In this episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle listener questions on reducing capital gains taxes and advanced tax strategies for real estate investors and business owners. They explore the intricacies of cost segregation studies and bonus depreciation versus Section 179, including timing issues for renovations. Amanda and Eliot discuss strategies for minimizing capital gains after decades of depreciation, converting ordinary income to capital gains in development deals, and the tax implications of oil and gas working interest investments. The duo also covers deductible expenses for corporate retreats, entity structuring for piano tuning and bookkeeping businesses, and sophisticated trading partnerships using C corporations. Finally, they take a deep dive into Solo 401(k) contribution limits, explaining the differences between employee contributions, employer matches, and the mega backdoor Roth strategy for maximizing retirement savings. Tune in for expert advice on these and more!
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “I purchased a rental and did a cost seg in 2024. I renovated it in 2025. Can I use a cost segregation and/or Section 179 to depreciate the new renovation assets in 2025?” Answer: Yes, bonus depreciation works; 179 has limitations.
- [21:16] “How can I reduce capital gains on the sale of a rental property after nearly 27 and a half years? The accelerated depreciation reduced the basis to zero.” Answer: 1031 exchange, installment sale, or opportunity zones.
- “How can I get capital gains on my K-1 instead of ordinary income on my investment into a real estate developer corporation?” Answer: Development corporations typically generate ordinary income, not capital.
- “What expenses for an off-site retreat for an LLC member and officers meeting are deductible? For example, travel, lodging, meals, activities.” Answer: Travel, lodging, 50% meals if genuinely business-related.
- “If I invest in an oil and gas working interest and I have a first year larger intangible drilling cost loss than is needed for a given tax year based on adjusted gross income, can the excess be carried forward to a future tax year as a net operating loss? Would the NOL have alternative minimum tax implications as well?” Answer: Yes, NOL carries forward; minimal AMT concerns today.
- “How do I set up a holding company in California? I want the holding company to own my two companies. One’s a piano tuning business and then a bookkeeping business. I have an average income of $125,000 per year combined: $45K for piano, $80K for bookkeeping.” Answer: Wyoming LLC holding company owns two California entities.
- “I want more information on how I can structure my LLC more efficiently for day trading. What can I do to minimize my taxes for the new year? How can I lower my capital gains tax from day trading?” Answer: Trading partnership with C corporation for deductions.
- “Please take a deep dive into Solo 401(k) contributions. What are the individual contribution limits, employer match limits, and especially the voluntary after tax contribution limits. Which components need to be earned income and how does this change if contributing to a Roth 401(k)?” Answer: $72K total; $24.5K employee; mega backdoor uses after-tax.
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Full Episode Transcript:
[0:00:12] Amanda: All right. Welcome, everyone. It is the first tax Tuesday of the year, 2026, Eliot.
[0:00:17] Eliot: Welcome. Happy New Year.
[0:00:20] Amanda: Happy New Year.
[0:00:22] Eliot: Hope everyone’s having a good one so far.
[0:00:24] Amanda: It is. It’s the 6th, so things haven’t gone completely downhill yet.
[0:00:27] Eliot: Right. Give it a little time.
[0:00:29] Amanda: Give it some time. All right. Welcome to you all. Why don’t you go ahead and throw up into the chat where you’re from. We like to see where everyone’s joining us from. My name is Amanda Wynalda. I’m the executive attorney here at Anderson Advisors, and this…
[0:00:42] Eliot: Eliot Thomas, manager of the tax advisors here at Anderson.
[0:00:46] Amanda: Also a tax lawyer, the funnest lawyers out there. Don’t let anyone tell you anything different. Where we got people coming from?
[0:00:56] Eliot: Let’s see here. Chat is on. We haven’t had any.
[0:01:00] Eliot: No. We got Zion here though. New Jersey, there we go. San Diego, Houston, Boston,
[0:01:12] Amanda: Wow. Coming in hot. So fast. I can’t even keep up. Hi, California, Albuquerque. Simi Valley. I used to live in Moore Park and Westlake. That’s right around Simi Valley.
[0:01:23] Amanda: Hello to my neighbor.
[0:01:25] Eliot: Very nice. Austin.
[0:01:26] Amanda: Was that supposed to be Norway?
[0:01:29] Eliot: I thought it went so fast. I think it was.
[0:01:31] Amanda: It really is. Minneapolis. Love it. Atlanta, Hotlanta as they call it. All right, welcome. We usually get people from all over the country, so thank you for joining us. I got a new clicker. Check this out. Bam. Switch the slide up.
[0:01:48] These are the rules because again, as we mentioned, we are tax attorneys, so we like rules. The rules for Tax Tuesday are, this is a live Q&A. If you are joining us, please use the Q&A to answer your questions. Q stands for…
[0:02:07] Amanda: If you put it in there, you will get an A for…
[0:02:11] Amanda: The chat is for any technical difficulties or things like that that you might and for us to push out some information to you, maybe some links, things like that. If you have a question, please put it into Q&A. Who do we got joining us answering questions for us?
[0:02:24] Eliot: I don’t have the team on.
[0:02:27] Amanda: Just make it up, Eliot.
[0:02:27] Eliot: I know we got Barley.
[0:02:28] Amanda: No, I know too. Jeff, Dutch.
[0:02:29] Eliot: Jeff, Barley, probably Rachel, Dutch. Jared’s always good there.
[0:02:33] Amanda: Troy? Troy might be joining us on the live YouTube chat. There you go.
[0:02:39] Eliot: Got one of them.
[0:02:40] Amanda: Lots of CPAs, some attorneys here helping us out into the Q&A. A lot of times the q and a has nothing to do with what we’re even saying, so feel free to put any question. Thanks for coming and pretending you’re listening. All right, the questions that we will be answering today have been emailed in. You can email if you want us to feature your question in episode of Tax Tuesday. You can email to taxtuesday@andersonadvisors.com. Eliot here gets to go through all of those. If you don’t like the questions we’re answering today, you know whose fault it is.
[0:03:12] Eliot: It’s me, it’s all me.
[0:03:13] Amanda: Yeah. If you need a more detailed response than what you’re either getting through email or through the Q&A, consider joining us becoming a platinum or a tax client. You can be in a zoom just like this with lawyers and tax professionals every day if you want to. We have people who do come every day too in our platinum knowledge room. This is designed to be fast, fun, and educational. There’s nothing better than knowing the tax law, the code as we call it. All right, check it out. Boom. Okay, we’re just going to go quickly overview of our questions before we dig into it. What do we got coming up first?
[0:03:48] Eliot: “I purchased a rental and did a cost saving in 2024. I renovated it in 2025. Can I use a cost segregation and or section 179 to depreciate the new renovation assets in 2025?”
[0:04:04] Amanda: That one’s going to be good because we’ve got a couple of different depreciation issues and also the timing issues going to be significant there.
[0:04:11] Eliot: Yes, a lot going on.
[0:04:12] Amanda: All right. “How can I reduce capital gains on the sale of a rental property? After nearly 27½ years, the accelerated depreciation has reduced the basis to zero.” It’s a pretty specific number, 27½ years. Maybe a clue there.
[0:04:28] Eliot: “How can I get capital gains on my K-1 instead of ordinary income on my investment into a real estate developer corporation?”
[0:04:37] Amanda: That one, we’re going to have to untangle that question to get to the answer.
[0:04:41] Amanda: That’s okay. That’s what we love to do here. All right. “What expenses for an offsite retreat for an LLC member and officers meeting are deductible? For example, travel, lodging, meals, activities.” We’ll go over that exactly and why that might throw up a red flag to the IRS.
[0:05:00] Eliot: “If I invest in an oil and gas working interest, and I have a first year larger and tangible drilling cost loss that is needed for a given tax year based on adjusted gross income, can the excess be carried forward to a future tax year as a net operating loss? Would the NOL have alternative minimum tax implications as well?”
[0:05:23] Amanda: I like that one, a lot of acronyms.
[0:05:26] Amanda: We love that around here. “How do I set up a holding company in California? I want the holding company to own my two companies, one’s a piano tuning business and then a bookkeeping business. I have an average income of $125,000 per year combined, $45,000 for piano, $80,000 for bookkeeping.” This a little tax and asset protection, so you’re in the right place, sir, ma’am, or neither.
[0:05:58] Eliot: “I want more information on how I can structure my LLC more efficiently for day trading. What can I do to minimize my taxes for the new year? How can I lower my capital gains tax from day trading?”
[0:06:10] Amanda: Age old question, how do I pay less tax?
[0:06:12] Eliot: Yeah. I had quite a few of trading questions coming in, so I mushed a couple together there.
[0:06:17] Amanda: Yeah. Let’s take a deep dive into Solo 401(k) contributions. “What are individual contribution limits, employer match limits, and especially the voluntary after tax contribution limits? Which components need to be earned income, and how does this change if contributing to a Roth 401(k)?” That’s the last one. The deep dive for the end. Why not? Stick around for that.
[0:06:42] All right, our shameless plug. Clint Coons is one of our founding partners here at Anderson Advisors. This is his YouTube channel. As you can see, a little over 300,000 subscribers. As the kids say, smash that subscribe button, and you will get alerted anytime he comes out with a new video. You can make fun of the silly faces he’s making right in these thumbnails.
[0:07:06] You are here because you’re likely already subscribed to Toby Mathis, our other founding partner. Tax wise, Toby. As you can see, he has quite a few more subscribers. Throw Clint a bow and he’s trying to catch up.
[0:07:19] Eliot: Got a lot of videos too.
[0:07:21] Amanda: Lots and lots of videos. This one right here, never work again.
[0:07:25] Amanda: That’s it. That’s all the advice. Just kidding.
[0:07:27] Eliot: 142,000 views, though.
[0:07:30] Amanda: I can see why, but we need to be building wealth. We need to be saving on taxes. Really, the number one way to build wealth is keep more in your pocket. You’re in the right place. We’d also like to invite you to our Tax and Asset Protection workshops. We have two upcoming webinars. They’re typically from 9:00 AM Pacific till about 4:00 PM. You can register here at this link.
[0:07:54] If that’s just not enough for you, please come and join us for a free strategy session. That is correct. You can sit with a senior strategist who will take your goals, your investments, the things that you want in this life, the things that you’re afraid of in this life, and come up with a customized plan. It’s 45 minutes and it’s completely free. Let us get you set up. All right. Use that QR code. Are we ready?
[0:08:22] Amanda: “I purchased a rental and did a cost seg in 2024. I renovated it in 2025. Can I use a cost seg and or 179 depreciation to depreciate the new renovation assets in 2025?”. First, we always like to start off basic. I know a lot of you out there understand some higher level concepts with tax, but we post these as recorded versions on Toby’s YouTube channel, so if you want to watch it later. We got to speak to a broader audience. Maybe they don’t know. Eliot, what is depreciation? Explain what it is and why we love it.
[0:08:59] Eliot: Yes. Depreciation is simply the ability to finally deduct something like a house because we’re talking about real estate here. If you go out and have just ordinary business expenses, typically you deduct them right away, but we don’t get to do that with bigger capitalized assets as they’re called. A house is a good example. If it’s a rental property, you can’t just buy it for $400,000 and typically deduct $400,000 right away that year. The government says you got to deduct a little bit over time. We call that depreciation.
[0:09:31] With a regular single family rental, it’s something that’s going to be depreciated over 27½ years. It happens over a long period of time. Straight line, the same amount each year for 27½ years. That’s what’s going on with depreciation.
[0:09:46] There are things that can be done maybe to speed that up. One of them is a cost segregation study. We often shorten it to just a cost seg. What’s going on there is a special group just comes in, looks at the house, does a study, and says this house is filled of different components that on their own would be depreciated at different rates, maybe not 27½. Carpet is a good example. Everything in this studio is a good example of that. We got lights, they may be five year, 10, year, 15. The floor, the ceiling, that probably would be 27½.
[0:10:21] They come in, they do this study, they break all these assets out into these various components. With a cost segregation study, what you’ve done then is you’ve sped up the five-year property, that’s carpet. Instead of being deducted over 27½ years, it’s now shortened to a five-year period, which means you’re just going to deduct more each year. You’re not adding to the overall depreciation amount, it’s just that you’re speeding some of it up, but then we can take something called bonus depreciation.
[0:10:51] Couple that on and attach that. If it is something that’s under 20 year property, five 15, what have you, then you can go ahead and deduct maybe a hundred percent. We’re going to learn that there are different rules to that, but that’s a way you can really get a massive deduction in one particular year to really help out with your tax plan. Maybe that’s a year where you have a lot more income. Therefore, if you have a heavier deduction, you’re probably going to have a loss on it. Given other factors, it might just offset some of your highest level income.
[0:11:20] Amanda: That’s right. Section 179 and cost seg, bonus depreciation are two different ways, two different systems to take that depreciation. This concept of using 179 or bonus doesn’t only apply to real estate, it’s for any business use property. If you have a rental car company, you have a fleet of vehicles, you would be depreciating those as well.
[0:11:42] How are those two things different? How does 179 work? What are the limitations? How does bonus depreciation work? What are the limitations? And then we’ll get into why would we do one or the other in this case.
[0:11:54] Eliot: Yeah, that is a critical question that we have going on here and in our tax planning in general. Bonus depreciation versus 179. Section 179, think of it just as an expense deduction. For layman’s purposes, it really doesn’t make a difference too much, deduction to deduction. However, there are different limits on these. Section 179 can only be used to reduce net income. It cannot be used to create a gain or make larger of loss. We can only use it to get rid of the gain, no loss created. However, bonus doesn’t have that limitation. You can use bonus depreciation to create all kinds of losses.
[0:12:39] Typically, again, other things being considered, whether it’s passive or active, depending on how that hits your return, that can wipe out a lot of income. Section 179 again will only go against your net income in that particular business, so we have to be very careful when we do that. That’s probably one of the biggest differences between your bonus depreciation in your 179.
[0:12:58] Also, additionally, when you start talking heavy buildings and heavy assets, meaning heavy dollar amounts, there’s an overall limit of how much of this activity you can do under 179’s $4 million. Most people don’t have to worry about it, but it is a limit. You can only have $4 million. Anything over that, you slowly lose the amount of $2.5 million that you can do if you have asset purchases over $4 million. In other words, if your asset purchases are over $6.5 million, you can’t use 179. Of course you can’t use it to create a loss.
[0:13:27] Amanda: Yeah. That’s why I think about these two different ways to depreciate property, 179, I don’t usually think about that with real estate because with real estate you’ve got all these other deductions, property taxes, mortgage interest, insurance. Your net income at the bottom of your Schedule E, page one is typically a pretty low amount.
[0:13:47] Section 179 doesn’t have a lot of work to do there as opposed to maybe our rental car situation, where you’ve got a whole lot full of cars, but you’re making a ton of money with every rental. Your potentially a full 179 deduction does get you to zero or maybe doesn’t wipe out all that income. With rental property, you don’t necessarily need that loss. How does it work with 179 versus bonus? In the rental real estate world, that limitation can be bad news if you do it the wrong way.
[0:14:24] Eliot: That’s right. The code anticipates the idea of using one, the other, or maybe both. The rule is that you have to use your 179 first. We will get to the real estate, but Amanda mentioned a vehicle. There are limits there of what we have to do with 179 as well, sometimes depend on the vehicle, and then we couple on, again, the bonus appreciation. Certainly you can put them both together there. That’s right.
[0:14:49] In the case of real estate, 179 should only be used with tangible personal property. That’s going to be the car, something like that or qualified real estate property, which means something that’s gone through a cost segregation where we’ve created that five or 15-year property. Some of it might still be 27½. Under the rules here, you can use 179 again for anything that’s under 20 years, just like our bonus. It’s very similar in that regards. Only as Amanda points out, if you don’t have a lot of net income, you’re not going to use a lot of 179.
[0:15:23] It can be a tax planning object to use a lot of 179 if you have maybe an older property that’s making a lot of rental income. We have clients out there who make considerable amounts of net profit on their rentals, despite best efforts to have come up with deductions, so 179 might be a play there. What that would do from a tax plan standpoint is it allows you to save up some of that bonus depreciation in other ways that maybe you could push that out over a couple of years.
[0:15:51] Amanda: Okay. How do you elect one or the other? Practically speaking, how are you choosing one or the other?
[0:15:57] Eliot: It’s certainly something you’d work with your tax preparer. They will make elections when they’re putting the data into the tax return software and say, hey, this is going to be 179 or no, this is depreciation. It’s going to be either active or passive loss depending on whether or not you’re a real estate professional, or it’s the business that you materially participate in.
[0:16:19]Amanda: All right. For a rental property, most likely we’re going with that bonus depreciation because we don’t want to butt up against that 179 limitation, especially if you’re a real estate professional, especially if you’re doing a strategy like short term rental loophole and you’re trying to generate those additional losses. The second thing in this question that I thought was interesting was the timing. With the Big Beautiful Bill, some things with bonus depreciation have changed. When you do the cost seg, when you do a renovation is interesting.
[0:16:55]When you first purchase a property, if you are planning to renovate it, you can actually do a cost seg, take the bonus depreciation on the existing structure no matter in what shape it’s in, then you do the renovation, do a second cost seg, and then you could bonus depreciate all of the new stuff that you put in, the new roof, the new HVAC. If it’s a complete remodel, all of the new things, you’re getting to essentially double dip in this scenario.
[0:17:24] The interesting part here, it sounds like that’s what this person’s doing, which is one smart to do that, to do the cost tag before the renovation. Because it happened in 2024, how does that change because the tax rules have changed so much?
[0:17:39] Eliot: They have. Back here in 2024, we were under a whole different tax bill. We were still under the Tax Cut and Jobs Act bill started in approximately 2017. Bonus depreciation was dwindling going down 20% each year to where in 2024, we were at 60% bonus depreciation. In other words, we purchased and placed the service we were renting it in 2024 we did a cost seg.
[0:18:07] Our bonus was nice. It was 60%, but it certainly wasn’t a hundred. That didn’t come in until we had the Big Beautiful Bill that came in July 4th last year in 2025. However, it said retroactively went back to July 19th as a start date for this. In other words, we may have activity if we got something in that first couple of weeks of January of 2025. It’s subject to 40% bonus depreciation, 20% drop from 2024. Anything after January 20th or beyond, then you’re back in the hundred percent bonus depreciation, provided that asset is eligible for bonus depreciation.
[0:18:44] We had a little bit of everything going on here potentially. Indeed on these renovations, if they had it contractually obligated, if it was already started in the littlest area, it’s a little bit different than the place in the service rule. But if they have already even inked a deal to have some renovations done, if it was done before January 19th, still in 2025 though, it’d be under the 40% bonus. If it happened after that date, it’d be a hundred percent bonus. There’s a critical difference here, a big difference between 40% and a hundred percent bonus depreciation.
[0:19:19] Amanda: Yeah. It’s a little unfair because that rule didn’t come into effect until later in the year, so January 19th had come and gone. There wasn’t even a way for this person to say, hold off, I’m not going to sign a contract with you until January 20th because you wouldn’t have known at that point. That’s where the timing issue becomes interesting. It’s a big difference, 60% difference.
[0:19:42] Eliot: It is. Although, I will say this. If that was the case and we had some stuff going into play early January, so we’re stuck under the 40%, at least we got that. That is still a great investment to get that 60% in 2024, 40% on this stuff in 2025. It was still the right thing to do. We didn’t know what was going to happen with a hundred percent bonus, but that is the right thing. Get that cost seg, take that bonus depreciation, and use what you had in front of you at the time.
[0:20:10] Amanda: Short answer, yes. Yes, you can do a second cause segregation. Most likely you would apply bonus depreciation rather than 179 because again, 179, you can get yourself to zero, but you can’t take any losses. Those losses, unless you’re a real estate professional or you’re doing some other activity, that transforms those passive losses into active losses. You may not be able to use those extra losses, but most likely you’re doing bonus. It is an election you have to make on the tax return and one that you cannot change or amend later.
[0:20:46] Eliot: Yeah. There is a time and place though. Like I was saying earlier, where you would want to use 179 with a rental like this. If you did, again, you had a traditionally a building that was creating a lot of net income. It might be a good play to use a combination of 179 and bonus depreciation. It takes tax planning, but there is a time and place for it. Certainly, yes, you can use 179. But if we’re going for overall loss and we’re not wanting to see any net income, we probably would stick with just bonus.
[0:21:14] Amanda: All right, question two. “How can I reduce capital gains on the sale of a rental property? After nearly 27½ years, the accelerated depreciation has reduced the basis to zero.” We’ve got that 27½ year mark, which means that this is a residential real estate. The lifetime depreciation or the useful life of commercial is 39 years, so 27½, meaning that this person has held the property either for that amount of time, taking that smaller one 1/27½ fraction every year for each of those years, or they’ve done a cost segregation, taken bonus depreciation, and now have no depreciation left.
[0:21:57] Depreciation’s a huge deduction against your rental income. When it’s gone, you’re paying a lot more tax there. How can we avoid that, especially when we’re selling the property now, and we’re getting a capital gain? The easy first answer is a 1031 exchange.
[0:22:14] Eliot: Absolutely. The thing behind the gain, just a quick example of that, is let’s say that we had simple example, not at all possible. If you had $30 of depreciation and you had a hundred dollars of capital gain, if you were going to sell this and you knew that was what’s coming, the first $30 would be depreciation recapture out of your a hundred dollars of capital gain. The following $70, the remainder, would be at your capital gain rates. That’s something we contend with, with tax planning and things of that nature in this situation. We’ve had capital gains come up, we’re trying to at least limit, reduce those capital gains.
[0:22:55] Amanda’s absolutely correct. The first knee jerk reaction is, why don’t you do a 1031 exchange? All that is is saying that I’m going to go ahead and buy another rental property that’s of equal or more value and has equal or more debt on it. If I meet those criteria and get this new rental property that’s going to be used for business obviously as a rental, then I can go ahead and defer a hundred percent of that capital gain. It doesn’t mean you get rid of it is, but the key word is defer. I’m kicking the can down the road. The only way you really get rid of it is if you pass away. Exactly, right?
[0:23:29] Amanda: You just got to die. That’s it.
[0:23:30] Eliot: That’s all you have to do. One requirement, die.
[0:23:32] Amanda: Never work again.
[0:23:33] Eliot: Exactly. Never work again. Toby would love it. That’s all you have to do and then your heirs get stepped up basis. If its fair market value is a million dollars and you had maybe only a hundred thousand dollars that you’d purchased it for, they don’t have to pay any tax. They could go ahead and sell it right away, or what if they want to use it as a rental? They get to start over depreciation at a million dollars as opposed to the hundred where you bought it. A lot of benefits to the 1031, but it is, as we say, 1031 till you die if you really want the best tax effect of it.
[0:24:05] Amanda: Should we be like 1031 plus die?
[0:24:09] Eliot: Exactly, yeah.
[0:24:10] Amanda: Looks like an algebra right equation there.
[0:24:12] Eliot: Right? It’s a good one.
[0:24:14] Amanda: If you are thinking 1031 exchange, the keys are, you do have to work with a qualified intermediary, a QI. You cannot have any of the funds hit your bank account, the QI holds it and then uses that to purchase the new property. There are some pretty strict timelines in terms of when you have to identify a replacement property and actually close on it. It becomes more difficult in a seller’s market, a buyer’s market, depending on how the market’s going. If you can pick up a property pretty quickly, then you can get it done. Sometimes though, these deadlines are very tight or exact.
[0:24:52] Eliot: In fact, they allow and pretty much require that you look for a couple extras just in case. You can have up to three. It depends on the value of the house, but three and you double the value of the house that you just gave up or unlimited if you’re not doubling. I think there you double. The point being, yeah, three for unlimited amounts, or if you get an unlimited number of houses that you want to look at, you can only double the value that the house that you gave up. That’s what it is.
[0:25:20] The point is that you only have that first timeline to get it done first, 45 days to list all those out, and they are strict. They got to know right away that 45-day limit. The whole thing has to be buttoned up within 180 days and have all the purchases done. You got to work with that qualified intermediary.
[0:25:38] Amanda: Yeah. I erased the die part because that was making me nervous. It’s just bad mojo. Okay.
[0:25:43] Amanda: If you don’t think that you can meet those deadlines, there is an alternative. It’s called the lazy man’s 1031. It’s not the lazy woman because there are no lazy women. Am I right?
[0:25:54] Eliot: Right, exactly. No, the men won this one.
[0:25:55] Amanda: The lazy man’s 1031. How does that work, Eliot?
[0:25:59] Eliot: What’s going on here is that we have to go back to the concept of, is it passive activity or is it non-passive? If you’re a real estate professional, we don’t want to get into it too much, but the normal status of a rental activity or in fact any business is that in the code it’s considered passive, which means that you can only take passive losses against other passive income. You can’t use, typically speaking, passive losses to offset any of your ordinary income.
[0:26:30] In long-term rentals, which this would be, the idea is if you’re a real estate professional, which means basically that’s your day job, all you do is real estate, then they say that’s not fair to call this a passive activity. We’re going to go ahead and make it active, which means if you have losses, that will offset any income on your return. That’s the idea we’re going with here.
[0:26:51] If you’re passive, that is that you’re not a real estate professional and you have one property that you fully depreciated, you got a lot of potential gain coming your way, you could just go out and buy a couple of other properties and still be passive. Do cost segregations and bonus depreciations like we were just talking about. That’s going to create a really large loss. If it happens in the same year that you sold this property that’s being proposed here, you get a steal.
[0:27:23] You get to pull those passive losses from the other properties, which are going to be theoretically very high because you did cost segs and bonus, and they will offset the gains for the property you’re releasing that you’re getting rid of. That also will attack that gain first and you may not have any gain.
[0:27:40] Amanda: Yeah. It’s not necessarily taking a capital loss to offset the capital gain. It is doing a separate real estate related strategy if you are full-time in real estate using those active losses to then offset the capital gain. When we’re really good tax planning, you’re not looking to offset apples to apples. You’re looking at apples, oranges, lemons, grapes, watermelon, and seeing how it all works together.
[0:28:06] Eliot: Exactly. Fruit punch.
[0:28:08] Amanda: What about speaking of the Big Beautiful Bill? What about an opportunity zone? Is there an opportunity to opportunity zone this? First, what even is an opportunity zone?
[0:28:18] Eliot: Opportunity zone is something we’re talking about capital gains. If you’ve incurred capital gains, something again that came with the Tax Cut and Jobs Act back in 2017, there are some special provisions. Basically it said, up until the end of 2026, December 31st of 2026, you could take your capital gains, throw them into what’s called an opportunity zone fund, which invests in an opportunity zone, which is simply an area set up by local and state government saying we want to encourage more investment.
[0:28:50] They give you this deal, come in and buy something, spruce it up, et cetera, take your capital gains, put it in this fund, puts the money into it, and you get to defer the tax on that capital gains. If Amanda had a capital gains of a hundred thousand in 2024, she could put it into one of these and wouldn’t have to pay tax on it until the end of this year, December 31st, 2026. That’s where it ends. We could do that. Typically, we would have that as a strategy, but the problem is we are in 2026, so you’re not really deferring anything. You’re going to have to pay the tax at the end of this year.
[0:29:25] Now you mentioned the Big Beautiful Bill, as of July 4th, they have what I’ll call Opportunity Zone 2.0, and they have made some improvements. There is still that type of strategy where you can defer capital gains, but it’s not good. Right now, I haven’t heard anything that says you can use 2016 capital gains and roll them into the 2027 plan.
[0:29:47] I haven’t seen that yet. What I have seen is that you’re not allowed to take investments that you put earlier into an opportunity zone fund between 2017 and 2026, and then move it into the new one and continue to defer. They won’t let you do that, so not really a good plan here perhaps.
[0:30:03] Amanda: Assuming they’re selling this year.
[0:30:05] Eliot: Correct. If they’re selling in 2027, then that definitely look at it. Absolutely.
[0:30:10] Amanda: The opportunity zone is similar to a 1031 exchange, except it really allows you to take your capital gains from any asset, not just real estate. People in 2018, we’re selling stocks, and then rolling it into opportunity zones to defer the gain there. It’s not just a deferral, there was a step up and the basis. It’s that continue 10%, a hundred percent step up in basis?
[0:30:37] Eliot: Yeah. Originally, if you got in right away, you got a 10% step up, and then the next year, if you kept it in there, another 5%, so you could get 15% step up, which just basically means if you had a hundred dollars of capital gains ultimately at the end of 2026 when you’re paying a bill, it will only be on $85.
[0:30:55] Amanda: Do we get that with the new 2.0?
[0:30:57] Eliot: We have a form of it. It’s going to be a little bit different. Yes, but it’s not quite as elaborate. We also have different types of opportunity zones. One for more rural and one for more urban types of investments. You just have to see which one you want to get into. Yes, there is an element of step up as well going on there.
[0:31:16] Amanda: Rural. If you can say that word, more power to you. I cannot say that word. Okay. Those are the real estate related strategies, but again, we don’t always have to compare apples to apples. Let’s look at some oranges, some watermelons, some grapefruits. What about donating the property to a nonprofit?
[0:31:35] Eliot: Certainly can. If you got a nonprofit, you can put it in there. It is appreciated asset, I’m assuming here, because we have no basis in it. When we put it in there, we will be subject to a limit, 30% of your adjusted gross income, that’s the amount of the deduction you can get in the year that you donate. You’ll be still stuck with that. I don’t want to say stuck, but you’ll be limited to that 30% AGI for the next five years you have to use it up. It is something certainly you can do and get a very nice deduction for your nonprofit.
[0:32:04] Amanda: Yeah. Especially if it’s your own nonprofit. We have a lot of clients we’ve set up. How many nonprofits do we set up here?
[0:32:11] Eliot: Tons. I don’t even know. I would say we’re over a thousand.
[0:32:14] Amanda: At least, and we have a 100% success rate with our nonprofit applications here at Anderson. If you donate to your nonprofit, you get the charitable deduction up to 30% of your AGI. If it’s above, that rolls over for the next five years. You could be taking care of your charitable deductions for the next five years with this. Still maintaining the property, you’re able to use it for a charitable purpose such as shared housing, transitional housing, and then potentially, depending on state laws, property owned by a nonprofit not only doesn’t pay any tax on the profit, but potentially doesn’t even pay property taxes.
[0:32:51] Eliot: To just take it one more step here as far as possibilities, what if your nonprofit had to do with housing? If it’s something that housing for the homeless, wounded vets, or something like that, you’ve not only had the benefit of this rental all this time, gotten the deduction, but now you have the asset you actually need to incorporate your nonprofit plans.
[0:33:11] Amanda: To do good in the world.
[0:33:12] Eliot: Exactly. Absolutely.
[0:33:15] Amanda: Just throw out some other ones, just other fruits. What about…
[0:33:20] Amanda: Oil and gas is a good one.
[0:33:21] Eliot: Completely unrelated typically to your real estate, but oil and gas is just, and we do have a question coming up about that, but if you have what’s called a working interest, that gets into the idea that basically this is going to be an active business, an active interest in an oil lease, and then you can get typically a large deduction upfront depending on how much you put in as far as a deduction. That would offset any income on your return, including these capital gains.
[0:33:46] Amanda: I have a question. Sorry, I’m springing this on. We didn’t talk about this one. I’m relating this to a renovation and doing two cost segregations. If you’ve completely reduced your basis to zero, how would doing that renovation, like a full remodel this year, that wouldn’t necessarily affect the capital gains. That would give them some more depreciation deduction to be taking, but how would that affect their capital gains?
[0:34:12] Eliot: Let’s say that you knew you had to spruce it up to make it sellable before anybody would buy it. Let’s say you put $200,000 in. If you did it after January 19th, as we learned earlier…
[0:34:23] Amanda: Which it is after January 19th, so there you go.
[0:34:25] Eliot: Exactly right. Now you would be able to do a cost seg on those new renovations. If they were substantial, you’d be able to take that and create a passive loss that would be released the passive losses when you sell. Yes, that could offset your capital gains.
[0:34:42] Amanda: Plus you’ve increased your basis by putting in more money into the property.
[0:34:48] Amanda: All right. Clicker.
[0:34:50] Eliot: Good thinking, good clicking.
[0:34:51] Amanda: I thought of that just right now, guys. “How can I get my capital gains on my K-1 instead of ordinary income on my investment in a real estate developer corporation?” First, this question’s using some words in the wrong way. Ordinary income just doesn’t magically become capital gains. It depends on the type of activity that you’re doing. With a real estate developer, you were thinking somebody who’s going out and developing homes. I was thinking more like a syndication situation. When you are a real estate developer, that’s active income.
[0:35:33] Amanda: If you’re flipping, if you’re building, that’s active income if you’re then turning around and selling it. That’s not going to be capital gains. When you’re doing flipping, when you’re doing building continuously for the purpose of selling the property as opposed to holding it for investment like keeping it as a rental, that is no longer a capital asset. That is treating more like inventory. Go back to our car analogy on a car lot. The cars on a car lot are not capital assets, they’re inventory. When one is sold, you don’t have capital gains, you have ordinary income. You can’t just turn that ordinary income into capital gains by throwing in an entity and having a K-1, if that makes sense.
[0:36:16] Eliot: Right. There isn’t an input output box, where we put something that’s making ordinary income. We take that particular income. You’re not able to change it into capital gains or vice versa. It doesn’t really work that way. Capital gains is going to be because you sold an asset. Maybe you have some kind of digger, a bobcat, or something like that in your real estate a development company. You sell an asset that was used in the business like that. You’ll have capital gains there perhaps, but the operations are going to be always ordinary.
[0:36:52] If you sold the business, if you did sell the stock or something like that, that stock, that’d be capital gains. We can’t just turn our ordinary income into capital gains, so we’d have to look for some other types of things. You mentioned the syndication.
[0:37:06] Amanda: Yeah. I do want to touch on why this submitter’s asking, and it’s because capital gains have a different tax rate. They’re zero, 15%, or 20% depending on your overall income. If you are flipping, if you’re developing, and the properties are treated as inventory, not only do you pay your normal income rates. That’s from 10 all the way up to 37%. On top of that, you’re paying self-employment tax in a lot of situations because you have dealer status. It’s even more taxed. That’s why this is being asked.
[0:37:46] In a syndication situation, that’s typically going to be a limited partnership. That’s what I thought. When I read this question, I was thinking limited partnership syndication, maybe we’re building an apartment complex, maybe we’re building a storage unit. I wasn’t thinking of individual houses being built and sold. Normally you are being treated as you have your limited partnership, which are the people who are just investing money.
[0:38:15] The developer themselves is the general partner. The income to the general partner is ordinary income because they’re the active partner. They also have unlimited liabilities. Some asset protection planning you need to do there. The limited partners, if the property is sold, they are getting the capital gains.
[0:38:38] Eliot: Yeah. In other words, if you have a syndication, typically they go for five years, you’re going to have rent coming in for five years. That rent is ordinary income. Whether it’s active, ordinary, or passive is a different matter, but it’s still ordinary income. Even if you’re an LP, limited partner in her, it’s going to be passive more than likely, but that doesn’t make it capital gains. It’s still ordinary, it’s still taxed at your ordinary rates, et cetera.
[0:39:04] As Amanda points out, five years later, they sell the building, that’s capital gain. Of course we’re going to have depreciation recapture to look at, but the point is that it is capital gain. Now, on your K-1, you’re going to see some capital activity.
[0:39:19] Amanda: A little more information, we can maybe sort this out, but that’s essentially the answer there. You’re not going to ever really be able to take your ordinary income and turn it into capital gains now. Overall, can you reduce your tax? Sure. There’s tons of strategies to do that. We talked about a few already, but that’s where more extensive tax planning comes into play.
[0:39:43] All right. “What expense for an offsite retreat for LLC members and officer meetings are deductible? Travel, lodging, meals, activities?” So much fun stuff to talk about here. Let’s start where we always start when we’re talking about the deductibility of business expenses, and that is with CORN.
[0:40:02] Eliot: CORN, customary, ordinary, reasonable, and necessary.
[0:40:07] Amanda: Any business deduction or expense that you want to deduct needs to be customary. I say common, but customary, ordinary, reasonable, and necessary to your specific business. If your business requires travel, then yeah. The flight, the rental car, the hotel, 50% of meals while you’re gone because you got to eat anyway, so we’re not deducting more. All of that is going to be deductible. If you go on a trip, and people do this, a lot of our clients will come out to Vegas, they’ll meet with us on a Friday, or they’ll attend an event on a Friday that we’re hosting, stay and then have another meeting on Monday, the hotel room for Friday through Monday is covered because you had to be here Friday for a business meeting, and you had to be here Monday for a business meeting, the flights to and from.
[0:41:01] Even though for Saturday and Sunday, you’re not actually doing any business related activity, you’re just waiting around, it’s Vegas, so we all know what you’re really doing, but the flight, the rental car, the hotel, all of that, 50% is going to be deductible, and then your meals are going to be 50%. The interesting part here is that they’re asking specifically for an offsite retreat.
[0:41:27] Eliot: Right. Typically, I’m going to tell clients don’t try, but you are allowed to go ahead and take it. If you have an overall business purpose for going to that destination, then it can be deductible travel like anything else. That’s the real key though. What is the business purpose? Why did you have to fly your family to Hawaii and call it a business purpose? Especially if you’re a sole proprietor, you’re a sole member of your own S-corporation?
[0:41:57] Amanda: You, just yourself. We’re having a retreat with me and my multiple personalities.
[0:42:02] Eliot: Right, exactly. Tickets for all seven of them. How do you deduct that? You got to be really careful. Amanda came up with a good point. How is the IRS know? If you put it out there on the return, corporate retreat, that’s probably a good way to get it flagged.
[0:42:22] Amanda: Corporate retreat to Hawaii, that’s going to get flagged.
[0:42:25] Amanda: If you’re doing airline travel, hotels, meals, can they really flag that? Maybe a good CPA is going to use categories that are not just blaring a red light at the IRS. Also looking at the difference between the income and the cost of this retreat. If you’ve just started your business and you made $15,000 and then you go and spend $14,000 on your retreat right in Hawaii, then that’s going to raise a red flag.
[0:42:57] If you really think about it, with the way technology’s going it, we’re not even relying on humans to catch something anymore. It’s all going through algorithms, AI, and all of that stuff. It’s much more likely that a human’s not even involved. The robots find the red flag. The robot sends you the letter. The robots collect the money from you, so you can.
[0:43:23] Let’s play a fun game, where I come up with ways that this could work. Single member LLC trip to Hawaii, probably not going to make it happen. What if it’s a partnership? Does it make it less likely to raise a flag more?
[0:43:39] Eliot: Probably less, because a sole proprietorship shows up on what we call Schedule C on your 1040, and that’s a lightning rod for an audit right there just by its placement in Schedule C. Partnership, a little bit different. It’s less likely that they’re going to audit a partnership return. All that’s coming onto your 1040 is a K-1, that’s the activity of the partnership, so less likely there.
[0:44:06] Amanda: Even less so with maybe an S-corp and even less so with the C-corp?
[0:44:09] Eliot: Correct. The C-corporation doesn’t hit your 1040 at all, so no problem there. It’s going to be the C-corp, and they don’t like to audit a lot of corporation returns. It’s one of the reasons we use those. That’s not a license to go out and commit fraud. I won’t point out, you’d said a good CPA will know how to categorize these things. Probably even a better CPA will not try.
[0:44:30] Amanda: Will tell you not to do it.
[0:44:33] Amanda: Okay. What if I have my S-corp and my adult children are all officers, but they actually live in other parts of the state? Can we pay for everyone to have our director, officer, shareholder meeting in a reasonable location that’s easy for everyone to get to?
[0:44:51] Eliot: That scenario makes a lot more sense. There’s a reason behind it. You’re across four or five different areas of the country, all meeting in Kansas City or something like that, wherever it be. That would make sense.
[0:45:05] Amanda: What are you trying to say about Kansas City, Eliot? We have friends from Kansas here.
[0:45:08] Eliot: Yeah. I grew up in that area.
[0:45:10] Amanda: He’s from Iowa, he’s allowed to say that.
[0:45:12] Eliot: I love Kansas City. I do. My point is it’s the center place where everybody could meet, then that makes sense. You have an argument for a business purpose for that’s why you had to go there as opposed to maybe some other…
[0:45:27] Eliot: Right, yeah. It’s got to be bonafide.
[0:45:28] Amanda: Necessary. Reasonable. This here says activities.
[0:45:35] Amanda: What activities? The Hawaii example, snorkeling, deep sea fishing, those are not going to count. Those are not going to be included. What activities could you include?
[0:45:47] Eliot: You see the things in the movies. We were talking about they’re out of the camp.
[0:45:52] Amanda: They just take them to like a summer camp essentially and make them repel down cliffs.
[0:45:55] Eliot: Right, exactly. People just fall back, catch them, and all that. There has to probably be something more substantive towards the business itself. You sit down for eight hours and hash out what’s going to be the game plan, where are we going from a marketing standpoint, et cetera. Real authentic type of thing. You’d have to have more days of doing that than you do personal days.
[0:46:19] Amanda: The snorkeling, yeah.
[0:46:20] Eliot: Right, than the snorkeling. One example, let’s say you’re in real estate development. You’re thinking about expanding into the idea of fishing in your business.
[0:46:34] Amanda: I’ve gotten this at least a dozen times. We run short term rentals in the US and we’re thinking of expanding to Europe. Can we ride off our trip to Europe to check it out?
[0:46:43] Eliot: No. Not really, no.
[0:46:45] Amanda: You can try.
[0:46:46] Eliot: You can try. Yeah, exactly.
[0:46:47] Amanda: That’s not really bonafide. That’s not really reasonable or necessary. If you actually end up do getting a rental there, the argument becomes more tenable. If you don’t…
[0:47:00] Eliot: Certainly if you already have a business interest there, then yes. You’re traveling to see it, and then you continue on doing other actual business activities, again, not the snorkeling unless you have a business.
[0:47:12] Amanda: Sunscreen is not deductible unless you are a bikini model, maybe.
[0:47:20] Amanda: Perhaps. All right. Toby Mathis, you’re on his channel. If you have not subscribed, please smash that subscribe button. You’ll get an alert every time a new video is posted.
[0:47:31] Toby was just recording some stuff for about four hours today, so a lot of good stuff coming your way as well as a recorded version of this. You think we’re funny the first time, you should hear all these jokes the second time around.
[0:47:43] Clint Coons, our other founding partner, has a YouTube channel as well. His goal is to catch up to Toby for real. As my boss, I think you should all do that. Just help me out. Help me help you. Subscribe there. If you’d like a free strategy session, if you want a one-on-one with this comedy show, check out this QR code. It is a 45-minute individual strategy session where you can ask all of your questions. We’ll set up a tax and asset protection plan for you. You can do it. We can help you do it. Our goal here is really to get everyone where they want to be in terms of building wealth, protecting their wealth, and keeping more money in their pocket.
[0:48:24] All right. “If I invest in an oil and gas interest and I have a first year larger intangible drilling costs lost that is needed for a given tax year based on AGI, can the excess be carried forward to a future tax year as a net operating loss, NOL? Would the NOL have alternative minimum tax, AMT, implications?” Let’s just first start off with oil and gas. What is this intangible drilling cost? What is a tangible drilling cost? Why are we even getting losses from this?
[0:49:01] Amanda: Why are we not all driving electric vehicles?
[0:49:03] Eliot: Right, exactly.
[0:49:04] Amanda: Because we like to save on our taxes.
[0:49:05] Eliot: Exactly. Oil and gas investment, there are typically two categories. It’s going to be the working interest where you actually have share a part of an oil lease operation, where you are taking on the rights and responsibilities of that directly. Or a royalties interest, where basically after revenue and expenses, you’re just getting a small payout or something of that nature and just the royalties, but you have no input into the operations or anything like that.
[0:49:35] The working interest is analogous to the idea of being a real estate professional or having material participation in some other business. It’s active income. If you invest without any any liability, you can’t do it in an LLC or anything like that, you do it as an individual, then you’re able to take whatever loss you have as an ordinary loss and in-step the intangible drilling cost, because in the first year, that’s the cost of basically building the rig and things like that, the labor required. These are things that you can’t recapture.
[0:50:10] You had to pay a lot of people to put that rig in. Actually, there are paychecks, the wages that you paid for the group to put the thing in. Stuff like that is what we’re talking about. It’s usually quite large, anywhere from 60% to 85%, let’s say out of a hundred thousand dollars investment. You’re looking at $60,000 deduction or up to $85,000.
[0:50:28] Amanda: In the first year?
[0:50:29] Eliot: In the first year. Yeah. That’s the intangibles. Also, those are the tangible, that’s going to be the actual physical rig. That’s deducted maybe over seven years. You get straight line on that. Maybe even it’s available depending on what’s going on with bonus depreciation, maybe even more on that. The point being, it is separately depreciated. It’s not the intangible drilling costs. That’s the real key here. That’s what gives you the heavy loss. It will offset any income on your return. There’s always a limit to a good party. That’s the excess business loss. That’s something new. We’re going to hit that a little bit.
[0:51:03] Amanda: Always someone trying to bring us down when we’re trying to party.
[0:51:06] Eliot: Right, exactly, especially in Vegas. That changed between 2025 and 2026. Under the old Tax Cut and Jobs Act, where we saw a steady increase based on inflation criteria, where we were getting up to last year, the excess business loss was approximately $310,000 if you’re single, $620,000 for married filing joint. That means you could take a loss up to that amount overall on your return. Anything above that would just be extended onto the next year and be carried over, but you couldn’t go beyond that.
[0:51:43] In 2025 when they came out with the Big Beautiful Bill, for 2026, it says that we’re going to reduce that amount. We’re going to start over. It went down to $256,000 for 2026. Double that married filing joint to $512,000. That’s a significant drop from what we had a year ago in 2025 taxes.
[0:52:09] Amanda: That’s because there’s no inflation, Eliot.
[0:52:09] Eliot: Right, of course. Exactly.
[0:52:10] Amanda: They’re trying to gaslight us, the IRS.
[0:52:12] Eliot: Yeah, no inflation going.
[0:52:13] Amanda: Inflation going down, guys. No, it hasn’t.
[0:52:15] Eliot: It was a big misunderstanding. There was never any inflation.
[0:52:17] Amanda: I think they just spin a wheel and come up with a number.
[0:52:20] Eliot: Yeah. That’s clearly what happened here.
[0:52:22] Amanda: That’s the theory.
[0:52:23] Eliot: The point is that this is an overall limit to how much we could deduct. It does take other components of your return into play, but this was the only investment in a static investment situation. That’s the most loss you could take.
[0:52:37] Amanda: Still not too shabby.
[0:52:39] Eliot: No, it’s a great deduction because remember, whatever your tax bracket times that amount, that’s your savings.
[0:52:44] Amanda: If you hit up against this limitation, the loss carries forward.
[0:52:48] Amanda: For how long?
[0:52:49] Eliot: Indefinitely.
[0:52:51] Eliot: Yeah, exactly.
[0:52:53] Amanda: Second limitation is the nefarious AMT. What is the alternative minimum tax and what would that limitation be?
[0:53:02] Eliot: First time I ever did one of these shows, I called it ATM, and they didn’t let me forget it.
[0:53:07] Amanda: And then we fired you.
[0:53:08] Eliot: Right, and then I wasn’t around for a couple of years. AMT, when you talk to people who really deal with this, it’s a second tax system that we have. That’s actually what it is. Most people don’t know it’s hidden back there. It only gets triggered, and I’m going to make it real simple, if you made too much money and you’re not paying enough tax. Those are the things that can trigger it. All of a sudden you have to pay under a whole different tax bracket system at different rates, different ex exemption amounts, et cetera. This could possibly trigger that if you had enough loss. How do I know, Eliot? Can you be any more vague? No, I can’t tell you. You have to sit down.
[0:53:48] Amanda: We can’t tell you. We can’t be any more vague.
[0:53:50] Eliot: I wouldn’t try, but you really have to sit down with tax planning. It is something that we have to knock out the numbers and things like that. All I can say is that, at some point, if you have too much loss, we have what’s called preferences in AMT. That means that we’re going to subtract and pull away some of the deductions that you ordinarily got to take. Some of them being bonus depreciation, not all of them, but that might be a part of it. All of a sudden, you very well might trigger this, and you just won’t know until you sit down and work with a tax planner.
[0:54:22] Amanda: I refer to AMT as just RUDE. Rude. I’ve done so good at tax planning, you’re going to say no. Now you still have to pay this other tax. Just rude.
[0:54:32] Eliot: It is. It’s very disappointing at times, because you can see where you did so well for a client, knocked down their tax, and then, oh, wait, here’s the AMT showing up. It went back up, but it’s something we have to work with.
[0:54:44] Fortunately, it was a lot harder up until the Big Beautiful Bill to run into it. We hadn’t had a whole lot of problems. Where you do run into it is if you have RSUs, stock, and things like that coming in from your applicant. We run into that an awful lot, and you probably will hit it at some level most likely. That’s where we do a lot of tax planning to make sure we try not to hit it or if we do hit it, we don’t hit it too hard.
[0:55:11] Amanda: If your NOL is limited by the AMT, it would still carry forward as well.
[0:55:18] Eliot: Yeah, correct.
[0:55:18] Amanda: We still get the carry forward.
[0:55:19] Eliot: Correct. There’s actually another whole carryover for AMT taxes as well that carries forward. Like I said, it’s a whole second tax system that we have. It was all designed for a very good purpose, and it was really one thing that they did exceedingly well.
[0:55:35] It was designed to keep the wealthy from not getting a situation where they weren’t paying much tax. It’s done very well in its history. I think it came in the 50s approximately. It’s done just that, but it worked too well, and they never made adjustments for inflation. All of a sudden it started hitting your middle class people, which was never designed to do.
[0:55:58] Amanda: That’s because they’re making up the inflation.
[0:56:02] Eliot: Exactly. Yeah, they’re just pulling out. There was no inflation. You’d be astounded how much money you’d have to make before you’d actually trigger this AMT if they’d kept it with inflation, but they didn’t adjust.
[0:56:14] Amanda: I’m saying it, I don’t care if the black ops come for us. My theory is they make it so complicated that you just give up and say, just take my money, just take my tax. That’s what it feels like sometimes, but not for you. You won’t give up. That’s why you’re here. We won’t give up either.
[0:56:31] Eliot: The tax advisors don’t give up.
[0:56:31] Amanda: We’re going to keep every dollar in your pocket. All right. “How do I set up a holding company in California? I want a holding company to own my two companies, a piano tuning business and a bookkeeping business. I have an average income of $125,000 per year from both $45,000 for the pianos, $80,000 for the bookkeeping.” Many of our platinum client attorneys would answer, how do I set up a holding company in California with, you don’t. You don’t.
[0:57:02] We’re going to go over what this potentially looks like. Legally speaking, you can put a holding company in any state. That’s just setting typically be an LLC. In order to create an LLC and register it, you would just need to file articles with the state, pay whatever state fee there is with the Secretary of State’s office, draft an operating agreement, or if it’s a corporation, bylaws, and get a registered agent listed, pay them, and you’ve got yourself an LLC, a holding company. If you’re just doing it online out of a template, you have a bad one, but you have one.
[0:57:41] What it sounds like this person wants to do is set up this California LLC and then have two separate LLCs, one for our bookkeeping business and one for our piano business. What do you see as the major problem with this?
[0:58:00] Eliot: You’re in California, you got three LLCs. You’re looking at $800 at least for each of those, $2400 a year just for FTB annual fees. What I’m going to do, outside of piano wiring, snapping, and taking out a student or something like that, I don’t see a lot of lawsuits happening in these two businesses, so I would just combine them under one S-corp.
[0:58:24] Amanda: Wow, just jump to the end. There are so many other options in between. He just jumps to the punchline. I agree. Three LLCs for these two types. I love what you’re doing because you’re on the right track in terms of asset protection, separating out our activity. However, number one, we would never really put a holding company in California. California, not only is there that $800 minimum franchise tax board fee, but California doesn’t have very favorable holding company laws like Wyoming does with their charging order protection. You could if we’re looking at it solely for tax purposes.
[0:59:05] What about having it as an S-corp? This could be a corporation with an S-election or an LLC with an S-election, so it’s treated for tax purposes as an S-corp. This $125,000 a year, I don’t want that on my Schedule C. I don’t want that getting hit with self-employment tax for the entire amount. You could have an S-corp, and then you could have individual LLCs leading up to the S-corp or QSubs as we call them. That’s still going to get you hit with that franchise tax board fee.
[0:59:41] Eliot: Still three fees going on there before you even do anything.
[0:59:48] Amanda: You could do one corp, do your bookkeeping from there, and then have a sub LLC for the piano business. That will give you down to two, or as Eliot already said, one S-corp for both businesses, in which case you’ve brought yourself down to the one $800 franchise tax board fee. That’s not going to be avoidable. If you were doing business in California, you own an entity, a legal entity in California, you’re paying at least $800, but there’s no reason to pay three times that for this structure up here that you’re thinking of. I would go with one of these two.
[1:00:26] Eliot: Being the S corporation, why do we keep stressing that? Because it still is a pass-through entity. All that income’s going to come to your 1040, but we have a lot of corporate deductions and reimbursements we can take advantage of. You’re not going to have $125,000 when we’re done with you. You’re going to have maybe $80,000 or something like that with about $30,000-$40,000 reimbursements.
[1:00:46] Amanda: So ominous, Eliot.
[1:00:48] Eliot: You’re going to get some good reimbursements with an S-corporation that you couldn’t get with these other structures and just the one $800 fee. That’s probably what I would do.
[1:00:58] Amanda: Definitely at this income level, you’re making some S-corp election. On the liability side, Anderson sets up LLCs, so we’re normally separating them out as much as possible. One rental property per LLC is going to be the default. Bookkeeping, not a lot of liability there. Piano repair, tuning, I don’t know. Maybe it’s more dangerous than it seems.
[1:01:25] Amanda: Me playing the piano for you is dangerous. Those two activities, I’m pretty comfortable running them both through a single entity. Normally we’re not trying to commingle activity, but they’re pretty low liability items there. It would be up to you. The second less expensive to maintain situation would be running one of those businesses directly out of the S-corp, then one of them out of a sub entity to that S-corp, and then all of the income and expense from both are just flowing up to a single 1120-S in giving you a single K-1, instead of having to do even more tax returns and things like that.
[1:02:06] Eliot: Exactly right.
[1:02:08] Amanda: That’s a fun one.
[1:02:09] Amanda: Do you play any instruments?
[1:02:11] Eliot: I used to do guitar.
[1:02:13] Amanda: What do you mean you used to?
[1:02:14] Eliot: I’m not very good.
[1:02:16] Amanda: Jeff here, he’s answering in Q&A, he plays the drums.
[1:02:18] Eliot: He is excellent. He is good.
[1:02:21] Amanda: I played the tambourine once. Just kidding. All right. “I want more information on how I can structure my LLC more efficiently for day trading. What can I do to minimize my taxes for the new year, and how can I lower my capital gains taxes from day trading?” When we’re talking about asset protection tax planning for traders, we look at it differently depending on whether you’re a passive investor or an active investor. On the passive side, what are we typically doing?
[1:02:52] Eliot: On the passive, you have ETFs or something like that. You have some brokerage account that’s really being managed by a Schwab, a Fidelity, or something like that. You’re really hands off.
[1:03:07] Amanda: Yeah. You’re set it and forget it strategy.
[1:03:09] Amanda: You’re setting up that brokerage account. You’re picking your funds maybe initially, and then you just automatic deposits into it every month. Just a Wyoming LLC there. What deductions are you able to take in that situation?
[1:03:25] Eliot: None really. Really, there’s not much.
[1:03:27] Eliot: Yeah, there’s not much we’re deducting there.
[1:03:29] Amanda: Home office? Computer. What if I need a computer and a big screen? How many languages can you say no in? All right, then this person though, day trading, what does that mean? A lot of people say, I’m a day trader, and they aren’t really. What makes you a day trader? How much activity do you have to do, and then how does the structure change?
[1:03:56] Eliot: The IRS has definition of a day trader. Remember, this does not exist in the tax code. It was designed by the IRS. They came up with these tests, and they kept losing in court cases or sometimes winning, but the point is they had to take courts to come up with some idea. There isn’t a stable answer to what creates a trader. It’s very subjective. Basically, you have to be making your living at it, and you have to have tons of trades each day. What’s tons? The number changes.
[1:04:27] Amanda: I’m going to put tons?
[1:04:28] Eliot: Yeah, tons, oodles.
[1:04:31] Amanda: Oodles. Tons of trades.
[1:04:34] Eliot: You’ll see something, well, no, I saw something on the IRS website that said if I do over a hundred trades. Okay, look, they’re still going to argue that. This is a lightning rod for audit, and you still overhaul have to show the principle that this is your real job, that you don’t do anything else for a living. You make substantially all your income from this. That excludes a lot of people.
[1:04:57] As you pointed out, even though we hear, oh, I’m a day trader, you’re not probably as far as a tax code. When we’re doing that though, what we can take advantage of is a trading partnership. That’s what we all often do. We’ll set up that brokerage account into a partnership. Partnership means it has partners. We have two partners, you as the individual and a C-corporation as the other partner. C-corporation or an LP, that would be their general partner, your C-corporation, it’s the one managing everything, all business activity for the LP, which may be more expansive than just trading, but the point is it’s overseeing everything. As far as percentage, maybe 10% to the C-corp, 90% to the individual. That can vary just depends on how much money we have going in there.
[1:05:46] Amanda: Now we get deductions.
[1:05:48] Eliot: Exactly. We also have just shifted off at least a portion, 10%, of our taxable income that would’ve otherwise hit our 1040. It now immediately goes to the C-corporation to be dealt with, but the C-corporation can have corporate meetings, it can have a medical reimbursement plan underneath a larger accountable plan for reimbursement as well, for administrative office, and things like that. It has all kinds of goodies to get money out of there back to you tax free in a manner that’s still a deduction to the C-corporation.
[1:06:21] C-corporation can also earn more of what we call a guaranteed payment. Think of it as a management fee, but it’s a precise term that we use with partnerships. It’s called a guaranteed payment, and that’s ordinary income to the C-corporation, again, subject to all of these deductions that we just talked to, these reimbursements. There’s a lot of benefit to this structure to get that money back to you tax free that you never had to pay tax on to begin with. It’s back in your pocket to do what you wish. That’s a really nice structure there for someone who’s a little more active.
[1:06:52] The C-corporation, it’s not an investment advisor. It’s not overseeing brokerage accounts or anything like that where it might have to be licensed. No, it’s just managing operations, bookkeeping, making sure the tax returns are done, annual filing fees, things like that, whatever it be. It has to be reasonable what it’s making for that guaranteed payment.
[1:07:10] You’d look at those amounts that you have on the right. If you knew you had $30,000 of 280A meetings, 105, medical reimbursement, accountable plan, things like that, then you have an idea of how much money you might want to move in there. You cannot base that guaranteed payment on profits. It has to be based on the services being provided. It has to be a flat amount. You want to be careful of that, but that’s the analysis that you can look at when you try and put something like this together.
[1:07:35] Amanda: Yeah. Whether you’re doing passive or active trading through just this Wyoming LLC, you’re not getting any deductions for any of the costs associated. Even outside of doing meetings, medical reimbursement, or things that are only available in the C-corp, you don’t get to deduct any subscriptions or your subscription to the economist. You’re buying 20 screens so that you can have the crazy wall of Bollinger bands and whatnot. What’s the show with the guy and he hits things with bats and stuff?
[1:08:11] Eliot: It’s not Motley Fool, is it?
[1:08:17] Amanda: No. You’re DirecTV, you’re not deducting that. You’re home office. In this partnership trading structure, all of that is not deductible on the partnership side, but then those do become normal business expenses for the corporation there.
[1:08:32] Eliot: Yup. It’s just a superior structure for that. Again, if you’re not really doing anything, you’re passive, Wyoming LLC, there would probably be the call here.
[1:08:43] Amanda: Again, we’re not looking to find a way to offset capital gains with capital losses, apples to apples. We’re using other strategies here to reduce your overall tax burden, income shifting to the corp, and then pulling out a bunch of that money with a tax free reimbursements. Our favorite reimbursements, the tax free time.
[1:09:04] Eliot: Those are the good ones.
[1:09:05] Amanda: They are. “Please take a deep dive into solo 401(k) contributions. What are the individual contribution limits, the employer match limits, and especially the voluntary after tax contribution limits? Which components need to be earned income, and how does this change if contributing to a Roth 401(k)?” I first want to start off with a little bit of semantics here. The solo 401(k) is simply a 401(k) that has four people involved in it as most. Most of us that go to W-2 job, it contribute to the company 401(k). The solo 401(k) is for small businesses, sole proprietorships, places where there are two partners or two shareholders, and then that can include their spouses, so up to four people. It’s either a solo 401(k) or a regular 401(k). There’s not just 401(k), actually.
[1:10:04] Roth and solo are not opposing terms. With that, Roth and traditional are the two opposing terms there. Within a solo 401(k), you can have Roth contributions, and you can have traditional contributions. The difference there is that traditional contributions, you get the tax deduction now, but when you take the distribution later, you are taxed at your rate in the future. The Roth, you don’t get the deduction now. But when you take it out in the future, the initial contribution as well as the growth is tax free. It’s not a solo or a Roth. You can have a solo with a Roth bucket in it. What are our limitations there?
[1:10:51] Eliot: The limitation is going to be the lesser of whatever your earned income was from the business that’s sponsoring the plan, not all your income on your return. Let’s say it’s an S-corporation that’s sponsoring the solo 401(k). What was your earned income? What was your W-2 income from that particular sponsoring business? It’s going to be the lesser of that amount or $72,000 for 2026.
[1:11:19] Amanda: Okay, $72,000. That’s the amount that I as an employee can contribute of my money.
[1:11:26] Eliot: That’s the max into the plan overall of all contributions, if we’re under 50.
[1:11:34] Amanda: How much is that as an employee can I contribute?
[1:11:37] Eliot: $24,500. Again, this is in 2026. That means that alternatively, the employer could theoretically put up the balance, which would be 72 minus 24.
[1:11:52] Amanda: Do the math right now in your head. The max match is 25%.
[1:11:57] Eliot: Yeah. You’d have to make a lot more than clearly your W-2 impact. Let’s say you had a hundred thousand dollars of W-2 wage. The employer could put up to 25% of that or $25,000. You need to be in approximately the $260,000-$240,000 range before you’d be able to max out a $72,000 overall contribution from both parties.
[1:12:18] Amanda: Those numbers increase because there’s not only catchup contributions, but now there’s these super catchup contributions.
[1:12:24] Eliot: That’s right. What we’re looking at here is if you’re under 50.
[1:12:35] Amanda: What if you’re over 50?
[1:12:36] Eliot: If we’re 50 or above, then we get to add on $8000 as an employee. Now that $24,500 becomes $32,500. The overall amount that can be put in is no longer $72,000, it’s $80,000.
[1:12:53] Amanda: Okay. I’m going to rewrite this. Wait, 82?
[1:13:01] Amanda: Yeah. Obviously, 72 plus eight, and then $8000 if you are the employee. Okay. There’s an even more after that.
[1:13:10] Eliot: There is. They made a very special provision. If you’re in the 60 to 63 range, you can put an additional $11,250. I have no idea how they picked that number, but that’s what it is.
[1:13:22] Amanda: Probably with the inflation bill. Now they just make up the inflation.
[1:13:25] Eliot: It came in this time.
[1:13:27] Amanda: 11,000 what?
[1:13:28] Eliot: $11,250. As the employee, you can put in up to $35,750.
[1:13:36] Amanda: I didn’t write it that way. Just give me the total.
[1:13:39] Eliot: Yeah, that’s all. With a total of $83,250 total contribution. [1:13:43] Amanda: Wouldn’t it be $91,250? [1:13:49] Eliot: It would be $72,000 plus $11,250. [1:13:52] Amanda: Yeah. Okay. No, I got it. $83,250. [1:13:59] Eliot: There you go. Yup. Those are the amounts. What are the limits, the limits, the limits? There isn’t. Again, the overall limits are those amounts that Amanda just put up there, $72,000, $80,000, $83,250. Understanding that the employee can only put up a maximum of 25% of whatever that W-2 wage that it paid you, those are going to be your limits. The fact that it’s voluntary after tax doesn’t matter. You can use that as a filler to meet that overall amount, but it’s not going to be above the $83,250, the $80,000, or $72,000, depending which bucket you’re in here. [1:14:38] Amanda: Yeah. As you earn your W-2 salary, you can choose to put it into your traditional bucket, tax deduction now, pay tax in the future, or your Roth bucket, no tax deduction now, tax deduction in the future. Or you can receive it and then put it into your after tax bucket to hit these ultimate limits, the mega backdoor Roth. If you then roll after tax into Roth, that’s how you get that mega backdoor Roth there. All of it has to be earned income. [1:15:11] Eliot: The amount is based on earned income. In other words, if Amanda had in her S-corporation $72,000 of W-2 income, then she’s okay there as long as she’s under 50. [1:15:26] Amanda: Which I am, Eliot. Wow, rude. [1:15:30] Eliot: I knew that was not going to go well. [1:15:32] Amanda: You knew as the words were leaving your mouth. [1:15:34] Eliot: Things are going to get ugly when the camera goes off. $72,000 there, but what if she had stock gains from 2023 or something like that? That cash she could put in, it’s after tax, it’s already been taxed. That would be the 80 bucket there.[1:15:50] Amanda: This is any income.
[1:15:52] Eliot: The overall limit for that year was based on the earned income from that year. That’s what I’m trying to get across there.
[1:15:59] Amanda: In this situation, you do have to pay yourself a W-2, then it becomes earned income to you.
[1:16:05] Amanda: Not to be confused with the income from the company. The company can make money however it wants. It could be capital gains, it can be ordinary income. It doesn’t matter where the actual source dollar comes into the company, it does need to pay to you as a W-2 salary of the earned income.
[1:16:21] Eliot: Yeah, you got to get that W-2 income from the entity that’s sponsoring the plan.
[1:16:27] Amanda: Make a backdoor. Save a lot.
[1:16:31] Eliot: Yes. It is a way that you can just shift over far more into that and get it to grow in a Roth component. It’s already been taxed, typically.
[1:16:42] Amanda: All right. I can barely read my own writing, so I apologize.
[1:16:45] Eliot: There’s a lot there, but it’s good.
[1:16:47] Amanda: It is. Toby Mathis, you’re on his channel. He is tax wise Toby, he’s our fearless leader. Please subscribe. You’ll get an alert next time Tax Tuesday comes out. We have this show at every other week.
[1:16:57] Eliot: Every two weeks, yup.
[1:16:58] Amanda: Every two weeks.
[1:16:59] Eliot: Get those questions in.
[1:17:00] Amanda: For 52 weeks out of the year. Get those questions in. Also, subscribe to Clint Coons’ channel. Toby’s a lot more tax, Clint’s a lot more asset protection.
[1:17:12] Eliot: They definitely know each other.
[1:17:13] Amanda: They do, they’re besties. For anyone who has been here even a few times, you know that those two things go hand in hand. You can’t really separate them in a lot of ways. Subscribing to both is going to get you the best of both worlds and a ton of information. If you’d like to speak to us directly, please schedule a free strategy session by clicking this QR code. If you would like us to feature one of your questions, then please email us at taxtuesday@andersonadvisors.com. By us I mean Eliot, because it’s his greatest joy in life to read through your questions and choose the eight that we do each week.
[1:17:58] Eliot: They change my life every time.
[1:18:00] Amanda: Life-changing. They’re always different.[1:18:03] Eliot: They are fantastic. Some of these questions are absolutely astounding. Yeah, I love them.
[1:18:07] Amanda: Hey, change the tax rules as much as you want, government. We’ll have unlimited shows for you. You can also visit us www.andersonadvisors.com. With that, thank you all for joining us. We will be signing off. Have a great day and a great 2026. Take care, everyone.
