In this episode, host Toby Mathis, Esq., welcomes regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to discuss several questions about taxation and S-Corps. Other topics include paying your children to work on your real estate properties, paying medical deductibles with your HSA, and of course minimizing capital gains taxes on stocks you’ve purchased. Submit your tax question to taxtuesday@andersonadvisors.

Highlights/Topics:

• Is there any differences between bonus depreciation and 179 depreciation and, if yes, what are the differences? – They are completely different, though easily confused, and you can use them together.
• if I set up my LLC for real estate investing but I have not bought anything yet, can I ride off the courses I have enrolled in to educate myself and equipment? – if it is true investing, then probably you wouldn’t be able to deduct. There isn’t any place in the tax returns to deduct something like that.
• Can I run a payroll payroll for my son, who was 18 years old, to manage my real estate properties? What is the maximum amount that I can pay him to support me in my business? – There isn’t necessarily any limit. It’s just that, whatever you have to be reasonable for the services that the child is providing.
• Can you pay the high deductible health insurance premiums from the HSA? – you can pay ANY deductible out of an HSA.
• I’m a Big Dog and I have lots of questions about forming my LLC for a fix and split business and how to effectively write off expenses for 2023. I haven’t set up my LLC yet and I’m in the middle of rehabbing a house that we won’t be able to put on the market until next year. Is it too late to set up the LLC and get those write offs for this year? Does it matter if I’m not making any money yet? Should my LLC be filed as an escort? But I would have to be earning income and paying myself something, right? Can you explain how it all works? – So lawsuits are all over a place when you’re rehabbing. So get that set up. All your costs that you’re incurring are inventory, which means we don’t get it deduct anything until a year you sell it.
• What are the benefits of taxing my beauty salon as an S-corp? -you can write off like the percentage of the use of the home under many different theories. You could be using net square footage, you could be using the room methodology, you could be using gross square, or whatever is your best interest.
• Can you roll over money from a current 401k account into a solo 401k account to invest in real estate? Can you please explain the taxes I would be responsible for paying on any gains made on a real estate investment using money in a solo 401k? – typically you can’t move it if you’re still employed. There aren’t any taxes.
• what is the tax way to invest in the stock market and protect capital gains to minimize them? – we like to set up a partnership, put the trading into the partnership, and that partnership will be composed of a portion that goes to the individual, maybe 80, 90%, the rest to a C corporation.
• I own rental properties and manage them myself Currently. I don’t need the income right now. That’s a great situation to be in. What are some strategies to get that income into a retiring account such as a solo 401k, since it’s not earned income? – if it’s a rental, you’re going to want to hit in your 1040, which means it’s probably a partnership.
• I am looking for tax treatment benefit of a DST Stands for Delaware statutory trust, not a deferred sales trust, delaware statutory trust. It would be done through a 1031 exchange, so I understand that part, but it sounds like not only would I get a new depreciation schedule, but I get more. Granted, I should get more just due to the new asset purchase price. Right, what are the flags for a DST investment? – What are red flags? I think the things we always talked about is – it’s just not very liquid when you have that Delaware statutory trust.

Resources:

Tax and Asset Protection Events

Toby Mathis YouTube

Toby Mathis TikTok

Clint Coons YouTube

Full Episode Transcript:

Toby: So first off, happy turkey week, and hopefully you’re getting some time with your family. We have a lot of folks getting time with their families here, so we’re a bit of a skeleton crew. We got Dutch, Tanya, Patty, and Matthew on to answer your questions. Somebody says gobble gobble. That’s about right.

Before we go into the food coma, we have a whole bunch of fun stuff to go over, which is this week’s questions. Before we do that, we got to talk about our rules, and our rules are simple. If you have a question that’s going to be more than like a couple of words or a comment, put it in Q&A, and our people will get to it as quickly as they can and answer it.

Use Q&A for your questions. Use chat. Somebody says no rules in Kansas, and there’s Sherry. She missed us last time. We were sad, Sherry. We were calling out for you. If you have just comments, put it in chat.

Right now, you could tell me what you’re going to have for Thanksgiving. How about that? What’s going to be your main? Is it going to be turkey? Is it going to be ham? Is it going to be beef? Is it going to be tofurky? I got some hams. Just let me know. I got venison. Somebody’s going to bring it.

Oh my god, […] was off to Venezuela. Tamales, turkey, tamales, two tamales. Turkey times two. I’m going to smoke a turkey. I don’t mean to smoke a turkey. I mean smoke a turkey, not the Snoop Dogg. KFC turkey. Beef bourguignon. Oxtail. Alcohol.

All right. We got big rolling papers for that. I don’t know. Pizza or fried chicken? I hate turkey. I’m going to ask that question again next year. Wagyu prime, river snake, river farm. I fished a snake river up there in Idaho. You guys are fun today.

This is a fun day because we’re on a holiday week, but we still have a bunch of questions. If you have questions when we are not on the session but you want to have a question answered later, go to taxtuesday@andersonadvisor.com. Just type that into where you send an email and it’ll come to us.

Somebody says sloppy joes. My wife hates that I eat sloppy joes. I do a manwich. I actually keep the little pans around and when she’s not watching I do it. Lau Lau and Poi. Mark, you must be in Hawaii, and aloha and mahalo to join us. Yeah, I like sloppy joes, too. Anyway, what does that have to do with taxes? Nothing. You can’t write off a sloppy joe.

All right. Opening questions. “Are there any differences between bonus depreciation and section 179 depreciation. If yes, what are the differences? For example, I was told in 2023 the bonus depreciation decreases from 100% to 80%, but in 2023, the 179 depreciation remains at 100% as long as the amount of item to be depreciated is less than $1,080,000. Is this true?” We’ll answer all that for you.

“If I set up my LLC for real estate investing, but have not bought anything yet, can I write off the courses I have enrolled in to educate myself and equipment?” Good questions.

“Can I run a payroll for my son who is 18 years old to manage my real estate properties? What is the maximum amount that I can pay him to support me in my business? Can I pay him $2000 a month?” Great question. Reasonable compensation. That’s where that’s going to fall on.

“Can you pay the high deductible health insurance premiums from the HSA?” Really good question. Kind of an unusual one. Somebody says, I am a Big Dog. Hey, Big Dogs. That’s a group down in Texas.

“I have lots of questions about forming my LLC for fix and flip business, and how to effectively write off expenses for 2023. I haven’t set up my LLC yet. I’m in the middle of rehabbing a house that we won’t be able to put on the market until next year. Is it too late to set up the LLC and get those write offs for this year? Does it matter if I’m not making any money yet? Should my LLC be filed as an S corp? But I would have to be earning income and paying myself something, right? Can you explain how it all works?” We’ll get into that. Eliot picks these questions, by the way.

Eliot: For better or worse.

Toby: Yeah. That’s a great question. I got to give you something.

Eliot: FYI, we did have over 200 questions and I read every one of them that you submitted. I do take the time to look through them all, so we appreciate you sending them in.

Jeff: Ken, welcome from Wasilla. “What are the benefits of taxing my beauty salon as an S corp?” That’s a pretty question.

“Can you rollover money from a current 401(k) account into a solo 401(k) account to invest in real estate? Can you please explain the taxes I’d be responsible for paying and any gains made on a real estate investment using money in a solo 401(k)?” Great question.

“What is a tax-wise way to invest in the stock market and protect capital gains or minimize them?” We’ve had good questions today. You just had one that was a book. We love those book questions.

“I own rental properties and manage them myself. Currently, I don’t need the income right now. What are some strategies to get that income into a retirement account such as a solo 401(k) since it’s not earned income?”

“I’m looking for the tax treatment benefits of a DST. It would be done through a 1031 exchange so I understand that part, but it sounds like not only would I get a new depreciation schedule, but I would get more. Granted I should just get more just due to the new asset purchase price. What are the flags for the DST investment?” I imagine they said red flags, but we’ll get into all that. Are those all the questions?

Eliot: That’s it.

Toby: There’s going to be some today. Yeah, we’re going to be working. Number one, we are starting to break these questions out and post them into YouTube, so you’ll notice that there’s more stuff coming out almost on a daily basis now off the channel, but it’s absolutely free. Please subscribe. If you haven’t subscribed, go there and just subscribe real quick right now. It helps us get a little bit more reach. We don’t charge for this stuff.

What we’re trying to do is spread out good information. For example, today I had a wonderful guy trying to tell me about how you don’t have to pay taxes on anything when you use an irrevocable trust. They always say you don’t have to pay tax on capital gains under a section of the code and I’m always like, that’s not actually the case. Maybe if you had a simple trust, but not in a complex trust.

They always mis-cite the section and then somebody says it’s a dividend. It’s not taxable and you don’t have to pay tax ever again. Everybody knows this. That’s smart and it’s really rich. I always point out that’s how you go to jail.

How do I know? Because I had a client get pitched one of those. He came to me and said, this is what I just bought, so I wrote lots of letters to the wonderful accountant and the attorney that set it up. I said, not only is my guy not going to do it, but that’s a crock.

Somebody says, some might not. Stop it. You guys are being mean to my photos. There are a few Toby photos on there. I’ll give you guys photos of my cats. That used to be the bribe.

Anyway, so my client, I rattled on the cage, tried to get their money back. These guys went into hiding, had them file a whistleblower complaint. Lo and behold, they get indicted. Not my client, but the guy that was running this whole scam. Every now and again, I see these.

YouTube, it’s kind of fun, lots of comments and I learned lots of things that people are doing and I can help them. Keep them out of trouble. That particular case kept him out of the slammer because that would have been a very ugly situation. CID did show up at their doorstep, which is never exciting. It’s never a good thing.

In this particular case, they had my correspondence to the accountants, so they knew that this was the good guy, but something that you just have to be wary of is some of this crud that’s going out there. The reason I say that is because if we can share good information, then people won’t make those mistakes. Feel free to subscribe and share it.

If you want to, come to our live virtual events. They’re absolutely free. We also have a four day live event. I think we still have availability for December. I think it’s December 7th through the 10th at the Virgin Hotel and Casino in Las Vegas. You’d come out and spend four days with us. Always fun.

Clint, my partner is going to be speaking. I’m going to be speaking. We got Flipping Boston. We got Ryan Gibson. Markay Latimer’s coming out to teach on the trading. Oh my goodness. We got Michael Bowman who’s going to be out there. Amanda Winalda. We got a really good team coming out for four days in Las Vegas.

You’ll learn everything you want to know about trusts, LLCs, corporations, different ways to make money in real estate. In this particular case, it’s going to be everything from multifamily to storage to single family. I know Aaron Adams is going to come out again.

It’s always fun to hang out. Sherry, yes, we would love to see you, too. Joan says, I’m coming out to Vegas and it’ll be fun. You get to actually put hey, here’s people. Look, we’re real. Not always through a screen. You’re around a bunch of like-minded people who really do want to make a difference with their investing.

All right, you can always go, there’s YouTube. If you want to join YouTube, go to this link right here, aba.link/youtube. Enough of that. Let’s jump into questions.

“Are there any differences between bonus depreciation and 179 depreciation? And if yes, what are the differences? For example, I was told in 2023, the bonus depreciation decreases from 100% to 80%, but in 2023, the 179 depreciation remains at 100% as long as the amount of item to be depreciated is less than $1,080,000. Is this true?”

Eliot: Yes, that is true. There is a difference. They are completely different, though easily confused, and you can use them together. There’s not a whole lot provided in the code itself about using the two together, but I’ll get into that in a second.

You pointed out correctly here that 179 doesn’t change. You can use it. I think the biggest difference is you can use 100% of 179, but it can’t create a loss. That’s the biggest difference. I think the biggest difference between that and bonus depreciation is bonus depreciation can create a loss.

That’s why you haven’t heard a whole lot about 179 for the last couple of years, because we had 100% bonus depreciation. Anybody would rather take that to get that lost offset other income on the return. That’s why 179 disappeared, if you will, for a while. It’s still in the code, but nobody was using it.

Now as we start to see that bonus depreciation slide from 100% to 80%, 60% next year. We’re going to start hearing more about 179, and how the two work is basically the commentary out there that I’ve been able to find in a lot of research in this. Section 179 has to be used first. Again, it can’t create a loss. Then you go to the bonus depreciation.

Toby: That is absolutely right, except that in 179, it’s an immediate deduction. They wouldn’t call it accelerated appreciation. They would just call it an immediate expense where anything that’s equipment or off-the-shelf software, you can write off.

This is where you see the gross vehicle weight, the 6000 pound gross vehicle weight vehicles where they write them all off. That’s considered equipment under 179.

The other thing you can write off on 179 that you can’t on bonus depreciation is HVAC with commercial properties. Things like roof, HVAC, and some of those components can be immediately expensed under 179, but not under 168.

The other thing is 179 is actually, I think it’s $1.16 million this year. It’s indexed for inflation and set to go up again next year. There’s a phase out over $2 million. I forget the exact, but it starts to phase out the more that you’re expensing. You lose that 179 and then you have to use 168(k). The bonus depreciation is 168(k), just to be clear.

When I say 168 versus 179, again, you can use them together. There are some caps over what you can use. There’s a maxim for non-equipment, for things like passenger cars, I forget what it is, it’s like $20,000 that you can write off in any given year under 179. Then you can bonus depreciate the difference, and then you can regularly depreciate the difference.

If you buy a vehicle, let’s say you paid $50,000. Under 179, you might only get $20,000.  But then you bonus 80% of that difference, that $30,000. What is that? $24,000. Now you’re up to $44,000. Then you’re writing off the remaining $6000 over five years. You’re going to be close to $45,000 of deduction in year one by using them together as opposed to just losing.

There are some benefits. There are definitely some differences. As Eliot said, the big one is you can’t create losses with 179. When we’re doing real estate and we want to create losses that we’re going to use against other passive income or perhaps we’re going to use it as ordinary loss if we’re a real estate professional, we need to use that 168(k), the bonus depreciation. We wouldn’t use 179. Great question.

Next question. “If I set up my LLC for real estate investing but I have not bought anything yet, can I write off the courses I have enrolled in to educate myself and equipment?” They’re educating their equipment. Educate myself and the equipment as well.

Eliot: Yes. While one can deduct education expenses, typically if it’s a new line of business, one of the things that we often do is we’ll set up a C corporation. There you could deduct a new line of business expenses.

But depending on how this LLC is taxed and you say you’re getting into real estate investing, which probably means a rental, that’s something that is an appreciable asset you wouldn’t put into a C corporation. We typically would put that in maybe a disregarded LLC, disregarded to you. There you would not be able to do education expenses if it was again, a new line of business.

As far as the equipment, you’ll probably have no problem with the equipment, provided it’s reasonable and necessary for the business.

Toby: Is there an issue with the fact that it’s investing? Would you be able to write-off education ever with investing?

Eliot: That becomes really difficult with investing. If it is true investing of nature, then probably you wouldn’t be able to deduct. There isn’t any place in the tax returns to deduct something like that. We are using the term investing in that we’re just sitting on the sidelines, then probably you wouldn’t be able to deduct it even then.

But if you’re using investing in the sense that you’re going to go out and get a rental property that you are renting yourself, then again it would be as I said, you probably need to set up a C corporation to take that deduction.

Toby: It comes down to do you have a trade or business that can write off? Investing, you get very limited on what you can write off, especially like stock. You can’t write off anything that’s education, conventions, seminars, or anything like that at all unless you are a trader in securities, which means you’re trading more than 750 trades a year, 70% of the days, and it’s your major source of income. Really, really, really tough to meet. I wouldn’t do that to somebody.

The easy thing is to set up, like Eliot said, an LLC taxed as a C corp, because just by being set up their trade or business, they don’t have to meet the profit requirement and all that jazz.

The other thing is when we used to try to write these things off, where would they go? On miscellaneous itemized deductions? Pre-2017, you could write them off to the extent they exceeded 2% of your adjusted gross income, which most people phased out anyway.

There’s actually a really good case called the Woody case. That was Woody v. Commissioner because it was a gentleman by the name of Woody, not from Toy Story. It’s not that Woody. It’s Mr. Woody. They went to a course—actually, we had spoken to this individual—and held the position that he couldn’t write off what he was trying to write off, so he went to somebody else who did allow him to deduct it. He got audited and ended up being a tax court case.

We recognized it. We’re like oh, wow. Remember that? We told him he couldn’t write off, and guess what the court’s telling him? You can’t write it off. It wasn’t rocket science, but what it was, he was a flipper. That’s a trade or business. You’re not a real estate investor when you’re flipping. You are a dealer in real estate.

The problem is he took the course before he flipped a property. Let’s just use this year, this would be like he took a real estate course in 2023, and he bought his first property in 2024. You can’t take the deduction. You’re not in the trade or business yet. You’re not in existence. You’re not doing the activity. He lost the deduction under those circumstances.

What is the worst thing that happens to you when you do it? Let’s say that you did the education and eventually you set up a corporation. You’re using that education as the means of why you’re setting this up and you’re implementing a plan. You could always grab it as a startup expense. Up to $5000, you can immediately depreciate and write yourself a check for and reimburse. Otherwise, it’s 15 years, anything over that.

We have clients that spend, it’s not uncommon to see $30,000 to $50,000 to $70,000, with some organizations that are more on the higher end. They’ll end up spending quite a bit of money on education. In that particular case, you want to make sure you have either an ongoing concern or you have a C corp or an LLC taxed as a C corp that’s grabbing those expenses.

Worst case scenario, you’re writing off a portion of it off over in year one and the rest of it off over a period of 15 years, but you’re not losing the deduction. If the business fails for whatever reason, you can write the whole thing off when you dissolve the company. It actually becomes an ordinary loss instead of capital loss.

That’s why whenever you’re doing these, talk to your tax and asset protection professional, when you’re going into these before you start spending some real money to make sure that you don’t end up in a situation where you lose a deduction. I don’t know a way that they’re necessarily going to grab it unless they set up a corp, right?

Eliot: Correct.

Toby: I don’t think that they would get it as an individual. Any clarification on that? No. Great. All right, let’s move on.

Next question. “Can I run a payroll for my son who is 18 years old to manage my real estate properties? What is the maximum amount that I can pay him to support me in my business? Can I pay him $2000 a month?” What do you say?

Eliot: You certainly can run a payroll. In fact, we highly recommend it. You’ll hear us talk a lot about paying children even if they are over 17 or 18. It has to be reasonable. As for the maximum, there isn’t necessarily any limit. It’s just that you have to be reasonable for the services that the child is providing. That’s typically always the case for payment. If that’s reasonable for the services being provided, then certainly you could pay $2000 per month.

Toby: IIt all comes down to what could you pay a third party? What would be a reasonable compensation? The fact that your son is 18 years old doesn’t really matter. It’s about what they’re doing.

I use the example of the nine year old that was doing work that was payable comparable to the Screen Actors Guild. It was actually a court case. They said they’re getting too much, but no, they would have qualified to be under the Screen Actors Guild for the type of work they were doing. That was the amount, those hourly wages. It was like $300 an hour. It’s like some really high amount if I’m not mistaken that they were able to be paid. It matters what they’re doing.

If they’re doing tech, it’s really high. If they’re sweeping a floor, you can’t pay them more than what the going rate is for somebody who sweeps the floor, but it’s a range. You don’t have to pay the bottom of the range, you could certainly pay the top. $2000 a month doesn’t scare me at all.

If they’re working on your real estate properties, here’s the deal. Let’s say they make $24,000 a year, the first $13,850, that’s their standard deduction, zero tax. The rest of it is at 10%. If you think about this, what if you’d made the $24,000 and just paid for things for them and you’re at a higher tax bracket, it’s not even close. You’re going to save thousands of dollars by doing it this way. You do need to run it through payroll, though, if they’re 18 years old.

You can’t get away from doing the employment taxes if they were 17. If they were under 18, you could get away with the employment taxes. If it was paid out of a real estate partnership, in this particular case, you’re going to have to pay them either as a 1099, which means you’re paying them as an independent contractor and they pay their employment taxes, or you’re going to run it through payroll and you’re going to pay the half of the employment taxes and they’re going to pay half.

At the end of the day, my answer is yes, you could do it. I’d probably run it through payroll once a year, twice a year, four times a year, whatever works for you, and pay them that way, but it’s a great way to save money.

Eliot: I would just add, and Toby talked about this. I don’t remember when we did the tax plan, if that was last week or earlier this week. It goes so fast. I think it was last week. Make sure we get it paid before the end of the year. We always run into this problem. December 31st comes up, don’t wait that long. Make sure you have plenty of time to find a payroll service to help you out. That’s not last minute because they’re going to ask you for a lot of documents, probably, et cetera. Maybe late November.

Toby: It was last week and it’s for our tax clients. We do year end tax planning events and we also do tax-wise business ownership, which is, what they do? Every other week?

Eliot: Yes. We talked about that a lot and that’s a big thing. I can’t stress enough, get it paid before year end.

Toby: Year end. You want to get it out of this tax year where cash basis, taxpayers, which means you write the check before the end of the year, it’s good. Even if they cash it the following year, which by the way is a great way to get an expense.

If you have a landlord, you could prepay expenses that you would incur in the next 12 months. It’s a safe harbor. If you have a bunch of profit this year and you’re like oh my gosh, you’ve got all this money, pay something ahead of time. It’s like maybe pay your lease a year in advance, let your landlord know, but write that check on December 30th and mail it. Then they deposited it in January. They pay tax in 2024, you get a deduction in 2023. It works.

Fun stuff, but this is all about them kids, get them kids working. If it’s 18 years old and you’re paying for their college, stop it, pay them and let them pay for their college because now you get a deduction and that’s what it comes down to.

Next question. “Can you pay the high deductible health insurance premiums from the HSA?”

Eliot: A lot of different opinions on this one. I’ve seen commentary both ways. I think it may depend on the type of premiums. I know there are some you can certainly, your medicare’s and things like that. I think it’s B and D and Medicare advantage. I’m not so sure, Toby, if you know exactly about the high deductible plan and premiums, whether or not that can be or not?

Toby: Yeah, you can pay any deductible. Anything that’s out of your pocket, you can absolutely pay it out of an HSA. The reason you do this, an HSA, is a triple threat. If it’s a high deductible plan, which means if you’re single, the deductible is $1500 or higher, and there’s a maxim out of pocket. I think it’s around $8000. If it’s a family plan, I think $3000 is the maximum deductible and what is it?

Eliot: $15,000.

Toby: There are some simple rules and most insurance companies are going to make sure you fit within that rule. Now, here’s the thing. You get a deduction if you put money into an HSA. I think it’s $7500 this year? Do you know the exact amount?

Eliot: I don’t, but it’s in that ballpark.

Toby: For a family, it’s high. For you, it might be $3750, something like that. You would just look at HSA amounts, but it’s deductible to you. I get a personal deduction just like an IRA. I can find my HSA, I think I have until April 15th, but you want that plan in place. Now, if I write and use that plan to reimburse myself, ordinarily, I would have to exceed 7.5% of my adjusted gross income and I would have to itemize deductions in order to actually get a benefit for my medical expenses.

By doing an HSA, I get to write it off right away and then it could reimburse me. It doesn’t have to reimburse me before the end of the year, either. It can reimburse me at any time. As long as I have an HSA in place, I could reimburse myself. Let’s say I had an HSA in place last year, I could reimburse myself out of that HSA for last year at any time. But I get a deduction for putting it in the HSA.

I could trade it myself. I could do a self-directed HSA and do other things. But as it grows, there’s no tax. Then as long as I use it for health coverage, health expenses, including my deductibles or copays, I don’t have to pay tax on that. That’s what we call a triple threat. I don’t know of any others that are like this. I get a deduction going in, I get tax-free growth, and I do not have to pay tax on any of it in the future.

Let’s say you’re single and you put $2000 in an HSA, what’s the benefit of it? Let’s say you’re in the 24% tax bracket plus your state. Maybe you’re looking at 27% or 30% just to make the math easy. You would get a $600 tax benefit. And then I use that $2000 to pay the deductible. I just got a $600 benefit, I just got 30% off, or whatever it is. That’s all you have to do.

You can set up an HSA for free. You go to Fidelity or any of these major brokerages. I have one at Fidelity. I traded like crazy. I had a huge return in one year. I thought I was a genius.

I’m just sitting here, and when could I use that? At any time that plan is active, I can reimburse any of my medical expenses. I’m not doing it because I’m letting it grow, but it’s getting bigger and bigger and bigger every year the amount that I could spend, and it ends up being great.

People are worried about somehow they’re going to have to oh, I’m going to have to pay tax on it if I have money left over. Yeah, you’re not going to have money left over if you use it unless you just blow it. That’s the least of your problems. You’ll probably end up paying tax on it. I think if you get over a certain age, like 65, there’s no penalty. You just pay the tax if you take it out for any other reasons than health.

For the most part, if you’re using it on health expenses and we all have them, you never pay tax ever on the contribution, or the growth on it, or the withdrawal. Triple threat. Pretty beastie.

Eliot: Absolutely, and just a little bit more, a really popular question we’ve had in the last two weeks is a lot of our clients have maybe a C corporation with a medical reimbursement plan, 105. We get asked a lot if you can use them both?

Typically, if you do have both of those going on, the code will basically say that you do have to spend up to the deductible amount first and then you can start using your 105 plan. Alternatively, you could have your 105 plan what we call limited or maybe it can only be used for things such as vision or dental things that typically wouldn’t be used under the HSA. Those are two ways that you could use both of those plans.

Toby: All right. I just used the Internet and it’s so omnipotent, the self only amount is $3850. That’s how much you can contribute individually. As a family, it’s $7750. That’s the max Amy was asking. You have now received. That’s for 2023 and it’s indexed for inflation. We like that one. We’re going to have to do some.

Thank you Congress for doing something, not being turds. You get the non turd award Congress for doing that one, which is hard for them. It probably was what are we doing this for? And add an extra $1000? Yes, if you’re over 50, you get to add an extra ketchup of $1000. You’re over 50?

Eliot: Yes, I am. I’m an AARP here.

Toby: I am too. I’m okay with that. Patty’s way over 50. Oh my gosh, Patty says I’m older. All right, let’s go to the next question. “I’m a Big Dog and I have lots of questions about forming my LLC for a fixed and split business and how to effectively write off expenses for 2023. I haven’t set up my LLC yet and I’m in the middle of rehabbing a house that we won’t be able to put on the market until next year.

Is it too late to set up the LLC and get those write offs for this year? Does it matter if I’m not making any money yet? Should my LLC be filed as an S corp? But I would have to be earning income and paying myself something, right? Can you explain how it all works?” Oh my God, that’s a big question.

Eliot: There’s a lot packed in here and that’s why I picked it. First of all, the one thing I want to get to is we’re in the middle of rehabbing a house. We don’t have the LLC set up yet. There’s probably not a more dangerous time for getting sued just from an asset protection standpoint. so I’m going to advise you get that thing set up.

I’ve sometimes told the other tax advisors and and and other clients that I used to do a lot of Habitat for Humanity. I remember one time a gentleman who brought his young son there to help out, learn about helping others and things like that. It was a very nice gesture. He immediately goes for the automatic nail gun and starts waving around.

Now, apparently those things won’t fire unless you press them into a wall, but when it’s aimed at you, everybody’s dropping to the floor. Lawsuits are all over the place when you’re rehabbing so get that set up. I remember it was a Wesley Snipes movie, one of my favorite ones. He does that.

Toby: They don’t shoot, right? You have to push them, right?

Eliot: They did in the movie. But anyway, get that set up, that LLC, get it in there. I don’t mean to scare you, but this is a hazardous time right now for that.

All right, onto the tax side of it. Write-offs, remember, you’re doing a fix and flip and there, it’s basically inventory. All your costs that you’re incurring are inventory, which means we don’t get to deduct anything until the year you sell it.

Right now, those are just going to pile up. We call it goods available for sale, lots of different terms, or just inventory. While you will get to deduct at some time, it won’t be until you actually sell it that year. We have a matching of when we sell and when we take the expense on those. That’s the first two things I’d point out.

Now, is it too late to set up the LLC? No, I’ll get it set up right away. How do we want it taxed? You’re going to probably want it as an S corp or a C corporation. A corporation nonetheless, either way, because it’s ordinary income subject to additional employment tax. Get it into the S or C. You can do all the reimbursements we talk about. Like I said there’s a whole lot packed in here.

Toby: The difference between the S and the C is the S flows down to your return. You’re looking at saying, don’t I have to pay myself? You don’t. The only time you have to pay yourself a salary out of an S corp is if it has net profits and you distribute them. In this particular case, it’s clearly going to have losses.

If you want the benefit of those losses, what you could do is set up the LLC and tax it as an S corp because we’re holding this property for inventory. You can incur a bunch of expenses. Do you have any income? No. Could you, in theory, create losses? Yes. If you dump cash into it so you could reimburse yourself, you have basis.

You can actually create a loss this year that’s going to offset your other income because you’re obviously materially participating in this. I’m saying obvious, but you’re probably, because it looks like you’re doing the fix and flip. That would create a loss that you could use against your W-2 income if you want that deduction this year.

Now, it ends up being a loss that gets passed down so long as you actually reimburse yourself for those expenses. I don’t know what other expenses we have. Most of the rehab gets added to the basis, but to the extent that there are other expenses, like let’s say you bought that nail gun and that nail gun cost you $500, we’re not capitalizing that. That’s an expense.

Let’s say you fix something on the house that was broken. You’re not capitalizing that. You could safe harbor that and write it off as an expense now. You could generate some expenses that would go on to your personal return, things like that.

I guess I’m not going to repeat everything you said, but that fix and flip business just remember that real estate isn’t always passive. It’s not always an investment. Sometimes it’s a trade or business if you’re a construction, if you’re a real estate agent. If you’re flipping houses, it’s a business. It’s a trade or business, so it’s not a passive activity and you get to write off all ordinary or necessary expenses.

When you have that S corp, it’s a little different. You can actually reimburse yourself for an administrative office in your home. You can create losses in that way. You can create 280A, which is another way to create more expense. Again, in order to write it off in 2023, you have to fund it and then reimburse yourself. If you want to wait until 2024, you could do that, and as long as you reimburse yourself from that business, and it could be after you sell, then all those expenses would actually go into 2024.

Just to reiterate, I would be setting up that LLC, taxing it as more than likely an S corp under these circumstances. But it would depend if you have a ton of income or maybe you have no income, this is all you’re doing, then we might make it a C maybe.

It depends on your health expenses, too, because you can write those off out of a C corp that you can’t out of an S corp with a health reimbursement plan. There are some things we would look at. For the most part, I’m going to say probably 90%, it’s going to be that S corp or LLC taxed as an S corp and that we’re going to want to probably get those things funded out to yourself.

Somebody says, “I thought it makes it more difficult to sell a property if it’s set up as an S corp.” No, Kim. If it’s investment properties, we don’t want an S corp because if you take them out, it’s taxable. If you take it out to refi, like I have a house that I bought and it’s in the S corp and then I pull it out to do a refi, that’s a taxable distribution to myself of wages. It’s actually really heinous. It’s ordinary income.

Whereas if I’m just going to do a flip and I’m going to sell it there, it’s not really considered investment real estate. We’re not in that same scenario. This is inventory when you’re a dealer. It’s no different than if you were a car dealership, or if you were a mini mart and you had Cheerios on the shelf, you don’t write off the cost of goods sold until there’s actually a sale. I hope that helps.

“I have two S corp businesses […] and I’d like to know what are some of the write-offs for the business?” I’m sure Regina that we teach that. I’m sure you could reach out. I would actually put it in the Q&A and they can give you some of those ideas. So that is that question. Anything to add?

Eliot: No, that’s it.

Toby: It’s never quite simple. Sometimes you’re going to get a little bit of it depending on your facts and circumstances, but the general rules are there.

All right. Next question. “What are the benefits of taxing my beauty salon as an S corp?”

Eliot: There were a ton of S corporation questions. That’s why you’re seeing a small theme here. Lots of benefits. The accountable plan reimbursements is a big one. That would be typically anything that you pay out of pocket on behalf of the corporation with your own funds. It’s for a reasonable, cell phone, that’s one of them certainly.

Toby: Equipment.

Eliot: Internet.

Toby: Accountable office like your home. I’m using my home as an office. The place is getting a bedroom of its own. You can write off the percentage of the use of the home under many different theories. You could be using net square footage. You could be using the room methodology. You could be using gross square feet. Whatever is in your best interest, you could choose when you have an accountable plan. Keep going.

Eliot: Actually, I used to get my haircut from the lady who had it in her basement. There are lots of write-offs potential there. Corporate meetings, also an S corporation, let’s say you had $100 of income, there are two ways of basically getting paid besides the reimbursements. A reasonable wage, which we talked about way back in the beginning of the show, and then basically what we call the distribution. That’s anything else, that’s $100.

Reasonable wage we got paid, maybe that’s $30. The key about the other $70, that amount you take out, it’s not subject to employment taxes, that’s 15.3%. Whereas if it was a C corp and you did all $100 as a W-2, you’re going to get iced with a 15.3% between the corp and the employee. S corporations have a lot of benefits.

Toby: I’m going to hit on a couple that are unusual. Number one, if you are taxed as an S corp, your audit rate drops by about 800% versus a friend in the same circumstances.

Let’s say you’re a sole proprietor and you’re making $100,000 net as your beauty salon. Your audit rate is 1.4% versus 0.025%. It’s a fraction of a quarter percent. It’s thousands and thousands of percent higher likelihood to get audited, and they lose their audits 94%–95% of the time statistically. When I say they, sole proprietors.

If we make that same $100,000 in an S corp, there are going to be things that we get to write off that we don’t get to write off as a sole proprietor. The most obvious is when you’re a sole proprietor, you can only write off your business use of your technology, and you have to track it. You only get to write off the business use of your car, the business use of your computer, the business use of your home as the home office, which is five square feet in a safe harbor. They have a lot of restrictions.

In an S corp, you eliminate those restrictions for the most part. I’m able to say am I using this for the benefit of the employer? If it is, I can reimburse the whole amount for me and anybody else that’s working in my family for the company. If I have a computer, I will be reimbursed the whole amount. If I have an administrative office in my home and it’s got a TV in there.

Let’s say the case of your situation where you’re going into somebody’s home and they have the salon there, you’re writing off let’s say it’s 20%. Let’s say that you have a three bedroom home, three bedroom, two bath, and you have two big areas. You have your kitchen area and then you have a living room. I would count that as five rooms. One of those five is 20%. I would write off 20% of your property taxes. I’d write off 20% of your mortgage. I’d write off 20% of the insurance, 20% of the what?

Eliot: The outdoor areas because you have foot traffic coming in.

Toby: People coming in, you get to do landscaping. If I have a cleaner, it’s 20% of that. I even get to depreciate the home. I get 20% of what it would have been on depreciation. The IRS gives us a schedule there.

I’ve done the math on this a number of times. It’s about 10 times more of a deduction. If you would have written off $500 as a sole proprietor, you’re going to write off $5000 as an S or a C corp, probably an S corp in this case, because you can do an accountable plan. Because it’s an accountable plan, you can also get an extra $5000 a month deduction by having your corporate meetings in that home.

Now, can it be by yourself? No. I would not do that. But what I would do is find other folks in your industry, maybe do continuing education, maybe you come over and watch a Tax Tuesday once a month. You’re all learning and you’re saying this is our continuing education, or maybe you’re doing classes, or maybe you’re doing a meeting, talking about marketing, whatever the case. You can reimburse yourself the fair market value of what that accommodation would have cost in your market.

What we suggest is that you price out three hotels where you could get a meeting room that’s of equivalent size to wherever you’re going to have your meeting. Maybe it’s going to be your kitchen area. Maybe it’s going to be your living room. Maybe you’re going to use a TV. Maybe you’re going to have refreshments, and get an equal pricing.

We’ve been doing this a lot. We’ve defended this twice in the last 23 or 24 years under audit, and won both times because it’s very, very clear, this is called 288. You can reimburse yourself that value for your house or technically you’re renting it to the corp and it’s paying you, but you don’t have to recognize it as income if it’s 14 days or less.

So 14 days or less, you do that. Once a month you do it, you’re fine. You get to have that money tax-free and it’s deductible to the company. Let’s just say that’s an extra $6000 a year. That S corps all of a sudden starts lowering our tax.

Then as Elliot said very well, in S corporations, you only pay employment taxes on the amount of wage you take, which is generally about a third of the profit. If we had a sole proprietorship and they made $100,000, your tax after a small deduction for half of the payment is $14,100 for employment taxes alone, that’s old age, disability, and survivors of Medicare. It’s $14,100 plus your federal taxes plus your state if you’re a sole proprietor.

Now let’s go to the S corp. S corporation is not $100,000 anymore because we just wrote off a bunch more stuff. Let’s say it’s $80,000. Now let’s say that you paid yourself $25,000 as a salary. You could defer that whole amount, by the way, into a 401(k). Let’s just say that you paid yourself that money. You’re going to pay employment taxes. You pay half the company pays half so ultimately it’s the same thing. It’s 14.1% when you do the math.

You’re going to pay $3525 versus $14,100 because once you pay that, you’re done. All the profit, you could take that profit out or you could leave it in there. It doesn’t matter. It’s not going to be subject to employment taxes, whether you take it out or leave it in there. You just saved yourself $11,000 just by making that one S election.

Now here’s the thing where people don’t realize, if you are a sole proprietor right now and you’re going crap, but you’re an LLC, we can make a late election for this year. Even for 2023, it’s not too late. We can make a late election and treat you as an S corp, but we need to do a payroll before the end of the year.

I just did one of these today. It saved the guy $9000 so I was like, cool. As an accountant, sometimes we’re doing the taxes, not everybody, the accountant was like, whoa, you can do that? Yes, there’s a revenue procedure that allows us to do it. It has to be an LLC and we make a late S election. I think we’re doing the 2553 with a late rev proc across the top. You get it almost automatically.

Boom. Tax in your pocket plus you get all those others. I guess it’s going to save you a ton of money. Every time I hear an accountant go hey man, it’s more complicated. Most things that pay you a bunch of money tend to have a little bit of complexity to them, but it’s not rocket science. This is actually really easy stuff.

Any good accountant is going to know how to do it or if they don’t do business, they will learn how to do it in about 10 minutes. It’s not hard. It just actually really makes sense. That’s why you talk to people, when you’re setting up your business, that do business. Don’t talk to the guy that’s down in the corner doing a bunch of individual returns or don’t do the chain preparers. They’re horrendous.

Eliot: Yeah, that’s awful.

Toby: Treasury Inspector General did a study on their accuracy rate on small businesses. Do you want to know what it was?

Eliot: It was under 10%.

Toby: It was 0% for the chain preparers. For small accountants, it was 4%. That was their accuracy rate. It was horrific because nobody learns how to do it. You learn it by doing it. You better work with people that do it all day long that have that niche and then you get to save yourself a bunch of money. But yeah, you want to be that S or you want to be a C depending on your situation. For a beauty salon, you got all those expenses. I know that the Dyson is like $500.

Eliot: They’re so quiet, though.

Toby: I’m going to do that because the curlers that Elliot uses are really expensive.

Eliot: To sum it up, there are a few benefits. Is that what we’re saying?

Toby: There are a few benefits. All right, move on. We can talk about that all day long.

Next question. “Can you rollover money from a current 401(k) account into a solo 401(k) account to invest in real estate? Can you please explain the taxes I would be responsible for paying on any gains made on a real estate investment using money in a solo 401(k)?” What do you think?

Eliot: I picked this one because I think there’s a lot of confusion going on here. Can one move from a 401(k) to a solo? You could. But if it’s with your current employer, typically they won’t let you move that until you leave that position.

Once you go out, you retire from there or whatnot, then you could move it over to a solo 401(k). But generally speaking, if you’re still employed somewhere, they probably won’t let you move it over. You would be limited in being able to invest in real estate, but once it got to the solo, yes, then you can. If you have a properly set up solo 401(k), we really max ours out as far as options here at Anderson with the solo 401(k)s that we set up. They’re not all created the same.

As far as the taxes, again, there aren’t any unless you happen to be going from a traditional into a Roth-type 401(k) and some rollover. In that sense, you might pay some tax, but otherwise, there isn’t any tax and gains when we’re in a retirement plan of any nature. It just goes up tax-free until you take it out later on typically at retirement.

Toby: That was a good answer.

Eliot: Got one right.

Toby: If your employer does have it, it’s called in-service rollover. If I can do an in-service transfer, then you can move it into another 401(k). Most don’t allow it. Ours do, but most don’t. Then you put it into a solo 401(k), which means it’s you, a business partner, you and a spouse that are the only employees of the business, it has to be the employees, and you could roll that right on in there.

If it’s self directed like Anderson, it’s wide open, you get to choose what you invested in. A lot of places, if you open up at a brokerage house, they only let you buy securities. That’s why you can’t do real estate in it. When you do it with a group that has their own plan like you would adopt the Anderson 401(k), it’s our Anderson 401(k) prototype plan, then you would adopt it, and then you could absolutely invest in real estate.

The only thing that I would change a little bit is the gain. It’s exempt. Even in a 401(k), you can have debt, and it doesn’t change things. That is not the case for an IRA. IRAs have UDFI (unrelated debt financed income). If you have debt, there’s going to be a tax bill. If you’re making money leveraging your real estate, that does not happen inside of a 401(k). Inside of a 401(k), you can have debt. So there’s no tax in there. It’s exempt until one thing, you take it out.

If you hit 73 and you start taking withdrawals, now you have to be cognizant. If all you have in there is real estate and you’re getting partial interest in that real estate, it is taxable. That amount is taxable as ordinary income to you. When it comes out, it’s a small amount, it’s the required minimum distributions, unless you want to give it directly to a charity, in which case you’d have to roll your 401(k) into an IRA, then start giving it.

It gets a little complicated, but there are ways to do it. But there’s never a tax. You could go nuts in there. You don’t need 1031 exchanges anymore. You can just go bonkers in there buying all the investment real estate that you want. You could say, I’m going to innovate homes. I’m going to start buying all these houses all over the country and I’m going to sell someone when they go up. You’re just sitting there managing that puppy.

The one thing you can’t do is pick up a hammer and start fixing the house. You always have to use third parties. You have to make sure that you’re not painting it, fixing it up, or adding value to it. You can’t personally do that because you’re a participant. You’d disqualify the plan at that point. Hopefully that helps.

Somebody says, “Can you speak to mega backdoor Roth as a sole proprietor?” You can’t. I guess you could try. A sole proprietor I suppose you could do a 401(k). You’d have to put it on the employee side like you’d have to have a bucket.

I’m used to dealing with S corp and C corp and you actually have three buckets. You have the employee deferral, you have the employer contribution, then you have the Roth, and you do an in-service roll from the employee contribution that you haven’t taken a deduction for during the year, and you roll it into the Roth, and you never take a deduction. Now you have $66,000 sitting in a Roth 401(k).

I suppose you could still do that with the sole proprietor because all of your income is considered employee. Somebody says you can still throw a hammer through the neighbor’s window. John’s already hitting the sauce. That’s what’s going on.

Eliot: Thanksgiving is starting early.

Toby: Anyway, you guys have good questions today. I know we’re going a little long. Speaking of long, no, I’m just kidding, Tax and AP workshop. By all means, come and join. If you want to learn about this stuff, I know I do a long section on depreciation.

I think I always go over three common mistakes made by accountants on real estate when they’re taking a depreciation, how they treat it, what grouping elections are, how you benefit from it, everything from real estate professionals to cost segregations and bonus depreciation we’re going to hit during that event.

Clint does a great job going over land trust using anonymity, how to get your name off of your property so you don’t get sued and you don’t have tenants targeting you. The virtual one day events, those are all listed there. I think we got November 30th, December 16th, and December 21st. The four day live event, by all means, comes on out.

Somebody asks, is it the same content? No, we have four days versus one day. One day we’re doing like six hours. These four days, we have a ton of different speakers coming in. It’s going to be a party. We have a lot of fun, so you should come. That’s my pitch on that. No sauce for 10 hours of work to go. Oh, that’s the problem, John. We need the vino.

All right. Next question. “What is a tax way to invest in the stock market and protect capital gains to minimize them?”

Eliot: Generally speaking, we like to set up a partnership, put the trading into the partnership, and that partnership will be composed of a portion that goes to the individual, maybe 80%–90%, the rest to a C corporation.

What does that do? If we did do that and we had a $100 of gains, normally that would all hit your 1040, 100% of it taxed on your 1040. But by putting it in a partnership, maybe let’s call it 90/10 split, $90 will only hit your return, $10 we’ve automatically had savings there. We kept it off the 1040, it would go to the C corp.

You might say, it will still get taxed in the C corp. Well, it would. But for that it has all those reimbursements that we were talking about earlier, which you can use in the C corporation—the accountable plan, all the office, the cellphone, everything Toby was talking about, mileage reimbursement, so on and so forth.

Probably you’re going to have more expenses to reimburse than what your 10% is and because it’s a partnership, we have a very special unique payment called a guaranteed payment that you can pay to the partner, which would be your C corp that would get you more money into the C corporation. It’s going to allow you to get more money out of their tax free to you, a big deduction, and then that guaranteed payment, 90% of it would be a deduction on your personal return as well.

Toby: Or you are actually an LLC taxed as a partnership?

Eliot: Correct.

Toby: What he just described as having the cash in that LLC where the brokerage account is held and having that corporation, what’d you say 20% or 10%?

Eliot: Either one, yeah.

Toby: In that way, if money’s made, it just automatically goes over there. If I was talking about other ways, like what’s the tax wise way to invest in the stock market and protect capital gains, the best is always going to be a Roth IRA or a Roth 401(k) if you can get money in there, or an HSA, and then you never have to worry about paying tax.

If it’s the HSA and you use it for health, you get a deduction and you never pay tax. If it’s a Roth, you pay taxes, it goes in. You’re not getting a deduction for it, but then you never pay tax again.

If you have expenses like Elliot just explained, you have very few options. You’d have to qualify as a trader in securities, which is really, really difficult to do. 750 trades a year trading about 70% of the trading days, four hours a day, taking advantage of daily swings of the market. You have to be very, very active to qualify as a trader, then you can write off your ordinary necessary business expenses. And then you get audited because you have zero income on a Schedule C.

Lots of expenses on a Schedule C, all your income sitting on a Schedule D, which to the accountants out there, they understand exactly what I’m talking about, but it’s unusual and the IRS likes to look at that and go, what the heck is this and why are you trying to say that you’re this thing called a trader?

It does not exist in the internal revenue code. It’s a facts and circumstances test. We ignore it and just go right to that LLC court mix because there are frankly a lot more benefits to doing it that way.

But still there are folks out there that do the trader status. I get it. I’m just not a big fan, 24 years of doing this, seeing too many mess-ups, 25 years, actually. Just seen too many train wrecks for my taste. The best tax-wise way to invest in the stock market and protect capital gains is generally speaking, going to be that structure or getting it into an exempt plan.

Here’s another fun one. If you want a big deduction towards the end of the year, let’s say you’re looking at it right now going, I know that I am service driven.  I want to create something that’s for my family, a foundation. Maybe it’s because I want to do charitable work, maybe I love like you did Habitat for Humanity, maybe I want to do affordable housing and you want a big fat tax deduction.

Take your appreciated stock where you have long-term capital gains, transfer them directly into a donor-advised fund or into a charity, 501(c)(3). You can set up your own if you have to, but a donor-advised fund, for sure. Anderson has them, by the way. They don’t cost anything.

Pop it in there, you get a deduction on that fair market value of those shares of those stocks. You get a big deduction and then it’s an exempt entity. You could trade like crazy inside that donor-advised fund and make a ton of money, but it’s going to go to charity. That’s going to go to charity. But I love exempt organizations because you never pay tax.

What’s an exempt organization? IRA, 401(k), 501(c)(3), donor-advised fund, they’re all exempt. Those are the best places because you don’t have to worry. You can just go nuts, make tons of money, and you never have to pay tax. It’s what the rich do.

If everybody ever wonders what the rich do, they get the money out of it. They don’t own it themselves. They usually have it owned by something else that’s exempt or has tax advantages. Or if they own it and that it’s growing and it’s something that they can borrow against, then they live off of tax-free income off of the loan, knowing that when they die the basis steps up. If there are any sales to pay off that loan, it’s 0% tax. That’s what the rich do.

Anyway, that’s it for that. Next question because I know we’re long. I don’t even know where we’re at.

Eliot: Just two minutes.

Toby: Oh, good. That’s it. It’s not horrible. “I own rental properties and manage them myself. Currently, I don’t need the income right now.” Great situation to be in. “What are some strategies to get that income into a retiring account, such as a solo 401(k) since it’s not earned income?”

Eliot: I really like this one because it’s something that we probably would have to think a little bit out of the box. Because if it’s a rental, you’re going to want to hit in your 1040, which means it’s probably a partnership or probably a disregarded coming straight in, which you can’t have earned income, which the individual asking the question recognizes.

What you could have as a management C corporation and you do all your work for that as an employee of your management C corp. That means the C corp has to earn money for what it’s doing, so you shift income, a rental income into the C corporation. Now you can pay yourself a W-2 wage.

You can have that C Corporation sponsor the solo 401(k) we’ve been talking about all day to day. You can make your contribution. You have your end income and you can still take advantage of all the other things we’ve talked about with the reimbursement, et cetera.

Toby: This is what it looks like guys. If you have your real estate, let’s say down here, these guys down here are where the properties are, they’re held by a holding entity. Usually we use Wyoming because nobody can see it. Nobody can take it even if they could see it. It’s great asset protection. But then you have an agreement to pay money, management fees to a C corp.

Now, you just took money that would ordinarily flow down to you as passive income and we moved it over to that C corp where it can be expense or it can be paid out to you as active income and fund a 401(k). That’s how you do it. But you have to change the nature of the income. It has to go from being rental income to active income. The only way I know to do that is this strategy right here.

You could have that as an S corp or a C corp, but in either case, you’re paying it a management fee to actually manage that holding entity. You want to start running your stuff. You want to have your home office and everything else run through that C corp and you want to say, this is my family office. That’s what you look at, it’s my family office. This is the business that oversees all my other investments.

I could even have (let’s say) the trading LLC right here and you had the ownership up to the C corp. It could all be in that same little structure. Then when it takes money out to you, you’re putting it straight into a 401(k). Boom. It works like a charm.

The only thing you’re out of pocket is going to be the employment taxes because 401(k)s are deductible for federal and state taxes, but you still have employment taxes to get it in there. That’s the only thing you get hit with.

Eliot: If you’re going to do all that to manage them yourself, you might as well get paid and get some tax breaks.

Toby: Yeah, I liked it. By the way, somebody asked this. Yes, we post these questions onto our YouTube channel. Plus, I know that if you’re a member of platinum, you could see the whole thing. There’s probably YouTube. I forget where we actually post.

Patty, where do we post the full tax Tuesdays, the replay? I don’t think it’s just sitting there on YouTube. Then they get a link so if they registered for this, they’ll get that. It’s not available to the regular public.

For you guys, you’ll get a link to the whole thing, but otherwise I post the individual questions on YouTube over the next two weeks. All right.

Eliot: Last one.

Toby: Really?

Eliot: Yup.

Toby: All right, we’re rocking. “I am looking for tax treatment benefit of a DST.” Stands for a Delaware Statutory Trust not a Deferred Sales Trust. “It would be done through a 1031 exchange, so I understand that part, but it sounds like not only would I get a new depreciation schedule, but I get more, granted I should get more just due to the new asset purchase price, right? What are the flags for a DST investment?”

Eliot: I picked this one because Toby actually has a video that I did with him on it. But we were looking at if you have capital gains sitting there from a real estate investment, what are the different ways you can maybe postpone paying tax on it, defer it, et cetera? DST was one of them. Spent a lot of time looking and learning about that myself during that period of time.

You may or may not get a new depreciation schedule. Whenever we’re doing a 1031, it carries over what your prior basis was in the relinquished property, the property you gave away. You had a basis left over, that becomes a basis in the new.

As you point out here, though, if you paid more for the replacement investment in the DST, then yes, you might get a different depreciation schedule on the newer stuff. They’ll work that out with you and how that all works.

What are red flags? I think the thing we always talked about is, it’s just not very liquid when you have that Delaware Statutory Trust.

Toby: You are stuck. What some people do is they do an UPREIT. With the Delaware Statutory Trust, they say the trust is treated as though you’re on the underlying real estate. When you buy into it, it’s 1031-qualified because they say it’s a Delaware Statutory Trust that’s really the real estate, but you’re stuck with a piece of real estate or whatever that is that that one is invested in.

Let’s say you want more diversification. You don’t want to be sweating it, like I don’t want to be just in one apartment complex or whatever this happens to be. Then you may just roll it into an UPREIT which is another fancy way of converting a 1031 exchange property into a fund, into an actual REIT that holds lots of diverse real estate. But again, you’re a illiquid when you’re in that Delaware Statutory Trust. You’re going to be there for a while. It’s hard to get out.

Eliot: You might want to think of the UPREIT. I know in that video, one question Toby asked me about it was the depreciation recapture. Technically there isn’t any depreciation recapture, but there is unrecaptured 1250, which I wasn’t trying to be cute with, so you will have what commonly would be thought of as depreciation recapture, but we just call it unrecaptured, 1250.

Toby: On the DST?

Eliot: Yeah, and an UPREIT as well.

Toby: There might be some tax hit. You might be able to avoid the capital gains, but you’re not going to be able to avoid it.

Eliot: Later on when you finally sell. It will defer until you are out of the investment.

Toby: Yeah. As long as you don’t sell, you don’t have any tax.

Eliot: Correct.

Toby: Somebody says what is an UPREIT?

Eliot: Umbrella partnership real estate investment trust. I had to memorize that one. It’s a much bigger Delaware Statutory Trust.

Toby: It’s a REIT designed to allow you to roll DSTs or other 1031 exchanges into it. Usually when you’re 1031 exchange, you have to do it yourself. It’s entity to entity. If I have an LLC and I 1031 exchange, I get to take the title of other real estate in that LLC. But in the case of a DST and an UPREIT, they said you can do it. It counts as owning the underlying real estate so it ends up working great.

Real quick. I want to do a shout out to Matthew, Patty, Amanda, Dutch, Tanya, Tricia. We had to bring some more people on because they’ve already answered 141 questions to the folks that are waiting. There are 16 questions right now in the queue. We’re answering them as quickly as we can. These guys are working their tails off. They don’t get paid to come work on these things. They’re doing it because everybody loves Tax Tuesday because we’re weird.

We like talking about that tax. If you like taxes, if you like asset protection, if you like passive income, please go to my YouTube channel, subscribe, and share it with other people. Not just mine, but also Clint Coons. They always put mine up, but my partner Clint Coons does more on the asset protection side. He does a great job, too.

They’re free. We don’t spam you. All that happens is it lets you know when a new video comes up. Come to our Tax and Asset Protection Workshop if you haven’t been. They’re fun. We have the live ones. We do them about four times a year where we do them in different locations. We did our Orlando and Vegas.

We just did two in Vegas, so we did one a few months ago and they said, boy, that was so much fun. Let’s do another one in December. I’m like what happened to Tahiti. I was ready for Tahiti. I was hoping for Hawaii. I always like Hawaii.

Please come to an event, share it with other people if you think that they might benefit, and then if you have questions, even when we’re not on, just email them on in because Eliot likes to take the 10 most difficult ones. He goes through them and looks for things that we’re seeing repeated.

He said I had a bunch of questions about S Corp, he’s going to take a representative question so we can answer it and get to the most, but we still answer everybody’s questions. We always like to take care of our people.

Then visit us at Anderson Advisors. Somebody says go to Bora Bora. That’s where we should do a Tax and AP event. There it is. You just nailed it. We’re going to go to Bora Bora and I’m just going to start picking weird places where I can drink with John.

Anyway, I really do appreciate you guys coming on and coming. We got a lot of people that are voting for Bora Bora. I’m with you guys. We’ll do it in maybe there’s a conference room out over the water. They probably don’t have electricity on it, but we don’t care. We’ll be okay. We’ll be sweaty and we’ll be sweaty taxes.

Hawaii conventions? Did events there with iHeartRadio. They had me over there once. We taught a bunch of people around the island about financial planning. It was funny. They do have electricity over the water bungalow. All right, then we can do a PowerPoint.

Eliot: Someone’s done reading already.

Toby: All right guys, have a great Thanksgiving. We will continue to answer questions, so I’m going to say sayonara. They’re going to keep this on until we answer all your questions. We’re not going to leave you hanging, but we’re going to ask people don’t ask more questions. Let these guys go home and we’ll see you at the next Tax Tuesday. Thanks guys.