What business expenses can be deducted? Are memberships, technology, coaching, training, and supplies included? Jeff Webb and Eliot Thomas of Anderson Advisors talk about how to claim business expenses on year-end taxes and other topics. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Can the owner of a C Corp and the founder of a nonprofit have a 401k plan for the C Corp and a 403b plan for the nonprofit without there being a control group? Depends on who is controlling the nonprofit (i.e., directors vs. shareholders)
- Are capital gains from stock sales/options trading included in calculating minimum income for IRA/Roth IRA limit? Capital gains from stock sales/options are all considered portfolio or non-earned income
- When trading crypto, if you trade an altcoin for bitcoin, is that a taxable event? Yes, it’s similar to securities but more of a direct conversion; whenever you buy something or trade with bitcoin, that is a taxable event
- I have rental property that I would like to sell. Can I find a replacement property first and still do a 1031 transaction? Yes, you can do a reverse 1031, but you need to loan money to a qualified intermediary (QI) to buy the replacement property on your behalf
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Resources:
Infinity Investing by Toby Mathis
Full Episode Transcript:
Jeff: Hi, welcome to Tax Tuesday. I’m Jeff Webb. I’m Head of the Professional Services, and Eli Thomas is here. He is the Director of Tax Advising, the consulting arm of our tax department. He’s not quite right so he’s perfect for this role. There’s something we love doing. We do this for pretty much open and whoever wants to listen in. As the screen says, we’re just bringing tax knowledge to the masses.
Tax Tuesday Rules. Ask live via Q&A, feedback in Zoom. That will be answered by who all we have. We have Dutch and Kurt, both CPAs.
Eliot: Troy from bookkeeping. We have Dana and Emily both on YouTube and I believe, doing both their duties there.
Jeff: Yes, we are live on YouTube also.
Eliot: We have Piao there as well.
Jeff: Piao is there.
Eliot: They’re our CPA and Christos. We can’t forget Christos.
Jeff: Christos who always manages to find time to do this. I am not sure how. You can send in questions to taxtuesday@andersonadvisors.com.
Eliot: If you need a detailed response, you will need to become a Platinum member or a tax client. This is our idea of a fast, fun, and educational. We just want to get back to help educate.
Jeff: I always like to say that we really do this for your benefit, but also your tax person’s benefit and all. The more knowledgeable you are, the easier everybody’s life is.
Eliot: Absolutely.
Jeff: Eliot, can you go over our opening questions?
Eliot: Yeah, we’ll just run through all the questions and then we’ll come back and start answering them. Is that how we’re going to do it?
Jeff: Yup.
Eliot: Okay. First of all, “Can the owner of a C-corp and the founder of a nonprofit have a 401(k) plan for the C-corp and a 403(b) plan for the non-profit without there being a control group?
Number two, “I opened my LLC in November 2019. I have not generated any income, but have accumulated a whole lot of business expenses to include training/coaching, memberships, technology/supplies, and personal development. I’ve opened an Amazon Seller account. How would I claim these expenses on my year-end taxes? Do I wait and claim past years once I’ve generated income?” Always a popular question.
Next, “I understand life insurance personal/key man/woman is not deductible to the corporation. For small S-corps/LLCs, if possible, what would be the pros or cons of adding the payment as taxable income to the individual’s W-2s? Wouldn’t that also help count towards a reasonable salary?”
Number four, “Are capital gains from stock sales/options, trading, et cetera included in calculating minimum income for IRA and Roth IRA limits? I saw online two different opposite answers.”
“I withdrew $140,000 from two IRAs (wife and mine) in December 2020 for the real estate investment. I was told I had to return 1/3 each year or pay tax on it. The Ameritrade admin told me that the IRS website gave no such timeline, just that I had three years to return it. For some reason, the return amount was not posted in time, so I guess, I’ll find out. What is true? One-third must be returned each year or just returned in the last of the three years? Can you quote IRS sources?”
Number six, “When trading crypto, if you trade an alternate coin for bitcoin, is that a taxable event? I converted some of my Solana and Cardano to buy bitcoin. Is this a taxable event?”
“Airbnb has requested I submit a W-9 form by the end of the month to avoid a 30% deduction. This is the first time they’ve requested this. I believe it’s because I’ve made over a certain dollar amount for the year. All of my income has been going into a business account of my single member LLC from day one, not taxed as a corporation. Is there any particular way I should complete the form to ensure the lowest tax liability?”
Number eight, “I have a rental property that I would like to sell. Can I find a replacement property first and then still do a 1031 transaction?”
Nine, “I own four duplexes, each one held in a separate LLC. I also self manage them. Is it beneficial to set up a C-corp to manage them? Does this provide asset protection and tax benefits? Since I’m a mom and pop business, is this expense worth it?”
“I own a rental in California. I’d like to put it in an LLC for asset protection. If I exit in a 1031, the Qualified Intermediary has told me it is better not to have the LLC. If I sell outright in an LLC, is that better, worse, or the same with respect to tax? Will it still be a disregarded entity? Any other issues to consider tax wise?”
“Explain a scenario filing a 1065,” that’s a partnership return, “instead of a 1040. I thought everyone had to file 1040 for their personal returns.”
“My wife and I are directors, officers, and shareholders of our Wyoming C-corp. We have not taken a salary for the past five years. We want to take medical reimbursement from the C-corp. Do we need to take a salary in order to do so? Our CPA told us we needed to.” All right, I guess that was it.
Jeff: Here we go to our first question. You know what, I’m disappointed because I can’t blame Toby for these questions. I selected them this week. Toby is out at an event, so he was unable to attend. I’m really glad you were able to help me out here.
Eliot: Yeah, happy to be here.
Jeff: Read it again.
Eliot: “Can the owner of a C-corp and the founder of a non-profit have a 401(k) plan for the C-corp and a 403(b) plan for the non-profit without there being a control group issue?”
Jeff: I’m giving Toby standard answer, it depends. Here’s what happens. When we talk about control groups, we’re typically talking about for-profit entities where there’s more than 80% common ownership in each of the entities. Now with a non-profit, you don’t own the non-profit. You’re not a shareholder or anything else. What they actually look at is who is controlling the non-profit? We’re talking about the directors.
If you are the sole director of your non-profit and the sole shareholder of your C-corporation, you’re likely going to have a control issue. You really want to have more than just yourself as the director. It could be your neighbor, your friend, or so forth to help with the directing of that non-profit. It can’t be a direct relative because there are problems there. That’s called indirect ownership.
Anyway, if you have you and a good friend as directors of the non-profit, then you each own 50% and it doesn’t matter that you own 100% of that C-corporation because you don’t have the ability to direct the goings-on of the non-profit. You don’t have that 80%.
Eliot: The control power.
Jeff: The control power, thank you.
Eliot: Really, what you want to do is probably trying to dilute that power a little bit, getting that percentage down, throw them on some other people who are non-related parties. Just real quick, for some people out there, they may not know the 403(b) plan. That’s really just kind of a 401(k) designed for non-profits, governmental plans, and things like that. But I do believe a non-profit could actually have a 401(k)plan, but typically, they go with a 403(b) is my understanding.
Jeff: Yeah, you could do all the salary, the C-corporation, and just do the 401(k) there if you want to double-dip into multiple plans. You could do that with a plan also in the non-profit. If you want to throw lots of money at your retirement and you have the capital to back it up, there’s always a defined benefit plan.
Eliot: Absolutely. A defined benefit plan is really what I tell clients, it’s kind of a 401(k) squared. You got to put a lot more money into it typically. Maybe that’s a better play for you here. If you put it in the C-corp or the DB plan, you get a lot more money in there, and you don’t have to worry about the control issues over in the non-profit, perhaps.
Jeff: Right. Anytime you have a deferred compensation plan like a 401(k) or 403(b), you’re going to have to have a salary before you can make any contributions to that retirement plan.
Eliot: That’s right. You’d be trying to take a salary out of your non-profit that you’ve just put in. So maybe it just works better in the C-corp world, but I guess the bottom line, it just depends. Great question.
Next one. “I opened my LLC in November 2019. I have not generated any income, but I have accumulated a whole lot of business expenses to include training/coaching memberships, technology/supplies, and personal development. I’ve opened an Amazon Seller account. How would I claim these expenses on my year-end taxes? Do I wait and claim past years once I’ve generated income?”
Jeff: How’s an LLC taxed?
Eliot: That’s the thing. As you’ve heard probably a thousand times on this show from Toby and Jeff, and any Platinum questions, et cetera, an LLC really tells us nothing. It can be taxed disregard, which means it’s not basically a tax. It just filters on, flows through to another return where it is taxed. It could be a partnership, it could be an S-corp, it could be a C-corp. All those would have different answers here.
Jeff: Let’s assume it’s a corporation. A lot of these expenses, the training and so forth, could be built into establishing the business, what we call startup expenses. In a corporation that works out really well. We’ll say a corporation taxed as an LLC. If it’s a disregarded LLC, it’s probably at the opposite end where some of this training is not going to be deductible because it relates to learning a new business, a career path that you’re not currently on.
Eliot: That’s right. Yeah, new lines of business typically make it very difficult to deduct your training and things of that nature, which is often why people wonder, why does Anderson work so much with a C-corp? There’s a good reason. Because that’s the one place we can deduct it without too much consequence.
You also get the benefit. The corporation can deduct that expense. It may be a startup cost, which means it’s amortized over time. But also it’s treated as a loan from a shareholder amount where you can get that money back to you.
Jeff: You mentioned the Amazon Seller account. That leads me to believe that this is some kind of trader business. If it’s disregarded to you, you’re going to report this on Schedule C. Personal development is probably not going to be deductible. Supplies will be things of that nature, technology, certain memberships if they have a direct correlation to your entity or your LLC. But most of those would be claimed on Schedule C if it’s disregarded or they could be an S-corporation or a corporation.
Eliot: One other point, Jeff pointed out and I was talking about that we can’t deduct those education expenses. That’s the training, coaching perhaps on that first return. Let’s say that this has been around for a bit. That wasn’t our case here. I guess it was November 2019. But if we are saying year two or three of this business, then it’s no longer education for starting up a business. It’s continuing education, and also, we can deduct those there.
Jeff: Right, and personal development in particular, it’s really on a case-by-case basis. If you’re a salesperson or something where networking is very important, that tends to be more deductible. If you’re just wholesaling to people who respond to your Amazon account, probably not deductible at all.
Eliot: Yeah, very well it might be the case. Sometimes people start getting into a little different categorizations like marketing expenses and things like that. They’re trying to push over expenses into another category, perhaps. We incurred these expenses maybe back in ‘19, we would need to take them in that year if we incurred that year. We don’t really get a hold of them in future years.
Your last part there, “Do I wait and claim pastures once I have generated income?” No. The generation of income has very little anything to do with the timing of when we recognize the expense.
Jeff: Correct.
Eliot: You’re recognizing the year you incurred them.
Jeff: Infinity Investing. I’m sure you’ve all heard about this if you’ve been on here at all. How the rich get richer and how you can do the same. I think Toby describes this as getting rich slow. This is not a get-rich-quick scheme. This is about making smart investments. Investing in dividend-paying stocks, real estate, a whole variety of different things. But it’s not for buying that option that’s already out of the money and hoping that something good or bad happens to that company.
Eliot: It’s a great resource and a whole department that we now have. Just a wonderful group of people that we have. I couldn’t go through the whole list of all the people working in that department here in Anderson, but a fantastic investment strategy overall program, I guess, is the way you put it. This is Toby’s book on it.
Jeff: We also do the Infinity Investment seminars. They’re usually on Saturdays. Not every Saturday, but fairly frequently. Pia Washington’s involved with that heavily.
Eliot: Very smart lady.
Jeff: Yes. Everybody seems to love her.
Eliot: Yeah, she’s fantastic. Yeah, absolutely. I think the clients love her. I think they meet a lot of times in little groups during the week as well to talk over strategy. It’s not just a Saturday thing, I believe, but I could be wrong on that.
Jeff: It’s a really good thing to get involved in if you can get involved, basically, for free.
Eliot: As much and as little as you want to. The more you get involved. I think if you’re going to want to get involved, I think it becomes very addictive.
Jeff: Yeah. Get your feet wet. Get the book. Do the Saturday seminar. You may want to sit in on some of the trading rooms usually during the week. Of course, they’d be during the week, wouldn’t they? You can’t do this on Saturday.
Eliot: Because they have a program, yeah. I don’t want to speak for Toby, but I think he would say that you should not all be worried about your lack of knowledge. You’re not going to get the knowledge unless you come in and try to learn. That gets back all the way to where Jeff started us today. We’re about getting tax information to the masses, educating, and all that. It’s a really great program to start at any level and learn some more.
Jeff: These are some reviews, we’ll keep going. But these are reviews of the book.
Eliot: Clearly, it does well.
Jeff: It does well.
Eliot: I never get stars like that on time.
All right, next question. “I understand life insurance personal/key man/woman is not deductible to the corporation. For small S-corps/LLCs, if possible, what would be the pros or cons of adding the payment as taxable income to the individual’s W-2? Wouldn’t that also help count towards a reasonable salary?”
Jeff: Something I want to cut out is the key person policy because in that case, the entity is typically the benefactor of the policy. There are little different rules. Again, it’s not deductible because the whole idea is if the president of the company passes away that the company benefits from them. Not benefits, that’s a terrible word.
Eliot: Well, they do. They get that funds to help…
Jeff: To help them replace that person.
Eliot: Help them continue an ongoing operation.
Jeff: The personal insurance factor, yes, it could pay the insurance.
Eliot: Yeah. To say here that you understand the life insurance for the personal is not deductible, that’s not exactly true.
Jeff: That’s what I was thinking.
Eliot: We can have something called executive bonuses, the term they really use. That just means that, let’s say the premiums are worth $12,000 over the year, basically that becomes taxable income too, as you’re pointing out here, the W-2 income. That is deductible to the corporation because it’s considered salaries. So we get the deduction there. It’s just that that individual is recognizing more taxable income.
My understanding is it is subject to employment taxes as well. If that’s the case, why is that important? Because I would think that probably would go counting towards a reasonable salary. Now I’m jumping ship and talking to an S-corporation here, but I think we would have the same analysis there.
Jeff: If you’re paying out any amount for insurance and reporting your own W-2, I’m okay with that. Yes, it would go toward your reasonable salary, whatever you deem it may need to be.
Eliot: Just that we might be showing more income to you that you didn’t think you had before because you’ve increased your W-2. Many people try and flee from that, but it’s not like you’re not getting anything from it. You are getting the insurance plan where you could maybe take loans out, et cetera. So it is a strategy. It’s one that we use, a lot of our clients still use.
It’s always important. I know when I’m talking to clients, I’m not trying to belittle this plan, but just want to make sure they understand that this is taxable income too because I think sometimes that gets lost.
Jeff: Let’s say your insurance premium is worth $10,000. You’re going to have to have more than that on your W-2 because as you said, there are employment taxes involved.
Eliot: Yup, correct.
Jeff: There’s a little calculating you need to do if you do this. I would do this for a payroll company, I wouldn’t do this myself.
Eliot: I would recommend the payroll because you got to get those payroll employment taxes in there. You got to get your income tax there as well, just federal and possibly state as well, depending on what state you live in. So a lot to do with it, but it can be done. It’s a very good question.
Jeff: Do you think it’s more beneficial to do it this way? Because the one thing I go back to is payroll taxes.
Eliot: Right there, you’re at 15.3% on this amount. Whatever it is that you’ve paid is a premium. I think there’s going to be an income tax on it. You’re not getting this for free by any means. But if you want the plan, it’s a way to go about it, and you get it through your corporation, well then it can be done.
Jeff: Yup.
Eliot: All right. “Are capital gains from stock sales/options trading included in calculating minimum income for IRA/Roth IRA limits? I saw online two different opposite answers.”
Jeff: There are two things we need to worry about. When we talk about minimums, it’s that earned income. We also talk about maximums where you can have too much total income. There’s a difference there. We have earned income versus total taxable income. Capital gains from stock sales, options, and so forth, dividends, interest, rental income, that’s all considered portfolio income, not earned income.
You really have three big sources of earned income. One is your W-2. Number two is self-employment. Number three is if you’re a general partner of a partnership.
Eliot: With a guaranteed payment too.
Jeff: Yup. Where you are getting, again, self-employment income.
Eliot: Yup.
Jeff: Those are the three things that go into it. If I can max out my IRA contribution if I have $6000 of earned income…
Eliot: It doesn’t take much.
Jeff: Right.
Eliot: But the other half of that, which Jeff pointed out, is that I’m not sure it’s tax one, I think it’s actually AGI, but the same idea. We’re putting all of our income together. Every source, that’s going to be your capital gains in your earned income to see if we hit this other limit of maybe we made too much and now we can no longer contribute to an IRA or something of that nature. So that might be why you’re getting two different answers perhaps.
Jeff: The maximums are confusing because there are different rules for different situations.
Eliot: It matters whether or not you have access to another plan. If your spouse does or if you both do, all those have different levels of how much income you can have whether or not they can contribute or not. We have a cheat sheet that we use, so I don’t keep it in my mind. I think it’s one that Jeff put together this year.
Jeff: I think they just sent that out again to me.
Eliot: We need another one. It’s time for another one already for 2022. I think that’s why you’re probably getting two different answers because they’re talking about two different levels. The amount of earned income, which is one thing, that minimum you have to have. Then there’s the max that you can have, which includes all your income, your trading, et cetera, and earned.
“I withdrew $140,000 from two IRAs (wife and mine) in December 2020,” I think we’re talking about maybe CARES Act distribution here perhaps, “for the real estate investment. Told I had to return 1/3 each year or pay tax on it. The Ameritrade admin told me that the IRS website gave no such timeline, just that I had three years to return it. For some reason, the return amount was not posted in time, so I guess, I’ll find out. What is true? One-third must be returned each year or just returned in the last of the three years? Can you quote IRS sources?”
Jeff: Your Ameritrade person is correct. You have three years to repay that if it is a CARES-qualified distribution. Until you repay at all, you’re required to pay 1/3 of the tax. So that may be where the confusion is coming from. I’m going to use $120,000 instead of $140,000.
If I take out $120,000 each of the next three years—including the year of distribution, which I never understood—each of those three years, I would have to report 40,000 or a third of my distribution as taxable. Let’s say I do that, I pay tax on the first 40, pay tax on the second 40, and then the third year I repay the whole thing, my whole $120,000 distribution. What do I do?
Eliot: Then you have to go back and amend it. At least that’s the current thought. That they’re going to make you amend, go back, and get your credit for those taxes that you paid in the previous years. There was a lot of controversy about this whole thing way back in the day, the CARES Act. It wasn’t really believed that this is what was intended by Congress. Nonetheless, this is how it turned out.
Most felt that it was like, you got three years, don’t pay any tax until three years. I think the IRS knowing, hey, we know how taxpayers can be, maybe we’ll take a little bit each year so it’s not such a big whammy after three years perhaps. It might have been the thought process, I don’t really know, but that’s where we’re at.
Jeff: Are you saying if you give me a 1099-R in 2020, I may ghost you in 2022?
Eliot: I’m sure you wouldn’t.
Jeff: I did want to bring up something else about this. The very first sentence that says, I withdrew $140,000 in December 2020 for RE investment, this is actually a disqualifying event for this entire rule. The purpose of the CARES distributions was if you had—what’s the terminology?
Eliot: Any illness, expenses, or any hardship from the COVID virus impacted negatively. I don’t know who wasn’t.
Jeff: True. It was to pay your expenses and so forth in a time of need. You’re not the only person who has done this. Lots and lots of people have taken advantage of this, taken money out of their IRAs or 401(k)s, and made real estate and other types of investments. But technically, this does not qualify as a CARES distribution.
Eliot: I don’t also remember the dates. I know one of the dates, there was a CARES distribution and then there were the other loans maybe. I think they had two different dates. One was like in late September and one was toward the end of December 30th, but I can’t remember which was which.
As far as quoting IRS sources, I do have them. Honestly, I can’t type them in here. If you could submit this somewhere or maybe send it off, we can get you that. I have the IRS website where they have frequently asked questions and they go over some of this. That might be of assistance.
Jeff: One of the things you have to do for this is fill out form 8915-E, which actually asks if they’re qualified distributions, how much was qualified because of COVID reasons, how much was not. You have to attest as to your reason for taking the distribution.
Eliot: How the funds were used, yeah
Jeff: We’ve also seen this—Ida was another area where people were taking EIDL loans, emergency, whatever, disaster loans, where they were taking money out. The rules for these EIDL loans are very specific and very tough that you can’t use them for anything but your company’s needs. We saw quite a few people distributing it out to themselves, putting it in their pockets, and so forth. In that case, SBA, when they’re finding people doing that, they’re actually calling the loans.
Eliot: Just be careful in that.
Jeff: Some of these laws were not well thought out.
Eliot: I think it was done in…
Jeff: In haste?
Eliot: Yeah, maybe, a little bit. The world was definitely in turmoil at that point. Not that it’s not now, but I think things were a little bit hazy, at best. All right. We’ll get past those bad memories and get some new ones here.
“When trading crypto, if you trade an alternate coin for bitcoin, is that a taxable event? I converted some of my Solana and Cardano to buy bitcoin. Is this a taxable event?”
Jeff: Yes. Pretty much the same way securities are. I have to sell IBM to buy Microsoft, and though this is a more direct conversion, IRS has already said they consider this the Solana fold and the cash without being used to purchase the other cryptocurrency.
Eliot: When they finally acted and spoke on this, which was maybe three years ago, perhaps four, they came right out the gate and said this. This is something that I would believe they’re going to stick to, this treatment of it.
Jeff: I don’t like that they follow some of the security transaction rules and some they don’t.
Eliot: I appreciate that it’s a difficult situation here. Nonetheless, you want to have clarity and understanding in the code. But nonetheless, in this particular situation, anytime you buy something or you trade with bitcoin, that’s a taxable event one way or another.
Jeff: That’s very true. If I go out and buy a Tesla with bitcoin, I have a taxable event on that also.
Eliot: That’s right. Purchasing anything, yeah. If you mine bitcoin, you get ordinary income for that or staking. Typically ordinary income, although they always talk about giving you interest. Well, it’s not interest, it’s ordinary income. Anytime you spend that for something, then you have another taxable transaction because you bought something with it. It’s like double taxation.
Jeff: I think the company that’s holding the wallets and all, I think they’re going to be forced to get much better at tracking transactions.
Eliot: Yeah, I think it has to go that way. I heard a comparison to where maybe the major brokerage houses were some time ago, now, therefore, it’s nothing to them. They always have to track all those trades and things with stocks and whatnot. Many are thinking that’s probably the way this is going to go as well. Technology, frankly, is there to be able to do it. It’s just a matter of getting it set up correctly.
Jeff: All right.
Eliot: “Airbnb has requested I submit a W-9 form by the end of the month to avoid a 30% deduction. This is the first time they’ve requested this. I believe it’s because I’ve made over a certain dollar amount for the year. All of the income has been going into a business account of my single member LLC from day one, not taxed as a corporation. Is there any particular way I should complete the form to ensure the lowest tax liability?”
Jeff: The answer to the very last question is, there are rules on how to fill this out. Let’s talk about the W-9 first. All businesses who pay other people for services and certain other things apparently don’t trust medical professionals or attorneys. But you have to issue a 1099 miscellaneous or 1099-NEC, nonemployee compensation?
They’re kind of jumping. I felt like they were jumping ahead. If this is the first time they’re asking, they’re already threatening the backup withholding. The W-9 needs to be filled out. The IRS will actually come back and tell them that they have to withhold 30%. I just haven’t seen it happen this early.
Eliot: I had heard that they weren’t doing it so much unless you made a lot of income. It’s supposed to be $600 is my understanding, but most people weren’t running into it until it’s maybe $10,000, $20,000 perhaps. I think Airbnb is slowly just coming around and being forced to get this out there at lower and lower dollar amounts, and they’re getting their systems together to comply, et cetera.
I would not be surprised if a lot of people get that this year. You do have to fill out now. How to fill out? That’s a whole different question. You note that this is a single member LLC. Often, you’ll see on that W-9 form, and we’ll talk about what entity got it, and which EIN number, perhaps what name, et cetera, and all these different confusing questions. How does that work?
Jeff: They’ve changed it in the past couple of years. They want to know who the ultimate recipient of the income is from a tax standpoint. I can fill it out and say, this is being paid to Webb LLC, but I also have to list myself as the primary recipient. Because if the LLC is disregarded to me, I’m going to have to list my Social Security Number probably.
I don’t know if we can show just the EIN. We’re seeing this on a lot of forms that the IRS is wanting to know who is the ultimate recipient. When Airbnb issues you a 1099, the 1099 will say Jeffrey Webb, DBA, Webb LLC on it and will probably have my Social Security Number on it, so I’m sure to report that income on my return.
Eliot: That’s right. If this LLC happened to be a single member here, let’s say it was disregarded as a C-corporation. If it had been, then you’d have the name of the corporation online […] use the EIN of that corporation. We just ignore the disregarded, although they’re certain to ask more about the disregarded too, but they won’t need the EIN or anything. Just maybe the name online too, I think that’s where they put the disregarded name.
Jeff: When you have a corporation or even an S-corporation involved, you don’t have to issue 1099 to those. It will ask what type of entity it is and you’ve marked C-corp, S-corp, or whatever. In those cases, you won’t get a 1099 back. The best practice for issuing W-9 is before I pay you a cent, Eliot, I want a W-9 from you.
Eliot: You have to get that W-9. As I’ve told clients before in Platinum office hour, I used to work for a company that built components for gaming machines here in Vegas. There are a lot of parts that come into those things. We have numerous vendors. I had to go out and get a W-9 from all of them every year. Not just if we had one on file from a previous year, every year I’d have to get one updated. That was our get-out-of-jail-free card in case something went wrong. We would not do business with them until they filled that out first.
Jeff: If you’re filling this out for a disregarded entity or an LLC, I’m going to suggest you look at the instructions for the lines. It’ll clarify it. There’s really not that much information they’re asking for. I agree with you, it can be confusing.
Eliot: It’s an intimidating form the first time you see it. After you’ve dealt with it many, many times, you get used to it. But you’re not dealing with it many times, you’re just trying to deal with it once. Don’t be scared of it, but you do want to be compliant. If you have any questions, the instructions actually are all in the back for just about every question you could ever want. It’s just taking the time to read that small fine print. Certainly, we would try and assist as best we could as well, but it’s something that you need to fill out.
Jeff: If you feel like you’ve done the W-9 correctly, your next step should be to make copies of it.
Eliot: Yes.
Jeff: Because if anybody asked for a W-9, you’re just going to hand it out to him.
Eliot: That’s right. So you don’t have to keep doing it over and over and over. All right.
Jeff: You can follow Anderson on social media. We’re all over the place. We have so much subject matter out there.
Eliot: I just love the young picture of Clint up there.
Jeff: Yeah, he’s not that young anymore. We’re on Twitter, YouTube, Instagram, where else are we?
Eliot: Twitter, YouTube, LinkedIn.
Jeff: What’s the first one?
Eliot: Facebook.
Jeff: Facebook.
Eliot: Call us all these ways to get a hold of Anderson and we’ll help however we can.
“I have a rental property that I would like to sell, can I find a replacement property first and still do a 1031 transaction? Oh, I love this one.
Jeff: What’s that called?
Eliot: A reverse 1031 or reverse like-kind exchange. Yes, you can. You just do it in the opposite direction. Instead of finding a property first, you find the property first that you’re going to get the replacement property, then you list that, and then within 45 days, you start the process of selling yours.
Jeff: Let’s talk about a few details. The first thing you should do before you sell or purchase that property, you need a qualified intermediary. You cannot give the seller cash. How you do this is you loan the money to the QI who purchases the property for you on your behalf. I think the only way I’ve seen this is when there has been cash available to do this.
Eliot: Right. I would think so, yeah.
Jeff: I guess you could get cash from elsewhere to satisfy it. If you buy it with a mortgage, that really complicates things. I wouldn’t suggest that. The next thing you mentioned was 45 days. Within 45 days of purchasing this property, you have to identify the property you’re going to relinquish. That shouldn’t really be that hard since—
Eliot: It’s the property you want to give up.
Jeff: It’s usually a lot more difficult the other way around. If you’re ready to sell your property, you’ve sold your property and you have 45 days.
Eliot: That’s the hunt because you’re not trying to find a property, and right now, everybody knows real estate is flying off the shelves. Probably a reverse is the better way to go.
Jeff: I agree. The other date is 180 days after buying the property. You have to have closed on your relinquished property.
Eliot: We got to be done with it.
Jeff: Got to be done.
Eliot: All right. “I own four duplexes. Each one held in a separate LLC. I also self manage them. Is it beneficial to set up a C-corp to manage them? Does this provide asset protection and tax benefits? Since I’m a mom and pop business, is this expense worth it?”
Jeff: I like that last question. It could be beneficial to have your C-corp manage it. I’m thinking if you have significant expenses like the medical expenses and stuff like that, which you can pass on to your C-corporation, then any management fees that you pay to that C-corp are going to offset, that lowers the amount of income to you personally.
Eliot: You do have four duplexes, that’s eight units. We got a lot to manage there. The C-corp typically takes on more and more utility the more you have to manage. That’s not an insignificant amount to manage. You could earn a little bit of fee, shift that income off your 1040, get some cash in your C-corporation, and get some reimbursements like Jeff’s talking about.
The asset protection, absolutely, is there if you’re in the LLCs. C-corporation has really good asset protection typically. It could be worth it, but that comes down to, as Toby and Jeff always say, is it worth it? We got to calculate, calculate, calculate.
Jeff: Right. You’re basically adding one entity, a property manager. Depending on what state you’re in, it’s going to depend on what the state renewal fees are, filing fees are. You’re going to have to file a tax return for that corporation every year. So there are some expenses involved, but those expenses are also deductible to that corporation.
Eliot: Right. It can have a lot of tax and asset protection attractiveness to it.
All right. “I own a rental in California. I’d like to put it in an LLC for asset protection. If I exit in a 1031, the QI has told me it is better not to have the LLC. If I sell outright in an LLC, is that better, worse, or the same with respect to tax? Will it still be a disregarded entity? Any other issues to consider tax wise?” We have 1031 with an LLC.
Jeff: I’m going to disagree somewhat with your QI. If you put it in an LLC for asset protection, especially if it’s disregarded to you, it doesn’t really affect anything.
Eliot: It typically does. This is the one thing that the IRS says. When we do a disregarded LLC to the same—title ownership is the big issue with a 1031. You’re going to be best, I would suggest, having it in the LLC titled in there, and then always doing your business through there. Because you always have your asset protection, it just means any replacement properties if you ever did a 1031 down the road have to come back into that LLC.
This was one of the things that we always want to be really careful with the IRS. Can you take it out of that LLC? It’s disregarded. If it’s in your personal name, you may not have a problem, but you want to be careful. Just make sure and talk to people and make sure they know what they’re talking about because things can change.
One other common problem we have with LLCs like this, if it was disregarded to you right now, what if you got married and you went to a non-community property state? That turns it into a partnership. Now, we got a problem. There are little tricks there you got to be aware of that LLC, making sure it’s always disregarded. But there isn’t any difference tax wise, better, worse, or other.
Jeff: I think the only issue would be if you put it in an LLC that is taxed differently.
Eliot: Yes, then you’ve changed it. That’s what I’m saying. If we went into a partnership, absolutely. You got problems or if it was a C-corp or an S-corp, a whole different type of entity than the disregarded, and now we have issues.
Jeff: But even if it’s in an LLC taxed as an S-corporation, that really shouldn’t affect the like-kind exchange as long as I’m selling from that S-corporation and the property I’m replacing it with, it’s going back into that S-corporation.
Eliot: Yeah. As long as we have the same title, it’s always going back to that same thing. Yeah, we should be okay there.
Jeff: As far as it being an LLC disregarded to you personally, I don’t see any issues.
Eliot: No, no, no. Not that I know of.
Jeff: We’ve actually run into where we talk about putting entities in LLCs, then you want to refinance, and the bank wants you to pull the property out. They pretty much ruled that even that, it’s not a big deal. It’s a temporary thing to do the refinancing,
Eliot: The IRS seems to work with you on this a little bit more. But always be careful of that LLC somehow having its tax status changed from what it originally was. That’s the big cautionary tone here, I think. Very good question.
All right, “Explain a scenario filing a 1065 that’s a partnership return instead of a 1040 for your individual. I thought everyone had to file a 1040 for their personal returns.”
Jeff: You are exactly correct. 1065 is a pass-through entity, which means it doesn’t pay its own tax. It passes all of its income through a Schedule K-1 and you report that on your 1040. It’s not, I’m going to file a 1065 instead of a 1040. I’m going to file 1065 and I’m going to report that income on my 1040.
Eliot: All right, 1065 would come first. You get your K-1, which is your part distribution of information coming from the partnership return. That goes on your 1040.
Jeff: You’ll sometimes hear your accountant say, you’ll turn in your partnership or S-corp tax documents and your 1040 stuff. You may want to know where your 1040 stands because you know you got a refund coming. Unfortunately, your CPA or accountant can’t finalize that 1040 until they have those pass-through entities finished.
Eliot: That’s right. It can kind of gum things up. Where we’re seeing a lot of problems with this is with the syndications, these big operations. Partnership returns, no doubt. They have all these K-1s, but they are really slow at getting those K-1s out and that can gum up getting your 1040 done.
Jeff: Several years back, I don’t even remember when, end of 1040 deadlines, partnership and S-corp deadlines were all the same day. Corporations were a month earlier. The IRS pretty much did everybody a favor and made all the pass-through entities of 1065, 1120-S due a month before the 1040 and the 1120 are due.
Eliot: Yeah, it just made a lot more sense.
Jeff: It’s really terrible how many 1040 almost done, you’re waiting for a K-1 from somewhere else, and they send that to you on the 15th of the deadline.
Eliot: So much crossing of wires and all that stuff. It was ugly back in the day. We’ve moved on, thank God. All right. Subscribe to Anderson Advisors on YouTube for the newest updates.
Jeff: Aba.link/youtube.
Eliot: “My wife and I are directors, officers, and shareholders of our Wyoming C-corp. We have not taken a salary for the past five years. We want to take medical reimbursement from the C-corp. Do we need to take a salary in order to do so? Our CPA told us we needed to.”
Jeff: I want to hear your answer first.
Eliot: No, you don’t have to take a salary. Salary is not what makes you an employee. Being an officer, you are an employee.
Jeff: Correct.
Eliot: You’re automatically allowed to take that medical reimbursement.
Jeff: You’re not going to give me an opportunity to disagree with you, are you?
Eliot: No. That’s it. That’s the answer.
Jeff: Yes, your CPA is incorrect. Since medical reimbursements have nothing to do with taxes or payroll, if LA reimburses me for all my medical, he’s still not going to issue me a W-2 if he has not paid me salary.
Eliot: Yeah, there’s no salary, so nothing to issue. This is a simple one.
Jeff: We’re going to disagree with your CPA.
Eliot: I understand where they think that they need to have a salary because I’ve heard this before myself, but it’s just not the case. All right, I think that was it. That was all of our questions. Just a little reminder, we have our Tax and Asset Protection workshop coming up on November 20th, 9:00 AM to 4:00 PM. You can register at abalink/tap.
Jeff: I haven’t been to that in a while.
Eliot: We always need to get in there and brush up.
Jeff: We like to have as many of our employees attend that because there’s a lot of good information. I feel like the Tax and Asset Protection is a place where they tie things together.
Eliot: They really do.
Jeff: Both the legal and the tax side.
Eliot: Yeah, it really is the great melting pot of the two.
Jeff: Maybe that’s why they call it Tax and Asset {rotection.
Eliot: Probably, TAP. There you go, November 20th, 9:00 AM to 4:00 PM.
Jeff: These are our various podcasts. You can see me and Toby.
Eliot: Tax Tuesday, Stock Market Strategies, et cetera, Alternate Solutions for Real Estate Investing.
Jeff: I’m telling you, we got a ton of information out there. I know sometimes I’ll google stuff and I end up on our own page.
Eliot: It always comes up on my cell phone. My YouTube videos, there’s always an Anderson ad in there. I always think, oh my gosh, can the partners see me? I’m trying to watch some music videos.
Jeff: Please take advantage of that. We like putting that out there. The partners love doing this material. I think they just like the whole idea of, hey, I got something I can share with people.
Eliot: Yeah, absolutely. Always different corners, always looking for new ways of doing things. The personality of Toby and Clint, it’s just who they are. Michael, the partners, they definitely send that good vibe down to us.
Jeff: You can probably put a heck of a lot of different terms in your search, put Anderson in there with you, and you’re probably going to come up with one of our pages.
Eliot: You’re going to get the Andersen that’s no longer with us from back in the early 2000s.
Jeff: I told them not to share the documents.
Eliot: The old Arthur Andersen, the other Anderson. All right. Replay is in your Platinum portal. Yes, you will have access to replays for this and any other event like this in the Platinum portal.
Jeff: I think I usually get an email the following week. Questions. If you have questions, please send them to taxtuesday@andersonadvisors.com or visit andersonadvisors.com. We have a database of tax questions that have been asked over this taxtuesday@andersonadvisors.com. We try to get to all of them.
Eliot: We do the best we can. It takes some time, but we try and get to them all.
Jeff: If you have a question that has a lot of personal information, a lot of financial information, you probably want to ask for a tax consult for something like that. That’s for your protection as much as anything. Also, in some certain detailed situations, our answers are honestly going to be more detailed the more we know about the situation.
Eliot: Yeah, and more accurate. It’s all about the details. Sometimes it takes a consultation to do that. It might be a little frustrating. You put your question and you want an answer, we sometimes have to talk a little bit more about it in a consultation.
Jeff: I think we’ve all run across where we’ve answered a question. Then after you’ve answered that question, it comes back that they give you another piece of detail that you didn’t have before. It can really change what your answer is.
Eliot: We understand that the clients don’t always know what to provide, we get that. If you often get a question saying, hey, I need another consultation, we’re doing that for your own benefit. I think that’s about all we have here.
Jeff: I think that’s it. We’re going to get you out of here at 3:56 PM. Hey, one other thing I wanted to bring up if you don’t mind. You all heard the Infrastructure bill was passed. I believe it’s sitting on the President’s desk waiting to be signed. There are also a couple of other items out.
The Employee Retention Credit is probably going to go away. If you’re an employer paying employees, I see that sunsetting very soon. The other thing they talked about, if you’re in states like California, New York, or other places that you may have to pay high income taxes, Congress is probably going to change that $10,000 state and local tax limitation. They’re looking at an $80,000 limitation.
Eliot: Yeah, that’s a brutal one.
Jeff: My bad, excuse me for the people who work for me. I thought that was part of the Infrastructure Bill, and apparently, it’s not. But it sounds like it has a really good chance of passing and should help out a lot of people.
Eliot: I think that one probably has a lot of fans, to put it mildly. I don’t think that $10,000 was ever really popular.
Jeff: Yeah, that was a really bad number.
Eliot: It didn’t really help at all in any way, shape, or form. I don’t know how they came up with it other than it was an even number.
Jeff: If they were looking to make people angry, job well done.
Eliot: Yeah. That had a crushing effect, especially for our clients in the Northeast or West Coast, where they have typically higher state taxes. I saw six-digit losses and deductions that you had one year that all of a sudden you didn’t this year, and that was a terrible shock to a lot of people.
Jeff: If you’re paying high income taxes, state income taxes, and also paying high personal property taxes or real property taxes, you may be having a huge tax bite taken out of you by state and local that you’re getting no benefit from. This is actually one I’d be happy to see resolved into a higher number.
Eliot: They need to retool that one, that’s right. Hopefully, we get it.
Jeff: That’s it for us today. We thank everybody for attending. Toby should be back in two weeks.
Eliot: Yup. I’m probably back on the other side answering questions.
Jeff: These two guys are also here every Friday from 4:00 PM to 5:00 PM. Who picked that time slot?
Eliot: We already have the Platinum. I think that was to make sure Eliot was still in the office on Friday afternoon, probably.
Jeff: I thought about changing that because 5:00 PM on the East Coast is like 8:00 PM. It’s not like 8:00 PM, it is 8:00 PM.
Eliot: We have the Platinum office hour that time all week long, so I suppose that’s why we kept with that.
Jeff: Feel free to join us for those tax Platinum hours or tax office hours. We also have Platinum office hours.
Eliot: Monday, Thursday for Platinum office hour and then 4:00 PM to 5:00 PM Fridays for the tax hour.
Jeff: We have bookkeeping office hours I believe are on—Troy, what is that? I’m blindsiding Troy.
Eliot: Wednesdays, he says.
Jeff: Wednesdays. I think it’s at 3:00 PM.
Eliot: Sounds right, 3:00 PM. Yes, thank you to everyone on our staff here. I just remember Dana. We have Piao, Christos, Dutch filling in, and Kurt. I know I’m missing somebody, Troy. I don’t have a list of them. But anyway, thank you so much for everyone helping out and thank you for joining.
Jeff: Have a good week and we’ll see you in two weeks.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
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