Today, experts Toby Mathis, Esq., and Elliot Thomas, Esq., explain valuable tax strategies for real estate investors, traders, and various income earners. You’ll hear about the optimal tax classifications for short-term rentals, using retirement funds for real estate investment, and the transition from W-2 to 1099 income for tax benefits. Additionally, Eliot and Toby discuss maximizing deductions through trading partnerships, the benefits of Health Savings Accounts, vehicle write-offs, and home office deductions. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Is short -term Airbnb and VRBO (short term rentals) under Schedule C or Schedule E? – if it’s just bare oversight management, etc. That might put it on Schedule E. Schedule C is if you have more substantive activity you’re putting into it.
- I was told I could use my company assets of 401k to loan money to buy real estate investment. Is that true? If so, how? – its true, one is allowed to take a loan out by law, if your plan allows for it. If you don’t pay it back it becomes taxable income.
- How how can I position my child’s college tuition as a business expense? – let’s say your child’s handling the bookkeeping for your corporation, and they’re taking accounting classes, then you can deduct the classes related to what that child’s already doing in the corporation.
- What percentage of gains do I need to pay tax on if I trade for it, if I trade forex and if I put money into a holding LLC? Can I minimize it? – often it’s gonna be section 1256, and You get a treat 60% as a long-term capital gain, and the other 40% is gonna be short-term capital gains, which means you’re at your ordinary tax bracket rates.
- How do I deduct expenses if I have a W2 and a 1099? – generally speaking, on a W-2, there’s nothing you can deduct business-wise against. If you had expenses that you incurred in order to get your W-2 income, they took that section away with the Tax Cut and Jobs Act back in 17.
- I just started my small business of being a mortgage broker. I own a single family rental about an hour from my house. Can I take a tax deduction for mileage expenses if I use my vehicle for both businesses? What about taking deduction on one car for mortgage and take deductions on the other car for the rental property? – We’re going to recommend your vehicles be titled in your personal name. Usually we’re going to deduct that mileage.
- If I purchased a property to rent it and I have it as an Airbnb and I did a lot of work in 2023, can I claim all the expenses for 2023 tax year, even if the house was not rented at all in 2023 because of work is estimated to be complete in quarter one of 2024. – You can in 2024, but we can’t go back to ‘23, when the expenses were incurred, because it wasn’t placed in service yet.
- Can I make charitable contributions from my business LLC income and take it as a business tax deduction? Due to the standard deduction, I can’t deduct them from my personal return. – If it’s a C corporation, then the C corporation can deduct up to 10% of its net income. Used to be 25% during the CARES Act but they’ve moved it back to the traditional 10% of your net income
- Started regular 15-year depreciation for capital improvement of rental property in 2021, didn’t know any better. I switched to bonus depreciation and claimed the remaining amount in 2023. Are any home improvement projects tax deductible? – At its base level, no. But if you happen to have a home office, and you have a C corporation or an S corporation, then any your home improvement projects, yes, they will be deductible in the sense that if it’s directly related to the office
Resources:
Free Emergency Estate Planning Kit
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Welcome to Tax Tuesday. My name is Toby Mathis.
Eliot: Eliot Thomas.
Toby: If you’re looking for a bunch of answers to a bunch of tax questions, you came to the right place. Just let people flow into the room. There’s always several hundred folks, if not more, that join us. I’ll give you guys all the rules as soon as everybody comes in.
If you want to, just to have some fun, give me a thumbs up or a reaction if this is your first Tax Tuesday. Give me a thumbs up if it is your first Tax Tuesday, if you’ve never been on a Tax Tuesday before. It’s down here today. Look at that. All right. Give me a cry emoji if you’ve already been to a Tax Tuesday and then this is your second, third, or 20th. I see a lot of crying. I have to do this.
Okay. For all of you new folks, welcome to Tax Tuesday. We’re giving tax knowledge to the masses. Let’s go over some of the rules. If I could make my computer work, I’m going to think about it and maybe it’ll do things.
(1) This is really about you guys getting answers to your questions. If you have questions during this event, I am looking at a full staff today. I got Matthew, Patty, Barley, Dutch, Jared, Jeff, Jennifer Phipps. Wow. Ross, Tanya. and Troy. All bunch of tax professionals and folks that could answer your questions, ask your questions in Q&A. As long as you’re not getting too crazy, we’ll answer it. If you give us a book, we’re going to say you need to become a client. But if you have general tax questions, ask it. You have tax professionals there that can answer your questions.
(2) Chat. You can make lots of comments in chats, and we read it. Sometimes I even have conversations with people that are asking questions, because we could actually communicate in real time. This is live, absolutely. It’s always fun, unless you’re watching a recording, in which case it’s not live. It was live when we recorded it, so whatever. But you’re watching a live event right now, if you’re on the Tax Tuesday live stream on YouTube or on the Zoom where you’re registered for it.
I know that they have folks answering questions on the YouTube side too. Sometimes they interrupt, they throw stuff up in chat, and they ask me questions and I’ll answer it live there too. Lots of fun. But if you have questions that are not today but in the future, or you have something that’s just been gnawing at you, email it to us at taxtuesday@andersonadvisors. Eliot here grabs those questions. We get them answered, and he grabs usually 10-15 and make sure that we answer. How do you think you did this week?
Eliot: I’m hoping I did all right. I’ll tell you what, I picked questions that really hit the broad range of what you were all asking. There are two really big areas you were asking about, and I think we got those covered. We’ll try and expand on our answers to cover all that.
Toby: See, some of you guys asked the same questions. We try to grab ones that are representative, so it’s a lot of fun. Anyway, feel free to use the Q&A. You have CPAs, EAs, accountants, and even bookkeepers there to answer your questions. They know where their expertise is, so you’ll get somebody good for your question. It’s not like a round robin. Everybody’s looking at them. If I don’t know the answer, I skip it and let somebody else answer it, that type of thing. It’s absolutely there for you.
If you would, let me know where you guys are sitting right now, what city and state. Drunk is not a state. Put it into chat and just let me know where you’re at. It’s always fun to see the scope of these. Odessa, Baltimore. Whoa. Woodbridge. Okay, now they’re flying through. There’s Honolulu, Exeter, New Hampshire, wow.
There’s another Honolulu. There’s Bellevue, Washington, Sweetgrass, Montana, Arkansas, Lost Wages, which is my town. That’s where we’re sitting right now. There’s another Las Vegas. There’s Little Rock, there’s Worcester, Kapolei, that’s Mark, Spokane. I know Spokane, but I lived in Seattle, so it has to be Spokane. If you’re down on your luck in your pickup truck, Spokane. Anchorage, Brazil.
Eliot: Somebody’s got to do it.
Toby: We have folks all over the place. We got you guys all the way from Hawaii down to the edges of Florida. What did I say? Hawaii and Florida. Yeah, we got a good group. I’ll give you guys a big applause.
This is what we’re going to do. I’m going to read through the questions, and we will answer them. Somebody’s always like, you didn’t answer the question. We’ll answer it for sure. All right, let’s see if I can read these.
“Is short term Airbnb and Vrbo under Schedule C or Schedule E?” We will answer that. They’re talking about short term rentals.
“I was told I could use my company assets/401(k) to loan money to buy a real estate investment. Is that true? If so, how?”
Here’s another how. “How can I position my child’s college tuition as a business expense?” I love you guys. That’s just awesome. Yes, sometimes you can believe it or not, but we’ll get into that.
“What percentage of gains do I need to pay tax on if I trade Forex? And if I put money into a holding LLC, can I minimize it?” Great questions thus far.
“How do I deduct expenses if I have a W-2 and a 1099?” We’ll go over that.
“I just started my small business of being a mortgage broker. I own a single family rental about an hour from my house. Can I take a tax deduction for mileage expenses if I use my vehicle for both businesses? What about taking deduction on one car for mortgage and take deductions on the other car for the rental property?” I don’t know if I’ve ever seen that, but that’s awesome. I have a car for my mortgage and a car. Yeah, I have one rental. I get it. We’ll answer it.
“If I purchase a property to rent it, I have it as an Airbnb, and I did a lot of work in 2023, can I claim all the expenses for 2023 tax year, even if the house was not rented at all in 2023 because work is estimated to be completed in quarter one of 2024 where we’re sitting right now? Good question and we’ll answer it.
“Can I make charitable contributions from my business LLC income and take it as a business tax deduction? Due to the standard deduction, I can’t deduct them from my personal return.” Interesting. “Started regular 15 year depreciation for capital improvement of rental property in 2021. Didn’t know any better. I switched to bonus depreciation and claimed the remaining amount in 2023. Are any home improvement projects tax deductible?” Good questions all the way around, and we’ll do our very, very best to answer them.
In the meantime, I’m going to point you guys to some free resources. First of which is my YouTube page, where we take lots and lots of these questions and reduce them into videos, as well as probably two or three more videos a week. It depends on how bored I am and how much stuff there needs to be said that’s going on out there in the tax world. But you can actually sign up.
There are, right now, 779 videos. I have a feeling there’s probably more than that, probably close to 780 videos on there. You could just absolutely fill your brain if you like this stuff and you like finances and tax. For those of you guys who are already signed up for YouTube, give me a thumbs up so I know who you are. Give me a thumbs up if you’re on the YouTube already. Let’s see how many folks are out there. There we go, now they’re coming.
Thank you. For those of you guys who aren’t, feel free. It’s absolutely free. Also, look at the very top of this page where the videos are. A free estate planning starter kit, that is an emergency binder that anybody can have. It’s absolutely free. If something happens to me, who my doctor is, dentist, who takes care of my animals, I have two cats, obviously my wife, but if something happened to both of us, then there needs to be something there.
Also, things like, you know what you everybody thinks about, but how do I get into my Facebook or Instagram? How does someone get access to things that might be under lock and key? We don’t put your password in that binder, but we have a separate sheet that has your passwords that you can secure.
If you’re military, here’s what kind of things you want. If it’s a funeral or obituary, things like that, stuff, not in a typical estate plan is in that document. Everybody can have it, it’s absolutely free for you guys, for anybody, obviously. I just put it out in the universe, because I think that it’s really important that people have some sort of plan.
Speaking of a plan, we do the tax and asset protection events here. My partner, Clint Coons, myself. Sometimes you see Brent Nagy, one of our longtime clients, a very successful real estate investor. He gets on here sometimes. But we’re doing tax and asset protection workshops just about every week, including a live one coming up in Orlando in March.
If you want to attend any of those, they’re free. I think we have one coming up this weekend too. I’m not 100% certain. Maybe, but wait, that is this weekend. [EGADS 00:10:12] is the 27th. I think there’s one in February. It’s in March. All right. This weekend is Saturday the 2nd. Feel free to join us to learn about land trusts, LLCs, series LLCs, corporations, and all that stuff. Sherry says that you’re coming to Florida when I’m not here.
Eliot: I didn’t plan it.
Toby: It’s all Patty. Patty’s awesome. Sorry, we got to bang on Patty a little bit. Clint also has a YouTube channel if Patty has it. Yes, Patty is awesome. All the Patty supporters come out when I say anything about Patty. She rocks.
Clint, my partner, also has a YouTube channel. That’s absolutely free. I think he hit 200,000 subscribers today, which is a great milestone. It’s fantastic. All right. Let’s get into the questions, guys. Enough of this pontificating.
“Is short term Airbnb and Vrbo under Schedule C or Schedule E?” What say you, Eliot?
Eliot: It depends. Easy answer. Yup, exactly. What’s it going to depend on? It really depends on the activity that you’re putting into it. What I mean by that, Schedule E is typically where you’re going to see rentals, your long term rentals. While we’re talking about short term rental here, maybe you’re not putting a whole lot of activity and overseeing it.
You might just be doing the bare minimum and just bare oversight management, et cetera. That might put it on Schedule E, and you could put it there. Schedule C is if you have more substantive activity you’re putting into it. Maybe you’re having to clean every day. You are more of a host. You can give tours and things like that. Maybe you give a car that can be used as part of the fee of being in there or something like that. It’s more of a hotel feel to it, and that would probably be Schedule C.
I think from a tax perspective, your big difference is that if you had net profit on Schedule C, it’s probably going to be subject to additional self employment tax. I know Clint talks about that in some of his videos, making that distinction. It might favor you to maybe push it towards Schedule E. Maybe you could still do a non passive on that. Otherwise if we have a lot of activity going on, it’s going to be Schedule C.
Toby: Yeah. I’ll condense it a little bit and try to make it a little more bite size. Airbnb and Vrbo means in all 99% of the time, seven days or less average stay, which means you add up for the calendar year, you grab all the days that it was rented, and divide it by the number of guests. Unique rentals. If a guest is coming back every other week and renting it for two days, you don’t just call that one, add up all those days. No, it’s two days that it gets averaged in.
Each unique rental of it. If it’s seven days or less, then it is not a rental activity, you’re a hotel. It’s ordinary activity. It’s not rental, it’s just business income. No difference than if we were running a pizza shop. It’s always pizza time. But we’re just running a business.
The question is, that business activity, does it rise to the level where you are actively participating? Because if you are not, then it’s going to go on Schedule E, because it’s there with all your other passive activities. It’s not subject to employment taxes. If you are providing substantial services, which are defined as things that aren’t normally included in a rental, if you have lights, water, and stuff like that, you’re okay. You’re not substantial services.
If you do concierge services, if I clean your room every day, I have maid services, I have somebody take you on tours, that’s substantial services. Now we’re Schedule C and dollars to donuts, they’re going to say it’s an active business that you are participating in, and you’re going to pay employment taxes on it. There is the possibility that you aren’t doing anything and it could still end up on Schedule C, and you’re saying you’re a passive sole proprietor. I’ve heard about it, but I’ve never actually seen it.
That’s what it really comes down to. Are you providing concierge services? Am I providing things that a hotel would provide? That’s even a better way to look at it, or am I just renting them the raw space and getting away from it?
If it’s the former, hey, I’m providing these additional services, Schedule C. If it’s, I’m not, I’m just giving them the unit and getting out of there, no daily maid, not bringing them food, I’m not taking them on tours, I’m not doing anything like that, then it’s Schedule E. The question is, am I a material participant? It’s lots and lots of fun. Clear as mud? Yeah, that’s why you work with a professional because they make it somewhat difficult in the code and in the regulations.
“I was told I could use my company assets/401(k) to loan money to buy real estate investment. Is that true? If so, how?”
Eliot: Yes, it’s true. I’m going to break this into a 401(k) versus company assets to break that part. To hit the 401(k) here first, one is allowed to take a loan out of their 401(k) provided that your particular 401(k) documents allow for it. In other words, the law allows it. That’s the big umbrella, but does your particular plan allow for a loan? Often they do, but you want to check the documents.
Toby: It’s 50,000 per participant, up to 50% the value of that account.
Eliot: Yeah, max would be 50 overall, so you can’t take that loan now. It’s got to have all the…
Toby: The five year payback at federal AFR rates.
Eliot: Yup. You got to have it just as a regular loan agreement, and you got to pay it back. They do look at that. If you don’t, then it becomes taxable income as a withdrawal of it, et cetera. But then also, company assets. Maybe your company has a lot of cash or something like that. You could certainly do a loan there, but likewise you got to treat it as a loan. The IRS really hammers down on that, making sure that if you’re taking assets out, you’re really treating it fairly.
Toby: You couldn’t put it better. There’s company assets where I’m going to borrow from the company. There’s the 401(k), where I’m borrowing from the 401(k). In either situation, I can use those funds to buy real estate. If it’s investment real estate, then I can even deduct the interest that I’m paying back into it.
When you borrow from a 401(k), for example, if I borrowed $50,000, let’s say it’s husband and wife, and they have each have $200,000 floating around in their 401(k), and they each borrow $50,000, they take $100,000, and they buy real estate with it, they would be paying their own plan back in federal AFR rates, which are published every quarter.
Depending on the term of that note, it’ll say what the interest rate has to be. It’s probably around 5% right now. You would pay that back to your 401(k) and you deduct it on your personal return. If I’m having to pay myself, guess what I’m doing. I’m jamming more money into my retirement plan, which is great. Somebody says, if you’re 59½, does it change the approach? Not necessarily.
Eliot: No, I wouldn’t think so. Just on the interest rate, sometimes if you’re a client here, we may use the blended rate. All it is is exactly as Toby talked about. It’s the applicable federal rate that comes out every month, but the blender rate just looks back 12 months. It’s just an average of it, and that comes out in July every year. You’re in the same boat either way.
Toby: Yup. As long as you’re being reasonable, then you’re going to be fine. You can’t charge 10%. Some people are like, ah, I want to charge myself a whole bunch.
Eliot: Blood money.
Toby: Yeah. You can’t do that. They say, no, related parties, so you have to use the federal AFR rates. All right, let’s move on. Enough of this. There we go.
“Can I position my child’s college tuition as a business expense?”
Eliot: In a sense, you can. A lot of people hear about the various education deductions out there for corporations. There are tuition assistance programs. There’s probably about three in the code, but none of those are really applicable to our clients who have our management corporations because you’re an over 5% shareholder, so we have different rules.
What you can do is, the perfect example, let’s say your child’s handling the bookkeeping for your management corporation and they’re taking accounting classes, then you’d be able to deduct the classes related to what that child’s already doing in the corporation. Maybe it’s marketing or something like that, social media, et cetera, then you could deduct those related classes from the child.
Toby: Yeah. It all comes down to, is it preparing them for a new profession, or is it helping their current business? If you’re just an individual, you never can write it off. If you’re a business and it’s helping the business, then it’s a reasonable and necessary expense that is deductible. Things like you’re a lawyer, I’m a lawyer, we have to do continuing education. We can go take a class that’s the exact same class as somebody is taking at a university. We can deduct it, they can.
I always remember when I went to CLU, and CLU’s MBA program was like a ton of Boeing people. That’s where their managers were sent. Some of the people that were moving up the ladder at Boeing, they would send them to get an MBA. Boeing gets to write that off if Boeing is paying for it. If that individual was paying for it, they couldn’t write it off.
I couldn’t write it off. I was just a student. But the business, if it’s helping that business out, can. What do you do? You get your kids involved in your business. You find something that they’re doing, and then you enhance that skill. Even if it leads to a degree, it could still be deductible.
There are actual cases on this where they’re saying, is it improving your skills as an employee for the benefit of the employer? If it’s improving your skills as an employee for the benefit of the employee to go and do a different profession, not deductible. If it’s benefiting the employee that works to the benefit of the business, yes, it is deductible. That’s what it comes down to. I wish it was easier, but we know the IRS and Congress like to make it a little bit muddy to keep people from going too crazy.
All right. Somebody asked the question on the 401(k). I’m just going to go back for a second. You cannot borrow from an IRA. You can only borrow from a 401(k) or a business supported retirement plan. Individual retirement accounts, you can not borrow from. You can loan it to third parties, but you are disqualified from borrowing, so sorry. Hope that helps.
All right. “What percentage of gains do I need to pay tax on if I trade Forex? And if I put money into a holding LLC, can I minimize it?”
Eliot: As Toby pointed out when we first looked at this, a 100% of gains are going to be taxable, but I got a feeling that’s probably not what we really were asking. If you’re doing Forex, often it’s going to be what we call Section 1256. If that’s the case, automatically good or bad news, you’re going to treat 60% as a long term capital gain, which means lower rates, typically. The other 40% is going to be short term capital gains, which means you’re at your ordinary tax bracket rates.
It’s a fair position really by the IRS because most of the people are doing this short term, but they give you a benefit of the doubt, give you 60% at long term rates. That’s going to be the bucket, how the gains are split. What the overall percentage is going to depend on your overall taxable income because that’s where we get our tax brackets for capital gains.
Is there anything we can do to minimize it? Right there in of itself, no. If you put it into a holding LLC, we’re not really going to be able to deduct any expenses, necessarily, business expenses against it. However, we often set up what’s called a trading partnership. If we had that trading account in there, maybe we could split it between the individual and a management C corporation. As often, many of you watching the show before, we talked about the C-corporation. We got a lot of benefits and reimbursements that could help get some of that money back to you tax free.
Toby: Yeah. Again, I’m not going to repeat what you said. Forex is currency for those of you guys that aren’t familiar, and it’s not treated like securities. It doesn’t necessarily get business deductions unless you’re rising to the level of a trader business, which is in the world of securities, there’s this thing called trader status. It’s 750 trades a year. You have to trade 70% of the day, it has to be a substantial portion of your income, or they could deny you under any number of theories, they always do.
I can’t remember the last time I saw somebody actually win a case outright. Usually, they win a portion and then they lose on something, so it’s a moot point. When you’re doing that with Forex, are you rising to the level of trader business? Can you write off your expenses? But in Forex, you get to pick. At the beginning of the year, you actually make a determination internally. Am I treating this as ordinary income, or am I treating this as something called a 1256 contract where we’re splitting it between two types of capital gains, long term 60%, short term 40%?
Just think about this. Even if I’m trading every two days, three days, whatever it is, I get to treat 60% as long term capital gains, which is 0%, 15%, or 20%, depending on how much you make. But your losses are capital losses. If I do what’s called a 988 election, which is the default, that’s called spot pricing, 988 is ordinary income and ordinary loss.
Accountants will oftentimes tell people, oh, you should do 988 because you can write off your losses. I’m always like, what the heck are you doing an activity for if you’re just going to make losses anyway? You have to make it day one of the tax year. I’m like, no, 1256 is the route to go because you have to assume you’re going to make money, and you want to minimize the tax. That’s how you do it. You’re going to pay about 20% less in tax.
I forget the exact calculation, but when you’re paying tax at 60/40, it’s way better than 100% being at your ordinary bracket. It’s just automatically is under any number of theories. No matter how you calculate it, you’re going to be better off doing it as 1256. But 1256 contracts are also market to market. I believe that every December 31st, it’s like you sold it. If you’re sitting on positions, you’re paying tax. Although if you’re a Forex trader, you’re not sitting on things very long. Usually they’re boom, boom, boom like a lot of you guys.
If you want the deductions just like Eliot laid out, you use that partnership with the corporation so that we don’t have to qualify as a trader. It works magic both in the areas of securities and Forex. A bunch of you guys are probably Forex traders. A bunch of guys are probably stock traders. It’s the same exact strategy. If we want the business deductions. The only question is losses. How are they treated?
I’m fine with capital losses. Capital gains offset capital losses or capital losses offset capital gains with $3000 a year that you can use against your ordinary income or other income sources. That beats that horse. We can move on.
“How do I deduct expenses if I have a W-2 and a 1099?”
Eliot: Generally speaking on a W-2, there’s nothing you can deduct business wise against it. If you had expenses that you incurred in order to get your W-2 income, they took that section away with the Tax Cut and Jobs Act back in 2017. It used to be part of the miscellaneous 2%. on Schedule
Usually, in a general sense, you can’t really deduct any business expenses against your W-2. You may have other things going on in your returns that help offset that, but it’s not going to be related to your W-2 income. The 1099 might give you some opportunity. There’s a lot of potential here. If you had enough 1099 coming in, you might have it set to an S-corporation or C-corporation, either one. We can take advantage of all accountable plan, reimbursements, corporate meetings. Maybe if you paid yourself a wage out of that, you could put into retirement. That’s your real game plan here.
I think in the 1099, if you made $10,000 or probably be looking at more $50,000 at 1099, you might put that in an S-corporation where you have all these reimbursements, get some of that money back to you tax free, and probably save on some employment taxes, et cetera. You’re going to just get a lot of business deductions. There, you can deduct the business related expenses as well. I think that’s probably your best opportunity here.
Toby: Yeah. The only other thing you can do with W-2 is HSAs, IRAs, deductions that you would take against your typical return, Schedule A, my charitable donations, my medical expenses that exceed 10% of my adjusted gross income, and things like that. You’re not going to get to write off any business expenses against it, but your 1099, you can’t. That’s what it really boils down to.
I have one cell phone, depending on how I set myself up or what kind of business I use, if I use an S-corp, for example, or an LLC taxed as an S-corp, C-corp, or an LLC taxed as a C-corp, or even a nonprofit, I can reimburse 100% of that expense, 100% of that cost. As an individual, I can never write it off. Sometimes there’s an appetite.
If I get 1099 and I decide to be a Schedule C, a sole proprietor, I can write off the business portion of certain assets, of certain things I use like my cell phone. Again, if it’s 10% business, I could write off 10%, whatever it costs. If it’s $200 a month, I can write off $20, slow clap. It’s not going to get you much.
You might be like, all right, maybe I need to look at what my expenses are. There’s a lot of analysis we do as we’re adding up, seeing what your tax appetite is. Hey, if we pull this lever over here, is it going to unlock enough benefit to justify the expense of pulling the lever? If the lever costs a thousand bucks to pull, but you get $7000 of benefit, you might do that, especially if that’s $7000 a year, then it becomes a no brainer. That’s the type of stuff you’re looking at.
HSA might not cost you anything. You’re looking at that going, hey, should I put money into an HSA? For a lot of you guys, it’s a no brainer. It’s just like, hey, if I qualify, if I have a high deductible insurance, I could put for a family over $7000 a year into an HSA. I get a deduction for it, it grows tax free. If I use it for medical, I don’t pay any tax at all. I could eventually even make that thing.
That’s not the one I can roll into a Roth, but it’s treated just the same. Eventually, I lose the 10%. I think at 65, I don’t have any penalties for taking it out for anything other than medical. I pay tax on it when it comes out if I don’t use it for health, but we know we’re going to have health expenses. You can use it for deductibles, you can use it for out of pocket expenses. You could even use it for certain types of premium.
There are rules there, but you’re looking at that as an opportunity against your W-2. Otherwise, the name of the game is businesses, and that 1099 falls squarely within that definition. If you have both, it’s usually good to sit with a tax professional and figure out whether you can wipe out a whole bunch of the stuff you’re incurring that you don’t get to write off otherwise by using that 1099, even if you zero it out.
A lot of you guys might be surprised to find out that you don’t pay any tax on that income and it’s still in your pocket. How did that happen? You got $20,000. I thought I had to pay tax on that. If you had a bunch of expenses you never got to write off here, we got it out back out to you tax free.
Here’s a fun one. “Just starting my business of a mortgage broker. I own a single family rental about an hour from my home. Can I take a tax deduction mile expense if I use the vehicle for both businesses? What about taking deductions for one car for mortgage business and take deductions on the other car for rental property?” It sounds like they have two cars. Do we need to get that technical?
Eliot: Not necessarily. No. Often, we’re going to recommend, first of all, that your vehicles be titled in your personal name. What that’s going to do for us here is travel to your rental, usually we’re going to deduct that. I can’t remember what line. I think it’s line five on Schedule E. You can typically deduct that at $65.5 a mile or whatever. I think it’s $66.5 right now for 2024. I can’t remember exactly. But nonetheless, you’ll be able to deduct mileage. We’ll get the exact number here.
For the business, if that business is taxed as a corporation like an S-corporation or a C-corporation, we have that accountable plan that we were talking about earlier there, you can get reimbursed that amount. If you drive maybe a hundred miles for business, you can turn that in for reimbursement for approximately $66 or so. That’s money is back to you in your pocket tax free while you get a deduction on your return. Very hard to beat that.
There’s opportunity here. We just typically are going to recommend that you have the vehicle in your personal name. You could if you wanted to do one vehicle for the other, but you don’t need to. Because it’s titled in your name, you’re allowed to use whatever vehicle you want, whenever you want for whichever business.
Toby: Yeah. That mileage reimbursement as we’re sitting here right now is 67¢ a mile. The IRS puts it out and updates it throughout the year, depending on whatever the gas prices are doing, oil prices. I look at it and say, you have two vehicles.
Here’s the problem. Unless you’re going to dedicate one to business, there are actually two ways you write off a vehicle. (1) Mileage and the other is the actual expense methodology, where you’re writing off the vehicle, writing off anything that you do for business, putting it into it, oil changes, things like that. But you got to track personal and business use, and make sure that your business use is over 50% of that vehicle. When I see two vehicles, it makes me a little nervous.
(2) If I travel between my home and a rental property, I don’t have another business, and I don’t have a home office, then that’s commuting and I don’t get to write it off. If I am traveling between two businesses, if I have a home office, anything I’m driving to that’s business or investment related, I’m attaching to that income. For the investment income from the rental, I would offset with that 67¢ a mile that I am incurring driving to the rental.
For the mortgage broker business, I’m using those 67¢ a mile when I’m driving around. I don’t know what I’m driving around for as a mortgage broker, but maybe it’s to go to meetings, maybe another office. Maybe you have a couple of offices you’re driving in between, including a home office or an administrative office for your home. We call them the same thing, but they’re different from a tax perspective. All of those miles, we get to add up. It starts really really adding up, but that would go against that income.
You got to be a little careful. Sometimes we have stuff that’s not super profitable. In the rental income, for example, you’re going to be writing off a depreciation. You may be at a negative number, and now we’re throwing some fuel on that fire. We’re just adding more negative number. We don’t lose it. But if I am in my mortgage business, I’m probably having taxable income. Boy, it looks really good. If there’s a push, I want that. I want to be writing it off under there.
If more than 50% of a car is being used for that particular business, I’m probably looking at the actual expense method and see, is there a reason that I wouldn’t try to write it off even faster? Both are great. I tend to do mileage.
By the way, if you’re doing mileage, use MileIQ. It’s an app you put on your phone. It tracks your GPS, where you’ve driven. You get to swipe left or right to say whether it’s a business trip or a personal trip. It remembers. If you’re driving between your home and a rental property, it’ll remember. What’s the QuickBooks one, Troy? QuickBooks also has a pretty good mileage tracker. What is that one? Is it just QuickBooks?
Troy: Yeah, it’s through QuickBooks. It’s very similar to MileIQ. I would recommend it if you’re using QuickBooks online and don’t want to pay $2 a month or whatever it is for MileIQ, then QuickBooks is a good one.
Toby: Perfect. If you’re using QuickBooks Online, then use the QuickBooks one because it sounds like it’s free. Otherwise, use MileIQ if you’re not using QuickBooks Online. It’s a couple few bucks a month, I think. Well worth it if you’re tracking any mileage.
Just to give you an idea, if you do 10,000 miles that are business miles, that’s $6700 that you write yourself a check for. It’s deductible to the business that you get to take that money, put it in your pocket, non taxable. That’s exactly how it works. Anything else on that one?
Eliot: No, I think that’s it.
Toby: Fun. All right. “If I purchased a property to rent it or have it as an Airbnb and did a lot of work in 2023, can I claim all the expenses for the 2023 tax year, even if the house was not rented at all in 2023 because the work is estimated to be completed in Q1 of 2024?” In English, they did a whole bunch of work in 2023, but the property wasn’t in service yet. Can I write that off in 2024?
Eliot: You can in 2024, but we can’t go back to 2023 when the expenses were incurred because it wasn’t placed in service. If we don’t have it available for rent yet, we can’t take any real deductions of this nature until it is placed in the service, which sounds like it’s Q1 of 2024. So it’s going to be a 2024 expense that will show up.
We just have to wait till it carries over. I can’t think of what we call it. It’s inventory, if you will, until it’s placed into service and things like that. If it happened to be that you did have it available for rent at the end of 2023, but it just didn’t get rented, it was, in a sense, placed for service even though it didn’t get rented, then you have an argument to take it in 2023 when it was incurred. But it doesn’t sound like that was the case here.
Toby: A lot of times, when somebody is getting properties, especially if we’re doing cost segregations, we want it in service in that particular year, because now we get to write off all the bonus and everything else in that particular tax year. As we sit here today, our bonus depreciation amount—I’m not going to get too technical. I’ll go down a rabbit hole. If I’m doing a cost segregation on a property, I’m breaking it into five, seven, and 15-year property, plus it’s 27½ or 39-year property. Probably just lost about half of you.
I’m writing off the stuff that is five, seven, and 15-year right away. I can write off up to 60% of it in year one using what’s called bonus depreciation, 168(k) of the code. If I had that same piece of property and I put it into service in 2021, 2020, or 2019, I could write off 100%. They may change it even for 2023, believe it or not.
The House has already passed legislation, and Senate is supposed to take it up anytime to pass the Child Tax Credit. It also includes a provision to increase the bonus depreciation to 100%. If that occurs, then we could write off a whole bunch of stuff in the year that we put it into service.
Eliot: Going to get busy.
Toby: Yeah. But right now, the difference between 2023 and 2024 is 80% bonus versus 60%. It could be a moot point. But if you had a bunch of income in 2023, you might be jumping at the bit going man, I would love to be able to take it. It’s going to be 2024 because it’s not in service. It’s not when we buy something, it’s when we make it available for rent.
I noticed I didn’t say it’s rented. Once it’s available, it’s in service. Anything that is five, seven, or 15-year property, even if it’s one day that you put it into service is deductible in that particular year. So we’re few months behind. If you’d gotten it into service and we had some tenants in 2023, we’d be writing it all off in 2023.
Based off of this fact pattern though, I think you’re looking at 2024. Pretty solidly, I don’t think there’s a way unless you actually had it rented in 2023 and then decided to do your rehab, but then that’s between you and your accountant. Some people would say if you take it out of service and then incurred an expense that I wouldn’t let you write it off either.
Eliot: Yeah, I’ve seen it go both ways on that.
Toby: Again, we love tax, but you’ll understand that tax is sometimes shades of gray. You got to be able to navigate it and try to get it as close to black and white as humanly possible. That’s why you’re here. We’re trying to give you some good guidance.
All right. Speaking of good guidance, go to the Tax and Asset Protection workshop. We have two coming up March 2nd and March 9th. Those are virtual events. They’re free. The live event is a four-day workshop in Orlando. There’s a small fee. If you click on it, it’ll show you what the discount is. It’s less than a thousand bucks. It would be great to have you come out to a live event.
If you haven’t been to a live event with Anderson, they’re actually a lot of fun, not just because we bring out some really cool speakers that are in everything from real property to storage, to manufactured homes, multifamily, we bring stuff like that, but we are also getting into the meat and potatoes of land trust, deed transfers, LLCs, corporations, series, you name it. We’re diving into those topics for four days, and you’re surrounded by a bunch of investors.
Everybody has a fun time because, hey, we’re all a little weird if we’re doing investing and bookkeeping. Troy is speaking on bookkeeping. Yes, Troy does a fantastic job. It’s a four-day event, but how many of you guys have been to our live tax and asset? Give me a thumbs up and just let me know how many of you guys.
Eliot: There they come.
Toby: Yeah, here we go. It’s always a delay. I see one thumb. There’s a bunch. All right. We would love to have you back, and it’s always fun. Somebody says I need a bookkeeper. You need to come to Orlando and meet Troy. We have a whole team. Troy leads them up, there’s about 500 of us here. All right, let’s get into the questions again. I thought we were done.
Eliot: Nope, we’ve got three more.
Toby: Never. I’m just teasing. We never get done before an hour, I don’t think. I should never say never.
“Can I make charitable contributions from my business, LLC, income and take it as a business tax deduction? Due to the standard deduction, I can’t deduct them from my personal return.”
Eliot: This is a great question because intuitively, one thinks, well, I made a lot of donations. Can I deduct it? That’s not always the case. As we start out with the first question of the day, this is an it depends. That LLC is going to depend on how it’s taxed. If it’s a C-corporation, then the C-corporation can deduct up to 10% of its net income. It used to be 25% during the Cares Act, but they’ve moved it back to the traditional 10% of your net income.
In other words, if you had net income of a hundred thousand prior to the donation by the C-corp, you’d be able to deduct a 10% or $10,000 on the C-corp return. But that’s not going to help us on our personal return, which you’re talking to as far as the standard deduction, your Schedule A.
If it’s anything else on that LLC, if it’s disregarded to you, if it’s a partnership or an S-corporation, especially a partnership in S-corp, any donation you make is going to be what we call a separately stated item. That means it comes back onto your 1040, and we get right back where we started as if you had personally made the donation. You’re not going to see an effect unless you are past the standard deduction in your itemizing. The real trick here is you’re going to have to itemize. Otherwise, if you want to see some effect, it’s going to have to be a C-corporation, and it is going to be limited to 10% of the net income.
Toby: I would say that what you’re talking about is charitable contributions. If you want to pay for something where you’re getting something of value, like, hey, I want to support this church, and you buy, great, put my name in the weekly flyer, or post it as thank you to Toby’s pizza shop, that’s advertising. Now I’m getting something of value back and it’s not a charitable donation anymore, that could be a business expense.
I just want to throw that little curveball at you that if you don’t get to write it off as an individual, and you’re like, gosh, I would love to get some money to an organization, get creative with the organization and say, great. I need to get something of value. Say, hey, my dorky lawyer on the computer says, somehow I need to get some benefit from this, so I’d like to sponsor something or whatever, so that I can write it off as a deduction. Whatever the organization is, it still isn’t going to be paying tax. They’re still going to be exempt. There’s always the question of UBIT and all that fun stuff that they get wacky on.
Eliot: Don’t go into details.
Toby: All right. Enough of that nonsense. Somebody is talking about Troy’s dogs, Elton and Olivia. Troy does have dogs if you guys know who Troy is,. You heard his voice. He was like speaking from the heavens a little earlier, and he is going to be out in Orlando with us teaching bookkeeping. He does have cute doggies.
I’m a cat guy. I just had to turn in my man card, but I still like my kitties. They’re naughty. They’re getting shaved right now. I make them into lions because they’re vicious little Persians. They look like a Q tip.
All right. “I started regular 15-year depreciation for a capital improvement of rental property in 2021. Didn’t know any better. Can I switch to bonus depreciation and claim the remaining amount in 2023?”
Eliot: A little maybe confusion on what was going on with this initial asset that we called 15-year. But whatever was the circumstance, in 2023, what you can do is file what we call a 3115. If we need to change the form of accounting, let’s say we do a cost sake or something like that, you certainly can catch up all of that, take advantage of bonus depreciation, et cetera. There is an opportunity to work with this. Yes.
Toby: To me, the reason I say this is because there’s no such thing as regular 15-year depreciation of capital asset. The default is they’re going to go under a modified accelerated cost recovery system or MACRS, and they’re going to say it’s 27½ year. If it’s a residential property, if it’s commercial or non residential, it’s 39 years.
If you do a change of accounting, or if you just do it right from the get go, you break out the five, seven, and 15-year property from that 27½ or 39-year property. It’s called cost segregation. If you want to learn about cost segregations, I just did a video with Erik Oliver over at Cost Seg Authority. It’s on my YouTube channel. Patty might even be able to grab that. It was probably from a week or two ago, Patty. It’s me and Erik waxing philosophic about 45L and 179D in cost segs.
If this is a 15-year property and you had already done the cost seg, then you have to take the bonus in the first year. There’s no 3115 anymore because there’s no change of accounting. It was accounted for properly. You were supposed to write it off as a bonus unless you opted out. If you didn’t opt out, then guess what you’d do? I think you’d go back and amend, right?
Eliot: If we’re going back…
Toby: You assume that they’re accounted for correctly. Assume that they’re writing off their five, seven year, and 15-year property and that they mistakenly put their 15-year property.
Eliot: Yeah. I think you could amend on that.
Toby: Yup. Isn’t that crazy? If you’re a platinum client, talk to us. We’ll take a look at your situation, we’ll give you guidance. If you’re not platinum, you can still reach out to us, but we probably won’t talk to you. I’m just kidding.
If you’re a platinum client, we answer those questions as part of being a platinum client. If you don’t know what that is, feel free to reach out. Our folks will explain it. It’s inexpensive, unlimited tax, unlimited attorney, and less than a hundred bucks a month, cheap. For these types of things, that’s what you’re doing. You would literally just come in and say, here’s my scenario. We’ll look at it. Or whatever tax filings you did., we’ll be able to give you guidance.
This type of deal can make a big impact. If we make that 3115, that change of accounting election, and that property was put in service in 2021, you have 100% bonus. Whatever the value of that, you could be taking as a deduction. If it’s a $50,000 improvement, you’re talking about a $50,000 deduction just like that, which can have a pretty big impact on your tax bill.
All right. “Are any home improvement projects tax deductible?” Eliot.
Eliot: At its base level, no. But if you happen to have a home office or again, as we’ve been talking about here and there throughout the day, if you had administrative office because you have a C-corporation or an S corporation, then your home improvement projects will be deductible in the sense that if it’s directly related to the office, we’re in a small room right here in the studio. If it was a new carpet in here or the walls directly related to it, that’s 100%. If it had to do with the whole house, you’ll take a percentage on that expense based on how much area your office has taken up your whole house. Yes, in that case. Otherwise, typically not.
Toby: I will add one thing because you’re absolutely right. If you’re going to house hack and you’re going to make it a rental property, just that room, we could allocate it over there, you’re going to get a deduction for a portion of the house. Whatever percentage that it’s being used, you’re going to be able to depreciate. But if you did have some expenses that were attributed, I guess you wouldn’t really isolate it out.
Let’s say that you had one room, 10 by 15, that you were renting out in your house and the rest of the house, 2500 square feet, you’re going to have a small portion of the house that you’re depreciating. You’d get a deduction in an offhanded way.
Somebody says, what about solar and heating energy improvements? It’s really weird. You get the tax credit regardless. It’s 30%. If it’s being used for business, if this was a rental property, then you would subtract off half of the credit from the basis, and you could accelerate that depreciation with the proper 3115 election. We’d write that whole puppy off again. We’d get an 85% deduction, and we get a 30% tax credit. Start doing that math.
I’ll do it for you. You put a $100,000 solar unit up. I know you guys were like, no, I never do that. Okay. Let’s say you have a little quadplex or something. I put a $100,000 unit, I get a $30,000 tax credit, not a deduction, credit. $30,000. in my pocket, and then I would write off $85,000 because I’d take half the tax credit, $15,000, subtract it from the basis, $100,000. I have $85,000 and I would write that puppy off, boom, just like that. I’d get a $30,000 tax credit, $85,000 deduction for putting in a solar unit on a rental property, even if I financed it.
A lot of times, they pay for themselves just through that. I’m always shocked. I’m looking at solar going, until they get it to where somebody can’t steal it or destroy it, I’m not necessarily putting it on the rental. If you put it on your personal home, you get the tax credit. You don’t get the deduction because it’s not investment property.
Here’s the deal. Personal property, you don’t depreciate. Your personal home, I don’t depreciate. Investment property, I depreciate. If I have a home that has a portion of it that becomes investment property, I’d depreciate. If I have an employer that is reimbursing a portion of my home, even if that’s my own S-corp or my own C-corp, they are reimbursing me as though I was depreciating my house, they’re reimbursing me that portion, that’s how you get money out of your company tax free. It actually works like a charm. That’s in our tax toolbox. We go over that during TAP, the Tax and Asset Protection, but those ones are also great.
“If you have a home office, wouldn’t you be able to add the home improvements to the basis?” Yeah, but you would use a portion of it for the home office. Sorry to talk over you, but let’s just say that this place here was in a house. It cost us $10,000 of improvement to make this usable for business. I’m writing off 100% of that, because it’s 100% being used for the business. I’m reimbursing myself that cost.
Assume that I did $10,000 of improvement to the house, say I put a new roof on it, and I’m using a room, let’s say it’s a three bedroom, and I have a couple big rooms, so I call it a five-bedroom house, and I could reimburse 20% of that cost for my business, then I’m factoring in as though I’m depreciating that roof, and I’m getting to reimburse myself tax free money. It’s bizarre, but that’s how it works.
You could actually be getting, in some cases it’s $5000-$6000 a year from your business. That’s like, here, thank you for letting me use a home office. You don’t report it on your 1040. It doesn’t say home office. It’s actually an administrative office in your home or an office at the convenience of an employer.
It is literally reimbursing you for everything from the property taxes, mortgage interest, cleaner, your utilities. It’s adding it all up. We’re giving you a check for whatever percentage, in that case, 20% if it’s one out of five rooms. You can only do that if you’re an employee of an S-corp, C-corp, LLC taxed as either or a non profit. It has to be a corporate entity, then you can do things like that.
Eliot: It’s a deduction to the business as well.
Toby: Huge deduction. Business deducts it and hands it to you. I’m just handing Eliot cash. Where do you report that?
Eliot: I don’t.
Toby: Yup, and I write it off.
Eliot: I go down to the strip.
Toby: Yup. That’s how that works. Guys, if you like that stuff, I should probably do a video just on the home office. That’s what I’ll do. I needed an idea. I’m going to do that. By the time you see this again, we’re going to get this, I’ll send that puppy out and make sure everybody has it.
All right, go to YouTube. If you want that, here, I’ll give you guys a little incentive, a little hook, sign up and ring the bell. Ring that little bell, subscribe, ring the bell, and you’ll be notified when I do the video on the home office. It’ll be how to write off an office in your home. I’ll probably call it that. I’ll show the different ways that you could do it, because we like to put money in our pocket and not that we don’t trust Congress and government with our money.
Eliot: We trust Toby more.
Toby: In case anybody’s listening from the NSA, we love our government. All right, Tax and AP, make sure you register. If you have questions in the next two weeks, email them because Eliot’s going to read them. If it’s really cool and we like it, then we’re going to throw it in here. You’re going to be going, hey, they’re reading my question. That’s always fun.
“Would a home photo studio for a retail online store work for a deduction and reimbursement?” Maggie, yes if they’re willing to reimburse you. Sometimes this is a negotiating thing. It’s like, hey, rather than just pay me, could you also reimburse my photo studio that I’m using for your benefit. That’s tax free money versus if they paid you, then that’s not. But if they paid your business, and your business now has to pay you as an individual, you could do it that way, but you’d have to set up an S-corp, a C corp, or an LLC taxed as an S or a C-corp.
Isn’t that fun? Now you start realizing, hey, to get from A to Z, sometimes I have a whole alphabet in between that I could use to get myself there. It’s a ton of fun. Sherry, great to see you. People in the chat, we know a bunch of them, so it’s always fun to say, hey. I’m across the way.
Anyway, taxtuesday@andersonadvisors. Shoot your question in. Visit us at Anderson Advisors. We’re always doing events and we’re always posting out lots of information. I want to say a big thank you because I have a whole team here, Matthew, Ross, you heard Troy, and there was Jennifer. They’re over there. Tanya, Ross, Jennifer, Jeff, Jared, Dutch, Barley, Arash. Patty, you called the whole crew. They answered 172 questions, 173. Wow. You guys killed it.
There are 12 questions still open. What I’m going to do is bid you guys farewell and say thank you for joining us at Tax Tuesday. If you are waiting on an answer, just hang tight. They’ll answer you, and we won’t stop the feed until we answer the very last question. We’ll make sure that we get you an answer, guys. Thanks again to all the team for doing all you do.
They don’t get paid to do this. We just do this because we think it’s fun, and we like sharing this type of information. If you think anybody could benefit, by all means, invite them to the next one. They are absolutely free, and you can watch it on YouTube, or you can register. It’s always great to have lots of folks joining us from all over the country. It’s just a kick in the pants. Thanks Eliot for all your help.
Eliot: Thank you.
Toby: We’ll see you next time.
