As most of us experience financial hardship due to the COVID-19 pandemic, there is support through the new Coronavirus Aid, Relief, and Economic Security (CARES) Act. When doing your federal and state income taxes, stay up to date and safe. Toby Mathis and Jeff Webb of Anderson Advisors continue to practice social distancing to answer your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- What are updates on the tax impact of COVID-19?
- Tax Grace Period: July 15, not April 15 is deadline to file your federal taxes
- Families First Act: Addresses FMLA and other payments
- CARES Act: Options for everyone, from forgivable loans to stimulus checks
- Is the stimulus check based on adjusted gross income (AGI) or taxable income? AGI for 2018 or 2019 determines if you qualify for stimulus check
- How to apply for stimulus check, if you qualify? No need to apply, IRS direct deposit
- Can a partnership LLC be assigned directly to a living trust? Yes
- Can I hire someone outside the United States to do my bookkeeping? Don’t do it
- What are the best practices for a small business to record and track its profit/loss expenses? Check your numbers and hire a qualified bookkeeper
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:
Unlock Free Money from the New Stimulus Bill – CARES Act with Clint Coons and Toby Mathis
Tax-Wise Business Ownership by Toby Mathis
Paycheck Protection Program (PPP)
Economic Injury Disaster Loan (EIDL)
Family and Medical Leave Act (FMLA)
Individual Retirement Arrangements (IRAs)
COVID-19 and the Family and Medical Leave Act Questions and Answers
Employer Identification Number (EIN)
Capital Gains Exclusion/Section 121
Full Episode Transcript
Toby: Hey guys, this is Toby Mathis.
Jeff: And this is Jeff Webb.
Toby: You’re listening to Tax Tuesday. We’re in two different locations because we’re practicing social distancing. I always felt like I should practice social distancing with Jeff anyway. Probably shouldn’t make a light of it. We’re in two different locations. Jeff and I usually are sitting next to each other so that we can harass each other, this time we’re not. If there’s any delays that’s probably it. I’ve been learning about the news people are all having to deal with all these too. I feel like for them to figure out technology on the fly is rewarding. I’ve been doing it for years. I’m like, “Now you guys know what it’s like.”
I hope everybody’s doing well. I know it’s not the greatest of times in this country, but there’s all things you can choose how we’re going to react to it. We are either going to use it to make us stronger or we’re just going to fall underneath its way. I for one believe that we use these things to make ourselves stronger. We’re going to definitely be diving into that. What we’re going to do is we have so many questions because somebody, namely me, picked out way more questions that we usually have time to do. We’re going to make sure that we go through them. We’re just going to jump right on in.
First off, make sure that you’re staying on our social media. If you want to keep up to date, you’re going to see that there’s a whole bunch of stuff going on. Oh my God, there’s so many questions already coming in. You guys must have been paying attention. Somebody is asking, “Did it start?” Yes.
You can ask live, you can go to the question area and ask questions. We’re getting inundated with them right now. Make sure that we’ll get a bunch as we go on. We’ll try to answer them before the end of section. You can always email in questions at taxtuesday@andersonadvisers.com and we always will get you a response. If you’re not getting a response, by all means, let us know. Even if you’re here and if you haven’t gotten a response, then reach out and just let me know in the question area, Patty and Susan will see it and grab on to make sure that we get you a response. There’s so much coming in right now.
That CARES Act was 863 pages of amendments and I have to make sure you guys understand what that means. That means that you’re talking about thousands of pages of code that have been impacted. Hours and hours and hours and hours for the last how many days since it passed, since the president enacted. We had the senate version and the house version for a long time. We’ve been going through this for literally weeks. Man, it’s been crazy. People are asking already a ton of questions and I will make sure that I go over all the, “Is it true?” about all these different provisions in the tax act. Don’t worry, I’ll get to it.
These Tax Tuesdays are for anybody. This is one of those few times where I say, “You know what, share it out with people because we’re going to be going over these things over the next few weeks. The CARES Act has almost no interpretation yet. There’s going to be lots that come out. There’s areas where there’s gray, there’s weird things under the Paycheck Protection Program, people are figuring out that certain benefits are included, some aren’t, some are ignored, they don’t really give us a lot of clarity on it. There’s going to be all sorts of fun stuff. I’m going to show you guys how to do this and how to get the money.
There’s free money in there which means forgivable debt that’s from the SPA for certain people. There’s money that’s going to be stretched out, there’s money that you can access at your retirement plan for 2-3 years without a penalty, there’s a doubling of loans, there’s all sorts of fun stuff that’s in there that will be shared to hit on and you guys are probably be asking questions on it.
The other thing is I will show you guys a link before we’re out of here, there is a link that we’re going to be doing on Saturday, on April 4. Patty and Susan can get it out to you guys. We’re going to be doing nothing more than the loans that come out at the CARES Act on Saturday for three hours. Clint and I will dive into that and I’ll show you guys exactly how you get access to the money. There is free money, by the way. You rarely see this, where they literally will give you money, you don’t have to pay it back and you don’t have to recognize it as income. We’ll show you how to do that, we’ll show you how to do all sorts of benefits that are in this thing. It’s really there to put cash in your pocket, there’s stimulus that’s for anybody. There are things for small businesses, there are things for individual investors, there’s something in there for everybody. We’ll go through it all.
Is there anything you want to interject? By all means just do it, because if I start a small business now, is it free money? No, you can’t do it. Unfortunately, you had to have been in business on February 15th of 2020, otherwise you’re not eligible. And yes, you can be eligible as a sole proprietor, you can be eligible as an IC. If you’re an Uber driver, you’re eligible underneath the PPP, the Paycheck Protection Program, and the EIDL which is Economic Injury and Disaster Loan. There is a $10,000 grant just for applying that you can be eligible for, if you know how to do it right. I’m just telling you, you don’t have to pay it back, even if you don’t take the loan.
There are a ton of things. You’re crazy not to take advantage of this. And yes, nonprofits are eligible too. We go over that. We’re going to go over that Saturday. I’m not going to go over that now, I want to focus on taxes now. The big things for you guys right now, we’re going to focus on tax, but on Saturday, we’re going to do nothing but loans, loans, free money, how to get it. Please register, take two minutes right now and register. Susan sent out a link, I believe it’s in the chat, or Patty did, it’s aba.link/taxCARES they’ll send it out to you guys again. We’ll send it to you in an email, we’ll make sure that you’re aware of it. I just want you guys to do that so that we can show you.
Again, this is meant to put money back in our pockets. For the investors out there, yes, you’re eligible. For the business owners, yes, you’re eligible. You just said, “Hey. I’ve had my business, but I haven’t filed my taxes yet.” Yes, you’re still eligible. I’ll show you, I’ll search ways to get access to the funds.
“Tax grace period. What time?” It’s at 9:00AM, Pacific Standard Time until noon. Again, we’ll get you all everything. Yes! I love it. I wish I was in Hawaii right now.
“Tax grace period. We don’t have to pay our taxes for 2019 yet.” I went over this last time, but for those of you guys who weren’t there, the grace period is federal taxes. Just so you know, we have 8000 people registered for this Tax Tuesday. Lots of people jump on. The tax grace period, you don’t have to pay your tax for 2019 until July 15th, 2020. Your taxes are not due yet. Your tax return, if you file it by July 15th, it’s the same as April 15th. All these things, quit worrying about 2019 taxes as far as stress. There’s lots of other things to be stressed about. You don’t need to be stressed about that. Just put your mind at ease. We’ll worry about it next time.
Jeff, what are the older payroll taxes? Payroll taxes have been deferred, it’s not just the end of this year, Jeff, they’re deferring it until next year?
Jeff: I have not seen that yet, Toby.
Toby: There’s a deferral, and I believe it’s 2021. Any taxes due in 2020, in 2022. I believe we’re looking at a deferral of at least a year, possibly two years. Your estimated tax payments, the estimates got kicked until July. What is going to happen is your quarter one is going to be technically due in July, and your quarter two are going to be due on June 15th.
Let’s go over the family first. Family medical paid sick leave, the FMLA, that’s typical. If you have an injury, normally you don’t get unpaid under the EFMLEA, the Enhanced Family Medical Leave and Enhancement Act, they are giving paid sick leave of up to $200 a day if you’re taking care of somebody. The big thing is if you are tested with COVID, if you’re put in quarantine, you’re not able to work, then employers are being forced to pay up to $510 a day, up to two thirds of your pay, for two weeks of your pay. If you’re part-time, they’re going to average out your part time amount and use two thirds of that, capped at $510.
For those of you guys who can do math, that means the maximum that employers are going to have to pay somebody for that is $5110. There is a tax credit on this. It’s not just gone as the money, but there is going to be some relief for the business. If you’re a business owner and you say, “Oh my God, that means I’m going to come out of pocket if somebody’s sick, if somebody is home caring for somebody.” You’re right. They saddled us with that responsibility, but then they’re giving out money to do that.
Real quick, people are asking about the states. The states are separate from the federal government. Most states automatically mirror. In fact, Jeff, you may know this. It’s like 20-30 states automatically mirror the federal, everybody seems to be on board. I’m not aware of any states that are not allowed the extension through July. Somebody says, “Do I have to file an extension?” No, you don’t have to do anything. If you file an extension, it’s going to be from the April 15th. You can file your extension on your individual taxes for 2019. It means that you won’t actually have to file your return until October 15th. It’s not a six month extension from the new extended deadline, it’s from April 15th. Jeff, I couldn’t hear you so I didn’t know if you interjected in there.
Jeff: No. I was just going to say, we’re just treating April 15th as July 15th or vice versa. We’re treating July 15th as though it’s April 15th.
Toby: Are you aware of any states that have not gone on board with this?
Jeff: No, I was looking at something that AICPA put out and it’s about 150 pages long on the states and what they’re doing.
Toby: What we could do to everybody is, yeah, the AICPA has a list, but I’m not aware of anybody that’s not doing it now. There’s a bunch of questions so I’m just going to go down these questions.
“If I need an extension on 10/15, do I need to file that by 4/15 or 7/15?” The answer is 7/15. April 15th, just pretend that that’s just dropped out of the English language and for purposes of 2019, April 15th is now July 15th. If you needed to make an IRA contribution, you can make the IRA contribution up until July 15th because it used to say April 15th. That’s another way to look at it.
“California says you have to apply for the 60-day extension.” We’ve got to look at that. Your states can be a little different. What you do is just ask us and we’ll get you an answer because every state can be a little different. Again, Jeff has the master list.
“Somebody just went to file my state taxes.” Somebody just put something up, it’s a California confirm. We have people arguing with each other even online. Hey, Susan, can you grab that USA Today article so when my taxes are due and we just filled that out there. This is from one of the people that’s on, “Everybody except New Jersey, possibly extended.” There we go. Susan, thank you, maybe we share that. We’re dealing with that.
Schools and families, if you’re home caring for somebody and you get up to $200 a day. An employee that is at home that cannot work—this is a big one—because they’re caring for kids or they’re caring for somebody and they’re not able to telework, the maximum that you have to pay is $200 a day and it’s maxed out at $10,000. That’s long term, that’s 10 weeks.
The CARES Act, this is a big one. The CARES Act really did free up some money. I want to go back. You guys have asked so many questions, that the ones that people are asking at the beginning are buried in my pile here.
“Is it true? One provision lets investors of any age take as much as $100,000 from retirement accounts this year without paying an early withdrawal penalty. They can also avoid taxes on the withdrawal if the money is put back into the account within three years. If it can’t be returned, taxes will be paid over three years.” Kim, first off, yes that is true. Under the CARES Act, you can access retirement funds tax free for up to three years. The term that they used is the tax liability is ratably spread over three years, ratably just means before the end of three years.
But if you pay it back, it’s treated as a 60-day rollover. We have to go and say, “Hey, what does a 60-day rollover mean?” It means you pay no tax. As long as you pay your withdrawal back within three years, it’s treated as an interest free loan. It’s free money. You have to put it back. It’s interest free money. There we go. Penalty, tax free, interest free, but you have to put it into your account before that.
Ratably is one of those words that I like to play around with because that’s not pro rata. It’s like, “Hey, if I have to take an IRA over five years, I just have to take it. I could take it all out the last day.” This is one of those things where I believe, because there’s no guidance on it, that you can just take the money, $100,000. I would say that as long as you pay it back within three years, we’re never going to report the transaction at all. If you’re going to keep the money, then we would choose how we’re going to spread it out. Maybe we’re going to spread it out over three years, maybe we’re going to take it over the last years. But you could do that.
Somebody says, “Is that good for a SEP IRA?” It’s any retirement plan, any retirement plan can do this. The exception would be Roth, you don’t have to worry about tax anyway. The other one that is really important and it’s specific only for qualified retirement plans is you can now double the borrowing amount without regard to a limitation on the amount. You can borrow up to $100,000 per participant, up to 100% of the proceeds. If I have a 401(k), this does not work for an IRA, but if you know us, we’ll roll the IRA into the 401(k). We’ll create a IRA 401(k) guys if you need it, raise your hand, let Susan and Patty know and we’ll get an adviser to talk to you.
But if you have IRAs with a substantial amount of money and you want to get access to $100,000 immediately, we could do the loan, we have to roll it into our 401(k), loan it out. The loan is payable over six years. You have a one year deferral and you pay quarterly amounts at federal AFR rates, which are below 2% right now. You’d pay your self interest at less than 2% over the next 5 years. It’s a six year total loan, one year no payment, five years of quarterly payments.
It’s extremely powerful. I see people are saying they are interested. Susan and Patty, please make sure you grab them. A 403(b) is eligible, but if your 403 is with an employer, then you’re going to have to talk to them. There’s a whole bunch of people raising their hands. Guys, just make sure that we grab those folks and that you’re reaching out to them.
This is the thing. And somebody says, “Is this loan for US citizens and green card holders only?” No. It’s for anybody that is a participant in a retirement plan. It’s actually really cool. Under the CARES Act, if you’re taking this amount, you get to defer for a year, pay the rest over five years. It’s pretty cool. Somebody says, “It’s at $50,000 or $100,000? I have a Solo 401(k) where I can get $50,000.” Right, Bill. It’s now $100,000. That $50,000 just became $100,000 to the end of the year. It might be June 30th, I’d have to look at that. I don’t know off the top of my head, but you could absolutely get that money. Again, you’re crazy not to take this.
Let’s put this in english. If I have a 401(k) with a husband and wife with $400,000 in it, I can take that entire amount out. I would take $200,000 out between the husband and wife. $100,000 each as a penalty free withdrawal. I have three years, I’d put that on a three year payback. I will pay that before the end of the third year. I’m going to have to pay a third of it every year. I just paid $100,000 back by the end of the third year of three years anniversary date of taking the money out. If I do that, I don’t have to pay tax on that, but I’ve had three years of use of that money and I am out of my cash crunch.
Remember, I had $400,000 in there, husband and wife, 401(k). You each take $100,000 out. Now there’s $200,000 left in there, you each borrow $100,000 out and then you don’t have to make any payments for a year, and then you would pay it back over five years. If you guys have retirement money or if you know anybody that’s in this situation, the CARES Act enacted this provision specifically to put cash in people’s pockets during this time. There’s bad information out there, unfortunately. I don’t want to see people get hurt. You can never borrow money from an IRA, don’t do that. You can do it through a business sponsored retirement plan even if you don’t contribute to the 401(k).
This is really important. I get this question a lot too. I can set up a 401(k) and I can never make a contribution. I can literally say, “You know what, I’m going to set up a business and as long as it has an active profit mode.” If this won’t work for an investment property for example, but a management company. “I can set up a 401(k) and mom and dad can both roll their IRAs no matter how big they are into that single 401(k).” Now you’re the trustee of it. You can absolutely borrow out immediately $200,000, $100,000 each and you could take a distribution out of $400,000 each. This is a very, very powerful provision. I don’t want to go over this too much, but I could see a million people raising their hands right now.
“Can the rules of the 401(k) preclude an employee from borrowing from the plan?” It’s up to your employer. If your employer has it says, “No, you can’t.” Then the employer plan can, but the rules allow you to. “Are there cut off dates when you can take the money out of the 401(k)? I don’t want to do it now because of losses.” I know what you’re saying, David. I believe it’s either June 30th or the end of the year. I have to look that up.
Patty, if you can grab David’s question and let me know that you got it, you could send that to us in an email then we’ll make sure we get you an answer. I don’t know it off the top of my head. It’s 800 pages, I dig into it right now and I can tell you. And then, “Can you roll a Roth IRA into a Solo 401(k)?” No, you cannot. You cannot roll a Roth IRA into anything, but if you need the money and spin in there, you can take penalty free withdrawals anyway. The money that you put into a Roth, you can always take out. The growth on it, you have to wait five years to take that. If you have $100,000 in a Roth, it depends on whether you put $100,000, but now it’s worth $120,000. I can take the $100,000 out anytime.
“What’s the difference between a loan and an early withdrawal?” A loan you pay back over a five-year period with a one year deferral under the CARES Act. The early withdrawal is when you actually take it and you’re paying tax on it. If you withdraw money that you’re going to pay back over the three years under the CARES Act, then there’s really no difference between a loan and early withdrawal under that scenario except under the loan I’m paying that back over six years, I have a one year deferral, under the three year loan, I have to pay it back. I just have to pay it back by the end of the third year. I don’t have to make any payments. Under a 401(k) loan, I pay it back quarterly, I just have a year deferral. It’s going to be pretty wild.
Jeff, if you have a chance, can you see how long the IRA deferrals last? I can find this in two seconds if I was looking at the Tax Act, but I don’t have it in front of me and I’m rambling here. I want to go over a few things. There’s so many questions, so many questions that are coming in. “What about if you did this in 2017?” Sam, you could have up to 14 loans out of any particular plan. You could take a loan out in 2017, you can go up to $100,000 amount and just add on top of that. You can absolutely do that.
“Wish this was around in 2008.” Absolutely! We were screaming at the mountain tops. You got that one. “If somebody has already taken RMD, can they pay it back and eliminate it using the provisions to repay in three years?” John, you have 60 days, if you had a required minimum distribution, you no longer have to do the required minimum distribution in 2020. You could pay it back as long as you did it within 60 days and then yes, you can do the 3 years. Absolutely. We can get you the money back so you don’t have to pay tax on it.
There’s a lot of PPPs. “This good for a SEP IRA?” Yes. Lots of questions. you guys are good. Oh my goodness.
“What about an inheritance IRA, can we draft in this account?” Yes.
“How long will the Saturday CARES Call be?” Three hours.
“Can I take funds from an IRA Roth and the IRA borrowing program?” No, the Roth IRA has to stay in a Roth IRA, but you can take the money out at any time, Bill, without paying tax on it. You don’t have to worry about it. You don’t have any tax anyway.
“Is it okay to roll over a self directed IRA back into a traditional IRA account?” Yes. You can also roll it into a 401(k).
“Can I get set up with a C-Corp that was in the process of a roll over from a 401(k) into a QRP?” QRP is a 401(k) and let’s borrow from the 401(k). Speak to Susan, we’ll get somebody to talk to you on it. My guess is you’re going to be able to do either one.
“Is this your today info or is this for Saturday?” No, we’re just going to be talking about loans on Saturday. You guys have a ton of questions on this. I didn’t realize we’re going to be hit with so much stuff.
“If we did an RMD for 2019, can we pay that back?” Diana, no. I believe you’re stuck with the 2019 RMD, I believe. Jeff, correct me if I’m wrong, but I believe that the RMD is only for 2020. You don’t have to do it for 2020.
Jeff: Yeah. I believe all the IRA changes on the CARES Act are for the calendar year 2020. The distribution limitations are changed and service distributions, everything, all seems to be for January 1st to December 31st of 2020.
Toby: Now I’m looking at this. The CARES Act allows the person to skip both their 2019 RMD if it was their first year and they did not make the RMD. Your 2019, technically no, unless it was your first year that you got an RMD because you’d normally make that by April 1st. But your 2020 RMDs, absolutely. You don’t have to make it. It says, “2019 RMD for someone deferring first year too can be skipped.” Yes, that’s exactly right.
“What can I do if I have an existing QRP loan?” You add on top of it. “I took a distribution against a 401(k), due to financial reasons last month, is it too late to convert it into a loan?” No. What you would do is you’d have to pay that back. I have to do this in two steps. You take a loan, pay back the distribution within 60 days so you don’t have any penalty, and then we do a loan, or we just call that a distribution that we’d want to pay back. I’m not certain whether it’s going to hit us.
Jeff, do you know whether he’d be able to reclassify that or is it only beyond this period?
Jeff: We really don’t want to reclassify that because these qualified loans, the increased amount and delayed repayments, started March 27th and then it only goes to September 23rd.
Toby: Oh, it is September 23rd. Okay.
Jeff: Yes. Anything that happened in January, we don’t want to reclassify as loans.
Toby: You want to pay that back. You pay that back and then you redo it. If you have an RMD and you have an automatic RMD, tell them to stop. If they do make it, you have 60 days to put it back in. You just have to put it back into your account. If you did it right away in the first week of January, you’re out of luck. If you did it recently, in the last 60 days, then you’re in luck, you can pay it back.
“The taken loan is part of my CARES Act.” I’m not sure, I’d have to look at it. Robert, you have the stuff about public charge. We have to take a look at it.
Somebody says, “Hey Patty, are you getting my questions? I see you answer others but not mine.” That’s just not nice. We have lots of fun stuff, let’s keep going on. Toby will talk all day long without regard to anybody else, Jeff, if you let me.
Jeff: I’ve gone and made a sandwich and all kinds of stuff.
Toby: Carla says, “If Susan’s going to put you in touch probably with a bunch of our folks, they’re just making sure you’re married up with somebody.”
“The senate passed the CARES Act and changed the amount of charitable giving in 2020. Can I now give more than 50% of my adjusted gross income? If I make $200,000, can I donate $170,000?” We will answer that. You’ll be surprised at the answer. “Can you explain to me the $500,000 excess laws limit for real estate losses introduced in the CARES Act?” Yes, we will answer that. “We haven’t filed our 2019 returns, though we would be eligible for the 2019? 2019 for stimulus, but ineligible for 2018. Is it too late to file 2019 to try to get the part of the stimulus? If not, how late can we file to get a stimulus check?” Great question, we will answer that.
Do you like all these questions today, Jeff, by the way?
Jeff: I do.
Toby: I looked at these and I was like, “These are pretty tasty.”
Jeff: Yes, I do.
Toby: You’re too verbose.
“What is the deadline for the next two estimated tax due dates?” Jeff knows that because I think I know, but I think Jeff knows it even better. “My property was in my IRA under an LLC, I had to deed it into my personal name to refinance it.” Anybody that’s been on this is already crying for you. “What can I do so I do not suffer the tax consequences?” We’ll answer that.
“What is the difference between a Solo 401(k) and an EQRP?” “Which one is better for real estate investing?” “On trading, are you taxed if you trade inside a Roth IRA or 401(k)?” We will answer that.
“Can my C-Corp borrow money from a shareholder and then use it to invest in a fund with the intent to pay the shareholder with the profits?” We will answer that too. “I am an LLC taxed as a C-Corp. I took a […] to buy the business. What is the proper way to pay myself?” Great question, we will answer that.
“Do I have to make a profit the month in which I spend at in-home meetings?” We’ll go over all that fun stuff.
“What is a K-1 and how is it generated? As a silent partner in LLC, can it pay me a shareholder dividend?” We’ll go over all that good stuff. You guys are asking really good questions.
I don’t know what it is, but somebody says, “I asked earlier and got nothing.” We have, at this point, probably 500 questions that came in online. I will be going back to it. I’ll make sure that we get an answer. There’s so many of you guys who asked questions right when we were going into the CARES Act. I will be doing I’m sure some webinars on it, I’m sure we’re going to be doing a whole bunch of stuff and we’ll make sure all the tax stuff is going to be crazy. We’ll make sure.
A lot of you guys are asking about the grants. “I file taxes with my EIN, do I qualify?” Yes, you do, I’ll go over that on Saturday. They opened up the SPA loans to include independent contractors, 1099, gig workers, sole proprietors, anything you want to call them. Yes, they’re going to do that. If you are in that boat, you want to listen on Saturday because we’re going to go over all of the options. This Saturday is going to be the CARES Act, all the SPA stuff there is free money, free money.
Hey Jeff, have you ever heard of free money? Usually if you’re forgiven a loan, you have to pay tax on it. And they specifically say, “You don’t have to pay tax on it.” It is free money. We’ll show you how to get it. Then, it’s a limited pool. Here is the good news: nobody can get it yet. Keep trying. No. Nobody can because it’s to local lenders and it doesn’t start yet. It starts Thursday, Friday and the SPA hasn’t come out, but the forms for it, don’t worry, we can wait. You walk into these things, you don’t run.
Here’s more questions. “Should I have an LLC before you start in real estate investing?” “Can a partnership LLC be assigned directly to a living trust?” Let’s roll the fun stuff. Thanks Infinity Mastermind. By the way, do not forget, we are going to be doing Infinity Investing on April 18th. If you’re an Infinity Investor, you’re chilling through all these.
“Selling puts, selling covered calls,” you’re a rockstar. “Are there any tax consequences when I buy to close a caller put or roll the call put, can you explain?” I’ll go over that. We’ll answer that.
“If I sell 2022 SPY LEAPS and hold until expiration for two years, will our taxes be deferred until the expiring tax at long l term capital gains rates?” We will answer that.
“I recently learned about HSAs. They seem to be a wise investment going into retirement. Can you expound on the good and the bad?” Absolutely. Love them, we’ll go over them.
“I have a tax-exempt non-profit doing monthly food distributions.” Thank you, you are a God sent. “Aside from gas supplies and science, what can it pay for?” We’ll answer that.
“How do I separate a Roth IRA if it was mistakenly put in the same traditional IRA?” Going back to that, by the way. The tax exempt, if you’re doing monthly distributions, seek all the restaurant owners so that they can donate their wares. They get an ordinary deduction for that. Is that correct, Jeff? They don’t have to write off the cost of goods, they get to write it off, whatever the values?
Jeff: They get to write off the cost of goods, plus they get a charitable donation for it.
Toby: Yep. You get both, you get a double dip.
Jeff: You get a double dip.
Toby: Yup. Call all your restaurants around that are feeling bad. Everybody has been hit by this thing and says, “Hey, least I can get you some money. Give it to us, we’ll give it away.”
“How do I separate a Roth IRA if it was mistakenly put in the same traditional IRA account as a 401(k) roll over fund?” “How and when should I report a contract for deed sale on a small retail building?” “Can I hire someone else outside the US to do my bookkeeping? Any legal issues?” “The best practices for small businesses less than $1 million of income to record and track their profit and loss expenses.” We’ll answer that. “If you lend money to your business, can it be interest free? If there must be interest, then how much is required?” Love that question. I didn’t like these questions.
Here’s the registration page. They’re giving you a link to register. This is the unlock free money stimulus bill CARES Act. Get access to free money via grants and loans before it’s gone. Register now. That’s Clint and I, we are like kids in a candy store with this CARES Act. I’ve been doing this for a long time. Jeff has been doing it even longer. Rarely do you get congress serving up what they just served up. I’ve never seen it. Have you ever seen anything like this?
Jeff: No. It’s really crazy. Even in bad times in the past, in 87 and 2008. There’s never been anything like this.
Toby: I have never seen anything like this. This is the thing, somebody’s going to pay for it. I always look at this as like this is the inhale and there’s going to be an exhale. You better get it. Please join us, and we’re just going to go over, there’s economic injury, disaster loans, there is SPA loan underneath loan, the SPA is actually lending money which they never do, they usually work to partners, they have their preferred provider, there’s the 7(a) loans, the Paycheck Protection Program is underneath the 7(a) loan, if you know what that is. The 504 loan still exists, the 7(a) loans for the express loans that went from the rapid loans are $350,000-$1 million now. The EIDL is $2 million, there’s $10 million per tax payable under the Paycheck Protection. There are all these different things. We’re going to go over all that.
“The senate passed the CARES Act and changed the amount of charitable giving in 2020. Can I now give more than 50% of my adjusted gross income? If I make $200,000, can I donate $170,000?” I’m going to make this really easy. Yes, you can. They eliminated the adjusted gross income amount. You can now go up to 100% of your adjusted gross income. But I think it has to be cash. Jeff, did they make any adjustments, I didn’t see it. I haven’t looked at it today, but I was thinking, for the appreciated property, I still think it’s 30%. Everything else, I think is at 100%.
Jeff: I want to say it’s only for cash, but I’m not absolutely sure. I do know the other thing they did was put in an above the line.
Toby: $300.
Jeff: Up to $300.
Toby: Guys, Jeff, explain what that means.
Jeff: That means, in the first $300 you contribute for the year actually gets deducted from your AGI. You don’t have to itemize to take that $300 deduction. That should be what everybody should be doing.
Toby: Yeah. First off, charities need money. Second off, we need deductions. Always. They opened up something called carryback for five years. You can go $300 above the line deduction, which means you can give any charity $300 and you don’t have to worry about itemizing it, and then you can still take the standard deduction. A married couple could still take the full $24,800 in 2020. How does it work with conservation easements, you’re stuck at the 50. “Is it doubled for married?” I don’t know. Good question. I think $300 is per taxpayer. You know the answer to that, Jeff? Is the $300 per taxpayer? I believe it’s just $300 per return.
Jeff: I agree with you that the $300, I believe is per tax return. But they also increased the contribution limit for corporations from 10% of taxable income up to 25% of taxable income.
Toby: C-Corp net profit. C-Corps are incentivized to give away money. Individuals are incentivized to give money. We want to make sure. The $300 is federal, but again, most states mirror the federal. I don’t know off the top of my head, by it’s 20 something states that automatically just follow, and then there’s states like California. New Jersey, New York that do their own thing. This will give you a federal deduction, it may not affect your state.
The answer to this question is yes.
Jeff: Like you said before, this is limited to cash contribution. It’s 100% of the ATI deduction. It’s not going to be non-cash contributions like your car or artwork, things of that nature.
Toby: “Can you explain the removal of the $500,000 excess loss limit for real estate losses introduced into the CARES Act?” You want me to hit that? Actually, I really enjoy this stuff.
Jeff: I know this was a reversal of what came in the TCJA, the $500,000 laws limit. I don’t believe that this is exclusively for real estate. What they’ve effectively done was roll this back to pre-2018 rolls.
Toby: For 2018 and 2019, someone who had access to excess losses, the way they do it is let’s say you made $300,000 and you’re married filing jointly. Your losses could not exceed $800,000. If you had a $1 million of losses, you would have an excess loss of $200,000. They would say, “Hey, you can’t take that.” Why would I even want it? Anyway, you should never be a huge deal. Never really saw this pop up. Did you ever see this pop up, Jeff?
Jeff: It didn’t even take effect until 2018, I haven’t seen it at all.
Toby: It’s 2018 and 2019.
Jeff: That’s primarily to keep you from taking losses from one area and huge losses from one area and apply it to other income whether it’s W-2 income or whatever.
Toby: But here is the big one. Losses can be carried back to 2015. This is huge, if you had losses. This is how you’re going to free up some money. Because you could quite literally, if you had losses in 2019 or 2018, you could go back and go all the way back to 2015. You have to do it each year, you have to use up your loss for each year and amend the return, get the money back that you paid in taxes. For anybody who had losses that you were carrying forward and you had taxes the year before, then you would take that back. “Does this include loss on rental property?” Yes. “Can 2018 losses be carried back to 2013?” No, it’s 2015. You can go back five years. It’s still pretty dang powerful. If you had any losses that you had to carry forward, this is pretty powerful. This is what they did in 2008, by the way. They allowed you to carry back, you got a bunch of money. Even if your income is over $150,000, you don’t have to worry, you can carry losses back.
Jeff: Actually, those losses can be carried back five years from the year of the loss. The 2018 would get carried back to 2013?
Toby: Let me think about that real quick. I think there is a five year limit now. 2015.
Jeff: It’s a five year carryback from the year of loss and applies to 2019 and 2020.
Toby: Okay. I may say hey, we have to look at that, but you might be right. I thought 2015 would be the latest year we could carry back. Do you think we go back to 2013? John, that just tells you that Jeff is your man. Let’s keep going through these. I’m sorry, we’re already at almost 4 o’clock and we’ve gotten through two questions.
“We haven’t filed our 2019 returns. Though we would be eligible for the 2019? 2019 for stimulus, but ineligible for 2018. Is it too late to file 2019 to try to get the part of the stimulus? If not, how late can we file to get a stimulus check?” Jeff, you probably know this off the top of your head.
Jeff: I think the clock is already ticking on the stimulus checks. Here’s the thing how this is probably going to work. They’re going to treat this as prepayment for 2020 and then include it as a type of credit on your 2020 return to see if you’re eligible for it. Even if you don’t get it this year, I think you’ll probably get it next year if you find that you’re eligible for your 2019 return. The other thing I was going to say is we also want to make sure if we have seniors who are only collecting social security or other people who don’t normally file tax returns, we probably want to file a tax return to get our names on that list.
Toby: Here’s the thing. The answer to the questions is yes, you can file your 2019 and be eligible. You’re using 2018 or 2019, when do you have to do it? I believe it’s June 30th, but I’m not 100% certain. I think it’s June 30. The stimulus checks will be going out right away, you apply for it, and your limit as a couple is $150,000 and $75,000, then it faces out between $75,000 and $99,000, per couple it’s $150,000 and what if you filed the tax, you shouldn’t think of the IRS your bank info then they’ll send you a check. I believe that actually, you can give your bank info on the stimulus. I’m not sure how that’s working. I could see that being right for somebody stealing your money, filing your stimulus for you. You might be what it has to do.
Jeff: I have heard that the IRS is going to set up a website to collect direct deposit information. I agree with you that that’s just totally prone to theft of information. Not from the IRS website, but just giving it to the wrong people.
Toby: Yeah. I have to find how late we can file the stimulus check. You know off the top of your head, Jeff?
Jeff: No. I know that the CARES Act says it’s got to be all paid out by December 31st, but that’s all I have on it.
Toby: You say it’s December 31st. I know that’s most inept to stimulus check.
Jeff: Yes.
Toby: I think you’re right. I haven’t looked at it otherwise. I believe you have until December. For whatever reason, I had June 30th. We’re going to have to get you an answer on that. I know most people are going to go right away, but for some of you guys, 2018 wouldn’t work and so you’re going to take your 2019. I just know that you’re going to have an absolute right to it, this is not one of the things where you put it in a word not like the EIDL loans and the PPP loans. The Paycheck Protection Programs has $349 billion in the pool. The EIDL loans have $10 billion in the pool. This doesn’t have a pool, you just automatically get it. I just don’t know the exact end date. No, this is automatically by the IRS. Maybe they’ll do it automatically. That’d be nice if you automatically qualify, you may not even have to ask for it. We have to see.
“What is the deadline for the next two estimated tax due dates?”
Jeff: The first estimate is going to be due July 15th and the second estimate is going to be due June 15th which happens before the first estimates due.
Toby: Don’t you love that? I don’t think it matters. You would just be back at it. It’s June 15th and July 15th, that’s the due date. We can just go right past that because we answered it so quickly, plus we’re way over time.
“My property was in my IRA under an LLC, I had to deed it into my personal name to refinance it. What can I do so I do not suffer the tax consequences?” Here is the good, the bad, and the ugly. The good was you probably had a distribution or you at least had taxable income in your IRA by having a loan under it in the first place because you refinanced that. You cannot have debt in an IRA. If you do, you have unrelated debt financed income and you should have been paying tax on that back when you got the loan. When you pulled it into your personal name, that was a distribution, which if you put it backward in 60 days, probably won’t affect you. But by taking it out, that was definitely distributed by refinancing it and putting it back in. Assuming that you put it back in, you’re still looking at unrelated debt financed income. You would just have to put it back into wherever you took it out of within 60 days. If you go beyond 60 days, it’s a distribution and it’s for the value of the property. It’s just like you gave yourself money for that dollar amount.
Somebody says, “Is there any way to get a stimulus check if my new salary qualifies even if my 2019 would not?” No, it would have to be 2019 or 2018, you get to pick. Either year qualifies. “Is the stimulus check based on AGI?” I believe. Is it AGI, Jeff? Or taxable income?
Jeff: That’s AGI.
Toby: Yeah. It’s before you do a bunch of other stuff, just your gross income. You’re not going to get yourself down a point where you’d qualify for it by giving away a bunch of money or other things. It’s either going to be you’re qualifying for it or you’re not. It just happens to be that if you have your 2019 taxes and you want to get that stimulus check, file your 2019 taxes sooner than later. Somebody says, “What happens to people who have abnormally high income in 2019?” Like a Roth, you’d use 2018 and you’d use that year. “How to apply?” They use either year. I don’t even think you have to apply for it. Do you have to apply for it, Jeff? Or do they just automatically send it out if you qualify?
Jeff: I think they’re going to automatically send it out. They’re also saying that if you haven’t filed a return, there are ways to still get the money even if it’s filing the return with just some basic information on it.
Toby: I could see that. They need the money in it. The answer to the question is you don’t have to worry about it. Somebody just said, “Can I use my IRA to invest in real estate properties?” Yes. You should hang out with us more often. You need to do a self-directed IRA or use a 401(k) where you’re the trustee.
“What is the difference between a Solo 401(k) and an EQRP?” The difference is Solo 401(k) says Solo 401(k) and an EQRP says EQRP. Otherwise they’re the exact same thing.
Jeff: An EQRP is actually somebody’s market of products. An EQRP is what this company is selling, how they can convert your IRA into a qualified plan while keeping in a QRP. The EQRP has not been recognized by the IRS.
Toby: This equals marketing. It’s a Solo. It is a Solo 401(k). That’s the difference between water and agua.
Jeff: This is a trademark of a company called Total Control Financial, LLC. It’s something they’re selling.
Toby: Sounds neat though. I get that question periodically. They must be marketing well. All we care about is that if you want to control your money and you don’t want to have a custodian in between you and your investing and you don’t want to have to worry about unrelated debt financed income. You want to be able to finance properties inside your 401(k) instead of your QRP.
Jeff: That’s right. It’s an Espanyol QRP.
Toby: “On trading, are you taxed if you trade inside a Roth IRA or 401(k)?” The answer is no. Somebody was asking me, “Can you do real estate?” Yeah, you do the 401(k) so you don’t have a custodian, so you can actually write your offers. You don’t have to go through a custodian.
Under the question on the screen. “I’m trading. Are you taxed if you trade inside a Roth IRA or 401(k)?” The answer is no! Make it easy. The only time you get […] is if you use margin. Could you be taxed on unrelated debt financing if you have margin? Jeff, you know?
Jeff: Yeah. You can get hit with UBIT for margin accounts, margin interest.
Toby: Yeah. As long as you’re just trading, you’re fine. Any time you’re leveraging in a retirement plan and it’s an IRA, bad. If it’s a 401(k), no bad. You don’t have to worry about it.
“Can my C-Corp borrow money from a shareholder and then use it to invest in a fund to pay the shareholder with the profits?” Yes. Some of these are pretty simple. Usually we go into a bunch of stuff. You can borrow from your C-Corp, or the C-Corp exuding can borrow from a shareholder, so we have the company, it’s going to make the company borrow from you. And you loan. Here is the rule and you’re going to see this in a future question. If it’s over $10,000 then interest is imputed, you have to charge interest. Over $10,000, there’s an […] on that. Over the $10,000, interest is computed.
That corporation can then go out and use it to invest in the fund. They go out and they have an investment and they make a whole bunch of money. The money flows into the corporation and they say, “Hey, I’m going to use that to pay my shareholders.” Yeah, you’re allowed to do that. Absolutely. A lot of companies do.
Somebody asked a good question, “Regarding a 401(k), is the owner trustee, a prohibited person like inside an IRA? Can’t use or maintain the property, has to be arm’s length.” The answer is yes, it’s still a disqualified person just like in an IRA. But here’s the difference: in an IRA, it can’t do anything unless it owns and has to go to the custodian. In a 401(k), you can have a trustee and yes, you, as the participant can be the trustee so you don’t have to have a custodian. We can get rid of all those custodian fees. It’s great.
“I have been shopping around lately for a Solo 401(k), can I roll over my traditional IRA into a Solo 401(k) without using a custodian?” Yes, it’s all about the plan. When we sell 401(k), we sell you the plan doc. You adopt our plan and then we’re out. You don’t have to pay us the due diddly squat. The reason why you can go to TD Ameritrade or some of these others and open up retirement accounts, not pay anything it’s because you have to invest through them. They’re going to make their money on the investment. We don’t do that. We don’t care what you do inside, as long as it’s not crazy stuff.
Who was the guy? Was it the PayPal? It made some obscene $6 million or something like that on a private amount, or that they did in PayPal inside of a Roth, they never had to pay tax on it. You know the one, Jeff?
Jeff: No, I don’t know that one.
Toby: I had to look that up. Somebody may know out there. If you know out there, let me know. There was a case where the IRS tried to break a Roth IRA because somebody invested in a private business and they made a little over $3 million tax free. They put money into the Roth when they were in a 0% tax bracket, they never paid money on it. It took off and they said, “That’s not fair.” The tax court said, “Here’s the world’s smallest fiddle, pretend that you’re rubbing your fingers together.” Or they said, “Where should I send the balloons and the cake for your pity party? Because you’re not going to get any relief from us. The laws are the laws. Quit whining.” The taxpayer prevailed in the tax court case. That’s why they don’t attack Roths for doing anything. Pretty much like you have tax free. The judge said those, we’re going to abide by the judge.
“I am an LLC taxed as a C-Corp. I took a […] to buy the business. What is the proper way to pay myself?” Those of you guys who have been around for a long time, know that an LLC to the IRS is either a sole proprietor, a partnership, or a corp. It can be disregarded. If this is a person, this is your choice. If it’s just one person, it becomes two choices. You have sole prop versus corp. They chose to be a corp so for the IRS, all they see is a corp. The IRS is going to look at this and say, “That is a corp.” How do corporations pay money out to somebody who owns them? They pay it as wages, they pay it as reimbursements or any expenses that you may incur, they pay it as dividends and they’re all taxed differently. Wages, there’s ordinary income, that’s like salary, etc., that’s your W-2, reimbursements, there’s no tax in that, you don’t have to report it, dividends are taxed as long term capital gain. That’s it. The proper way to pay yourself is some combination of that.
Somebody says, “Is the CARES Act the same format like this? We can ask questions?” Yes. We’re going to do our best and I apologize guys, that there’s so many questions coming in. Usually I can keep with them, but this one’s just blown me out.
Somebody said, “Can I take $100,000 in my 401(k) to put into a Roth IRA? Or is the rule required to pay the 401(k) within three years? If yes, what is the tax advantage of taking cash out of a 401(k) now since they are investing funds sitting in a different account?” No, you can’t put it in a Roth, you put back, if you take the money out. Where’s the tax advantage? You don’t have to pay any tax on the money that you used for three years, you don’t have to pay any interest on the money that you use for three years, but you’re putting it back.
“Do I have to make a profit the month in which I expensed an in-home meeting?” Jeff, do you want to answer this one?
Jeff: No, you don’t. The profit has nothing to do with either expenses of the meeting.
Toby: There you go. That was good. I like it when it’s simple. “Do I have to have a profit in the month?” No. Here’s the deal. If you are an S-Corp, partnership, or sole prop, you always have to be worried about something called 26 U.S.C. 183, which is the hobby loss rule. You always have to worry about, “Hey, am I making enough money where they’re not going to call me a hobby.” Guess who’s not on that list? The C-Corp. Which is why we like C-Corps because they just do what they want. They lose money, they lose it, they keep the loss, they carry it forward.
You’re losing money, but you’re doing these in home expenses and stuff, just expect to have somebody question you after a few years if you’re generating losses.
Somebody says, “What is the difference between the 401(k) and profit sharing plan?” The 401(k) has a profit sharing component. They’re the same thing. Here’s a new one, “What is the K-1 and how is it generated?” Jeff, you want to answer this? You’re the accountant.
Jeff: Yeah. K-1 is simply a form that is issued to shareholders or partners of S-Corporations and partnerships, and even trusts that tell you what income is passing from that flow through the entity to you. It breaks it down by the type of income whether it’s ordinary income or it’s rental income, dividends, interest, capital gains, and on and on. You have different types of expenses. It’s simply a form and it tells you what your share of a partnership or S-Corporation or trust income is.
Toby: Simple. The K-1 is always going to come out of a flow through entity. S-Corp, partnership, trust. Basically, none of those pay taxes. The way the IRS looks at it is, “Hey look, S-Corp, partnership, trust, what else could it possibly be?”
Jeff: Just stuff like this split end of trust, returnable trust, and trust of that nature.
Toby: Yes. It’s just basically saying, “Hey, these things don’t pay tax. The individual pays tax.” On an S-Corp and a partnership, that’s the most common for us. That’s an entity and it doesn’t pay taxes of its own. It’s just passing it down saying, “Hey, here are the people that are going to pay the tax, here’s what portion of the income they make.” That’s it.
Somebody says, “If you buy real estate in a Solo 401(k), does the property need to be held on LLC within the 401(k)?” Yes. That’s a great question that nobody can see. But I’m going to repeat. “If you buy a real estate in a Solo 401(k),” you’re buying a real estate. This is what people don’t get, is they go and they buy real estate inside of an IRA or a 401(k) which is great, but the liability is the account holder, it’s the participant. Somebody falls down the stairs and sues the pants off you, they’re inside the plan and then they’re going to go outside the plan and try to take your stuff too. There’s no box around that. We always believe in putting an asset protection plan in place. You use an LLC inside of it.
You set up the LLC in the name of the 401(k). It’ll be like the ABC Inc. profit sharing plan by its trustee, Toby Mathis. And then I just set up the LLC member and Toby Mathis is the trustee, so I’m managing the LLC. That’s it. I’m able to hold the property and then if somebody falls and sues the pants off me, they’re stuck inside the LLC. They’re not coming in and getting the rest of my money.
“As a silent partner in an LLC, can it pay me a shareholder dividend?” What do you say, Jeff?
Jeff: I’m assuming this LLC is a corporation.
Toby: Let’s go back. Jeff, hold on for a second. Because we went over this earlier, remember, an LLC does not exist to the IRS. We have to tell it and it’s going to be sole prop, partnership, or corp and that corp could be an S or a C. The reason that this is important is because Jeff is going to go in and say he assumes it’s a C, because only a C has a dividend. That little word right there means ignore that it’s an LLC, we now know because you use something very specific that it is a C-Corp. You may continue, sir. Didn’t mean to interrupt you.
Jeff: That’s okay. A C-Corp has to pay dividends based on two things; what type of stock you own and how much stock you own. The silent partner in the corporation, we don’t see much of it with our clients, but you could actually have two different classes of stock. They may pay a class A stock dividend, but not pay out class B’s dividends. But if you’re all the same shareholder, whether you’re silent or not, they have to pay a dividend if they’re paying everybody else a dividend.
Toby: Somebody ARC, ask your question again that you asked earlier because honestly, I’ve never been one of these so many questions. Usually there’s hundreds of questions, usually I answer about two hundred. I would guarantee, we’re probably pretty close to a thousand questions coming through at this one. I’m sorry. Ask it again, because I’m looking at it. The flow has stemmed a little bit.
“Should you have an LLC before you start in real estate investing?” The answer to that one is it’s a box to protect you. Here’s the easiest way. Let’s say that we have Mr. Happy Investor and they make good money from W-2, they have a nice house, they have a nice car, and they have a little bit of money sitting in their bank account. They have good W-2. They have a little bit of cash and all that. They say, “You know what? I heard that you could get really good properties in North Carolina,” and so they buy a little house in North Carolina.
Let’s say their W-2 income is $200,000 a year and they buy a $30,000 piece of property North Carolina. What’s the worst thing that could possibly happen? What do you think, Jeff?
Jeff: I think something could happen at the North Carolina property and that tenant could sue your happy client for everything they have.
Toby: Let’s pretend that the North Carolina property burns down, this is horrible. I shouldn’t do this. We’re not going to kill them, we’re going to make them like, “Oh, I survived but I have no cash and I’m still on the ground for some reason.” They get injured so they go and they find an ambulance. I shouldn’t even do this, I shouldn’t be allowed. I’ve been doing webinars for five hours now.
They find an ambulance and they look behind the ambulance, and they see somebody chasing it with a briefcase and they say, “Hey, are you a lawyer?” They’re running after it and they hire a lawyer who decides to sue you for $1.75 million because of the damages you caused.
They’re going to take your money, it’s going to go away. They’re going to garnish your wages for 25% forever to cover the 1.5% and any interest that they could get. I’ve actually been in this scenario where you’re going to go above liability insurance. You’re going to realize this.
By the way, all these companies that had insurance, business interruption insurance, just wait. Mark my words how much gets paid out to anybody. Insurance companies are not in the business of paying out, and they know what’s coming, and they make sure they’re not covering it.
“What about a $5 million liability insurance policy?” Collin, great one, except there’s exemptions. It’s never the dollar amount, but let’s just say you’re right. This person had tons of insurance and they sued. What lawyers do is they say, “Alright. How much of that is going to be covered versus uncovered?” I can allege wonderful things that are not covered by insurance. I can say you’re grossly negligent, or you did something. I will look at the policy and I will find something that’s beyond the policy. I’ve actually seen this.
I clerked in court for three years. You can say yeah, you always want to have insurance but don’t count on it. What you’ll do is you look at the worst that could happen. Actually I can give you a real life case. In 1998, when I was in business. I was a Solo practitioner working outside of Anderson. We actually put Anderson together in 1999. I had a gal who I was talking to, a little bit of a group meeting that I was giving and we’re talking about business planning and the use of, at that time LLCs were brand new, 1997 in a lot of states. Check the Box Regulations came out 1997.
All of a sudden you were able to do this, use these LLCs for real estate and this gal came up to me and said, “I need to do that,” and she was older and I said, “What even brings you in?’ It was a real estate investing group and she goes, “I need to make sure it doesn’t happen again.”
That’s almost a quote because that’s the one thing I remember and I go, “That’s a weird question.” So it doesn’t happen again, it prompted me to ask what happened. She had at that time, and I just remember there was 11 or 13 properties on the East Coast. She had a commercial property in Florida and she had a property manager, and there was a three storey building, and they would have window washers come out.
Things that are funny is I have a two storey building and I have window washers come out. Everytime I look at them, I think of her, because they had a three story building, window washers come out. The window washers go up on an aluminum ladder. They have an aluminum squeegee, and the guy on top of the ladder touches the wires that are going to the building, the electric wires electrocuted himself.
When you are electrocuted, you don’t fly off the ladder, so he stays on the ladder, but it’s not like in the movies where they fly off. This buddy who sees his buddy doing something, convulsing basically, he goes to save him to climb up the ladder, never leaves the ground, touches it. Two wrongful deaths.
Insurance, she had an umbrella policy and she had the general liability and policy. The way they got out of this one is the young man who had an actual company with an actual license, they let the license expire. Licensed and bonded contractors no longer. We have another one and she lost every single piece of property, they foreclosed on all of them. It’s not that I’m saying, “Hey, it’s likely,” no. I just want to put a box around this.
Same thing happened in California where it was a valet at a nightclub. We use this example with some of our courses because the liability to this day is still going on. I won’t give you too many other facts because you can backtrack and figure out possible who it was, but the scenario was the valets were an excluded party underneath the insurance policy so the night club who hired a third party valet company to come out and do the valet which is what everybody does, they’re not covered so they caused a massive amount of liability and the guy’s still dealing with it.
All we’re doing is saying the worst case scenario, you have a North Carolina property, you’re not there with your eyeballs, you have a property manager. Worst case scenario, that’s what they take.
“Should you have an LLC before you start real estate investing?” The answer is yes, when you close. You don’t have to go and put an LLC together right now. I’m not going to tell you to do that. There’s maybe some tax reasons why you might want to have a business depending on what your expenses are and what types of expenses, but otherwise if you do an LLC and by the way, this is what’s funny. I used to have people tell me, “Don’t use an LLC for commercial buildings.”
In the early 2000s, Jeff, you’ve been doing this longer than me. I literally have an accountant tell me, “Insurance is enough. I don’t need an LLC,” and I just said to the client that we’ll have the accountant sign on that they’ll cover you on an event that the coverage doesn’t cover or the liability exceeds the coverage limit and I’ll follow his recommendations.
It used to be that LLCs, nobody will go, “Oh, you don’t need that.” Now you can’t even close on a commercial loan in your name. You cannot do it. Good luck trying.
“Can a partnership LLC be signed directly to a living trust?” This is a 1065, that means a partnership. “Can the owner be my living trust?”
Jeff: Certainly, you would contribute your ownership and that partnership to your living trust.
Toby: Yup, you could absolutely. The answer is yes, we won’t even believe that one. It’s not a taxable event because that’s guarantor trust.
A bunch of questions came in online, “I’m expecting an insurance settlement. Is the money taxable? If not, can I put it in a Roth for investment purposes?” Kevin, it depends on what your settlement is for. Pain and suffering is generally ordinary income. Payment of lost wages is ordinary income. Certain types of payments are not income. I have to go down my little laundry of things that may not be taxable.
Jeff: Medical settlements are not taxable.
Toby: Yup, so they settled for your medical bills and things like that, they figured that you already had to pay tax when you paid it. But when you have lost wages and stuff, they figured you never paid tax. Damages incurred from a flood, I do not believe. I have to look at it, but if you got flooded out and they’re reimbursing you for the damage to your house, I don’t believe it’s going to be taxable. In fact, I’m pretty sure that it’s now. Jeff, can you think off the top of your head?
Jeff: That sounds right to me because they’re restoring your property to its present value.
Toby: Yup, I think that if they’re restoring it, then you already paid tax when you bought it on the dollars that you used. But Kevin, this is when you use Tax Tuesdays and Anderson Advisers will send that and we’ll get you that answer.
“For self employed people without any employees, how do they go about collecting unemployment cheques with W-2 people?” The CARES Act opens that up. Also, “How do they go about filing for zero interest loans?” There are no zero interest loans. What you can get is a Paycheck Protection Program, and they’re going to use 2.5 times your average monthly compensation that you received as sole proprietor.
“What’s the maximum loan amount that they can get under the PPP?” It’s $10 million. “How would this loan affect their 2020 AGI tax return if any?” We’re going to go over this on Saturday. There’s an eight week period where we use it for payroll, payment of interest, payment of mortgage interest, payment of leases, or utilities. That amount is forgiven and it is not taxable to you. That’s free money. Thanks for asking that.
We want to make sure that you want to come on Saturday because I’m going to dive into that stuff. Sorry to kick you off, but you definitely want to come on Saturday. “Please go over the sole proprietor with Schedule C that makes $20,000. More or less is there anything I could apply for?” Yeah, you’re going to be able to apply for the new unemployment, and you’re going to be able to apply for EI-DLC and the Economy Injury Disaster Loans and the PPP. We’ll go over that.
“If I close with my name and transfer to an LLC, is that the same thing?” Yes, your name is still on the title. I prefer if you’re going to close, some loans you have to close in your name and then you transfer it. Other loans, they don’t even know about the LLC. You might use a land trust, but most lenders if it’s commercial or their investors, they’re going to have you close directly in the LLC. Somebody asked that same question.
“When you buy real estate and an LLC, you cannot do 1031 Exchanges, is that right?” No, that’s not right. You can actually 1031 exchange as long as it’s in the LLC or you can do a drop and swap where you put it in your name and then transfer it, but it’s the same thing under the 1031.
If you have partners in the LLC, then you have to get everybody to agree. If they don’t agree, then you do a buy out and do what’s called a swap to the 1031 exchange then drop that partner, pay them out, or you do that before which is called a drop and swap. There’s really cool names for all of these.
“Is an ICS Corp. I’m the owner of the S corp. My wife is on my W-2, but can we max our Solo 401(k) without touching my net profit sharing 25%?” It’s part of the profit sharing. The profit sharing is part of the 75. Can you have two 75 plans? Yes. You can do it out of your S corp if you have a business, if that’s what you’re asking you can do both. “Can you pay the entire $57,000 directly from the S corp?” Yes. You only get to deduct 25% of it so you have a whole bunch of money in a retirement plan, but you didn’t take a deduction for it.
Somebody says, “Where do I see people’s questions being asked?” You don’t. I’ve had reasons you don’t. It’s because I don’t want you to see their name and they may ask something that incriminates them so I keep it away.
“Can you maybe explain purchasing real estate in a Solo 401(k)? What type of real estate can we legally invest in?” You can invest in anything. What I say, Kevin, is that when you have a long term real estate and you buy enough Solo 401(k), you’re not necessarily doing yourself any favors because a lot of people like to do it because the money is there, but the tax benefits, you lose because it’s in the 401(k) and you are going to have to pay tax on it. It’s going to be a requirement of distribution whereas if I own real estate, I probably never pay tax on it ever again. I can 1031 it when I die. The basis steps up. My heirs don’t pay any tax. I made something that might never be taxable into something that’s taxable, but if you have the money in it, then you do it.
“Did you say earlier I have until July 15th to put away for my 2019 IRA?” Yes, I did. You have until July 15. They moved the April 15th to July.
“How is the assignment done when signing a partnership to a living trust?” You do a simple assignment form. Let’s say I’m a partner so I go from AT Mathis, to AT Mathis, Trustee of the Mathis Family Trust. I do a one pager in that transfer, it’s really that easy.
“If I transfer property under my personal name to my LLC, will property tax be reassessed?” No, because you are the beneficial owner. Going back, “If I have a rental property, my self directed IRA, is that a box like the LLC? Am I protected?” The answer is no and what happens in the IRA goes out to the participant in the IRA so there’s no box, that’s why you use an LLC.
Anybody can ask a question via Tax Tuesdays and if it’s generic, we’re going to give you an answer. If it’s specific to you, then no. But what we do is we take all these questions and we answer them during this podcast. Even if you’re not platinum, there’s still limited benefit. We’re still going to answer your question. It’s just we ask a bunch of stuff about your stuff, we’re going to say you need to be platinum. It’s cheap. It’s $35 a month, you shouldn’t do that.
[…] selling put selling covered calls. Jeff, you can answer this one. “Are there any tax consequences when I buy to close a caller put, or roll the caller put. Can you explain?”
Jeff: Anytime you close a transaction, there are going to be tax consequences. You’re going to have a gain or loss. Even if you’re rolling the transaction forward or backwards, you’re closing that for a used position and you’re buying a new position that’s further out at time to defer the expiration. Having closed that previous transaction, that is going to have a tax consequence. You can defer the expiration of the option, but you cannot defer the taxes on it.
Toby: Yup, great answer. The easiest way to put it is if I get called out, if I sell it, or if it expires, that’s a taxable transaction. Another question here because they happen to be related right after the other so on the spreadsheet that I get with all the question and I’m like, “Oh, this is neat.”
“If I sell leaps,” leaps are long options, so somebody sold a call, they must own the SPY, maybe they’re just pretending like they do, and hold to the expiration for two years. They’re not called out for two years. “Are taxes deferred until they expire and taxed at long term capital gain rates?” The answer is yes. I could see it and bring in the dollars today. Anybody who sells options knows this. You can bring in money today and pay taxes in two years.
Jeff: That is wild. One of the things I’ve seen is if your covered options you’ve owned for less than a year, once you purchased that option on that security, that stops that clock from ticking. Is that correct?
Toby: Correct. When you cover a position, the position itself stops ticking. If I do a leap on a stock that I own. I own SPY and I see leaps for two years. It’s just like I bought the SPY, but the leaps are what we’re selling. If you’re an infinity investor and if you guys know an infinity is, again April 18th you are all invited it’s free, you buy the stock and then you sell the options. You’re basically never selling the underlying stock.
Let’s keep going, people are starting to drop off. We had a ton of folks on. “I’ve recently learned about HSA. They seem to be wise investments. Can you expound on the good to bad and the ugly?” HSA is a Health Saving Account. Jeff, do you want to jump on this?
Jeff: The HSA is a Health Savings Account and in connection with that, you have to have a HDHP, a High Deductible Health Plan.
Toby: Weird, I was already writing it up before you even said it. I already know what you’re thinking. Go ahead.
Jeff: The HSA allows you to set money aside for medical causes. It was designed for these high deductible health plans to help you cover that deductible when you need to use it. It can be a great thing to have especially if you’re young and dont have money. You can put away a lot of money to this self savings account and the contributions to the HSA is tax deductible.
Toby: I believe it’s $3500 individually?
Jeff: $3500 individuals, $7000 for family is the contribution limits.
Toby: You just put it in there. You get to pick it as a deduction. By the way, July 15th is the deadline to take that deduction for 2019. You can still do this guys, and yourHSA just sits there as a use for medical, but here’s a hint. If you make it to over 63 or something, you’re average medical is $212,000 anyway. You’re going to end up using it. Yehey, and there’s an age catch up. The age catch up is what?
Jeff: I want to say it’s 55 and I think it’s a thousand dollars.
Toby: Extra thousand, close to thousand. If you’re over 50, is it a grand?
Jeff: It’s a grand and it is 55.
Toby: That is to both. So if you’re over 55, extra grand on either one. If you’re an individual, it goes to $4500, if you’re a family it goes to $8000. Yehey.
“I have a tax exempt on profit doing monthly food distribution from gas supplies and science. What can it pay for?” I’m just going to give you guys the code provision, 162. It can pay for all ordinary necessary business expenses from running that business. It can give you 280A, you can reimburse your home. It can do an administrative office in your house which could be on average it’s probably 25% of the house of all those expenses including cleaners, utilities, etc. If you have a dedicated area in your house, those bunch of stuff.
I just think that it’s a business, not a profit. It’s not going to distribute profits out to anybody. It can’t, but it can still run just like a regular business. Let’s just get this, a lot of those preachers that you see on TV fly around in private jets.
“Do I separate a Roth IRA if it was mistakenly put in the same traditional IRA account as a 401(k) roll over fund?” Sounds like you rolled over 401(k) and some of it was Roth, and some of it was traditional, and you mixed them up. Do you have anything on that?
Jeff: You basically have to pull that Roth money back out because you cannot put a Roth IRA into a traditional IRA or a 401(k). You’re going to have to get that money back out and put it back to where it belongs.
Toby: You just take it out. I don’t think you’ve killed anything. I just think once you discover the air, take it out. But you want to make sure the Roth is… The Roth is in a traditional account right now.
Jeff: Right. Usually these need to be corrected by the due date of the tax return, otherwise you could subject it to excise taxes on that Roth IRA.
Toby: There’s no way you would have gone through a tax season without noticing that. This is probably something, not a 60 day or anything like that, you just have to do it. Suzy, figure it out. “How and when should I report a contract for deed sale on a small retail building?”
Jeff: I would think that would have happened as soon as the sale takes place and all the closings have taken place.
Toby: Great. If you’re doing a contract for deed and they’re paying you for a period of time, you treat that as an installment.
Jeff: Correct.
Toby: And you make an election. But you report the sale on the day that you sell it. If there’s a difference between reporting the sale and reporting the income. If this is not a flip, if you’re doing a flip, there’s no such thing as an installment sale.
If this is an investment, then you’re going to recognize the return of basis. You’re going to have depreciation recapture, you’re going to have long term capital gains assuming you owned it over a year, and you’re going to have interest, and your accountant will create a spreadsheet that says, “Here’s how much of each portion.”
They’ll do a percentage based off of the payments schedule and they’ll screw it up if they pay early just so you know they’ll have to do some calculations, but they’ll figure out which portion of that is reportable upon receipt during each year. Is that fair?
Jeff: Yes.
Toby: I didn’t screw that one up.
Jeff: Nope.
Toby: “Can I hire someone outside the US to do my bookkeeping? Any legal issues?”
Jeff: You can absolutely.
Toby: I’m just going to say this, just don’t. The problem is first off, 27 years. Everytime I see somebody who’s getting ripped off, it seems somebody that they’ve given access to their accounts. You end up having an issue, it’s almost always a bookkeeper accountant. Ask Donny and Marie, ask the folks on Schitt’s Creek, that’s on Netflix so I’m not swearing.
It’s always somebody that they give access to. If you’re going to have somebody do your bookkeeping, make sure that they’re not getting your identifiable information and that they’re not able to take your documents and run off with them. You have no recourse with somebody overseas. If they’re in the US, at least you have them here in the US, but otherwise if you let your financial information go overseas, you have to be careful.
Even in the US, if somebody uses an outside the US company, they’re supposed to be letting you know and say, “By the way, we used somebody outside the US.” If your information is traveling outside the US, if it’s going over there. If you have somebody that’s doing bookkeeping, make sure that at most they are remoting into your system. Is that a fair assessment or am I being crazy?
Jeff: No, I think I’m okay with that and I agree with you completely. There aren’t any legal issues per se, however, you got to be careful. Whether they’re bookkeepers in the US or another country, you have to be careful with who you give access to your financial information.
Toby: Yeah. It doesn’t matter. Offshore, somewhere, Canada because that’s offshore even if they’re right next to us, and they decide to sell your stuff. They sell your data or they get access to your bank account and they drain it. I’ve seen that happen way too often, like every time. It’s always somebody paying a fake company. Bookkeepers are like, “You got to pay this,” but then you realize three years later you’ve been paying an extra $30,000 to their cousin’s fake company.
You just want to have recourse against that person. You don’t if they’re outside. I’m not writing cheques. Here’s the rule, here’s a big one. If you remember this, I’m really happy. Your bean counter never is a cheque writer. Your bean counter is never your cheque writer. Jeff, I’m sure you love bean counters.
Jeff: I do.
Toby: That’s where you always see it. Somebody is making fun of me. I’m not a cheque writer. “What are the best practices for small business,” I’m going to let Jeff just take this one by himself, “with less than one million income to record and track their profit, and loss, and expenses.” What do you think, Jeff?
Jeff: I only have a couple of things on this. The first is what you just said. You got to check your numbers especially if somebody else is working your books and depending on the number of transactions you’re going through, I would suggest having a bookkeeper.
People who tend to be good at their business may not be good at keeping their books and that could turn into a real nightmare. I always suggest finding a bookkeeper who knows what they’re doing that can record and track your profit, loss, and expenses, and your statement of financial position, and so forth. But you got to double check them.
Toby: I have good input on this. I’ve created some great processes to work with my bookkeeper in Quickbooks, which Jeff said is absolutely right. The first thing is you get to know your numbers, which is the key. The P&L is your income and your expenses which tells you half the story. Your balance sheet is the other. Your balance sheet is just your assets and liabilities.
Usually when you are losing money, it means your liability starts going up because you’re borrowing it. If it’s not your liability, it’s the shareholder putting more money in. You’ll get lulled into thinking there’s no issue if you have a big pot of assets to draw. I have never been one of those guys who says it’s okay to lose money. Amazon proved me wrong. I’ll be the first one to admit it. I always said Amazon, I don’t know what they’re doing but for every Amazon, there’s WeWork. For every Amazon there’s a company that goes out there and face plants. There’s only so long you can go without making a profit. Amazon had a plan, and they got buy in, and had billions of dollars to go implement that plan, but most companies don’t. You got to make money.
“If you lend money to your business, can it be interest free? If there must be interest, how much is required?” You can do interest free up to $10,000. Anything above $10,000, you’re going to be […] and you’re going to look at AFR rate. AFR rates are somewhere less than 2% right now. Have you looked at the AFR rates since this whole […] has been going on?
Jeff: The […] for 2019 was about 2.4%, and it comes out in July. I’m looking for the 2020 rate to drop quite a bit…
Toby: I think it was 1.9% last time I looked at it.
Jeff: You can actually use a short term FRA rate for the month that you do the promissory notes.
Toby: You could literally just go type in FRA rates and it is right now, .91% in April.
Jeff: Wow.
Toby: March, 1.49%. There you go. That’s what you need to pay. Thank god, Jeff, went way over today. Chatty Cathy. Come to Anderson Advisors. What’s that?
Jeff: You can’t shut me up.
Toby: Yeah. Jeff is the best sport because I am the worst person to do podcasts with, I’ve decided. andersonadvisors.com/podcast if you want to check this out. You guys have a bunch of questions up there.
“Do you recommend putting properties on […] to Wyoming LLC as beneficiary?” Sometimes, it depends if you have loans. I do trust Jeff. “I have under my C corp 3%, can I amend the loan to 1.5%?” It’s when you make the loan, but I suppose you guys can get together and decide to readjust your loan, there’s no problem with that.
“Can I put properties in my Wyoming LLC? Do I need to have LLCs foreign filed?” No. You are actually talking about something that you’re going to want to talk about one of the Advisors on. Yes, we can get away from the greedy California state. You have to give them a little bit of blood, so you always give them one and there’s ways to get around it.
Somebody had some other questions here. “When you repossess the building sold on the contract for deed, is your basis remain the uncovered basis? Or do you restore the original?” Technically you restore the original. If there’s a contract for deed and they breach, you never sold them, they never got the contract. You would recognize the income on the payments that you receive that the original basis would control, I believe.
There’s a bunch of questions the other day. Send them all in. Just understand that we are getting hammered by the CARES Act. We will get through everybody. We are going to have more programs for you all. I can just tell you right now that you will be all invited to Saturday’s event. We will have another event the following Friday and Saturday that you’ll get invited to. We’ll send you out some emails.
There are two full day courses, one on tax and asset protection, the other one structure implementation workshop. I should say the SIW might just be platinum. If you’re a platinum then that’s going to be free to you. Then I’m doing for everybody the infinity workshop on April 18 and I know I’ll be doing a couple of webinars because the stock markets dropped freaked people out. We’re going to show you some ways that you’re never going to be subjected to that again.
There are some investments that literally go zero. We will make sure that we’re getting stuff out to you and we will take care of that. Somebody says, Paul Xavier, I know that name in Honolulu, great guy. You have to make sure that you’re working with us, I hope you guys are doing okay.
“What about the new book?” They shipped out. Tim, you should have gotten it. The new book, The Tax-Wise book came in. If you guys took advantage of the pre-offer, then there’s a bunch of us that got there. I got it, so I’ll make sure that we get it. It’s a page turner so we’ll make sure that we get it out to you. They may be cranking them out as we talk. If you didn’t get it, let them know right now.
Somebody says, “Great book. I love it,” because you like taxes. Somebody says, “I know most of the stuff. I’ve been with you guys forever.” It’s not rocket science, guys. “What’s the title of your book?” Tax-Wise Business Ownership: Fourth Edition.
“I’ve been doing that for 20 years so it could be great if you wave the flag.” David, we will reach out to you. You’re right, there are a lot of things we are trying to do especially for our clients, but I think we’ll be rolling it out. We’re going to do a lot of free stuff and the loans, and the grants. We’re going to try to get that. We will get you.
“I missed the offer.” That was a $10 preorder for a long time, but somebody will reach out to you. Just go ahead and send something, these are all the free stuff, you can always go to our social media. Reach out to Tax Tuesdays and say, “I want the cheapest thing that you could do for the Tax-Wise Business Ownership,” and we’ll make sure we’ll get you in the specialty that we did for you guys.
We will do something really cool. “What’s the platinum cost?” $35 a month. You can ask tax questions and you can get on the phone with the consultant, or business consultants, or our attorneys. You can ask any question, you can get documents reviewed by attorneys if you want, it’s lots of fun. Then there’s tons of stuff inside the platinum portal. Say, “Hey, I’m interested in platinum for Tax Tuesdays Anderson Advisors,” and I will give you without advertising a special. You just say, “Hey, Toby says to tell me what the special is,” and I’ll make sure we get you to platinum for a ridiculous deal.
Alright, that it is guys. Please be safe out there. We’ve been touched by this thing in our offices so I know what it’s like. It’s scary. I have an employee in the hospital right now that hopefully isn’t suffering from that, but it’s all just over the place. Everybody got this a little bit of fear. Hopefully we get through this thing in the next few weeks and get something back to the ordinary.
Call the people that are stuck at home. Call the older folks. I’ve been talking with my mom way more than I normally do because I’m always worried. Stay home until we get our arms around this. Thank you guys for your well wishes. We’ve shut down our entire rainbow location simply for that reason that we want to make sure because we have somebody, you guys can read between the lines. I don’t want to disclose stuff. I’m not legally supposed to. Anyway, thank you guys for visiting and spending two hours, geez, Jeff.
Jeff: I know.
Toby: If you just didn’t talk so dang much. Jeff is awesome, he’s a good sport. Thanks, guys. We’ll be back in touch. I know a lot of you guys reached out about the 401(k) for Susan and Patty. They’re peaches, this is the highest compliment I can get. They do a great job. Thanks guys and good luck to you. We’ll get through this and we’ll see if we can get you guys some dough.
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