Welcome to our last Tax Tuesday for 2023, where tax experts Eliot Thomas, Esq., Manager of Tax Advisors at Anderson, and returning guest Jeff Webb, CPA, CFO of Anderson Business Advisors share their expert advice on topics like crypto taxes, reimbursement for moving expenses if you’re in the military, and investing in real estate with your IRA. You’ll hear how to protect yourself when flipping houses, by creating the right kind of entity to hold those properties. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- “How can training costs including travel be tax deductible? If we got some costs regarding starting up our corporation, maybe some education or something like that, can we deduct it? If so, how?” – training costs can be deductible in certain cases.
- “We’ve been engaged two years. I want to get married in July of 2024. I make $85,000 a year, and he makes $120,000 with W-2 jobs. I’m wanting to become a real estate professional next year and make income from my for-rentals. Am I able to keep more of his income if we file jointly after we’re married? What type of strategy would help him keep more of his money?” – There’s a lot that can be done here – retirement plans, S-corp, hiring your spouse, etc.
- “Once the purchase of a property is finalized, should cost seg study process be started immediately after? And can you double dip the cost segregation process, meaning before and after upgrades/repairs?” – If I am not a real estate professional. If I do a cost seg, I might just be creating a giant passive loss that I can’t use…
- “Does depreciation taken from a syndication have to be paid back when the property is sold?” – You will receive a K-1 from the partnership that is a syndication, and it will show your gain on the property. Yes, you’re going to have to recapture.
- “Are there advantages of investing in trading securities, stocks, bonds, commodities, futures, et cetera, in an entity account rather than in an individual account? Any kind of benefits, maybe setting up certain structures for that?” – There is, and it primarily comes from income shifting.
- “How do we do real estate investing if we have an IRA fund?” – You can invest, but you cannot be involved in any way in the running of that property
- “When are crypto earnings taxed?” – It depends on where the income is coming from.
- “As a member of the armed forces, are my travel expenses from overseas location back to my property location stateside tax deductible? If we’re doing some traveling there, we’re in the armed forces, what can we do as far as any deductions if possible?” – If you have overseas travel on a change station, make sure you’re seeing an accountant to do your taxes that knows what the heck he’s talking about and what you’re doing.
- “Is it better to have a separate entity for flipping, such as an LLC or corporation, or should I report it as an individual?” – do not flip in your own name. There’s plenty that can go wrong…
- “I am a new real estate agent. Does the time I spend searching for a property in my local market, including travel time, and my family count towards the 750 hours needed to qualify for rep status, even if we end up not buying the property this year?” – first of all, we can’t use travel time usually as far as rep status.
- “Is it possible, feasible, or legal to incorporate yourself and transfer all your assets to the new company while also deducting expenses used to support the new business, in other words, yourself?” – No, you can’t make your personal expenses into business expenses. The real answer is just a flat-out no.
Resources:
Tax and Asset Protection Events
Full Episode Transcript:
Eliot: I’m Eliot Thomas, manager of the Tax Advisors here, filling in for Toby, who is doing some other filming right now, but we’ll have him back before long. I’m joined by Mr. Jeff Webb.
Jeff: Hello, and today is our last Tax Tuesday for 2023.
Eliot: That’s it. Yup, we’re kicking the year away. Happy for that. Anyway, again, Tax Tuesday here. We’re bringing the tax knowledge to the masses, as Toby says. As far as our other rules here, as far as Tax Tuesday, remember these are all driven by questions that you’ve submitted through our Tax Tuesday website. We picked the 10 or so commonly asked questions usually, or if there’s one that’s really unique, I try and throw that in there as well.
These were taken from a sample of things that a lot of people were asking a lot of questions about, similar questions. We try and get a spread approach there to as many people as we can. We always thank you for sending the questions in. During the program here today, if you have questions, please go through our Q&A section in the Zoom. You can ask them live.
We have a lot of our staff here. I can’t see all their pictures, but we have Tanya, Troy, Ross. I know Amanda was there. Of course, we have all of our tech staff behind the scenes helping out. Feel free to put those questions in there. After, if you want your questions to be put on the show, please email to taxtuesday@andersonadvisors.com. That’s where we pick them from every show.
If you need a detailed response, you do need to become a Platinum client or a tax client. If we don’t get through all the questions here today, we do submit them through the Platinum portal for Platinum clients so that we can get those answered.
We try and make it fast, fun, educational. We cover a lot of tax items. It’s just our way of giving back to our clients and to the general public to try and get a little more tax knowledge out there. As far as some other things, just some of the questions we’re going to have here today.
Jeff: Like he said, you put your tax questions in the Q&A. You can use the chat just to make comments and to make sure that everybody is actually hearing us. Can you put where you are at right now, city and state, in the chat section?
Eliot: New Mexico.
Jeff: Some people have this already ready, waiting around Toby to say it.
Eliot: I saw Dakota in there.
Jeff: Now they’re flying by. We have people all over the place, and we are glad to have you. Some clients, some not clients.
Eliot: Yeah, this is for everybody, not just clients. We take questions regardless of whether you’re a client or not. Denver, Colorado. I got a family there, I used to live there myself. Vegas, solid. Always liked that. Anyway, should we go through the questions?
Jeff: Yup.
Eliot: All right. First question, we’ll come back. We’re just going to list out the questions here, and then we’ll come back and address these. “How can training costs including travel be tax deductible? If we got some costs regarding starting up our corporation, maybe some education or something like that, can we deduct it? If so, how?” We’ll address that.
“We’ve been engaged two years. I want to get married in July of 2024. I make $85,000 a year, and he makes $120,000 with W-2 jobs. I’m wanting to become a real estate professional next year and make income from my for-rentals. Am I able to keep more of his income if we file jointly after we’re married? What type of strategy would help him keep more of his money?” We hear that a lot. We got a lot of strategies related to that. We certainly will be able to throw a lot at that question.
“Once the purchase of a property is finalized, should cost seg study process be started immediately after? And can you double dip the cost segregation process, meaning before and after upgrades/repairs?” We get a lot of cost seg studies. A lot of that in tow from what we’ll discuss in question number two there. Just an added information there we threw on a cost seg question.
“Does depreciation taken from a syndication have to be paid back when the property is sold?” That’ll be a good question.
“Are there advantages of investing in trading securities, stocks, bonds, commodities, futures, et cetera, in an entity account rather than in an individual account? Any kind of benefits, maybe setting up certain structures for that?” We’ll address that.
“How do we do real estate investing if we have an IRA fund?” It’s something that we get asked quite a bit. And there was a lot of questions about that in solos as well. We’re investing in real estate.
“When are crypto earnings taxed?” If we do crypto currencies, a lot of different things that we can be doing with crypto, and that may have an impact on how they’re taxed. We’ll address that.
“As a member of armed forces, are my travel expenses from overseas location back to my property location stateside tax deductible? If we’re doing some traveling there, we’re in the armed forces, what can we do as far as any deductions if possible?”
“Is it better to have a separate entity for flipping, such as an LLC or corporation, or should I report it as an individual?” I see this one quite a bit, and there might be some significant consequences there, so we’ll address that.
“I am a new real estate agent. Does the time I spend searching for a property in my local market, including travel time, and my family count towards the 750 hours needed to qualify for rep status, even if we end up not buying the property this year?”
Lastly, just a bonus question here. “Is it possible, feasible, or legal to incorporate yourself and transfer all your assets to the new company while also deducting expenses used to support the new business, in other words, yourself?” Actually, we used to see that question a lot about five, six years ago. Jeff and I were just talking about that, so we’ll threw that one as a bonus. That’s cause it’s a kind of a unique question. We’ll hit that.
All right. Before we begin, just a reminder, always go to our various YouTube channels. Toby has now 728 videos, and he is cutting some more right now as we speak. He’s always adding to that. Make sure you look at it. YouTube videos, Toby Mathis and Anderson in general. We have our YouTube channels.
Jeff: Please subscribe to Toby, he has his channel. Clint has his channel. By subscribing, you’re not committing to anything. It’s just going to notify you every time Toby or Clint put out a new video. You can look to see what it is and say, oh yeah, that’s a good one, I need to watch that. Or, eh, I don’t care about this particular subject.
Eliot: But at least you know it came out.
Jeff: Right.
Eliot: Exactly right. So make sure you subscribe just so you know the ongoings, and we put a lot of information out there. Clearly, the partners are busy cutting those videos, so usually a lot of good content there. We also have our tax and asset workshop. We just finished up one here, not too long ago in Vegas.
Jeff: The live event?
Eliot: Yup. We have the taped one as well, come out here December 27th of the tax and asset protection workshop. That’s going to be, again, virtual. I’ll be online. Shortly thereafter, January 6th as well, I’m sure we’ll have some live ones again in 2024, although I have not heard of any dates.
Jeff: No, I haven’t either. You did say taped. It’s not taped, it’s just virtual.
Eliot: Excuse me, live and virtual. All right. Again, subscribe to our YouTube. You can do so at aba.link/youtube. It has a lot of replays, et cetera, for our Tax Tuesdays as well. A lot of information, a lot of videos, so on and so forth.
All right, getting to the questions. Jeff, “We have training costs, including travel. Can it be deducted?”
Jeff: The training costs can be deductible in certain cases. Mostly, I’m going to say on a C-corporation, it’s a more likely a place to do it. I’m going to go to my father-in-law example. I’m a pipefitter, I go training updates to control systems and stuff like that, and I have my own Schedule C, self-employed. That would be deductible. That is a legitimate training cost, because it has to do with a business I’m already doing.
It’s not deductible if you’re learning how to sell or do real estate. We had one person tried to deduct their medical school from three or four years ago as a startup expense. It didn’t work. Training is very particular. Usually it’s a startup expense for the corporation, but what about travel? It’s got to be business travel.
Eliot: Yeah, it certainly does. There’s a definition to what that is, and it does matter if we’re traveling in the US or international. We’ll see a little bit of that later on in one of the questions. But travel typically, if the training itself is deductible, more than likely the travel will be as well. You hit on it. A lot of times, the training part, education, et cetera, is a new line of business. It’s one of the big focal questions that we look at.
The unique thing here in the tax code is that, what if it is a brand new business starting this? We often will set up a C-corporation. You made mention of that, that’s where we can. We can train employees on that C-corporation, take that deduction right away the first year. It doesn’t matter if it’s a new line of business as much.
There is an avenue. Typically, if the training again, if it’s going to be a legitimate deduction, likely the travel will be as well. But we’d have to look at some of the tests we look at there if we’re within the US. Was more than half of your days while you were traveling, were they business or not ? And the business day is what?
Jeff: More than half of that day?
Eliot: More than half of that day, four hours in a minute, we call it. As long as you have that, that’s a business day. If you have more business days than personal, then typically that travel will be deductible. If that was going with our training costs and it was for a new line of business, but we were doing it in a C-corp, yeah, we’d be able to deduct all that.
Jeff: Hypothetically, I go to Orlando. I have four morning sessions that cover just over four hours of training for the first four days I’m there. But I’m there for a week, and I spend the last three days going to Epcot and Disney. So you’re saying that whole trip?
Eliot: Yeah. The costs getting down there, the cost coming back, the hotels, typically would be deductible and have 50% of the meals.
Jeff: Because you’ve met that standard of half your week or half your time.
Eliot: Yup. More days than not being in business, which Jeff said. So we’re four hours and a minute. International is a little bit different. Typically if it’s less than a week, you just have to show that travel is your main purpose, and that’s a little bit of a unique test there. But if it’s over a week international, then you have to have 75%t of the time, or 75% of the days have to meet that same standard. As you can imagine, the IRS is a little more picky on that, so you want to have good documentation for it.
Jeff: All right, I’m going to throw out a question that we sometimes get. I’m a doctor. In order to get my CME, my certified medical education for the year, I take a cruise where they teach it every day. Are there issues there?
Eliot: There are issues. Whenever we bring the cruise ship into play, we have a lot of different factors. There’s, first of all, an overall limit to how much we can deduct annually on a cruise ship. There is also a requirement that it would be registered under the US flag, which most cruise ships are not.
Jeff: Most cruise ships are not.
Eliot: Yeah, for insurance purposes. You’ll see that they’re from Bermuda or something like that. There’s a lot of things that really prevent us from deducting those related costs. You can use it as what I call a water taxi. The IRS gives an example of that in the publication, basically.
The taxpayer is going from New York to London. It’s using it as a taxi to get them there or an Uber in the modern world. There are certain per diem deductions that you could do. There’s an overall limit, but it’s just being used as a purpose to get to a business meeting on the other side of the ocean, so that’s a little bit different.
You got to really watch the fact patterns on. When the cruise ship gets involved, during Covid, it made our day very easy because those were pretty much devastated. Now, as people are starting to take cruises more often, we do get a lot more questions, and we have to be careful what’s going on in those facts.
All right. Let’s go on to number two. “We’ve been engaged for two years, want to get married in ‘24. I make $85,000, he makes $120,000 with W-2 jobs. Wanting to become a real estate professional this year and make income from for-rentals. Am I able to keep more of his income if we filed jointly and are married? What type of strategy would help him keep more of his money?”
Jeff: Okay. I want to look at the real estate professional first. If she is just a real estate agent working for somebody else, are her hours going to qualify her?
Eliot: Probably not. You have to own at least 5% of that corporation or business.
Jeff: What could she do? Could she create an LLC and…
Eliot: Taxed as an S-corp? Often our clients to do that. When she owns her own and gets her commissions coming through the S-corporation, yeah.
Jeff: Now she asked about, can I save money, save him taxes? First off, once you get married, you have to file married. It can be either married filing jointly or married filing separately. I will tell you up front, married filing separately is almost always a bad idea.
Eliot: Yeah. Married filing joints, most often, what you’re going to want to do, if she does this, becomes a rep status. She’s getting some hours from being a real estate agent. She’s got her own S-corporation. Let’s just say for the sake of argument, we get it, and we have these rentals. Are there things that we can do with those rentals that maybe create some kind of loss that would offset the husband’s W-2 income in this case?
Jeff: First off, we have the cost segregation. What we don’t talk about much with the cost segregation is let’s say I have one rental property, and I cost segregated. I get a big deduction this year. What about next year?
Eliot: Not as much of a deduction. That does level out as far as how much deduction we have from depreciation. But we have four of them, so maybe we would do it on another unit. Perhaps, there we’ll really get into the facts, whether or not it would pay off to do this or not, but it can be done. If that’s your only job profession in the real estate trade or business, then more than likely, yes, you could take advantage of this with a cost seg and things like that.
Maybe you pick up a new property. There’s always the short term rental we talk about. If you’re so inclined, you got a short term rental, you’re the one who manages it, and directly you put more time into it than anybody else, we call that material participation. We meet all that, then typically you could do the same thing, have a heavy depreciation deduction on it. That depreciation will often cause a loss that year, because it’s a really big deduction. And that loss would offset your spouse’s W-2.
Jeff: Often I see somebody who has four properties, and they go out and cost segregate all of them.
Eliot: Yes. Finding a fault with that?
Jeff: A couple years ago, that may have been okay. But since we now have limitations on NOL carriers and so forth, this is something that really takes a little more planning on your part or with an accountant. I’m figuring out, how much deduction do I need to get each year? To be honest, you don’t want to eliminate all of your income. If I can pay it in the 12% bracket, I’m hunky dory with that.
Eliot: Yeah, it’s a victory right there. To that point, if we have enough loss to go around, if we could get some of it to the next year, still bring down our overall income from a higher bracket, it’s not always the best thing to just eliminate all the income as Jeff points out. But that’s all calculations.
Jeff: What else? Do you see anything off the top of your head that they could do? I’m assuming these are all long term rentals. If you do short term rentals, you don’t have to be a real estate professional.
Eliot: That’s right. Make it a lot easier. The real estate professional status typically is a little more involved. But if it is a short term rental, we have a different standard, the material participation standard, which is generally speaking, “much easier”. I say that in quotes, because I hear from our clients who are doing short term rentals, I think Clint one time mentioned that he had done it, and it’s not that easy. There’s a lot of stress to the short term rentals sometimes. But if you do and you materially participate, you put more time in it than anybody else, then we can get that same tax effect as if we had rep status with a long term rental.
Jeff: I know the partners are talking about and are doing pad splits. They’re making really good money on them, and you can still cost segregate those. Do those fall under trade or business, or are they still long term rental?
Eliot: That test, to my understanding, is always going to be based on the average days that someone stays there. If you have a week long contract to stay there, but you repetitively stay there, that’s considered just one stay in the long haul, so you would average it all out. It could theoretically be that you won’t know if it’s a short term rental or a long term rental towards maybe the end of the year, or you’ve gotten so far that it really is not reasonable that it would be a short term rental.
Jeff: Even though you’re making about $40,000 less a year than he is, now you’re making $200,000 a year. Not a huge deal, because the tax brackets have also gone up. The tax brackets are effectively double of what they were when you were single. I could see where with her having a lower income, where she may have pulled him down in the brackets, or you may be in the very same place. Other things you should always be doing if you have the cash to do it, maximizing your retirement contributions. It’s nothing like paying yourself.
Eliot: If we went into this, she has her S-corp set up, what kind of plans? What would she be looking at as far as retirement plans there?
Jeff: She could actually do a 401(k) out of her plan. That would require compensation. Actually this fits really nicely, because if she’s a real estate agent, she forms her own S-corporation, and the brokerage agrees to pay the S-corporation, she then pays a salary out to herself.
Eliot: Which she has to do anyway.
Jeff: Yeah. By paying a salary, she can start a 401(k) and make contributions through that.
Eliot: Exactly, right. Yeah, you solo 401(k) or even a SEP IRA, whatever it is. But you got that earned income through that W-2 reasonable wage that we often talk about with an S-corp, so it’s a win-win. A lot of potential opportunity here.
Strictly to the question, is there something I can do to help get more of the W-2 income as a deduction and take deductions against it? Absolutely. There’s a lot that can be done here, and these would be some of the strategies short term or long term.
Creating your own, you got that S corporation Jeff just mentioned, the retirement plans. There’s also a lot of deductions and reimbursements you can take advantage of in that S-corp. Just a whole lot of good things that could potentially happen for you there.
Jeff: I’m going to throw out something a little crazy. If you have an S-corporation, you’re obviously an employee, guess who else you can hire? Your spouse.
Eliot: Yeah, absolutely.
Jeff: And include them in your solo 401(k). It’s an exception to the solo 401(k) rule that spouses are…
Eliot: It’s not so solo.
Jeff: Yeah. If you wanted to get crazy, and you were just making money hand over fist through your real estate sales, you could do this. Pay him out. Even if he’s already got a 401(k) in his other job, he’s not going to be able to defer more employee contributions, but he can still get more employer contributions.
Eliot: Even if you didn’t have the S-corp, let’s just say you didn’t go into real estate, but you were just managing your own properties, you can still meet that status of being a property manager over your properties and meet that rep status. All right, anything else?
Jeff: Nope. I’ve talked enough.
Eliot: All right. “Once the purchase of a property is finalized, should the cost seg study process start immediately thereafter? And can you double dip the cost segregation process, meaning before and after upgrades/repairs?”
Jeff: Okay, this is an opinion. I’ll see if your opinion’s different. If I buy a property, and I’m not really putting that much additional money into it, just repairs and maintenance, I’ll do the cost seg immediately. Keep in mind, before you do a cost seg, can you actually deduct that loss from that cost seg? I have a full time job. Training cost.
Eliot: Exactly right. Yeah, this is a little bit different than what we had on our previous question. We’re going on the assumption that we make rep status or have material participation with a short term rental. Here, we’re not so sure that’s the case. Should we do a cost seg? First, we want to know just as Jeff pointed out, if it creates these losses that we talk about, which is typically always coming from the depreciation, that’s our real big game there, if it creates this loss, can we use that loss against our other income? That’s going to depend.
If it’s a long term rental, we’re going to want that real estate professional status, and we have to materially participate in the rental of that property, the management of it. Or if it’s a short term rental, we have to materially participate in the running of that short term rental. If we don’t do those things, as Jeff pointed out, it’s just going to create a lot more passive losses, which we likely can’t take advantage of.
Jeff: Nailed to the improvements in the opinion. I think if I have a property that I’m substantially improving, I wait till the improvements are done, and then I go to somebody like Cost Seg Authority and say, here’s how much I paid for the property, and here’s my basis in the property. Here are all the improvements I made, and you got to provide those improvements to them, or they won’t know. Would you do the same?
Eliot: I would always talk to a cost seg specialist. Usually, a lot of our clients go to Cost Seg Authority. They will be able to give you a lot more guidance on it. But I think the conventional wisdom is if you do have heavy repairs, improvements, rentals, renovation costs, you’re probably going to wait until it’s all done to do that study.
Jeff: Let’s talk about the double dipping question. From what I read, I do a cost seg as soon as I buy it. I do all the improvements when I do another cost seg, which is fine. I prefer not to do it, it’s more expensive.
Here’s how a cost seg actually works when you’re preparing it. I’m going in, looking at all the assets, and I said, oh, that fixture is a seven-year property, that carpet is five-year property. You’re actually changing the depreciation lives of these properties. If I go back in a second time for the cost seg with the improvements. The improvement lives may change. However, they’re not going to change the lives of the fixtures, the carpet, and all that. It’s not really double dipping. You’re just looking for additional assets to change the depreciable life of them.
Eliot: Yeah, we always think of double dipping meaning we took the cost deduction twice. That’s really not what’s happening here.
Jeff: Yeah, and I was pretty sure that’s not what they meant.
Eliot: Yeah, I agree.
Jeff: Although my first response was […].
Eliot: Yeah, double dip is always bad. In this context, I think it was just being misapplied. Yeah, very good. All right. “Does depreciation taken from a syndication have to be paid back when the property is sold?”
Jeff: You will receive a K-1 from the partnership that is a syndication, and it will show your gain on the property. We know that’s what these syndications do. They buy an apartment complex with the intent of fixing it up and selling it in three to five years.
Eliot: Like a flip.
Jeff: They’ll give you a K-1 with your normal rental income and all, but there will also be long term capital gain on it from the sale of the property. The number right above, that’s going to be unrecaptured 1250 gain. That’s the long way around to saying, yes, you’re going to have to recapture that. As I’ve said at previous times, your 1250 recapture is limited to the actual gain on the property. But if that’s all the gain they get, they’re not doing a very good job as syndicators.
Eliot: That capital gain, they will broken out into 1245 and 1250 property, but you have that recapture. Technically it’s unrecaptured 1250 gains is what they call it. You have to meet that first. Anything above that of extra gain, if you will, that will get you your actual more favored capital gains tax.
Jeff: That’s a really good point, and that’s something that confuses even tax preparers.
Eliot: Certainly, yeah.
Jeff: That unrecaptured 1250 gain is part of that long term capital gain. You pay the higher tax rate, and that’s 25%?
Eliot: Yes. Maximum of 25%.
Jeff: Maximum of 25% on that unrecaptured, but you don’t pay that tax again on the long term capital gain. If I have $10,000 of that recapture and $100,000 total gain, I’m only paying long term capital gain tax on that $90,000, the difference between the $100,000 and the $10,000.
Eliot: Correct. The cap that Jeff’s referring to, that 25% cap, that only goes up to whatever your tax bracket is. In other words, if you’re in the 37% tax bracket, you’ll begin a break there, because you’ll get a 12% deduction on it. It’s still a good deal. Absolutely.
How many times do we get asked that? I get capital gains, like people treat it like they’re evil. That’s not necessarily the case. Those are favored tax rates to begin with.
Jeff: That’s a great point. When I took the depreciation deduction, it was at my ordinary rate.
Eliot: Exactly right, 37% perhaps.
Jeff: But when I have to pay it back, I’m only doing it at 25% or possibly lower.
Eliot: Capital gains, don’t be scared of them. They’re still a good thing. A gain’s a gain. That’s a good thing, like people are upset because they get income. That’s not a bad thing.
All right, next. “Are there advantages of investing in trading securities, stocks, bonds, commodities, et cetera, in an entity account rather than an individual account? I’m trading as an individual, probably all of that’s going to go to my 1040. I’ve heard Anderson talk about maybe putting it through a certain entity structure and things like that. Is there any benefit to that tax wise?”
Jeff: There is, and it primarily comes from income shifting, which is also another nasty work.
Eliot: Yeah.
Jeff: Meaning we’re wanting to shift income to the corporation. Okay, let me step back. What’s the usual structure for these trading entities?
Eliot: Often we talk about a partnership. We’ll put the trading into that partnership. Partnership means it has partners, so we have typically a C-corporation, which will be one partner gets a little bit of it, maybe 10% of the activity through there. Then you as an individual or an entity that’s disregarded like a Wyoming holding to you, that would have the other 90%.
Jeff: Okay. I make $10,000 in dividends. A thousand of that 10% is going to the corporation, and the other $9,000 is going to me. Is there any other way to get more money, because I got a lot of bills I’m sending the corporation?
Eliot: That’s the beautiful thing. You get that money into the C-corporation. What can we do there? You just mentioned bills. What are we doing? What kind of bills?
Jeff: I have a medical condition.
Eliot: Medical reimbursement plan.
Jeff: I have corporate meetings to discuss the management of the trading LLC.
Eliot: 280A meetings? Maybe you have an administrative office. What Jeff’s doing is now getting that thousand dollars in the C-corp back to him tax free typically as reimbursements. But what if he has more expenses along those lines than just his thousand? Is there some way we can get more money in the C-corp? Enter a very unique item for partnerships only called a guaranteed payment. Any idea what that is?
Jeff: Guaranteed payment is something I guarantee to pay you.
Eliot: Exactly. It’s pretty self-explanatory. There’s going to be an agreement to guarantee to pay that amount to a partner, in our case a C-corporation. Maybe it’s for another thousand dollars. When that happens, that becomes a deduction to both parties and more income, another thousand in this case to the C-corp, i.e. more reimbursement cash for Jeff.
Jeff: This guaranteed payment, can I guarantee you that I’ll pay you at the end of the year, 20% of our profits?
Eliot: It cannot be based on profitability. It has to be a flat amount. That takes some of the fun out of it. Really, because it can’t be used based on profitability, ideally you would have it done before you even began the year that you have that flat amount agreed on.
Jeff: What this guaranteed payment is actually doing is you’re paying a partner for the work they do in the business.
Eliot: Correct.
Jeff: That’s why IRS hates the idea of you basing it on how much the entity made in the year. Again, you said that I have to make this decision before the year even starts.
Eliot: Really should be, yes. It’s a flat amount again and it’s guaranteed just as the name implies. Don’t go overboard and make it a hundred thousand dollar guaranteed payment or something like that. It’s be reasonable for the services that that partner is creating.
That’s another aspect. It’s intuitive for us. It’s down here in Vegas, people want to count cards on their head. You’re not supposed to count cards at the casinos, but people intuitively want to count to see how much guaranteed payment they can do. That’s understandable, but it is a flat amount. Whatever we’re paying, it’s not about what amount we think we should move over, it’s what service was actually provided by the partner, and it has to be reasonable for those services.
Jeff: There are advantages to having a trading entity.
Eliot: But we talked about all the pros. Where would you not do this maybe?
Jeff: I don’t know.
Eliot: Maybe if we didn’t have a lot of income going on, we just learned our trading, because we’re going to have an extra tax return or two if we’re setting up a C-corporation. Do think about it. Like always, you want to calculate, calculate, calculate. But it does put it in entities where you have asset protection. Sometimes it’s not all about the money, it’s about asset protection, and you certainly have that going on here.
Jeff: I actually prefer that my C-corporation is doing something else. maybe managing my rentals or something like that. Because if I’m blowing too much portfolio income into the corporation, not capital gains, but dividends and interest, I put myself at risk for that personal holding company tax.
Eliot: Exactly right. Yeah, we can’t have too much of a good thing. Often, our clients will have this trading partnership going on as well as maybe managing their rentals. Like we saw in one of the previous questions, we’ve got four rentals out there. Set up a C-corporation, have a property managing as well. That creates a different type of ordinary income to the C-corp to avoid any possibility of getting too much portfolio income in the C-corporation that we would from investing.
Jeff: Let’s talk about risk a little bit for a corporation. I think managing rental properties, that’s probably middle risk. It’s not high risk like the rentals themselves are, but it is middle of the road. But this investment is very low risk. You’re not going to get sued over your investments. They may come and try to take them, but I don’t see that really happening too often.
Eliot: If you have a lot of reimbursements going on draining the cash out of that C-corporation, there’s probably not a whole lot that it can impact anyway.
Jeff: Correct.
Eliot: Again, the C-corp, we set up as a lightning rod for lawsuits for this exact purpose if we don’t have a lot of cash in it.
Jeff: Going back to calculating the guaranteed payment, would you suggest that they actually look at what expenses they believe, forecast or budget for that?
Eliot: Yeah, exactly right. If you don’t have any clue where to begin, look at what kind of expenses or reimbursements you might anticipate. We now have an idea where we’d like to be, and then see if the services that your C-corporation can provide can match that type of income being reasonable. All right. Great question there.
“How to do real estate investing with an IRA fund?” I think we could expand this maybe for solo as well to some degree.
Jeff: Yeah. There is one difference, and we’ll get to that last. I have an IRA, I’m going to buy a property, and I like having an LLC disregarded to the IRA.
Eliot: Why is that?
Jeff: To give the IRA protection, because my IRA may not only have this property in it, it may have a million dollars of cash in it or other investments. I want to be able to protect those assets from the property that I just finished saying was a little higher risk.
Eliot: We’re thinking asset protection, so probably we would move the funds from the IRA to the sales seat, go out and purchase the real estate. What about if we have debt on it? Does that matter?
Jeff: It does. IRAs cannot have debt, period. If you do, you get what’s called UDFI. Help me out here.
Eliot: Unrelated Debt Financed Income.
Jeff: You pay an excise tax on that.
Eliot: And it’s hefty. We always have to explain this, that tax hits. It’s basically the trust brackets, and it increases at an exceptionally fast rate.
Jeff: I think it’s $12,000 for the top bracket.
Eliot: Yeah, $12,000, you’re already at the top 40% or so. So it takes no time at all to be maxed out and getting hit with a ton of tax, so we want to watch out for that.
Jeff: Here’s the other problem. You have to have enough cash in your IRA after you purchase a property that you can pay taxes, insurance, repairs, remodels, anything like that. As Toby likes to say, you can’t pick up a hammer.
Eliot: No. You cannot be involved at all with the running of it. We have a lot of easy to get into what we call prohibited transactions.
Jeff: Do you see why we work together?
Eliot: Yeah. There’s a lot of that going on there that we want to watch out for. What if we happen to have a solo? Any differences there?
Jeff: Yes. The one big difference is I can have a mortgage in my solo.
Eliot: No UDFI. That’ll help protect us from that. You can still run it into UBIT for other things if you had ordinary, but not in a long term rental. That’s the big thing. We talked about real estate here. We’re talking about long term rentals. What if we were doing maybe flipping? Is that something maybe we want to shy away from?
Jeff: I’ll give you that and short term rentals.
Eliot: Exactly, short term rentals. It’s your more ordinary active businesses. Probably we want to shy a little bit from that in our retirement plan.
Jeff: Why does Eliot bring that up? Because that’s considered a trade or business. Guess what, IRAs and 401(k)s can’t have business income in them.
Eliot: Yeah. If they want to do something like that, they have to get a ROBS, which we’re not going to talk about today.
Jeff: No. But it gives us the brother of the UDIF, the UBIT, Unrelated Business Income Tax. Again, it is hefty.
Eliot: Very significant penalties on our taxes. I call them penalties in this case.
Jeff: You do?
Eliot: Yeah. Anyway, real estate again, thinking long term, set up an LLC that’s owned by the IRA or the solo, move the cash in there. It buys real estate, try to avoid the debt in the case of the IRA, and that’s how we do real estate investing.
Jeff: Just real quick, making sure you have enough cash in it. When you’re doing that part of planning, think worst case scenario.
Eliot: Yes. Think you’re going to have Eliot as a tenant, everything’s going to go wrong, it’s twice what you paid for the house, do not have that cash available. Yeah. Anything else?
Jeff: Nope.
Eliot: All right. Another great question down. “When are crypto earnings taxed?”
Jeff: I have the answer to this. It depends.
Eliot: Yes, exactly. “What does it depend on?”
Jeff: It depends on where the income is coming from.
Eliot: Such as?
Jeff: You could be buying and selling crypto. You could be creating crypto mining. You could be staking, which is a little different from mining, but still taxed the same way. Here’s my nightmare scenario. You’re taking crypto and business transactions. Eliot comes into my pizza shop, buys a piece, and pays me with a fraction of a bitcoin.
Eliot: He’s not too bright, he gives a whole bitcoin.
Jeff: Let’s run through these real quick. I trade crypto, that’s all I do with it. I buy bitcoin, sell it, buy Ethereum or whatever it’s called, and sell it. Those are pretty much treated as securities.
Eliot: Yup, capital gains.
Jeff: The one difference that I need to bring up is there are no wash sale rules.
Eliot: That’s a beautiful thing about crypto.
Jeff: If I buy a crypto selling for about 40 right now, if I buy it at 40 but it drops to 20, I’m going to realize this loss, but I can turn around and buy it the next day. That same crypto.
Eliot: Recognize that loss. No wash sell impediment to it.
Jeff: Then we have mining and staking. My garage full of servers, just algorithm in a way, and I create a Bitcoin. That Bitcoin is taxed at your ordinary rates at the moment that coin is created.
Eliot: Correct, but you didn’t even sell it.
Jeff: No.
Eliot: But you got taxed. It’s being ordinary. Is it employment tax as well?
Jeff: That’s an interesting question for another show.
Eliot: Yup. Nonetheless, ordinary income, higher rates. You didn’t even sell it yet, it’s just sitting there in your inventory, so to speak.
Jeff: It’s the one time that inventory gets taxed when created, which is just crazy.
Eliot: Yeah, because they don’t consider it inventory, even though I use that term. One can get taxed without having anything to pay the tax for. It reminds me back in the early 2000s. They gave out a lot of stock options when they had that whole mess where the prices dropped, but you were taxed at the date of receipt. Maybe you never took advantage of getting them sold off. It’s very similar in that regard. You can really get hurt by that.
I’ve gotten taxed on the coin that I created, the crypto I created. I hold it for a year and a day. Long term capital gain. What’s my basis in that coin? Not a trick question.
Eliot: It was the price when you first made it?
Jeff: Yes. Whatever you were taxed on, that’s going to be your basis. You get taxed twice, or possibly you could have a capital loss if you sold it at a loss.
Eliot: No wash rule.
Jeff: If you got a loss, don’t sell it.
Eliot: Yeah, just hold on to it. It’ll probably go.
Jeff: The last one treated the same way. If Eliot pays for his pizza with a bitcoin, that’s taxed as though it was a cash sale. But again, I have to track my basis in that coin or fraction of a coin. I got $12.95 for that coin, and that’s my basis in the coin.
Eliot: That brings up a really good point. Especially when they start to get more popular, you have to have really good software tracking some of this stuff, the basis, and all that in your trading, so make sure you’re prepared. You have all the basis covered before you get into crypto and are properly documenting all of these things.
Jeff: Yeah, the software has improved so much in crypto.
Eliot: It was scary there for a while, early on.
Jeff: I know that one company has really good one. FTX? Wait, they’re out of business. If any of you invested in FTX, I’m sorry.
Eliot: Yeah, that one didn’t go out as planned. But there are other great ones out there, and just make sure you have good software tracking it all. Absolutely.
Jeff: Yeah, they talk about you can get a vault or a wallet. Just make sure that your crypto is as secure as you can make it.
Eliot: Not so secure that you don’t remember the password. We’ve heard those stories.
Jeff: Don’t lose the password.
Eliot: Or one of the drive that they put it on. One guy, he went to the garbage. He’s paying people to dig through the garbage and find, because he knows he has something like $100 million on some drive out there. Terrible stories, forgetting passwords, et cetera.
Jeff: How is my crypto taxed if it gets stolen?
Eliot: That’s a tough one. Tough and you get no tax benefit from it. There’s no deduction.
Jeff: Eliot’s exactly right. If it’s lost, stolen, whatever, you’re just out of luck. If it’s stolen through a Ponzi scheme, it’s the one exception to this. I have seen quite a few people who say, hey, I lost my crypto. It got stolen. What do I do?
Eliot: Not a whole lot we can do. Getting that Ponzi scheme status, the clients I’ve seen, usually it’s a letter from the FBI, some state revenue investigation group, or something of that nature. It’s very official. It’s very difficult. You can’t just go out there and claim, oh, it’s a Ponzi type scheme. The good news is that they’ve broadened, I think, what they consider Ponzi than just the traditional Ponzi. There’s a little bit of room, but it’s still not exclusive to all business losses.
Jeff: It’s amazing because the way I see people treat crypto, if they had a million dollars in their house, they would treat it completely different.
Eliot: Right, that little drive.
Jeff: That little drive, like I got a million dollars with cybersecurity or whoever. I think people become more complacent when it’s digital.
Eliot: We’ve certainly heard the stories. Anyway, back to how are you taxing these. Of course, it depends. If it’s more from a trading, it’s going to be capital gains treatment. If it’s more we made it, in other words we’re mining or staking, you’re looking for ordinary income, which leads into maybe it might be something worth setting up some amenities to get some tax benefits like we talked about with other traditional trading, it’s something to look into. It might be something that can help you out there from a tax perspective.
Jeff: Okay. We are running late, and I am talking too much.
Eliot: All right, moving on. Let’s look at Clint here. We got a Tax and Asset Protection Workshop, as we talked about, coming up here on the 27th. It will be live, but virtual.
Jeff: But not in person.
Eliot: Also on January 6th, but not to be sure. On 24, we’ll be seeing you guys on the road live, I’m sure. We’ve got some events. Continuing on here. “As a member of the armed forces, are my travel expenses from an overseas location back to my property location stateside tax deductible?”
Jeff: If it involves a permanent change of station, and this is not only for armed forces members, it’s also for government workers. I’m stationed at the American Consulate in Berlin, and I get moved back to Indianapolis. That’s a permanent change of station. You got to have the orders. You can deduct all your travel expenses, just like in the old days when everybody could do it.
However, I also know that military gets compensated for certain things, and certain things get shipped. You can’t deduct a portion of your move that the government is funding for you. They also do some crazy stuff, where I’ve seen they gave them W-2s for what they would pay for movement.
Eliot: A lot of different aspects. From my understanding, it can depend whether or not you’re in reserves or more of a permanent station moving back. There could be other things going on here. What was our reason for traveling back?
Let’s say you’re still stationed overseas, and you’re coming back to see your rental property for a business trip. That gets back into what Jeff and I were talking about earlier. If it’s an actual business trip, more than 4 hours and a minute spent per average of the days, I think then you have a whole different perspective of what you’re trying to do here. Just keep that in mind as well.
I believe, I would argue that if you’re leaving from Germany coming to the US, it’s international travel. Even though you’re coming domestically, once you’re stateside, I think you have to have more than 50%. I think you have 75% of the days that have to be business related.
Jeff: I’m pretty sure this does not apply to TDY travel. If you’re on temporary duty, you may get shipped out to Okinawa for a year, which sounds like a permanent change of stations.
Eliot: One would think, but no.
Jeff: I said Okinawa. The Marine Corps will say, nope, that’s just temporary duty, you’re still attached to VMA-261 or something like that. If you have overseas travel on a change station, make sure you’re seeing an accountant to do your taxes that knows what the heck he’s talking about and what you’re doing.
Eliot: Exactly right. All right, moving on. “Is it better to have a separate entity for flipping, such as an LLC or corporation, or should I just do it in my own name?”
Jeff: I’ll answer after the comma first. No, do not flip in your own name. Why, Eliot?
Eliot: That is a lawsuit’s worst nightmare. If you do it in your own name, you’re personally responsible for a lot. It could go wrong. There’s plenty that can go wrong in flipping. You got construction going on. You got perhaps a bad deal going on, a lot of potential lawsuits. You would never want to do something like that in your individual name. What about where we want the taxes to hit?
Jeff: I wanted to hit something else real quick first. Let’s say I have two rental properties and two flips that I’m all selling in 2024. You’re now a dealer. What’s bad about that? The IRS could come in and say, no, you may have rented these properties out for years and years, but now you’re a dealer, they’re all flips to us.
Eliot: What’s that? Why do I care?
Jeff: Flips have so many bad things at the individual level. They’re taxed at your ordinary rates instead of capital gains.
Eliot: We know employment tax is going to be on that one.
Jeff: Right. You can’t use the installment method, and we have seen people burnt by that.
Eliot: That has been one of the toughest things with flipping. Individuals think that they’re selling inventory. They are selling inventory. It’s not that they’re selling the house and can do it on installment. You can take payments.
I flip a property to Jeff, and let’s say it’s for $100,000, $10,000 a year for 10 years. He pays me $10,000 a year. I have to recognize income on $100,000 the year that we entered that. I cannot install it out over 10 years, so very tough consequences. Very harsh consequences with flipping.
Jeff: We prefer that you got to have an entity. Here’s what I would do. I have a corporation. I flip in the corporation, but I don’t flip under the corporation’s name. I put LLCs in there. I know this sounds expensive, but it’s not.
Eliot: It’s really not.
Jeff: It’s insurance.
Eliot: Yeah, it is. It’s insurance having these individual LLCs. We want to do that, because if you’re consistently flip in the same business, imagine Jeff flips five properties in the C-corporation, and he’s got four others in inventory that he’s still renovating, et cetera. Now I come in and I sue him. Everything he has in that C-corp is open to exposure.
What we do at Anderson, this is one of the many reasons we came up with our Titanium Unlimited LLCs, you just set up new LLCs underneath the C-corp for each transaction, and you just throw that thing away like a garbage bag after it’s done. Try and keep that extra asset protection.
Jeff: Let’s define what Eliot means by when it’s done. As soon as that sale is closed and there’s nothing left to do, I trash that LLC.
Eliot: Yup, get all your payments. You want to make sure you receive all your income, et cetera, before you shut down.
Jeff: There’s not going to be any more filings and all. Is there anything wrong with moving all that cash up into the corporation?
Eliot: Not at all. Do your reimbursements. Jeff was talking about earlier, medical reimbursements, corporate meetings, accountable plan for home office, administrative office, et cetera.
Jeff: I’m flipping this house. That’s the only house I have in this corporation, but I’m going to flip another. Can I just put it back in that same LLC?
Eliot: You could, but we’d recommend getting a new one.
Jeff: Yeah, that’s a bad idea.
Eliot: Can you? Yes, but lawsuit could come up for that old LLC from a previous transaction, so you want a new one.
Jeff: What we’re coming down to is I buy a house, I flip it, and I sell it to Eliot, and then I buy another house in that same LLC. If something goes wrong, and Eliot comes back and sues me for the first house because he slipped and fell, I could lose that second house, because it’s in the same LLC as the house that I’m getting sued over.
Eliot: Correct.. Keep it separated. Set up an LLC underneath a C-corporation, maximize your asset protection, and you get better tax results because of the reimbursements that you can do through the corporation that you couldn’t do. For whatever we do, don’t do it as an individual.
Jeff: Yeah, not even through an LLC.
Eliot: Right, exactly.
Jeff: What’s next?
Eliot: “I’m a new real estate agent. Does the time I spend searching for my property in my local market, including travel time for me, and my family count towards the 750 hours needed to qualify for rep status, even if we end up not buying the property this year?”
Jeff: I want to hear your answer, because I want to see if you read this the same way I did.
Eliot: I’m going to say, first of all, we can’t use travel time usually as far as rep status. There’s an exception to that, which I’ll get into, but here it looks like we’re looking for new properties going out there, we may or may not buy a property. Can we log that time towards our 750? I’m going to say no.
Jeff: I wasn’t sure if they were looking for a property to rent an investment property. When they said for me and my family, it almost sounded like they were looking for a primary residence. That’s not going to qualify at all.
Eliot: What if it was even a rental? Or if they’re buying their own rental, I would argue that time, still does it. Any idea where in this process you might be able to include it? Have you ever run into that?
Jeff: Here’s the problem with this situation. If you don’t have an intent to purchase a property, it’s not a business trip anymore.
Eliot: Right, exactly. That’s another potential problem here. If you don’t buy, typically any related expenses to that, we run into this a lot from the expense side, you make a trip to go look at a property, and you decide you don’t get it. You look at a second property, you put a bid on it, but you get outbid. You still don’t get that property. Now you get to the third one. Finally, it’s not too warm, not too hot. You get this property. We typically will add those other expenses onto the basis of that.
Jeff: Okay, Eliot. One of my expenses was earnest money.
Eliot: Basis?
Jeff: It goes to basis. Earnest money usually isn’t cheap, it could be a couple thousand dollars. It could be $10,000 or $20,000. You’re not losing that deduction, it’s just moving into the property you end up buying. Any idea if I don’t ever find a replacement property?
Eliot: It just goes away, you don’t get the deduction then. You want to be careful with that. One time where travel time does come into play is, let’s say you already have your properties. You have rentals, you’re managing them. If they’re local, here in the Las Vegas Valley, you go from south to north or what have you, that drive time, typically yes, you can include that into your hours.
What if I have to go to LA? They don’t come out and directly say it sometimes, sometimes they do. Typically that time’s not going to count. It has to really be a local area. They’re not going to let you fly across and count that travel time or anything like that. In this particular question, I’m saying that the travel time would not. It’s a great question. I like that you’re thinking, trying to get what time does count, but that would not be it. I wouldn’t think.
All right, moving on. This is our last one. This is a bonus. “Is it possible, feasible, or legal to incorporate yourself and transfer all your assets to that new corporation while also deducting expenses used to support the new business, which is you, yourself?”
Jeff: I have not seen this one in a while. I know it was something that was being pushed on the internet, probably somebody serving in Fort Leavenworth or some other federal prison.
Eliot: Exotic location.
Jeff: Which by the way is where most of people who say income tax is illegal. They’re usually writing their papers from prison.
Eliot: Yeah, Leavenworth is a big one for that
Jeff: Back to the question. No, you can’t make your personal expenses, business expenses. The real answer is just a flat out no. I picked this question for a couple of reasons. Toby had been talking about some other schemes out there probably about four shows ago again, so I wanted to throw this one on here.
We’d seen this come up a lot about six years ago. This is not a thing. It’s not it’s not a good thing anyway. We’d have clients who’ve been talked about getting the C-corporation throwing all their assets in there and trying to basically deduct their whole life through it. You can’t do that. It’s just a flat out no.
Jeff: Here’s what annoys me about this question. I’m not annoyed as a person who has them. I’m really glad you asked.
Eliot: Absolutely, that’s why we picked it.
Jeff: This is put out on the internet and other places. It leads people who are not bad people that believe that they can do this, and it just puts them in a terrible position. Let’s look at something really briefly talking about a new business. You are not a business, Eliot. You are not a business. I’m talking about Eliot’s personal life. To set up any kind of entity, tell me if I’m wrong on this, you’re going to have a business purpose.
Eliot: Right. You have to be transacting business with others about your personal life, and that’s just not a thing. It’s not. I don’t know there’s much else we can say about that one. We are two minutes over, so we apologize for that.
Jeff: How’d we pull that off?
Eliot: Yeah, right. This is somewhat close landing. Again, if you got questions, please feel free to throw them in. Remember to check out our YouTube channels. Get loaded on so at least you can see the videos coming in whether you want to watch them or not, but we got a lot of good content out there.
Jeff: You know what else is in these videos, Tax Tuesday questions.
Eliot: Yes, a lot of Tax Tuesday questions. You can see some of this great content you heard here today. All right. Again, Tax and Asset Protection Workshop coming up, again, live but virtual, December 27th and again, on January 6th, 2024, as we enter the new year. Again, if you have questions, please submit them through taxtuesday@andersonadvisors.com. Visit us at andersonadvisors.com.
Jeff: Real quickly, we didn’t really talk about this. Year-end is coming up.
Eliot: Yes, it is.
Jeff: In less than two weeks, be thinking about those things you need to do. My thing that I needed to do by year-end that I did today was calling up the solar power people and yelling at them.
Eliot: A long story behind this one, but it’s a good one.
Jeff: Yeah. If they didn’t get it completed by December 31st, I would not get that Solar Credit for 2023, and I’d have to wait another year. Solar Credit is back up to 30% with the Inflation Reduction Act. It was supposed to be down to 22% this year. But before I go off on a tangent, just make sure that you’re getting things done, maximizing your 401(k) contributions if you’re able to do that.
Eliot: Wages paid.
Jeff: Getting wages paid, things like IRA contributions, employer contributions to a retirement plan. Reimbursements do have to be done by December 31st, but the IRA contribution, employer contributions, and certain other things don’t have to be made right this [inaudible 00:56:26]. Compensation though is very important if you want to take certain other deductions. Anything else in closing?
Eliot: Just write your congressman and support Jeff in his solar panel venture here. It’s been a real saga. Thank you all for joining us. I think we might have Toby back next time, we’ll see. We’ll be back. This is the last show for the year, so happy new year to you all. Happy Holidays, and we’ll see you in January.
