Practicing social distancing to avoid getting sick and livin’ la vida loca to experience the calm before the storm of tax season, Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- How can you accelerate a large capital loss carryforward instead of just offsetting from capital gains every year? To get rid of large capital loss carryforwards, there must be capital gains to offset them
- When would it make sense for stock/options traders to do the mark-to-market election? If you’re a trader, you should do 750+ trades per year and expect no time off or W-2 income; you need to do the mark-to-market election sooner than later (by April 15) and if you’re going to lose lots of money
- Is there any additional tax benefit besides the federal solar tax credit when you install the solar on a rental property? Yes, the current tax credit is 26 percent for 2020 through 2022, and 87 percent of the solar installation cost can be depreciated
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Resources:
Real Estate Professional Requirements
Small Business Administration (SBA)
Paycheck Protection Program (PPP)
Economic Injury Disaster Loan (EIDL)
Solar Investment Tax Credit (ITC)
State and Local Tax (SALT) Deduction
Anderson Advisors Tax and Asset Protection Workshop
Anderson Advisors Tax-Wise Workshop
Anderson Advisors Infinity Investing
Full Episode Transcript:
Welcome to the Anderson Business Advisors Podcast, the nationally recognized, preferred provider for asset protection and tax planning in the nation. This show is for investors and business owners looking to save on taxes and build long term wealth with Toby Mathis, an attorney, author, business owner, and a featured instructor at Andersons’s Tax and Asset Protection event held throughout the country. Enjoy this show!
Toby: Let’s dive in. I had to separate from Jeff just because some strep throat’s been going around the office. Not COVID but just another type of disease, and I’m pretty sure that I have it. I’m on antibiotics but I want to make sure I do not get Jeff sick, so we are literally a couple offices down. I isolate myself and don’t talk to anybody. That’s what decided to go around our office.
I forgot who it was but Patty was like, oh, your throat is sore last week? I said, yeah, it’s kind of rough. Strep has been going around and I think that pretty much infected me right there. Just the thought of it, I think it planted the seed.
Tax Tuesdays. Jeff looks very cool, he looks like a man in black there.
Tax Tuesday rules. Ask live, Q&A features. The Q&A allows us to see your question and not get rid of it, it won’t go away. I like the chat when you’re just responding to things, instantaneous, you’re dealing with tax.
If you have a question, by all means put it into the question and answer feature. If I ask you for a response on something, maybe do non-scientific polling, then we’ll do it in chat.
If you have questions during the week or you want to ask something for our staff, by all means send it to taxtuesday@andersonadvisors.com. We get hundreds every week. That’s where we pick a few questions every week. I always grab the shorter ones to do them live.
Some of you guys are like, yeah, sure. No, you should see some of these things here. It’s a book.
Patty misspelled Anderson Advisors. You may want to retry that again.
If you need a detailed response, you need to become a Platinum or a tax client.
By the way, we do have a couple of tax professionals on. Christos is on, Eliot, and Piao. You actually have some horsepower here on your questions, this is the time to use it. If you want to ask a bunch of really good accountants good questions, then this would be the time.
How do you get loose money last year? The market, it was giving us their money. We won’t make fun of that.
This is fast, fun, and educational. We want to give back and help educate. The whole idea is to give good tax principles so you’re able to start using some logic to get through some of the stuff that’s out there.
Here are the opening questions. I didn’t even say, hi, Jeff. I’ve been talking to Jeff for the last 10 minutes. I would say, how are you doing today, Jeff?
Jeff: Jeff’s doing great. Got my drink, a few nuts left, we’re good.
Toby: Jeff is livin’ la vida loca. It’s the calm before the storm of tax season. I’ve never really ended here but it gets intense at certain times. Looks like there are some trading questions.
Somebody said yeah, those are from 10 years ago. Okay, so it’s not from this year. I was going to say you should jump into our Infinity class if you’ve been having issues, we’ve been killing it. It’s not like we’re a proprietary trading system, we’re actually a really boring trading system that works. We don’t really trade and buy good value stocks that pay money. We like that.
Opening questions. “Can you accelerate a large capital loss carryforward instead of just offsetting with capital gains every year?” We’ll go through that. That sounds like it’s probably—that may be your question.
“Could you go over when would it make sense for stock option traders to do the mark-to-market election? Can you go through an example?” Absolutely.
“Is there any additional tax benefit besides the federal solar tax credit when you install solar on a rental property?” We’ll go over that, too.
“We own shares of a real estate farm syndication that will have K-1 passive income. It will have operating income, no rental income.” It sounds like they’re actually working the property. “If we have other real estate K-1 passive losses from rental property, can the K-1 income from the farm investment offset the rental loss from the other property?” I’ll probably math that one out, we’ll go over that.
“Can I convert my current single-member LLC started in December of 2019 to an S-Corp for 2021 and have the tax benefits for 2021?” I’m assuming you’re asking about the tax benefits for the S-Corp. We’ll go over that.
“If I start a 501(c)(3), are there syndication deals that my 501(c)(3) can invest into that are geared towards qualifying investments like facilities for care for the sick, or veterans, or with disabilities? Or is it a requirement of the 501(c)(3) to purchase its own complex and turn it into a facility to help a group like veterans or economically disadvantaged?” Really good question. We will take care of it.
“If I have a single-member LLC”—when you see SM, that just means single-member—“can I still get reimbursed for costs like vehicle mileage, or do I need to have an accountable plan in an LLC taxed as an S-Corp?” We will absolutely go through those.
I think we have a few more. There’s always more, right Jeff?
Jeff: Always.
Toby: “Are tuitions for professional learning deductible?” We’ll answer that.
“What expense will I be able to write off in your first year of having an LLC, specifically expenses associated with establishing your business?”
“I heard that you can turn your EIDL loan into a PPP loan and get it forgiven if under $150,000. Is there a procedure to do that? Can you help us with it?” We’ll go through that.
“Can my S-Corp pay me rent for my home office? And if so, is this considered personal income?”
We have some pretty good questions today. We will zip into those.
Right away, Jeff, what do you say about these large capital loss carryforwards?
Jeff: I hope you have a better answer than me because the only way I know to get your large capital loss carryforwards is to have capital gains to offset them. There is no way that I’m aware of to accelerate those.
Toby: You have ordinary, capital, and passive. These are the types of income that you’re dealing with. I’m not aware of any others. Let’s see.
If I’m looking at things like rents, royalty, rents would be over here in passive. I’ll just say rental for this income or losses. Passive business interest, those are the only two things that sit over in the passive side.
Capital, you’re going to have short-term and long-term.
And ordinary is pretty much everything else. That’s going to be your royalties, that’s going to be your interests, profits, wages. Is there anything else I’m missing?
Jeff: Dividends can be either capital or ordinary.
Toby: Yeah, but you won’t have a loss on dividends so I’ll just put dividends. They could be taxed as long-term capital gains.
It’s this weird thing, but you don’t have a dividend loss. Is it possible to have dividend loss?
Jeff: No.
Toby: Anyway, we have these three categories that you fall in. What he’s talking about is in either one of these categories, the gain offset is by loss, and then loss is stuck if it’s passive. There’s two exceptions, act of participation and real estate professionals.
In capital gain, the gain is offset by loss, loss offsets the gain and $3000 of ordinary income, I should say, per year. Is that the right way to phrase it?
Jeff: Yeah.
Toby: Then I’ll get rid of this dividend thing because the dividend’s always positive. I’ll just say that ordinary income is offset by ordinary loss, but ordinary loss offsets everything. If you have capital gains, if you have passive income, your ordinary loss can wipe all those things out.
This is probably the biggest area of confusion that I see in accounting. If you have people that are making money in one of these categories, you’ll have a loss in one of those categories and they may not be able to use it.
We have a big loss over here. Unfortunately, your loss carryforward, you even lose that when you pass away, so you better live a really long time. You’re going to be using that $3000 against your ordinary income unless you can get some capital gains.
You have a capital gains tax appetite. It doesn’t matter whether it’s short-term or long-term. You just need to make gains because you have a bunch of losses.
It depends on how much loss you have as to how much it’s really worth, but you’re going to get gains here. It’s like you could go conservative and maybe do syndications or things, or the gain level’s going to be small but you’re going to get the extra because you’re not going to pay taxes.
Is there anything else I’m missing there, Jeff?
Jeff: No. The only way to really accelerate it is you got to sell stock that has a large unrecognized capital gain in it. It might be a rental property, your home could be a candidate but that’s got the large exclusionality built into it. We may have stock positions that have grown over the years if you just have none left or never done anything.
It’s just a matter of finding where you can generate that capital gain to offset those capital losses. If you got large capital losses, that’s free money from selling stock that got substantial gains to it.
Toby: Somebody’s actually talking about the depreciation. They’re starting to realize, wait a second, so it’s over here? Passive gain or income—I should say, it’s income because it’s not really gain, it’s not a capital sale—active income is offset by passive loss.
If you have a syndication that creates a big, fat loss and you have other rental income or passive business income—these are business income which you do not materially participate, so it’s usually, I put money into a business and I don’t do anything for it—then yes, you could use it against that as long as it’s passive income.
You end up with a tax appetite capital. Let’s say that I have something where I’m generating large passive losses every year. I own buildings, I own big real estate, you now have a tax appetite to go into syndication to be a passive owner.
It is weird when you start realizing. You watch the wealthy and you say, why are they investing at? They would want control because quite often, they have a tax appetite so they’re willing to take less on something because they won’t be paying tax on it. Hope that makes sense.
Jeff: One thing you mentioned, Toby, when we’re talking about the dividends, that is a decent way to help reduce that capital loss because most dividends except for real estate investment trusts are considered capital income.
Toby: But qualified.
Jeff: Qualified dividends, correct. In real estate investment trust, it’s not a qualified dividend but many of your standard corporations are.
Toby: Johnson & Johnson, Federal Realty, or I guess Federal Realty Trust wouldn’t be.
Jeff: I think this is one thing talked about in Infinity too. That if you have a good dividend paying stock, it may not be growing much in value, but it could be generating a nice income stream that’s not going to be taxed because of your capital losses.
Toby: Patty, it’s okay if they ask a few questions relating to it. We’re getting on right now. Patty’s always going to tell you guys put it in the Q&A.
“What is a capital loss? Is an example depreciating the value of a building?” No. It’s if you sell the building at a loss. You actually lose money on it. Or if I sell stock at a loss, that’s going to be capital loss.
If you sell a house, you don’t get any. That’s personal property, you get no loss from personal properties. If you sell a car, if you sell your house, or something at a loss, it doesn’t help you any.
It gets kind of funky. This is why you have an accountant. This is completely self-promoting but this is why you have Platinum, guys. It’s because you could put a question like this. Hey, I’m about to do X, what are the tax ramifications?
Let’s say you have capital gains, this could be short term. Short term capital gain is really bad because it’s going to be taxed as ordinary income. But then we see that there’s capital losses, that’s one of the first things they’re going to ask you. If you have capital loss, you might say, yeah, but it’s from long-term. Perfect, use it against your short-term gain. It doesn’t have to be the same, it just has to be capital gain and loss.
Then you realize, wait a second, you mean I can use something that I’ve been sitting on for years, afraid to take the loss, and it will offset my short-term capital gains after some option trading at it? Yes, it’s exactly what you do. Sometimes, it’s just getting clarifying answers and asking the right question. We’ll help you out.
Then with the passive side, it’s the same thing. If you have a tax appetite somewhere, then you can go into the right type of income just like Jeff was saying. If I have a bunch of capital loss carryforward, maybe I should be doing dividend investing like crazy. Maybe I want to have capital gains, maybe I want to sell options and get option premium because I won’t pay any tax on it.
It gives me an appetite and tells me exactly what type of income I want.
I forgot the name of the gentleman that had the capital losses but that’s Jeff’s recipe right there. Get qualified dividends, a selling option on your stock portfolio, maybe it’s even doing covered put where you’re selling put on something that you would buy just to take the premium. You have enough cash to cover it if you were the stock […] but you have an appetite.
Somebody says, “Does being designated as a real estate professional impact all this?” Only over here and only with regards to loss. If you have excess passive loss, the two exceptions to that having to be used against passive income are if I’m an active participant in real estate and I make less than $150,000, or I’m a real estate professional, in which case the loss has become ordinary. It’s kinda weird.
Or in the stock market, if I don’t want my capital losses to be treated as capital loss, I have to qualify as a trader, in which case, I would not only have to qualify as a trader but then I would have to make a mark-to-market election. Then, my losses and my income are considered ordinary.
What happens is I move over into this category. Over here, you also have traders. I tend to just freak out when I see traders because it’s not supposed to be there. It’s not really there, it’s something made up that people are putting over there. The IRS always says, should it be over here, should it be in this section? Then they give you the once over, I try to avoid that. At this pace, Jeff, we will be here until midnight. That was a good question.
“Could you go over when it would make sense for a stock option trader to do the mark-to-market election? And could you go through an example?
Jeff: You know my opinion. I’ve seen so many cases where people claim trader status and made mark-to-market elections. The court is notorious for saying, no, you don’t qualify, etc. It’s very onerous to be a trader.
Toby: I agree with you 100%. If you’re going to be a trader, you’re going to have to be doing 750+ trades per year with no time off and with no real W-2 income. It has to be what you do. Then, you’re treated as a business and you get to write off expenses.
Traders have the option to do something that’s called a mark-to-market election. It’s what, 475?
Jeff: I believe so.
Toby: You have to do it at the beginning of the year. You have to do it before April 15th of every year. If you are a trader and you wanted to make a mark-to-market election, you have to do it sooner than later. What it does is it makes all gain now ordinary income. In other words, there’s no gain anymore, and losses equal ordinary losses which can be used against any other form of income. You get to write off your losses.
You’ll see “trader specialist” accountants always talking about losses. That’s how they sell to clients in doing the MTM. They’re like hey, if we do this, not only do you get your expenses but you can write it off against your other income when you lose money.
I would say, why are you losing money? Well, we’re trading in the stock market. I’m like, all right. Traders tend to lose lots of money in the market. My experience. People that trade aggressively and aren’t coming at it from a different philosophical standpoint. A lot of people are just chasing. This year is probably a good year to be a trader. Most years are bad years to be a trader and you lose big time.
Jeff: Going back to that, 750 trades, one of the rules for being a trader is those trades have to be going after the very short term change in price. In other words, you’re not looking at growth or investment, you’re looking at being in the market, daily.
Toby: A lot of times, traders will say you’re out of your trade by the end of the day, you don’t carry overnight.
It’s not bad. The problem is it’s something like you go to court and you say it’s facts and circumstances. You’re going to present your case to a judge. It’s not something that you get to say, here’s the hard and fast rule. It doesn’t exist.
Mark-to-market, that’s the question. When would it make sense? It really only makes sense to me if you’re going to lose lots of money. Otherwise, it doesn’t make sense to me.
It’s frustrating because I actually saw this happen. When the stock market goes up and then down, and let’s say that it goes down on January 1st, you are taxed if you do mark-to-market, you are taxed as though liquidated.
Jeff: Meaning they treat you like you closed down all your possessions.
Toby: They treat it as though you sold it all. You’re going to have all this gain as ordinary income on December 31st even though you didn’t sell it.
Let’s say this is April 15th. You owe your taxes on all of this gain but you didn’t sell anything.
Qualcomm is the example I always give because Qualcomm had a whole bunch of clients doing the Qualcomm thing in the late ’90s, and ran up some ridiculous amount.
It did like a Tesla. It just ran way up and then gave it all back the following year. If you had sold, you would be paying most of it to tax like you were forced to be in a position where you had to pay the tax bill regardless of whether you sold it. Even if you liquidated your portfolio, there really wasn’t anything left over after paying the taxes for a lot of those folks. I was like, why would you do that to yourself? It doesn’t make a lot of sense.
We tend to focus more on making sure that we have a partnership of some sort with a corporation. It could be an LLC taxed as a corporation, but I want a 1065 which usually is going to be an LLC or limited partnership probably. I would just say LLC so I don’t confuse people.
That corporation, more than likely it’s going to be about a 20% partner and it’s going to be the manager. It’s going to make money, and it’s going to use that money that it generates to cover expenses and things like that.
Then when your 80% flows out, it keeps its same status, it’s capital gain. We don’t play around. We’re not trying to qualify you as a trader. We’re saying hey, it’s a managed portfolio. You have a guaranteed payment to a partner if you want to say hey, we’re going to pay the corporation $10,000 a year, or whatever it is, the decent-sized account that will come off or it’s just purely paying it as profit. In that way, you’re not looking to deduct anything, you’re just allocating the profit.
Somebody says, “Why the LLC versus the limited partnership?” Jeff, you can knock that one if you want.
Jeff: The LLC, we have a little more flexibility with, especially some for paying the corporation who is one of the partner slash members of this 1065. It makes it a little easier to pay that management fee or that guaranteed payment to the corporation. It also allows the other member, the individual that owns the 80%, allows them to deduct their share of those ordinary losses created by that management fee and any other business expenses.
Toby: We don’t want it coming down onto your personal return because you will not be able to take management deductions any longer since the Tax Cuts and Jobs Act did away with miscellaneous itemized deductions. I suppose you could do either. We get to the same place with either but I prefer not to, I couldn’t think around.
Somebody’s asking about the corporation managing this. You always make sure that it’s conducting multiple businesses. There is the question as to whether the corporation would have to qualify as a trader. A management company never has to sit there and qualify. If it’s just managing a singular portfolio, you may be looking at an issue. I’ve never actually seen it go into a court.
“Could they, under some tortured interpretation of the law, try to make you qualify?” Yeah, but we combat that by saying hey, it’s going to manage real estate, it’s also going to be a part of a real estate plan. We can do all these things.
Somebody says, “What about an LP to an LLC?” You don’t necessarily have to convert it. You can, but we would look at it and just make sure it’s giving you, under your circumstances, the optimal treatment.
Let’s jump on. Somebody asked about futures and whether it’s still 60/40. Yes. Our adage is first do no harm. We don’t want to change the nature of the income. If you have futures, it’s treated as 60% long-term capital gain, 40% short-term whether you held it for a day or a year and a day.
Somebody says, “Can the managing corporation deduct 20% of the qualified business expense?” You could actually do 100% of any business expenses for managing and it can get deducted out of its portion of the profit.
Somebody says, “Could you be a trader and a real estate professional?” They’re different, so you can, it would be really tough. Because real estate professionals require that you’re spending more than 50% of your personal time qualifying.
It would have to be a spouse and then yes, you could still qualify. You can be a full time surgeon and still qualify as a real estate professional because you don’t have to do the first part, it could be a spouse. Then you both materially participate. You could literally be sitting back spending 100 hours a week on something and your tax return could still say you’re a real estate professional.
“Is there any additional tax benefit besides the federal solar tax credit when you install the solar on a rental property?”
Jeff: Yeah, there is a benefit. The current credit is 26%. Is that correct or did it drop again in 2021?
Toby: Well, 2020 was 26%. It was supposed to drop in the last Tax Act at the end of the year, what do they call it? The last one that they did with all the stimulus checks that included an extension for two years, the solar tax credit at 26% for 2021 and 2022.
Jeff: Let’s say it was still 26% for solar panels put in 2020. You get your 26% credit. Since it’s a rental property, you’d also be able to depreciate 87% of your total cost of that solar installation and depreciate that over a short-term life, a five-year life, I believe.
Toby: It’s five years but you can accelerate. You could choose bonus depreciation.
Jeff: So we could bonus depreciate that.
Toby: Yes. You take one-half of the, did you say 86%?
Jeff: I said 87%. At 26% you get half of the…
Toby: Half of it? Yeah, 26% divided by 2 is 13%, so 87%. And it’s a different section. You’re going to see people say you can’t do it, it’s Section 48 and 38. Those are the two operable sections for businesses. It’s not the same tax credit than you do on your personal home. It’s for business.
Somebody says please explain. All right. Let’s say I have a rental house and I put solar on the rental house. Not me renting it, but I’m renting it to tenants. Let’s say that Jeff owns a rental house in Indi and the house is worth $60,000. You put $20,000 solar on it and you’re going to provide the electricity now to the tenants. Tenants are going to pay you for the electricity.
First off, level number one, first benefit number one is equal to a 26% tax credit. This is not a deduction, this is a credit. What would 26% of $20,000 be? That would be $5200 credit. That’s just dollar bills in your pocket. If your tax bill is $5200 and you have a $5200 credit, you pay zero.
Number two is the cost of installation and the materials. You get to write off 87% of the basis. Would that include the installation and everything, Jeff?
Jeff: Yes.
Toby: Yeah, everything in the basis. You would get a $17,400 deduction. If you’re wondering how I got to $17,400, it’s because we took half of this $5200, we take $2600, we subtract that and this is the amount you can depreciate. We would also get a $17,400 deduction. If renters in an LLC, can it come down in your personal return? Absolutely.
Here’s what’s cool. You may have had to come out of pocket no dollars to get solar on your house nowadays. You may be paying that off over a period of years. In year one, you’re going to get a big tax credit and you’re going to get a big deduction, but you may be paying it off over 5 years, too, so there’s some benefit there.
And they said, “Would it also include the net operating income from the lower electricity bill?” Yes. You’re now starting to make income off of your investment of $20,000. You’re going to be getting an income source in addition to the tax. It makes it much tastier if people understand how to do that. Where we’re really seeing that is in Hawaii where a lot of housing is starting to go off-grid.
Somebody says, “Does the credit apply to the primary residence?” Yeah. The 26% is a different code section, but it will apply to your house giving you the 26% tax credit. You don’t get any depreciation because it’s not a business asset.
Jeff: But on a rental property, this $20,000 investment sounds like a lot of money. I’m calculating the first year of tax savings for most people, it’s going to be about $9000.
Toby: Yup. Again, we’ve been talking about this for a few years. I haven’t pulled the trigger on a lot of solar because for whatever reason, it always seems like with the utilities they play games. They give green credits here in Nevada and one second you could do things. Then, they say ‘no’ and now you can’t. You hate playing games. You got to have some certainty.
I think we’ll have some certainty especially under the new administration, whether you like it or not. This administration seems very geared towards alternative energy. You just want to keep your eye on. It may be something that you’re able to get a nice benefit on.
“Can the business rent to an owner of the business?” Yeah. There’s no problem with this; arm’s length. If you have a business that’s in the rental and you’re actually renting it, then it’s investment property, then absolutely.
By the way, we do have groups that actually do this with nonprofits. They put it on their church, they’ll rent it to their church, they’ll have an agreement or whatever the organization you care about. There were some water utilities that were putting these things out for people to put the property on so they can get the tax deduction on it. Instead of just depreciating it, they usually try to get a tax deduction.
“When does the credit become effective?” I think it’s 10% completion. Once you know that, that’s the year where you get the benefit.
“We own shares of a real estate farm syndication that will have K-1 passive income. It will have operating income and no rental income. If we have other real estate, they want passive losses for rental property, and the K-1 income from the farm investment offsets the rental loss from the other property.”
Jeff: What’s really important to remember here is it doesn’t matter if it’s rental income or ordinary income. What matters is passive income offsets passive losses, regardless of the source. In this case, the ordinary income from operating the farm is going to be offset or can offset any of our rental losses that you may have come from elsewhere.
Toby: That’s exactly right. I drew up the three categories earlier. It’s kind of funny that it’s playing itself out throughout this; I didn’t really intend to. Just because you have ordinary income doesn’t mean that it’s not from another source.
Short-term capital gains, for example, are taxed as ordinary, but capital gain versus capital losses are in their own little basket. You may have passive income that is taxed as ordinary, but it is still passive and passive losses offset passive income. If you have passive operating income from a farm and you’re not materially participating, then that is passive. And if you have passive losses from rental real estate activity, that is passive and they offset each other.
I made a whole bunch of money from my farm and I had a whole bunch of losses that are generated from syndication I was in. It ends up offsetting each other and the thing’s pretty cool.
Good job, Jeff. You answer so quickly and I just blah-blah-blah on.
Jeff: Little to say.
Toby: I think our guys are really hammering away on these. I’m trying to think. They’ve already answered 41 and we just have 18 open. Here’s an easy one. “Is depreciation recapture subject to the net investment income tax?”
Jeff: I want to say that it’s not. That’s a good question that I really haven’t ran across before.
Toby: I thought you would know that just off the top of your head. I was like, oh this is an easy one. After all, Jeff is on top of it all.
Jeff: You hit me right between the eyes. Yeah, because the capital gains would be and the depreciation recapture is more or less a reclassification of some of those capital gains. I’m going both ways now.
Toby: I just like watching you squirm a little. Eliot, Piao, or Christos, do any of you guys know? Put it in chat if you do. That’s why we have the brain trust.
“Is depreciation recapture subject to a net investment income tax?” Jeff, you could probably look it up in two seconds.
Let’s move on. On January 30, we have a Tax and Asset Protection Workshop. It’s a one-day event. We’re doing them virtual. We used to do them three days live, but since we saw the flag going around out there, we are making sure that we do not subject anybody to unnecessary risk, so let’s do these things virtually.
Clint and I are teaching this one. We don’t get to teach together a lot, but this is one where Clint and I definitely are going to be teaching on the 30th of January. If you want to come one day, I will share with you the link—it’s free—aba.link/tap—Tax and Asset Protection.
I’m still waiting on a question. Somebody says, “Tax and Asset Protection class is awesome.” It’s a lot of fun, too. Anyway, did you see whether it’s subject to the net…
Jeff: Not exactly, but I’m leaning towards that it is. It will be subject to net.
Toby: All right. We’ll let it go. Christos is getting on it. Let’s get into more fun stuff. We’re going to say that you stump the class on that one. We’ll get back to you. It’s not something I want to guess on.
“Can I convert my current single member LLC started in 12/2019 to an S-Corp for 2021 and have the tax benefits for 2021?”
Jeff: Absolutely. It’s fairly easy to do. There’s a form called Form 2553, your S election. The only stipulation I’m going to give you is it needs to be done by March 15th of 2021 to be effective as of January 1st, 2021.
Toby: Could they potentially go back and do 2020, with the circumstance where they make a late election?
Jeff: There are circumstances where they can make a late election. I don’t want to say it’s a guaranteed late election. They do approve most of them, but I’ve seen a number that, for whatever reason, they decided not to.
Toby: Do you have to have an excuse?
Jeff: Absolutely.
Toby: Is bad accounting advice an excuse?
Jeff: Sometimes. Reliance upon a professional can be an excuse.
Toby: All right, so sometimes you can go back. What you can definitely do as long as it’s a 2553 election and when you go from a disregard LLC (which is what a single member LLC is) and make it 2553, that’s all you have to do. You don’t have to do, what’s the other one—the 8332?
Jeff: Correct, what they called the check the box form.
Toby: Yes, so you can go back, and yes, you get the S election.
Somebody says, “What if I started my LLC in 2012? Can I still do the S election?”
JeffL As long as you’re electing for the current year, you can actually go back (I think) up to three years with a late election. But the further back you want to go, the less likely they are going to approve it.
Toby: What about the penalties that might be incurred if you made a late election? You said, hey, I should’ve had this election. Do they penalize you for a late filing?
Jeff: I believe they do. If you wanted to go back and say, my 2017, 2018, and 2019 returns all should’ve been S-Corporations, they’re going to subject you to a penalty. I think that’s a case where you need for your tax professional to write a letter for reasonable cause, that we didn’t know at the time there was a mishap or something that kept you from being an S-Corp timely electing.
Toby: There’s no penalty if you change it for this year, so Chris, they’re wrong on that one. I’m assuming that you haven’t revoked an S election within the last five years. You still have to qualify for S, which means it’s an individual and natural person owning it. It’s possible to do it through a disregarded LLC that owns it, possibly a living trust.
Jeff: No foreign owners.
Toby: Not unless they’re a resident. You have to qualify for the S, but if you make it, it’s forward-looking. There are no penalties, and it’s not an issue the start of this year, so Chris you’re good. Even for changing this year, correct. There’s no penalty because there’s no return due on it yet.
The question is, what if I changed last year and I should have done for 2020, and you did it now, you’re not even late on 2020 yet. For 2019, you’d be late and you would have penalties. How much is it per share?
Jeff: I believe it’s $205 per shareholder per month, up to a max of 12 months.
Toby: Yeah, and the date is the 15th day of the third month following the end of the tax year, so March 15th.
Jeff: That date is also important. Say you did convert to LLC for 2020. You need to either get your tax S-Corp tax return done by March 15 or at least get an extension.
Toby: We’ll just give you a big old yes on that one and all the other questions.
Somebody says, “Christos says the entire gain from the sale will be subject to net. There is no additional net on the depreciation recapture. The gain on sale will be subject to net investment income tax, but there’s no net on the depreciation recapture.” Christos, I just want to confirm that. Just the gain would be taxable.
If you do a 1031 exchange—I’m not even sure if you can avoid it—if you have a bunch of capital gain loss carry forward, you can avoid it. The depreciation recapture subject to net investment income tax. Just verify that that’s true if it just by itself. There are always two components. Correct. All right. Thank you. No worry about that. Glad we didn’t guess. That’s why we keep accountants on the line.
“If I start a 501(c)(3), are there syndication deals that my 501(c)(3) can invest into that are geared towards qualifying investments like facilities for care for the sick, veterans with disabilities? Or is it a requirement of the 501(c)(3) to purchase its own complex and turn it into a facility to help a group like veterans or the economically disadvantaged?” Mr. Webb?
Jeff: We talked about this somewhat about being an accredited investor, and some of the syndication where you do not have to be an accredited investor. I think part of my problem with this is if you’re just investing in a syndication to fulfill the purpose of your 501(c)(3), I’m not sure you’re actually fulfilling the purpose of the 501(c)(3).
Toby: The first thing to always understand is that 501(c)(3)s, generally when they’re getting approved, they’re specifying what it is that they’re doing. If you’re doing a deal, like if you’re going into the working and providing housing for the disadvantaged, and you have a very open definition, it could be low-to moderate-income housing, it could be veterans, it could be single moms, it could be any group that is disadvantaged, then it would qualify. Unless you had the approval, then anything you do in that space that’s furthering your purpose is going to be fine.
Any investment you get into is also fine. 501(c)(3)s can do investments. What we do here is we do a five-year advance approval process. We get what’s called an advance ruling on your 501(c)(3) status as a public charity, meaning that it doesn’t have to do anything to qualify as a public charity. It’s qualified based on its plan.
You don’t have to worry. You’re actually good. It helps. The reason that we look at this is that there are some safe harbors that are written from the treasury. As far as the advisory opinion, this is what we say. It’s a safe harbor, 60% of your income, maybe as high as 70% coming from low- to moderate-income housing. That means that you automatically qualify going forward. I’ve never seen somebody denied.
When somebody goes and says I want to help people, it’s not an issue. Just the safe harbor is no matter what I do, they actually can’t mess with me. But if you’re doing things for groups like you just mentioned, you’re going to be absolutely fine. Everything here is like a big old yes. You can absolutely do it.
Jeff is pointing out that if you’re in a syndication, a lot of them are only for accredited investors. Which means that the organization would have to have over $5 million or it would have to be in an investment where they allow non-accredited investors. That’s the one thing. I’ve never seen them question organizations that are doing this type of work that are actually doing this type of work. I don’t think there’s any.
Somebody just asked a very simple question that I thought I’d throw up there. “What if your rental burns down and you get insurance?” You generally have the replacement value and there’s no tax ramifications. What you’re not allowed to do is get rent lost rents, get money for it and not declare that as income. I had a rental property burned down. All they do is give you checks so you can fix it up. They’re just going to go on the basis, so it’s neutral. You’re just going to write it off. Again, you’re going to depreciate it.
Just remember that whenever you have a rental property, the structure itself is what you’re depreciating over time. It’s 27½ years unless you break it into its components for the cost seg. You’re depreciating it over time, so if you have something that gets destroyed and then you put it right back into service, you’re just re-appreciating.
I suppose that if he had something burned down you could say, hey I’m retiring the whole roof. Take a whole bunch of depreciation and then write off the new part again if you retire. Again, if your whole house burns down, you may get your little tax benefit there.
Jeff: The only time I ever seen issues is when the property was over-insured. That’s not only a tax issue, that’s an insurance issue also where you’re receiving more money than the property was actually worth.
Toby: I guess what I would say to you, Andy, is send us over your situation so we can look at it and just see what you’re getting compensated for. Missed rents, definitely. If they’re fixing something that’s a repair, then I would say probably no. Insurance proceeds tend to be nontaxable. It always depends on what they’re for, though.
You can always follow us on social media. By all means, jump into any of those. You can jump in and you can follow us. We do put a lot of material out there.
Somebody says, “What software program are you using right on the screen?” I use Surface Studio. I have a big screen that I can draw on. Or I use Surface Pro. Today, I’m using Surface Studio. And it’s just regular PowerPoint with a little pen. A lot of people are Mac fanatics. I tend to be more on the PC side just because it allows me to draw whenever I want, so I can draw all over the place. And I like to draw.
Jeff: And I’m still using DOS.
Toby: You’re still using an abacus. I see him there and he’s moving beads across the big stick. Move up to a calculator.
“If I have a single-member LLC, can I still get reimbursed for costs, like mileage, et cetera? Or do I need to have an accountable plan and an LLC like an S-Corp?”
Jeff: Single-member LLCs can certainly reimburse your cost, like the vehicle mileage. You mentioned an accountable plan. You got to remember that when you’re reimbursing for vehicle mileage you’re actually keeping track of your mileage, which automatically makes that an accountable plan.
An accountable plan is you’re saying that you’re accounting for the cost that you are reimbursing. A non-accountable plan would be, like you may have a traveling salesman that you dispose $1500 a month for a lot of expenses, and don’t expect them to report back what they spend it on. That would be a non-accountable plan. It has totally different ramifications.
Toby: When you have an accountable plan, I tend to think of that as employee-employer. When you have an item like rental property, for example, you have a single member, and you have expenses directly associated with that property, then you’re not reimbursing an employee anymore, you’re just taking a direct expense. It’s a subtle difference, but it makes a big difference depending on the type of activity you do.
Jeff: You’re right. This would be more of a direct expense of the LLC.
Toby: Yes. In this particular case, it’s not really handing you the money. You’re getting the rental money, but it’s taking your deduction. In the case of an accountable plan, think of you working for Microsoft. You’re incurring expenses, you turn to Microsoft and it hands you money, and then Microsoft writes it off. What you’re not having here is the reimbursement. It’s just writing it off, but it’s your money. There’s no difference between you and the entity.
“Do you have to put in an accountable plan language?” In an LLC, you have an accountable plan language if you are an S-Corp or a C-Corp for tax purposes. Otherwise, it just says it’s allowed to incur expenses. It can pay those.
There’s no difference between you and the entity when you’re a single member. It’s just you. You’re already incurring expenses for the mileage. You’re not getting reimbursed. You’re just writing it off on your tax return. It’s a subtle difference, but it makes a big difference depending on what you’re doing.
“Are tuitions for professional learning deductible?”
Jeff: We haven’t said this yet today, so I’ll say it now. It depends. If you’re in a business where you have professional learning, you can deduct it in that business. If you’re talking more along the lines of deducting professional learning as a tuition expense or a tuition credit, it’s not eligible for that. The only place I can think of to deduct it is within a business at this point, or get your employer to reimburse it.
Toby: Yes. Jeff is always so literal. I would look at this and I immediately start thinking, hey can I deduct it in my business? Jeff’s way smarter than I am because he immediately say, this may be an individual asking this. If I go get an MBA or things like that, I can’t write off. That’s not a deductible expense. If I go get a PhD, JD, even a CPA, it’s not a deductible expense to me individually. I may get learning credit, I may get some deductions on interest. There are things like that, but it’s not deductible.
Now, if my employer sends me to improve my skill as an employee, or if it’s part of my licensing, like Jeff is a CPA, he has to go to a continuing education. I’m an attorney. I have to go to continuing education. All of those are deductible. All of my expenses for continuing education would be deductible.
I’ll use a real life example because my mentor Jerry, a super, super cool guy, passed away a few years back. What a great guy. He went to school with an MBA, he was working with Boeing. Boeing was paying for the MBA. He is sitting next to the students that don’t work for Boeing. Boeing can reimburse him for his tuition, because it’s making him a better employee. None of those other students can write off their MBA because they’re not employees, they’re preparing themselves for a new skill for a new profession.
Hopefully, that somewhat makes sense. You do have to have a business if you want it to be deductible. Gone are the days when even if you didn’t have a business, you can’t write it off as an unreimbursed business expense because gone are the days of miscellaneous itemized deductions.
What about conferences that are perfect for professional development? Yeah. Write those off if you have a business. As an individual, you can’t, it’s personal. Always business or personal. Go ahead, Jeff.
Jeff: The one thing I wanted to add was I couldn’t stand it so I had to look it up, tuitions…
Toby: Tuitions?
Jeff: Yeah.
Toby: That’s what I was looking up.
Jeff: It’s used in a weird way.
Toby: I was thinking of tuitions for professional learning, or tuitions for professional learning. It’s plural tuition for something. I guess professional learning whether that could be plural. I don’t know. This struck me as odd.
“Can a 14-year-old have a business and have to pay taxes?” They can be in a business and you would be owning their interest for them more than likely for them until they’re 18. Yes, they can be a member of the business, make them work, and they can pay taxes just like ordinary people. You could pay them wages out of the business, there’s all sorts of stuff.
Jeff: Do any states have laws where a minor can’t sign contracts or agreements?
Toby: I don’t believe they have the capacity until they’re about 18. Somebody says, can we get a copy of the recording? Yes. Somebody says tuitions, the British say it that way so you know it’s correct. You’re probably right. I just looked at it and I was like, is that right? You know what? Now I’ll probably start using tuitions. I’ll just make sure it’s plural all the way around and that I don’t have anybody that tries to correct me.
Jeff: Say aluminium.
Toby: That’s right. Pop into our YouTube channel by the way, guys. We’re always putting new stuff up, we have Toni Talks, Coffee with Carl. My mug sitting here, we’re always breaking up these Tax Tuesdays into two or three pieces and sending them out. Jeff just won’t stop talking and makes us late every time. You’re still there? Shoot. Maybe it’s me. Let’s jump on.
“What expenses are you able to write off in your first year of having an LLC? Specifically expenses associated with establishing your business.” Mr. Webb?
Jeff: There are two types of business expenses that you’re talking about. There are startup costs which you hear about a lot and there are organizational costs. Company goes public, all the costs incurred to get their stock up. Many public things like that, filing things of that nature, that’s our organizational cost, costs incurred just to get your LLC setup. Startup costs are more along the lines of research and development but that’s not really what it is, it’s expenses that you have to explore your company, the possibility of running your company, you’re going to incur certain expenses along the way.
Toby: You said organizational expenses?
Jeff: Organizational expenses, yes.
Toby: Even if you haven’t made $1, you can take that organizational expense up to $5000, right?
Jeff: Yeah.
Toby: Startups are the same, right?
Jeff: Correct.
Toby: Startup is investigation.
Jeff: Thank you.
Toby: Organizational is state, legal, tax, and licensing. Think hard cost of organizing the business. Startup you could be investigating a business. Hey, I’m thinking about it. Somebody said I formed an LLC last year but I had attended some workshops in 2019. I just set up the LLC. Can I write off the cost of the workshop? Yeah. You go back and the way it works is you’re either going to take it as a startup expense if it was not putting you in a new business. Either it was helping you investigate and start a business. A lot of them do.
Then you can go up to $5000 and amortize the rest. Amortizing the rest means 15 years, but it depends on how many of the workshops you went to also. Some people are pre-paying for a whole category, things that they’re going to do. Then they do a little bag, they take a little break, then they go back and do some more, and take a little break. They’re on a progression. If you incorporate right in the middle of it, some of that’s going to be the $5000 startup and some of that’s going to be just ordinary necessary expenses that you reimburse. Did I miss anything, Mr. Webb?
Jeff: No.
Toby: Does employee training qualify as startup expense?
Jeff: I saw that. That was an interesting question. My first thought was if you have employees, you probably already started your business. I think there might be arguments made that either you started your business and hired employees. If you really aren’t selling anything, say you have a restaurant, you’re training people, maybe you haven’t really started your business so it is a startup cost.
Toby: Yeah, it is kind of weird. Depending on the type of business, for example a building, you could have five years of startup expense. Basically, you don’t get to write it off until you put that building into service. You’re going to just be grabbing those things in year one, you’re not writing them off as you go. This is why we’re very bullish on C-Corps by the way, because we like to have the business set up that’s going to manage other businesses, because we like those management companies, because they’re immediately like hey, start managing other businesses as soon as we have the ability to manage. If they could bill, it’s a business. Then we’re going to grab all of those things. Even if they’re just a loss carry forward, it’s going to offset future income. You’re just grabbing it as you go.
Somebody says, what about the cost like supplies, equipment, gas? I’m just reimbursing you those probably as an ordinary startup expense. I’m just going to say in exchange for buying some supplies. If you used up the supplies during the investigation, then that would be a startup.
This is the big it depends, it’s because it’s facts and circumstances.
Jeff: Even going back at any equipment you buy before you actually start your business, we’re going to throw that into the business as a capital purchase.
Toby: I don’t have to give it cash, I can give it a bunch of debts, right?
Jeff: Yeah.
Toby: I value that. Somebody says, “If you haven’t answered this already, I live in Maryland. Do you have suggestions on finding a really good CPA with a real estate background who can do my taxes?” You can reach out to us, we’re happy to do them. What I always tell people is, don’t hire people that don’t do what you do. You know how you find a really good CPA that does real estate? You go to your local REIA, you go to your investor groups, and you find someone who actually does what you’re doing, or you work with an organization that that’s all they do.
I like to think that we’re the best on the planet, but we’re not the only game in town, and we’re not the best fit for everyday life. We lever technology like crazy and all that good stuff, but by all means, if you find someone who does what you’re doing, and you match with them, you don’t replace them. You buy them nice things during the holidays and treat them good. You don’t wait until the last minute and spring stuff on them. You treat them like they’re golden because those are the people that are really going to save you some serious stuff.
If you guys know, there’s Jeff Cohen of Katz and Cohen in Pikesville, Maryland that somebody threw up. We’re all about whatever is in your best interest. Yes, we could absolutely help you, but if you have somebody local by all means, if that’s a better service for you, do that.
“I heard that you can turn your EIDL loan into a PPP loan and get forgiven if under $150,000. Is there a procedure to do that? Can you help us with that?” Jeff.
Jeff: I’m going to let you answer this one, Toby.
Toby: Alright, EIDL loans, Economic Injury Disaster Loans. The way I always explain it is, this is the SBA loan that’s meant to help you when a tornado hits your place. In this case, we have a national disaster that was declared nationally and it’s called Covid. All of a sudden, you had a square peg in a round hole and the SBA just got hammered. Same time yet the CARES Act which created something called a paycheck protection program. That was on March 27th of last year. The EIDL loans, they’re supposed to be up to $2 million but there’s too many people that were asking for them. They made a max of $150,000.
Now here’s where the confusion is, there’s two sides to the Economic Injury Disaster Loan. An emergency grant to up to $10,000 and there’s a loan up to $2 million that’s paid back for over 30 years. Then you have the PPP loan which—I forgot what they capped it, I want to say it right. I cannot remember. I want to say $5 million or something. It’s a huge amount. But if you spent it on payroll and a few other expenses like your lease or your mortgage on your facility and perhaps some utilities, then it was forgiven. You could get the entire amount forgiven.
The EIDL loans allow you to spend things on payroll, and utilities, and things too. What ends up happening is if you have an EIDL loan and you have a PPP loan, you need to use the PPP loan on certain expenses. Your EIDL loan, you could still use those expenses if you want, it just makes it so that it’s not forgivable anymore. There’s a lot of confusion about it, people can go like, wait a second, when I get a PPP I can use it on anything? Yes, you could use it on anything. But if you want it to be forgiven, you have to use it on these things, but I could use the EIDL loan on those exact same things. You want to make sure that you’re using the EIDL on something else.
To the point that a lot of practitioners including us are separating the money for the PPP and show it going right into your payroll. We just take all the arguments off the table, we want it to be forgiven, make it easy for everybody, and do it that way. There’s one other side to this where they crossover also which is the $10,000 maximum emergency grant gets subtracted off your PPP forgiveness. If you get the grant, let’s say that you had a $100,000 EIDL loan, $10,000 of it is a grant. There’s a $90,000 loan, there’s $10,000 spree money, and then you go get a PPP loan of $200,000.
When you go for forgiveness, that $10,000 grant gets subtracted from the $200,000 PPP loan. Now you have $190,000. I know it gets confusing. Trust me, that’s why it’s facts and circumstances and we can simplify it for you. We can un-confuse it for you so you know exactly what you’re doing. You don’t turn an EIDL loan into a PPP loan. They’re two very different programs, completely different sections, a PPP loan is a fancy way of saying we’re going to give regular banks money to loan the people, and then we’re going to pay it for them if they meet a certain criteria.
The money came out of your local banker’s account and they’re going to get reimbursed from your SBA. The EIDL loan, the money came directly from the SBA. There is no third party lender involved and you’re going to pay it back. It’s an actual loan. You can always pay back the PPP if you want to call it a refund I guess. If your brain got scrambled a little bit that’s fine. There’s some pretty interesting questions going on here. Yes we do this every other Tuesday and yes it’s just like this every time. Sometimes we go a little late.
Somebody’s asking about how to get access to they want to do a how to. Patty, take a look at Al’s comments so that we can help him use the other resources that are available for free, like a lot of the Facebook and Instagram and then YouTube and all that. It looks like there are some folks.
“Can my S-Corp pay me rent for my home office? If so, is this considered personal income?” Mr. Webb.
Jeff: Can it? Yes, absolutely. Should it? No. For the very reason you’re asking your second questions, if you’re renting your home office through your S-Corp, that’s going to be taxable income if it’s more than 14 days a year. You really don’t want to do that. The better way to do this is you have your home office, you have an administrative office in your home, you’re asking your S-Corporation to reimburse you for the cost of that home office. That is not taxable to you but it’s still deductible to that S-corporation.
Toby: Correct, absolutely. Can your S-Corp rent a room in the house? Yes, this becomes investment property. When you have investment property, you can lease it and you could do things called depreciation. Once you start depreciation then it also recalls recapture and then this money right here, the rent equals income. That’s why Jeff says don’t do that. Can it? Yes, but you never want to have rents. Instead, what you want to say is home and S-Corp and the S-Corp reimburses you.
What’s really going on here, this is not something under an accountable plan, this is why we like S-Corps and C-Corps because we don’t have to worry about depreciation recapture. We don’t have to file that silly home office deduction form that you do as a sole proprietor. What we’re doing here is we’re just going to reimburse you the reasonable cost of that space that it’s making available to the business. You still have to meet the requirements of saying its exclusive use.
Let’s say that you have a 3-bedroom house, two baths, one living room, one kitchen, and you take one of the bedrooms and you make it into an office. When you do a reimbursement, this could be something that’s just from a regular employer, it doesn’t have to be just your S-Corp, you qualify as an employee of an S-Corp, you cannot be an employee of a sole proprietorship that you are the proprietor or a partnership. you have to be an employee of a business that would have to be a corporation, either an S-Corp, C-Corp, LLC taxed as an S-Corp, LLC taxed as a C-Corp or 501(c)(3) or 501(c)(26), any non-profit corporation. Then we could sit here and say alright we’re not going to count the baths, but we’re going to count up these rooms. We have five rooms, so you can reimburse 1/5 of all expenses associated with the house including mortgage, utilities, if you have a cleaner coming in.
All that stuff, now I can just reimburse you and say thank you. Or you could do net square footage or you could do gross square footage. You have some choices there. That S-Corp could just reimburse you and then what we look at is reimbursements equals no tax, no withholding, no social security, nothing. It’s free money.
Let’s say that Jeff said, Toby, on your way into work hit the Pinkbox Doughnuts and bring in a couple of dozen donuts, and I bring in some donuts and Jeff hands me some cash incentives, the business reimburses you. Can they do that? Or write me a check whatever it is.
The business can reimburse it if they have the receipt and they paid for it, then they can write it off as an expense. What do I do with the cash? I’ll tell you what I’d do with it, I’d stick it in my pocket. I don’t have to record it anymore. I just got reimbursed. That’s the difference between if I sold the donuts to the business. You can give me $20, but I’d have to recognize that $20 and then I would deduct the cost of the donuts against it. I could still be in the same place. I could just be at zero but I’d have to recognize it. As opposed to just getting reimbursed for the donuts. Here’s what my cost was. I don’t have to do any paperwork. I didn’t sell anything. I just got reimbursed. Does that make sense? Did I see anything crazy, Jeff?
Jeff: No. I’m just picturing you going through the company selling doughnuts.
Toby: I could do that. 5 plus 5 equals 10. No, 5 plus 5 could equal 0. We always have to define what we’re using, Brian. A good accountant once told me that, they said what’s two plus two, I said four. He goes, no, it depends. Two chickens with two wolves go into a room together. Two is coming back out because the wolves are going to eat the chickens. They always make it’s the accountant doing something shady. He’s like, it depends on what it is. Does the answer to the office reimbursement question change if the S-Corp has another office location?
Scott, it used to. In 1993, they changed the rule and you can have an administrative office, so long as it’s where the employee is doing their administrative services or if it’s at the convenience of the employer. Like during Covid, a lot of employees, the employer wants them to work from home. Could the employer be reimbursing them? Yeah. Most of you are saying you can, which means they are not forced to. There’s a big difference. If I say you cannot ever come into the office ever again, you need to work from your house. I should be reimbursing you for some of your expenses.
Most employers just paid for all the cost of the items, like a computer and maybe some equipment, a keyboard, things like that. But if an employer forces you to work from home and they don’t do that, you actually probably have a claim against them. Could they also be reimbursing you for the use of your house? Absolutely, they could. Most aren’t, because it’s just like I already provided you with the workplace, we have a lease. I’m already paying that expense. Let’s just say that they said, you know what Jeff, everybody’s going to work from home. I should probably be reimbursing you or at least covering the cost of your stuff. Anything on there that would say that’s crazy, Jeff?
Jeff: No.
Toby: Did you say whether or not this home office reimbursement would have to be done on the accountable plan? Yes, it would be under an accountable plan. An accountable plan—there’s a lot of misnomer about it. An accountable plan doesn’t even have to be in writing technically, although we recommend it. Accountable plan just basically says the process in which you get reimbursed. I provide here’s what my expenses are and then you cut a check and there’s something there that says you’re supposed to provide backup when asked so the employer could basically write it off.
Jeff: One thing I want to say Toby, I know you put down a mortgage. They could reimburse you for your mortgage interest, not your mortgage payment.
Toby: Yeah, your mortgage payments, you don’t have to because you’re basing it off the value of that property and you get a portion of depreciation as a recovery. It kind of sounds weird but you’re being reimbursed for the fact that your house is being used. But it’s not tied to the exact mortgage principal. The interest, yes, even if you’re paying your interest really fast, if you’re paying it, you could reimburse it. This is where for those of you who live in states where the SALT limitation is affecting you, this is how you can get some of that money back in your pocket as a deduction where some of you guys are phasing out of your $10,000 cap.
You’re like, my mortgage interest is $14000 a year, I’m losing out. Here’s a way you can get some of that back in your pocket. I think we did good. I always go too long and now I’m feeling really self conscious that it’s almost 04:30. Let’s finish this up. You can always go listen to our podcast. We do put these up as recordings in our podcast, too. You can actually go through. Some people actually said thank you for all your knowledge, Jeffrey. Jeff is really smart and Jeff is very measured. As opposed to yours truly who sometimes pontificates.
Andersonadvisors.com/podcast, you can go in there. This is what it looks like. You see Jeff. I took his sunglasses off. He’s wearing the Men in Black. He’s looking pretty good, but you can go there and also see all the other podcasts that we do. We like to put up there a lot. I just did one with Frank Cottle which is really, really cool. He’s one of the largest virtual office providers in the world, one of the largest in the United States as well. We had a really good discussion of the future of office space, if you happen to be in office.
Be on the watch out for it. It went a little long too, but it was really good. Frank is a buddy of mine and he’s really, really smart. He knows […] Regis and they’re very good competitors. They’re a lot of fun. He was fun to have on. He’ll be on the podcast. There’s always really good folks in the podcast. If you want replays of all of these, if you really want to go back and listen to everything we’ve ever done, we’re on 100-and-something. I think you can see them in your platinum portal. Send your questions. Again, out of the questions that are sent in, we send them around to the advisors. A lot of folks just answer them. I have a good chunk of them that get put aside and we’d pick out of those. Usually, either in the morning or the night before, we scrap a bunch of that, so it’s just kind of cool. We just grab them. Somebody says material participation—I spend my own money. A material participation has nine different versions, but we’ll go over that. Email it in, that’s a good thing. You could email that in and say what is material participation in Airbnb? Talk about it, it’s kind of fun.
That’s it. Jeff, thank you for coming in and hanging out. Thank you for starting the Tax Tuesday five minutes early and making us sit around and tap dance.
Jeff: I thought we might get done five minutes early.
Toby: Good luck with that. I don’t think that will ever happen. Somebody says, thanks guys. We really appreciate you coming on. Share it with all your friends, get people on to Tax Tuesdays. Especially now, in the next few years this may be more and more critical. I have a feeling we’re going to see some action. We’ll have some fun with that. We’ll always make it to where you keep more in your pocket than you have to give away. Alright guys, thank you.
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