In this Tax Tuesday episode, Anderson tax attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle a diverse range of tax questions covering rental property strategies, depreciation rules, and business structure optimization. They explain the tax implications of renting property to family members below market rates, including income reporting requirements and limited deduction capabilities. The attorneys discuss gifting rental properties to children and the associated gift tax filing requirements, while exploring sophisticated property management company structures for generating earned income and maximizing retirement contributions. They provide detailed guidance on utilizing IRS sections 168 and 179 for depreciation and bonus depreciation, clarifying the current 100% bonus depreciation rules and debunking outdated 80% figures. Other topics include S-corp benefits for 1099 contractors, holistic health business taxation, accountable plan cell phone deductions backed by IRS Notice 2011-72, vehicle deduction methods and limitations, and even professional gambling expense deductions for Vegas visitors. Throughout the episode, they emphasize proper entity structuring, asset protection, and tax planning strategies.

Submit your tax question to [email protected]

Highlights/Topics:

• “I have a question about tax implications of renting my property to my parents. If I rent it to them for less than fair market value, are there any tax incentives or exemptions in this situation? I’m trying to understand whether I would still need to report the income and if I would lose the ability to deduct expenses associated with the property.” – Must report income; IRS treats below-market family rentals as not-for-profit activities.
• “In 2024, I deeded some rental properties to my children about $250,000 each. Is there a way to write this off?” – No deduction available; must file Form 709 for gift tax reporting.
• “I have four rental properties. I personally manage them through an LLC. Can I use my company as a management company and charge a 20% fee for managing it to be able to show I have earned income and then contribute to an IRA? Also, would I be able to establish a Roth IRA?” – Yes, with reasonable fees and proper structure; enables IRA contributions.
• “How do I utilize IRS code section 168 and 179 for depreciation and bonus depreciation? How do I buy cars and furniture right off up to 80% of the value of the property every time I buy a house rental or asset? Can I utilize AI or any AI software with these to automate and hands off anything?” – Use 179 first, then 168 bonus depreciation; now 100% not 80%.
• “I’m a 1099 independent contractor. I own two pieces of property, one is my primary residence, the other has a home and a small apartment on it that I rent out long term under the table. My thoughts are that I need to create an LLC for my business, possibly an S corp. As I understand the tax laws, there will be no way to use any of the rental properties to reduce the tax burden of my 1099 income. Am I on the right track here?” – Report all income; S-corp saves self-employment tax; passive losses don’t offset.
• “I’m going to start a consulting business that focuses on holistic health. What should I be looking for in the next six months or so when I launch? Is taxation different from real estate and in what way?” – Consider S-corp for self-employment tax savings; business expenses differ significantly.
• “With an accountable plan, can I deduct a hundred percent of a cell phone? Is there some documentation that backs this up? Prove it.” – Yes, 100% deductible with S/C-corp; IRS Notice 2011-72 provides documentation.
• “I have a question about vehicle deductions. There are two methods available, the standard mileage deduction and the actual expense method. Can I use the actual method to claim all the depreciation in one year, then switch to the standard mileage deduction in subsequent years. If this is possible, how does it work? Assume the vehicle is used a hundred percent for business purposes.” – Three methods exist; business-owned vehicles allow 100% bonus depreciation benefits.
• “Since you’re in Vegas, you might know the answer to this one. My friend won a reportable jackpot, mid five figures, and he was wondering if he could deduct the travel lodging expenses just as he might do if he made this money as a business deal or future excursions to Sin City to try and extend his winnings.” – Only if professional gambler with business intent and meticulous records.

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Full Episode Transcript:

Amanda:  All right, everyone. Welcome to Tax Tuesday, where we bring tax knowledge to the messes. My name is Amanda Wynalda, and this is…

Eliot: Eliot Thomas.

Amanda: We are tax attorneys. You’re about to have some fun, aren’t you?

Eliot: Right, it’s going to be a great time.

Amanda: Aren’t you? All right. Why don’t we find out where you all are from? Go ahead and throw into the chat where you’re from.

Eliot: We got Dallas.

Amanda: We got Dallas, Texas. We’ve got some frequent flyers, some people saying, hi.

Eliot: Claremont.

Amanda: Denver, Columbia, South Carolina, San Francisco, and all caps.

Eliot: Right on. Arizona, LA, Michigan, all over. Some Dallas, we got southwest, east, west.

Amanda: Cupertino.

Eliot: Missouri.

Amanda: Palm Desert. Eagle, Idaho, Arizona, Minneapolis, Minnesota. I was just at your airport. It’s very large and not that crowded, so I appreciated that. NYC.

Eliot: Big town.

Amanda: Orange County, that’s my neck of the woods.

Eliot: Wisconsin.

Amanda: We never see anyone from your neck of the woods.

Eliot: No. There wasn’t much woods in my area.

Amanda: Eliot’s from a small town in Iowa.

Eliot: Yeah, I was showing someone a picture of it and it was just corn fields. That was it, soybeans. That’s pretty much it.

Amanda: Fun stuff. All right, the rules for tax Tuesday are, if you have a tax question preferably, we don’t do any other marriage counseling questions or philosophical questions. If you’ve got a tax question, you’re in the right place. Please throw that into the Q&A for questions and answers. You give the question, we’ll provide the answer.

The chat, other than us, if we ask you something like where you’re from, that’s more for technical difficulties. If you’re having an issue there, or if we need to push out some information like links or things like that, all questions that we’re dealing with today were emailed into [email protected]. If you come up with something during today’s show, then you can go ahead and email that in. Eliot here may choose it for next time.

If you need a more detailed response than what we’re able to give you over this forum in the Q&A, then you can think about becoming a tax client or a platinum client with us here at Anderson Advisors. The idea of this is to be fast, fun, educational. We want to give you the info because, hey, what  clients do we like? Informs clients.

Eliot: Right, educated. Yup.

Amanda: Yeah, we love it. All right, we’ll just go over the questions from the get-go. These are the ones we’re going to hit on. “I have a question about tax implications of renting my property to my parents. If I rent it to them for less than fair market value, are there any tax incentives or exemptions in this situation? I’m trying to understand whether I would still need to report the income and if I would lose the ability to deduct expenses associated with the property.” We’re going to hit on that. What else we got, Eliot?

Eliot: “In 2024, I deeded some rental properties to my children about $250,000 each. Is there a way to write this off?” Surprise.

Amanda: “I have four rental properties. I personally manage them through an LLC. Can I use my company as a management company and charge a 20% fee for managing it to be able to show I have earned income and then contribute to an IRA? Also, would I be able to establish a Roth IRA?”

Eliot: Got the rental, got the retirement on that one.

Amanda: Yeah, we got a lot to go through with that one.

Eliot: “How do I utilize IRS code section 168 and 179 for depreciation and bonus depreciation?” We got those code numbers, real nice to see. “How do I buy cars and furniture right off up to 80% of the value of the property every time I buy a house rental or asset? Can I utilize AI or any AI software with these to automate and hands off anything?” Always want to throw the AI in there.

Amanda: It makes our lives easier in some ways. We’ll tell ourselves when the machines take over. All right. “I’m a 1099 independent contractor. I own two pieces of property, one is my primary residence, the other has a home and a small apartment on it that I rent out long term under the table. My thoughts are that I need to create an LLC for my business, possibly an S corp. As I understand the tax laws, there will be no way to use any of the rental properties to reduce the tax burden of my 1099 income. Am I on the right track here?” You will soon find out.

Eliot: “I’m going to start a consulting business that focuses on holistic health. What should I be looking for in the next six months or so when I launch? Is taxation different from real estate and in what way?”

Amanda: All right. “With an accountable plan, can I deduct a hundred percent of a cell phone? Is there some documentation that backs this up? Prove it.”

Eliot: Exactly. We will do just that. “I have a question about vehicle deductions. There are two methods available, the standard mileage deduction and the actual expense method. Can I use the actual method to claim all the depreciation in one year, then switch to the standard mileage deduction in subsequent years. If this is possible, how does it work? Assume the vehicle is used a hundred percent for business purposes.”

Amanda: All right, let’s assume that. All right, those are the questions we’re going to go through. Again, if you have a question that has nothing to do with what we’re talking about, you just came here to get your personal tax questions answered by our lovely tax team. Please do so in the Q&A. Who do we got?

Eliot: We still got one more too.

Amanda: Wow. Eliot.

Eliot: “Since you’re in Vegas, you might know the answer to this one. My friend won a reportable jackpot, mid five figures, and he was wondering if he could deduct the travel lodging expenses just as he might do if he made this money as a business deal or future excursions to Sin City to try and extend his winnings.” Yes, it was a Vegas question. We had to include it.

Amanda: That’s right. I should have remembered that. This was a fun one actually. Jump into the Q&A. Who do we have helping us in the Q&A today?

Eliot: Yes, we got Kenny. Tanya’s in there. Let’s get it back down here. Jeffrey, Rachel, Ross, a whole bunch of people here. Troy. I may have missed somebody there, but that looks like the majority of them.

Amanda: Yeah. Troy’s also helping us live on YouTube.

Eliot: George, Dutch, and Jared.

Amanda: And Jared.

Eliot: It’s not Thursday though, orange soup.

Amanda: If you’re on YouTube, you can go ahead and use the YouTube chat. Troy is in there. He is going to help you there. All right. If you haven’t subscribed, subscribe to Toby Mathis and Clint Coons’ YouTube channel. I just got back from a 10-day trip to Europe yesterday, so my brain has not started working yet.

Clint Coons is one of our founding partners here at Anderson Advisors. Please subscribe to his YouTube channel. He focuses on real estate asset protection. As we all know, that plus taxes really go hand in hand, so it’s  hard to separate the two. Also, Toby Mathis, if you’re on YouTube, you’re on his channel right now. Please smash that subscribe button as the kids say and you’ll get alerts anytime a new video or if we’re going live like this.

If you want to discover the hidden secrets from America’s most successful real estate investors, join us. It’s only $99. Come to our live tax and asset protection workshop. That’s going to be in Las Vegas, September 11th through 13th. If you come to Tax Tuesday often, we’d love to see you. We’d love to meet you. I heard you were at the last one, right?

Eliot: I was. It was great to see everybody there. Thank you so much for all the compliments. We appreciate that.

Amanda: Yeah. I heard a nasty rumor though.

Eliot: Which one?

Amanda: I heard that we have too much fun here at Tax Tuesday.

Eliot: Yes, too much fun on Tax Tuesday.

Amanda: Don’t go spreading those lies around. Everyone will start coming in. Join us. You use this QR code here, or Ms. Patty can maybe put a link. Sorry, Ms. Patty. I’m throwing that on you at the last minute, maybe put a link into the chat as well. If you can’t commit to a whole three-day event, then you can join us. We have one day Tax and asset protection events online. They’re typically from 9:00 AM to 3:30-4:30 PM in the afternoon. It is like drinking from a fire hose, so typically you’ll end up attending more than one of these, but our next one’s going to be up this Saturday, August 16th, and then the following Saturday, August 23rd. You can also go to andersonadvisors.com, hit our events page, and you can get those links and sign up for those events there.

If you are ready to just move forward, you want to schedule a free strategy session, talk to one of our senior strategists, tell us what assets you have, what your goals are, what you are concerned about, we can set up a customized blueprint for you. Again, just click on this QR code. We may be able to throw up a link into the chat as well. Are you ready to get started?

Eliot: We are ready.

Amanda: Ready to start this party?

Eliot: Yes, too much fun.

Amanda: Not too much fun. Who said that? Two tax attorneys, too much fun.

Eliot: Yeah, never.

Amanda: Someone did. They’re spreading that rumor. All right. “I have a question about the tax implications of renting my property to my parents. If I rented to them for less than fair market value, are there any tax incentives or exemptions in this situation? I’m trying to understand whether I would still need to report the income and if I would lose the ability to deduct expenses associated with the property.”

Eliot: We got some issues.

Amanda: First and foremost, you must always report your income.

Eliot; Yeah, we’ll just go back to that deal.

Amanda: Regardless of the source.

Eliot: Right. Do we need to report income always? We’re not getting around that one. Always need to report. Here, what we got going on is when we are renting to family and especially below the fair market rate, the IRS has already thought of that. They call it not-for-profit. Not to be, not-for-profit as in a charity or something like that, but they say if you’re running that business or potential business, you’re not trying to make a profit because you’re going under the market rates. Furthermore, it’s the family. It just gives that appearance of that. We really had no business purpose here.

As such, they almost effectively treat that house as being a second home to you. That means that it falls in a situation, where the only deductions you’re going to be able to take would be for the mortgage interest and the property taxes. You’re going to have whatever income mom and dad are paying, but the only thing you can deduct against it is going to be mortgage interest and property taxes. Those, you can only deduct if you’re actually itemizing on Schedule A.

If we’re not itemizing, you don’t even deduct those, and the income goes in a whole special place on what we call Schedule 1 line 8J. That’s where you’re going to put that income, so it doesn’t even have the ability to have a deduction taken against it. It’s not a win situation other than families getting a place to stay, but there are no tax incentives and there’s certainly no exemptions. Yes, we absolutely have to report that income.

Amanda: Yeah, we do have to report the income. There are some limitations on the Schedule A. If you are itemizing and you are going to deduct the mortgage interest, you can only deduct the interest of up to $750,000 loan. You’re already going to be deducting the interest from your primary residence. You got to do those calculations there to make sure you can deduct all of it. For the state and local taxes, you can deduct the property tax again. You would already be deducting your personal residence property taxes.

If you’re already hitting that limitation, which is $40,000, after the new tax rules go into effect, then you’re not going to even be having any deductions for the second property depending on where you live. There are states, unlike where I’m from, California, where property taxes are not going to exceed that amount. But because you’re doing the under fair market value and especially because it’s to a family member, the IRS is no going to no longer going to treat that as a business, meaning you’re in it to make money. It’s more just like a hobby. It’s very similar to the hobby roles and so you’re not going to be able to take those regular deductions that you can against rental income, which include.

All of the things listed on Schedule E, I know you can’t see that, but advertising, auto and travel, cleaning, maintenance, insurance, legal fees, so mm-hmm. Paying your CPA to do your tax return. management fees again, mortgage interest, taxes, repairs, utilities, and the key depreciation.

Eliot: None.

Amanda: Yeah. Usually all of those expenses together, you’re not paying a whole lot of tax on your rental property income. They got to balance the tax benefit there.

Eliot: Yup. A harsh situation from the tax perspective. Maybe if we get that fair market rent up and maybe if we kick the parents out.

Amanda: Yeah, get those freeloaders out of there. What? They only raised you.

Eliot: Right? They raised you better than that. Suppose not they’re going for the dime or dollar.

Amanda: It sounds like from how the questions worded that this question asker knew that that’s the way it was going.

Eliot: Yeah, but we got to report the income. I think that’s the number one takeaway here.

Amanda: Yeah. We got to report that income.

Eliot: Yeah.

Amanda: All right. “In 2024, I deeded some rental properties to my children.” Just a bunch of freeloaders in these first two questions. “About $250,000 each. Is there a way to write this off?”

Eliot: The quick answer is no, but a little bit more in depth. When we talk about a deduction, usually we’re talking about an expenditure we incurred for a business, a trade or business, which we certainly don’t have a trade or business here. We’re just giving away property, so that wouldn’t work. Maybe we could call it charitable, but the problem calling it under the charity ideals is that you have to actually give it to a nonprofit, and you can’t specify certain recipients of that.

You have to give to a nonprofit that will, without any strings attached, gives it off to just various people or something like that. Here, you’re clearly giving it to specified persons, i.e, your children. It’s not going to fall under that as well. What you can do is you’ve gifted it and you do need to fill out a form 709. That will go that $250,000 times two, one for each of them, $500,000 total will go against your lifetime exclusion, which I think, did you have the numbers of lifetime exclusion?

Amanda: $15 million for an individual, $30 million for married filing jointly or for spouses. It increases for inflation, so that’s going to go up a little bit more each year, and that’s for your lifetime. Most people, even though you do have to file the gift tax return, the Form 709, if you give a gift to any other individual above $19,000, that’s the annual gift exclusion, then you do have to file that form, and then that amount gets added back into your estate when you pass away. If you are above that total lifetime exemption, then your estate’s going to pay, I think it’s 40% in tax on the amount above.

Eliot: It’s pretty high.

Amanda: The exclusion is so high, the majority of Americans are not going to have to worry about that. Even if you know that you’re not going to be over that lifetime exclusion, you still have to file the gift tax form each year. The $19,000 is per person, per recipient, per grantor. If Eliot and I could both do $19,000 and $19,000 to a single person to essentially double, so if you are a married person and you are looking to gift your children something, you and your spouse together can essentially double that gift. If it’s to your child and their spouse, you can essentially quadruple that gift. In this situation specifically, that $250,000 property is going to far exceed any exclusion that you’re going to get, so you have to fill out that form 709.

Eliot: Yes.

Amanda: This was a funny one because when we first read it, it was like, nope, next question. But we found some other things to talk about.

Eliot: We can always expand a little bit.

Amanda: We can expand on it.

Eliot: Code has breadth to it and depth.

Amanda: It does. It has too many pages. All right, “I have four rental properties. I personally manage them through an LLC.” That is a good idea. “Can I use my company as a management company and charge a 20% fee for managing it to be able to show I have earned income and to contribute to an IRA? Also, would I be able to establish a Roth IRA?” Tons to unpack here. I do want to first say if you already have an LLC that you’re managing the properties through, I’m hoping that it’s an LLC that’s not doing anything else.

If you’ve got an LLC that you’re using for any other active business activity, you don’t want to co-mingle that activity with your property management. The fact that you’re secondarily asking, should I use it as a property management company, makes me think that you’re already using it for something else. We don’t want to co-mingle activity for asset protection purposes. Property management is a fairly high risk activity. There’s lots of things that a property manager can fail to do that if it results in harm, they can be sued for.

You definitely want to be doing it through an LLC. You don’t necessarily want to be doing it through an LLC that’s also doing something else. If you are a plumber or doing consulting, you don’t want the liability from one activity to commingle with the other. First and foremost, you may be wanting to set up a separate LLC to do your property management through. I love the idea of a management company. We actually teach the strategy quite often, don’t we, Eliot?

Eliot: Yeah, most certainly we do. Of course we want to have those rental properties and LLCs as well, just for the same topic being real estate professional. We got four of them. I don’t know if we want to draw some little boxes.

Amanda: I’m going to draw some boxes here, I think. Okay. Our typical structure’s going to be a Wyoming LLC, that’s our Wyoming holding company, and then four properties. We’d want to do four separate LLCs, so state specific. If you are in Iowa, you’d want an Iowa LLC. If you are in Florida, you’d want a Florida LLC, although Florida’s a little tricky. Texas, you’d want a Texas LLC, and then one property per LLC is going to be the default recommendation  because again, we don’t want to commingle liability between the two. If something terrible happens in one, worst case scenario, you lose one and it’s not going to take down your entire structure.

We separately have an entity. I’m going to call it an entity for now. What we need to do to effectuate the structures, we do need to have a property management agreement. It should be in writing. It should clearly state what the property management entity is going to be doing and then how much that fee is. That fee needs to be reasonable. Is 20% reasonable?

Eliot: Could be, just depends on what it’s doing. How do we determine that? We’ll go out and see what the average management rates are in that area. We would go by area. Let’s say it’s 15 or 10%. It’s a little bit lower, but maybe our property manager does a little bit more. Our entity will do a little bit more to justify that extra 5%, so it’s possible.

Amanda: Maybe it’s paying the utilities, maybe it’s paying the mortgage, something that in a traditional property management situation may be the landlord you are still doing. It just needs to be reasonable. There’s no reasonable police out there. If you can find another property manager that quotes you that 20%, you can use it because that’s something you found on the open market. You don’t have to ask three property managers and take the average, whatever percentage you find out there.

It can also include some additional fees. I’ve seen property management agreements charge a fee when they place a tenant or charge different fees for that.

Eliot: The background checks.

Amanda: You can add all that in. You do need a property management agreement. How should this and C be taxed?

Eliot: Typically we’ll start with a C corporation because it’s a separate taxpayer. First of all, C-corporations have excellent asset protection, very hard to break those walls of a C-corporation. Some say, well, what about an S-corporation? That’s not the worst idea by any means, and we do have some that have an S-corp. The key to C-corporation is a separate taxpayer away from your personal 1040. Anything going on in your C-corporation has nothing to do with your 1040. Most of the time we like that. An S-corporation, I’ve seen as well.

What we probably don’t want is a disregarded entity and maybe not a partnership, because we’re going to learn here in a second that C and S-corporations have a lot of tax goodies that they can take advantage of, that you don’t get with your disregarded or your partnership.

Amanda: Since the goal here is to have earned income, what you’re going to need to do is actually pay yourself a salary.

Eliot: Employee.

Amanda: Has an employee. You’ll pay a little bit of tax on that, but the ultimate payoff is going to be worth it because you’re going to be able to defer some of that income through this IRA. He is asking specifically, can I contribute to an IRA? Yes, you can.

There’s a couple of different options you have for an IRA. Let’s erase this so we have a little bit more. Actually, let’s do this. It erases when we jump back to this slide. For a traditional IRA and there’s a Roth, the limitations are the same in terms of how much you can put in. You can put in $7000, or if you are over 50…

Eliot: That’s 55 or 50, one of the two.

Amanda: You can do a catch up contribution of an additional $1000, so you can do it here.

Eliot: I think you’re right. Yeah, it’s a thousand.

Amanda: Yeah, it is a thousand. There are some limitations though for the Roth. We like the Roth because your money grows tax free. You’re putting in money and then all of the growth, you don’t pay tax on it. When you take the money out, no tax.

Eliot: The key is when you put it in, you didn’t get a tax deduction. It was after tax funds. That’s why they let it grow tax free because it was already after tax dollars.

Amanda: Like most things, the IRS doesn’t let it be too good to be true. There are some income limitations. If you are an individual and you have to make less than $150,000 a year, you get to put the full contribution, the full $7000. But if you make more than $165,000 a year, then you can’t contribute it all to a Roth. If you’re in between that, it’s a percentage, so a calculation there.

Eliot: Slow phase out.

Amanda: Yeah, a slow phase out. If you are married filing jointly, then you need to make under $236,000 and you get the full contribution, the full $7000 contribution. But if you make over $246,000, then you get zero. Again, something in between, you get a percentage of that.

It’s mostly for people lower than that. If you make more than that at your modified adjusted gross income, then you can’t contribute to a Roth. You’re doing the traditional IRA. These are the same contribution limits. The traditional IRA, you get to take a deduction for the funds that you’re putting in now. You’re getting the tax benefit now, but when you take it out at retirement, it’ll be treated as ordinary income.

Eliot: Correct.

Amanda: Yeah. Is there any way around this?

Eliot: We could set up a solo 401(k) if we had enough income coming in. That’s a little bit more advanced and you’d have to pay yourself again a wage. You can defer that though and put it in. With a solo 401(k), we have the employee portion and an employee or portion. As an employee you can defer approximately 30,000, and then your employer can make a contribution up to 25% of whatever your earned income was, whatever that W-2 was. Yes, there are definitely other options.

Amanda: Yeah. This one with the IRA, you can actually do what’s known as a backdoor Roth, which is just a tricky way of doing it, where you first contribute to the IRA because you don’t have that same deduction limit, and then you roll it over into the Roth. You pay the tax this year, but then you get the long-term benefit. What Eliot’s talking about for the solo 401k, and this is how it would be, you would have your company, typically a corp that’s your property management company, it would sponsor a solo 401(k). And so.

Same thing, you would want to pay yourself a W-2 salary because you need earned income. From there you can contribute to the solo 401(k) even more money. Your individual contribution can be up to $23,500 per year for 2025. You pay yourself $23,500, you can put that entire amount into your solo 401(k). The great part is because it’s your individual account, your company can separately contribute a percentage, and that maxes out at 25%. Most companies pay what, 4%?

Eliot: Four percent.

Amand: My daughter I think is six and I was like, wow, that’s a lot. Most companies aren’t doing 25% because you have to apply that to all employees. But if you are the only employee, why not make it the maximum amount that you can do there? I think I did the math.

Let’s just say you paid yourself a hundred thousand dollars. Of that, $23,500 is your personal contribution from your salary. Then your company can match 25% of your salary, which is an additional $25,000. That’s quite a lot to defer into your solo 401(k). Again, the amount that your company is paying you is a deduction for the company, and the amount that it’s contributing on your behalf is a deduction to the company as well.

What you can actually do is there’s another bucket. In your solo 401(k), there are three buckets. There’s the traditional bucket, there’s the Roth bucket, so you can choose. I want to make it a traditional contribution just like a regular IRA, take the tax deduction out, or you can make a Roth contribution and not take the tax deduction. You take the tax deduction later. There’s this third bucket called the after-tax bucket. What that means is of your salary that you still have, you can contribute to the after-tax bucket the total amount of $70,000. Your individual salary contribution plus 25% of your company contribution, plus your after tax contribution up to all those added together can be up to $70,000.

Eliot: In this case, we’d have another $21,000 I believe. Yeah.

Amanda: Are you doing the math for me?

Eliot: Yeah. I think we have 49 there.

Amanda: That’s five, so be a five.

Eliot: Three plus five. I see what you’re doing. Yeah.

Amanda: How much the after tax, so what is that? Somebody in the chat has already done this math for us. I lied, it’s 48. I have it written down. That’s a lot to be able to put away. Now, four rental properties, you’re probably not there yet. Just doing the IRA is probably where you are, but what happens when you get 14 or 40 rental properties? That’s when you’re effectuating the strategy. There are different tax strategies for where you are, and then those can change over time as you scale your business.

Eliot: Absolutely. The key here is that there’s a lot of flexibility, a lot of possibility when you got the rentals, when you use the structure. Just as Amanda pointed out, you got that asset protection. We got money shifting over her management fee. Certainly the contributions to the retirement plans IRA, solo, if we had crazy amounts going in, we could even do a defined benefit plan.

Amanda: That’s true.

Eliot: Also within the corporation, S or C, we can do what I call the tax goodies. You could do 280A, you could do accountable plan with reimbursements for an administrative office. If it’s a C-corporation, you could do the 105 medical reimbursement plan. A lot of good stuff out there if we got that corporation going to earn those management fees.

Amanda: This isn’t just limited to real estate investors as well. We have a lot of clients who do this for their trading business. What that is is you have a partnership and they trade full-time or even part-time, it can be worthwhile. That partnership is 20% owned by the corp and 80% owned by them, so 20% of the income from their corporation shifts over, or income from their trading shifts over to the C-corporation where it’s a lower tax rate typically than their personal tax rate. You take out as much as you can in reimbursements and deductions, and then even what’s left is getting taxed less.

I have three clients. One is a doctor. He is a retired doctor. He trades over a million dollars a year, and he taught his two daughters to do that. Because they’re trading, again, like our question asker, that’s not earned income, so you can’t contribute to retirement. They actually set this structure up. I set this structure up for them, specifically with that solo 401(k). They took the tax hit like, yeah, we’re going to pay a little bit of taxes for income and a little bit of taxes for payroll taxes, but it was the only way for them to save for retirement this way. That’s a very effective strategy if you’re in either real estate or trading.

Eliot: Absolutely. It’s a good plan.

Amanda: All right. “How do I utilize IRS code 168 and 179 for depreciation and bonus depreciation? How do I buy cars, furniture, and write up up to 80% of the value of the property every time I buy a house rental or asset?” Then lastly, we’ll touch on whether you can use AI to do that.

Eliot: Yes. First of all, 169, just to clarify what that is, is they’re referring to depreciation. Actually, 168(k) I believe is the bonus depreciation. 179 is a whole, different treatment, but it is a deduction. It’s going to have to do with equipment, tangible property. You bought a new crane for your business or something like that, computers, or things like that. You could either depreciate or you could do 179. 179 though has some limits that make it maybe a little bit less useful. You can do up to, I think it was 2.5 million. They just upgraded with a new big, beautiful tax bills. Is that what it is, the three Bs? It gets a lot of names.

There, you still cannot use 179 to create a loss. If you had a hundred thousand in net profit, but you got an asset worth $300,000, well, you’re only going to be able to wipe out that hundred thousand of net profit. The other $200,000 we’ll carry forward for next year or something like that, but you get the profit first.

Bonus depreciation doesn’t have that limit. As long as we’re in a trade or business, we can do a hundred percent bonus depreciation now if we bought the asset after January 19th, 2025. That’s the difference between the two. You can use them in tandem if you do. You always do 179 first and then the bonus depreciation if there’s anything left in that expense.

One thing about furniture, I’m going to hit that before I hit cars, usually your furniture is a little bit lesser. There’s a third option here that’s not on here. We call it the de minimus election.

Not many people are very familiar with that, but it’s an election that most people make on their tax return every year. It just says that if you buy one asset, let’s say we bought one couch for our rental, it was under $2500 with that one receipt, you can go ahead and deduct the whole thing right there. Even though that would ordinarily be a depreciable asset, we’re allowed to deduct it if it’s under that $2500. That’s for each purchase, so we look at them separately. Maybe you bought a couch down here and a TV for an upstairs room, two different bills, two different receipts, they’re under $2500 each, so you could deduct both of them. That can be very handy.

People try and run with it. It’s a little too far sometimes and they say, well, maybe I could renovate a whole house with a bunch of receipts and get everything under $2500 and just expense everything. That doesn’t work. The IRS clearly says if this seems to be an overall renovation scheme or something like that, or project, then they’re not going to allow you to use the de minimis rule. We get back to depreciation.

To the question at hand again, bonus depreciation’s going to be your 168(k). Whereas your tangible property, immediate deduction up to the amount of income is going to be your 179, 179 hits first, and then you go to your bonus depreciation on what’s left over. That’s how they work in tandem. Yes, we certainly can use them both. Cars are a little bit different. Just about anything with the IRS is considered a luxury vehicle. I don’t know if you remember my last car before.

Amanda: The Fred Flintstone, the one where they use your feet and not an engine.

Eliot: Yes, my proud little Elantra. That would be a luxury car back when I had it, believe it or not, in our IRS.

Amanda: High roller over here.

Eliot: I love that thing. I had that for 14 years and she finally died on me, but it would’ve been a luxury automobile to the IRS for these purposes. There, we can’t do bonus depreciation. Really, you’re very limited. I shouldn’t say you can’t. They allow you a little bit of depreciation, but it’s very, very limited. We’re talking about $12,000 or something like that.

You get into what’s called luxury, which is anything over, I don’t have the exact dollar amount, but it’s just about every other vehicle. There, you can deduct up to $12,200 plus $8000 of bonus depreciation. That’s the maximum you could deduct for a total of $20,200. Then they have it scheduled out for the second year. The most you could deduct is $19,600, third year, $11,800, and every year thereafter up to $7060. That’s going to be your luxury automobiles.

What everybody really focuses on is that what they call the luxury SUVs, the heavy SUVs. That’s your £6000 up to £14,000. That’s the target zone there. There, all of a sudden the IRS changes tune. They say, well, you can only do up to 31,000, approximately $300 of 179 deduction, but all the rest you can hundred percent bonus depreciation. That’s your sweet spot. Heavy SUV, between over £6000 up to £14,000. That’s where you can take that massive deduction.

You don’t even have to use the 179 if you’ve wiped out all your income. Just take the bonus depreciation, you can create a loss and that loss will carry forward. It’ll be an ordinary loss in your business. That might be a plan, but certainly, again, you can use both of them. 179 first, then the 168.

Furniture, looking to see maybe if that de minimis rule might be in play for you, but the 80% is a misnomer here. That’s outdated. That was a couple years back. We’re at a hundred percent bonus depreciation. If you unfortunately bought the asset between January 1st and January 19th here of 2025, it’s actually 40%. Yeah, not good. Hopefully we got it after the 20th and placed it in service. That’s where a hundred percent kicks in. If we happen to get it in 2024, that was 60%, just FYI. That’s what we have going on here for basic houses.

You can get the bonus depreciation. Do you want to walk a little through that? Maybe on a house?

Amanda: For a house, some bonus depreciation? Sure. Again, the bonus depreciation with the big beautiful bill went back up to a hundred percent. A lot of us were  watching and waiting, especially before the election because this goes all the way back to 2018 with the Tax Cuts and Jobs Act. It increased bonus depreciation to a hundred percent, but then that started phasing out. We were in phase out years the last couple of years where you were only getting the 80%, then the next year is 60%, and we were down to 40%. A lot of people were looking at this and were maybe waiting to see how it would shake down.

With the BBB bill, we’re back to a hundred percent bonus depreciation. That’s not going to expire. That’s where we are until another act of congress comes through and changes it again, which may never happen because guess what? Politicians don’t get along, but they also like tax deductions as well. Who would’ve thought?

With a rental property, you’re going to have the same thing. You can take a hundred percent bonus depreciation. You are going to need to do what’s called a cost segregation study. That’s reaching out to a firm that specifically does these types of analysis. We work with cost segregation authority. I think they’re cost segregation partners now. They’ll do a free analysis for you. If you need the full study, then that will cost money, obviously, but then that’s a deductible business expense. Rather than doing the straight line depreciation over 27½ years, you get to do a hundred percent bonus depreciation.

In talking to them for property, it comes out to about 25%-30% of the value of the property. We’re only talking about the structure because with land, land doesn’t depreciate, so you have to back out the cost of the land when you’re working with property and you’re only depreciating the structure itself. All right, can you? It’s not 80%, and it’s going to apply to cars, furniture, any equipment, or things like that. Do 179 first and then do bonus depreciation. “Can I utilize AI or any AI software that will automate this and make it hands off?”

Eliot: As I was telling Amanda, I get asked this a lot. It seems that every time I leave the airport and the Uber driver asks me, what do I do, and I say, well, I help with taxes, they say, oh, excellent. They got a thousand questions and they always will ask about AI.

Amanda: That’s a rookie move.

Eliot: Right? Exactly.

Amanda: You got to say, I’m a lawyer, and then nobody wants to talk to you, and then you get to sit in the back with your eyes closed and not be bothered.

Eliot: She’s the smart one. I’ll tell you what, we use AI a lot to try and help, but it’s just not there to where it could calculate these type of things. The machines are going to lie to us. They’re going to take us over anyway, and AI is just the start of it.

AI really, unfortunately gets it wrong a lot. You can’t beat just knowing the code and how it works. It takes some time to learn all that. You can use AI for suggestions, but I would not try and use it to formulate a game plan here amongst between 168, 179, and these various types of assets because there’s so many different changes.

Just from the houses alone, straight line, adding a cost seg in there, what parts are available for bonus, et cetera, et cetera, all that gets really detailed. It’s been difficult to find a program that can really accept all that.

Amanda: For practical purposes, your CPA is using tax software, which is running those calculations. If you’ve got a good CPA that’s actually working with you in a tax planning perspective and not just a reactionary tax filing perspective, then you can run these numbers. Throughout the year, it’s going to help you make a better decision in terms of what to do, what to buy.

Looking at your profits, it’s September now, August now, you can look at your profits so far and they can tell you, hey, if you bought a vehicle for X number of dollars, then you would be able to take this deduction, 179. You wouldn’t be able to use it all because your business isn’t profitable enough. That’s where it really comes. Working with a tax professional that does planning and not just prepping really is going to make a difference here.

Eliot: That’s an excellent point about the software. That software isn’t based on AI, it’s based on the actual code. It’s accurate. That’s far more reliable actually, sadly, than AI right now.

Amanda: Yeah. Ultimately, you’re still going to have to go out and buy the asset. You are still going to have to keep the receipts. Somebody’s going to actually have to put the information. Even if their AI was involved, someone would have to put the information in, so you’re never going to be able to totally automate this but definitely use technology when you can.

Eliot: Yup.

Amanda: All right. Shameless plug, Toby Mathis’ YouTube channel. Please subscribe if you’re watching us on YouTube right now. Thank you for joining us. Hit Troy with all of those questions. We like to keep him busy.

Clint Coons, our other founding partner here at Anderson Advisors Tax and Asset Protection. He focuses more on asset protection, Toby focuses more on tax, but those two things go hand in hand. It is very hard for us to answer a solely tax based question versus a solely asset protection or business based question because there’s just so much overlap. That’s great though because instead of sending one, you need a question answered and you go to an attorney, what do they say? Here’s the answer, it depends. Here’s the answer, but go ask your CPA for the tax question. Then you can ask your CPA, they say, go ask your attorney. Here at Anderson, we’re under one roof.

Eliot: One roof, there it is.

Amanda: One roof, you get it both here. If you’re ready to move forward, you can schedule a free strategy session with our team. You will tell us what you’ve got, tell us what you’re looking for, and we’ll set up a customized blueprint for you with a plan. That is a living plan that’s going to grow with you as you and your business grow as well. If you’d like to visit us in beautiful, lovely Las Vegas, you could come out to our live three-day event, tax and asset protection event, September 11th through 13th, and you can write off the whole thing because it’s a business expense.

Eliot: Yeah, deduct the AC.

Amanda: Yeah. Have you heard all those rumors that tourism’s down so much in Vegas?

Eliot: Yeah, that’s reducing prices.

Amanda: Yeah, so please come out.

Eliot: Yeah, help us out.

Amanda: Yeah, help us out. We like to not pay state taxes anymore, so we need you guys to lose some money here. All right, moving on. “I have a question about vehicle deductions. There are two methods available, the standard mileage deduction and the actual expense method. Can I use the actual expense method to claim all the depreciation in one year and then switch to the standard mileage deduction in subsequent years. If that’s possible, how does it work?” Let’s assume for purposes that the vehicle is used a hundred percent for business. Your first thing you said was there’s actually not two methods.

Eliot; There’s not, this is incorrect. There’s three, and we alluded that in the previous question. What we’re referring to here as far as the two methods, the standard mileage deduction, the actual expense method, that would be the concept that Amanda has a business, let’s say it’s a sole proprietorship, but she has her own personal vehicle and she’s using it for that business. She can turn in mileage 70¢ per mile driven under the standard mileage deduction, and the business would take that as a deduction.

Alternatively, she could do the actual expense method, but that’s where she owns the vehicle, and she’s having it paid into her sole proprietorship. Here, the third method would be if the business itself owned the vehicle, then you can get into where that business could take depreciation deductions and things like that. She, as an individual, can’t take depreciation on that vehicle. She’s not allowed to. It’s her personal vehicle and she’s getting reimbursed.

There’s that depreciation within that 70¢ mile deduction amount. You could calculate for actual expense, but it’s very different than the concept that the business owns it. When you have that sole proprietorship, you have that mixing in between whether she owns it or that, and you can still take some good deductions.

If we get into something like an S-corporation or a C-corporation, which we use a lot because of all the benefits, you really have to have it titled in the name of the S-corporation and the C-corp, then we use it for a hundred percent bonus business purposes. Now we can do all that. If it’s a heavy SUV, we get to do all those deductions we talked about. You could do the 179, but you can take a hundred percent bonus depreciation on that vehicle, create a loss that’s going to offset all your income, and carry over the next year if need be.

A lot of benefits to the fact that they’re using a hundred percent for business purposes. Tell me, why not just go ahead and buy it in the name of the business so you can take advantage of those things? That’s what I would suggest. Let’s just say that we are going to standard mile introduction again, that’s 70¢ per mile. That is wear and tear, some element of depreciation and things like that, your gas, whatever it be, oil changes, et cetera, and those things. Actual expenses would be the actual amounts that you paid for those various items. It would be the deduction and again, for some depreciation on that as well.

Those are the two different methods, but again, it’s improperly phrased here because it really is a third method where we would typically recommend. If you’re going to use it a hundred percent for business purposes and you have a corp, go ahead and buy it in the name of the business.

Amanda: Makes it a lot easier.

Eliot: It does, it really does. Otherwise, your reimbursements are not as good as compared to a hundred percent bonus depreciation. It’s just not going to add up. But if you happen to have a business where you drive a lot, I mean a ton of miles and maybe use it for a little bit of personal use, which is probably the average person and probably is everybody actually, then it might be better to do the standard mileage deduction because it’s very generous. It’s 70¢ per mile. It would be one thought.

Amanda: I think you’ve got a hybrid or an electric vehicle.

Eliot: Yes. Right. It could go on forever. Yeah, exactly. It might be a little bit better in the case if you have high mileage going on. But if not so much, then I’m thinking have it purchased in the business. Make sure you have another vehicle out there for your personal use. Here, we’re saying a hundred percent business, so I like that.

Amanda: Yeah, a hundred percent business. What record keeping are we going to need?

Eliot: No matter what we do, we got to have the good record keeping. You want to have a MileIQ or something going on to track personal versus business.

Amanda: That’s an app for those of you who aren’t up with the lingo.

Eliot: Yeah, and do your own due diligence out there. What apps are working or you know what, you could use that other app, the Mead Notebook and a number two pencil. That’s a really good one too from Grandpa Eliot’s age. Whatever it is, make sure we’re tracking business and personal and that you’re doing so on a regular basis, et cetera.

Amanda: If you’re doing actual expenses, then you’re going to need to be keeping receipts and all of that good stuff. Normally you’re picking one method and you’re sticking with it. You can do mileage in the first year and then you can switch to actual expenses, but at that point, you’re not going to be able to do any bonus depreciation or anything like that. You do have to do straight line depreciation.

Eliot: Yeah, excellent point on that. That’s just the opposite of what we’re asking here in the question. Can we do actual and then go to standard notes, the opposite of way around.

Amanda: Yeah, you can only go one way. It’s a one way straight. All right. “Would there be a situation where, if it’s your first year and you’re still trying to decide, could you possibly do both and see which one comes out better?”

Eliot: No. First of all, if you are going to do that own rule there, you’d have to do actual first, but I don’t think you can switch. I think it’s an annual plan. We don’t get a mix and match. It has to be year by year choices.

Amanda: Yup. It’s going to be different depending on how old your car is because the mileage rate may not go up. That’s up to Congress.

Eliot: Never did it on my cars.

Amanda: We’ve even seen it go down one year. Usually you think everything goes up to adjust for inflation, which inflation’s out of control. It doesn’t exactly adjust for inflation, but there was a year where it even went down, I think.

Eliot: I think it was Covid.

Amanda: Yeah. Then the actual expenses are going to get higher and higher the older your car gets and the more maintenance it needs. Either way, it’s a lot of paperwork.

Eliot: It is.

Amanda: If your vehicle is owned by the company, but you don’t use it a hundred percent for business, what happens then?

Eliot: Big question there. If we only use it let’s say 90% for the business purposes, 10% personal, that’s why we got to track that mileage, that becomes taxable wages to you. We’re going the wrong direction. As I recall, it’s at 70¢ a mile. They follow the standard mileage rate for that for however many miles we went over. Yeah, we’re
 wrong direction there. We’re going to start adding income.

Amanda: Yeah. If you do have it owned by the business, you really do want to make sure it’s used a hundred percent.

Eliot: Along that line of question though, Amanda’s got a good point here. What if we even went lower below 50%? Now we can’t even use it for any depreciation or anything like that. We got to have at least 50% business purpose for these type of thing if it’s going to be owned by the business and we want to take depreciation.

Amanda: Yeah. If it’s not going to be a hundred percent used for business only, then own it in your own name, and then use either the standard mileage deduction or the actual expenses to get reimbursed from your company for that business use.

Eliot: Yup.

Amanda: All right. “I own two pieces of property, one piece is my primary residence and the other is a home with a small apartment on it that I rent out long term under the table. My thoughts are that I need to create an LLC for my business, possibly an S-corp. As I understand the tax logs, there’s no way to use any of the rental properties to reduce the tax burden of my 1099 income. Am I on the right track here?” What is the first thing that stands out to you in this one?

Eliot: The under the table…

Amanda: Under the table.

Eliot: That caught my attention, and that’s what probably pulled this question into the bunch here. There is no such thing as under the table unless you’re a cash basis earner here in Las Vegas. That is about the only time and that’s a whole nother subject tips. You got to declare your income. As I told Amanda, the IRS is under that table too. They’re in the table, they’re above the table, they’re everywhere, so we got to declare that.

Amanda: Yeah. Under the table is another way of saying tax evasion, so yes.

Eliot: Phrases like that. We’re going to highly recommend that we not do under the table.

Amanda: Let’s start with the 1099 income. What do you think about the S-corp for that?

Eliot: That’s going to be the go-to for most tax advisors. It does depend on how much 1099 income. If we only had a thousand dollars, we probably would just go sole proprietorship, Schedule C. But if we start getting up even $20,000, some would say more, $30,000 of net income, you probably do want to use an S. The reason why, right now, let’s just say we had $30,000 of income coming in on our 1099. If we didn’t do anything, it’s going to be Schedule C on our 1040 and a hundred percent of that…

Amanda: 1099 versus an S-corp.

Eliot: Yes.

Amanda: I’m going to actually ask that we make it a hundred thousand dollars of income because we like to use nice round numbers. For those of you here 10 minutes ago, you know that Eliot and I are not great at doing calculations. Let’s say you have a hundred thousand dollars of income, it is a 1099, right off the bat, you are going to be paying self-employment tax. That is 15.3%. Already, that’s $15,300 in tax. On top of that, what are we paying?

Eliot: We’re paying income tax. Let’s just say we’re in a 20% bracket, which we don’t have.

Amanda: A hundred thousand is the 22nd percent bracket, so 0.2% bracket.

Eliot: Granted it wouldn’t be actually 22,000, but you get the idea because we’re in a bracketed system, but that’s still a lot of tax coming out.

Amanda: Of the a hundred thousand, your $37,300…

Eliot: We haven’t even started California state taxes.

Amanda: That’s beyond state taxes. If you’re lucky enough or smart enough to live in a state with no state tax…

Eliot: Come to Vegas.

Amanda: Yeah. Although most of the states that do not charge income tax, they still get you. They get you on property taxes most of the time.

Eliot: Or the casinos.

Amanda: Yeah, or the casinos. In an S-corp, what are we going to do? We make the same, a hundred thousand dollars in income, but we pay ourself a W-2 salary. That needs to be what’s called a reasonable wage. What’s reasonable, Eliot?

Eliot: You want to go out to see what other people are making, doing what you do in the business that you do, typically in the same geographical area but not always, but just saying what, what’s the average person make doing what I do? Good rule of thumb here might be $50,000, nice and even.

Amanda: No, $50,000. What is the key here?

Eliot: There are two streams of income in our S-corp. It’s the reasonable wage that I managed, just put down the $50,000, and then you have what’s called distribution now. The sad part is on the $50,000. It’s subject to all those taxes we just talked about. It’s not self-employment tax, it’s just employment tax. But if this is your S-corporation, the amount is still going to be 15.3%, half for the employee, half for the business, and you’re going to pay your income tax. It’s going to be one half of that $37,300.

Amanda: What did I do there? You as an individual, for this $50,000 W-2, you are going to pay 7.65% in payroll taxes. That’s what’s withheld from your paycheck each every two weeks. That’s going to be $38,025. On top of that, the income that’s coming from the K-1, that $50,000 isn’t subject to any additional payroll taxes. Now you’re just looking at income tax.

Right off the bat, you’ve cut out half of this $15,300 that you’ve just paid.  Then you’re paying again, let’s say the same $22,000 in income tax here. That’s a huge savings right off the bat.

Eliot: Yup.

Amanda: The taxes, your S-corp is going to pay the other half of the payroll taxes, but that’s a deduction for your S-corp. It’s not a deduction when you pay your own taxes, at least your payroll taxes.

Eliot: Yeah. Again, the S-corp, as we talked about, it has the 280A, it has the accountable plan reimbursements for ministry of office, all kinds of things that it can take advantage of. You could do this with a 1099, but you can sponsor retirement plans like we talked about earlier as well. Lots of goodies with that S-corporation. Probably the only complaint I ever hear is like, well, we got to do an extra return. Yeah, well that’s deductible too. But it’s worth it if you’re going to get this tax saving.

Amanda: Yeah. That’s why we say typically, once your 1099 income is getting into the $30,000-$40,000 range, the cost of that additional tax return is the amount that you are saving in taxes makes that additional tax return.

Eliot: It really does. Yup.

Amanda: All right. Now, we’ve got them out of the tax evasion.

Eliot: Right, exactly. We’re not under the table anymore.

Amanda: We’ve handled the 1099 income, we’re going to do the S-corp, and we’re going to take our reasonable business expenses. The great thing about running it through the S-corp too is that Schedule C, which you would be reporting your 1099 income on, has some limitations for some of the deductions that you take. Namely, the one that comes to my mind is the home office detection. There’s a limit on that on the Schedule C.

Eliot: Yeah. First of all, (1) you can never use it to create a loss. (2) It is just a deduction. When you do it as an administrative office or a new S-corporation, it’s actually a reimbursement. It’s a deduction to the S-corporation cashback reimbursement because we do it through an accountable plan. You’re on a Schedule C, which has higher audit risk, so lots of bad things there. You can do the safe harbor election, which is only $1500. It’s $5 tax.

Amanda: Not a ton for your Schedule C. If you’ve got a pretty big home office space that you’re using, or you’re doing something where you’re using storage or things like that, you can deduct that percentage of your utilities, your mortgage interests, landscaping if you have clients coming to your home, and all kinds of good things. That’s going to be less scrutinized on that separate tax return with the S-corp.

Eliot: Yes.

Amanda: All right, now for the rentals. “We’re renting out long term.” The key here is long term.  Long-term rental is considered a passive activity. For those of us who do real estate, it doesn’t feel passive The code says it’s per se passive, so it’s automatically passive, which is the opposite of 1099 or W-2 income which is active. Those two things don’t mix and match. Even though, if you can create a loss with your rentals, which happens quite often because of all the deductions we were talking about that are available in the Schedule E, even if you create a loss, that passive loss isn’t necessarily able to crossover and reduce your active income except in limited circumstances. So $3000, a passive activity loss.

Eliot:  Actually on the passive loss, because if we took that example where we had the hundred thousand, if you’re under a hundred thousand AGI, you can deduct up to $25,000 passive, but that phases out relatively quickly between a $100,000 and a $150,000 AGI. For every $2 you make, above a hundred thousand AGI goes up $2. You lose $1 in that $25,000 that you can deduct in passive. Of all the returns I see, I rarely ever see anybody able to take advantage of that.

Amanda: Yeah, it phases out so quick.

Eliot: It really does. I wouldn’t count on it. Just as a Amanda pointed out, these passive losses, you’re not going to be able to deduct them. They’re just going to build. It’s not the worst thing in the world. It’s frustrating though, because you see these losses on your return and you keep asking your tax preparer, why can’t I take those? They’re going to explain to you, hopefully.

Amanda: You get to take them, you just don’t get to take them now. When you sell that property, it will release those passive losses. That will go against the capital gains you pay, assuming you sell your property for a gain, but you’re just not going to take them now.

If you’re looking to get a tax benefit from the loss that you’re generating for your property against your W-2, there is a way, but we’re not going to be able to do that easier long-term rental situation. We’re going to need to do what’s known as the short-term rental loophole.

Eliot: Short term rental typically just means that the average day is seven days or less. That’s the most common pile we run into. If you have that and you’re doing the property management yourself, you can’t have a third party property manager. You got to do it yourself.

A lot of different rules. You have to materially participate. That just means that the most common rules we run into there is you put at least a hundred hours into running that and more than anybody else. That’d be the cleaners, repair persons, and things like that, or over 500 hours, which would be difficult in one property probably for a year.

Amanda: Yeah. We’re probably looking at the hundred hour for this situation.

Eliot: Exactly, most often what we see. But if we meet that, then you could go ahead and do again that cost segregation that Amanda talked about earlier. Bonus depreciation create theoretically a large loss, and that loss will go against any income on your return. It doesn’t matter what it is.

Amanda: Yeah. In this particular situation, and I don’t know how much 1099 income you are making, maybe you’re making enough that that additional effort to run this rental as a short term rental. The loss that you’re going to be creating will be worth it. This short-term rental loophole strategy were typically seen with very high W-2 salaried earners or people who have experienced a large capital event this year.

I have a client who sold their family business. They’re bringing home north of $12 million this year, retired couple. They’ve purchased their dream home right in front of the beach, over $5 million. It’s being purchased, fully furnished. Our recommendation to them was like, hey, you’ve got four or five months of the year left, go ahead and run that as a short term rental. Between the two of you, you only have to spend a hundred hours managing it. That’s going to be pretty easy to hit if he’s going there and fixing the light bulbs, fixing the irrigation, and then she’s hanging things on the wall. Clean it yourself a few times.

There’s no minimum number or maximum number of stays that have to happen. It’s just that whatever stays do happen needs to be seven days or less on average. By the end of the year, maybe you’re doing four or five stays, maybe you are cleaning it yourself a couple of times to hit that a hundred hour mark, and then they can fully depreciate that property this year and take a huge chunk off of the taxes.

Eliot: Big tax savings. Absolutely.

Amanda: Yeah. Again, it’s only the structure, not the land. For a $5 million plus house. A hundred percent purchase is going to be pretty, pretty nice. It’s going to save a lot of taxes. In this situation, I don’t know if doing the effort to hit that short term rental material participation standard might not be worth it depending on how much you’ve got going on.

Eliot: Just because they mentioned out here in the question that was long term, often we get this question and that’s a great question. Eliot, what if I started the first half of the year as long term, January 1st to June 30th, and then after that I turn it into a short term, then I can maybe bifurcate the year? No, the IRS looks at that house from January 1st to December 31st. They’re going to add up how many people stayed in it and what was the average stay for the number of days it was rented out. There, you would still fall into long-term rental.

Amanda: Yeah. That’s why with this strategy specifically, we tend to see the time of the year where people start picking up properties, especially since that bonus depreciation rule just passed last month. To make it a hundred percent, we’re going to see a lot of investors and high active income earners looking to pick up these properties so that they only have to rent it as a short-term rental till the end of the year. Maybe for a few months next year, but sometimes it’s too much work for people. After that, once you’ve taken the tax benefit, you can turn it into a long-term rental.

Eliot: Yup, or turn it over to someone else to handle.

Amanda: Yeah, that’s true. Get a property manager because you’ve gotten the big tax benefit already.

Eliot: Yeah.

Amanda: All right. “I’m going to start a consulting business that focuses on holistic health. What should I be looking at in the next six months or when I launch? And is taxation different from real estate and in what way?”

Eliot: All right. First of all, what I always look at in my particular state, make sure that that type of practice, whatever it is, doesn’t require a professional corporation or a professional LLC. Every state’s different. Don’t even ask me. For a client, the state of Texas, I was reviewing some of that. They have I think it’s at least 50 different occupations that you could not even imagine are out there that would require professional entity of some sort. That’s the first thing I would check whenever I hear anything health related or anything like that. Some of this might be covered, some states they want it. That’d be the first thing I’d check.

Second, if you have any rough idea of how much you’re probably going to make because we’re going to go for that same analysis, do we want an S-corporation or is it worthwhile, if we think that we’re going to be making at least $30,000-$40,000, then probably we want the S-corporation. When might we go C-corporation, we haven’t too much about that. One of the major difference is as far as tax benefits is that the C-corp has a medical reimbursement plan. Is that something of interest? Maybe, maybe not, but you can look at that situation.

At the S-corporation, again, as Amanda had written out there, that’s going to help you save unemployment taxes. There’s a trade off there. Both have the 280A available to them. Both have accountable plans for reimbursements for administrative office, mileage, and things like that. They’re very comparable in that situation. The name of the game here is probably S or C-corporation as far as how we want it taxed. That would just be one of the things I’d start looking into, getting an idea.

Amanda: If you’re just starting out and you’re really not expecting to make a lot of money, you can just go with an LLC, and then you can make an S selection later on, especially since it’s partway through the year. Again, the additional cost of having to prepare that S-corp, 1120-S or 1120 doesn’t start making sense until you’re making $30,000-$40,000 there. If you’re really just starting out, you can kick that decision down the road. You can just get an LLC. It will be taxed as a disregarded entity. When you start gearing up and making money in it, then we can make that S selection.

S-corps are the most common entity for service-based businesses. We’re not thinking anything about anonymity because you are the one providing the service. You are the face of the business. We don’t need to look at an S-corp owned by a Wyoming LLC to try to get any anonymity there because you are the brand, you are the face. The things I look at when considering between a C and an S are what other income is hitting your tax return. If this is just a side hustle and you’ve already got a pretty substantial income, maybe we are throwing it into a C-corp because guess what, that C-corp only pays a flat 21% tax.

If the rest of your income’s already getting hit with 24%-37%, we can shelter some of that income over into the C-corp and take it out in tax free reimbursements through 280A,105B. We can even set up a 401(k) to pay ourselves and defer a lot of it. Even if you can’t, even if you still have money left in the corp at the end of the day, 21% tax is less than what you’re paying on all of your other income. It can still be a benefit, and then you just use that corporation as essentially your personal piggy bank, your personal vault.

You can loan the money out to yourself to do other kinds of investments, and then you’re using a dollar that paid 21% tax instead of a dollar that paid 37%. Those are the things that I look at when deciding between a C or an S-corp. The S is going to be the most popular option.

All right. “Is taxation different from real estate?” Yes. Alex, yes and no. Any business, so real estate for business purposes, holistic healing consulting business for business purposes, is all going to be the same. It’s income in minus business expenses out, and then you pay tax on the net income. The real difference is what are those expenses? They are going to be very different for a holistic health company versus real estate.

Eliot: Yeah. I think you’re going to have probably some inventory or some supplies of the medical nature or health nature. Got to be CORN. What’s CORN?

Amanda: Keep it CORN, common, ordinary, reasonable, and necessary. That’s obviously going to be different things for holistic healing versus real estate. For real estate, it’s easy. Again, your Schedule E gives you a list of what’s common, ordinary, reasonable, and necessary expenses for a rental property.

On Schedule C, I know you can’t see this, they look very similar. Go to Schedule C. That is for your sole prop for your disregarded entity. Again, it’s got a list of categories. That is a great place to start for what is going to be expenses.

Again, advertising, that’s same for real estate and for service-based business, car and truck expenses, commissions, contract, labor, depreciation, employee benefits, insurance interest, mortgage, legal and professional fees, office expenses, rents or lease, vehicles, machinery, repairs and maintenance, supplies, taxes and licenses, travel and meals, wages, and other expenses. The list goes on. There’s probably some things that don’t fall into one of these specific categories that you need for a holistic health company, that you would then just itemize on a separate schedule.

Eliot: Yup, it’s on the next page. Page two would be our part three. These things that we picked up, just google PDF, IRS, Schedule C, or Schedule E and you get a safe straight from the government PDF of it so you don’t have to worry about some crazy one attached to something else.

Amanda: This is a actually a great place where our platinum membership comes into play. If you come across an expense and you’re just like, I can’t really figure it out on my own, as a platinum member at Anderson, you can just join us in our knowledge room. It’s a zoom just like this. It’s open five days a week, Monday through Friday from 9:00 AM to 2:00 PM.

We have tax professionals in there almost every hour of the day. There’s a few dedicated tax hours throughout the week, where some of the guys and gals in the background here answering your questions will be doing the same in that tax hour. You can call in and say, hey, I’m needing to buy this, is this a business expense that’s deductible? We can walk you through that analysis right there on the spot. Do you have anything else for this one?

Eliot: Also on real estate, there is a difference between if you’re flipping, that’s going to be what we call ordinary income. There, we might want to use an S or a C-corporation because it’s subject to employment tax as well as income tax. Whereas your traditional rental, the good thing about that, that rental income is not subject to that employment tax, so that’s a little bit of a difference too there. I would just note that.

Amanda: Yeah, you could say it’s different from real estate, but even within real estate investing, there are so many different activities and those can sometimes be taxed a different way, and then we definitely want to be setting up our asset protection structures to suit what you are doing specifically.

All right. “With an accountable plan, can I deduct a hundred percent of a cell phone? Is there some documentation that backs this up?” Prove it, Eliot, prove it.

Eliot: I’ve been asked this quite a few times.

Amanda: What’s an accountable plan? I know we’ve mentioned it throughout the day, but we haven’t actually gone over what it is.

Eliot: Accountable plan is simply just the IRS fancy term for reimbursement. It just says that if Amanda has her business and she individually as a person goes out uses her private debit card, buys a thousand dollar laptop for her business, and comes back and gives it to her business to use for business purposes, the business can pay her back a thousand dollars. It’s tax free to her. The business gets to receive it and take it as a deduction.

In that situation, it’s the same thing. She just taken the business card and bought it, but we’re just saying in this case she didn’t have it. It’s a way she can get reimbursed anytime she pays out of pocket personally for a reasonable business expense, CORN, common, ordinary, reasonable, necessary. It just says you can get reimbursed tax free to Amanda, deduction to the business.

Amanda: Yeah, and it’s interesting because we set up our LLCs, corporations, and whatnot under Anderson with an accountable plan. People look through their operating agreement, their binder documents, which are sometimes this big and they go, where’s the accountable plan? I can’t see it. It doesn’t actually have to be in writing.

The accountable plan is created through that initial set of meeting minutes. It’s basically you as the business owner authorizes an accountable plan and then poof, it’s there. It doesn’t actually have to be in writing. It can be as little as one sentence in some meeting minutes. If you have an existing business, you can do those minutes now, sign a company resolution saying, we authorize an accountable plan. Boom, you’ve got it. A hundred percent of cell phone. When can we do it? When should we not be doing that?

Eliot: Before we get there, I’m just going to jump back because this seems to think, well, there’s a time where you can’t do a hundred percent. It just gets that taste to it. If we go back to that Schedule C that Amanda was showing us and what if one of those other deductions, we wanted to deduct our cell phone? If I have a hundred dollar cell phone bill and I want to deduct it on my sole proprietorship, sole proprietorship doesn’t have this accountable plan. I can only deduct the percentage of business use. If I use it 40% for business, 60% for personal,  only a $40 deduction.

Fast forward, now we do have an accountable plan. I’m an employee of my S-corporation. I’m told that I can deduct a hundred percent. Why is that? The IRS came back a long time ago, back in 2011. They came out with an IRS notice 2011-72. They went over this explicitly and they said, in the case of a cell phone where you’re getting it for an employee or an employee, you’re reimbursing an employee, including the monthly bill.

If you’re using it for business, we don’t care about the personal, because they knew it was going to be ridiculous to track. You’re not going to go up against Apple or Google who’s making their own cell phones, which you know every employee’s using and deducting anyway. It would be absolutely absurd. Where we get the ability to deduct a hundred percent is from IRS notice 2011-72. It takes a lot of time and they go through it in detail.

Amanda: Man, I remember pre 2011. You had to get your cell phone bill, and you had to highlight every call that was for your business, and then you had to turn that into…

Eliot: Add up those. Yup.

Amanda: It was like, if I wasn’t a poor production assistant moving in New York back then, I would’ve just said, no, it’s fine, I’ll configure it.

All right. A hundred percent in S-corp, C-corp, percentage of use in a sole proprietorship. What about a partnership, Eliot?

Eliot: A partnership is a little bit more unique in that, first of all, to be able to do it, they don’t have an accountable plan. Why? because they’re not employees. Accountable plans are only for employees.

If Amanda and I had a partnership and we hire Barley as an employee, he could have it if we extend it to him, the accountable plan, but we can’t. In a partnership, what you have is unreimbursed partnership expenses. UPE it’s often called, and that will show up. You have to explicitly put it in the operating agreement, the partnership agreement, saying that that partner can be reimbursed for that expense or take a deduction for it, and then you’d be able to deduct again the business portion. As an accountable plan, you couldn’t do a hundred percent.

Amanda: Okay. Since we’re never going back to the days of printing our bill and highlighting the calls, how do we figure out this percentage? What’s a quick and dirty way of doing it?

Eliot: You’re just going to have to guesstimate and hope that you can back it up because you’re going to have to highlight.

Amanda: Don’t be too aggressive.

Eliot: Yes, exactly. That’s just the thing. You’re going to want to have those records. No matter what you do, you want to be able to substantiate it with records. No problem a hundred percent. You just show them, here’s my bill. You turn that in and they can reimburse you in the S-corporation or C-corp. In that partnership or that sole prop, you’re going to have to keep records. You’re going to have to keep the old proverbial shoebox and a lot of highlighters.

Amanda: I don’t answer the phone for anyone, so it’s going to be pretty easy for me. All right, our final fun question. “Since you are in Vegas,” which we are Studio 210 coming at you live from very far off the Las Vegas strip, thankfully. “You might know the answer to this question. My friend won a reportable jackpot, mid five figures.” Good for you. “He was wondering if he could deduct his travel and lodging expenses, just as he might do if he made this money on a business deal and on future excursions to Sin City to try to extend his winnings.”

First of all, a reportable jackpot does not have to be five figures. That’s going to be much lower, $1500 if you’re playing certain games. The amount changes depending on what game you are playing. You have to report all of your gambling earnings. You throw $20 into the slot machine, and you win $21, you’re technically reporting that dollar of gambling earnings.

Eliot: Which no one’s ever done, ever. That’s the rule.

Amanda: Yeah, that’s the rule. What’s the answer to this? Can we deduct business type expenses from our gambling.

Eliot: The fantastic part of this, yes you can, however it’s a little bit different. Your W-2Gs, that’s what you get from the casino that hey, you want a lot of money. You’re going to report that on what they call Schedule 1, again, line eight instead of J. This is going to be line B as in bravo. That’s where you’re going to put your gaming.

Again, there’s nothing you can take against that because it’s just a line item. If you itemize, then you can put your gambling losses in there, but you have to be itemizing it. You got to be able to substantiate that. It’s not just as you put the ATM withdrawal. You want to get one of those player cards. They keep points, track your activity. They know that people are using it for tax purposes. That’s how you want to track those losses, some documentation. That’s at best. You can only deduct up to the amount of your winnings. You can’t create an overall loss.

Amanda: Yeah. The big thing is you can’t create no loss.That’s because gambling isn’t a business. You’re doing it for entertainment purposes. That does change if you are a professional gambler, which, there’s a lot of them out here.

Eliot: Here, we’re going to get a lot. But as a percentage of gamblers, there’s not a lot.

Amanda: Yeah. The difference is that they’re doing that as a profession. The purpose of their gambling is for profit, not just for entertainment. That changes it, in which case it becomes a trade or business. All of the same rules that apply to your holistic health business, your real estate trade or business still apply here. You can deduct your common, ordinary, reasonable, and necessary business expenses. What things would fall into that?

Eliot: Certainly travel would if you had to get to Vegas, and we’d welcome you coming here, but it would still incidentally on the travel. You’d still be under the travel rules. In other words, your travel trip, the majority of it has to be business days. If you came five days, at least three had to be business days. What’s a business day? Over four hours in a minute. Just about everybody goes down there, they’re there for a long time or they’re out in 10 seconds.

Amanda: It takes me four hours to figure out how to get back to my car in the parking garage.

Eliot: Yeah, there’s your four hours in a minute right there. If you had more business days, then you can deduct the cost getting here, that would be your travel, cost going back, hotels, 50% meals, and those type of things. Just as Amanda pointed out, it’s a trade or business. You can treat it exactly the same. Take those deductions.

Amanda: The full sunglasses if you are at the poker table.

Eliot: Yup. Get all the stuff, and they usually have AirPods going on or something like that nowadays, which I wonder why they get away with that. because they’re telling secrets.

Amanda: Yeah. How do they do that?

Eliot: I don’t know. Yes, you can deduct things.

Amanda: You don’t just become a professional gambler because you win one jackpot and then now you’re like, well, I’m going to be a professional gambler so that I can deduct my losses and deduct this trip. You’ve got to do a lot. You have to have the intent to make profit, not be for entertainment. You have to do regular and continuous activities. Just coming back to Sin City a couple of times before the end of the year is not going to cut it. You’ve got to do a 40-hour work week type of thing. You have to have the skill and the expertise.

If your friend just got lucky, it’s probably not going to fly. You’ve got to constantly continue to improve, so education, practice a lot, and that kind of thing. If you are terrible at one game, you got to pivot into another game just like you would in a real business. If you sold one product, it was awful, and no one bought it, you got to pivot and change strategies. Maybe even write a business plan.

The court cases that look at this mostly turn on the meticulous record keeping aspect. Not just relying on some casino card that you throw into the machine that tracks your wins and losses, but meticulously keeping track of what you’re doing, what you’re spending, the games that you’re playing, and things like that. That’s what’s really going to push it over the edge to make it more business-like conduct, in which case you can create a loss. Although if you’re creating a loss, maybe you should consider changing professions.

Eliot: Yeah, a new job title. I will tell you this. When I first came to Vegas, one of my first jobs, I was a casino auditor in one of the big casinos down here that’s green. I won’t say which one. There was an individual who done very well, very affluent, had won $2 million at poker, and was waiting for all the cash to come in, got bored and waiting, sat down to the mega bucks, and won another $12 million just waiting for the $2 million. He walked out $14 million just was because they were bored, basically.

Amanda: Some people just have the magic touch.

Eliot: And that’s not me.

Amanda: Yeah. I consider casinos and slots the most expensive and boringest video games out there.

Eliot: Right? As we always talk about, the only reason I can afford to live in Vegas is because I don’t gamble.

Amanda: Yeah, we don’t go to the strip.

Eliot: No.

Amanda: Nope. All right, that was our final question. Again, if you are on Toby’s YouTube channel, which is now most of you’re seeing this live, if you’re seeing a recorded version of this, go ahead and hit that subscribe button. You’ll get an alert anytime we come out with a new Tax Tuesday live. Toby’s constantly posting videos on all kinds of tax topics, so it is a great place to get your education.

Also, Clint Coons, our other founding partner, he’s got a channel as well. They’re in a little bit of a competition over who has the more subscribers. It’s like team Jacob, team Edward. Do you remember Twilight? No. You can choose one, but we’d like you to choose both. If you want to come out and visit us in Las Vegas and hopefully win a five figure jackpot, no guarantees from us though, come out September 11th through 13th to our live tax and asset protection event. We love to see you guys in person.

We love to hear how much you love Tax Tuesday, even if you think we’re a little too goofy. We got to keep it fun. Tickets are only $99. Use the code Tax Tuesday. It is limited availability. These events tend to sell out pretty quickly, so get on it.

If you want to schedule a free strategy session, you can do so through this QR code. You’ll have a 45-minute one-on-one consultation with one of our business strategists where you can ask all of your tax and asset protection questions, and we’ll come up with a customized blueprint which then grows with you as you at scale your business.

Finally, send us more questions at [email protected]. Eliot gets to comb through those every week, so please bombard him. It’s actually a lot easier to choose questions when there’s a lot to choose from. On the days when there’s not a lot, it’s feeling a little thin.

Eliot: We don’t feel popular, we don’t feel bonded.

Amanda: Yeah, make us feel the love. You can join us at Anderson Advisors. You guys, our team answered almost 200 questions today, so good job for you. We want to thank our team in the back, Kenny, Miss Patty, as well as our tax pros.

Eliot: George, Jared, Jeffrey, Rachel. I know Dutch was in there, Troy, Dutch. Of course we got Kenny running the show back there, so lost of stuff.

Amanda: Yeah, let’s give them a hand. Hit both emojis. Thank you. Thank you at home for joining us. We will be back next Tax Tuesday to have a little more tax fun, right?

Eliot: Right.

Amanda: All right, we’ll see you then. Take care.