There we have it.
Barley: There we have it. That’s the question. We’ll get to the answers though. As usual, guys, make sure you sign up for the YouTube pages here. Are we subscribed?
Eliot: Yeah, we are.
Barley: Toby, Clint. Toby focusing on more tax law, Clint on the asset protection. Tons of great interviews as you guys know. Check out the YouTube channels there.
Eliot: He was just cutting another video or two today.
Barley: Yeah. I don’t know how up to date this is, but so much new content coming out all the time and over a thousand videos, over 1100 videos. Lots of content on there, guys, all free. This is all trying to just get this information to you guys on YouTube. It takes a lot of work to get through all this. It isn’t like you just hear it once and you got the answer. We want to try and get this to you guys in as many different ways as we can. The upcoming event, here’s the QR code as promised. Do you scan QR codes?
Eliot: I do.
Barley: Okay, good. I tried it and he was like, you just take a picture of it, right? I was like, no, you have to have the QR code scanner. I forgot all about that. I haven’t done a lot of it.
Eliot: I do both. Yeah, I’ve done that.
Barley: Okay. For those of you who don’t know how to scan the QR code or visit the website, we got more information there. Lots of ways to get in touch with us on more information on that event. What’s this?
Eliot: Number one real estate protection workshop in the nation.
Barley: What?
Eliot: Pretty bold. That’s true. We stand up to it.
Barley: Tell them all about it.
Eliot: We got, again, the live event here in Dallas coming up Thursday, Friday, Saturday. Please attend if you’re anywhere near. It’s a great event. Chance to meet some of your other like-minded investors and things of that nature. Of course we’re covering a lot of tax, asset protection, and all that good stuff. We have the virtual Saturday, December 6th as well going on, and then the following weekend, December 13th on Saturday.
Barley: Yup. For anyone that hasn’t been to one of these live events, they are a lot of fun. Meet your fellow entrepreneurs, network. You get a lot of good synergy there. A lot of good conversations that lead places. We form those network networks and build them out.
Eliot: Absolutely.
Barley: If you want to, you can scan this QR code right now and set up a strategy session with us right now. Are you interested in becoming a client? You want tax planning, tax guidance. Maybe you have someone doing your tax preparation, but maybe you don’t have a CPA you’re comfortable with guiding you through this whole tax maze. This is where we want to do strategy sessions, tax planning, tax consulting. Scan that code and get more information right now. You can set up a call right now.
Eliot: It’s a good point you make. I think the number one thing I hear from clients is I’m not hearing anything about why my taxes are the way they are, not getting any insight on planning or anything of that nature. We have a whole staff, Barley being one of them with tax advisors to handle just that.
Barley: Yeah, it’s such a good point. To no fault of your guys’ zone, I’m sure in your mind it’s like, tax is tax. It means preparation, filing, advising, all this stuff. In our world, those are very different silos. Of course, they’re all the one engine driving this whole tax machine, but a lot of different components there. Any questions you guys have, please let us know. That’s why we’re here today.
Eliot: All right, let’s do it.
Barley: We’re starting with a different one.
Eliot: It is. We talked about it not too long ago on one of our tax wises.
Barley: Yup. We had changes in the recent legislation. We talked about that.
Eliot: “What are research and development costs and how are they deducted?” Really a niche area, but it is talking about developing products, anything related to that or especially software. We have clients that have been in both those avenues. You’re really looking at the expenses related to actual development of that product. Now it’s a fine line. It’s easy to get into the areas where maybe they aren’t cost related to that, such as maybe building a building where you do all this isn’t related, but anything related to making a product.
We’ve had clients make accessories for vehicles and things of that nature. We certainly have a lot of you out there in software development. In the software development field, all those costs related to that, typically you can deduct right away with a new rule. This is all as of July 4th. Prior to that, you had to amortize over many years.
Barley: Eighteen years.
Eliot; Exactly. A long time. Exactly right. There are some other nuances behind it too. As of July 4th with the new bill came in, as long as it’s domestic, that as you’re doing it here, the costs are in the US, you have a choice. You can go ahead and deduct immediately a hundred percent of those related costs for R&D purposes, or you can make an election to go ahead and amortize over five years.
We were hypothesizing. Why would anybody want to do that? My gosh, I can take all that deduction right now. Why would I choose five years? We thought about it, we thought about it, we thought about it, and just stared at each other for a while. What if you had half a million dollars of R&D costs, and maybe you have only $200,000 of income that you expect this year and the future years?
Probably it’d be better over time to just take a hundred thousand each year as opposed to $500,000 in the first year. Yeah, you didn’t pay any taxes the first year if you wiped it all out, but what about taking a hundred thousand each year? We talk about that in many other avenues as well. You’ve heard a lot of shows where we talk about spacing that expense out there. That’s one thing that’s really nice, again, if you have domestic related R&D costs right here in the US, then you have an option. Whatever fits you, it works really well for a lot of our clients as a tax planning item.
However, we also have a lot of work with international development on certain items. There, we’re still under a 15-year amortization. That means if you incur $500,000, divide it by 15, that’s how much you’re going to deduct each year for the next 15 years, not nearly as favorable. Clearly, it’s one of those things to try and bring high tech, any research type element back on state side, and that’s what’s driving it. As we always often talk about, you hear Toby talk about this all the time. Barley brings it up. A lot of our tax code is here to drive incentivization. That is the word right there. Exactly.
Barley: Right, that domestic portion that encourages us for domestic investment, domestic research and development. What point did I want to cover on there? Exactly, spreading it out over five years. We’re trying to eliminate those high bracket tax dollars. We don’t need to eliminate our first $10,000-$12,000 of income. It’s not even taxed. It’s at 0%.
Me, you, and Warren Buffet all paid the same on our first chunk of income, effectively zero. It’s expensive to eliminate 0% tax dollars. What’s the point? We’re going to try to offset those higher tax dollars and spread that benefit over time. Exactly. Great point. Time value of money plus just good classic tax planning. What costs can we deduct here?
Eliot: That is what we run into where it gets a little bit gray. Again, you’re going to hear the same thing over and over. It’s going to be labor costs, but they’re directly related to that product development, that software development. Of course, any material supplies used, any machinery used in there, you can certainly depreciate. We talk about bonus depreciation. We got that, or 179. You can see where some of these other aspects of the code start coming in. Nonetheless, this is R&D.
We have to be careful though because if it’s again the building or something like that, that’s not allowed. That’s still going to be under 39 years because it’s a commercial building. You’re looking at the straight line depreciation. You could still do a cost segregation, bonus depreciation perhaps on that, but it’s not going to be your immediate R&D deduction, certain related overhead costs that are directly related to rent.
Supplies, again, like we’ve talked about, repairs, maintenance, anything like that, directly related to the product itself. Travel costs even, related again directly to the R&D if you can have that pathway of good documentation showing that travel was related directly to the R&D. We talk about that all the time. We’re not asking a whole lot more than we would for any other deduction. Just a good documentation, great bookkeeping. We always talk about that. Same thing, but we just don’t get to talk about R&D too much. It was that big change with the new bill, so that’s why we’re hitting it today.
Barley: Product, software app like Eliot mentioned, those are going to be common things. For cost accountants out there, you might be thinking like direct versus variable expenses. Those are avenues we’ll go down there to figure out what kind of costs we allocate actually to this product. They’re deducted different ways.
Eliot: Just a real quick overlook at what’s not included, it’s going to be more your general oversight costs related to it. It could be indirect support, payroll, and things like that, cost related to that type of thing. Things that are just outside of the direct impact on that product or software.
Barley: One of the ones we talked about earlier, that quality control function, that’s a confusing one, but if you think about it in a way, that wouldn’t be the development of the product. Once the product’s developed and we’re putting out product, we need to test for quality control. That’s why that isn’t included in there. That’s another confusing one.
Again, this is going to apply to a certain specific range of you guys. If you have specific questions on this, please let us know. We can certainly go into more detail on this. This is part of the new bill. It’s great legislation encouraging us to invest dollars in manufacturing. We’re going to talk about qualified opportunity zone here in a little bit as well, similar concept there.
Eliot: Yeah, we’ll start building. It’s one of those things. One thing that we did exclude, we’re just trying to look at the examples. We have a lot of real estate investors. Probably you went out there with your two by four and tried to learn different ways to get three nails or two nails instead of when three is really required. That’s not R&D. That’s probably not what they’re looking for here. It doesn’t have to necessarily be techie, but it’s going to be more product driven or software development, things of that nature.
Barley: Yeah. Great.
Eliot: I think we got that one.
Barley: Yeah. Any questions on that, let us know. Again, if you have a specific product or service that you’re developing, that could very well be a good option for you. Let us know if you have any questions on that. All right, any questions we want to hit in the chat there?
Eliot: I think they got it. They’re on top of it. No surprise.
Barley: All right, moving on then. “What expenses did I incur on behalf of my employer can I deduct on my personal 1040 tax return?” What was that thing we used to have? Miscellaneous, 2%, itemized deductions.
Eliot: Something like that. Somebody remembers.
Barley: Pre-Tax Cut and Jobs Act. We did have a way we could deduct.
Eliot: In 2016.
Barley: Whatever exceeded 2% of your AGI or whatever. We had that previously. We don’t have many options here.
Eliot: We really don’t. That’s why I picked this, because I do get this question surprisingly quite a bit. You’re incurring your own expenses on behalf of your regular W-2 job on behalf of your employer who is an unrelated party. You really don’t have an avenue to deduct those. Hopefully they’ll reimburse you. That’s the best you can do. We’ll talk about that a little bit later on. That’s certainly something.
Barley: That’s your number one.
Eliot: Yeah. If they choose not to reimburse, they’re not forced to usually, so you really don’t since the Tax Cut and Jobs Act. Again, even under the July 4th tax bill, it continues to be that we have to itemize first back when we did do this, and then it had to be in excess of 2% of your adjusted gross income. If your AGI was a hundred thousand dollars, you had to incur at least $2000 of these expenses before you could deduct the first dollar. It wasn’t all that favorable to begin with, but that’s even gone, anything like that. We learned in our research that there are four exceptions to this, and people have certain expenses related to this that they can deduct.
Barley: The first one’s pretty obvious. You probably even have assumed that. There’s a term in here, reservist. Not all armed forces, but armed forces reservists can be reimbursed for certain. I think it’s moving expenses and stuff.
Eliot: Exactly. If you have to do some travel related to your reservist position outside of a hundred miles, then you can go ahead and reimburse those expenses. We’re glad to see that we have that available for those serving the country. Qualified performing artists, that’s a tough one, but it is allowed. It’s very restricted. Some of the detail there.
Barley: We could throw a starving artist in here potentially. What we’re talking about is for qualified performing artists, whether they can deduct these unreimbursed expenses. Yeah, you can if your AGI is below a staggeringly low $16,000. If you’re effectively close to the poverty line, you can deduct that. Hopefully that’s not the case for you guys, but if you’ve got a crazy uncle, cousin, or something in the house that’s a juggler, maybe this will be for them. Of course we just want to throw these things out.
Eliot: They’re all ears right now, I’m sure.
Barley: You get the knife juggling act going again.
Eliot; Exactly.
Barley: Yeah, but it’s primarily for reservists. What else? For local and government officials, I don’t even know what this really means, to tell you the truth, for fee basis government officials.
Eliot: The best we could determine from that is where you are an employee of the government. However, you’re only paid on a specific fee for a service you perform. It’s not the same as an independent contractor. It is distinguished from that. I’ve never met one, anybody who’s paid that way, but that is one of the exceptions. The last one, a very understandable one, employees with impairment related work expenses. If you have any expenses, if you’re impaired and expenses related to that job, you can go ahead and take deductions for that.
Barley: Yup. Again, if you can get reimbursed by your employer, that’s option number one. If not, then we have some options on that. Would you throw that $300 educator thing in there? Would that be in this category?
Eliot: I think it’s certainly worth mentioning. If you’re an educator, you can get that special deduction.
Barley: Yeah, out of pocket up to, I think it was $300. It might have gone up to get more than that, but I think it’s still $300.
Eliot: Yeah. I don’t know why it wouldn’t be on this list, but it wasn’t one that came up.
Barley: Same concept. Yeah. If you’re a teacher or educator, I think it even includes coaching potentially. A lot of times you guys are coming out of pocket for a lot of those supplies. Just throwing it out there. Any questions, let us know.
Eliot: I know we got a lot of great teachers here that I personally know here in the valley that do that. They pay on behalf of their students.
Barley: Yeah, absolutely.
Eliot: We’re very thankful for that.
Barley: All right, moving on.
Eliot: Yes.
Barley: All right. What’s this one?
Eliot: All right. “Could you please explain what a 72(t) procedure is?” I don’t know, but it sounds scary.
Barley: Sounds like a tax related thing.
Eliot: It is. We’re probably talking about something to do with 72.
Barley: Section 72. We dig in there a lot. Yup. What we’re talking about here is how to turn your authorize, your traditional IRA. A few terms here, required minimum distributions, age of retirement. We’re looking at our IRA and potentially turning it into an annuity and setting it up in a way potentially where we can avoid the penalty. It’s the whole goal here. What’s the background on this?
Eliot: Let’s say you’re 30, something’s come up, and you need money that’s been put away into an IRA. We are talking IRA here or IRA related. That means SEP IRA.
Barley: As opposed to a 401(k), individual retirement arrangement IRA.
Eliot: Or any of the IRA based like, again, a SEP IRA or something like that, but not your 401(k) as Barley points out. Exactly right. Let’s say you’re 30 and you need that money earlier for whatever reason. You can put up an arrangement, if you will, where you take equal amounts, just like an RMD almost, equal amounts each year until there’s a couple different ways of defining the amount but basically over the term of your expected life. You can start getting these amounts, and you’re not subject to the 10% penalty. You are taking out from an IRA, so we’re still going to pay tax on that.
Barley: Right because you got a tax break going in.
Eliot: Exactly. We’re not getting anything like that as far as getting away with the taxes on it, but we’re not paying that penalty. For those who might really need this, maybe they’ve been in some injury or something like that, they have some medical condition, whatever it be, you can go ahead well ahead of time. You don’t have to be 59½ or in retirement ages and you can go ahead and start taking from your IRA. Again, three different basic ways of doing it, you can calculate it on the same way you would an RMD, which is based on your life expectancy.
Barley: Require Minimum Distribution just in case anyone is unfamiliar there.
Eliot: Yeah. That is adjusted each year. That amount you take out is, it looks at what’s in the plan, and then they divide again by whatever your expected life is. That can change from year to year.
Barley: Sounds like some actuarial formulas.
Eliot; Exactly. Yeah. You’re definitely talking someone who’s smarter with numbers than I, but then you can have also these straight line payments where you’ve again determined what your expected age is, and you just take the same amount each year. You noted a really interesting little switch that you can make in between this process. If you start out where you take the even amounts of payments over time, you can make a switch to the RMD method, which can fluctuate a little bit over years.
Barley: Right. It allows one time switch.
Eliot: Yeah, the one time that you’d found that exception to it. It’s a unique thing. We’ve only get asked this a couple times. That’s why I picked it up. The last time I was asked was probably seven years ago. I don’t know. It’s been a long time since this has come up again. Great to see it back out there. Every now and then someone asks about the 72(t), it is a real thing. It is only for IRAs. It’s a way to get that money out earlier if we need it.
Barley: Yup. Normally you have to wait until age of retirement to start pulling from the IRA. This just takes that one lump sum and makes it even distributed payments from now through the rest of your life. It just avoids that penalty.
Eliot: Yeah, the 10% penalty.
Barley: Exactly. Good.
Eliot; There we go.
Barley: Yeah. Anything else on that? No, I don’t think so. Good question. All right, what’s next? “I’m considering investing in an opportunity zone fund to defer capital gains.” You guys have likely heard that term, qualified opportunity zones, economically distressed areas. The government is, again, incentivizing us to invest our dollars into these economically distressed areas. I hesitate to say economically distressed. For some areas, they just want to encourage investment. They don’t have to necessarily be economically distressed areas. Certain rural areas are going to be perfect for large scale manufacturing, so they want to encourage that open space, more resources, et cetera.
Anyway, back to the question. “Looking at an opportunity zone fund to defer capital gains.” That’s what it’s for. If you’re sitting on a big chunk of capital gains right now, one of the things you’ll want to consider potentially is a qualified opportunity zone and using a fund to defer or eliminate those gains. We’ll talk about that detail here in a minute, but what are some top items should I be thinking about?
Eliot: One thing that often people ask us is, should I create my own fund?
Barley: I don’t like doing it myself.
Eliot: Do it yourself thing. No? Should I go to some big investment firm that’s doing it?
Barley: That sounds expensive.
Eliot: Yeah.
Barley: We got to find a sweet spot in there somewhere, right?
Eliot: Yeah. There isn’t one. It’s one or the other. You’re going to have to either do it yourself, or you’re going to have to find a group out there that’s investing a lot of money. Sometimes it’s nice just to tag along with the big folks like that who are investing in those.
Barley: Like a syndication thing.
Eliot: Right, but it is a fund. What is a fund? It’s either a corporation or a partnership. Now that could be an S-corporation or a C-corporation. A lot of time we see real estate development. If you ever heard anything or learned anything from us, we never put appreciable real estate into a corporation. We’re going to argue that you want a partnership if it’s real estate.
You can invest in actual businesses as well. It doesn’t have to be real estate. If you’re doing that, then maybe the S-corp and C-corp are better options in that case. Nonetheless, that’s your fund. This is always coming from capital gains. It’s always capital gain related. It’s not ordinary income, but if you had a lot of capital gain, you put it into the fund, which invests in the opportunity zone. Typically in a building or something like that, or maybe even barren land, but you have to make improvements. There’s a testing that goes with this.
Barley: Substantial improvements.
Eliot: Exactly right. There’s testing to show that X amount of your resource or your assets are being put into that zone or that fund, that area. There’s a lot of testing that you’re responsible for. If you’re a do-it-yourselfer, that’s fine, but just know that you have to meet all and check these boxes off each year. It’s a reporting that you have to do. Often we’ll recommend just go ahead and get it with a bigger group that’s putting into it.
Eliot: This came about in 2017 with the Tax Cut and Jobs Act. It had a lot of other incentives that you don’t hear about right now because a lot of them are phased out. They expired early on by 2019 or something of that nature. However, the idea that you can defer your taxes, imagine if we go back to 2017, you had this capital gain, you want to defer it, you put it into one of these funds, and you wouldn’t have to pay tax until the end of next year, December 31st, 2026. It was really great then all that time.
Barley: Just a deferral though. It’s not like it eliminates.
Eliot: Exactly.
Barley: It just pushes it to the end of 2026.
Eliot: Good point. Excellent. Very important point there. You’re paying and you never changed the character. If it was a short-term capital gain back then, it’s still going to be a short-term capital gain December 31st of 2026. Would people still want to do this today? We have used it as a tax plan. I’ve been in consults where, hey, you do have this option. It doesn’t last long, but if they’re in a situation, they just need to get that capital gain off their return just to buy them one more year. If that’s all they can get, that’s great. Indeed, it will expire at the end of next year and they’ll have to pay the tax.
Barley: Why would I do it then?
Eliot: If you had a wad of taxes, let’s say you had $300,000.
Barley: I’m sorry, I was jumping ahead of the 10-year part. Let’s finish that part.
Eliot: Yeah. No, that’s a good point. If you invested in a building and then you pay your taxes at the end of 2026, what Barley’s point out here, okay, you still have this building, what if you sell it later on? What happens? If you hold onto it for 10 years, any additional gain, you don’t pay any tax on. That’s fantastic. If you get the right property and it takes off, it’s really hard to beat.
Congress knows this as well. There will be we’ll call it the opportunity zone part two, 2.0, that will be coming up in 2027. Everyone asks me this. Can I just roll over my previous one into the new? No. There are different rules and they have some improvements on it.
Barley: Great question. Love the way you’re thinking. The IRS just declined to it.
Eliot: Barley hit on a really important point. It’s another aspect to this new plan that’s coming out. They really do encourage new investment for the rural areas. Get some money out there to the areas that really don’t have a lot of financing, typically. They really thought ahead on this and tried to take away some of the problems that were going on. Not that there was a reported a lot of problems, but nonetheless they tried to refine the process. We have a lot to look forward to in 2027 with this.
Strictly speaking today though, what do you got to do? You have to have capital gains. You got to put it into a fund, a qualified opportunity zone fund, which is a partnership or a corporation. It invests in an opportunity zone, an area that has businesses, land that needs improved on, or something of that nature. You will pay tax at the end of 2026 on that capital gains. If you hold onto that investment for 10 years, no tax.
Barley: Right, on the gain. Absolutely. The qualified opportunity zone, that’s just the political boundary identifying the actual area, drawing a box around the area where we can actually invest. The fund, as Eliot said, is either going to be a corporation or a partnership. The fund is just the entity we use. What do we put the money in to go invest? What taxable entity are we using? Again, partnership, S-corp, C-corp. That’s your opportunity zone fund and within the greater opportunity zone.
The rural thing’s cool because we’re trying to build smart factories. We can’t refurbish a lot of these old factories. We have to build new. We’re encouraging massive dollar investment, massive capex investment in these smart factories, essentially. We’ll see if it all works.
Eliot: Yeah. Technology’s really making a difference.
Barley: Let’s see when it all plays out. Build those robots, Elon.
Eliot: Whether or not you want to do it yourself, take on all the responsibilities of the compliance, which there is, it’s not like it’s small.
Barley: That’s probably the big one.
Eliot: Yeah.
Barley: The tax part, we can help you with that, but the compliance part, that’s what I’m hearing about.
Eliot: That’s on you, the do-it-yourselfer. You get to choose though the investment. Hey, I want building A, not building B. You put it into the larger fund, you won’t be making those decisions, and you won’t have that responsibility either. It’s a tossup. It just depends how much you want to be out there on your own on that.
Barley: Yeah. Whatever experience you guys have, if this is something you’ve done before, then go for it. If you’re new to this, likely look to hop in on a group. That would be the basic starting point.
Eliot: Better, if you find out where a big group’s investing, maybe $2 billion or something like it, then buy the property next door.
Barley: We’re here in Las Vegas obviously. I remember when they were building Allegiant Stadium and stuff, I just remember looking at these gas stations and hotels around and be like, man, those guys are so happy right now. They’re just like, yes.
Eliot: Especially if you just built. I know in my area where I built, immediately I had two car washes, a 7/11 type convenience store, all of them with that special bonus depreciation.
Barley: It all just came up overnight.
Eliot: All this. Again, just another example of where we started out earlier, the code is there to try and work our investment and incentivize. I think it’s our word.
Barley: Right. It push us where we need to go. That’s right.
Eliot: This is just another example of it.
Barley: A lot more we could go into there. Top items you should be thinking about, obviously the capital gains, the time period. Be careful with this. It’s not a 1031 exchange, but has these similar strict timelines and requirements. The compliance part is what we want to be focused on there.
Eliot: Yeah. Basically you got to get your capital gains within six months into a fund. If you’ve incurred the capital gains, get it in there. You do have a timeline to how fast you can invest in it. Ninety percent of the activity has to be, again, in that zone with that investment. You have to do the paperwork behind that to make sure the testing, as they call it. That’s something just to be aware of.
Barley: Another thing worth mentioning, if you invest a hundred thousand dollars capital gains, the substantial improvement requirement, you’re going to have to come up with another $100,000. Just keep that on the back burner there. If you only have the capital gains to reinvest, you’ll have to have other sources of funds. I think it’s 80% or a hundred percent.
Eliot: You have to double the value.
Barley: Yeah, double the value. If you buy a building or a car wash for a hundred, I guess that’d be more real estate, you have to improve the asset by a hundred percent. Just throwing that out there. It isn’t just to defer the capital gains, you have to reinvest as well. Again, back to the point, that’s what they want us to do. Take our cash, invest it for the long term growth.
Eliot: Yeah. Definitely, that 10-year thing is attractive though.
Barley: Yeah.
Eliot: I think that’s what we got.
Barley: All right. Make sure you subscribe. I think we’ve mentioned this a couple of times.
Eliot: Yes.
Barley: Toby Mathis on YouTube. Hey, we’re on YouTube live right now, so you can go check it out. Subscribe to both of the channels, tons of great guests. Guys, you can dig through the content on there. It’s just really valuable. The interviews there with captains of industry and different leaders in the industry, a lot of great content there. Of course, scan this QR code right now to schedule a strategy session. You really want to go into the weeds on taxes? We are ready, so scan this code and get more of an idea of what our services are. We’d love to have you become a client. Live events. This is something we focused on for a long time. We had Covid tapered off, but now we’re coming back a little bit with the live events.
Eliot; Yeah. Doing more of the live events, we really had a fine tuned, well-oiled machine prior to Covid we were hitting. We had teams, maybe three different teams, four different teams out there at any time on any weekend across the country.
Barley: Big production.
Eliot: Incredible staff supporting it. Now we got them all. We have two this weekend actually going on. We have the Dallas one and we have another event. I want to say it’s up in maybe Minneapolis area, something of that nature. It’s cold wherever it is.
Barley: Right, up north.
Eliot: Right, so take the parkas. Nonetheless, it’s a great time, especially the Dallas one here where this is one of our own TAP events. Great chance to meet clients. You’ll learn the stories, hear what they’re doing. You get in these conversations. I did X, Y, and Z. Yeah, you don’t want to do Z. That one didn’t work so well. Here’s our story. A lot of that, that talking through things, and that’s where you get some of your best advice out there.
Barley: I totally agree. I’ve heard it too. Just overhearing conversations.
Eliot: The best is listening to you guys talk about your investments. I love this. I know it’s hard to believe. I just shut up and listen.
Barley: Right, yeah. They all just start going back and forth. Here’s what I’m doing, here’s what I’m doing, here’s what I’m doing. It’s great.
Eliot: I got to say that’s one thing that’s exciting. Whenever you hear Clint, Michael, and Toby start talking about stuff like that, it is amazing. I just completely go silent and I just learn. I just go Zen in a sponge.
Barley: That’s right. Soak it all in.
Eliot: It’s all because of you guys.
Barley: That’s right. That is the nice thing about Anderson, we’re just applying what the partners are doing, what works for them. It’s nice to know. This isn’t just theory. I have a degree in accounting theory.
Eliot: Right.
Barley: Pretty useless. Where the rubber hits the road, that’s where we like to be.
Eliot: Exactly.
Barley: All right, let’s keep it moving. All right. “How can I be exempt from paying the IRS the penalty of using my retirement money to buy my condo?” Similar line here. We’ve got some retirement account. It could be IRA, 401(k), whatever. How do we get cash out of that? I guess this could be a personal residence or a business asset, maybe.
Eliot: Yeah, we’re thinking personal residence here. This is just another provision, where we start to look at the distinction between IRAs again and your employer sponsored plans like your 401(k). This, again, is only for the IRA. I chose those to the 72(t) in this question not only because they’re full of a lot of useful knowledge, but they show the difference between the different types of retirement plans and how the code can be unfair it may seem at first.
Barley: Very different world.
Eliot: It is. It really is. The IRA here, again, you can take money out if it’s for personal residence and avoid penalty. Wow, okay. Can I do that with my 401(k)? No. Okay. That’s something that we need to be aware of, that there are different consequences to the type of retirement plan you have. It doesn’t mean just go out and change your plan right now. You just want to be aware of it. This is one provision for the IRA that you can take funds out.
You are limited to $10,000. That’s a lifetime exclusion. Once you hit $10,000, you can’t do it again. Interestingly enough, if you’re married, each spouse can take $10,000 out. You can reapply, take $10,000 out. It can go towards down payment, building a new building, something like starting the construction or something like that, anything like that towards getting your personal residence. It’s just a thing that the government allows us to do to get a start in. Again, they love to encourage real estate. We see that throughout their code. This is just one element of doing that.
Barley: You can do this every two years. It’s for first time home buyers, but every two years it resets the clock. You’re back to be in a first time home buyer in two years. Yeah, I do like that option with each taxpayer and spouse if you’re married, filing joint, so that effectively doubles your limit there. That’s great.
Eliot: This can go to acquisition costs as well, so anything like the closing again and things like that. We talked about how an IRA can do this. We got to thinking, my gosh, what are going to do if you have a 401(k)? Anderson set me up with a solo 401(k), what can I do? You do have a loan provision in your 401(k).
Barley: Exactly, and what you can’t do from the IRA.
Eliot: Exactly. They got back at them on that one. You can take out the $50,000 as a loan from your solo 401(k). You can do that with any 401(k). The rule, the law allows it, but you got to go look to your plan itself because your plan can be more restrictive than what the rules are, the code. You want to check. If you’re working for a big CO USA then you want to make sure that their 401(k) allows for that, but the law does allow for taking a loan. Certainly your solo 401(k), you’re the one controlling that, so you can take your own loan up max to 50% is what you can take out of there. That is something that one could do there, but that is a loan. You’d have to pay it back with interest, but at least if you needed it, you’re allowed to use it for whatever you want when you take the loan, not limited just to your house.
Barley: Just a fun fact here, that first time home buyer credit, that can apply to a spouse’s child, grandchild, ancestor. It doesn’t have to be your primary residence. Just throwing it out there. This is maybe common today actually. We have families moving in together, that thing. If that applies to you, you can take a look at that. We have some other exceptions here too.
Eliot: We do. Just one other point I just want to point out. What happens if I take this out? I’m in the IRA land again. I’ve taken this money out, my $10,000, going to get my new home, or at least a down payment towards it. What happens if it falls through? You got 120 days, you got to get back in. This is another thing, like anything that’s got rules, dates, and limitations, so you got to just be aware of that to make sure you get it back in time.
Barley: You can’t just keep the money.
Eliot: Unless you wanted to pay the 10% penalty.
Barley: This is all about avoiding the penalty. Yeah.
Eliot: Again, this is a taxable event. I’m taking out, you will pay tax on it, $10,000, you just don’t have to pay the penalty. Just to clarify on that. There’s a lot of other little nifty little details. You’re right, there are some exceptions. Did you see some of those there?
Barley: Yeah. Let’s see. Eligible first time home buyer, but that’s the obvious one. We have this over 59½. That’s just our standard cutoff mark there. Also disability, distribution to after death, that’s going to be included there. Certain medical expenses, health insurance.
Eliot: I like that one right before that. Distribution is part of a series of substantial equal periodic payments. That sounds a lot like 72(t).
Barley: SEOS’?
Eliot: Yes.
Barley: Whatever it is.
Eliot: SOSEPP, is that what it is?
Barley: SOSEPPs, there we go. We’re going to have some more fun acronyms, guys, so stick around.
Eliot: Yeah. That is the 72(t) that we’re referring to there. Just another example or ways to get money outta your IRA without paying that 10% penalty. There is a little bit of flexibility there on things that will allow for this.
Barley: Just to reiterate, guys, and we’re just reading off a sheet here, the stuff isn’t on the slides, but we’re talking about getting money out of your IRA. What are ways we can do that to avoid the penalty? Those are your topics there.
Eliot: A 120 day limit and again, $10,000 overall dollar limit that we have on that one.
Barley: It does not apply to the 401(k)s, 403(b)s, et cetera. All right. Any questions we got to hit there?
Eliot: Yeah, they’re filled up with questions on this stuff. No.
Barley: All right, no 72(t) questions?
Eliot: I can’t believe it. I was expecting that to go off the charts.
Barley: We do. You can look up 72(t)(2)(F).
Eliot: If you have nothing else going on tonight.
Barley: Yeah, right. If you got trouble sleeping tonight, you can crack out the code book and see what’s going on.
Eliot: That’s what these guys were talking about.
Barley: Should we keep it moving here?
Eliot: Yes.
Barley: Let’s see. We got a combined question here, six and seven. Do you have that combined together?
Eliot: I do.
Barley: Great. What’s that one?
Eliot: This is going to be our expenses such as real estate property taxes and home improvements deductible on vacation homes used for both personal and rental purposes. This has come out of nowhere. We’ve gotten this question a lot lately. I know the team has, we’ve talked about it in our meetings, and go over this over and over. There’s a lot here that more than meets the eye. Just off the top, I would say, okay, you got a house, can I deduct a real estate property taxes? Yeah, you can.
Barley: In most cases, personal or business, you can.
Eliot: We talked a little bit about this. Where are you going to deduct that?
Barley: If it’s personal, schedule A, if you itemize your deductions right as opposed to the standard deduction, or if it’s business, you just deduct against rental income.
Eliot: Right. On the Schedule A, we do have that limitation though, salt limitation. It is up to $40,000. That’s nice, which phases out if you have over half a million of income. Nonetheless, you’ll always get at least $10,000, and this would be part of that if you’re paying county property taxes or something like that. Yes, we can deduct. Home improvements, certainly. If they’re on your personal residence, we don’t get a deduction, but we get to increase your basis for when you later sell or something like that.
Flipping over on that, what if it’s a rental? You pointed it out. Yeah, you can deduct the property taxes there as a rental. Again, if you have improvements, it depends. Is it a repair, or is it actually an improvement? Repair being just that quick fix, something that brings it back to how it was without improving on it. It’s not a betterment.
Example, I break the stairs of the building I’m renting from Barley. I go out there, I get a hammer or something like that, and I just put a couple nails into it or something like that and just bring it back to how it was before I broke it. That’s probably a repair. He can deduct that expense immediately this year. Now, the second time I come in and I break it again, boy did I really do it this time, and I realize that there was a lot of wear and tear on it. Now it needs all kinds of boards in there to shore up these stairs. I’m putting a lot more effort into it, really not liking it. That’s going to be more of an improvement.
I’m making it better, stronger than it ever was before, perhaps. Putting some improvement in it, maybe, or adaptation. If you had a whole different use for a particular thing and you’ve changed it, those are all things that are going to be capitalized. That means we got to depreciate it over time, and that’s what we’re looking at. Within this question though, we had the situation, we have both worlds going on. It’s a personal and it’s rental. We have some other things that we got to be aware of there.
Barley: Right, absolutely. There’s a number of ways we could look at this. If we buy an asset for business use, let’s say we’re buying it to rent out and we use it personally, it can affect how much deduction we can take. We do have some limitations here. If you use the business asset for less than 14 days or less than 10% of the total fair market days, whichever’s less, you got to keep an eye on that one. As long as you’re within that little sweet spot, you can deduct anything you want. You can take a loss, you can do a cost seg, you can take a big bonus depreciation, report a loss, all that.
As soon as you go over more than 14 days or 10% of the total fair market value days, it’s now considered a mixed use asset. It’s part personal, part business, and you can’t take a loss. You can deduct down to zero. You can deduct expenses, but if you’re going for that big cost like bonus depreciation, the deduction, you’re not going to get that.
Eliot: If you’re doing improvements, what I hear from our clients, I don’t know about you, but we hear a lot of heavy dollar amounts being put on some of these improvements. If you find out, all of a sudden, now Eliot tells you that you are going to be limited in how much you can deduct and maybe you can’t take that big cost seg bonus depreciation, you’re going to be angry with Eliot. It’s not my fault, it’s the rule. To Barley and he tells you about this rule ahead of time, you’re able to plan for it and do what you can to try and work with the rule.
When you get limited like that, again, you overuse it personally more than 14 days or the greater of over 14 days or 10% of the fair market rental days. Notice that it’s not the 365 day calendar, it’s the number of days it was rented at fair market rates. Any personal use goes that 14. Any use by any related party, if you have family stay there, that counts as a persona use.
Barley: Even if you charge them rent?
Eliot: Even if you charge them rent. Really sounds harsh. I get this a lot though, this question, and I know that the team does as well. If you go over that, you’re going to be limited. You do get to bifurcate. You get to separate out what ratio of personal use for the property taxes, for the mortgage interest, and things like that. You get to put that on your personal return related to whatever rules are going on there, and then the business side, then you can take those deductions up to, again, the amount of rental income you have. You do get to do that.
Barley: Property taxes, home improvements. Again for your personal residence, if you put in a swimming pool, a new roof, or something, you don’t get a tax deduction in most cases unless you’re using your home for business or something like that. Just assuming it’s just your regular primary residence, you don’t get a tax deduction, but you keep those receipts, keep the invoices. Those increase your basis. When you sell, that will reduce how much tax you pay on the sale. I think we covered that one pretty good, right? Personal and rental. We do get that question a lot.
Certainly okay to use it. We like to say just don’t use it personally because that makes it so much easier. We don’t have to worry about you guys and whether it’s going to jeopardize these deductions, which can be a nasty surprise.
Eliot: Yeah. A lot of people do run into that surprise. We see it all the time. I probably would use it though, personally.
Barley: Right, of course, but as part of our job.
Eliot: Right, exactly. We know what we’re doing, do we?
Barley: We got the spot of Manhattan Beach. Go down to the condo for a weekend.
Eliot: There it is.
Barley: Okay. What do we got next here? “I’m attempting to calculate the reimbursement for administrative office. How do I calculate the reimbursement amount?” Great call. We’re talking about a reimbursement here. First of all, we’re not talking about a deduction on Schedule C. We’re getting paid back for expenses we’ve already incurred. We got a couple of ways we can do this, right?
Eliot: Yeah, it’s a very special thing. If you have something, a close cousin, as I call it, a sole proprietorship or something like that, you have what’s called the home office deduction, you got a method where you can just take the square footage of the room that you’re using in your house, divide it by the total square footage, you get a percentage. Take that time as your home expenses, and then you can take that as a deduction on your Schedule C on your personal return.
When we talk about administrative office, that’s really something that’s isolated towards when you’re an employee. You are not an employee of your partnership, nor are you of your sole proprietorship. If we’re talking S-corporation, C-corporation, things of that nature, now we can do an accountable plan reimbursement for administrative office. That is the same concept. We’re taking that square footage.
I always like to use the example, let’s say you have a thousand square foot home or apartment. You got that spare bedroom in the back that’s a hundred square feet right there. That’s 10%, a hundred divided by a thousand. You could get reimbursed 10% of your costs. However, there is a provision where you can get rid of what we call the unusable areas, restrooms, hallways, stairwells. In our example, let’s say that’s 200 square feet. Now we don’t have a thousand, we have 800 square feet, so a hundred, we didn’t touch the office. A hundred divided by 800, that’s going to be 12.5, a little bit more there of our percentage. Again, this is a reimbursement on what expenses?
Barley: Right. Most of your home utilities, if you own, it’s going to be your property taxes, mortgage interest. If you rent, it will be a portion of your rent. Gas, electric, cell phone, and internet, we can do it a hundred percent. Just keep that over on the side, most any of your home utilities.
Eliot: HOA.
Barley: HOA, security potentially.
Eliot: What about outside? You got gardening going on?
Barley: Right. If you have a home office where you see patients, maybe you have more of a home business rather than a home office, that may be deductible. That’s pretty much the gray area, right?
Eliot: It is.
Barley: Do they allow that if we just have a home office?
Eliot: You have to have continual people coming, and then the IRA says, okay, we can respect that. We understand why they have to pay extra days.
Barley: Beautify the entrance or whatever.
Eliot: We understand this is in Eliot’s backyard with his dead plants. These people are trying to make it look nice.
Barley: You don’t want to see clients there.
Eliot: No. A lot of death in my backyard.
Barley: If you have a home daycare or something like that, you might be able to deduct a part of your landscaping.
Eliot: Exactly. That’s just one method. You’re adding up, you’re getting the tape measure out, getting all these dimensions, and what have you. There’s another one that you can use. First of all, the rule is bigger than all of this. It’s any reasonable method, but the most common second method, number of rooms. Can you walk us through that? What’s going on there?
Barley: Yeah. Essentially, the prerequisite to this is that all your rooms are relatively the same size. I don’t know how strict they’re going to be on that. Essentially, let’s say we have a six room house, four bedrooms, a kitchen, and a family room or something, we can say we’re using one of the rooms. One out of six, whatever that percentage is, 27% or something like that, or less than that, if it turns out to be a more favorable rate to you and it’s still a reasonable method for calculation, we can certainly use that. That’s the number of rooms calculation as opposed to the square footage calculation.
Eliot: Yeah. You exclude, again, the restrooms in that case. They’re not rooms or anything like that. You get your calculation, percentage, ticket time, all those times, all those multiply it times all those expenses. This is going to lead into something that we’re going to talk about after this.
We have a little bonus here for you today after question number seven. We got to make sure you get it paid. If you don’t pay, if your corporation doesn’t pay you, remember it’s reimbursement, they got to cut that check. You must receive. You don’t have to pay taxes on it, but your corporation is cash basis, so it’s got to get that declared on its return. It gets the deduction, but it’s tax free to you, and it’s the deduction to that corporation.
You want to do it before it’s corporate year in, which is typically often 12/31, but it doesn’t have to be. If you had a March 31st year in, that’s fine. You just got to get that paid before March 31st. That goes into some other things as well, which we’re going to hit here in just a second.
Barley: Yeah. If you want it on the tax return for that year, the expense has to be paid that year. We just have to keep that in mind, cash basis, taxpayer. Remember, you don’t even have to report this as income, let alone pay tax on it. We have plenty of clear IRS guidance on this using an accountable plan for reimbursements.
If any of you have worked for a large employer, Fortune 500, most likely you’ve all got reimbursed for something. It’s the exact same concept. This happens every day, all day. It’s not just to throw a twist in here. What we don’t want to do is have the corporation pay our personal expenses. The corporation never makes our mortgage payment, our electric bill payment, or anything like that. It reimburses us for a payment that we’ve already made. That’s very important and, again, very common. We have lots of IRS guidance on this, and we can get great benefit from this.
Cell phone, internet, you can add up your whole year’s worth of cell phone and internet bills and reimburse yourself tax free, same with your home office and medical reimbursements through a C-corporation. 280A meetings, meals, miles, travel, all that stuff can be reimbursed you tax free. There’s a benefit to it. It’s like getting a little bit of cash back in your pocket.
Eliot: Just back to the office real quick, a couple of other points, I don’t know if we said this, but it has to be an area that you use exclusively for the business and on a regular basis.
Barley: We got requirements here.
Eliot: Yeah, a couple of those, so I just want to point that out. A unique thing happens when you do have that office. Before having the office, if you drove to your apartment, let’s say to your rental, or something like that, you actually can’t deduct that mileage. That’s just a commute and you’re not allowed to deduct it. Once you get to the apartment and you have to drive to Home Depot to buy a new hammer and then come back, that mileage is deductible. The actual deduction from the rental back home is not deductible.
Once you have this administrative office, and it just has to be a primary place of business, you can have more than one. Once you have that now any mileage, you’re leaving the office. Now that mileage from your home to your rental, reimbursable to you, deductible to the business. We don’t have that problem. I know physicians meet with a lot of patients throughout the day, they got to do their own homework, make their notes, and things like that. I know many of them come back and do that from home.
If you have employees and you don’t really want to downgrade them in front of them in the office, you come back, you make your notes at home or something like that, you’re working with your HR related questions at this one area that use exclusively and regularly for that business, as long as you meet those criteria, then you’re good to go.
Barley: Yeah. I’m glad you brought that up because a lot of you may have an office space that you rent, but come on guys, let’s admit it, you’re entrepreneurs, you’re working at home. We want you to get a credit for part of this. Why not have a portion of your living expenses, your utilities, and such paid back tax free? It’s a great option. Again, we’re just trying to get you tax benefit for something you’re likely already doing anyway.
Eliot: With all that said, I think we probably beat that one to death. We’ve got some other things. It’s the end of the year as we started out, so we got some things we just want to hit real quick. Some last minute things to make sure we’re doing them.
Barley: Yeah, 12/31 is unique. It’s a calendar year end obviously, but there’s certain things we want to focus on before year end. I just printed out a couple just to focus on here. We got payroll, let’s start there. That’s an easy one.
Eliot: Always run into it with the S-corporation, you have to have that reasonable wage. As we talked about, what if we have a solo 401(k), you got to get that payment in. The contribution by the employer, your corporation, that’s all predicated on how much you get on your payroll check. You got to get that payroll check out there. It’s required if you’re an S-corporation, but even if you got a C-corporation with a solo 401(k) or if we’re paying the children, we talked about that or we have in the past, we want to make sure they got to get paid before year end.
Barley: Yeah. Like Eliot just said, your retirement contributions are based on how much you paid yourself in the year. If you cut yourself a check after the year, that will be for the next year. We’re not looking at current period deductions anymore. It’s very important there. We got bonus depreciation, obviously.
Eliot: What’s that?
Barley: You got to get the asset in service this year. You could place it in service next year and you’d still get a hundred percent bonus, but if you want the deduction this year, we got to get it in service this year before the end of the year.
Eliot: You buy a heavy piece of equipment, or we always talk about real estate, but let’s go equipment. You buy a heavy crane or something of that nature. Purchase it, get it placed in service this year before 12/31, now you can take a hundred percent bonus depreciation. That’s a big deduction.
Barley: Do I have to do the cost seg before the end of the year?
Eliot: If it’s equipment, you wouldn’t need to do a cost seg. We’d always talk real estate, so we’re always thinking cost segment with bonus.
Barley: What I wanted to throw in there, if you purchase a piece of real estate before the end of the year, you’ll get the tax deduction this year, but you have until tax filing to do the cost seg study. To get that implemented, I wouldn’t wait till the last minute, but you have essentially until next October. You get a short term rental, get it into service this year, we don’t need to file that cost study report until the next tax filing. It’s going to be based on when it was placed into service, the amount of bonus depreciation, which isn’t as important anymore because we have a hundred percent this year, a hundred percent next year. We’re not too worried about that part. If we want the deduction this year, we got to get the asset in service.
Eliot: I just was talking to a client today. This is a common thing this time of the year. What if I get a vehicle? Yes, bonus depreciation’s back. However, when it talks about vehicles, it’s a little more stingy than that. The vehicle typically that a client’s going to get where they get a hundred percent bonus depreciation, it’s going to be the over 6000 pounds, and it’s got to be an SUV. It could be a truck, a heavy truck. Usually what we’re seeing clients get is the SUV, but it’s got to be over 6000 pounds. That means that your sedan, your car, even if it’s over 6000 pounds, that’s without Eliot in it, even if it’s over 6000 pounds, you’re not going to be able to take a hundred percent bonus depreciation on the whole vehicle. You’re going to have some limits.
Barley: I was like, what car? I guess maybe a Bentley weighs probably over 6000 pounds. The doors are probably a couple of hundred pounds each.
Eliot: Yeah, right. Exactly. Just the doors themselves are almost 6000 pounds. Case in point, you get that heavy SUV, now it qualifies for a hundred percent bonus. We’ve talked about this before. You can’t do the 179 deduction, which is a media expensing and some bonus. That’s another tax tool we have. Whatever it be, you got to have that vehicle, have it placed in service before year end. If you want the heavy deductions, that’s got to be over 6000 pounds SUV, heavy duty truck, or things of that nature.
Barley: What else? Yeah, so bonus is back. That’s obviously the big news for 2025, a hundred percent bonus continuing into 2024. Related to payment, we want to set up any retirement contributions. What’s our timeline? We see people mess this up every year, unfortunately, so let’s touch on this now.
Eliot: The employee has to be paid before December 31st. The employee, individual human, is on a calendar tax year, January 1st or December 31st. That’s why it’s so critical that your corporation get that paid. If it’s a C-corp, your C-corp may have a different tax year end, and that has its own benefits for tax planning. However, the employee’s got to get paid before December 31st. Make sure you have that have happen. The employer can wait until it has its return due. It doesn’t have to have it before December 31st, unless that happened to be when its returns due.
Barley: Right. That employee, employer difference is confusing, but that’s the only staggered timeline part of this. The employee has that cutoff at 12/31. We’re still talking about these contribution limits, guys, $70,000 or more depending on your age. You got to pay yourself quite a paycheck to hit that limit, but $70,000 to each, you and spouse every year over to a solo 401(k) that we can then invest in real estate, stocks, et cetera. All that growth is tax free. We can borrow from that plan. Lot of flexibility there.
Just to remind you, guys, most of our clients are closely held, family held corporations. This is nothing but benefit here. This is a very powerful tool. Massive contribution limits. Make sure you pay attention to that before the end of the year. Again, it’s based on your salary. If you want to pay yourself a little more into the solo 401(k), you can give yourself a little bonus at the end of the year. Pay yourself a little less, you’ll pay less payroll in taxes.
Eliot: This year, we do have that little bit of a difference on how much more we can pay. If you’re under 50, it’s $23,500. If you’re over 50, we have this catch up of an additional $7500. Then we have this weird, what if you’re between 60 and 63? It goes up $11,250.
Barley: When you turn 63, it’s off.
Eliot: Yeah. It’s odd, and I don’t know where in the world they picked up those numbers, but that’s what it is. If we’re over 50 but under 60 or over 63, you just have this carve out between 60 and 63 where you get to put in an extra 11,250 as opposed to just the $7500.
Barley: If you look at this, again, incentivization, the government’s just like, hey, if you’re 60 years old, haven’t stacked for retirement, and you’re making money here, you can do this now. Put an extra $11,000 on top of the $7750. That’s a huge amount of cash.
Eliot: Yeah, incentive. That is the big word of the day. You can see it all over the code.
Barley: Yeah. We like to think that we think for ourselves, but we really don’t. We just go wherever we’re steered. Go this way. What else? Augusta Rule, home office, a lot of these kinds of things are in the same boat. We got to get these turned in so we can get a reimbursement. Medical, absolutely, through C-corp. Huge one.
What we want at the end is this check that we don’t have to report or pay taxes on. To substantiate that, we actually have to have the corporation make a cash transaction, ACH, Zelle, whatever. It doesn’t have to be a check or cash, obviously. The money has to change hands. To do that, you just got to submit a copy, invoice, or whatever to the C-corp to reimburse yourself. We got medical, the Augusta rule, home office, cell phone, internet, all these things.
Again, if we have a different C-corp calendar year in March, that won’t apply. Assuming just a calendar year end for your C-corp, we want to have these reimbursements in by the year end so we can get paid back before the year end, so we can get the deduction on our tax return in that same year.
Eliot: That’s a plan.
Barley: Last one, this charitable giving, the bunching trick. When you get to the end of the tax year, if you’re just under that itemized deduction rule and you expect to itemize in the following year, you could double up your charitable donations in the following year if that’s important to you to get the tax deduction for that. Remember, if you’re making charitable donations but you’re not itemizing your deductions, you’re not really getting any tax credit for that. If that’s important to you, you could just double it up in the next year. That might push you over the standard deduction limit. You get a higher deduction.
Eliot: That’s certainly correct. Just one thing there that we might want to think about though. We may want to double up this year if we can. Get it this year as the deduction because next year, they introduced a small floor that we’re going to have that 0.5% floor. We’re getting that to 2026. It’s not the worst 0.5%. If we’re giving substantial amounts, it might mean a bit much more, so just keep that in the back. Absolutely, the bunching is a great idea if we need to get into that.
Barley: That was all. There’s plenty more stuff for year end. I just want mainly to make sure we’re all thinking that way. You’re going to hear Eliot and I say this, Amanda say, all your advisors here say, a lot of stuff we got to look at before the end of the year. Mainly I just want you guys to start forming that mental checklist. Don’t let the calendar beat you. Run payroll, solo 401(k). Get those padded out this year, get the deductions this year.
Eliot: Again, I just want to thank our team so much. We got, again, Troy running the chats. We got Dana, we got Dutch, Jared, Jeffrey, Rachel, all answering questions. We’ve the road warrior Zion in the back there.
Barley: Barely hanging in there. Zion’s been traveling doing film work, our camera guy in the back.
Eliot: Can’t stop the guy.
Barley: Yup. Thanks again so much for joining us. We only went an hour. We didn’t go too bad here. Make sure you hop on YouTube. You’re already there, but make sure you go subscribe to the channels. Come check out the live events. We really do love seeing you guys there. It’s so fun when I get to meet you guys or Eliot gets to meet you guys, then we can talk about your business on the phone. It just adds a whole another layer of depth to our relationship. We’re all in this together, man. We got to do it together.
Scan this QR code right now. Set up a strategy session. You can do this right now. Get on the phone with one of us. If you got questions about this end of the year stuff or any of these, the 72(t), whatever we went over, let us know. We’re always happy to hear from you. Really, this is our passion helping you entrepreneurs do your thing. Join us again in two weeks.
Eliot: Yeah, we look through all the questions. Get them into taxtuesday@andersonadvisors.com. Visit us at the website, www.andersonadvisors.com. We got all kinds of events listed there, all kinds of information.
Barley: Yup. Good work today, guys. Good work. Any other questions remaining, if we aren’t getting your questions here, if you are a platinum client here, you can of course submit those to the Platinum Portal 24 hours a day or hop in the live Platinum Knowledge room five days a week, five hours a day, staffed by attorneys, CPAs, and tax preparers all day long. Come in there and ask any questions you have. We definitely look forward to seeing you next Tuesday back for Tax Tuesday.
Eliot: Thank you.
Barley: Thanks, team. See you next time.
