In this Tax Tuesday episode, Anderson Advisors’ Barley Bowler, CPA, and Eliot Thomas, Esq., tackle a wide range of listener questions covering everything from business structures to retirement planning. They discuss the pitfalls of investing in movie production under Section 1801, explain why commuting expenses aren’t tax-deductible even for long-distance work arrangements, and clarify the new 1099-NEC reporting thresholds and the upcoming 1099-DA requirements for digital assets. Barley and Eliot break down Section 179 vehicle deductions and the advantages of heavy SUVs over luxury vehicles, explain the reasonable wage requirements and distribution strategies for S corporations, and guide on structuring spec house construction businesses to minimize employment taxes. They also cover mark-to-market elections for traders, the tax consequences of below-market rent to friends or family, and the complications of placing a personal residence in an LLC. Tune in for expert advice on these topics and more! Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “Any thoughts about investing in movie production for high-income earners?” – Section 1801 expires 2025, creates passive losses, not recommended for most.
- “I work for a local government agency in Cochise County, Arizona and live in Maricopa County, Arizona, approximately 215 miles apart. I commute in on Monday, stay in a hotel and leave on Thursday. I’ve been doing this every week since December of 2024. Is there a tax break deduction for this?” – No deduction available; this is considered commuting, not business travel.
- “Is the new 1099-NEC now starting after $2,500?” – Still $600 for 2025; increases to $2,000 in 2026 only.
- “Who needs to file this new 1099-DA digital asset form?” – Brokers must send to clients by February 15, 2026.
- “I’m a sole proprietor and would like to buy a BMW X7 to save the tax based on section 179. Is it covered?” – Yes, if over 6,000 pounds; 100% write-off available first year.
- “I’d like to know the proper ratio of distribution payments to salary within an S corporation.” – One-third to 60% of net income is typical rule of thumb.
- “Can I pay myself quarterly out of my S corporation LLC?” – Yes, quarterly W-2 payments are acceptable and help avoid penalties.
- “What’s the best way to structure a business to minimize taxes when building spec houses? I do the majority of the work on the houses, so it looks like a lot of profit on my labor, which is not good. I’m currently structured as a pass through LLC and purchase the house lots in a different LLC from my construction LLC.” – Use S corporation for labor; sell land separately at capital gains rate.
- “Is it too late for a mark to market election for 2026?” – No, must file on 2025 return by April 15, 2026.
- “Is mark to market a good tax deduction?” – Only if trader status qualifies; creates ordinary losses on unrealized gains.
- “I’m renting to a friend for $300 a month. Fair market rent would be over $1,500. Any tax consequences?” – Deductions limited to income received; cannot create rental loss at all.
- “How can I have an LLC for my personal residence if the house is the residence of both my son and I as joint tenants?” – Possible but risks losing section 121 exclusion and homestead exemption.
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Full Episode Transcript:
Barley: Anderson Business  Advisors bringing tax knowledge to the masses. Welcome back, everyone. This is our last one for 2025.
Eliot: Yes, we’re done. A good year.
Barley: We made it through 2025. Not quite yet. This is the crunch time, the last couple of weeks, guys. Hang in there. We got a lot to cover today, but welcome back everyone. Tax Tuesdays every other Tuesday live here at Anderson Business Advisor studios here in Las Vegas. Welcome back, everyone. My name’s Barley Bowler. I’m one of the CPAs here at Anderson. Very happy to have you back live on YouTube. This is open to the public. Like I said, bringing fun, fast tax knowledge to the masses.
Eliot: That’s the idea.
Barley: Tell them who you’re, sir.
Eliot: Eliot Thomas, manager of tax advisors here at Anderson. Great to be here again.
Barley: Yup. Eliot’s the regular here. We switch people out, tax and law people, but going over your questions every other Tuesday. For anyone here for their first time, welcome back to all of you joining us again, for anyone here for your first time. We have the chat and Q&A as usual. You guys are probably familiar with the drill there.
If you got any feedback for us, throw us a chat if you can’t have any technical issues, want to comment on our bad jokes, or anything like that, but please also feel free to post questions to the Q&A. As we go, let us know what questions you guys have. We have Troy and Rachel in the background answering questions.
Eliot: Big group.
Barley: Yup.
Eliot: We got Tanya.
Barley: Post your questions as we go. We’re going to be covering a lot of different topics today. As you guys know, if you are clients, you can always submit a question through the Platinum portal or join us in the Platinum Knowledge Room five days a week, five hours a day. We’ll be going over the various services and stuff too. If you want to participate, please email your text questions to taxtuesdays@andersonadvisors.com. I think Eliot reads through these every other week.
Eliot: I read through every one for better or worse.
Barley: That’s right. If you need calculations or more detailed specific guidance, become a tax client. We focus on real estate and small business. This is what we do and we love to do it. We’d love to have you become a client. Again, real estate, small business, stock trading, that’s our area of focus here. We’re going to be going into all of that and more today. Fast, fun, and educational, give back and help educate.
Toby and Clint, they’ve been doing this for a long time. It’s the education part. Just tell you guys everything we know. Obviously we can’t solve specific issues or do calculations for you, but we want to give you as much guidance as we can to help you on your path. We’d love to have you become a client. With that, we’re going to hop right in. Anything you want to announce before we get started?
Eliot: No, I think we’re good to go.
Barley: All right. We got some questions coming up. “Any thoughts about investing in movie production for high income earners? “
Eliot: Seen an uptick in this particular question. We’ll get into that and I’m pretty sure why we’re seeing it.
Barley: Is it because Hollywood’s collapsing?
Eliot: Right?
Barley: Who knows why.
Eliot: Come to Vegas.
Barley: Great. Come to Vegas. What else we got?
Eliot: “I work for a local government agency in Cochise County, Arizona and live in Maricopa County, Arizona, approximately 215 miles apart. I commute in on Monday, stay in a hotel, and leave on Thursday. I’ve been doing this every week since December of 2024. Is there a tax break deduction for this?”
Barley: For commuting? Good question. Is he correct? The new 1099 NEC, we’re at the 1099 forms. Reporting, is it now start after $2500? We do have a change in limitation. We’re going to be going off of that instead of $600. Who needs to file this new 1099 DA digital asset form? For those of you in crypto, you probably already heard this is coming, so we’ll discuss that as well.
Eliot: A lot of questions, 1099 territory right about now. A lot going on.
Barley: Yup, through January.
Eliot: Exactly. “I’m a sole proprietor and would like to buy a BMW X7 to save the tax based section 179. Is it covered?”
Barley: “I’d like to know the proper ratio of distribution payments to salary within an S-corporation. We have that reasonable wage requirement. Can I pay myself quarterly out of my S-corporation, LLC?” We’ll go over that.
Eliot: “What’s the best way to structure a business to minimize taxes when billing spec houses?” I do the majority of the work on the houses, so it looks like a lot of profit on my labor, which is not good. I’m currently structured as a pass through LLC and purchase the house lots in a different LLC for my construction LLC.
Barley: You developers out there, that’s going to be for you? “Is it too late for a mark to market election for 2026? Is it a good tax deduction?”
Eliot: Inquiring mind. “I’m renting to a friend for $300 a month. Fair market rent would be over $1500. Any tax consequences?”
Barley: Very common question in real estate. Finally, “How can I have an LLC from my personal residence if the house is the residence of both my son and I as joint tenants?” Another structural real estate question. Great question and make sure you subscribe, guys. These YouTube pages talk about fast, fun, and free, right? Both Clint and Toby’s YouTube channels, tons of great information, over a thousand videos, tons of great info, all across the board. People from different industries, not just real estate, but across the board of different kinds of industries. A lot of great information there.
Eliot: Approaching 2000 between the two of them.
Barley: Yeah, no kidding. Yeah, all of that’s on lot there.
Eliot: A lot of video.
Barley: Start sifting through. If you’ve got any questions, we can help you narrow that down a little bit, guys. Email us. Hey, I’m, look I heard Clint and Toby talking about these one type of videos. The library’s getting pretty big, but we can steer you in the right direction if you got any questions on that.
Eliot: Yeah, we have a really comprehensive list that I think you’ve been doing some stuff on that.
Barley: Our partners, as you guys know, it’s a unique skill set to be able to take what they’re putting into practice and then put it into a digestible easy to use video, but they’ve sure got that down. We like to promote that a lot. Great educational materials. Something happens I guess after you do something for 30 years, it just comes thick in nature to explain it. Not doing tax because they’re doing real estate. Please come to one of our asset protection workshops. Are these both virtual here?
Eliot: This is going to be the virtual ones.
Barley: Yup, two virtual events coming up. These are our asset protection tax and asset protection workshops. Check those out. This is the fundamentals.
Eliot: That one is on Saturday the 27th right after Christmas. If someone buys you a short term rental, make sure you watch on December 27th. Come do the loop here.
Barley: That’s right, if you’re coming down from the Christmas holiday. As we go, guys, keep in mind you can scan this QR code. We have a strategy session. You can set that up right now. Again, if you want to become a client, we’d love to have you. If you’re involved in real estate, small business, and want to become a client here, scan this code. We’ll give you a free strategy session, tell you about our services. Let us know. We’d love to give you more information. With that, chop right in?
Eliot: Yup.
Barley: Yup. All right. “Any thoughts about investing in movie production for high income earners?” An interesting question because there actually has been, at least in the news a lot lately, about people coming from California to Nevada to do movie studios and stuff like that. Does any of that apply here?
Eliot: It really doesn’t necessarily for this particular code section that they’re searching for. This is section 181. It came with the Tax Cut and Jobs Act meant to spur investment into movie production, things of that nature, theatrical performances, and so on and so forth. It’s really geared towards, again, someone investing in that. It’s not really what’s driving the concept of coming to Southern Nevada. You can see all the movie studios. Sony and everything, they’re proposing getting here. That’s really unrelated to this for the most part.
Nonetheless, we’re getting this question a lot because it expires at the end of 2025. Can I make an investment here in 2025 before year end and be able to get some write-off? It is substantial. It’s up to $15 million that people could put into this and take advantage of it. The problem is if you’re going to get into a business, what do we run to? We talk about it every time we’re on. What are we looking at for businesses as far as how it hits our return?
Barley: I like how Toby says we don’t chase losses. I’m not sure if that’s where you’re going with that.
Eliot: That’s one of them.
Barley: We want to have investments, it depends. A lot actually makes some sense. If they provide good losses, that’s one thing. Where are you going to go with that?
Eliot: If we do that, how’s it going to hit our return?
Barley: Right. Yeah, sure. What type of loss?
Eliot: Exactly. Where are our limitations going on there?
Barley: Unless you’re sitting in the chair doing the little clicky clack thing, then you’re likely not a material participant. That’s a buzzword we use across the board for any business.
Eliot: Exactly. Every business in the US, you got to ask your first question, am I materially participating in it?
Barley: If I’m not, then I’m a passive investor.
Eliot: Exactly. Why do we care?
Barley: Limits our losses. That’s a great point. Again, this applies to any business. Toby’s Pizzeria, you go buy a froyo shop or whatever. You’re either a material participant or you’re a silent passive investor.
Eliot: Exactly.
Barley: Ironically, the income’s pretty much treated the same. It’s all about the loss. That’s all about what we’re focused on is how do we treat the loss.
Eliot: Imagine you win the Powerball for $1.5 billion or whatever it is. You probably don’t care about $15 million, but nonetheless, you invest in that. If you got 15 million of passive loss, you very well might not have anything to set it off against. You’re going to be very upset because it’s going to be very challenging if you’re like me, at least, to be able to become active in that material participation level in some show type related business. You have to be that director. You have to be a producer in order to get that treatment. No, this is not for everybody.
I’ve actually had a client who did invest in this. I was telling Barley, the name will remain anonymous to protect the guilty, but he invested quite a bit when I was in a previous CPA firm many years ago. It was actually one that at that time had the highest number of the raspberries, the worst made films ever. The film at least got to production, but it was a complete disaster, lost everything.
You put X amount of dollars into this investment, you get a passive deduction that you can’t take against anything. There was no income coming back. That thing maybe sold 300 tickets. It was a major flop, so it is not a good idea. This is not recommended at all. If you’re in the business, and we do have very credible people as clients, fortunately, in this business, that’s a whole different story for them. In this case, if you’re not, and it’s a very small world there, I would not recommend it.
Barley: Right. Yet, if you’re in the industry, that’s a great point. If this is what you do, you walk the talk, and you got a network full of people already doing it, then that may be the move for you. I usually say that when we talk about oil and gas stuff. We sometimes recommend that as a deduction. It’s like, if you haven’t even put a toe in the water, I don’t want to be the one telling you to test the waters there. Again, if you’re already doing this, you’ve got a professional network of people to work with, then that could be a good move for you.
Eliot: Yeah, but it’s probably going to be passive.
Barley: All right. “I work for a local government agency in one county in Arizona and live in another county.” They brought up an interesting point earlier, where’s our tax home? How do we determine that?
Eliot: Exactly. This whole question goes around the idea of your tax home, which is not your residence.
Barley: It’s not where you live, it’s where you work.
Eliot: It’s where the job is. Exactly.
Barley: It’s a common misconception.
Eliot: They’re down here. They work for the local government agency down in Cochise, which for those of you don’t know, that’s the O.K. Corral, Bisbee. That area is very southern part of Arizona. Beautiful area.
Barley: The real desert desert.
Eliot: Exactly, yeah. That is where it is true desert. You go up to Maricopa, that’s your Phoenix area. We have these commutes and that’s very popular. I used to live in Arizona a couple of times. That’s very popular for how people have these jobs, where they go up to Flagstaff if they go north.
Point being here is that the job is down south. It’s outside of Phoenix, so they have to commute 215 miles. They go there again on a Monday, stay in a motel, leave on a Thursday. That’s for their job. Can they take a deduction? Not since 2017.
When they got rid of that area on the Tax Cut and Jobs Act, where we maybe would be able to deduct something like this, this situation, the door was closed. Really, we don’t have any deduction here. We can’t take business related deductions on our Schedule A subject to 2% AGI. That’s long gone.
This gets confused a lot with a very similar type of situation. It’s publication 463 that the IRS throws out there. They talk about if it’s a temporary assignment, that’s a different concept. Let’s change it up here. Let’s say that we live in Phoenix, Maricopa, and we have some kind of job there, an office there, and then they put us on temporary assignment down in the O.K. Corral, and we have an office down there. Exactly and it’s less than a year.
We have some deductions we might be able to take advantage of, any reasonable deductions and things like that, because you’re having to make this long journey based on your job. It’s a very restrictive type of situation here, so you have to have that. I’ve actually worked with clients in some of the agencies protecting our country, and they had the same situation. We just couldn’t make it fit. That’s the situation we have going on here.
Barley: You nailed it in the question. What is this? It’s a commute. We can’t really deduct for commute. Maybe if we have a home office and we’re driving to the job site, that might count. But when we’re going from our residence to our place of employment, to what would effectively be your office, that’s just a commute and it’s not tax deductible. Now, we can throw out, hey, maybe you get a reimbursement. Look for an employer reimbursement. If they can reimburse part of that expense, that’s a good way to go. That’s generally not going to be taxable income to you in most cases, perhaps. Other than that, no real tax break for commuting.
Eliot: It sounds tough, but that’s a situation because the code looks at it as you’re choosing not to live next to your workplace. In their eyes, that’s not a taxpayer’s problem. It’s a you problem type of thing, it’s the way they look at it whether it’s fair or not. No, there’s no deduction here in this case.
Barley: Yup. Great question though. If you need to relocate, you’re in the military, there are some certain exceptions. Let us know if you have any specific questions on that or if any of you are curious about those moving rules or commuting rules.
Eliot: Good point.
Barley: All right. Keeping it moving?
Eliot: Yup.
Barley: Okay. We got new 1099 requirements coming up.
Eliot: Yeah. The NEC, this is relatively new as of 2021. In that range, they came out with it. It’s for your independent contractors.
Barley: They’re used to be miscellaneous. It’s NEC, non-employee compensation.
Eliot: Yeah, so think your independent contractor. It’s that type of arrangement. This is what you would give to somebody who’s doing IC or independent contracting work for consulting work for you. You would send them out a 1099 NEC. We talked about the reporting started at 2500. That’s a little bit off. It’s still $600. That is what it’s always been for a long time. It’s still $600 for 2025, but in 2026 it will jump up, but it jumps up to $2000. That means that until you pay somebody $2000, you don’t have to do this form in 2026. It’s still $600 here in 2025, but it does not go at anytime yet up to $2500.
Barley: Obviously if it’s a non incorporated individual. Get W-9 first. If you can have a contract, do some work. Get the W-9 first. If they give it back to you and says, hey, we’re an S-corp or a C-corp, that’s fine. You got that on your file now, and you know that you don’t have a 1099 filing requirement. Why? Because when you pay more than $600 or in 2026, $2000 to a non incorporated individual, that’s who we have a 1099 filing requirement for. Get the W-9 upfront, that has all the information you need to fill out the 1099.
Eliot: That’s it right there.
Barley: Yeah. The DA, we’ll see those first in spring 2026, I think. They’re not even out yet, I don’t think.
Eliot: Yeah, we haven’t seen them yet, but the due date on that is January 31st. Just real quick on the NEC. You have to get it out there. The DA is something new. That’s the digital assets. We’re talking bitcoin, cryptos, and things like that, but the individual or the group that has to send them out is if you’re a broker. If you are a middle person helping buy and sell these cryptocurrencies or digital assets, whatever they be, you will have to send out this 1099 DA to the individual that you’re working with.
Barley: You guys are going to be receiving one, we’re just going to want to know what that is.
Eliot: Right. You receive it. It’s not due until it was February 15th. It’s when you should have received it by February 15th, but it is just a new thing that started in 2025. We will have it for this tax year. About mid-February, you should be receiving those if you’ve had anything like this going from brokers. It’s new. There are going to be problems, I can guarantee it, but that’s where we are.
Barley: We got to start. We have to start this because in 2027, they’re going to add the basis requirement to that 1099 DA. That’s when the whole game will reset. We got to start tracking this stuff somehow.
Eliot: Probably I think from a tax preparation standpoint, the hardest part about digital assets, your cryptos, and things like that is the basis. Very difficult. Now that’s going to be forced upon to being recorded here. As Barley pointed out, we don’t have that requirement just yet, but it’s coming. That’s it for that.
Barley: Yup, that’s a big one. Digital assets. That’s going to be on the radar there. Let’s see, what else? “I’m a sole proprietor. I would like to buy BMW X7 to save the tax base section 179 expense deduction.” is what we’re referring to there. “Is it covered? Is that vehicle covered?” Any vehicles covered really, if it has business, at least more than 50% business or requirement there.
When you mention the BMW X7, we’re likely talking about that 6000 pound rule, because that’s where we get pretty much a hundred percent write-off. Whereas if the vehicle is less than 6000, we’re limited in the deduction. You still get a good deduction, it’s just not the full deduction necessarily.
Eliot: Right. What we got going on here is that with the 179 being thrown in there, this is the one that always is a curve ball to people, 179 is simply an expense amount that you expense up to the amount of income you made in the business. You can’t create a loss. If you go out there and you buy a hundred thousand dollars BMW X7, and I did do a little research, what I could find is it is a heavy SUV. It qualifies for 6000 pounds. In that case, you’d be able to take 179 deduction up to $31,200, or $31,300 against that hundred thousand. You’d have 68,700 left to depreciate, and you can do the bonus depreciation on that.
Again, if we’re using over 50%, whatever that percentile of usage is, you take it times that, that’s the amount that you can take as bonus depreciation. If it’s a hundred percent business use, then you’d be able to deduct the entire hundred thousand, the first $30,000 some as 179 as long as it didn’t create a loss, and then you can directly deduct all the rest as bonus depreciation a hundred percent.
We always talk about that. We use that example. We’ve used it here. We’ve used it in Tax Tuesday, we’ve used it in our quarterly tax plan. We always show that hundred thousand dollar vehicle, a hundred percent write-off, and things like that. What if we don’t have that heavy vehicle? What if it’s just a regular car under 6000 pounds? What happens then?
We start off in the same spot. We take our 179 up to $31,300 as long as it doesn’t create a loss in our business, and then you can take what is the prescribed deduction for bonus depreciation that the IRS gives us for a luxury motor vehicle. That’s first year $20,200. That’s the most depreciation you’re going to get. You take the $31,000, 179 plus 20,000 approximately of first year depreciation. You’ll only get a write-off of $51,000 that first year, but that’s it.
Second year, we have no more 179. We took that in the first year. It’s going to be $19,600 approximately for your luxury vehicles. It’s really dropping. Third year, $11,800, and it just goes down. Finally it will even out to a set amount until you deduct it all. It pays to get the heavy SUV. That’s where you’re going to get the heavy write-up. Remember, it’s a five-year property. What happens if we sell it early?
Barley: Recapture.
Eliot: Depreciation recapture. Exactly right. Same thing with 179. We have 179 recapture as well. We have all that going on there. People want these vehicles. I don’t blame them. We’re not going to tell you not to. If you have the cash in your business and you’re making a lot of money, I talked to a client the other day, she made a fantastic purchase in her situation for this type of situation to get a really nice write-off. It works very well hand in glove with what she had in her scenario, but it’s not for everybody. You want to make sure what you got going on, what you expect, and anticipate in 2026, 2027, et cetera. There is a big difference between the heavy SUV and maybe just a car that’s under 6000 pounds.
Barley: Yeah. A lot more we could go on the vehicles guys. There’s plenty of little things that we like to see there. For example, if you have another vehicle for personal use, that makes me more apt to want to give you the deduction within your business. When we mix that personal and business use, that’s where it just gets complicated. This is going to be one of our more common big deductions for you people out there doing broker, dealer, realtor. You’re driving probably 50,000 miles a year or so, and that’s all business, this can be a great deduction for you guys.
Eliot: Yeah. If you’re in the real estate game and maybe you’re getting your commissions through an S-corporation, we talk a lot about that strategy, maybe you don’t want to buy the vehicle in the name of the business. You buy it personally and get that mileage reimbursement 70¢ a mile here for 2025. I haven’t heard for 2026. No doubt it’s going to go up I’m sure. If you think about it, realtors can drive a lot.
I always tell about my friend here in the valley, she’s a realtor, she can go 30,000-40,000 miles on her little vehicle driving clients around and things like that. That’s a lot of money by the end of the day, $28,000. Just that one deduction reimbursement is buying her a new vehicle in a couple of years, and she’s getting a write-off for it. The tax savings, you compound that with whatever tax brackets you’re in. You could easily be pushing $50,000 of overall cash flow savings.
Barley: Yeah. More than covers your wear and tear, oil and gas, tires, and all that stuff.
Eliot: Very generous. Probably one of the more generous things that the IRS gives us besides maybe 280A, it’s a lot. It takes a lot of wear and tear to get 70¢ a mile on your vehicle.
Barley: I’m glad you brought that up because that is the first fork in the road. Do we title it in the name of the business or take a reimbursement? That’s one of the first places we’ll start just to look at that tax deduction.
Eliot: Exactly.
Barley: Don’t forget, YouTube pages, subscribe. Am I subscribed? I sure am. It looks like I have not subscribed to Clint. I just did. We’re subscribed. Check out the YouTube pages. Lots of great content as you guys know. Scan this QR code. We can set up a strategy session right now.
If you’re doing real estate planning, you have a small business, trading stocks, and you got a lot of capital gains, I’m wondering how to navigate that, that’s our area of focus. We’d love to have you become a client. Scan that code and check it out. All right. Moving on? You got any questions we need to hit or anything?
Eliot: I think we’re good. They’re tearing it apart.
Barley: Yay, team. Dutch is in there too. All right. You guys are in good hands. All right. “I’d like to know the proper ratio of distribution payments to salary within an S-corporation. Can I pay myself quarterly out of my S-corp, LLC?” Good question. Talking about distributions, W-2, or both maybe. What’s the proper ratio of distributions to salary?
First, what are we talking about here? We’re talking about the S-corporation. It has a reasonable wage requirement. We have to pay ourselves a wage. Maybe if you just started the business and you haven’t made any money yet, or you haven’t taken any distributions, you might not have to, but let’s just say for all intents and purposes, we’re going to pay ourselves a wage out of our S-corporation.
Let’s say we have a hundred thousand dollars net profit at the end of the year, how much of that do I pay as a wage? And how much do I just take as a regular taxable distribution? It’s what we’re getting at here. What’s the timing of those payments? First of all, W-2 versus we call it a distribution. A misnomer because whether you take the cash out or not, it’s still considered distributed to you and taxed to you on your K-1.
Eliot: Exactly right. All the code, you got to pay a reasonable wage. Thank you for nothing. It doesn’t tell us anything. It’s real empty of any real meaning.
Barley: At least they didn’t say substantial.
Eliot: Right, exactly, which is even worse. We got the reasonable wage requirement. It’s a W-2. What is it? It just means what’s the average person make, what you’re doing in the area you do it in the occupation that you have, your years of experience, how profitable the business is. A lot of criteria that get thrown into it. There is no real set amount.
Now we go to court cases and we see what they’ve done in the past, this, that, and the other. We typically see, again, the net income. Take your gross income, all the income you made, subtract all your business expenses out before you paid yourself anything. We said we went with a hundred thousand. Let’s say that net’s a hundred thousand. Maybe anywhere from a third to 60% is a rule of thumb. The higher you go, it means you’re going to pay more employment taxes typically, but you have less to explain if the IRS comes in and says that’s not reasonable.
If you go lower to 30% or about a third, you’re going to pay less in employment taxes. You theoretically might be able to pay to put less into a retirement plan because that’s based on earned income. If you get audited, you’re going to have more to explain why it was so low compared to someone who paid more, but there isn’t a percentage in the code. Again, we just have to look at this very subjective test, unfortunately, for how much again you make, area of business, area you live in, the territory, the type of business.
Barley: Geographic. I had a client yesterday that did a rough salary calculation, about a hundred thousand, did a number of tests to come up with that, and then they were in a much more rural area, and rounded that down a little bit. I thought that made sense. That was reasonable to me.
Eliot: A lot going on in that calculation, but that’s what we’re referring to. They want to ask what the ratio is. I really don’t like using 50% because out of a hundred, that means you got two 50s and which one 50 are you talking about? Let’s just say we go to a reasonable wage of $40,000 here. The other portion we call the K-1 distribution. It’s not really a distribution unless you take out. Incidentally, if we don’t take any money out of the S-corporation, there’s no distribution. You’ll still pay tax on the full hundred thousand, but you don’t have to actually pay yourself a wage if you don’t want to.
Barley: Technical loophole there. Most of you’ll take out some distribution just to pay the tax anyway, so we’ll just assume we’re going to pay wage.
Eliot: Yeah. Just so we’re clear on that, because the hundred thousand’s still going to flow to your personal return, you got to pay tax on that. If you happen to have the cash laying around, you wouldn’t technically have to pay yourself a wage. Nonetheless, let’s go with $40,000 W-2 wage, $60,000 on their distribution. Again, the reasonable wage is subject to all the taxes the IRS can throw at you, all the employment taxes, all the income tax. The other portion, the $60,000 just is going to get hit with income tax. No 15.3% employment tax going on there. That’s why we have this battle going back and forth.
What about the quarterlies? You’re actually considered having earned that across the years, so your quarterly amount at least is $60,000 to be sure, you’re going to be treated as if you start earning January 1st all the way up to December. There could be some late fees and penalties. Not much. They’re usually not all that much. A lot of clients choose not to pay quarterly estimates. They incur the late fees and penalties. It’s just a cost of doing business because they feel that they will do more with that money before we get to year end. Usually most of our clients are correct on that.
When you look historically, I’ve seen it. There’s very few clients who aren’t making and doing something with that investment. They’re very wise in that regard, but it’s our duty to tell you that you have quarterly payments. When are they? The April 15th. That’s not confusing because that’s the same date that we have to do our full return anyway.
Barley: That’s Q4.
Eliot: Right. Yeah, exactly. All kinds of chaos there. Barley’s exactly right. Quarter four of 2025 is due April 15th as well. That’d be not the fourth quarter, but that would be the first quarter of 26th. It’s the full year payment due date for all 2025. Second quarter is June 16th approximately, give or take. Its usually July the 15th. If you’re on a weekend, it can vary one day or another, September 15th for the third quarter, and then January 15th is the fourth quarter. Again, fourth quarter, January 15th, and then you turn around.
Barley: Yeah, I said that backwards. Sorry.
Eliot: At April 15th, then you’d have the full year for the previous year. Those are your quarterlies. When you have to put them in approximately, yes, we recommend it, but a lot of clients don’t. I got to be honest about it. They incur that extra little bit. They wait until the end of the year, which I can understand because now they have a better picture of what the year looks like to determine how much they do have to pay as a reasonable wage. As you pointed out, with some good tax plan, maybe we justify a little bit less because of the region we’re living in. Maybe we’re not as profitable, so that’s a perfectly good reason to maybe you wait a little bit and might save overall in your calculation a little more.
Barley: Just to note on that, remember taking this pass-through entity tax thing, putting that aside, your S-corp isn’t going to pay tax. Those estimated payments will be coming from you as an individual. That’s just to keep in mind there. Your S-scorp is a pass-through entity. When you make those estimated tax payments to the Fed, that’ll be from you as an individual, not from the scorp.
Eliot: Very big point because it is a flow-through in entity. We’re all talking your 1040 here, even though it originates in that S-corporation. Again, recapping here, proper ratio, there is none. Anywhere from a third to maybe 60% of the net income would be a rule thumb, but really there’s a more engrossed test of how much the average person makes doing what you do, the business you do, how profitable you are, and the region you live in. All these factors come into it. Hopefully that gives you some insight.
Barley: Just a side note. What do you think about paying a quarterly W-2?
Eliot: I would do that too if you can. Again, I wouldn’t fault the client decides to wait to see what the year looked like. But if you have that quarterly, then you got estimated payments in. That locks down, at least for that portion, any potential penalty, late fee, or something like that. You are definitely cutting back on that. Some clients will pay for the first three quarters and then they take the year off for their last fourth quarter if they think they find out that it’s been reasonable. Different theories. One’s not better. They’re worse than the other. It’s just what suits you.
Barley: When you set up W-2 payroll, you don’t have to get paid every two weeks. That’s typically going to cost you quite a bit there, so you can stretch that out a little bit.
Eliot: One cautionary point on that though, you do have to look to your state rules on when you have to pay your employees. If you had employees, all the states are different. Some say you have to pay them at least once a month, every two weeks, or every 15 days. That can get a little nasty if you have employees. If you’re paying your child or a spouse, odds are they’re not going to sue you unless it’s been a really bad year. You probably won’t run into any problem with that, but just be aware that if you have other employees, there are dates where you have to be paying these things.
Barley: Sure. Good work. All right. Moving on.
Eliot: Yeah.
Barley: All right. What do we got here? Best way to structure a business to maximize taxes while doing spec houses. Building houses, build to suit, build to sell.
Eliot: Speculative, yeah.
Barley: “I do the majority of the work on the houses, so it looks like a lot of the profit on my labor, which is not good. I’m currently structured as a pass-through LLC and purchased the house lots in a different LLC from my construction LLC.”
Eliot: A lot going on here. We’re going to start tearing it apart. First of all, I just want to go right into the center here. I do the majority of work on the houses, so it looks like a lot of profit on my labor, which is not good. What they’re referring to there, pretty confident, they’re talking about ordinary wages. It’s on their labor that’s going to be subject to income tax at the federal level, whatever their bracket is, plus an extra 15.3% we were just talking about in the previous question.
What if it is, they earn an S-corp, and maybe them as employee pay half of that 15.3%, 7.65%, and then the employer or the S-corp is paying the other half? It’s still all within their universe. t’s 15.3% approximately to this client no matter who’s paying what. That’s what I think they’re getting at here that’s not good. I would agree with that unless you had ulterior motives. You want to show earned income for other tax benefits outside of our question here, then that might be, but it’s not here.
You want to maybe have an S-corporation where you can battle. Probably the best weapon we have against employment tax is the S-corporation. You may not be aware that there’s a limited anything. If you get paid approximately $170,000 a W-2, the major component of that 15.3% is social security approximately 12.2% of it. It drops off to zero after approximately $170,000.
If you paid yourself $180,000, that last 10% is not getting hit with that extra 12.2%, so you have a significant drop off. But if we’re below that, then there can be some real savings with an S-corporation by simply doing some tax planning. I wanted to point that out here with, which is not a good portion. I think that’s what they’re getting at.
To the broader sense of the question, they bought a bunch of land in one of their LLCs that’s not the construction LLC. They went out and bought a barren piece of land. How did they treat it? How did they sell it to their construction company, which I’m just going to call an S-corporation? If they sold it piece by piece, lot by lot, that’s inventory. We got a problem with that.
Barley: That’s a word we want to avoid.
Eliot: Exactly. If it’s inventory, that’s ordinary income. Again, within that entity, it’s subject to employment tax. We didn’t do ourselves any favors, but what if they had bought just a bearing piece of land, didn’t break it up into bakel bits, or anything like that, it’s just a bearing land, and they sold it to their S-corp? Now, if it was for investment, that can be capital gains. If they held it over a year, they’re going to be limited to 20%, maybe plus 3.8% for NIT, net investment income tax, but basically 24% is going to be the max that they would have to pay, possibly less, capital gains on that.
You take the barren lot in your LLC if it’s disregarded, hopefully, and sell it to that S-corporation. Get a lot of capital gains. Sell at market rate plus a little bit if you can justify it because every dollar you get it and sell to your S-corporation, that’s going to be capital gains savings to you. At the S-corporation, that’s going to be their cost of goods received.
Barley: That’s where they’ll split it up.
Eliot: Right, exactly. They’ll break it up and sell it out in the various lots, but they’ve inflated as much as possible. That price from the sales point, you got more as capital gains. The S-corporation receives at a very high rate. If they only sell it for a little bit of profit, you have very little ordinary income at the S-corporation because again, they’re selling inventory at that level. Same story. That’s what’s going on here. That’s the thought process behind this.
Really, a lot of this is covered on what we call section 1237 in the code. What if you went out and got a barren piece of land and you don’t really play in this game a lot, this is a one time off? There are some rules, where even if you sell as an investment, but you held it for five years, and you’re going to get that capital gains treatment and things like that, you got to hold it for a while as an investment in order to get that benefit of treating it as capital gains.
In 1237, there’s a lot of detail. You don’t do a whole lot of improvement. You really don’t want to even touch the land. You can do some, but I’d be very careful what you do in it. This is definitely tax consult, tax planning territory. If you’re patient, if you had the time, if you held it long enough, there are some things that can be done here to save some significant dollars on that capital gains play if we do it right.
Barley: One of the fundamental issues here, if you go build a house as a contractor, it costs you $20,000. The house isn’t worth $20,000, it’s worth way more immediately. That’s I think part of the issue here. Anyone doing development stuff can certainly let you know more guidance on that. Like Eliot said, set up a specific consult if you’re dealing with a specific project here that you want to make sure you outline this properly and get the right tax treatment.
Eliot: Sadly enough, if you’re doing this and also you run into losses, it happens. That one house we thought was going to do really well just didn’t do so well. We want to have a consult to check out how those losses are going to interact with the rest of your return as well. Sometimes there can be some unique things maybe we can do to lessen the medicine on that. We want to make sure we have a good sound understanding of what’s going on in the situation.
Barley: Right. All right, moving on?
Eliot: Yup.
Barley: Oh boy, mark to market. It seems like we address this every few weeks or so. As would be expected, a lot of you ask about this. If I take this mark to market election, active trader status, then you can write off all these losses. That’s half the story certainly. Let’s dig into what this is. Is it a good tax deduction? It certainly can be a large tax deduction on your unrealized gains, but that gets us into some scary territory there. First of all, let’s just talk about the timing of it. Is it too late to make the election for 2026? I believe it is. This is one of these timely filed requirements.
Eliot: For 2026 on our 2026 return, we have to do it on our 2025 return, not timely before. In other words, we’re in 2025 right now. I’m going to do my return April 15th. I have to mark on April 15th of 2026 on my 2025 return. Hey, I’m making mark to market election. I very well might have to say which securities I’m talking about that are going to have that standard. That will be timely. Yes, we can still make the grade for 2026 activity, but we got to do it soon in our 2025 return without extension before the April 15th deadline.
Barley: Got you.
Eliot: Again, this all gets back to the whole trader status, which we’re not a fan of. Toby’s done so many videos. He’s put out so much good material on this. I can understand the popularity for wanting to have that status. It makes a lot of good points until you really start peeling it apart and realize that what’s going to go on here is that all your trading activity would go on an S-corp or on your Schedule C. That’s where all your expenses will go, just the expenses.
You’re going to show a loss. It’s going to garner the attention of the IRS. That’s just having a big fire litten, bonfire or something like that in the dark of night. It’s just going to stick out, get the attention.
Barley: It will already get their attention. The Schedule C losses will further get their attention.
Eliot: Right? In case the first didn’t get it, the second will probably. They love to audit this area, even if you didn’t do anything wrong. Just to make that trader status, it’s a moving target. Things change. I saw why I had to have so many trades or whatnot. There’s so much substantial testing here. Basically, it has to be your main means of income. How do you justify that when you have some other W-2 job? It’s very difficult, so I wouldn’t recommend it, but that’s not what we’re asking.
Barley: Types of securities. You’re limited and have all buy and hold securities, right?
Eliot: Yeah. You got to be trading every day several times rotating that inventory on this. That’s why you can pick some securities for it and not others. You have to be very careful with that as well and follow through on that. We don’t recommend it. We don’t like the trader status.
We have something else we work with, typically a trading partnership that avoids all that mess. It allows you to take the deductions. You’re showing all your income, showing all your expenses. You’re not hiding anything. It has very little audit risk. That’s one thing that we’d recommend, but still to the call of the question, is it too late to do the mark to market election for 2026? No. You just have to do it on your 2025, but you cannot extend that return. You can’t extend it out to the October 15th deadline. It must be on the April 15th deadline.
Barley: It has to be in your 2025 tax return, which remember is going to be due April of 2026. The tax deadline’s always fun.
Eliot: It’s difficult to keep that all straight, but that election would allow your activity in 2026 to be considered trader status where you could make the mark to market election.
Barley: Right. For the couple of you out there that are actually doing this, you’re like, I could tell you guys all about this, I’m sure you could. It’s just for a lot of people, it’s a misconception that they’re trading a little bit and think it’s an election they can take. It’s really meant for people that are doing daily activity in the market.
Eliot: The real only benefit and what happens if you get this trader status and mark to market is that at the end of the year, you act like you sold everything, even if you didn’t. If you have a bunch of losses on the books, you got to take those losses.
Barley: I think Toby has a good ism on that one.
Eliot: Yeah. Why would you be doing this investment if all you do is lose? That doesn’t make any sense.
Barley: Hey, I’m losing a lot of money. I want to become a trader.
Eliot: It lacks a lot of clarity about the bigger situation.
Barley: And not trying to be flippant there about your strategy, your approach, or anything like that. What’s the other one we run into that a lot of?
Eliot: There’s a couple.
Barley: Yeah, for sure. We don’t chase losses, and that’s how Toby, I like how he explain it. We go after investments that fit our criteria for an investment that makes sense, and then we take advantage of the tax deductions where we can.
Eliot: Yeah. Real quick, no, it’s not too late, but you got to get it in on your 2025 return for the 2026 mark to market.
Barley: Yup. Timely filed. Any questions, let us know, guys. All right. This is another great one, and it comes up a lot. “Renting to a friend for $300 a month. Fair market rent would be over $1500, so obviously not charging fair market rent. Any tax consequences here? What kind of legal consequences maybe?”
Eliot: Yeah, all kinds of oodles of consequences going on here.
Barley: Repercussions.
Eliot: We talk a lot about this as a vacation rental rule. It’s very similar. It walks hand in hand with that. The ideas is there, if you’re staying at the vacation rental rule, if you stay at a property too much, you’re going to get some limitations. Same thing here. The code says if you’re not really trying to make a profit off this, you really don’t have a business motive, which clearly you don’t, you’re renting for $300 a month when the fair market rent is $1500, the IRS is going to come and say, all you get to deduct for business expenses, first of all, you have to declare the $300.
You can only take deductions up to $300. You can’t create a loss, and any additional expense does not carry forward in this situation. You lose all the depreciation, the property taxes, et cetera. Anything above $300 a month in the expenses, you’re not ever going to take as a deduction. You can do this. You can show your $300 and just basically wash it. That’s it. If you’re okay with that, that’s fine from a tax perspective, but you brought up a little bit about some other consequences in the legal realm.
You’d have to talk more to your local attorneys, something like that, or platinum attorneys, but you do run in a situation here where if clearly you don’t have a profit motive, then do I really have asset protection? My LLC, if it doesn’t have itself, it does not have a business motive. One of the requirement often for an LLC for asset protection is that it’s for a business.
Barley: It doesn’t look like a business.
Eliot: Right. Your really savvy attorney on the other side could say, I don’t see a real business purpose here, your Honor. Just maybe they could pierce the corporate veil on this. It’s something I wouldn’t want to take a risk on, but you need to be aware of. I’d certainly still have it in an LLC, even a false sense of security or something like that, but I’d be very aware of the potential not just tax consequences but also potentially the legal.
Barley: Just to reiterate, if you’re not charging fair market rent, you can take deductions but just down to zero. You can’t report a loss. Like that hobby loss rule on Schedule C, if you’re an artist, performing artist, or something, you have to report the income. That’s the IRS rule. We can take that down to zero, but not down to a loss for an extended period of time.
Eliot: I would imagine I’d be hard pressed to probably find something that you could rent for $300 a month, where you’re not going to have more than $300 worth of expenses.
Barley: Yeah, of course.
Eliot: In that game, any rent on the house, the expenses would probably be in addition above and beyond $300.
Barley: Especially now, it’s gotten a little better, but boy, a year or two ago, rent was peaked. Wow.
Eliot: Yes. Very good point. Yeah, we’re running along a little bit faster here today than normal, but we got one question left.
Barley: We only got one question. Oh, boy. You better get the questions coming.
Eliot: We’ll make sure we show the ads for the YouTube.
Barley: We never know. Guys, sometimes we’d go an hour and a half and feel you guys petering out there, but it’s all about the information. Any questions on any of this, please let us know. All right, hop in there. Last one.
Eliot: “How can I have an LLC for my personal residence if the house is the residence of both my son and I as joint tenants?”
Barley: Would I even want to?
Eliot: Yeah. How can you? Each of you can put your particular interests into an LLC or if you were doing tenants in common, either way. We have a potential problem with that because as a generality, if Barley and I have a property together and we’re both having to live there, it’s our personal residence, and we put both our interests in an LLC, it will typically be considered a business opportunity, meaning it’s going to be a partnership.
We got problems if we get into that situation because if you have a partnership with a personal residence, you lose a lot. You lose the 121 exclusion. That’s if you sell your primary residency that you’ve owned and lived in two of the last five years. You can exclude $250,000, single, $500,000, married filing joint of your capital gains. That’s gone if we put it in there. You could have homestead just for putting it, not even if it wasn’t considered a partnership. If you put it an LLC, you could lose your homestead exemption for your particular state. That’s huge in a state like Texas or Florida, but that might be an issue, so you want to watch out for that.
Know thy state is the thing because sometimes it’s okay to do that. You’re not really concerned with the homestead, but you got to know your state. That’s a possible problem. Increase insurance because it will be considered a business. We run into vehicles again. If you want to have a vehicle as a business, your insurance, commercial, or insurance rates are going to go way up. This could have a problem with your financing. You’ve been financed as a residential building, all of a sudden it’s commercial, that could have some issues too. There’s a lot of consequences.
Barley: Yeah, a lot of non-tax issues too.
Eliot: Yeah.
Barley: Banking and lending. Who holds the title? Now’s the partnership hold the title. Is the bank going to be okay with that?
Eliot: What if it was just Barley putting his interest in the LLC? That might work, but you just want to be careful. All these concerns that you have to look out for. You don’t want to,trip over anything that would be substantial, but really watch out for that. We have to watch out for that partnership situation, especially with married couples. If you put a house in a personal residence, we’ve seen that happen where it gets into a partnership and they don’t live in a community property state. Automatically it could be a partnership or will be a partnership, and they lose that 121 exclusion. That’s huge. That’s a real dagger to your tax planning if you lose that.
Barley: I guess we’d probably start with why are you looking for the liability protection. Maybe your son has a bunch of his friends renting rooms or something there. That may be a case where we put some liability protection there. It could be a scenario.
Eliot: Yeah, but definitely a consult territory.
Barley: Guys, we crashed right through those. Let’s see, is there anything else we want to go over before we wrap up here?
Eliot: These guys are answering all the questions. They’re over 109.
Barley: My gosh, seriously?
Eliot: Thank you, Tanya.
Barley: You guys could have left this one. No, thanks, Harry, Rachel, Dutch, and Troy. Really appreciate your help in the background there. Yeah, 150 questions. That’s fantastic.
Eliot: A hundred and nine.
Barley: A hundred and nine, God. I said to submit your questions. You guys obviously did that. Fantastic. Again, just wrapping up, we’re cutting out a little early, I guess it is Christmas break. We’ll let you guys go 10 minutes early and not drag you down and tax stock. This is our last Tax Tuesday of 2025.
Eliot: Thank you for a great year. Yeah. It’s been a great year. We got Jared in here too. I just saw him in there.
Barley: Geez. No wonder all the questions are again, we got the whole team in here. Yeah. When are we back? Sometime Tuesday in 2026.
Eliot: One of the first Tuesdays. I think it’s the sixth, I believe, but I’m not sure. Maybe Penny knows, but thank you so much for a great year. It’s been a lot of fun.
Barley: Yeah, absolutely. Wow, 2025 was a rush. We got a bunch of new tax laws, stuff like that. Thanks again for your time. Great work today. Make sure to hit the YouTube channels. Schedule a free strategy session.
Eliot: Happy holidays.
Barley: Send us your questions for 2026. We’ll be back. We’ll still be here for 2026, so email your questions. Happy holidays, guys. Go get some downtime. Be safe out there. Much love from your Anderson Business Advisors family here, and we’ll see you next year.
Eliot: Yes.
Barley: Thanks, team.
