In this Tax Tuesday episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., explore the limitations of renting home office space to yourself as a sole proprietor and explain superior alternatives through S and C corporations that unlock better deductions and reimbursement opportunities. The attorneys provide detailed guidance on properly paying children through family businesses to maximize tax benefits while avoiding employment taxes, and discuss the complexities of transferring real estate to children through gift strategies. They dive deep into syndication investments, explaining passive income treatment, cost segregation benefits, and how real estate professional status can transform passive losses into active deductions. Other key topics include the master lease strategy for short-term rental owners seeking to optimize tax benefits, the mechanics and restrictions of 1031 exchanges, medical expense reimbursements through C corporations (including controversial deductions for specialty foods and safety equipment), and the proper setup timeline for nonprofit organizations. Tune in for expert insights on these advanced tax strategies and more!

Submit your tax question to [email protected]

Highlights/Topics:

• “Can I rent my home office to myself as a sole proprietor?” – No, use home office deduction instead.
• “I know an owner of a small business can pay their kids to work for their company. I’ve heard several different facts about how exactly to do that, which contradict one another. Can you please explain the proper steps?” – Pay kids W-2 from sole prop, avoid taxes.
• “We were advised to transfer real estate to our children up to a certain limit using the parent-child transfer provision form 709. Can you please discuss the advantages and disadvantages? Any limitations on the amount of equity transfer and any IRS requirements, etc.?” – Not recommended, complex bookkeeping, lose stepped-up basis.
• “I want to join a syndication as a limited partner. What tax implications do I face at the time of distribution of profits and how does it change if they do a cost segregation and bonus depreciation while I’m still part of this syndication? An additional fact is that this person has their own long-term rental.” – Passive income, and cost segregation create offsetting losses.
• “Are you entitled to cost segregation benefits if you invest in a syndication with your IRA/401k funds?” – Yes allocated, but no tax benefit in retirement.
• “Please explain the C Corporation Master Lease strategy for short-term rental owners. I own a short-term rental but was unable to capitalize on the short-term rental loophole because I had used professional property management. Does this strategy provide any advantage to somebody in my situation or allow me to take advantage of the loophole in a different way? How would the tax breakdown work in this case if I created a management C corporation?” – C corp manages property, shifts income, enables reimbursements.
• “What is the downside of using a 1031 exchange to avoid taxes in a profit transaction? Are there any benefits?” – Strict deadlines, higher debt required, but defers taxes.
• “What are the medical expenses aside from doctor visits and out-of-pocket medications allowed as reimbursable from the C corp? A doctor has recommended including antioxidant foods in our diet to improve my spouse’s diet due to a specific condition. Is it reimbursable if we buy foods that are not really on our regular grocery list? Only because our doctor suggested it. Additionally, the other day, my spouse slipped on one of the floor mats, so I had to buy rug grippers. Is this also reimbursable?” – Doctor’s note rule applies, antioxidants questionable, grippers no.
• “I would like to know if I can start a business as a nonprofit before I begin doing the work. Or do I have to already be up and running?” – Set up a nonprofit entity first for protection.

Resources:

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Toby Mathis YouTube

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Clint Coons YouTube

Full Episode Transcript:

Amanda: Hello. Welcome into Tax Tuesday. My name is Amanda Wynalda. I’m a tax attorney here at Anderson Business Advisors. And this is…

Eliot: Eliot Thomas, manager, tax advisors.

Amanda: It’s a step-up from being the fat kid who leads the pace, right?

Eliot: Exactly.

Amanda: That’s a movie reference. That’s not me being mean. Welcome, everyone. We’re live on YouTube and we’re also live on Zoom. Put into the chat where you’re all from. We like to know how far we’re reaching out. We usually get some people from even overseas but all over the United States. Let us know where you’re joining us from. We are joining you from Las Vegas.

Eliot: Yes, fabulous.

Amanda: Fabulous Las Vegas. There’s a sign that says it, so it must be true. Although we can’t tell you everything that goes on around here because as you know, what happens in Vegas stays in Vegas.

Eliot: That’s why we don’t even talk about it.

Amanda: We don’t even talk about it, but we will talk to you about tax. All right, Paris, California. I grew up in Corona, California, so that’s right down the highway from Paris. Florida, Arizona. Who else do we got?

Eliot: Austin, Carolina, Pennsylvania, New York. Well, they’re just flying in.

Amanda: Oh yeah, it’s going fast.

Eliot: It’s hard to keep.

Amanda: Harbor City, California. Las Vegas. Oh, that’s us. That’s hosts and panelists were also from Vegas.

Eliot: Miami, couldn’t be there next week.

Amanda: San Jose.

Eliot: Sunny Arizona, love it.

Amanda: Atlanta, spent quite a few hours in your airport this weekend.

All right, we do have people from all over the country. Let’s go over the rules. We talk about tax rules, but we also have Tax Tuesday rules. You can ask your live questions in the Q&A, so please use the Q&A for that. We’ve got a crack team of CPAs and tax professionals in the background that can help answer those questions. They can be follow-ups from what we’re talking about today, but they can just be anything. Who do we got joining us?

Eliot: We got Dutch, Jeffrey, Rachel, Ross, and Troy. Patricia.

Amanda: Rachel and Ross from Friends.

Eliot: Yeah.

Amanda: It’s not them. We couldn’t quite get them, but we have our tax team. Troy is also answering questions live on YouTube.

If you would like a question answered on Tax Tuesday live, then you can email those to [email protected]. Eliot combs through the millions of submissions twice a month so that we can bring you only the most interesting questions.

Eliot: Exactly.

Amanda: Send them in because the more, the merrier.

Eliot: It’s better than winning the lottery.

Amanda: If you do need a detailed response, you can become a Platinum client. That is our membership service here at Anderson Advisors. It gives you access to our attorney team and our CPA team, and we can give you a more detailed response through there.

This is designed to be fast, fun, educational, an hour you’re with us, and this is what we’re going to be going over. We’ll go over the questions here so you know what’s coming up, and then we will be going into more detail. What are we talking about first, Eliot?

Eliot: “Can I rent my home office to myself as a sole proprietor?”

Amanda: Great question. We get that pretty frequently. We’ll be talking about whether we can, and more importantly, whether you should be doing that.

“I know an owner of a small business can pay their kids to work for their company. I’ve heard several different facts about how exactly to do that, which contradict one another.” This is actually highly misunderstood, so it’s good that we’re going over it. “Can you please explain the proper steps?” Yes, sir or ma’am, we will. What else we got?

Eliot: “We were advised to transfer real estate to our children up to a certain limit using the parent-child transfer provision form 709. Can you please discuss the advantages and disadvantages? Any limitations on the amount of equity transfer and any IRS requirements, et cetera.”

Amanda: Also a great one for kids.

Eliot: A lot of kids stuff.

Amanda: “I want to join a syndication as a limited partner. What tax implications do I face at the time of distribution of profits, and how does it change if they do a cost segregation and bonus depreciation while I’m still part of this syndication?” Additional fact is that this person has their own long-term rental, which does change the answer a little bit.

Eliot: “Are you entitled to cost segregation benefits if you invest in a syndication with your IRS/401(k) funds?”

Amanda: We shall see. “Please explain the C-Corporation master lease strategy for short-term rental owners. I own a short-term rental, but was unable to capitalize on the short-term rental loophole because I had used professional property management. Does this strategy provide any advantage to somebody in my situation, or allow me to take advantage of the loophole in a different way? How would the tax breakdown work in this case if I created a management C-Corporation?” There is a lot to unpack in that one, and we will unpack all of it.

Eliot: “What is the downside of using a 1031 exchange to avoid taxes in a profit transaction. Are there any benefits?”

Amanda: You got to mix these up so that it’s two long ones. I’m reading all the long questions. You get all the short ones.

Eliot: Lucky picks.

Amanada: All right. “What are the medical expenses aside from doctors’ visits and out-of-pocket medications allowed as reimbursable from the C-Corp?” That’s going to be under a 105 plan. “A doctor has recommended including antioxidant foods in our diet to improve my spouse’s diet due to a specific condition. Is it reimbursable if we bought foods that are not really on our regular grocery list, only because our doctor suggested it?

Additionally, the other day my spouse slipped on one of the floor mats, so I had to buy rug grippers. Is this also reimbursable?” This was a fun one to discuss beforehand.

Eliot: We did have a lot of fun on this one. It’s a good question.

“I would like to know if I can start a business as a nonprofit before I begin doing the work, or do I have to already be up and running?” That’s our last one.

Amanda: That’s a good one. Nonprofit. We don’t get a lot of those.

Eliot: We don’t.

Amanda: All right. If you are joining us for the first time and you’re not a subscriber, please subscribe to Toby Mathis’ YouTube channel. He is one of the founding partners here at Anderson Advisors. He was the person who hired me, so we can trust his judgment, really.

Also have Clint Coons, he’s our other founding partner. His channel focuses more on asset protection. Toby’s focus is more on tax, but you’ll see a lot of cross information and topics, because really it’s really hard to separate the tax from the legal when you’re doing business and investments. That’s why we have it all.

Eliot: One roof.

Amanda: Under one roof.

Eliot: Absolutely.

Amanda: And if you just can’t get enough of tax and legal, you can join us live in Las Vegas for our in-person TAP event (Tax and Asset Protection). June 26th through 28th. Just scan this QR code or click on the link that’s going to be thrown up in chat. Only $99. Come hang out. And it’s a business expense, fully tax-deductible.

Eliot: Yup. Free trip.

Amanda: Meals are 50%.

Eliot: Fifty percent.

Amanda: No gambling. That’s not going to be tax-deductible, unless you’re a professional gambler.

Eliot: No entertainment anymore.

Amanda: And if you can’t commit to a whole three days with us, please join us for our one-day Tax and Asset Protection Workshops. The next one is going to be May 31st. They’re all-day Saturdays, usually starting around 9:00 AM Pacific, going until about 4:00–4:30 PM Pacific time. Bring some snacks so you can get through with us.

The next is going to be Saturday, June 7th. You can click on the links that are going to be thrown up into the chat. Thank you, Ms. Patty. She’s sending those up there.

All right. Let’s get started.

Eliot: Or do both. Go to the online and the Vegas event.

Amanda: That’s true. We do get a lot of repeat viewers.

Eliot: A lot of material.

Amanda: A lot of people will come to our Saturday webinar. Maybe they stay for the tax portion, maybe they’re staying for the asset protection portion. People tend to come more than once because it is a lot of information. Then we get a lot of people graduating essentially to that three-person event, for sure.

All right. Question number one. “Can I rent my home office to myself as a sole proprietor?” Eliot? First of all, let’s define sole proprietor.

Eliot: Sole proprietor is generally what we call Schedule C. That just is the form where it reports on your personal return. It’s where it’s just you owning the business.

The tax code, the IRS consider you, business one and the same. That gets into our answer about whether or not, you’re basically asking, can I rent a home office to myself? Is what we’re actually saying here. A lot of commentary out there will tell you, no, you can’t. You can’t take a deduction for that rent.

We do have a section that we use all the time, 280A. We often talk about it with having meetings and things like that, but actually, the broader sense of that tax provision is the disallowance of expenses surrounding your home and things like that.

That is where we get to this question right here. We can’t really take a deduction for paying rent to ourselves in a sole proprietorship situation. That’s the quick answer, whether or not the yes or no, so to speak, but there are other things we could do.

Amanda: For sure. When you think about it, even if you could, it may not even make sense tax-wise to do so because you’re taking and you’re having to claim that income personally, so whatever as rent.

We get what you’re trying to do. People often think of this as a way to maybe deduct or write off some of their home expenses. The better way to do that is actually going to be through either an S-Corporation or a C-Corporation, maybe even taking a home office deduction through the partnership.

Let’s start off. If you are a sole proprietor or an LLC taxed as disregarded, you do have the option to take some of these deductions through a home office deduction. What does that include?

Eliot: The home office, first of all, two criteria that you use it exclusively and on a regular basis. This area that an office, if you have a home office or something like that.

We can’t use it for something else. We can’t have our Thanksgiving dinner there or something like that. We really need to use it just for the business. You can use any reasonable method for determining the size. Usually, people just take the measurement of the office divided by the total square footage of the house, gives us a percentage.

Amanda: Or if you’re using an entire room, you can use one as the numerator and then the number of rooms as the denominator to figure out that percentage. But usually you’re looking around anywhere from 10%, 25%, maybe 30%. Then that applies to all of the expenses associated with that space. We’re looking at utilities. What else?

Eliot: We got utilities and property taxes. Rent if we’re renting.

Amanda: Mortgage interest?

Eliot: Exactly.

Amanda: HOAs.

Eliot: All the electric bill, water, sewage, all that stuff.

Amanda: Internet, phone service if you have a landline still.

Eliot: Yeah, and usually those, when we get into the phone, we might have to look at if it’s a cell phone, we’ll have to look at percentage of business use versus personal use. But at least for the office, things related to the house, that’s pretty much what we’ll be able to deduct.

Amanda: You also can deduct direct expenses. If you are putting in bookshelves for that office space, the cost of those bookshelves. Any motivational posters you want to put up, or maybe you’re doing a built-in desk. All of those things are also going to be deductible under that home office. But there is a limitation.

Eliot: There is. We can’t use it to create a loss. If you have (let’s say) only $100 of profit in your expenses for your office (maybe) or $2000, you’re only going to be able to deduct up to $100. The rest does carry over and should be reported on your return for the next year. But odds are, if we had a loss this year, we couldn’t use it. We may have the same thing the next year, repeating.

Amanda: And if you are doing the home office on your Schedule C or a sole prop, there’s the 300-foot limitation as well.

Eliot: There’s an easy catch-all. We’re up to 300 square feet of $5 a square foot can be used. IRS typically doesn’t look at that too much. They just allow it. But that will limit it to $1500.

That’s really low for an office. We usually see a couple of thousand more than that. For the ease of just calculating it, something probably the IRS, a better chance that they’re not going to look at it too much. But you are giving that all up at the expense of not having a better deduction.

Amanda: For sure. If we (say) have an LLC, sole proprietor in this case but you should be conducting your business through an LLC for the asset protection purposes, if we’re making about maybe $25,000–$30,000, you may want to consider making an S election that’s going to allow you to avoid some of the self-employment tax that you would normally be paying through that disregarded LLC. But then it also opens up this home office or administrative office deduction, and it removes that 300 square foot limitation.

Eliot: That’s right. When we go into the administrative office and we’re talking underneath what we call the accountable plan, which just means reimbursement, it’s just a fancy IRS term for reimbursement, you pay for something out of your own pocket for the benefit of the corporation, we can be reimbursed.

Well that’s what you’re doing with your home office. You’re paying for all your personal expenses out there. You’re using that office space on behalf of the business, so we can be reimbursed. When we become an S-Corporation, it’s not just a deduction to the S-Corporation, but it’s you receiving cash down from a tax-free reimbursement to you.

Also, we get into the area where we could possibly even add on maybe the other good part of 280A, having those corporate meetings. How many can we do?

Amanda: You can do 14.

Eliot: Fourteen means tax-free to you, cash coming to you, deduction to your S-Corporation. Now we’re in a far better scenario than we were originally. We’re here with a sole proprietorship that really we couldn’t even deduct the rent for.

Amanda: That’s true. Then additionally, if you are having people come or clients come to your home, you can potentially write off the cleaning costs associated with that space and even some of the landscaping costs—I’ve seen that done—but the real advantage is that you’re not limited to that $1500 deduction, and you can generate a loss on an S-Corp or a C-Corp through the home office reimbursements.

Eliot: It’s pretty intuitive to us, but that loss that Amanda is talking about, that’d be an ordinary loss. It’s going to go against any other income on your return. It’s not just any old loss, it’s not like it’s a passive loss or anything like that, so good stuff.

Amanda: Good stuff.

All right. “I know an owner of a small business can pay their kids to work for their company. I have heard several different facts about how exactly to do that, which contradict one another. Can you please explain the proper steps?”

This falls under the family help rules from the IRS, and they’re very specific. The idea behind paying your kids is two-fold. One, hopefully if you do it in the right way, they can avoid payment of that self-employment tax or what we consider payroll taxes. But then you’re also shifting income over to their (hopefully) lower tax bracket.

Some kids out there are out-earning their parents in the YouTube world, but hopefully they have a lower tax bracket. We’re really looking at a good, better, and best way of doing it. Ultimately, any income you can shift over to your kids is going to be good because of that lower tax bracket. But how do we do it if we want the maximum amount of tax benefit from them?

Eliot: Our best level. What we’re looking for there is a situation where the kids are being paid, and this is important, as employees. W-2 employees not 1099. Exactly. W-2. We’re paying the kids as a sole proprietorship just like we were talking about in the last, or a partnership where all of the partners are parents of the children.

Those are critical components. If we have that arrangement going on, we pay them as employees from that type of vehicle. Then all of a sudden, they’re not subject to the employment taxes. As long as they’re under 18, for your FICA, which is your social security and your Medicare, those taxes, and under 21—

Amanda: FUTA.

Eliot: Yes, Federal Unemployed Insurance Tax. Exactly, which is approximately 1.5%, something in that ballpark. Not very much. The other one is the 7.6% FICA.

Amanda: So under 18 they won’t pay any of those taxes, which together make all of that 15.3% self-employment tax.

Eliot: Correct.

Amanda: If they’re over 18 but still under 21, then they won’t pay which one?

Eliot: The FUTA, the federal unemployment tax.

Amanda: Which is that smaller 1.2%–1.3%?

Eliot: Yup.

Amanda: Still a small benefit, but may not be worthwhile if depending on your situation. Now we’re paying them W-2, we’re not 1099-ing them, so you do have to set a payroll. That can come with some challenges, depending on what state you’re in. You may have to enroll in workers’ comp insurance, depending on the state. It’s important to know your local state rules on that. Then how much are we ideally paying our kids in this situation?

Eliot: We like to keep under the standard deduction. Why? Because that gets us out of having to pay any federal income tax. We may or may not have to pay some of the employment tax beyond age and things like that, but being under the standard deduction amount, $15,000 for 2025, we’re not paying any federal income tax. That’s a real win.

Amanda: So under 18, paid from an LLC or a partnership, where the owners are all the biological parents of the children, up to $15,000 as W-2 salary, we’re going to avoid all of the tax.

Now, ideally we can tack on another strategy onto this where we’re setting up a Roth IRA for these kids. They normally aren’t going to even see the money. You’re going to direct deposit it into their UTMA (Uniform Transfer to Minors Act) account which you’ll have set up for them, and then directly contribute it to that Roth IRA where the limitation is $7000 a year, and it’s going to grow completely tax-free for however many years until they turn 65?

Eliot: Yes. Well, it will change by now.

Amanda: Yeah, it probably will change by then. They’ll probably want them to work longer by then. But we did the math for my 18-year-old when he started contributing to his Roth, and even starting that late, he would have $3.5 million in it by the time he turns 65. If you are getting started on this when your kids are very young, it can be a massive head start for them in life.

Now, what can we pay them to do?

Eliot: Anything reasonable. It always is just the reasonable test. We talk about it all the time. They could be cleaning the office, filing, maybe depending on their level some bookkeeping, something like that. Their ability to understand that concept.

There are a lot of things they can do. It does have to be reasonable. You need to keep some backup, some documentation of how much you paid them and what they exactly did. We can’t just pay junior $15,000 because he took the garbage out once, so it’s got to be reasonable.

Amanda: Reasonable for their age and a reasonable salary for what they are doing.

I’ve got a client here at Anderson who has four kids. One in college, one in high school, one in middle school, and one in elementary school.

The elementary school–aged child shreds paper—kids love shredding paper—and cleans out, sweeps the office. The middle schooler will do some light bookkeeping. The high schooler does the social media, in the Ticky-Toks and all that. Then the older, college-aged son does the actual property management, meets tenants at the property, shows them in, gets them their keys. Depending on what type of business there is, there’s a lot of opportunity there. But finding a reasonable wage for them is going to be really important.

Now, that’s the best way to do it. What if I don’t have a partnership? I don’t have a sole proprietorship. Maybe I’ve got an S-Corp or I’ve got a C-Corp. What can I do then?

Eliot: We still can take just a different avenue to get to that, same best way of doing it, if you will. In this case, just imagine you have a C-Corporation and you need your children to work. What your C-Corp can do is basically lease out or pay as a vendor, some other entity that has the workforce for them.

We do it all the time. We have people out there who are temp jobs and things like that. Well, our C-Corporation just comes into an agreement to some sole proprietorship owned by one of the parents or a partnership where the partners are the parents, just like what we just talked about. And now, we basically vendor out them to the C-Corporation.

Let’s say we have two kids. $15,000 each. $30,000. S-Corporation, C-Corporation writes a check for $30,000 to that entity. It comes on their 1040, or if it’s a partnership it will flow through to their 1040. But we’re going to have a deduction because that entity is going to pay both kids $15,000.

That zeroes out our income. We have no tax on this family partnership that we have up here. We got kids working under the S-Corp or C-Corporation. But because they’re W-2 employees out of the family partnership, again, all the tax benefits we just went over, no FUTA, no FICA if they’re under 18, and no FUTA if they’re under 21. No federal income tax as long as we’re paying less than $15,000. We were able to get to the same spot. Just had to go a little bit further forward.

Amanda: We’re just setting up another entity to pay them through, essentially. Now if you don’t want to go through and set up another entity, you can still pay them W-2 from your S-Corp or your C-Corp. But they’ll still pay the payroll taxes. But we’re still shifting $15,000 per person into a 0% tax bracket, so that can still be significant.

I’ve got six kids. I’ve got three step kids and three younger kids, so that’s a lot of income shifting that you can do. I’ve had clients come to our Tax and Asset Protection events to solely learn this strategy, and it’s usually because they’ve got quite a few kids that they want to shift the income over to.

Eliot: It’s a lot of work to be done for your business.

Amanda: For sure.

Eliot: Not eating paste either, right?

Amanda: Don’t eat paste. That’s not a job I’m going to pay you for. Okay, question number three. “We were advised to transfer real estate to children up to a certain limit using the parent-child transfer form 709 provision. Can you please discuss the advantages and disadvantages? Any limitations on the amount of equity transfer and any IRS requirements, et cetera.”

This is, again, a strategy for shifting wealth over to the next generation. Before we get into whether or not this is a good idea, how exactly would someone do this?

Eliot: Well, I think we talked about maybe we want to look at some of the bookkeeping on it?

Amanda: Well, the overall idea is the same—the gift. You’re able to gift each individual up to $15,000 without having to file a gift tax return. That’s the annual gift exclusion. Instead of gifting money like you normally do for Christmas or whatnot, we’re gifting them ownership in real property.

That’s the idea of what we’re trying to get through here. But there is, how do you actually do that? We asked our friend Troy Butler, who is on with us. We’re going to phone in a friend. Troy, what did you say it was? You said it was a bookkeeping nightmare?

Troy: Well, it’s not even so much of a bookkeeping nightmare as much as it is a tax nightmare. The tax preparation becomes a little more difficult if you’re doing this year over year.

When you have a partnership, which is what this would be, you have to file a partnership return, which is a 1065. Then each year, you’re going to have to change the capital accounts and the ownership. And that’s a pain. I would prefer someone not do this.

Amanda: Yeah, because you’re getting an appraisal each year, so each year the value that you’re moving over to your kids are going to be essentially different based on the fair market value and appreciation of the property, right?

Troy: Right.

Eliot: So a lot of finagling on the bookkeeping, the tax side, maybe not our best option. And yeah, we are just moving a set amount. You can’t give it, and actually I think it’s $19,000 for gifting per year, but times two parents, mom and dad, or spouses giving to the kids. You can give up to $19,000 each or $38,000 total.

But if we’re talking about a house with a lot of value to it, is that maybe not be our best option, as well as there’s the bigger fly in the ointment here that if they’re receiving part of a house, they’re not going to get stepped-up basis. We want to look back and see what that is.

Right now, if you’re alive and you give a property over to somebody, they’re going to take your basis. If it’s what we call inter vivos, if you’re alive and you do it while you’re living, they just take. If I give a house over to Troy, he takes it at my basis that I have, which could be very low.

If you wait until you pass and you leave it, now I leave it to Troy after I pass, then he gets stepped-up basis. That’s the market value, which over years especially we hear about California all the time, that could be millions of dollars of inflated basis that you get upon receiving it.

That means that that child, that beneficiary, whoever receives it can now if they want to run it as a rental, can go ahead and deduct it at a much higher basis for depreciation because they got that stepped-up basis. I think that’s the real loss here, by taking the advice here of transferring while you’re alive to the children, where you don’t have that stepped-up basis.

Amanda: Losing that stepped-up basis is a good one. All right Troy, thank you so much. He gave it a thumbs down I think. Eliot might be giving it a thumbs down as well. If the work involved in it is worth it to you. Obviously, work with your CPA, your accountant to determine that, but it is. I had said $15,000. I was going off the standard deduction. You’re correct. It’s a $19,000 amount that you can shift over that may be just a drop in the bucket over the course of time.

Having to go through all of that work may not be worth it. Plus losing out on that stepped-up basis, it’s typically much better from a planning perspective to be leaving property to your heirs once you pass away.

We had a comment in the chat too about California, specifically transfer taxes. There can be property tax reassessment due to adding on additional owners. Typically, you’re not going to see that for a parent to child transfer. But if you are perhaps adding on an unrelated party or your grandchildren, then that could trigger a reassessment and transfer taxes, which can also be quite costly and negate the benefits that you were hoping to get.

All right. “I want to join a syndication as a limited partner. What tax implications do I face at the time of distribution of profits, and how does it change if they do a cost segregation and bonus depreciation while I’m still part of this syndication?” An additional fun fact is that this person has their own long-term rental. What is a syndication?

Eliot: Syndication is just an investment where you got multiple, could be hundreds of investors. A lot of time we’re talking to real estate. I guess it doesn’t have to be, but that’s where we normally see it. They all pile in their money and invest in a property, usually large apartment buildings and things like that.

Amanda: Self storage, things like that. There’s a general partner which is taking on all of the liability. That’s typically the company that’s doing the project. And then just individual investors can put in money, $50,000, $100,000, much more.

You typically have to be an accredited investor to invest in these, which means that your assets are high enough that you’ve been deemed to have enough investing savvy to understand that. Although your legal liability is limited, you’re not guaranteed to get your investment back. That’s what a syndication is. Most investors are going to be entering into that as limited partner side.

How are you taxed on what you make from these types of investments? There’s typically going to be some type of return or there can be some type of return that comes back to you while you’re in the investment. Then most of these syndication deals are designed to have a hold period, maybe five years, six years, and then to be sold off to a bigger company at the end, in which point you will get additional income.

Let’s talk about the income that you’re getting throughout the years while you’re still a limited partner. What is that?

Eliot: At the basic level, a limited partner tells us right away that we’re talking passive. You mentioned the general partner. That’s usually a 1% owner who runs it. Theirs would be active or non-passive, but these limited partners, the vast majority of investors are all going to be passive income.

Why do we care? Because If we have a passive loss, we can only take that against other passive income is the general rule. Nonetheless, if we have that passive activity—they talk about distributions of profits, that’s what they’re asking about here—if there are actual profits, well you just receive it, it’s still passive income, but you’ll just get your portion. If you own 1%, you’ll get 1% of the profits. It’s pretty much what will happen.

Does it change if we have cost segregation?

Amanda: That’s taxed as ordinary income, too.

Eliot: Ordinary rates, correct.

Amanda: If you have a high tax rate, any income’s going to be taxed at that rate. If you have other passive losses, maybe from rental properties or other syndications, it could offset it. You could be paying zero tax on those profits.

Eliot: Likely, but we know we do have here without long-term rental. Exactly right.

Amanda: We do have a long-term rental. Let’s go first to see how it changes if they do a cost segregation and bonus depreciation. What is cost segregation? What’s bonus depreciation? What’s the result of having those done?

Eliot: We always talk about straight line depreciation. Again, that’s the entry level. We got a building, let’s say it’s a commercial rental property of some sort. Thirty-nine straight year for the property, the building itself. We depreciate that over 39 years.

However, we know that that building most definitely has different parts, like carpet, lights, fixtures, et cetera, and the foundation. All of those on their own have their own depreciation life. Carpet could be five. If it’s tacked on, it might be seven. The lights could be 7 or 10 or what have you. Of course, again, the foundation would be 39 years.

We come up with a cost segregation study and it breaks this house, this building into pieces, determine the 5-year, the 10-year, 39-year properties. If you can imagine that, all of a sudden we took a chunk that was a 5-year property and now depreciated over 5 years as opposed to 39. Well we’ve sped that up. We speed it up, we get a heavier deduction.

Same thing with the 10-year property, et cetera, whatever it is. As long as it’s under 20 years, we’re speeding it up. We get a higher depreciation expense, and that’s what our cost segregation does.

But then we bring in the bonus depreciation, and that says, well in the year of purchase, let’s say we got the building this year in 2025, that we can deduct an additional 40% right away of that 5-year property, 10-year property, what have you. As long as it’s under 20 years, we can take an initial 40% right off the top. Then of course we’ve sped it up because it’s now a 5-year property as opposed to 39.

Really, all we’re doing is making this really, really large depreciation deduction. Step back for a second. What’s that mean for our limited partner? Well that just means probably we’re going to have a loss.

Amanda: Losses.

Eliot: Exactly, and it’s going to be a passive loss as far as we know right now. That’ll be the normal status.

Now we do have this other long-term rental that’s going to come into play if that’s working at a profit, and if it’s passive, well then the two will net. Passive loss, passive gain, that’s a great marriage there and everything’s done. But we have some other things that might happen with a long-term rental, maybe. We can maybe shift that up, change it from passive, possibly?

Amanda: You want to change it from passive?

Eliot: I’d like to, if possible.

Amanda: How are we doing that? It doesn’t say in this fact pattern, but if you happen to be a real estate professional, which means that you spend 50% of your time in real estate trade or business, and you spend at least 750 hours in that business annually, you could qualify for this.

What does this do? Being a real estate professional changes your passive rental property income into active rental property income. A lot of times this is preferred because then we’re doing cost segregation. We’re taking bonus depreciation, generating losses that are now active, and those will offset whatever other W-2 income you have coming in or your spouse has coming in.

In this case, if the individual does qualify as a real estate professional and their long-term rental is active, how is the limited partnerships, syndication losses treated at that point?

Eliot: Well, to get to our REP (real estate professional) status, if we did what we call aggregation, we pull in all of our rental activity that includes syndications. Now all of a sudden the syndication no longer is passive. It becomes active. If those losses are heavy because of the cost segregation, because of the bonus depreciation, that loss will offset anything going on in our long-term. It’s now all non-passive. That will offset anything on our return.

Amanda: Anything.

Eliot: Any income at all.

Amanda: W-2 salary.

Eliot: Absolutely.

Amansa: 1099 income, capital gains.

Eliot: Throw it away.

Amanda: Gone. Depending on whether you qualify as a real estate professional and you can transform these losses, these per se passive or normally passive losses into non-passive, it could have quite an effect on your overall tax return.

If you’re not a real estate professional and you’re just taking the passive losses from a cost segregation and the bonus depreciation, that’s going to only offset other passive income on your tax return.

What about depreciation recapture? What is the tax effect when we finally exit or the partnership sells off this property? They give everyone their investment back, maybe whatever percentage additional to it. What are those? Is that also ordinary income?

Eliot: Well, it’s no fun, I’ll tell you that. What’s going to happen here?

Amanda: They’re making money. It’s going to be fun. Sometimes we pay tax because we’re making money.

Eliot: That’s true. We look at the capital gain from selling it, the initial capital gain, and that’s just going to be the cost of this building less whatever adjusted basis we have from improvements, less depreciation.

Let’s just say that’s $100. Let’s say we took $30 of depreciation over the years. But the code says that we don’t have basically a double tax benefit. They say we gave you a deduction for that $30 of depreciation over the years. We’re going to capture it back and we’re going to tax you on it.

Now if we did a cost segregation, we talked about the five-year property, et cetera, and the foundation. What we’ve done is we’ve taken what we call 1250 property, and we split it into still some 1250 and then a lot of 1245 property. That’s all your tangible personal property. That’s the stuff we can use the bonus depreciation on, et cetera, so we have these two components.

Now if it’s 1250 depreciation that we’re recapturing out of that $30, that’s going to be limited. A max of 25%. Can’t go higher than that. That’s not so bad because if we’re, say a 37% tax bracket, we still come out 12% ahead.

Amanda: So we’re paying 25% on the tax rate on the 1250 property.

Eliot: Correct. The depreciation that came back, exactly. 1245 we’re not as lucky. That’s going to be whatever our tax rate is. It could be 37%, whatever our tax bracket is.

Now, that was just the $30 that we had depreciated recapture coming out of our $100 of profit. We take that off the top, that still leaves 70%. That’s going to be the more familiar capital gains rate that we always talk about. That could be 0%, 15%, or 20%, depending on what our overall tax bracket is or taxable income for that particular year.

Amanda is exactly right. It’s still a great deal. We’re making money. Fine, we had to pay a little tax, but we got a great tax break over the years. We had some income coming into us. Then we got the gain here. It actually works out quite well.

Amanda: And you’d be hard-pressed to find a limited partnership syndication deal that’s not going in, already going to doing a cost segregation and taking bonus depreciation in that first year. That is why people get into it, is to get those losses. If you come in a year after the cost segregation has been done, do you still pay the depreciation recapture even though you didn’t get to take the loss?

Eliot: That first year, like Amanda’s talking about, we get this massive depreciation that we made you listen through about how I calculated it. We take this huge loss. But I didn’t come in the first year. Amanda got that. She was the first year investor. L.A. comes in two or three years later, and that’s already been done.

But I’m still working in the same partnership, still have the same income statement coming out, income minus expenses, et cetera. Same depreciation being taken on the balance sheet, et cetera. Or showing, I should say accumulated. I’m not aware of any provision that keeps track of that, so I’m going to get the short end of the stick when finally we sell. We’re going to have to go—

Amanda: You’re still going to be allocated your percentage of the profits.

Eliot: Overall net profit, exactly.

Amanda: You snooze, you lose, Eliot.

Eliot: That’s the story of my life.

Amanda: That’s where it came from.

Eliot: That and the paste.

Amanda: And the paste. What movie is that from?

Eliot: They told us it’s not Say Anything. I can’t remember. Matthew had it.

Amanda: It was a John Cusack movie.

Eliot: It is a Cusack movie.

Amanda: It wasn’t Say Anything.

Eliot: The Sure Thing. That’s what it was.

Amanda: Eliot doesn’t eat paste everywhere. Not anymore.

Eliot: Nope. Quit last week.

Amanda: “Are you entitled to cost segregation benefits if you invest in a syndication with IRS 401(k) fund?” Again, I think the short answer we’ve already answered.

If you are a partner, or you’re a business entity, or your retirement account is a partner, you are allocated the profits and losses based on your ownership percentage. If you invest into a syndication using your self-directed Solo 401(k) fund or your self-directed IRA funds, your retirement account would be allocated those losses. But does it matter?

Eliot: Well, that’s the thing, isn’t it? Because we’re in a 401(k), we’re in a retirement plan now, we don’t have these concepts at the surface level of depreciation or anything like that. Maybe it’s not the best example, but I look at it as we just simply have cash in. We have money coming in, rent’s coming in from a building, and we have cash out.

Eliot broke a window, got to pay a check for that one. Or his gardening’s bad, true story, so he has got to pay a landlord or something like that for whatever’s going on. Just cash goes out. But what about depreciation where we never really cut a check for depreciation?

Amanda: Yeah, it’s a paper loss.

Eliot: It is. So no, we don’t on the surface level really see that ever as a benefit.

Amanda: Your retirement account is a tax-deferred account. Income coming in, you’re not paying tax on that or at any point. Income’s coming in, expenses are going out. Most accounts you’re not keeping even an income statement or even keeping track of the expenses. Although I would still keep track of the expenses to determine whether or not that’s a good investment overall, but you’re not having to report the expenses or the income because it’s all happening within this account.

You are taxed not until you remove funds from the account, so at the point when you’re taking distributions in. If this is a Roth account, there’s no tax. You put in post-tax dollars, so it grows completely tax-free. Your distributions are tax-free.

If it is a traditional 401(k) or IRA, you will be taxed at ordinary income rates, depending on how much you’re taking out and factoring in all of your other income coming from other sources.

Are you entitled to the benefit? Sure. Your 401(k) is entitled to them, but there is no benefit. That’s why doing the type of investment of a property and spending the money to do a cost segregation may not be the best thing to do within your retirement account if you have the option of doing it outside your retirement account where you can take the benefit of those losses.

Eliot: Now we discussed one exception.

Amanda: Oh, there are always the exceptions.

Eliot: Wouldn’t be our lovely friendly tax code if we didn’t have an exception. What if Amanda put all this money in there, and maybe she gets a short-term rental? That’s a different income. That’s active income potentially. If we have active income in this type of retirement account, we have what’s called UBIT (unrelated business income tax).

What’s so special about that? Well, nothing’s good about it, that’s for sure. But it basically has the same tax brackets, if you will, but it just grows up really fast, by $10,000–$12,000. You’re already in the 37% tax bracket. Follows what we call trust tax brackets, but it’s very fast, very rapid in its growth and how fast you get up.

Holy cow. So you mean I’m going to get hit with that because it’s an active business? Yeah, you could be. However, the good news here, instead if we are in that situation, guess what? We do get to deduct depreciation. Now all of a sudden a bonus depreciation, cost seg could save our taxes here, that we’d have that and deducted against the income, the UBIT, that taxable income, lowering that amount, maybe wiping out. UBIT is not even a factor. Or even if it is, it’s certainly is going to reduce it quite a bit.

Amanda: And that’s going to only apply if you’re doing any active business within your 401(k), so not in the syndication world. The active business doesn’t have to be real estate–related. I had a client who had worked in car sales for his whole life, and he wanted to use his retirement funds to buy a car dealership. That would’ve been active income. But the UBIT, 37% tax dissuaded him from doing that.

Most people aren’t doing an active business within the retirement accounts because of this high tax. But if you end up doing it in real estate or end up in anything that has equipment or things that you can depreciate and use bonus depreciation on to reduce that tax liability, it could end up being a good thing.

The point being, planning, planning, planning. Tax planning. That’s where you jump on with your CPA, and you actually run the numbers to see if it’s going to be an overall benefit to you.

Eliot: Exactly.

Amanda: That’s exactly right. All right, “Please explain the C-Corp master lease strategy for short-term rental owners.”

Let’s stop right there and actually just explain that before we get into the rest of this question. The master lease strategy is essentially what most people know as Airbnb arbitrage. It’s where a person or entity owns a property, and then another company comes in—this is typically going to be a C-Corp for our clients—and enters into a long-term lease agreement. So 12 months, over a year, maybe 2 years, 5 years, it doesn’t really matter.

Ultimately, if you’re doing true arbitrage, one person owns the property, you are coming in as the investor renting it from them, and then essentially subletting it out as an Airbnb.

Now, when you’re on both sides of this transaction is what we’re talking about the master lease strategy here. The same individual not only owns the property through an LLC, but also owns the Airbnb management company. They’re creating a lease agreement between themselves, essentially.

Why are people doing this? There are a couple of tax benefits to it. First of all, you’re shifting income over to the C-Corporation. In an Airbnb arbitrage situation, you’re typically charging anywhere from 30% to even 50% fees for managing that Airbnb, which can add up very quickly.

Then you can take out tax-free reimbursements under the 105(b) (medical expenses), 280A (meeting expenses), and just general accountable plan expenses, which are going to be things for home office, phone, internet, miles, things like that.

We go into a lot of detail in these types of expenses. There are many other videos on this YouTube channel that can go into those details. That’s not really the big bang for your buck here. What it is is if you are a real estate professional. What does being a real estate professional impact this tax strategy?

Eliot: For a real estate professional, what we’ve already done, we’re saying, hey, we have other long-term rentals out there. They’re not passive because I’ve met this real estate professional status. Again, over 750 hours, in a real estate trade or business, 50% of my work week, and I’m materially participating in the management of my properties. And usually we get there, we make the aggregation election to pull in all of our rental activity, and that’s key.

But now, we have this short-term rental out there that in this case we’re not really managing ourselves, but boy does it make a good buck. It’s making a lot of money. Just as Amanda point out, C-Corporation’s making all kinds of good stuff. Well, if we do this master lease, we just turned it into a long-term rental for our part. The C-Corp sees it as their short-term rental. We see as long-term.

We’re a real estate professional, we’ve aggregated that, automatically pulls it in with a pile. If it’s brand new, we can go and do a cost segregation, bonus depreciation, do a lot of good stuff there. All that money that we shifted over to the C-Corporation is going to be a deduction against any rental income we have. It’s a deduction on that amount, of any management fee, or anything that we have over there. We’re going to have just a much better tax experience here with all that by pulling it into our real estate profession.

We don’t now have to worry about the fact that we had a third-party property manager had to oversee it. We’re good to go because It’s a long-term rental. We aggregate it, it pulls it into our pile of long-term rentals.

Amanda: Normally when you’re aggregating your long-term rentals, you can’t also add in a short-term rental. That’s just not how it works. We want to transform that short-term rental into a long-term rental by using this master lease or Airbnb arbitrage strategy, and then that allows us to connect all of those property and generate losses that way.

All right, moving on. “This client owned a short-term rental but was unable to capitalize on the short-term rental loophole because they had to use a professional property manager. Does this long-term master lease strategy provide any advantage to somebody in my situation or allow me to take advantage of the loophole in a different way? And how would the tax breakdown work in this case if they created the C-Corp management company and effectuated this strategy?”

Let’s talk about what the short-term rental loophole is. This is a way if you can’t reach real estate professional status, which is very difficult if you have a full-time W-2 job or even a 1099 job, because you have to spend more than 50% of your personal services on your real estate. If you can’t quite swing that, there is essentially a back door to getting the active losses through the short-term rental loophole.

What this means is that you have to have a short-term rental. The average length of stay, it’s seven days or less. Then you have to materially participate. The most common material participation test that we’re using here is spending 100 hours on that activity or on that rental and more time than anyone else.

In this case, it looks like the question asker tried to do that but was not able to individually manage that. And because they hired an outside property management company, they didn’t do more work on the short-term rental than anyone else. They couldn’t take advantage of the short-term rental loophole.

That has the same effect of changing what would normally be a passive activity into an active activity so that any losses you generate through a cost segregation is going to reduce your overall taxable income.

Now to me, the fact that they were trying to go for the short-term rental loophole indicates that they maybe knew that they couldn’t reach real estate professional status.

Eliot: We probably don’t have this grander situation where we can pull in because we didn’t meet REPS, but we ask, what is a master lease? How do we employ it? Here we could still use that C-Corporation as Amanda pointed out because we’re going to have some income that we can get through those reimbursements that she has down here. The 105 plan, 280A. There’s still tax benefit. It’s there, but it’s not as grandiose as if we could have pulled it into our other real estate professional properties.

Amanda: And this strategy, if you’re not a real estate professional and if you missed the threading the needle on the short-term rental loophole, this is taking those tax-free reimbursements, is still going to be a bigger benefit than perhaps just your regular deductions on your long-term rental there.

Because if you’re not REPS and you’re not doing short-term rental loophole, what is this activity? It’s going to be passive. If you do a cost segregation, you take bonus depreciation, you’re going to just have a lot of passive losses. And if you don’t have a lot of other passive income to offset that, that’s not really doing a whole lot for you on your tax return.

Eliot: But we never know unless we do some tax planning and look at it all.

Amanda: For sure. We’ll take a quick break from questions to plug ourselves. Our tax and asset protection event, it’s live in Las Vegas, June 26th through 28th. You can scan this code. Only $99 to attend. It is limited availability and we usually do fill up. Are you going to be at this one Eliot?

Eliot: I am waiting to hear. I think I am.

Amanda: How can they not invite you? It’s local.

Eliot: Right, since I have to drive down the strip. Where’s it at? Is that Durango here?

Amanda: It is not on the slide, so I do not know.

Eliot: It’s here in Vegas, in the valley.

Amanda: It’ll be Thursday, Friday, Saturday. If you are a Platinum client or you would like to come meet us for an in-person strategy session, you can do so at this event. Sit down with a senior strategist. We can answer all these questions that you have live for us. Look at your investments, look at your goals, look at where you may have some risk and put together a plan for you right there on the spot.

If you want to also stay the full weekend and meet with us on a Monday, an extra weekend in Vegas covered as a tax-deductible business expense.

Eliot: She’s the smart one.

Amanda: I am the smart one. That’s so definitely not true. If you can’t make it to our three-day event, come join us for our one-day event, the Tax and Asset Protection Workshop. We’ve got a couple coming up on Saturday, May 31st, and Saturday, June 7th. These start at 9:00 AM Pacific and go until about 4:00–4:30 PM Pacific.

A lot of info. We’ve got a lot of people who come regularly. Regular attendees. It’s a very similar format to what we have today on Zoom. There will be tax and legal professionals in the background answering your questions about the presentation, about the special event. Offers on these are incredible. They’re things that you can’t get anywhere else. Sign up for that, the link is in chat.

And if you just want to talk to somebody, talk to us in person. You can schedule a free strategy session through this QR code. It is a free consult, typically 30–45 minutes. Again, you bring us all your questions, we look at your investments, the type of risk that you may be incurring, and we want to mitigate that. We’ll put together a customized blueprint for your real estate investing and small business. Anything, really.

Eliot: Great deal.

Amanda: Great deal. Free. What could be better?

Eliot: Not much.

Amanda: $0.

All right, moving on to the questions. “What is the downside of using a 1031 exchange to avoid taxes in a profit transaction? And are there any benefits?” What’s a 1031 exchange?

Eliot: That’s the real question here. To start off, 1031 is just a code section, and it says that if I have a piece of real estate that was used in a trade or business and I want to sell it, I can go out and buy another one under certain conditions and defer the gain on the sale of the first one.

It’s called a like-kind exchange. We used to be able to use it back in the good old days for all kinds of assets like equipment and things like that in our business. But after the Tax Cuts and Jobs Act, it’s only for real estate.

It’s going to be your barren land, your commercial building, your rental building, something that was used in a trade or business, in investment. Again, you’re selling one, picking up a new one. You’re exchanging. If we do it right, we can defer all the gain and not pay any tax at that point. Notice I said defer, which is very different from what we have here in the question. It’s not avoiding tax.

Amanda: Not forever.

Eliot: Unless you die, and we get stepped-up basis.

Amanda: The number one strategy to avoid that, unfortunately. We’re trying to avoid that.

With the 1031 exchange, it’s a like-kind exchange. If you have a residential real estate, that just means you need to go into real estate. It can be a commercial building, it can be an apartment building. It doesn’t need to be another single family home. And it doesn’t have to be just one. You can 1031 from a single property into multiple properties, or vice versa.

The downside of a 1031 is that it is quite restrictive. There’s a specific timeline. You need to identify any replacement properties within 45 days. This is a hard deadline. We’ve had clients frantically emailing lists of properties to their qualified intermediary as the clock ticks down to midnight to meet that 45 day. Then you have to actually close on the property within 180 days. If your first choice falls through, you can be running up against some of these time crunches.

You additionally need to use what’s called a qualified intermediary (QI). You can’t have any of the funds hit your personal bank account. They’re held by essentially in trust by this qualified intermediary, and then rolled into the new property purchase. Do we have any other restrictions here? The amount of debt?

Eliot: Yes. Basically if we want to defer it all, the two conditions—you buy a more expensive billing than what you gave up and you pick up more debt than what you gave off on the relinquished property—meet those two criteria, typically any of that gain’s going to be deferred, but we have to do that. You are going to have to pick up more debt or at least an equal amount that can be considered a negative, certainly.

Amanda: You can take money out of it, but it’s considered what’s called boot and you will be taxed on it, both ordinary tax and depreciation recapture.

Eliot: It’s going to be capital gain, so we go right back to that discussion. If you have capital gain, the first top part of it’s going to be some depreciation recapture. We got to hit that first.

Amanda: Most people are just rolling over the full amount. Then you can keep doing that, over and over. That’s where a swap until you drop comes in. The idea being that you 1031 into bigger and better properties throughout the course of your lifetime. Then when you leave that property to your heirs, they get the stepped-up basis, meaning their basis is the fair market value of the property at the time you pass away. Then they can turn around and sell it, zero capital gains. This is not to be confused with swap and drop. Swap until you drop versus swap and drop, which is a way to do a 1031 out of a partnership.

Eliot: Where partners don’t agree.

Amanda: Which is a little bit more complicated there.

Eliot: But wait until death and your beneficiaries can enjoy all your hard work.

Amanda: Those are the downsides. Quite restrictive, but the benefits can be substantial when it comes to deferring and maybe potentially even ultimately avoiding tax altogether. Very popular strategy for the savvy real estate investor.

All right, this is a long one. “What are the medical expenses, aside from doctor’s visits and out-of-pocket medications allowed as reimbursable from the C-Corp?” Let’s talk about that. Let’s answer that portion of the question.

In a C-Corp and a C-Corp only—this doesn’t apply to an S-Corp, a partnership, or a sole proprietorship—you can reimburse yourself tax-free for out-of-pocket medical expenses that you incur. The process there is you pay for them with your personal funds, with your post-tax dollars, you can’t use your HSA, and if they’re qualifying expenses, then your company reimburses you.

It’s tax-free reimbursement to yourself and it’s a deduction on the company. It lowers the taxable income of the company, and you get it put into your pocket completely tax-free.

Great, great strategy, and one of our main income shifting strategies that are built into these tax and asset protection structures that we’re building for our clients. You can use this in our previous case of the master lease agreement, shifting income over to that C-Corporation as a management company, taking it out tax-free through these medical reimbursements.

We also see it a lot for our traders. They’ll have a trading limited partnership and then a corporation is the 20% partner of that trading corp. That allows you to shift income to the corp, write off some of your trading expenses that you no longer get to write off as an individual, but you’re also then putting money back in your pocket tax-free through this 105(b) plan reimbursement.

What are the parameters of what you can have reimbursed?

Eliot: There is actually an IRS publication, 502, that lists a whole bunch of things that will work. Now, it’s not exclusive, doesn’t mean there are other things that won’t work, but generally it comes down to if a doctor says you need it for a specific condition or something of that nature, then more than likely it’s something that we can deduct as long as it’s reasonable, et cetera.

Amanda: Call it the doctor’s note rule.

Eliot: It really is.

Amanda: There’s actual language in the code that says something to the effect for the care treatment, cure, or prevention of a disease or illness or ailment of the body. There’s formal legal language, but really most things you can essentially get a doctor’s note for will qualify. That doesn’t necessarily mean that it’s a prescription, though.

Eliot: It’s not. But that’s one way we get asked a lot about supplements, in this case anti-antioxidant foods. If it’s something that normally there’d be no reason for you to deduct, all of a sudden a doctor says yes you can for a specific ailment or treatment or prevention of ailment, then you very well might be able to.

Amanda: As you can imagine, and as this question illustrates, there’s a lot of gray area. It’s probably one of the questions we get most frequently, or at least I do when I’m teaching at live events, where everyone starts raising their hands and saying, well, what about this? Well, what about this?

“In this case, the doctor has recommended including antioxidant foods in our diet to improve my spouse’s diet due to a specific condition. Is it reimbursable if we bought foods that are not really on our regular grocery? Only because our doctors suggested it.”

Eliot: We have a little bit of a test. This is part of that gray area. What I did is if you ever looked at that 502 publication, you’re going to see where they talk about weight loss plans. There’s a certain condition because it’s similar. You have a specialty food. Will they allow you to deduct it?

I stole that test. A little caveat there. Be careful. It’s a pathway, a good argument because we already see that the IRS has accepted it, but we are talking about something a little bit different.

There are three prongs to it. First of all, the food that you are normally eating, doesn’t satisfy the nutritional needs? Number two, the specialty food, in this case the antioxidant food, alleviates or treats an illness? And third, the need for the food is substantiated by a physician, the doctor’s note.

Also just a point of fact here. Let’s say that these are special strawberries. Well, normal strawberries, let’s just say they’re $5 and the special antioxidant ones are $6. You only get to deduct that extra dollar, not the whole $6. That is very common in this 502 that’s a very settled point of loss. We’re only going to be able to deduct this little extra.

Could it be possible to do so? Yes, that’s probably a strong argument, but we couldn’t say for sure. We are borrowing an argument for something for weight loss, but it is for a specific medical condition. There’s an argument for it. I couldn’t promise you it would survive on audit, but it’s—

Amanda: Eliot’s being very nice. I find this almost ridiculous. Antioxidants are in blueberries. Think of what if and is a special antioxidant food? Are we talking about maybe the acai berry? I can go out and I could DoorDash an acai bowl right now.

To me, antioxidant food is not special enough or enough of a specialty food to qualify under this test. Mind you, this test is we’re overlaying it. We’re taking a similar test that applies to related category, and laying it over this because there isn’t a specific test for this.

I find it hard to even think of—mind you, I haven’t been prescribed antioxidant foods—something that would actually qualify under this. Apart from that, you are relying on your own statements that this isn’t something you would normally eat.

If it is merely a fruit or something that you can actually find in a regular grocery store, at some point it becomes something you do normally eat, and to me would no longer qualify. In this case, the spouse only has been recommended to eat that. Any amounts that you are eating don’t qualify because you don’t have this special need for it.

To me, this is more clearly in the probably is not going to qualify. Even if it did because we have seen some crazy deductions out there, if you and your CPA were comfortable taking this deduction, even if it did, it’s probably so minimal that it’s not worth it.

That being said, if you do have some sort of food supplement thing, that likely because it is so special, likely costs a lot, then in that case it might be worthwhile. But I can’t really think of an antioxidant-rich food considering that antioxidants are basically to some level in all of the food that we eat.

Eliot: If there was some miracle product like this, they’d mass produce it so they could sell to the end of the earth.

Amanda: The second part of this is the other day the spouse slipped on one of the floor mats, so they had to buy rug grippers. Is this also reimbursable?

Eliot: I’ve heard this quite a bit, actually, when we have to do certain types of additional things around the house to try and make it safer, if you will. I think this is a stretch.

Amanda: You’re being very generous again. If you have to install maybe a ramp because somebody’s in a wheelchair now, or you have to install one of those tubs—I’m thinking back to all the late night commercials—where you have to sit to shower because you can’t stand up, those types of things, yes. Those types of modifications to your home are going to be reimbursable under this statute.

Rug grippers are not special in any way, just like an antioxidant berry is not necessarily special in any way. A lot of people just regularly have rug grippers under their rugs. Just because that’s not something you’ve previously purchased doesn’t mean that it’s not widely used in common.

Additionally, there’s nothing in this fact pattern, at least, to indicate that slipping has anything to do with this specific condition that spouse needs to have the food for. How is the fact that they’re slipping related to the condition, and how the rug grippers actually treating the condition as opposed to the result of the condition?

Eliot: Exactly. Probably not a good deduction here on either items, but you can see how one would look at it, how we’d analyze it, and trying to come to that determination.

Amanda: Do you have an example? I’m just coming up with this. You probably just off the top of it. We got to get Eliot thinking on his feet. Do you have an example of something in the medical realm that you have seen be reimbursable?

Eliot: There’s a classic case that we all have to learn in school about this. The pool, someone had some injury. I don’t even remember what it was. The doctor said, look, the only way you’re going to fix that, the best way to fix it, buy yourself a pool and work out in it.

Now what you don’t hear about that case, there was a lot of other things that the judge said. It wasn’t like just buy a pool and deduct it. A matter of fact, there wasn’t a pool anywhere near this taxpayer. They were in the middle of nowhere. There wasn’t any other reasonable way to go work out at a gym or anything like that. This factor, that factor, et cetera.

If you can imagine your house went up in value. Let’s say you paid $30,000 for the pool. House went up in value by $10,000. You could only deduct the $20,000. There are a lot of little things behind this, but that’s a perfect example as to everybody has to learn in school. But the guy was able to deduct a pool for medical expenses because a doctor said so. There you go.

Amanda: There’s got to be a lot of other mitigating factors. As it applies to this one is that antioxidant food, so high in antioxidants that you couldn’t possibly eat enough blueberries to reach it. It’s so expensive that you could maybe…

Troy here, our friend Troy, you want to come back on? He said he’s heard a case of deducting a piano. Troy, what was…? He said no. Well, you shouldn’t have posted in the chat that you heard of one. I got you. Troy’s sound is echoing a little bit, so he’s not going to come.

Eliot: But he’s right. There is a case of piano where I believe it was for physical therapy.

Amanda: Do you know it?

Eliot: Yeah. They had him play the piano. I’ve heard of that. They’re out there, but they’re unique, probably a little bit more fact-friendly than what we have going on here.

Amanda: It is going to come down to the comfort level of you and your CPA. Your CPA has to sign your tax return, and they put their license on the line when they do. I don’t think I would be comfortable under the limited facts that we have here deducting the antioxidants. Definitely not the rug grippers, but there could be other mitigating factors that can swing it in the other direction for this person.

All right, this is our last question. “I would like to know if I can start a business as a non-profit before I begin doing the work. Or do I have to be already up and running?”

I’m going to be honest. I don’t understand this question. Maybe just in the way that it’s being asked. A business is not a nonprofit. A nonprofit is not a business.

Eliot: I think what they were trying to go for is just the general idea of setting up a non-profit. Now that all being said, you always hear the case as well, what about IKEA? Isn’t it a business? I used to work for a casino. Guess who owned it? A nonprofit.

There are things where we hear business being thrown into the nonprofit world. However, nonetheless, what we have going on here, your general nonprofit purpose, it has to be going out there doing something for the benefit of society, some important thing that you find yourself in tuned with.

I’m with Amanda, but I think we just dropped the word business because businesses shouldn’t be in a nonprofit for the most part. But let’s just say we do have a nonprofit. You want to have that set up typically before you start working for numerous reasons.

First of all, you don’t ever want to go out on any adventure that might be considered even business-related without any asset protection. You want to have that nonprofit set up. What if you have some funds that maybe come in. Were they donations? Are they income? If you have that issue and if you don’t have a nonprofit, well now they’re taxable income.

What if you then later did want to turn into a nonprofit, but you’ve already been for-profit world. A lot of headaches come in here. I think, and I talked actually with our head of our nonprofit department, Amanda and I did, Kareem, and he was very clear that we’re going to recommend you get that nonprofit set up first.

Amanda: And when looking at the timeline, to be fair, there is a gap. You set up your nonprofit by filing by-laws with the Secretary of State, and then you separately apply to the IRS to get what’s called a determination letter, essentially giving them information.

This is what Kareem is great at. He worked at the IRS for 26 years, approving these determination letters. Now he works for Anderson, works directly with our nonprofit clients to build that application. It will detail the charitable purpose so that that business or entity then is able to say, well, we’re a nonprofit, meaning that any profits we make, we’re just not having to pay taxes on.

We don’t want to do a lot of activity in this area because we don’t have any liability protection. We’re just doing the activity as an individual. Even if all you’re doing is making peanut butter and jelly sandwiches and handing them out to people experiencing homelessness, that one person has a peanut allergy and has a reaction, you would be personally liable in that case.

If we really have a charitable purpose that we want to move forward with, we want to do it the right way. Although at the same time, understanding that if you are a kind of person who has that giving heart, you’re likely doing things already on your own. Let’s get you set up correctly. We’re going to file by-laws with the Secretary of State, and then we’re going to do that determination letter.

That can take up to six months, usually about six months, usually not much longer if you’re working with Kareem, to get that letter. You can still operate and do work through this time period.

You as the, I’m not going to say owner because nobody really owns a nonprofit, but as someone on the board of directors that is directing the nonprofit, you can still make donations, which would be the income to the nonprofit during this time period. You are likely the only person that’s going to be making those donations because any third-party is going to want to see that determination letter before they make any donations. That’s going to include individuals. Or if you’re applying to any grants, you’re going to need to see that donation letter.

This is really the place where you want to start conducting your activity. Then once you’re up and running, you can make donations of your personal funds if you’re looking for the tax deduction, and you need to get that in before the end of the year, you can do it. But any outside funds coming in through donations or grants are typically going to not happen until after you get that determination letter.

But we don’t want to be doing any work generally until we at least have the business entity, the legal entity set up that’s going to limit our liability as someone who’s really just out there trying to do good.

Eliot: And most often that entity that we set up is actually a C-Corp. Then we denature, if you will, by turning that non-profit with that determination letter in the application. All those things that Kareem is so good at doing. If the worst thing happened and they denied your application as a non-profit, well at least it’s a C-Corp, you’re well protected.

Amanda: We can always appeal the determination letter. Out of the over 200 they do a year, I don’t think we’ve even had one denied.

Eliot: Correct.

Amanda: There we go. One last plug for Toby Mathis and his YouTube channel. This is Toby here, our little bobblehead. He’s with us here in spirit today. Please subscribe. Over 488,000 subscribers.

Eliot: Crazy. A thousand videos.

Amanda: He gets the YouTube plaque every year. He’s such an influencer. A lot of great education here. Link is in the chat from Miss Patricia. When I first started at Anderson, Toby said this is an education company. I was confused because I applied for a job at a law firm.

But we really are. We put out a lot of great information having clients who are educated, and just having people know what’s going on, putting themselves in a better position is what we’re here for.

Then Clint Coons, our other founding partner, not quite as many subscribers. But still more than us.

Eliot: 276,000 more than I have.

Amanda: 276,000 more. He focuses more on the asset protection side, but you can go to both. There are a lot of things maybe cross posted, and talk to a lot of different people, have guests on and things like that.

If you’d like to join us at our live tax and asset protection event, our next one’s coming up here this summer, June 26th to 28th. You can scan this QR code. Join us in Las Vegas. We’ve got a little link in the chat as well.

I saw somebody asking for this QR code, so I’m going to just ramble on a little bit to give that person a chance to snap a picture of it. You can take a screenshot if you’re having trouble getting your phone out. Scan that QR code at a later date.

Eliot: Pretty sure it’s on our website too.

Amanda: Yes, it is on our website. You could go to our website as well. Then if you can’t commit to the three days with us, you’re not quite there, you can come to our one day Tax and Asset Protection Workshop. These are from 9:00 AM to about 4:00–4:30 PM Pacific. They run most Saturdays. The next one coming up on May 31st. After that, June 7th. Come for the morning, come for the afternoon. I’m there usually a couple of times a month to teach.

Eliot: Yeah, I see you all the time.

Amanda: And some of our CPAs in the background, our tax attorneys will be answering questions, very similar format to this. You can come in, get your questions answered, even if they’re unrelated to the content that we have. We just like giving out free information.

Eliot: We do.

Amanda: Speaking of free things, you can actually schedule a free strategy session. This is going to be a 30–45 minute session with one of our strategists, where you bring all of your info, your goals, your dreams, your hopes, and all of your questions. We can get those answered for you. You’ll walk away with a blueprint structure, a written documented plan for how to move forward in your business and investing endeavors.

Then finally, what do they do if they have some questions?

Eliot: Please send them in, [email protected]. I’ll go through the millions of questions that we get. Not every two weeks.

Amanda: Send in more.

Eliot: Please. By all means, send them, send them. But I do read them all. I read everyone. Always go to our website as well, andersonadvisors.com. Thanks to our team. We got again Patty, we got Dutch, Jared, Jeffrey, Rachel, and Troy out there.

Amanda: They’ve answered—I can’t really see; it’s really far away—a lot of questions. Almost 200 questions today, so we love it. We love to see it. We love helping everyone out. I can’t see how many we’ve answered on YouTube, but it’s usually several dozen on YouTube as well.

This is being recorded. You can find the recording on Toby’s channel once in a few days. Usually takes about a few days, if you want to rehear some of what we’re talking about. Otherwise, thank you so much for joining us, and we will see you next time.