With all the lack of tax knowledge going around and politicians being pushed by their parties, get your tax questions answered by Toby Mathis and Jeff Webb of Anderson Advisors. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- When you have a PLLC, what do you put on a personal or business credit card? If you have a business credit card that’s great, but a lot of the credit card companies are not willing to issue credit cards to new small businesses; use a personal credit card and make sure to separate personal and business expenses
- How do you claim the solar credit on your personal residence? Use Form 5695
- Should I file a return with my kids as dependents or should they file their own return if they are paid from the family business? If they are dependents and not supporting themselves, they are still dependents on your return; however, the children can file their own return as well and claim the standard deduction up to the amount of their earned income plus $300
- I have a rental property in California. When I go there to work on it, can I use per diem plus mileage rather than actual receipts for housing and meals? Depends if you are self-employed or you have the rentals owned personally, you cannot use the per diem for housing but can use it for meals
- I haven’t done taxes for 2020 and I’d like to know how to write-off bills for my emotional support animal. Can that be done with business taxes? Maybe, depends on the IRS’ primarily for and but for tests
For all questions/answers discussed, sign up to be a Platinum member to view the replay!
Go to iTunes to leave a review of the Tax Tuesday podcast.
Resources:
Infinity Investing: How The Rich Get Richer And How You Can Do The Same by Toby Mathis
Anderson Advisors Tax and Asset Protection Workshop (April 24)
Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics
Form 5695 – Residential Energy Credits
Real Estate Professional Requirements
Old-Age, Survivors, and Disability Insurance (OASDI) Program
Section 162 – Trade or Business Expenses
Americans with Disabilities Act (ADA)
Small Businesses Affected by Border Closures
Anderson Advisors Tax and Asset Protection Workshop
Anderson Advisors Tax-Wise Workshop
Anderson Advisors Infinity Investing
Full Episode Transcript:
Toby: All right. You are watching, listening, or somehow taking in Tax Tuesday. This is Toby Mathis.
Jeff: And Jeff Webb.
Toby: We’re here to bring tax knowledge to the masses. There’s a lot of tax lack of knowledge going around out there right now, our politicians.
All right. Tax Tuesday rules. Let’s jump in. We got a lot to go over. First off, you can ask your questions live. I ask that you do that in the tax and answer area because we have accountants and tax professionals standing by to answer them. We have Eliot Thomas, Dana Cummings, Tavia Harter. I don’t know if Piao is here but we’ll get there. Is Piao there? Patty, you tell me.
Patty: Yes, he is.
Toby: Oh, my gosh. We have tax attorneys, accountants, bookkeepers galore. You can ask your questions. Ask it in the question and answer area.
If you have technical issues or if you’re responding to me, if I’m having a conversation with you, or if you just ask spontaneous questions, throw them up. If they’re something we’re covering and you want clarifying questions, use chat. If you have a question about yourself, use the question and answer. If you have questions about the subject that we’re on, by all means, ask it in chat.
Oh, Christos is on, too. He’s so quiet. He just sneaks by. You guys got some horsepower on today. We’re ready to rock it. I already see that they’re answering some questions. I probably won’t even get to see it. Just as a side today, could everybody let me know where they’re from in chat? Just put what city and state you’re in, or if you just want to pick a city or just a state. I always like looking at it.
“Anchorage, Long Beach, Miami, Florida, Tucson, Arizona, Colorado, Ashburn, Virginia, Titusville, Florida, Oregon, Texas, San Jose, California, Scottsdale, Minnesota, San Bruno, Kapolei, Seattle, Snellville, Sacramento, Oregon, McMinnville, New York, Maui.” Gosh, we got them flying through here. “Las Vegas, Middletown, Prescott, Fairfax, Virginia, Los Angeles, San Francisco, Burien, Washington.” I went to Kennedy High School, guys. I was right there with you. “Kansas, Evans, Wenatchee.” Somebody’s over there in Wenatchee. It’s a beautiful town. “Chicago.” We have people from all over the country. “Orlando, Evans, Kansas, Honolulu.” Wish we were in Honolulu. We should start. “Palm Desert, California.” Beautiful place.
Jeff: You used to live there.
Toby: I used to have a place in Palm Desert for about 20 years. Clint and I did which meant Clint had a place in Palm Desert. I was like, I already live in a desert. Why am I going to go there?
Patty, say that. […]. There we go. And, “New Jersey.” Let me show you how much—what do they call it in Hawaii? I’m not going to say it because it’ll probably get me in trouble. “Brooklyn, New York.” We got people from all over the place. “Saint Paul, Missouri.” It’s in Minnesota but it says Missouri. “Music City, USA.” I just never really ask that on the Tax Tuesdays.
We do this every other Tuesday. You can invite your friends. Ask any questions they want. It’s tax season. We’ll throw in there a little bit of tax policy tonight because we have some going on that’s out there in the press. I like to clarify certain things that get misstated. We like to make sure that everybody knows as much as humanly possible so you can make independent decisions.
“Manteca, Bay Town, Los Angeles, Ruby.” We got people from just all over the place. We’re so lucky.
Jeff: We are.
Toby: “New Orleans” My brother lives in Slidell, right across the bridge from you. New Orleans is another. The Garden District is gorgeous and I like Blue Dot.
We say it’s fast, fun, and educational. It’s meant to give back and educate. We don’t charge a dime for answering questions. If you get real specific, we might ask that you become a client. We can dig into things for you. Our packages are really inexpensive. You can become a Platinum member, for example. As low as $35 a month, we can answer your questions in writing. You can talk to attorneys and our advisors if you want to, but we can answer your tax questions in writing or you can become a full-fledged tax client.
That’s not why we do this. We do this just to spread out information. We have accountants on here, CPAs. We love to share. A lot of times, I get stumped. Every now and again, Jeff gets stumped and somebody comes to our rescue that’s out there and says, by the way, I’m looking at it right now, guys. Here’s the site.
We make sure it’s a good community. We learn as much as you guys. I was thinking about that today as we grabbed the questions. We get about 400 questions a week. We grab about 10, 15, and answer them live. I’m looking at it going, boy, it’s making me dig into things that I might not otherwise dig into. It helps me out, too. I don’t know about you, Jeff.
Jeff: Absolutely.
Toby: Jeff’s been doing this a little longer than me. He’s like, I got this stuff. Let me just go through them live. Here are the questions we’re going to be answering today.
“When you have a PLLC, how do you know what goes on a personal or business card?” We’ll answer that, assuming that it’s a credit card. I don’t think it means a business card. I was thinking about that.
“How do I go about transferring stock options to a 501(c)(3) before selling to avoid capital gains?” Somebody out there has been paying attention.
“How do you claim the solar credit on your personal residence?” I think we answered this a few weeks back, too, but sometimes, it comes up.
“Should I file a return with my kids as dependents or should they file their own return if they are paid from a family business?” We’ll go through all these.
“I’m remodeling two bedrooms to turn my home into a rental. Can I count the remodeling as a tax write-off?”
Jeff: They’re doing bathrooms.
Toby: They’re doing bathrooms.
Jeff: You called them bedrooms.
Toby: Oh, did I say bedrooms? Bathrooms. It’s out there in the ether. I should look down and actually read it from here, but I like reading out in the distance.
“How does one pay into a 401(k) from an LLC?”
“If I bought an investment property under my name, when could I transfer it into an LLC without the bank pulling my note on the house?”
“Which way should you report rental income, as a business or as an individual owning the property?” We’ll answer all of these.
“What is a reasonable age to start paying your child for work and open a Roth IRA for them?” These are really good questions. You’re going to get your money’s worth today. It’s free.
“I have a rental property in California. When I go there to work on it, can I use per diem plus mileage rather than actual receipts for housing and meals?” We’ll dissect that for you.
“Can you describe S-corporation non-taxable distributions or dividends?” Absolutely.
“I haven’t done taxes for 2020 and I like to know how to write-off bills from my emotional support animal.” Very common nowadays. “Can that be done together with business taxes?” We’ll dive into that. There are actually some specific rules on that. It’s very interesting.
Some of you guys are writing up there. We’ll talk to you. Some people got the book from Amazon. If you guys didn’t know, we have Infinity Investing coming out today. It’s already number one on personal finance on Amazon. Thank you.
We’re going to be spreading that word out. We sit there and for decades, we’ve been looking at tax returns. There are so many people out there full of so much poop. They tell you that they’re making money. They’re not really making money. Then, there are some people that never tell you that they’re making money and they’re actually making lots of money. They tend to do it all in the same ways. We’re going to talk about that.
Before we get into that, we’re going to talk about what’s going on right now in politics. No, we’re not going to talk about politics. We’re going to talk about the proposal to increase certain types of tax. We’ve talked about it before. This is apolitical. I don’t care about what side of the alley you’re on. But what we want is to make sure that you have the clearest view of what these proposals mean. Quite often, politicians may be getting pushed in a direction from their party and maybe getting misinformed. I always look at it and say, if your intention is to do X, what’s the most efficient way to get there?
One of the things that they’re talking about is this increase in corporate taxation. I happen to be a believer in less is more, that when we lower their corporate tax rate, we tend to do a little bit better. I think that worked its way out. There was a business roundtable that came to that same conclusion. Before this pandemic, our unemployment was at its lowest rate in 50 years. I tend to think, why are we going back and messing this up? But just for clarity, when they say they want to increase taxation on businesses to make them pay their fair share, keep in mind that businesses in the last umpteen years pay less than 8% of the total taxes in this country, less than 8%. It’s a minuscule amount. We’re talking about a drop in the bucket.
Even if you were to increase this, let’s say you were to double it and somehow, businesses all went along and said, you know what, we’re going to pay twice as much tax, you’ve increased your taxes by about 8%. Who pays taxes? We do. Employees do. People that pay the self-employment tax get old age, disability, hospital insurance, survivor’s benefits, Medicare. That’s actually 33% of the taxes collected. About 55% is individual income taxes. Between those two things, you’re talking about a huge amount. If you want to do adjust it, I’m all for it. Go for those over that $400,000 hump. I could see that, but I know why they’re picking on the companies.
Here’s the biggest reason. This was something from the Center of Public Integrity. Not a far-right. It could be closer to the left. But what is the absolute reality is that when you pack in a corporate tax, it is one of the few items that a utility gets to pass on to its customers. I want that to sink in for you for a second. The customers pay the tax. If they increase the corporate tax rate, what happens to all of the least wealthy amongst us? There have been studies that show that this pandemic hit the poor much harder than the rich. What is it going to do to the poorest among us, tax or utility bills? It’s going to increase it, just like when they lowered the corporate tax rate. It led to lower rates amongst the consumers. It’s not huge. It’s $5 a month.
Speaking of, somebody said they were from New Orleans. I was just thinking about New Orleans. I know that number was $4.10 a month is what the average utility bill was decreased. It’s not massive amounts. It’s $50 a year. But who does $50 a year matter to? Somebody says that maybe so, but many of the largest paid zero in tax. It’s because there’s such a disincentive to report your taxes in the United States. There’s such a punitive tax bill which we were the highest amongst all industrial countries. We would be back there again if we jumped up to 28%, just to give an idea. That gives the Amazons, the Apples, and all these companies of the world the idea to go someplace else where they don’t pay that tax.
You have to make it to where, hey, you know what, it’s not worth it for you to go through all of that mess. Why don’t you stay here and pay a little bit of tax so you don’t have to go do all this maneuvering? There is that the higher it goes, the more incentive you’re giving to somebody to find ways to defeat it.
I always look at it and say, look, why are we goofing around with things when I don’t believe it’s actually going to do what you intend? With the increase in the self-employment tax and the FICA Social Security, all of those increases over a $400,000 mark, I get it. Absolutely. If you want to increase the highest tax bracket, I get it. But I don’t understand why you’re going after a business and corporations that don’t pay their own taxes. All you’re doing is hitting the workers. They have shown that for every $1 tax decrease, there’s about $2 of extra employment.
I just look at that and go, gosh, are we really figuring this? I just say, be a little bit of a skeptic on it. By all means, don’t listen to me and say, what he said. Go out there, actually research it yourself, and take a look. That’s just another idea because you’re not hearing too much about that. I just look at it and say, is there a way that it can hammer the people that can least afford it? Absolutely.
By the way, one of the reasons why the bills didn’t lower further is because when they lowered the corporate tax rate, they took away utilities’ ability to use bonus depreciation. That meant that not as much tax savings went to the consumers because they weren’t able to write off all their equipment and everything fast. It wasn’t a big tax break. Even though utility bills went down a little bit, it wasn’t as big as it could’ve been. But if they increase it, are they going to readjust that and allow bonus depreciation amongst the utilities? That’s a big no right now which means it could actually go up much more than what we saw as a decrease after 2017.
Enough of that nonsense. You guys get to research and make your own opinions. That’s beautiful as the American way, but I just want to make sure that we’re considering all angles just because sometimes, we think we’re doing something that’s going to affect the rich, trust me, the rich have really good accountants and lawyers. If there’s a way to defeat something, they will find it. You need to be a little bit tighter. I’d be looking at more on the consumption side. Let’s just put it that way. Let’s go and dive into this.
“When you have a PLLC, how do you know what goes on a personal or business card?”
Jeff: This not only applies to PLLCs but any business. If you have a business credit card, that’s great, but I know a lot of the credit card companies aren’t willing to issue new small businesses, so you use a personal credit card.
My preference is you use that personal credit card only for that business. It makes it cleaner. That way, you deduct everything that’s on there. You deduct the interest should there be any if you’re not paying it off monthly. It’s pretty straightforward. Once you misused some personal card, you’re paying some expenses personally. It gets very confusing. The interest calculations get crazy. You just want to be able to separate those expenses from your personal business.
Toby: Let’s get technical on this. When you see a PLLC, that just means a limited liability company and that P stands for professional. Not all states have a PLLC, so just substitute PLLC to LLC if it makes you feel better. I’ll even just write it up there. It just means it’s a professional. It could be a lawyer, engineer, doctor’s office. It just depends on the state.
An LLC is not a tax vehicle. An LLC isn’t a tax form. For example, it could be a partnership. It could be a sole proprietorship. It could be an S-corp. It could be a C-corp for tax purposes. But that LLC just means the entity in which the business is held.
The big question is should I be writing any personal expenses—groceries, my personal utilities, my personal expenses. Should I be writing them on a business card? The answer is no. Anything that’s personal needs to stay with you even if you incur personal expenses that are for the benefit of an employer. For example, if I have a home office, if I have an administrative office in my home, that’s even better and the company’s going to reimburse you for that usage, you should still be paying that individually and then reimburse.
Somebody asked, “Is a limited the same as an LLC?” Kind of, yeah. It’s still just a state entity and then we’re going to choose how it’s going to be taxed. An Ltd might be the same as a corporation. In some states, it might be treated as an LLC and you pick its tax but similar concept.
When you’re using a business card, you’re using it for what’s called Section 162 Expenses for the most part which is ordinary and necessary business expenses. It’s something that you use in your business to derive a profit. You’re trying to use it so you can generate new customers. You’re using it for your services. You’re using it for things that are related to that business for the express purpose of operating that business with the intent to make some profit.
Once you start doing that, you realize the things that go on that business card should only be things that relate directly to that business. Should I be paying for these groceries? Crowd, that goes to the personal card. If in doubt, buy it personally and reimburse yourself rather than using the business card. It’s not like your company’s going to blow up, but if you’re buying a whole bunch of personal expenses and you’re mixing them, that’s called alter ego.
The easiest way to explain that is the amount of respect you show your business is the amount of respect the IRS or a court will likely show your business. If you’re using a business card, you’re paying for your kids’ soccer shoes, lessons, or whatever, when you go in and buy your groceries, you’re taking your spouse out to dinner that has nothing to do with business, and you’re just constantly using it for that, expect that the IRS or the courts aren’t going to give you a great deal of respect. It may treat the business as you. That’s what you want to be careful of to not allow.
Jeff: I find that to be a really slippery slope like, oh, this is one time. I need to get my business card. Then it happens again. Oh, I’m going to pay it back, but it never happens.
Toby: If in doubt, use your personal, and then do a reimbursement. But try not to use your business for, oh, this one time, I’ll use it to buy God knows I’ve seen enough stuff that goes on. I’m like, what is that? They’re buying a bunch of booze or something.
Jeff: I didn’t have any space on my card. I’m like, yeah, alright.
Toby: Somebody wrote about the previous issue that utility rates in Northern California and Eastern Texas went up. Yeah, they took away certain aspects of deductibility and gave a tax break on some. They offset. In some places, the cost of energy still is increasing. It’s always going up that if you looked at it, it’s on a continuous chain upward. Energy prices have not come down. It’s just if all things being equal, it ended up in a small reduction over the period of time after they lowered the tax.
Utilities are a monopoly and they’re heavily regulated. There are only certain things they can pass on to customers because could you imagine if they said, hey, we’re going to pass on our outside business endeavors to the customers as an expense. They’re a monopoly. You got nothing else to do. They could just start tucking in all their investments. They’re not allowed to do that as a result.
What gets funny is some of these companies were charging their customers for the tax, but then they would do outside ventures that were creating losses. They didn’t actually owe the tax but they had collected it. There are these millions and millions of dollars sitting on some of these utilities on their balance sheets. Everyone’s like, hmm, we owe the tax on it but we got a big deduction over here. If you know, Jeff and I like to play around the tax world. Real estate is a great example. You could very little out of pocket and create a big loss. Eventually, you got to pay it. There was a bunch of that stuff that went on. If you’re a tax geek, you can dive into that stuff. If you’re not, you’ll be happier. Just go about life, smile a little bit, and say, hey, it’s not as easy as what they’re saying.
“How do I go about transferring stock options into a 501(c)(3) before selling to avoid all capital gains?”
Jeff, could you tell them what are they looking at here? Why would they do this?
Jeff: When I first looked at this question, I didn’t realize they were talking about stock options. I’m not sure that you would want to transfer stock options into a 501(c)(3), but let’s just say that they’re stocks. They’re securities. The main reason that you want to do this is you want to deal with appreciated stocks. You don’t pay any tax on the gain. Say you bought it for $100 and now it’s worth $10,000. You don’t have to cash those in. We’ve seen it where clients have cashed in a lot of stock and then tried to transfer it to a non-profit. It cost them greatly.
Toby: What Jeff is talking about is let’s say that you have a company, ABC. I’m going to put FMV which stands for fair market value. That’s what its value is today. Let’s say it’s worth $100. What a lot of people are tempted to do is to sell it. They sell. They have $100 that comes in. They subtract off their basis. They have $90 of gain versus if this has been held for over a year, you could take that $100 stock and give it to charity in which case you have zero gain, but you have a $100 deduction. You have zero tax due and you get a deduction.
Quite often, when somebody has an appreciated asset, we tell them don’t sell it and give that to charity. Give the asset to the charity.
Jeff: I actually went online to my […]. I’m sure most of the brokerage houses are like this. It’s very easy to do this. When I used it, it had a page for donating to a charity. You go in and say I want to donate, who the charity is, what their account number is, and so forth.
Toby: I’ve done it.
Jeff: As long as they have the brokerage account, the 501(c)(3), it’s pretty easy to do.
Toby: Yeah. We had to do that on some stocks that we forgot that we had and it ran up. We’d had it for close to 20 years, had almost no basis on it. It was almost the same situation.
You’re just like, do I really want to pay tax on this? I’m going to dump it. It was peaking and I said, you know what, I’ll sell it. But I don’t really want to pay tax on it. I don’t want the money, so give it to the charity. In order for the charity to take it, the charity had to open up a brokerage account with the same institution. Then, we just transferred it over. It was actually fairly easy to do the transfer. The hardest part was opening up the brokerage account in the non-profit because it’s a little bit of paperwork.
Jeff: They’ve mentioned stock options. I can’t see doing it for options that you purchased on the market. If it’s options that you got from an employer, that may be a little different.
Toby: It’s funny you say that. Whenever I see options, I always think if it’s an employee incentive. Incentive stock option and then you have non-qualified options. Then, there’s your typical qualified option which is you as a company. But the non-qualified, if it’s an employee, it all comes down to what is the value when you receive it and did the employee exercise it? Are there transfer rights?
Let’s say that I have an incentive stock option. If I work at an employer long enough, let’s say I work at ABC and I’m an executive. The company is on the public market. It’s worth $25 and I have options of $25, but I can’t exercise them for 2 or 3 years. I have to stay employed.
Let’s say that the company is now worth $50. I know that if I were to exercise it, I have a taxable event because the option is worth less than the fair market value. I would have to recognize that difference in income.
Maybe I’ll give it to charity so that when I work long enough, I will be able to exercise it and not have to worry about the tax hit because the company knows that the $100 would be really severe on me to exercise that stock option. I’m going to have a lot of income. You can’t do that. You’re not allowed to do that because you are now putting your work into the non-profit. In other words, I’m not going to be able to do that because it’s not something that’s right. I need to have the ability to exercise it in order for it to actually be doable.
Even on the non-qualified options, it’s tough. If it’s tied to an employee agreement, again, what you’re looking at is let’s say that same scenario. It’s worth $50. I have the option at $25. I have income between $25 and $50 that I’m going to have to recognize regardless of whether I give it to the charity. I believe, under those circumstances, they would say whenever the charity sells it or exercises the option assuming it’s transferrable, you’re going to have to recognize that $15 difference between your strike price and the fair market value when you receive it.
Jeff: These ISOPs—these incentive stock options—let’s say that you have exercised those options, you’re going to have a very low cost on those options, in particular. However, you have to hold them for a year before you can do anything like that.
Toby: Otherwise, your basis is going to be—
Jeff: —It’s going to be a taxable situation.
Toby: If I transfer a stock that I’ve held for less than a year into a charity, they’re going to treat it just like a cash transfer.
Jeff: You exercise them. Hold them for a year and a day. Then, transfer them to your non-profit or whatever it is.
Toby: Yeah. If you do it a year and a day, then it’s the fair market value, not the basis, and your deduction is limited to 30% of your adjusted gross income as opposed to usually, 60% or 50%.
This year, cash donations are 100%. But I think this would be a non-cash. I’m doing an option. It’s probably 60%. Does that sound confusing, by the way? This is why you look at the type of option. It’s not as easy as saying, hey, can I transfer options?
Let’s say that I have LEAPS. Let’s say that I bought two-year options on Tesla and they go up in value. That I could transfer to charity. That, if I’ve held it over a year would be at its fair market value on the date of transfer. If I haven’t owned it for a year, then I could transfer that in there but it’s my basis. If I paid $30,000 for some options and it’s worth $40,000, I’m getting a $30,000 deduction. If I wait a year and it’s worth $40,000, I get a $40,000 deduction. My only limitation is it’s 30% of my adjusted gross income.
Jeff: Let’s say they’re not LEAPS but they are short-term, do you think they would have to be so far deep into the money?
Toby: I think you’re still less than a year. They’re going to treat it as a non. It’ll be a non.
Jeff: Oh, that’s true. It’s a good point. All of this whole appreciated stock thing has to be long-term capital gains.
Toby: Yeah. In the first year, it’s all going to be your basis, regardless. When it’s over a year, then it’s the fair market value.
By the way, this works on houses and other things, too. If you have a piece of property you’ve had for 20 years or 30 years, and you’re like, oh, I’ve depreciated it. I know what to do with it, sometimes, just give it to charity. Your own charity is great or somebody else’s, but this could be the fair market value.
Yes, it’s limited to 30% of your adjusted gross income but some of you guys make a lot of money. Somebody’s making $1 million a year. They’re sitting on some old house, and looking at it like, yeah. You’re in California, you’re going to give up almost $0.50 on $1 just for the gift and you’re going to make somebody’s day.
If you like this sort of stuff, you can always come to our Tax and Asset Protection Workshops. You just go to our website @andersonadvisors. You could sign up. They’re absolutely free. The next Tax and Asset Protection event is coming up on April 24th. It’s going to be taught by myself and Clint Coons, assuming Clint can get his computer to work in Hawaii. He’s going to be over there probably drinking too much.
We always do the Tax and Asset Protection event. He’s actually good. He’ll be fine. It’ll be early in the morning for him. I don’t think I have to worry about him. If it’s in the afternoon, I’d be worried because he likes those Mai Tais.
Anyway, we’ll be teaching another one on April 24th. Again, absolutely free. Feel free to register. We do send out a recording if you’re not able to be there for the whole thing. We always make sure that it’s easy for you to get on, digest the information, and they are full of everything from how to structure your real estate, your stock trading, your business. We look at it from an asset protection standpoint. We look at it from a tax standpoint. We look at it from a legacy planning standpoint. Last but not least, we look at it from a business standpoint and make sure that you don’t mess yourself up.
Let’s see if there are any questions rolling out there.
“Where do I find a good bank for my Solo-401(k)?” I think Christos is answering that. I would say go to Schwab. It’s where we open up most of our TD Ameritrade.
Jeff: Does it matter if he’s taking hard assets into the 401(k)?
Toby: Not really. If I was taking real estate or something, then it doesn’t matter. I’m okay with having a Schwab account with check-writing and debit card capabilities. It’s better than a bank in my mind. Right now, in savings, the interest rates are so low. Money markets are low, but they’re a little bit better if we’re talking about those. They’re in the toilet. All interest rates are in the toilet right now. They probably will be.
Let’s see if there’s anything else. You guys are pretty good.
“Schwab, TD Ameritrade.” What do we have? I think this one’s interesting. It’s in that same category. Some places are tough because they want to have minimums. If you’re rolling over a 401(k) or you’re starting a 401(k), it’s tough if you haven’t funded it yet. They set a minimum of $50,000. It’s sometimes tough.
All right, solar credit. “How do you claim a solar credit on your personal residence?”
Jeff: This is fairly simple. I believe the form is 5695.
Toby: Look, right there.
Jeff: Wow. Yeah, I got it right. You can see in the first couple of lines, it talks about the different types of renewable energy. You put the amount of solar that you bought. It multiplies, so times 0.26, then you’re virtually done.
Toby: You said 0.26. It was 30% from 2017, 2018, 2019. It went to 26%. Actually, it was going to go down to 22% this year, but they extended it. It’s 26% and it’s the cost of the installment and the equipment itself.
It’s solar power, geothermal heat pump—I’m looking at a list—small wind turbines, fuel cell property, solar electric collecting roofs and roof products, solar-powered storage, and some installation costs. This is different if you are a landlord putting it on your property although they’re the same tax credit. What’s the difference between a tax credit and a deduction?
Jeff: Deduction goes against your income. If it’s a $20,000 deduction and $100,000 income, it lowers your income down to $80,000. A credit goes against your tax. If that same $100,000 income has $20,000 of tax on it, then that credit is going to go directly against that tax and reduce your tax.
Toby: Yeah. If I have $100,000 of income and I get a $10,000 deduction, it just means that I’m going to pay tax on $90,000. If I have a $10,000 tax credit, then we take that $100,000, we calculate how much tax. Let’s say I owe $15,000 of tax at the end of the day. I get $10,000. I’d only owe $5000 after that. Credits worth substantially more than a tax deduction. When you see tax credit, go like this, how do I get it? How do I get that?
The same thing holds true if you’re a landlord. It’s a different computation. I think it’s 48%. The provision there is you still get a 26% tax credit but you could also depreciate the fair market value minus half of the tax credit that you took. Let’s say we put $100,000 worth of solar on our tenant roofs and we’re going to get the electricity money coming in which is not a bad idea, we’d get a $26,000 tax credit plus we’d get to write-off $87,000.
Under Section 168(k) which is the Bonus Depreciation Code section, we could just write that whole thing off in your wand like, boom, I have an $87,000 deduction. I have a $26,000 tax credit. I might be paying overtime, but I have enough money coming in to cover that payment. I’m going to be looking pretty good under that. I’m not always surprised that more people don’t do that.
Jeff: I’m a little surprised that I have not heard anything about them increasing this credit.
Toby: I keep thinking they’re going to do it. I keep waiting for it. I’m like, if you want solar, here’s what you do with solar. You make it to where we can actually put it up on the roof without getting molested by the governing agencies. It’s tough.
If you’re in California, you might be waiting a year, two years to get solar on a roof. Make it easier. Make it a little more transparent. There are lots of companies out there. Make sure that consumers aren’t getting ripped.
Jeff: I see Tesla’s doing it now.
Toby: Tesla is kicking some tush. By the way, if you have a Tesla roof and you’re in Houston during that freeze, you were just fine. They actually showed the rooftops and didn’t stay up on those roofs. They melted right off and they were providing energies throughout that whole […]. Tesla’s pretty good. It comes with a battery pack, the storage. You could store it up and survive for a while without even having the solar.
Yeah. I would give more incentives. If you want more of something, incentivize. The tax credit’s great but make it a little juicier. Landlords go out and do it. Could you imagine that? If they made it so appealing to landlords, landlords are like, you’re crazy not to put solar on your properties. Then, you have to deal with all the utilities, going back to utilities again. The way that they treat it or you could sell it back.
“Can foreign property treated as US property get the solar credit?” If it’s in the US and you’re US taxpayers, you get the solar credit. I don’t believe it works if it’s outside.
Jeff: Yeah. For me, in the form, if you own the property then, yeah, you should be getting the credit.
Toby: Let’s say that you have it in another country. Do you believe you’re able to get the credit?
Jeff: I don’t believe that’s the case.
Toby: Right. I think it’s the US, but I don’t know. I have to look at it. Good question.
You could submit your questions at taxtuesday@andersonadvisors. You can just submit that in. It’ll give us the hint to go search it up.
“I have waited 1131 days to get solar.” Did he actually get it? The last time I heard, he was still waiting.
“I’m opening an EGMA for my children, 10, 11, and 13. What are the tax consequences?” We’ll look at that one in a second. Somebody’s going to answer that.
All right. This is a great question. “Should I file a return with my kids as dependents or should they file their own return if they’re paid from a family business?” What do you think, Jeff?
Jeff: I know my opinion on this is if they are dependents, meaning they are not supporting themselves or at least half their support, they’re still dependent on your return. They can file their own return and probably have to file their own return.
Toby: Can they still get the standard deduction?
Jeff: They get the standard deduction up to the amount of their earned income. Was it $600?
Toby: It’s earned income plus $300. If you pay your children $5000, then it’s $5300 up to the standard deduction. Standard reduction is what? $12,400 this year, $12,200 last year, it’s over $12,000. They’re not going to pay any tax on it.
This is why we pay our kids, guys. They’re still dependents, but they get to have tax-free income. Where would you put that? Riddle me this. They have income that they don’t have to pay tax on. It’s active income. Where should you put it, parents? A Roth IRA. You’re looking over here. I can see you. You’re going to put it in a Roth IRA. That’s exactly right.
“Under the mattress” Don’t put it under the mattress, Rowena. Put it in a Roth IRA. The reason being is because you can get the money out at any time you want.
“I know.” Rowena, I’m just teasing you. She says under the mattress.
I’ll tell you a real-life story. I have a minister client. An older gentleman of their church had passed away and they went to help the family. He was a grandpa and lived on his own. They went to help the family clean up the house. The family said you could just take it all to charity. Take it all, all the furniture and everything else. They go get his mattress and the mattress weighs a ton. They’re like, what the heck, this thing is so heavy. Then, they hear clanking. It was stuffed with cash, gold, and silver. They just had a huge party. No, I’m just kidding. I said to him, did it go through your head that they gave it to you? He’s like, no. This guy had just stuffed everything in there. It was about $300,000 if I remember right of gold and cash.
If you ever had an older relative that passes, look through the refrigerator, see if there’s a hint. Look through the house a little bit. Some people do keep it under the mattress.
Jeff: Some people like it in the freezer.
Toby: The freezer is a big one. There have been people that had it underneath the floorboards. We’ve seen it all. They put it in odd places. People will never know. We had a guy that had a safe full of over $1 million in it.
“The Fed says there’s no inflation.” Don’t fight the Fed.
Somebody says, “Bill Maher got it approved. He got it in good.” I know that he was grateful for that for a long time. It’s a little tough. You got to have three or four guys come out there. I remember that when I looked at your proposal.
You can file your kids as dependents and they pay earned income. There’s no kiddy tax when you have earned income.
“How old can they be,” somebody asked. There are cases where the court has agreed with compensation paid to seven-year-olds that were helping their parents with property management. It’s not an age issue if they’re your children. If I remember right, you can’t have your kids working in mining, around saws, doing demolition work, doing things that are inherently dangerous, but you can have them working in your business if they’re family members. There’s no age limit.
In the court cases, I’ve seen 7-year-olds, 9-year-olds, 11-year-olds, 12-year-olds, 13-year-olds. Every single time, it comes down to are they able to do the task for which they’re being compensated for? In every single one of them that I’ve seen, the taxpayer one, the IRS was looking at it and they overcame the burden by producing records. You just want to make sure you have time sheets or something that says, here’s what they’re doing. If you do that, you put it in a Roth IRA. The Roth IRA is like a savings plan. I can always take that money back out of the Roth. Where I had to be careful is let’s say, I put $5000 in a Roth and it doubles. The growth is what I have to wait a period of years for, five years, to avoid the penalties on an early withdrawal.
Somebody says, “What’s the minimum age again?” Again, we’ve seen it as low as seven. There’s not a hard and fast rule. Just make sure they can do something.
If you’re going to open up a Roth IRA, understand that they cannot open their own until they are 18. You’re going to have to open up a custodial IRA for them.
Oh, there’s Infinity. This is what I like to circle. We were number one in new releases today. Thank you again. We’re doing well with that one. What we like to do is just spread the word. It’s not a big money-maker. There are publishers out there. We published through Forbes, but we’re not trying to sell millions. We just try to get the word out of how not to get ripped off.
Somebody says, “I had a friend that paid his one-year-old. He took a picture and paid him as a model.” Yeah. There’s actually a case on that where it was SAG rates, Screen Actors Guild rates so they can actually get paid. That’s pretty awesome. David, thank you for sharing that.
“Is the solar credit only for brand-new solar products?” I don’t believe so. I think it’s any solar that you put up on your roof.
Jeff: Would that be all brand new?
Toby: Are there used solar?
Jeff: I’ve never heard of a used solar. If you’re talking about buying a house that already has solar on it, you don’t get the credit for that.
Toby: Somebody asks, “Please clarify. Kids do not need to file their returns,” correct, “even if they are paid $12,000?” You don’t have to file a return if you don’t have taxes. They wouldn’t have to file a return under those circumstances.
“I have a rental property in California. When I go there to work on it, can I use per diem plus mileage rather than actual receipts for housing and meals?” Jeffery.
Jeff: This is going to be one of those it-depends answers. If you’re doing it as a self-employed person or you have the rentals owned personally, you cannot use the per diem for housing. You can use it for meals, but you have to be an employee to use per diem.
Toby: If it’s more than 10%, no housing. If you own more than 10% of the company, they’re going to say, hey, you’re an owner. You can’t use the per diem for housing. But for meals, you can. One of the reasons you can is because they capped it at about $75 a day and technically, you don’t have to have a receipt for meals if it’s under $75 a day.
Jeff: It is still subject to the 50% limitation.
Toby: There’s 100% meal depreciation that just came out at the end of the year for using restaurants and even if you order out of the restaurant.
It’s temporary. It was passed the last week of December. You guys were all dealing with 2020. For 2021, there is an exception for this year that you can write off 100% of meals as long as it’s at a restaurant. They’re trying to push it.
Jeff: Per diem works a little funny, the way it works. Let’s say it’s $80, I know you said $75, but it’s $80 a day for meals. On your first day of travel, you only get half that. On your last day of travel, you only get half that. If you go on a three-day trip, you’re going to get $160 of the meal allowance.
Toby: Somebody’s asking a question about the kids again. “What is the age limit to pay your child? Up to 25 years old?” There is no limit. You could be paying a child if they’re working for your company until they’re 150.
“Do you have to run payroll?” Somebody’s asking about self-employment tax. If you’re paying them as an employee, if you’re paying them through a corporation, you’re going to have unemployment, withholding, Social Security, and Medicare, withholding in employment taxes. If you pay them through a disregarded LLC, if one of their parents has a sole proprietorship, or if the parents have a partnership and you pay them through there, then you do not have to pay employment taxes.
If there is a partnership in your structure, you’d pay them through the partnership. If there is an LLC that’s disregarded, you pay them through that. If you don’t have those and you pay them through the corporation, you pay a little bit of tax, but just keep in mind that you’re putting that money into their Social Security account. They’re going to get some of that back assuming Social Security makes it. They would still get that.
Let’s keep plugging along.
“Can you describe S-corporation non-taxable distributions or dividends?”
Jeff: S-corps don’t have dividends. They don’t pay dividends. They pay distributions. Those are normally not taxed because you’re being taxed on the income of the S-corporation.
Toby: You pay regardless.
Jeff: Let’s say I make $100,000 in my S-corporation, that’s going to be my taxable income regardless of how much is distributed to me. The one time you will have distributions taxable is if you distribute more than you have basis in your S-corporation and then it gets taxed as capital gains.
Toby: That’d be really tough to do if you had multiple S-corp owners and somebody wasn’t at risk.
Jeff: Sometimes, we see it where we’ll have an S-corporation, they’ll go out, get a loan, and they’ll start taking distributions. That loan they got from the bank doesn’t give them the basis for their S-corporation.
Toby: Unless it’s a loan to them and they contributed. Then, you could increase the basis. It’s one of those nuances that if you’re ever looking at it getting a lending with an S-corp, you may want to be on the hook personally. It has come to you and then you could contribute it to the S-corporation. It’s a weird nuance. The S-corp can’t guarantee it and still be part of the basis.
Jeff: Yeah, almost the exact opposite is true in a partnership, but with S-corporation, they want you to be the lender.
Toby: It’s kind of funky. What Jeff said, just to clarify, S-corporations don’t pay tax. They pass it down to their shareholders regardless of whether you take distributions or not. That’s why they say nontaxable distributions.
What happens is if the company makes $100,000 and leaves it in there, it doesn’t matter. You’re going to pay tax on the $100,000 if you’re the sole owner.
The same thing is with the next year. Let’s say it breaks even and you take $100,000 out. You think I just took $100,000 out, it’s nontaxable. No, you paid the tax. You just paid in the last year.
Jeff: Sometimes, we hear that complain about phantom income. That’s exactly what they’re talking about. My company made a lot of money, but I didn’t see a dime of it personally.
Toby: Well, think about this. Let’s say that you are running a company and you have a whole bunch of meals that are 50%. Let’s just say that you’re bringing in meals to the office and stuff like that. It’s a 50% deductible. You spent $30,000 during the year and there’s no money left in it. You’re going to get hit with $15,000—half of that—as income to you. You’re going to say, wait for a second, but there’s no money. Your accountant’s going to say, half deductible. You were really nice to your employees, but that pizza isn’t free. You got to pay the piper.
Let’s see if there are any questions rolling out there. Somebody says, “I received my copy of Infinity Investing.” Let me know how you like it, please. Don’t pull punches. It took a couple of years to write that, four years of doing the research and preparing for it. It wasn’t done on a whim. I just want to make sure that we’re reaching people. Share it if you think it’s good.
“If you have a short-term rental property that you furnished and ran a cost segregation study, rent it out, then you decided a year later that you want to move into the property, is there a timeline on how long you can wait to move in or make it your personal residence?” Not really, is there?
Jeff: No. I don’t think so.
Toby: No. You just accelerate the depreciation. You just got be careful about when you sell it if you sell it.
Jeff: Yeah. They have a really low basis on that property.
Toby: Just remember that if you live in it for two years, then sell it, and you take a capital gain exclusion, that capital gain exclusion does not touch your unrecaptured or recaptured depreciation.
Jeff: Yeah, whatever.
Toby: Yeah, whatever we call it. We just had that argument last week. It’s not going to affect your recapture.
“The per diem meal for 2020, are there any limitations on the number of days?”
Jeff: No.
Toby: All right. Follow us on social media. We got Facebook, YouTube, LinkedIn, Instagram, and Twitter. Please plugin. We’re constantly putting at new information.
If you go onto YouTube, for example, you’re going to see Coffee with Carl, Toni Talks, and a lot of stuff from Clint, a lot of stuff from me. I can do all that fun stuff. You’re constantly going to get hit and you’re going to be old-hand at this. Everybody’s going to be asking you tax and business questions in about two or three years.
All your friends will be like, alright, what should I do in this situation? Then, you’re going to say, I don’t want to talk to you. Call these guys. No, I’m just teasing. You guys will be able to answer. It’s not rocket science. This is not the hardest stuff on the planet. This is actually once you see it, it starts to make sense.
“I haven’t done taxes for 2020 and I like to know how to write-off bills for my emotional support animal. Can that be done together with business taxes?” What say you, Jeff?
Jeff: That’s a maybe. It’s going to really depend on what the IRS and the courts have primarily looked at. There are two primary tests you have. That’s the primarily forward test and the but-forward test.
Toby: That is really good that you remember that.
Jeff: The primarily forward test says that these expenses for any kind of medical expense are primarily to deal with conditions—medical, psychiatric, mental, self-worth.
Toby: Either correcting something or treating something. It can’t be upset. It has to be a medical condition. There needs to be a diagnosis. Let’s say it’s depression, then it’s primary for depression.
Jeff: The second test, the but-forward test, is I would not have bought this. I would not have spent this money but for this condition. You can’t take your pet dog and turn them into an emotional support dog. It’s going to fail every time.
There are few ways to go about this. Number one, get it prescribed by your doctor. Number two, hopefully, this animal and how it’s treating you is on the ADA list—the Americans with Disabilities Act list.
Toby: If it’s prescribed, you’re probably going to be hitting that.
Jeff: Yeah. The courts are going to want to know what this animal is doing for you. If just living with you is usually not the answer, it’s either going to be treating something. It’s got to be trained to do something, in particular.
Toby: It needs to actually be a certified animal. When you say emotional support animals, some places would give you a certificate if you just said, oh, it’s an emotional support animal. But the IRS is actually going to want a certification that it was trained for this particular issue that is helping you.
For example, if it’s a post-traumatic stress disorder and you’re a service member or somebody that’s a first responder and there are issues, then the emotional support animal needs to be trained for that particular reason. The reason that you’re getting this support animal is because of that condition. But for this condition, I wouldn’t be getting the support animal.
Then, it becomes a medical expense. The reason that this is important is that if I’m an individual, I’m putting that medical expense on my Schedule A and I have to exceed over 7.5% of my adjusted gross income. If I have a C-corporation, I can reimburse. If I have an FSA or HSA, health savings account, then I can reimburse directly out of that.
Some of you guys, I know this is the scenario because I’ve seen this. Somebody goes out and they’re paying for something individually, it’s a medical expense, but they can’t write it off because they don’t exceed their adjusted gross income. Whereas they might have been able to do it if they had done an HSA, take the deduction, and then reimburse themselves out of the HSA or flexible savings.
Jeff: I have seen eye dogs. They’re professionally trained. I think they cost about $50,000. That’s a big write-off for you. You’re going to be guaranteed Schedule A, but there’s nothing that says you can’t self-train these animals to do what you need them to do. I’ve seen them for preventing certain behaviors.
Toby: Epilepsy, there’s one. There’s, obviously, depression and PTSD. They’ll understand. It’s like a pheromone or something. They can actually sense it or smell it.
Jeff: If you’re going to train it yourself, your costs are likely to be much lower. I still think you want to do some certification programs. Just to help you out. Emotional support animals, unfortunately, have gotten a very bad name from some very bad actors who just want to take poodles into the diner.
Toby: That’s what some of the states say. They couldn’t ask you whether it’s an emotional support animal. People are abusing left and right because you weren’t allowed to question them. In theory, there’s HIPAA and there are some other things about what they can’t ask you about. They would say, hey, an airline can’t ask you. Eventually, they just said only dogs.
Jeff: A friend is a flight attendant and showed me pictures of somebody whose emotional support is chickens.
Toby: Yeah. I was going to say it. I’ve heard about stuff like that. They had a goose. They had chicken.
Jeff: It’s obvious that these true emotional support animals are very helpful to people who need them just to get through their day. If you do it in the right way, you can get a deduction form.
Toby: You want to be talking to your accountant.
Going back to this question, you could still look and see what you did in 2020 on the emotional support animal. It says animal, but I believe it has to be a dog. Don’t quote me on that, but I believe that there might be some restrictions on certain things. It’s like, again, they don’t want to be an emotional support cat.
Jeff: There was an emotional support cat, that case that went through.
Toby: Really? Another fun one. Again, talk to your accountant. It might be worth digging into depending on the cost, how much you incurred.
Jeff: But you have a cat. You know they really don’t care about people.
Toby: If you want emotional support, don’t get a cat. If you want to be ignored, yeah.
Jeff: I’m only going to pay attention when you don’t want me to.
Toby: Unless you have friends over or if you have a Zoom meeting, in which case, that’s a good time for them to groom themselves in full view of everybody. Like, look at me. That’s a cat. Or if they have a hairball. They will wait until you’re eating dinner or you’re about to go to bed. I love my kitties. They’re just naughty. They are fluffy right now.
All right. Let’s see if there are any other questions. “How can you claim the solar panel credit as a landlord?” You’re going to write it off as an equipment deduction, but you’re going to take the solar credit. I don’t know if there’s an actual form that you have to do as a landlord. I’m trying to think of where you put it in your return.
Jeff: There is a form for the credit. Of course, the depreciation is going to the depreciation form. The most difficult thing with the landlord is just the accounting for billing their books.
Toby: Just remember, you can’t write off. The installation and everything that goes into it, you get to deduct, but you have to subtract from your basis that you’re deducting half of the credit that you take. They’re going to look at the tax credit. Let’s say it’s $20,000, you’re only allowed to take $10,000 off the basis. Enough of that.
Subscribe to Anderson’s YouTube channel, please. Again, there’s Coffee with Carl. There’s Clint looking all stately, giving out good advice. There’s just so much stuff that’s out there.
If you like listening to Tax Tuesday or watching Tax Tuesday, by all means, you can go to our podcasts. We record them and we put them out there as well. I’ve had some really cool folks on the podcast, by the way. On two different occasions, I’ve had some great wholesalers that are in the seven-figure plus a year range that is really doing a great job at it. I just think it’s fun.
I also had a good one that I would ask you guys to go take a look at. A friend of mine, Lars Jacobson, who is up on the border between Idaho and Canada, where they shut down the Canadian border, runs a restaurant, a gas station, and a mail stop where the patrons are primarily from Canada. About 95% of the folks are right there. The town has a border right in the middle of it. Here are all of his restaurants and all these things. Then, on the other side of it, is all the town. Since the pandemic, they’ve been shut down. He lost 95% of the revenue. I did a podcast there. There have been some news stations that have come out and talked because the programs that were designed by Congress haven’t really done much for him.
There are 10 members of the family all working up there. He moved his entire family from California years ago to basically this vision. He brought his mom, his relatives, and all these kids. They’re up there. Basically, they bought this little town—for lack of a better word—right on the border. There are a lot of folks that have been hit by this pandemic. I did a really neat one there. If you care to go look at that and if you’re able to spare $1 to help him out and his family. It’s really been tough for them, but I’m sure they’ll make it. They have good faith, too.
You can also go and listen to the previous Tax Tuesdays in your Platinum portal if you’re already Platinum. If you’re not Platinum, by all means, find out how you become Platinum. We have a ton of different programs. There’s ordinarily a sign-up fee depending on the program you do. You can get away from those sign-up fees. If you’re getting other services, you can always look and see whether or not that’s appropriate.
If you have questions, again, you can always submit your questions at taxtuesdayandersonsadvisors.com. There’s not a cost to it. We don’t have a surprise bill for you. We grab those questions, make them part of our shows when we go over, and we answer those questions. That’s where I always grab them. I always enjoy really good thoughtful questions. Don’t write a novel, but something that we can put up as a simple question, one or two liners that will help other people. Even if something that you’re like, I’ve always been wondering this, go ahead and submit it. We’ll see if we can answer it for everybody.
We also get to 700 out of shot. There are a few thousand people that listen to this. We can answer it for a lot of other people. Chances are if you are thinking it, other people are probably thinking of it, too. Otherwise, that’s it. We’re done early. Not necessarily early but look at this, Patty’s always yelling at me.
Jeff: I’m not going to know what to do.
Toby: I know. All right, guys. What I’m going to do is I’m going to turn off the Tax Tuesday with the exception of if you have questions, our guys will continue to bust through your questions.
I can see that we’ve answered over 116 questions. There are 15 remaining open. We’ll go ahead and knock those out. I just want to say thanks, guys, for joining us. We will see you in two weeks at the next Tax Tuesday.
Jeff: Until next time.
Toby: Until next time, that’s right.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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