Welcome to the Anderson Business Advisors podcast. Today, experts Toby Mathis, Esq., and Eliot Thomas, Esq., explain tax strategies for common questions concerning how to write off business travel that includes personal days (hint: business days have to be more than 50% of your trip), how and when you can qualify as a real estate professional, investing in real estate from your investment accounts, and some of the helpful tax benefits of creating and using a Health Savings Account. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- “Can I deduct travel expenses to rehab rent rentals that are in other states than my primary residence?” – Yes, but you have to spend more days doing work (more than 50%) than personal days.
- “If we convert our traditional IRA to a Roth IRA with the same provider, do we have to file any forms with the tax return or otherwise? If so, what forms?” – You’ll receive a 1099R – the converted amount is taxable.
- “Do we have to make the REPS election every year? And how do we make the election?” – That’s real estate professional status. Does one spouse qualify? Is he/she spending 750+ hours on the business?
- “Last year we neglected to register as real estate professionals. We ended up owing a substantial amount in taxes. Can we register as real estate professionals this year and carry over the expenses that were disallowed for 2022 and 2023?” –in ’23, if we make the status and we, the real estate professional status and we aggregated, we got everything done properly in return, it’s not gonna help us. for those prior losses.
- “For Augusta rule payments, what documentation is required beyond meeting minutes? Do I just write myself a check? Should Augusta rule go in the memo? Do I need to send myself an invoice? I am the owner and employee of an S-corporation?” – You always want to send an invoice. I would recommend it. You want to have that paper trail.
- “Can investment income be used to fund a health savings account? The deductibles are so high. We are always paying out of pocket.” – So you don’t need any type of specific income to fund an HSA health savings account. Limits for 2023 are 7750 for a family, 3850 for an individual.
- “I plan to buy a rental property using my 401(k). I’m 65 and set up my solo 401(k) for rollover. My question is, if I convert to a Roth 401(k) and purchase the rental, does the rental income and future equity gain become tax-free?” – Yes, it does, that’s a quick answer.
- “Should I have my rental income funneled into an LLC, business, or corporation to save money in taxes?” – how is it taxed? And it can be what we call disregarded, which means it’s taxed. Could be a partnership, could be an S corp, could be a C corporation, and all those have different answers.
- “What are the tax and legal benefits of making an owner loan to my LLC rather than capital contributions?” – just like the last question, how is that LLC taxed? We would do something different, perhaps if it was a disregarded entity or partnership versus an S -corp or a C -corp. They can all have different outcomes depending on how we do it.
- “Can you write off 100% of your trip to Las Vegas all expenses? I’m a realtor licensed in both Nevada and California. Any other tax deductions?” – You’re going to have to qualify it as business travel. That means more days of business than anything else…
Resources:
Tax and Asset Protection Events
Full Episode Transcript:
Toby: All right. If you’re looking for Tax Tuesday, you’re in the right place. My name is Toby Mathis, and I’m joined by…
Eliot: Eliot Thomas.
Toby: And we’re going to be your hosts today of bringing tax knowledge to the masses. If you’re looking for a bunch of tax questions and hopefully some good tax answers, you’re in the right place.
First off, we’ll go over the rules here in a second. I can already see a whole bunch of people saying hi to Patty in the chat. I can see you guys. I see David, I see a lot of friendly faces out there. Although I don’t see your face, I see your friendly writing. Anyway, welcome guys. We’re going to dive right on in.
Let’s go over some of the rules of Tax Tuesday. First off, give me a thumbs up if this is your first Tax Tuesday. You’ve never been to another Tax Tuesday before, but this is your first time. There we go. We got a bunch of thumbs. A bunch of you guys are old hats, and then we got a bunch of people that are brand new.
What we do here is we go over a series of questions, I’ll go over what they are, and then we’ll go through and answer them. We also see your chats. We can see questions that you pose there. Plus I have Patty, Dutch, Jared, Jeff, Jen, Ross. We got Tricia, Kenny, Kate, and Patty. We got a whole bunch of people on that can answer your questions in the Q&A as well. Somebody says, can I be promoted to a panelist? No.
Eliot: That’s a rush. Not yet.
Toby: Oh, that’s a rush? Sorry. I thought that was a client. My gosh, that’s awesome. All right, ask your questions in the Q&A. If you have comments, put it in the chat. If you have questions in between sessions since we do these every two weeks, send it to taxtuesday@andersonadvisors.com. Eliot here gets those. We answer them all, right?
Eliot: Yeah. We send them out and certainly read them all before the show.
Toby: Here’s the only thing. If you start asking us a volume, if you start asking us books, we’re going to say, hey, you need to become a client. Otherwise, we just respond. The whole idea is to give you guys easy answers that are easy to understand. We don’t play hide the ball. We try to give you really direct commentary. It’s one of those things. We just like to do it. It’s been helpful. This is our 214th episode, so we’re always going to do that.
Somebody says, will you be at the live event next week? David, yes. I will be in Orlando with Clint, Michael, and probably 20 of our advisors and the whole team. I know Ryan’s going to be there, Aaron’s going to be there, Jen and Stacy Conkey. That’s going to be awesome. Eric Dodds is going to be there. We have a really good crew coming in to speak.
Amanda’s going to be speaking. Michael Bowman should be speaking. Clint, myself. I’m going to try to do as little as possible. Just kidding. I just like to hang out and talk to you guys.
Here’s something fun. Just put in where you are located right now and what city and state, and we’ll see how many states we have. If you put inebriated, it’s not going to count. Let’s see. They’re already flying by here. I’m going to go back up.
We have Charlotte, North Carolina, Lewiston, Idaho, Queens, New York, Burbank, California, Phoenix, Arizona, Chicago, Illinois, Tampa, Oklahoma City, Honolulu. We’ve already got both coasts covered. Apex, North Carolina, Carson City, Colorado, Minnesota, California. There we got California, so we’ve got down in the corner, North Carolina, Texas, San Francisco, Nebraska, Louisiana, Tampa, Austin, Lake Lure in North Carolina.
Minnesota, Ontario, California, Annapolis, Maryland. There’s Keller, Texas, Fremont. I haven’t seen any Florida yet. I saw Tampa, Denver, Tennessee, Arizona, Cincinnati, Ohio, there’s more. Thousand Oaks, Mooresville, there’s Chicago in the house, we got people. Gulf Breeze, there we go, we got more.
Gulf Breeze is pretty downy. I think it was nice there because we were talking to a good doctor on that coast this morning, and it was just beautiful. Dallas, Minneapolis, Union City. Ahualoa, Hawaii, welcome. Mahalo. Beaverton and San Antonio. We got people from all over the place. There’s Seattle. We got all corners of the country. Did I see in Alaska? There’s Miami. No, we just have too many.
Eliot: Anchorage.
Toby: Where’s Anchorage? There’s Anchorage. All right. We’ve got a big bunch, and we already have questions coming in, which we love. There’s Honolulu as well. Guys, there are hundreds of you guys on, and I have no idea how many people are on the YouTube live stream as well. It’s a lot of people. Anyway, welcome. Let’s jump in on what the questions we’re going to be answering today are.
Let’s get ready. First off, Eliot. We have an issue sometimes with Eliot’s choice of questions. No, we’re not going to say that. We’re not going to say it out loud, even though we just did.
“Can I deduct travel expenses to rehab rent rentals that are in other states than my primary residence?” Good question. We can answer that. That’s going to be a short one. I’m just kidding.
“If we convert our traditional IRA to a Roth IRA with the same provider, do we have to file any forms with the tax return or otherwise? If so, what forms?” Good question. That usually causes the anxiety of, oh, what’s going to happen? How do I know?
“Do we have to make the REPS election every year? And how do we make the election?” That’s real estate professional status. If you’re not familiar, we’ll get into that. That’ll be a good segue.
“Last year we neglected to register as real estate professionals. We ended up owing a substantial amount in taxes. Can we register as real estate professionals this year and carry over the expenses that were disallowed for 2022 and 2023?” We’ll get into the ins and outs of that one. That gets a little into the weeds.
“For Augusta rule payments, what documentation is required beyond meeting minutes? Do I just write myself a check? Should Augusta rule go in the memo? Do I need to send myself an invoice? I am the owner and employee of an S-corporation?” Good question. We’ll go over that with you.
“Can investment income be used to fund a health savings account? The deductibles are so high. We are always paying out of pocket.” I know. That stinks, but we’ll answer that.
“I plan to buy a rental property using my 401(k). I’m 65 and set up my solo 401(k) for rollover. My question is, if I convert to a Roth 401(k) and purchase the rental, does the rental income and future equity gain become tax-free?” Good question.
“Should I have my rental income funneled into an LLC, business, or corporation to save money in taxes?” These are pretty straightforward questions.
“What are the tax and legal benefits of making an owner loan to my LLC rather than capital contributions?” Good question. We’ll answer that.
“Can you write off 100% of your trip to Las Vegas all expenses? I’m a realtor licensed in both Nevada and California. Any other tax deductions?” Yeah, we’ll get into that. It’s not like we haven’t heard that before. Just don’t ask Hunter.
All right. There’s YouTube, if you guys like these types of questions and you want to gain more knowledge, I think there are about 787 videos sitting there on my YouTube channel right now. Feel free to go there. Clint also has a channel, which is more asset protection–geared. Mine’s probably more tax and investment advice. Just because I spent a lot of time on the tax side, the investment goes hand-in-hand because the tax code sometimes tells us what investments we should be in.
We also have workshops. We have our free Tax and Asset Protection workshops on many of the weekends. You’ll see on March 16th, and then we have our live workshop coming up in Orlando. That one is a small fee to get in, but it is a live event. It’s four days, three days are asset protection, one day is infinity income generating. But we’re going to be there on March 21st through the 24th, so there’s still time to grab those if you want to attend next week.
We have another one day free event that’s virtual. That is on April 6th. Feel free to click on any of those and get more information. Patty’s also putting that link. By the way, it’s fun. Just come and hang out with us. There’s that link if you want to go to YouTube. If not, Patty will probably show you a bunch of links. All right, let’s dive in.
“Can I deduct travel expenses to rehab rentals that are in other states than my primary residence?” What say you?
Eliot: Yes. It depends as always, but one is allowed to. You have to treat it just like any other business travel, which basically means that you have to spend more days doing work than you do (say) having just personal days, I guess is what we call it.
There is a really nice trick that they have in the regs and in the publication on this. If you go on a Thursday, call it a business day, you work on Friday, call it a business day, and then you take the weekends off, come back to work on Monday, we call it book ending the weekend, then you can get a lot more free days.
Toby: Yeah, the weekend days count as business days when you book it.
Eliot: Yes we can, but we got to treat it under the regular rules of business travel. More days have to be business. You may want to make a little bit of not an intense log, but just a little bit of notation about what you did each day.
Toby: Just take one of these. This is the rule. If more than 50% of your time is spent on business—in this case rehabbing—then 100% of your travel expenses to and from that location are deductible. If you drive, that means 67¢ a mile. If you fly, that means the entire cost of the flight.
If you do some vacationing while you’re there, you have to make sure you don’t exceed that 50% of the total trip, including the travel days. Like Eliot said, if you’re working on a Friday and a Monday, then that Thursday is a travel day, Tuesday could be a travel day. You have Thursday, Friday, Monday, Tuesday, plus the weekends. We have six business days, so you could stay the following week and still call it a business trip.
When you’re doing that, the hotel for those days that are vacationing are not deductible. It’s really important. The travel to and from, 100%. Meals, 50%. When you’re doing it—that’s just the rule—50% of your meals are deductible. Whatever days you’re actually staying there for, like lodging, 100% of your lodging expense is deductible for a business day.
What is a business day? It’s four hours and one minute. If you’re wanting to stretch out, you’re rehabbing, let’s say you’re rehabbing a place in Hawaii, maybe you’re going to make sure that you work for four hours. We used to teach an event—and we still do it, but we have to do it again—the executive retreats where we would meet for four hours a day. We do it Thursday, Friday, Monday, Tuesday, so that we’d all get eight days of travel, and then you could stay an extra week, have a little fun, and still get to write it off.
Eliot: Four hours in a second there, right?
Toby: We actually went long. Every day, we were like, okay, we’re going to be done. We would do 9:00–1:00, and then we would bring in some lunch or something. It was always like 2:00 or 3:00 before we got out of there, and then everybody’s hanging out anyway because it’s Hawaii, and everybody’s having fun. That’s how that rule is.
The other one is if you’re in your local state, you have investment properties, and you’re driving to them, the question always comes down to, can I write that mileage up? If you have an administrative office in your home, the answer is yes. If you just live in your home and you don’t have a home office or an administrative office—in our world, it’s an administrative office—then you’re going to have issues because they’re going to consider it commuting to a place of work.
You want to make sure that you’re doing this where you’re getting the benefit of that administrative office in your home, which usually means you need to have something that’s filing a corporate return. It could be an LLC taxed as an S-corp, LLC taxed as a C-corp. You want to have something to where it’s reimbursing you so you can have an accountable plan. You’re writing off the use of an exclusive area in your home. Once you do that, anything that you travel to becomes a business expense.
If you’re wondering how you track mileage and things like that, just get MileIQ, or I think QuickBooks has a version too, or a GPS. They tell you exactly how many miles you went. You can track it easily, and that counts for the IRS. Keeping things on here is just as good as writing it down nowadays. Getting an app like that, pretty inexpensive and easy to track your miles at 67¢ a mile.
If you’re doing even 5000 miles a year, something pretty light, 3350 or something like that, it’s a lot of money. Plus your administrative office can be a lot of money. Your 280A, your Augusta rule, can be a lot of money.
You start adding those things up and you’re like, whoa, I just wrote off $15,000. Our average is probably a little over $20,000 a year for our clients. Whatever that’s worth is whatever your tax rate is that it’s coming out of. Let’s keep going. Toby will talk all day if you let him.
All right. “If we convert our traditional IRA to a Roth IRA with the same provider, do we have to file any forms with tax return or otherwise? If so, what forms?” What say you?
Eliot: The forms you’re going to get are from your provider. It’s typically a 1099-R, retirement, is when we get that. They’ll provide it for you, and then you would turn that over to your tax preparer. They’ll take the data off it, put it into their software, and you’ll be good to go. There’s really not a whole lot else to it. It’s pretty straightforward. It will have all that tracked out, how much was moved, the taxable amount that went over, and then your preparer can use it.
Toby: Yup, it’s very, very simple. There’s a spot on your return, and it used to be 15A and 15B. I don’t know what it is now. Might still be the same, but it says amount that is received from a retirement account. You’re going to put the amount from that 1099-R in there, and then it’s going to say taxable amount.
When you roll over money, they still issue that 1099-R. You’re still reporting, it’s just the taxable amount is zero. Here, if you’re converting it to a Roth, the tax amount is the entire amount. You’re just like, hey, here it is. You’re reporting it all. Is there anything special that you’re doing to let them know it’s a Roth, that it’s a rollover?
Eliot: There are always little boxes to check when you’re putting data in. Whether or not it was a traditional or a different type of retirement account that was pre-taxed, that would be the only thing that the IRS would really be interested in because they know they have to tax it. I can’t specifically remember if it’s just a traditional IRA. I think that you do put that in there, and then if it’s a 401(k), you put that as well. Just label what type it is.
Toby: Yup. Somebody says apparently. Somebody’s making fun of my math. All right, that’s John. I’m going to give John the stink eye. All right, let’s keep diving in. That was a fun one.
“Do we have to make REP status election every year, and how do we make the election?”
Eliot: Really, technically there isn’t a REPS election. You just qualify for real estate professional status, and many times they do that. You have to aggregate your properties, and there is an election. You need to put that on the return, and that’s showing that you did make the “REP status” (real estate professional status). That is very important that you get that in on your timely filed first return with extension, which we haven’t talked about.
We want to be getting those extensions out for partnerships and S-corps that’s coming up Friday. You can make the election now. Every year you have to continue to qualify to meet the standards, but you only have to aggregate once. Once you do that, it’s pretty much coming.
Toby: I’ll break it down, guys. Real estate professional status is a fancy way of saying your passive losses from real estate. Your passive income is offset by passive losses. Passive losses can only be used against passive income. There are only two types of passive income. There are rents and there’s business income from businesses that you do not materially participate in.
For us, it becomes really important when you’re in real estate to determine, am I a real estate professional? If so, that is an exception to the rule that passive loss is only offset passive income. Now all of a sudden I can use those passive losses against my W-2 income.
Let’s say that you’re a lawyer, you’re making $300,000 a year, and you have a piece of real estate. Maybe it’s multiple pieces of real estate or whatever, but it creates a passive loss. You use depreciation. Maybe you use a cost segregation and you accelerate that depreciation, and you create a $100,000 loss, that could offset your $300,000 of income if you qualify as a real estate professional.
There’s one other type of status. It’s actually fairly common. It’s called active participation in real estate, but it phases out at $150,000 of adjusted gross income. For higher income taxpayers, it’s not an option. For everybody else, if you’re making $100,000 a year, you can write off $25,000 of passive income without having to qualify as a real estate professional.
Everybody else, if that’s not you, you’re making $200,000–$300,000 or whatever it is, maybe more, real estate professional becomes your friend. There are two big tests. Test number one is, are you a real estate professional? That first test has to be met by one spouse. If you’re married, one spouse has to qualify. That is 750 hours in a real estate trade or business in which you materially participate.
There are 10 different types of real estate business. There’s development, redevelopment, construction, reconstruction, being a broker, being a manager. What else is there? I already said construction, but it’s active. Being a real estate agent would qualify. You’d have to do this 750 hours. This has nothing to do with your properties, but one spouse has to qualify.
Test number two is, did you materially participate in your rental properties? This is where it becomes really important. We have to make an aggregation election, otherwise you have to meet the test for material participation on each property. A typical test for participation is, did you do all of the services? Did you handle all the leasing? Did you clean the place? If somebody else is doing any other substantial activities, you’re going to have to meet at least 100 hours.
Now we count both spouses’ time, and we aggregate them together, or 500 hours. If it’s the 100-hour test, you have to be the number one. You guys have to be the most hours spent on your properties than anybody else. Otherwise, you have to meet the 500 hours. I know it’s confusing. It’s a little checkbox.
Eliot here probably does it in his sleep. He’s like, oh, check, check, check, check. Yes, okay, you meet it. You make that election on your Schedule E. You literally write down real estate professional, right?
Eliot: It will come through on the software down in the area where there is real estate professional. In the back, you’ll have a statement that you’ve chosen to aggregate. That’s the one you really want to make sure you got because, as Toby pointed out, you probably have to aggregate usually to get that REP status, and that has to be on your return. That’s the important one.
Toby: Yes. Then you get a real estate professional then you’re like, yes, all I have to do is buy more. Anyway, we keep doing that. Hey, this is fun. This is fun today. These are easy. I’m happy about this. Sometimes these make my head hurt. Today they’re like little softballs coming up in the air.
All right. “Last year we neglected to register as real estate professionals.” Okay, this is making my head hurt. Now I’m like, oh, no, this is bad. Okay, you didn’t register as a real estate professional and you could have? “We ended up owing a substantial amount in taxes. Can we register as real estate professionals this year and carry over the expenses that were disallowed for 2022 and 2023?”
Eliot: I have to be really careful to what I say here. Your losses from the previous year, 2022, you’re not going to lose them. They’re going to continue forward, but they’re still suspended because you weren’t a real estate professional.
Toby: They’re passive.
Eliot: Exactly.
Toby: They’re passive loss carryforwards.
Eliot: I’m going to assume you couldn’t use them, otherwise we wouldn’t have this question. They’re going to still be stuck there. In 2023, if we make the real estate professional status, we aggregated, and we got everything done properly in return, it’s not going to help us for those prior losses. They’re going to be trapped in the passive world, suspended we call it. The effect of your real estate professional will pretty much only be from that moment, January 1st of 23 going forward.
Toby: Yeah. The real estate professional is an annual election that you are not subject to the passive activity loss rules. You have to let the IRS do it. If you don’t, it’s just passive. That’s not the end of it.
Passive losses, when you carry them forward, a couple of ways that they get released. You sell the property. Whatever creates the passive loss, you use it against the sale of that property, and then it gets released further and can be used against anything. Or you have other passive income.
A lot of people that are real estate investors, me included, a lot of times we’ll say, I’ll be a partner in something, but I won’t participate. The reason is, again, pizza shop. We have a pizza shop. Eliot and I go into the pizza shop, Elliot works and he does the pizzas, and I do nothing. That’s a passive activity for me.
If that pizza shop makes $50,000 a year, hopefully it does, get working, brother, I make $50,000 a year, I could use my passive losses from my real estate to offset the passive income I am receiving. The distinction becomes are you materially participating, which is the 100-hour, 500-hour, or I’m doing substantially all the activities.
If you see these wealthy people sometimes saying, hey, I’m part owner in this part owner in that, but they don’t seem to do anything, it’s by design. Quite often they’re saying, hey, I’d rather be a part owner in a restaurant or something that is profitable, and it’s kicking me out a little bit of money. But then I don’t have to pay tax on it because I have all these passive losses over here.
Other people will try to qualify as a real estate professional, and then they have a really strong appetite for depreciable assets because it will keep them from paying tax on the rest of their income. For example, doctors, lawyers, engineers, salespeople, anybody that’s in a higher income profession might be looking around going, oh, I hope my spouse can qualify as a real estate professional so I can offset some of that income with the deductions from my real estate.
They’ll even go so far as to say, real estate professional status, I may not be able to hit, but I’ll do an activity that creates a loss like short-term rentals. Airbnb and Vrbo, if you’re seven days or less, that’s just a regular trade or business. You materially participate in that one, those losses can be used against your W-2 income. All of a sudden, there are strategies that pop up based off of those tax things.
That’s why when you look at my YouTube, I’m like, hey, I do a lot more investing and tax, because investing and tax go like this. Sometimes this investment is screaming at me because it’s going to save me $30,000 over here in tax. Hey, it’s going to keep me from having to pay tax this year on this amount, this is a great investment. But it’s only returning 5%. I don’t care because I’m getting a big hit. I’m getting 37% over here because it’s offsetting some of my income. Some things become more savory that way.
When you see people that are on a sporty chess, they start going to a different level, it’s because they’re saying, hey, I know I have a pretty good-sized tax liability, does this help with that? Now I’m looking at the return, plus I’m looking at, does it free up any of my other money? That’s where this stuff really comes in. Convoluted answer, sorry about that. I’ll go into that anytime with anybody because it gets into the weeds, but it’s so effective. For real estate professionals out there, it’s huge.
Eliot: Yeah, we can really tailor and come up with a game plan. Whichever side of the fence you are, real estate professional or not, there’s something out there that we can do if you have the time.
Toby. Yup. I don’t expect you guys to remember all this. Plenty of videos on YouTube. Plenty of times we can go over that. If you’re a client, you can always just come in. Our knowledge room is open, 9:00–2:00 every single day. You go in there, there are attorneys and accountants to answer any of your questions just like this, except they’ll put you into a private room and answer all your personal questions.
In the meantime, make sure you’re asking your questions. Where’s my Q&A? I’m going to pop that up. It’s disappeared. There it is, 107 questions have been answered thus far. You guys are doing it. This is a good place to go get your questions answered. I can see a bunch of good questions already there on real estate professional status. I like that.
All right, next question. “For Augusta rule payments, what documentation is required beyond meeting minutes? Do I just write myself a check? Should Augusta rule go on the memo? Do I need to send myself an invoice?” I am the owner and employee of the S-corporation.
Eliot: Certainly in the meeting, minutes are important. You got to get that covered. You’re asking about that or noting that you already have done that. That is an important one for all the rest of you out there. You always want to send an invoice, I would recommend it. You want to have that paper trail. You’re the one renting out to your corporation. Send an invoice to your corporation, it’s really not the other way around.
You’re the one providing the service to the corp, so send them an invoice for that dollar amount. Maybe it’s $750, whatever you came up for your quotes on the real estate rental. An important part, we see this a lot with other kinds of reimbursements and things like that, the corporation needs to really cut you a check, pay you, transfer money, actually pay you for that. That’s where we’re going to take that deduction at the corporate level, so get that payment out. We don’t necessarily have to put anything in the memo, you can if you want.
Toby: There was a case that just came out. It was a bunch of Planet Fitness owners. I think there were three or four of them. They were getting together every week, and they were using the Augusta rule. The Augusta rule is 280A subsection G2.
If you’re ever wondering what the Augusta rule is, it’s in a section that disallows a bunch of deductions. It’s at the very end where they give you a little something back. It says basically you can rent your residence any property that you use as a residence. It could be an RV, it could be a boat, it could be your house. So long as it’s a residence which means sleeping, cooking, and bathroom facility, then you can rent it for up to 14 days or less up to 15 days, so 14 days or less. And you don’t have to recognize it as income. It’s just like free money.
If I write Eliot a check tomorrow, let’s say Elliot’s going on vacation, and I say, Eliot, I’d like to stay at your pad for a week, and he goes, $100 per day, all right, and I write him a check for $700, he doesn’t have to report that. If I’m a business and I say, Hey, Eliot, I want to have meetings every month at your house, instead of renting a conference room down at the Hyatt, I would like to use your home.
In fact, I need internet. We’re probably going to watch a video. Maybe we’re going to watch Tax and Asset Protection live, or we’re going to watch some videos on real estate investing, stock investing, or fill in the blank, whatever your business is. You decide you’re going to bring your board over, which could be family members, and you guys are all there. I can do that. I could do that with a Hyatt, I could do that with myself.
Eliot could just say, here’s me, his S-corp. He says, hey, pay me. Now the question is, what’s the right amount of money? What I suggest, we have something called the tax toolbox, and I did a section on this, I have a whole kit that has all the paperwork broken down, but what works best is, call three hotels in your local area, similar accommodations depending on how nice your house is. Don’t go to the Four Seasons if your house is more on the modest side. In the same token, if you have a really nice house, don’t call up the Holiday Inn Express.
Try to get quotes, and that’s a reasonable amount. When you get a quote, don’t ask for a discount and say, I need internet, I need TV, I need refreshments. Anything that you would need during the day to have your meeting, do it, and then document your meeting.
Going back to our friends at Planet Fitness who were doing their 280A, they were disallowed a chunk of them because they had zero paperwork. They didn’t have meetings, they didn’t have any records. They didn’t even have a calendar. If you just put it in your phone and your calendar, Eliot and I are meeting at Eliot’s house to go over records, it’s so easy to document these things.
The IRS says you had no quotes, and you have crappy paperwork. They use the calendaring system and they said, you can prove 14 or 15 days. There were a couple of different owners, they were dividing it up. They allowed a number of those days, and they used $500 a day for the reimbursement because they said that seems reasonable.
I’ve been through an audit on this, and it was out in the middle of North Dakota with nothing around to get a quote, and they used $500 as well. That’s their bottom amount. We’ve been through audit where it was a higher amount too. All you have to do is show, here’s your paperwork. If you show them your paperwork, here’s my meeting minutes, here’s my quotes, you’re done. If you don’t have that, then they’re going to start saying, hey. Now they’re in a hard spot.
You could say that I had these expenses, but they want to see the paper trail. Yes, you could do this. Somebody says, can you do this as a renter? Yes, if it’s a residence, it doesn’t have to be owned. If you’re a residence, you could rent it out and get that tax-free money. It shows up as a lease expense on the corporation, and you don’t have to report it on your 1040. There’s nothing there. It’s not a red flag or anything. It becomes really, really easy. Exciting?
Eliot: Yeah. You probably overpaid for my place, but I’ll take it.
Toby: Free money. Yes. Somebody was asking, do you guys really hit $20,000 a year in accountable plans? You have to understand what an accountable plan can cover. Yes, it is over that on average. There are some that knock it out of the park. If you have a C-corp where we’re reimbursing medical, dental, and vision, we have clients there that it’s $30,000–$40,000 a year just that one line item.
There are things like your cell phone. If I’m a sole proprietor, I have to figure out what my business usage of it was, and I can reimburse just that portion. I could write that off. When I’m an employee of an S-corp, a C-corp, or an LLC taxed as an S-corp or a C-corp, 100%.
Did the business benefit? Yes. Boom, 100%. Computers? Yes. What if my kids work for it? Start reimbursing them too. If it’s used for the benefit of the business, you can reimburse it. That’s the thing. Then we use the Augusta rule. We use the administrative office in the home, and we’re writing off mileage. You get there pretty quick. Fun stuff.
All right. “Can investment income be used to fund a health savings account? The deductibles are so high, we are always paying out of pocket.”
Eliot: Yeah, you don’t need any type of specific income to fund an HSA (health savings account). Certainly, investment income would be allowed, but you don’t even need that.
Toby: What is a health savings account?
Eliot: That is money that you put in, you get a deduction, approximately $6000 or something?
Toby: If it’s a family, it’s over $7000 right now. They want you to speak up. Put that thing up higher. There you go. I’m going to look it up. HSA limits since I have internet here.
Eliot: Anyway, it’s an amount you put into this account. You can use it for what they call qualified medical expenses, which is pretty much any medical expense that you’d be ordinarily allowed to deduct on itemized deductions. Some argue that might be a little bit broader than that, but I think you cannot use it for health insurance premiums. That’s the one difference there.
Toby: You can in certain services like Medicaid or Medicare, otherwise no. Here’s what it can be used for 100% of the time, copays, deductibles, anything that’s not covered. The limits for 2024 is $8300, $4150 for a single individual. They’re around 70. Let’s see if I can find the 2023. I think 2023 was $7750. $3850 and $7750. If you’re over 55, you can add another $1000.
Why is this important? For 2023, I can lower my tax bill by making that contribution by April 15th. At the same time, I could be making another contribution for next year, for 2024. I could be putting, let’s just add those up, more than $15, 000, into a health savings account and getting a deduction for that.
Here’s the cool part. I can reimburse any expense I incur from here on out through that health savings account, even if I don’t do it this year. I could start tracking my medical expenses, and I don’t need to reimburse them for 10 years from now. As long as I have that plan in place, I can reimburse that expense.
In the meantime, that $15,000 is growing, and growing, and growing. No tax on the growth. When I take it out, so long as I use it for health, no tax on the distribution. This is literally better than a Roth IRA, because I get a deduction when I put the money in as opposed to a Roth, I cannot get a deduction for it.
These health savings accounts, I tell you guys, are the bee’s knees. You really want to be able to do it. If you qualify, do it. You have to have a high deductible insurance plan, which we almost all do now. You meet that test, you do it for your family. You could go to Fidelity, you go to Schwab, you could go to TD, whoever. TD’s even around. I think it’s Schwab now, right?
Eliot: Yeah.
Toby: You put it in there and let it grow as an investment. You can even do self-directed HSAs, although I don’t know if I would do that, it just seems too small. I could be doing covered calls, I could be doing my investments in there, and let’s just say you follow the S&P, you’re doubling your account every seven years. You do that a few times, you’re going to have a chunk of money there for your retirement.
Yes, it has to be used for health to avoid tax, but you do have the ability, I think, when you’re 65 to convert it to a Roth IRA at that point. I think you pay a little bit of tax, but man, they’re potent. Corporations can use health reimbursement accounts. You can do that, too. But that health reimbursement account is not the same thing. The money in the corporation is paying tax on it. You’re paying it at 21% flat if it’s a C-corp or it’s flowing down to you.
In the meantime, when you do this HSA, you get the deduction today, and then you never have to pay tax. It can be used for a lot of things other than what you’re saying. I’m probably not giving it a complete. There’s anything that’s health-, dental-, vision-related, anything that’s not covered, a whole bunch of stuff. Yes, there are a ton of things that can actually help. Somebody just sent us a link. That goes to the eligible expenses.
All right. Pretty cool, though. I could do that this year, by the way. I could actually put a plan in place. For 2024, I could reimburse expenses that I have this year and that I normally wouldn’t get to write off.
I put it into my plan for 2024, I get a deduction. I reimburse myself this year. I don’t have to pay tax on it. What did I just do? I just wrote off my medical expenses that would otherwise have not been deductible under my Schedule A. For some of you guys, this stuff really makes sense.
All right. “I plan to buy a rental property using my 401(k). I’m 65 and I’ve set up my solo 401(k) for rollover. My question is, if I convert to a Roth 401(k) and purchase the rental, does the rental income and future equity gain become tax free?”
Eliot: Yes, it does. That’s the quick answer. If you bought it in your 401(k), then you’d be subject to taxes whenever you took any money out, including the rents and things that have piled in. But since you’re rolling over first into the Roth, and then you go out and buy, anything you buy, any gains, any income coming in, any investment income, it’s all tax free when you later on take it out, I think, aside from UBIT, if you’re investing in an actual business, or something like that.
Toby: Yeah, you could have UBIT. For a rental property, you’re not going to have any tax. You’re not going to have to worry about that. The only time you have an unrelated tax in a retirement account is when you have debt inside of an IRA. 401(k)s are not subject to the same rules, it’s called Unrelated Debt Financed Income.
If you were buying this in an IRA, I’d say, hey, you could have tax. If you are leveraging, you get a loan against it. But here, no, you’re not going to have any tax. You’re not getting depreciation because it’s exempt. It’s a 401(k). It’s exempt whether it’s a Roth or not. The only question is when I take the money out, is it taxable? Traditional 401(k), I have to pay tax when it comes out. Roth 401(k), I do not, but I didn’t get a deduction for putting it in. Still, you’re thinking right.
What’s interesting is when we do polls with our clients, we do pre event polls quite often. What I’m always shocked at is that about 80% of the people want to know how to buy real estate inside their retirement plans. It’s actually a huge deal because they’re sitting in there and they’re like, man, it’s been with my employer. He then sticks it in these mutual funds, which have just been giving me poop returns forever. I want to get something. I know that real estate could return better. There are lots of tax benefits for real estate, but it’s also a really good asset class. You can unlock it and actually use it for that.
Just a reminder, the tax and asset protection events. If you want to learn about land trusts, LLCs, corporations, 401(k)s, how they’re taxed, estate planning, the two one-day events that are on the schedule are Saturday, March 16th, or Saturday, April 6th. We have the live tax and asset protection four-day workshop, live and in-person. We’re doing it in Orlando. That is next week the 21st through the 24th. There’s a slight fee for that one, but if you want to come join us, there are still tickets available.
All right. “Should I have my real estate income funneled into an LLC business or corporation to save money in taxes?”
Eliot: This is a popular question. Actually, there were quite a few questions around this theme, that’s why I chose this one. Whenever we talk about an LLC, we have to ask ourselves first, how’s it taxed? It can be what we call disregarded, which means it just comes out of your personal return. It could be a partnership, could be an S-corp, could be a C-corporation, and all those have different answers.
Where we want to have our rental income is something that is going to hit our return, and that’s going to be disregarded to yourself or in a partnership where you’re the member, one of the partners, so that we hit our personal return. That’s where you’re going to want to have your rental income.
You put the word corporation in here, and that’s always something that gets our attention. You never want to put the traditional rules. You never want to put appreciable real estate rental properties into any corporation, S or C, because we run into tax considerations down the line that you don’t want to have to deal with.
Rental income funneled in LLC, depends how the LLC is taxed, if it’s disregarded to you, if you’re a partner in a partnership, then that’s going to hit your personal return. That’s what we want to see. Do not put the property into a corporation.
Toby: All right. When you have rental income, usually you’re not going to pay tax on it anyway because you’re getting the depreciation. If you are paying tax, you need to buy some more real estate so you can accelerate the depreciation on that to offset your tax. But if you do have a bunch of expenses and you want to create more loss, go ahead. Use that corporation, but don’t have it on the real estate. Just have it paid like a management company.
Think of it as a family office. Hey, we’re going to set up our family office. We’re going to start pulling money in from different types of investments so that we can do accountable plans, so that we can do some of these cool strategies. It might create a little more passive loss for you. On your personal return, you just carry it forward until you use it, but you don’t lose it. That’s always a good benefit.
This is fun. “What are the tax and legal benefits of making an owner loan into my LLC rather than capital contributions?” You had to pick that one.
Eliot: We’ve had a lot of clients actually ask us one recently, so we wanted to bring a little bit of knowledge out there about it. They all see, again, just like the last question, how is that LLC taxed? We would do something different, perhaps. If it was a disregarded entity or a partnership versus an S-corp or a C-corp. They can all have different outcomes depending on how we do it.
If it’s a C-corporation, we’re generally going to call it a loan from shareholders. Why? Because that’s the money that the corporation can pay you back later on when it’s finally profitable. If we call it an additional paying capital or stock on the C-corporation instead of a loan, you’re not really ever going to see that back because it’s built up in the value of the stock. In other words, the corporation doesn’t owe you anything now at that point. That’s why we like the loans. We get the chance to have it paid back to you in the case of a C-corporation.
In the case of an S-corporation, you can go either or. It could be a loan, but we usually call it stock in that case because that ups some of your basis and allows you to take maybe some different deductions perhaps that might otherwise be limited depending on the type of loan that we have to the S-corporation.
Again, Toby will probably go a little more in-depth on here, but you could call it a loan, or you could call it a capital contribution. You may be better off calling it the capital contribution.
Toby: Let me give you guys a scenario. Eliot and I buy a property together. We each put $10,000 in, and we contribute that. The property, we’ve owned it for a couple of years, and a tenant trashes the place, and then it needs a new roof. We need $30,000 to fix it up and get it back in. I put $30,000 and Elliot says, I’m not putting in another nickel up, 10 is it. So I put more money in, and now I have a greater interest than Eliot.
Let’s say we sell the place. We don’t even make money on it, but we just sell it. It’s being distributed for a percentage. If I put in an extra $30,000, I might not get it back. Eliot’s maybe gets $7000 of his $10,000 back, and maybe I get whatever it is, 70% of $30,000 and $10,000, so $30,000 back. I get a total of $30,000. I’ve lost $10,000 on this, he’s only lost $3000. The way around that is I should loan my $30,000 so that I can get paid back my $30,000 because that’s the first thing that comes back, and then we share the loss equally if that’s the scenario.
We see this a lot when you’re doing joint ventures that flip. Hey, 10 houses go great, and then you have the one that comes off the rails. You don’t want to be contributing more money into it, even though you can to fix a bad situation. You want to be loaning that money so that you get it back. Otherwise, you’re proportionate.
We do see that come up. Sometimes it’s with multiple parties getting together doing something. It might be five or six people trying to do a project, and one person is providing a lot of the proceeds. You want to make sure that your initial contribution is all equal. After that, make sure it’s a loan under those circumstances.
You’ll see, most accountants are trying to make us do loans. They don’t really like the contributions partially for that reason. If you are doing corporations and if you have a loss, then you want to be you want to make sure that you’re doing it as a contribution if your company qualifies.
It’s a corporation, for example, C-corp or an S-corp, and there you’re qualifying 1244 stock loss, that’s the only time where you’re like, hey, I got to make sure I’m making the contribution exchange for it. Otherwise, that loan seems to be the best way. Is that how you guys usually do it?
Eliot: Yup.
Toby: Some people get mad. They’re like, hey, why am I having this loan? And why am I dealing with his interest? We’re trying to keep you guys towards in your favor. All we’re doing is just trying to make it. You say, well, why would you do that? There are five or six different reasons that you do that, none of them good. We’re just trying to make sure that you’re in the best position possible.
“Can you write off 100% of your trip to Las Vegas, all expenses? I am a realtor licensed in both Nevada and California. Any other tax deductions?” Nothing like an open ended question.
Eliot: This one is going to be very similar to our earlier question where we started out about traveling to go see the rental properties. You’re going to have to qualify it as business travel, that means more days of business than anything else, any personal days, and things like that.
I like this as a contrast because the fact that it’s rental or not really doesn’t change the rule. Is it a business? Is it a business-related expense, more business days? Four hours in a minute causes it a business day. More of those than personal time, then we’re going to be able to deduct the cost going. The cost coming back, 50% meals in the hotel on the business day.
Toby: If you’re a client of Anderson, you make sure you come visit our office. It’s what you do. Here’s the thing. If I travel to a meeting, even if it’s one hour, you’re good because the travel time is good. If you go to Las Vegas for a one hour meeting, that’s all you do, and then you stay the weekend, it’s not going to be a business trip. You have to make sure that you’re more business than personal.
If you book in a visit like, hey, I visit on Friday, and then I visit, maybe I’m looking at properties on Monday, and maybe I’m meeting with some other realtors, or maybe I’m doing a continuing education as a realtor, or fill in the blank, maybe I’m going to an event, then you can book in the weekend and make the whole thing 100% deductible.
Somebody says, doesn’t Anderson have an office in Delaware? No, it’s one state we don’t have an office at. We do have a registered agent officer, I should say that. But no, our main states are Utah, Washington, Nevada, and Wyoming, Cheyenne. You can visit us in Cheyenne or in Vegas, easy. Draper, Utah, of course, and then Tacoma, Washington. If you like Tacoma, you can come and visit the office there, too. Yes, there are three offices in Nevada.
We’re in the rainbow one, but we have one over in downtown Summerlin and one on the other side of town in McLeod. That’s been there since we bought that building in 2001 or something, 2002 maybe, one of those, early 2000s. Forget how long I’ve had that thing. It’s fun.
Eliot: Circling around changes, but not Anderson.
Toby: It’s been a while since I’ve had that building. It seems like yesterday. You ever do that guys? You buy a building or a rental property, and you’re like, gosh, it just seems like I just got it. Then you’re like, it’s been two decades. You can see my boat’s still there. I’m not going to admit that, but yes.
Sometimes my boat is sitting in there. It’s like the beast. It is a metal boat that you could drive over rocks with. It is an Illumina weld. It is a beast. Yes, I sometimes keep it in the parking lot over at the McLeod building.
Eliot: Like always.
Toby: Yeah, like always. It’s a good place. The homeless like to use it as a shelter. I feel like this is good for them. All right, here we go. There’s YouTube. I know Patty already shared that out.
If you do want to see the recordings of this, I think they’ll send out a link to a recording for everybody who registers. Otherwise, sometimes we take the videos of specific questions and make them into short videos. You’ll see that. But for all you guys, you’ll be able to come watch this. I saw some people said they came in late. We’ve really piled up an extra couple of hundred people since we started. If you want to watch the whole thing, you certainly can.
Make sure that you’re registering for our Tax and Asset Protection workshops. We have the live and in-person one coming up next week in Orlando. Click on any of the links and sign-up if you want to come to Orlando and hang out. We invite you to do it.
If you have questions in the next two weeks, if you want answers, Eliot reserves the right to pull it and use it as one of our questions here, but we also just answer questions. We’ew just weird that way. We think that people have to pay for way too much stuff. If the least we could do is answer your questions and give you a straight answer, we try to do that as best we can.
Thank you to our staff who answered, now it’s 240 questions. Jennifer, thank you. Dutch, thank you. Jeff, thank you. Patty for manning chat, thank you. Tricia, thank you. Kenny, Ross Jared, and Arash. Sorry. He got stuck outside the room. And Troy. I can’t thank Troy because he’s making fun of my boat. What should we say about Troy? What’s a good one?
All right, guys, this is always fun. There are 16 open questions. Do not worry, we will answer those. So stay on. If you’re waiting for a response in the Q&A, our folks will absolutely get back to you. In the meantime, I’m going to bid you guys farewell. Eliot, thanks for all the help today.
Eliot: Thank you.
Toby: Guys, we will see you in two weeks. Again, wait for your question to be answered. Otherwise, I’m going to stop my feed right now and we’ll see you in two weeks.
