Do you loathe the Internal Revenue Service (IRS) and Small Business Administration (SBA)? Why? Lately, both are doing everything possible to undo what Congress is doing to provide financial assistance and relief related to the coronavirus pandemic (COVID-19). Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions and clarify information about the CARES Act. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- Updates on Tax Impact of CARES Act:
- Paycheck Protection Program (PPP)
- Economic Injury Disaster Loan (EIDL)
- Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act
- My wife is 60. In 2019, she had $13,200 of Social Security income and $0 in income earned from work. Can she contribute to her health savings account (HSA) for 2019? High-deductible health plan is required to make contributions to HSA
- What’s the best way to set up a real estate LLC, if you’re an investor that does both buy and hold, and fix and flips? Split them; put buy and holds into LLC or partnership, and fix and flips into S- or C-Corp
- If I pull equity from a house, does the money need to go back into the house or can I use it on another property or for other things? You can use it for whatever you want, but deduct interest on Schedule A
- Can we write off donations to our nonprofit, even though we still haven’t been approved for 501(c)(3) status? Yes, you have 27 months from the application date to get approval
- Is it too late to apply for a PPP loan for a contract worker? No, but apply ASAP
- Will there be a penalty (forgiveness/tax) for paying an employee more than the average 2019 salary calculated (PPP) because of overtime or pension plan payments? There’s no penalty to help with forgiveness amount, but can’t pre-pay anything
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:
Small Business Administration (SBA)
Internal Revenue Service (IRS)
U.S. Government Accountability Office (U.S. GAO)
Paycheck Protection Program (PPP)
Economic Injury Disaster Loan (EIDL)
Individual Retirement Arrangements (IRAs)
Non-Filers: Enter Payment Info Here
Real Estate Professional Requirements
Employer Identification Number (EIN)
Capital Gains Exclusion/Section 121
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.
Additional Resources:
- Claim your FREE Strategy Session
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates
- Anderson Advisors on Facebook
Full Episode Transcript
Toby: Hey guys. This is Toby Mathis.
Jeff: And Jeff Webb.
Toby: You’re listening to or watching Tax Tuesdays. Thank you for coming through. We’re having some fun stuff with technology in our building. I want to make sure you guys can all hear us loud and clear, so please let me know that you can hear us.
Jeff: And me, too.
Toby: Good here. Let’s just jump in. We got a lot to go over and the first thing we want to go over is where you can always get lots of information. There are lots of different places. All of them start with that aba.link/ and you can put on Facebook, YouTube, LinkedIn, Instagram, Twitter, or all of them if you’d like to get multiple sources of information. There’s actually some really cool stuff.
Actually, I’m going to ask Susan. Susan, you know the link for Infinity Investing. I believe we have that coming up. I didn’t make it into a slide, but I want to give everybody the opportunity to think we’re May 23rd. Can you make yourself unmuted so you can just verify that you’re out there and alive and that it is May 23rd? I believe that we have another Infinity Investing coming up and put the link in chat.
We’ve been having a lot of fun with the Infinity stuff, guys, because if you were watching well over a month ago, we’ve been spot on as far as what’s been going on, so we feel pretty comfortable going forward. It’s not rocket science. It’s just playing what usually happens. I can’t hear Susan, but maybe she’ll put that up.
Susan: I’m here. It is Saturday, May 23rd, starts at 9:00, should run until about 5:00, and if anybody’s interested, I’ll post the link in the chat as well but it’s aba.link /iiw.
Toby: I will write that up before we’re done but I like to put some freebies stuff, have it whoever you can come in and join us for another day. We did a webinar earlier this week on just stocks and bonds. Was it a Tuesday? […]. It’s already been a long week. We had a whole bunch of companies that we’re going to go through in this particular Infinity Workshop. It’s not going to be like all the others. We’re actually going to go through a whole bunch of companies. We’re going to do some deep dive into their numbers.
I like looking at historical data and it’s pretty obvious when you look at historical data and charts on some of these companies. It was fun. There it is. There are some folks that attended yesterday. People seem to be enjoying it.
Jeff: Apparently you were there, too.
Toby: Apparently I was but I don’t know where my brain is. Tax Tuesday rules. I may have bitten off more than Jeff can chew today because there were just so many cool questions and I just started going through to say this is a good one, this is a good one, and then the next thing I know, we’re supposed to do that an hour and there’s no way.
You can always send in questions to taxtuesday@andersonadvisors.com. We’re getting hundreds a week, just so you know. If you think you’re going to get a response in a day, it’s probably not going to happen, although our guys are pretty good about getting stuff. We grab the questions that are up here every week from those Tax Tuesday. If you need something super specific on a tax issue, you’re going to have to become a client. If not, then you can always ask.
A lot of CPAs are hitting me up. I am part of a bunch of listers. I can tell you there’s a lot of misinformation going on out there on the Tax Impact or the CARES Act. In fact, this is an image for you, HONK if you hate the IRS. I don’t beat up on the IRS, but lately, the SBA and the IRS are doing everything they can to undo what Congress did and they’re really pissing me off. I never say that.
I always say to the IRS you treat them like a police officer. Hey cop, you’re pissing us off. You’re undoing what Congress is doing. It’s not just me. It’s actually Congress who’s saying it. What they did is in the CARES Act, they give us this PPP loan where you get a tax benefit of this loan forgiveness, and then the IRS somehow can cox it and pulls it out of their ear—wrong orifice, but they pull it out somewhere—that somehow we’re not going to let you write off these expenses because it would be exempting…
It’s stupid. We sit here and go, that’s absolutely asinine. You didn’t read the cases you cited, which is typical of these guys. I love cops. Cops are awesome but in this particular case, the IRS is acting like a knuckleheaded cop, we have to call them out on it. What they basically did is they came up with this idea that somehow, we’re not going to let you write off the expense and that’s really annoying.
That is just not true. That’s not what they intended. How do we know because Senator Grassley comes up and says, “When we developed and passed the Paycheck Protection Program, our intent was clearly to make sure small businesses had the liquidity and the help they needed to get through these difficult times, Unfortunately, Treasury and the IRS interpreted the law in a way that’s preventing businesses from deducting expenses associated with PPP loans. That’s just the opposite of what we intended and should be fixed. This bill will do just that.”
They just put out some new legislation literally in the last hour that is going to undo that. Jeff is probably learning about that as he’s sitting here.
Jeff: Nope. I have not heard that yet.
Toby: The house just put it out there; I’ll show you what that is. Then, the IRS does its best to do some other stupid stuff, which is they took a notice at this very bottom here you guys will learn to love to read this stuff. This little notice down here that says 2005-92 and they applied it to the new law, even though language is completely different, but since when do we want them to actually do their jobs? They’re all off anyway. There’s hardly any work in. Are you able to get anything done?
Jeff: No. When I call their phone, they usually say, “We’re not giving personal service at this time.”
Toby: Somehow you got Amazon working there […]. Costco is working their […] off. Unless you’re a hairdresser—no, they just reopened here—the IRS apparently can’t do their job. Gosh.
Jeff: I would have thought that people who collect money from the government would be essential?
Toby: Yeah. Somebody says, “Can you check on your stimulus?” Just screw that up. You don’t expect it to work. They keep giving money to dead people. Now they’re mad because they said you have to return it, but how the heck are they going to force you to return it because they just gave money to a deceased person. How are they ever going to get that back? What do they do to sue the deceased?
Jeff: Yeah, I guess the IRS is the new grave diggers.
Toby: I don’t know how they go do it. I’m just trying to think this through. I gave money that I shouldn’t have to somebody out of the country, and they gave money to somebody I shouldn’t have who’s deceased. I guess you’d have to try to do some discovery and figure out who actually took possession of those monies or maybe sue the estate.
Jeff: Apparently, it’s not as easy to give away trillions of dollars as it looks like.
Toby: I’m just mad at them. Anyway, the IRS did this weird three-year where we said, “Hey, as long as you pay it back by the end of the third year, if you take an early withdrawal from your retirement plan, you don’t have to pay it back technically until the end of 2002.” The IRS wants you to pay tax on that and then go back and amend all of your returns. That’s their theory. We think that stupid, and I think that we’re right, because it is stupid.
Here’s the HEROES act that they just passed. You’re learning about it right now because I learned about it right before we went on the air and I was feverishly reading as much as I could. At the very bottom here—I won’t spend too much time on this stuff because it’ll probably bore you to tears—what they did is they said, “Hey, we’re going to modify the Paycheck Protection Program so you can deduct the business expenses.”
This is really sad. When Congress is giving benefits to small businesses, and I’ll use the PPP as an example because you’re supposed to use 75% on payroll expenses, but it does not say that in the law. The SBA pulled that out of another orifice and threw it at us. That is not the intent of the law and now you have a Congress who shows up once in a while. I don’t even know if the house is in session. I know the senators showed up, but I’m not even sure if the house is, but do you know if they’re there?
Jeff: I don’t know if they’re there or not.
Toby: I’m just annoyed. I’m sorry to be annoyed, guys, but I’m just looking at this going, why do we have Congress having to undo what our bureaucrats are doing? That’s going to be my theme for the day is bureaucrats are ticking me off because it’s hard enough right now for some of you all to make a living. It’s really brutal out there. We have really had some difficult times and a lot of it’s self-inflicted. I get that there’s the virus and I’m not belittling that virus, but we are in a serious financial crisis if you are a small business owner. They’re not making it easy.
I’ve met with a gentleman earlier today. A friend of my wife, who is an independent contractor, who has not been able to work for the better part of two months, who still has not been able to get through to unemployment to get any money whatsoever and has been forced not to work is a non-essential business. I just looked at it.
Somebody says, “How does that work with stimulus payments to widows and their deceased husbands?” The widow would still get it. The deceased husband’s not supposed to, but they’ve been paying the deceased husband anyway. I don’t know how they’re going to come back and get it. They’re telling you that you have to return it or they’ll penalize you and charge you a bunch of inches, but good luck finding it. Give it to them. Somebody has passed. I’m getting off crunchy. Sorry, Jeff.
Jeff: No, that’s fine. I totally get it because we see so many of these financial aid plans, whether it’s unemployment or the CARE stuff, or even the Fed. They’re not working well. Even the stimulus check is not working well. It’s going to the wrong people. It’s not going to people who need it. We’re seeing a lot of this with all of these different products that are trying to help people out.
Toby: Somebody says, “Can you deduct more than just payroll like insurance and medical premiums?” That’s actually a question that we’re going to answer today on the PPP loans. Susan has asked the same thing. Do I really have only eight weeks to use my PPP money? Yes and no. It’s a loan, no matter whether you use it or not, but if you want it forgiven, then yes, you have eight weeks called a covered period, but they’re trying to relax that so you don’t have to use it all on the payroll. Right now it’s 75% payroll but that is stupid.
Jeff, you and I, we’ve tried to hire people in the last few weeks and nobody wants to get hired because they make more on unemployment. If you pay less than $30 an hour, most people are going to be like meh, I make more just chilling at home. Now my competitor is the federal government giving money to somebody not to work. They should have thought about this, and their forgiveness is based on me paying it.
They’ve given us some guidance saying, hey, if you try to hire people back and they don’t want to be hired back because they’d rather be unemployed, you can still count them as an employee, and I’ll show you why that’s relevant when we go through some of the rules.
Let’s jump into what we’re going to go over today. “Made a backdoor Roth IRA contribution two years ago.” It’s a mouthful. “If we need cash flow now and pull it out since we already paid taxes, does it adjust a 10% penalty?” I’ll explain what all that means. Also, it does not sound Roths are eligible for a three-year roll like normal IRAs under CARES. We will answer that.
“If I have a loss in my S Corp in 2019 and 2020 and from a 1244 stock, can I carry it back to recoup taxes paid on my personal 1040s?” Sounds interesting, they did a 1244 stock class. We’ll answer, we’ll explain all that. Jeff’s chilling, totally sitting back. He just nodded his head. I got that one. I got that one good.
“Can you tell me a couple of really good strategies to quickly recover the tax benefits from capital losses? I have a sizable amount of loss I want to recover sooner than later.”
“My wife is 60 in 2019. She had $13,200 of Social Security income and $0 earned income from work. Can she contribute to her Health Savings Account for 2019?” We’ll go over that.
“I started my own cruise agency mid-February. Sales were strong but then COVID arrived. Everything stopped and industry experts believed it will now take six months to a year to rebound.” This is a sad story and we’ll go over it. “I applied for the federal stimulus $10,000 funds but I still have not received a response.” “I have tried many times to file for unemployment. No success.” This is common guys. In my state, people have still not been able to get their unemployment. It is absolutely ridiculous.
“I still have not received the $12,000 check from the government plus I have not filed 2019 taxes. What options do I have? I’m sinking here.” I hate the fact that she is sinking because […] and I immediately think Titanic, but I feel really guilty for having that. “I’m sinking here without earning any income.” We’ll have some solutions for you here.
“What is the best way to set up a real estate LLC if you’re an investor that does both buy, hold, fix, and flips?” We’ll go over that. “If I pull equity from the house, does money need to go back into the house or can I use it on another property or for other things?” We’ll go over that. “Can we write off donations to our nonprofit even though we still have not been approved for that 501(c)(3) status yet?” That’s a great question and we’ll answer it.
“I own a dental practice. I am purchasing a new commercial building through a new LLC to add a new location and then rent it back to the business which will operate as an S Corp. The building purchase will be cheaper than the rehab. With the new CARES Act change, et cetera, what are the best tax benefits to this situation?” It’s a really interesting situation to be in. It sounds like you are just going to be very happy under the CARES Act.
“Will there be a penalty, forgiveness, or tax for paying an employee more than the average 2019 salary calculated PPP because of overtime or catch-up with pension plan payments, et cetera?”
“If you purchase vacant unimproved land with the intent to build develop homes for sale or rent within one to three years, what tax advantages can be taken? Are the LLC business expenses for it as well as interest taxes from the loan able to be included on a Schedule E like normal property?”
Another one, “LLC owns mortgage notes. Can the LLC file for the Economic Injury Disaster Loans or EIDL?” Those are the SBA disaster loans to recoup non-payment loss. We’re going for that.
Jeff: You did ask a lot of questions, didn’t you?
Toby: I couldn’t resist that. You’re okay being here at midnight?
Jeff: That’s right.
Toby: “I used to work for New York State and had a 457(b).” That’s a government retirement plan. “I left the state job five years ago. Is there a way to withdraw all of the 457(b) funds? I do not want the 457 amount to count to the $100,000 CARES Act withdrawal because I want to take out a separate $10,000 from a 403(b) using the CARES Act.” Though they have a 457(b) and a 403(b).
“If I pay my home personal internet bill with a personal credit card, and then pay the personal credit card transaction with my business checking account, is this considered piercing the corporate veil?” Happy to answer that.
“If my C Corp reimburses for vehicle mileage, how do I then do my personal and C Corp taxes?” You’re asking very happy questions for Jeff. He’s excited. He’s bouncing up and down his seat. Either he’s sitting on attack or he’s excited. I don’t think I’ve ever seen you bounce. That’s kind of neat.
Jeff: I don’t do the Tigger.
Toby: “I use a series LLC.” That’s actually pretty cool. We’ll go over what all this stuff means. “I’m a passive investor in apartments. Series A as apartment one, B has apartment two. Each series has its own EIN number. “It is a single-member LLC.” For series it’s always interesting. “When I do my taxes, it flows through to my personal taxes. This year my K-1s have to have my personal social security number instead of EIN. I also have rental houses in the series LLC with separate EINs. My question is if a renter tries to sue me, could a good lawyer reach into these other LLCs because the government associated my SSN with these LLCs?” That’s a really big question that we will answer.
“Can we write off passive loss with any taxable income? W-2, stock gains, active income, K-1 under CARES Act? Would you please elaborate on how much passive loss can we write off? Is that up to 100% taxable income? By the way, we are not real estate professionals.” We’re going to give you an answer, and then you can cry about it.
“What is the PPP forgiveness criteria?” A lot of you guys are asking that. I actually have the criteria that I grabbed and stuck into the presentation on a whim. “Even before this whole virus situation hit, we had a few tenants who skipped town early on their lease while also owing us back rent. The total amount in this case, for example, including the two-month penalty for breaking the lease is $3300. What do we have to do in order to be able to claim this as a loss on taxes?” We’ll get into that. There are a lot of rules that get triggered.
“My mom is 83 and when she dies, she wants to leave her house to me and my three siblings. She currently has about $100,000 in equity so each of us we’ll receive around $20,000.” We’re trying to do the math. Me so there are four siblings. That would be about $25,000. I guess he got to have the costs metric. We’ll go over that.
“Should we transfer the house into a revocable trust with my brother and her as trustees to avoid probate and reduce our tax liabilities?”
“Purchased rental property. Did a cost segregation. Property appreciated greatly. Did a 1031 exchange after 10 years. Wouldn’t the fair market value of the Section 1045 property have to separate out and the gain recaptured as ordinary income?” Somebody is asking that’s really smart because the fact that you’re breaking this out means you know a little something about what you are doing but the answer will surprise you. Section 1031 does not apply to 1045 property. We will answer all of those.
Jeff: Yes, we will.
Toby: You probably are excited for that one. Whenever Jeff sees a real weird, “out there” question, I like to see whether he’s getting ready for it because that’s one that has a weird answer. A lot of these have some funky little, you getting out there.
Jeff: I like the questions that make me say wait, what?
Toby: I know. Jeff gets to see them the morning of and I usually look at it for about 30 minutes before we start throwing them into the slide. If you ever see the slides all over, Paulie Wankel, it’s my fault because I waited until the last second to put them into slides.
Let’s jump into these. Backdoor Roth IRA. You want to go over what a backdoor Roth IRA because this sounds like a total work.
Jeff: A backdoor Roth IRA is a contribution to a Roth that is actually made to a traditional IRA first. It’s a non-deductible contribution toward traditional IRA.
Toby: You can’t put money into a Roth because you’ve made too much money.
Jeff: Exactly, and then you immediately convert that traditional IRA into a Roth IRA. You can do this every year.
Toby: If you make too much money and you phase-out of the Roth IRA rules, you can’t make a contribution, some people will just put money into a traditional and will convert it.
Jeff: And the IRS is fully on board with us.
Toby: Yup. They call it the backdoor Roth IRA. Now you did that. Let’s say I did a backdoor Roth IRA and I pulled the money out. There’s a five-year rule. What’s that five-year rule?
Jeff: You either have to be 59½ and have held it for 5 years. However, there are some exceptions to this.
Toby: Right now if you have expenses, if you’re paying for health insurance, if you lost a job, I think you have to lose a job or not to.
Jeff: The way distributions of Roth’s work is your basis, your contribution comes out first. If you’re only taking out the contribution part.
Toby: That we have two years ago. I’m going to throw you off here, Jeff. They did it two years ago, so they’re still within the five years. If you do it within five years, you’re going to have to pay a 10% penalty, unless you meet one of the exceptions. You would have to be using, I think $10,000 for a house or you can do it if you need health insurance. There’s a few emergency-based.
Jeff: Education.
Toby: Education, yeah. There are a few little exceptions. Otherwise, what Jeff said is absolutely 100% true. If this was not a backdoor Roth, but you made a regular Roth contribution, you can always take that money out, and you never have to pay any penalty on your contribution no matter what. You would only have to pay the penalty on the earnings and you’re going to pay tax on the earnings too, if you take it out of a Roth.
Here we have the one weird exception, which is when you convert a traditional to a Roth, you have to wait five years to take that money out. If they’re only two years, they’re going to get hit with that penalty, and yes, they already paid the tax on it, and you’re going to have that 10-year penalty. If you are 59½ already, do you know the five-year wait period?
Jeff: I think you might. I’m not sure about that.
Toby: I think anytime you convert, you’re going to have that little thing.
Jeff: In regards to your second question, Roths are not eligible for the three-year distribution roll under CARES. It only applies to traditional IRAs.
Toby: Somebody says, “If he has another Roth that’s five years or would you still have to wait five years?” Yeah, it’s a five-year rule on the conversion. Let’s say that I convert every year, I do this every year, then I can take back out the one that’s five years older, then I don’t have to worry about the penalty, I can take that out. Remember, we’re taking out the conversion only, not the earnings. When you do the earnings you’re going to have tax and potential penalty. You wouldn’t have to worry about the penalty if you’re over 59½, but you would definitely have to worry about the tax.
Somebody says, “Can any traditional IRA be converted into a Roth IRA?” Almost. The only one you can’t is an inherited IRA from a non-spouse.
“Can you also take money out of an education IRA and pay it back in three years?” I believe so. It’s somebody else’s though, right? If I put in a Coverdell? They’re talking about a Coverdell IRA?
Jeff: I’m not sure about the Coverdells. If they’re covered under this is an IRA.
Toby: I think it’s an educational IRA but who’s the beneficiary of the Coverdell? It may have messed around with them so much.
Jeff: We hardly see them at all, the Coverdell ESAs.
Toby: Mina, shoot that in because we can get you the answer. “I thought earnings in Roth are tax because the contribution was already taxed.” You think but if you pulled money out on the earnings, the earnings were never taxed as long as you meet certain minimal requirements. My son is the beneficiary then the beneficiary but the owner. I think that they should be able to pull it out if the question is who pulls it out. Whether it’s the child or the parent, the parents if their child is under 18, I believe should have access. We’ll actually look it up for you. On a traditional Roth, if you take it out after 59½.
Jeff: Traditional Roth?
Toby: A regular Roth IRA, you’re going to have to take their earnings out after 59½, I believe, without worrying about any tax even on the earnings. I may have misstated that a little bit earlier. If you’re taking it out earlier, then we have to worry about the tax and the penalty. There are two sides to that.
Somebody says, “If I take money from an inherited IRA under the CARES Act, can it be repaid to a regular Ira?” You’re asking some really interesting questions, guys. If it’s an inherited IRA, it’s not your IRA.
Jeff: Yeah. They made some changes to the inherited IRA rules under the SECURE Act, which was back when January?
Toby: That was passed in December.
Jeff: Okay. I think the only thing they did on that is they extended the amount of time you had to distribute. I think they changed it from a 5-year distribution rule to a 10-year.
Toby: Right. You can’t put it out over somebody else’s life. Also inheritance you can put over the spouse’s life.
Jeff: Say you’ve inherited your grandfather’s IRA, and he’s already started taking RMDs. You can keep doing that.
Toby: You can do that or the 10 years.
Jeff: Or the 10 years, correct.
Toby: I don’t believe you’re going to be able to access the $100,000 under an inherited IRA because technically, it’s still the spouse. If it was an inherited spousal IRA, then it’s your IRA, and you can access that. Yes, you can.
Jeff: Because it actually becomes your IRA.
Toby: Yup. “How do we make a backdoor Roth IRA? Are the IRA companies aware?” Some are. How do you do it? You literally make a contribution to an IRA, and then you literally transfer it to another.
Jeff: The custodian has to know what you’re doing so they can do the proper paperwork.
Toby: Somebody says, “What about extending the 60 days to 3 years?” Actually, Jay, we don’t have to worry about the 60 days. Under the CARES Act, if you take $100,000 out of your retirement fund, to your (let’s say) traditional IRA, and you pay it back before December 31st of 2022, it’s treated as a trustee-to-trustee transfer, not a 60-day, and then you just said it was inherited.
If it’s an inherited IRA from a spouse or from somebody a non-spouse, such as Jay’s sister, then I don’t believe you’d even be able to access the CARES. These are really good questions.
Jeff: The problem of the inherited IRA from a non-spouse is you can’t put that money back into anything. Anything that gets distributed has to stay in your pocket.
Toby: Somebody says, “Is a backdoor a conversion from a traditional to a Roth?” It’s a conversion where you could not normally put money into the Roth, so yes, it’s a conversion from a traditional to a Roth because you can always put money into a traditional. It just may not be tax-deductible. You convert it to a Roth. You didn’t take a deduction anyway. You just managed to get money into a Roth that you weren’t eligible to just put directly into the Roth.
Jay and Nina, if you guys could email me those, or Patty or Susan, if you could grab those, I want to make sure that we are getting answers on those because those are novel, interesting questions. Anyway, we’ll make sure that we get it.
“Do we avoid taxes totally by doing a backdoor?” No, because you’re paying tax on the money that’s going in. It’s just like putting it into a Roth but you’re not allowed to put it into a Roth and this is the way that we get around that rule.
“For kids Roth IRA, in which ways can they use it for college or they wait for their own retirement?” You can always pull out. Let’s say that I’ll use my daughter as an example. Daughter just graduated from college last year. If you guys listen to me she’s been putting money into a Roth IRA for years, since she was old enough to work.
That’s a great savings account, if she ever needs the money. She can literally take any money that’s put into that account, back out of it with no penalty. It’s the earnings that would subject her to the penalty. That’s what she always has to be cognizant of. I always say if you want a savings account, you want something where if you’re in a really bad spot, you need cash, or you have a great investment opportunity, the Roth IRA It’s a great savings vehicle. It’s a great savings account for somebody.
“If I have a loss in my S Corp in 2019 and 2020 from a 1244 stock, can I carry it back to recoup taxes paid on my personal 1040s from 2014 to 2018?”
Jeff: That’s an interesting question. S Corporations can have 1244 stock. However, the loss you can deduct is your basis in that stock. Unfortunately, when you’re taking losses from 14, 15, 16, 17, to 18, you’re already recognizing those losses on your 1040. I’ll give an example. You put $100,000 into stock with an S Corporation. You spend every penny of it. At the end of the year, you have zero left in your S Corporation. You’re going to take a $100,000 loss on your 1040.
Toby: You could do that as a net operating loss, too, right?
Jeff: Correct.
Toby: So, the 1244, a bunch of people are asking what’s a 1244 stock? 1244 is a fancy way of saying it’s a small business stock, it’s less than a certain dollar amount is a million capitalization in five or fewer shareholders. It’s basically a definition that allows you to take your loss as an ordinary loss on your 1040.
Jeff: You have to be the original shareholder.
Toby: You have to be the original issue, original shareholder. In other words, you can’t have purchased it from somebody else. It has to be from the company itself, and you have limitations on how much you can put into the company and how many shareholders it has. The CARES Act that allows you to carry back the loss is for net operating losses. If you take a 1244 stock loss, you can’t carry it back. If you lose money in the S Corp but in 1244 is when you liquidate the company.
Basically, let’s say you set up a C Corp and or an S Corp, either one works, and like Jeff says you put in $100,000, and after a year, you can’t win, so you shut the company down. Even if it was in a C Corp, you’d be able to take that loss and use it against your W-2 income or any other money that you have. It’s just an ordinary loss, but it is not a net operating loss underneath the CARES Act. If you do the 1244 and you’re saying I have a loss, my S Corp from 2019 and 2020 from 1244 stock, what that’s telling me is it’s not really 1244 that we’re worried about, you just have operating losses. If you have operating losses in 2019, you can carry them back to 2014.
Once you use up 2014, then you go to 2015. Once you use a 2015, then you go to 2016 and this is offsetting all your other income sources. This can be pretty potent for you. Let’s just pretend like you didn’t say 1244 because that’s only relevant if we are liquidating the company. Does that even have a place here?
Jeff: Not really.
Toby: Two years. You can’t have two years of 1244 loans of the same company.
Jeff: Basically the stock needs to be considered worthless.
Toby: Yup. You can only do that once.
Jeff: Correct.
Toby: The S Corp is operating loss. The 1244 is from a separate C Corp that we closed. There we go. We got the asker out there responding. The S Corp you can carry back. The C Corp is just an ordinary loss that you would use to offset your income and then carry it forward.
Jeff: Here’s the ugly news on the S Corporations. If the S Corporation owns 1244 stock, it cannot pass that loss on to its shareholders.
Toby: Oh, he has two companies?
Jeff: Right. If the S Corporation owns the C Corporation, and C Corporation has 1244 loss, that S Corporation cannot pass that loss on. Partnerships work differently. Partnerships can pass it on to the partners but S Corps can now pass it on to the shareholders.
Toby: You’re such a nerdy […]
Jeff: I know.
Toby: Here are some of the questions. It says, “Regarding the CARES Act where there’s no penalty for IRA withdrawal up to $100,000. Do we report income over three years? Do we report 130 each year?” Joey, the answer is the IRS wants you to report 130 each year or $100,000 in year one.
Our position is that’s stupid, because they’re using the Katrina Act language, and they’re trying to apply that to the language that is under the CARES Act, which is different, but what’s the penalty? What they want you to do is recognize the income over three years and then file an amended return for two of those years.
Jeff: This was a part of that CARES Act that the IRS was really in a no-win situation. If you’re planning, you have three years to pay it back, but they want to start paying taxes on it in year one. If you do pay it back by year three, then you have to go back and amend year one return, year two return…
Toby: That’s dumb.
Jeff: If we do it the opposite way and say my intention is to repay this loan, there’s no tax. As long as I get it repaid by year three. If something happens and I don’t repay it, then I’m going to have to go back in year one and year two.
Toby: Basically, you have owed the tax in year one and would there be penalties and interest?
Jeff: There will probably be an underpayment penalty. Not the IRA penalty, just the underpayment penalty.
Toby: That’s just weird because Katrina is a trustee-to-trustee transfer, so it actually would be non-taxable from inception. I’ll just look at that and go, wait a second. I never had the income in the first place. You literally take the income away. How could there be an underpayment penalty?
Jeff: It would have been much better if the act had been written that. You have to pay it in year three.
Toby: I think the IRS is wacky tobacky. Remember, this is written guidance from the IRS. This isn’t the law, the law is the CARES Act, and it says ratably over three years, which God knows what that means. If they had wanted it spread out, they would have said you included pro-rata over the three years or you include the income in year one. They actually said that in Katrina with the act, which is why I think it’s just weird.
Somebody says, “What’s the best place to donate a car?” Any local charity that will take it, Kars4Kids is always on the radio, but I’m always assuming that if they’re advertising that most of the money is going to the overhead, so maybe somebody would want it if it’s a good car. I used to give them to local Rotaries and stuff like that, and they would auction them off. I buy them at auction. Some of you guys know I was a liquidator growing up, that’s where I learned business. We buy all these cars and sometimes you give them away as your basis in the car, but you’re giving them to cool places where they’re going to be, to make a bunch of money and I like that.
Somebody’s asking the same thing. “If I donate my car, how much can I deduct on my tax return?” Full market value, what do I do? Usually, you can do it if it’s $500, I don’t think you have to worry. If it’s more than $500, then I think they actually look at what you sold it for.
Jeff: There are two rules. The first one is the most common one and you’re going to deal with is what the nonprofit sold it for. That’s going to be your deduction. If it’s sold at an auction for $3000, they’re going to give you I think it’s a 1099-H or something like that. They’ll give you a tax form to tell you how much your deduction is. If they keep the vehicle, then you’re in weird ground where you have to figure out what the actual fair market value of the vehicle is and what they’re using that for.
Toby: “Can you tell me a couple of really good strategies to quickly recover the tax benefits from capital losses? I have a sizable amount of loss and I want to recover sooner than later.”
Jeff: What do you got Toby?
Toby: If you have capital losses, you have to have capital gains.
Jeff: These capital losses have been the bane. I saw it in 87 with the crash, in 2001, and again in 2007. People carrying hundreds of thousands of dollars of capital losses on their books that you got to have capital gain to get rid of it.
Toby: You got to have capital and here’s the thing. This is one thing that really irks me because I’ve had people that will have capital losses that they’re carrying forward. We had somebody seven figures of capital losses, and they had lots of company stock that had gone up in value and they were afraid to sell them because they’re like, I don’t want to pay any capital gains on it. I’m like, you are not going to because you have all this capital loss. Just sell your company and buy it right back.
Somebody always comes up and says what about the wash sale rule? The wash sale is for losses only. Here it is. Let’s say that I have $10 of capital loss and I bought a share of company X for $1 and now it’s worth $11. I have $10 of gain. Let’s say my loss was long-term capital loss. It doesn’t matter. It’s still capital loss, and let’s say that the company I bought, I bought just a month ago, and it’s getting to the end of the year and I say man, this is great.
If I don’t sell company X and then buy it right back, I am crazy because I could just sell company X for $11 buy it right back, I now have $10 a capital gain that I don’t have to pay tax on because I have $10 of capital loss.
Jeff: You know what? I’ve seen people become emotionally attached to securities, then it’s always made me great money and all, and that’s great. Sell it today, buyback tomorrow.
Toby: Literally not even today and tomorrow, you could just sell it and buy it right back. You don’t have to wait. I could wait 10 seconds to buy it right back. The best way to quickly recover tax benefits from capital loss is to make capital gains. If you do not, you’re going to lose it. It’s literally going to go away.
Jeff: I’ll throw one in that I’ve seen as people holding on to investment property. That’s not really making them any money but they could sell the property at a profit. Walk away with cash and not pay tax on it because they have these capital losses.
Toby: The other thing is, you just go find a relative and say I have a bunch of capital loss. If you’re never going to make capital gain, have them give you something that has capital gains. If Jeff gave it to me, I could sell it. I’m going to get your basis, and I could sell it. I could use it for my capital loss and I could give it back to you.
Jeff: We’re going to talk about 1031 exchanges a little later. That is also one time if you’re planning on 1031 but you got significant capital losses, don’t do the 1031.
Toby: You want to step-up your basis.
Jeff: Step-up your basis and get rid of some of that capital loss.
Toby: Let’s see. “If I become 59½ by 2022, in which I’m able to make a penalty-free withdrawal from my retirement plan, do I still have to repay the $100,000?” You’re penalty-free. You’re never going to pay the 10%. Marvin, let’s say you take $100,000 out of a traditional IRA, because it’s only for traditional clients, it’s not for your Roth. The only amount that we have to worry about is the actual tax on it. You will never have a penalty on that early withdrawal. It is exempt from the 10% penalty. If you choose to just pay the tax on it, you can. If you’re going to hit 59½, you didn’t pay the 10% penalty anyway. You pay the tax, so there’s absolutely no difference.
Jeff: If he actually takes the distribution in 2020, but it’s only 57½, is the IRS going to look at that as though that was a 2020 distribution that you did not put back into your IRA, and that will get hit with a penalty?
Toby: Nope, there’s no penalty whatsoever.
Jeff: That’s true.
Toby: You’re just going to have the income tax. You just spread the income tax over three years. Let’s say you’re not going to pay it back and you say I don’t want to pay it back. Let’s say you’ll take $90,000. You would pay $30,000 of income this year in 2020. You’d pay $30,000 of income in 2021, and you’d pay $30,000 of income in 2022, you would have zero 10% penalty for early withdrawal. It’s great.
Somebody says, “I am trying to decide on the PPP loan by Thursday. Wouldn’t just have to decide which is best for me.” Elliot, you’re waiting a little late, but it’s actually pretty easy. Basically, the reason that there’s an issue is because if you take a PPP loan, you lose the employee retention tax credit, which is up to $5000 per employee.
The way I look at it is do I really need the cash? If I do then take the PPP loan and survive. If I’m not dying or I won’t go out of business but it’s going to be painful, then I would say do I need these employees right now or am I just basically paying them glorified unemployment? Then I would look at the total benefits.
If I take $100,000 under PPP and I have 20 employees but I can’t get any of that hundred thousand forgiven or I get a small amount, let’s say I get $20,000 forgiven, then my total net benefit to me is $20,000 under the PPP. But if I have 20 employees that I’ll end up hiring by the end of the year, and I’ve been forced to shut down, my income has been slashed in half. I could get $5000 per employee, and if I’m going to hire them back at the end of the year, like during the holiday rush, I could get up to $100,000 of benefit. So $20,000 versus $100,000, I’m taking the $100,000. It really depends on your scenario.
Somebody says, “What if the intention is to pay it back? How is it tracked?” It’s actually a tax document. There’s a number for it, but they haven’t issued it yet. “Did these taxes, are they paid over a three year period?” If you pay it back, no. That’s the weird thing is they’re saying pay tax on it, but then you would go and amend your return. We’re looking at it saying I doubt I would ever even tell the IRS. We have to make sure that you don’t get hit with a penalty. I don’t see how you get hit with a penalty if it’s treated as a trustee to trustee transfer, but the IRS has been weird. I would argue that all day long.
Jeff: The only thing I could see could happen is if they decided that the 1099 are the reports distributions have to be issued each year and I don’t see that happening.
Toby: “What if the intention is to pay it back? Who […]?” Carlos, you should be a little bit confused because the IRS is confused. What I would do is if you need the money take it. Worst case scenario is next year in April you decide to recognize ⅓ of it as income on your 2020 return.
Jeff: A big part of this decision is if I take this money out, am I going to be able to put it back? If not am I willing to pay the tax on it?
Toby: I’m going to put it all back in that. I’m not going to tell anybody. That’s who I am.
Jeff: That’s why you roll.
Toby: I would argue that all day long. I think that the intent from Congress and I think Congress has made it clear is its liquidity. They’re giving you access to money. It doesn’t make sense to charge you tax on the money that they give you.
We always give a replay of this, by the way, guys, so you can always come back and watch; some people just got in late. Somebody asked, “My wife is 60. In 2019, she had $13,200 in social security income and $0 earned from income from work, and she contributed to her health savings account for 2019?”
Jeff: First off, she does have to have a high deductible health plan to be able to make contributions to her health savings account. I’m assuming you’re filing married jointly, filing jointly, so somebody is going to have to have earned income to make this reasonable. If both of you are just collecting social security. I actually feel like putting money into an HSA is a waste because there’s no deduction.
Toby: I don’t think you can. First off, you have to have earned income.
Jeff: Actually, you don’t have to have an income for an HSA.
Toby: You can just dump it in?
Jeff: You can just dump it in.
Toby: Or the husband could dump it in, but I believe that once you start taking social security that it’s either social security or Medicare that you’re not able to do. You can’t do HSA anymore.
Jeff: Oh, really?
Toby: Yeah, there is a weird rule. I want to go look it up. I’m pretty sure that if you have an HSA that you cannot do an HSA if you start receiving. Let’s see. Don’t need earned income for HSA. Jeff, you’re absolutely 100% right. Both Jeffs. Somebody’s […], but if you’re a husband and wife, then one spouse could contribute.
Jeff: To a family HSA.
Toby: Yup. Somebody says, “No, you can’t do an HSA after Medicare.”
Jeff: But she’s too young to collect Medicare.
Toby: She is too young to collect Medicare but she’s getting social security. What I would be doing is I’d be contributing to the husband’s income. When I first read this, I remember my brain was doing Roth and an HSA and I ran away from the computers. I wasn’t looking at it. The other one is you can make spousal Roth. This was just completely as an aside. I remember just walking away going hey, there’s that? Was that HSA or was it a Roth that he was talking about? I just remember, you can always do a spousal contribution if somebody has $0 earned income.
Some of you guys are like, hey, it’s only earned income for IRAs. Well, you don’t even have to have that if you have a spouse that can actually contribute on your behalf.
Jeff: Personally, for me, if there’s no tax benefit to it, I’m probably not doing it because HSA accounts tend to pay terrible earnings.
Toby: I still use it against me, though. I can make a Roth contribution. I see what you’re saying. I see what you’re saying, Cardona.
Jeff: Okay, Toby.
Toby: “What is considered a high deductible plan?”
Jeff: I cannot remember what it is right now. I want to say $6000 is considered a high deductible.
Toby: Let’s see. It changes every year, the high deductible limit right now, the plan deductible at least $1400 an individual and $2800 for a family. It can’t be more than $6750 for an individual or $13,500 for a family. It’s 2020. The IRS defines a high deductible health care plan, at least $1400 for an individual $2000 for a family and total yearly out-of-pocket expenses including deductibles, co-payments, coinsurance, coed insurance can’t be more than $6900 for an individual or $3800 for a family. You have to look at both, so you have to be somewhere within that realm.
Somebody says, “I would like clarification on the 401(k) withdrawal from CARES. You can actually do different ways to get money out of the individual. I thought HSA but you could do a family HSA.” Somebody is asking this. I don’t want to get into all this other stuff. I’m going to go round and round. We’re already at 4:00 so I want to knock out some of these questions.
“I started my own cruise agency mid-February. Sales were strong, and then COVID-19 arrived. Everything stopped and the industry experts believe it will now take six months to a year to rebound.” Actually, the bookings for cruises have never been higher. It’s weird, but I think it’s all getting pushed out.
Jeff: Caribbean’s are up 400%.
Toby: Yeah, so it’s freakish. Hopefully, you see some bounce back.
“I applied for the federal stimulus $10,000 funds but have not received a response.” That sounds like the EIDL plan (Economic Injury Disaster Loan) and you’re not going to get the $10,000 unless you have employees. You’d have to have 10 employees to get $10,000 of the advanced emergency grant. Again, the SBA imposed that rule. That’s not what Congress said.
Congress said you’re supposed to get this money within 72 hours. If you apply before April 16, you should have received your money by now. Just the emergency grant, they still haven’t done loans on hardly any of them.
Jeff: I believe the idea was still closed, everybody but the agriculture.
Toby: Agriculture is the only one they opened it up for so it’s absolutely a dumpster fire which you’ve probably heard me say that many times before. When they came out I said I don’t know how the SBA is going to do this. They’re not equipped. I thought they were going to outsource it but they didn’t, so they’re just not doing it.
Jeff: Nevada announced this morning that they’re going to bring in people who used to work in unemployment because they were so terribly far behind.
Toby: Right. Somebody says, “I applied before 04/15 and have not heard anything.” Carlos you should have received by now. Actually, we could probably go back to the dates. They are working through everybody who applied before the first CARES Act was done, so you should be hearing something anytime. The way you know, is they hit your credit, and then the next day or the day after you receive the funds and it’s based off the total number of employees.
Jeff: You’ll see an inquiry on your credit or?
Toby: You see, it’s Experian is who they’re using. Somebody says, “I have tried many times to fall for unemployment, no success.” That is so frustrating and just keep trying, because you’re going to be entitled, if you are operating as a sole proprietor. If you are operating as a corporation, then it depends on whether you are taking any salary. By the way, if you started your cruise agency before February 15, you’re eligible for EIDL, you’re eligible for PPP, but if it’s after that, I don’t think you’d be eligible.
That may be a part of the problem. If you’re a sole proprietor or if you were an employee of your S Corp, you’d be eligible for unemployment as long as the S Corp was actually paying in. I think there are two states where you’re not. Most states allow you to be eligible if you were paying state unemployment. The $1200 check you would go and you would look, there’s something on the IRS site, I forget what it’s called. I don’t know. What is that called?
Jeff: I cannot remember.
Toby: There’s something like check my payment or check my stimulus.
Jeff: If you look up at ‘where is my stimulus payment?’ you’ll probably find it. Even though you haven’t filed 2019, as long as you filed 2018 and met the income limitations, you should be getting the $1200.
Toby: Other than that, what I’d be looking at are grants at your local area and also with your local business association. Some are doing some emergency grants. I’d be talking to your bank. I doubt that you’re going to be qualified. You’re not going to be qualified under the mainstream program, and it’s really, really tough.
Other things I’d be doing is looking at alternative lenders. What’s going on right now is most banks are only concerned with PPP loans. That’s leaving a big void for lenders. If you go to some of the FinTech folks and some of the alternative lenders, we’re having success on some other types of loans. It’s expensive but there are ways to get access to funds if you use your personal credit, like a personal credit card in doing cash advances. I hate to tell you this, but they charge you 10%–15%. I wish we could be more helpful on that one.
“What is the best way to set up a real estate LLC if you are an investor that does both buy and hold, and flips?”
Jeff: My first thought on this was that I would split them. I would not have my buy and hold with my flips. I’d probably run flips through a C Corporation. Something that doesn’t pass it through to me, personally. I’ll keep my buy and hold either in an LLC, in my personal name, a partnership, or some passive entity.
Toby: You are absolutely right. What you need to do when you’re an investor is to separate it out so it goes on your personal tax return on your Schedule E. In your flips, you’re either going to be doing that through an S Corp, a C Corp, or an LLC taxed as an S Corp or C Corp.
I’m just going to make it really simple for you. This is how 99.9% of the time you do that because fix and flips are an active trader business. An investor is a flow-through that should go right onto your personal tax returns. It’s going to go on either page one if it’s a disregarded LLC, if you’re a Schedule E your page two if it’s going through a partnership. Yes, your S Corp will go through on a K-1 on page two of your Schedule E.
It all ends up if you’re an S Corp or a partnership or just disregarded on your return. The only time that you’re doing a C Corp for fix and flips is if you want to keep that income off of your return or you’re at $0 now. This is kind of fun, by the way, but that’s the way you do it.
For an asset protection standpoint, it works like a charm. From a tax standpoint, it’s the way you have to do it because if you’re mixing them, the IRS doesn’t know what you are. It’s more likely going to treat you as a trade or business which means you lose the ability to do installment sales. You lose the ability to do a 1031. You’ll end up with self-employment tax. You don’t get long-term capital gains. You just have some bad stuff that happens. I want to make sure that we separate those things out. One is a trader business. One is an investment. We keep those things completely separate.
I know I’m zipping through these guys. I know we have a lot of questions. We will get back to you, guys, asking.
Jeff: We’ve got eight hours until midnight; got a lot to get done.
Toby: Somebody says, “If I pull equity from the house, does the money need to go back into the house, or can I use it on another property or for other things?”
Jeff: You can use them for whatever you want. However, you’re probably talking about deducting the interest.
Toby: What goes on your Schedule A.
Jeff: Right. If you use it for something other than your house—buy, build, improve—it’s not going to be a mortgage interest on your principal residence. However, if you use it for investment property, something like that, you buy a rental property, you can deduct it over that investment property.
Toby: Yup. In fact, that’s one of the workarounds. If you’re pulling money out of your house, right now the Tax Cuts and Jobs Act limited your interest deduction to mortgage for acquisition indebtedness on a house which just means you used it on your house, your residence. You can write-off through your personal residence or a secondary residence.
You can write that off on your Schedule A as long as it exceeds your standard deduction. When you look at your Schedule A, you would never write-off your mortgage interest if your Schedule A is below the standard deduction. You’re always going to take whichever is higher. Then, they say that it has to be used for acquisition indebtedness, which means if I pull money out of my house and use it to pay for my kids’ college, I cannot write that off on my Schedule A.
What Jeff said is 100% accurate, which is if I pull that money out and I put it into an investment property and I paid for the kids’ college through some other funds, I can write off that money I pulled out and use for my kids. I didn’t use it for the investment property because it will be on your Schedule E. If you’re pulling it out of your house, what I would do is I would reach out to us and make sure that we are being as clear as possible.
I’m just going to answer somebody’s question about the loans. There are two types of loans under the SBA program that are time-critical. Number one is the PPP. Number two is the Economic Injury Disaster Loans. The PPPs are going full steam ahead right now. In fact, there’s probably another $120 billion waiting. People are sitting back on them because of the ability to write it off. People did not realize that they would not get forgiveness. They’re like oh man.
The PPPs were getting approvals for, in some cases, the same day. In some cases, two days. In some cases, it just depends on lenders. We apply it in multiple places because we never know who’s going to say yes, I’m taking more. We’re walking through it so many doors as we can to get that magic E trend number which is when somebody gets an approval with the SBA.
The EIDLs, we’ve been getting approvals on the ones applied before April 16th but we cannot get status from the SBA. We used to be able to and then they just shut it down. They sent emails out to everybody. If you did an EIDL (Economic Injury Disaster Loan), it […] right now. We cannot get to anybody with the SBA. You can call and if they’re going to say we don’t know, we have approvals from April. One that popped up from my head was April 7 that approved and had the loan approved, yet they have not sent out the email. What they’re doing is they’re working through the backlog and God knows how they’re doing.
We’ve had approvals for people going all the way up until the last day of the applications, before they shut it down which was April 16th. We have people that applied previously that have not been approved. So, you just got to watch your account. They’re going to hit your credit. They’re going to do it. They’re supposed to do it in 72 hours but they haven’t.
Somebody just went through it and looked at it and said, “They weren’t doing what they’re supposed to.” We knew that from the […] because they did as many loans in two weeks as they had in the previous 10 years combined.
Jeff: I think it was the GAO who did it.
Toby: GAO did it (Government Accountability Office). You’re absolutely, 100%, correct. They basically said, “SBA’s not getting guidance. The SBA is not doing what it’s supposed to. It’s not responding.” It’s all this stuff. What are we supposed to do? This is an organization that did tens of thousands of loans a year that’s now been forced to do tens of millions of loans. What do you expect? It wasn’t set up to function. They gave it more money but God knows trying to scale up in this economy right now, they’re probably in the same trouble as we are. You can’t get people to work because they’re all taking their unemployment when they get it. They’re afraid to go back to work because it took them so long to get unemployment in the first place. We really do have a ridiculous situation.
“Can we write off donations to our nonprofit even though we still haven’t been approved for that 501(c)(3) status yet?” The answer is yes. Your 501(c)(3) actually has 27 months to get approval on its application from the date it actually started the company or for when it first applied.
Jeff: From when they first send in their application.
Toby: You have plenty of time and yes, you can write-off your donation. It’s very commonplace for someone to set up their nonprofit at the end of the year. In fact, we had people that would actually set up the check, and actually get the application a month later. Since they set up their company and wrote the check to the charity, even before its bank account was opened before the end of the year, the IRS applies it to the year you wrote the check as long as it is set up within a few days. Literally, it’s two weeks so we never had a contest on it but they always say, “Yeah, we’re fine.”
“Is it too late to apply it for a PPP loan for a contract worker?” No, Jessy. It’s not too late and you want to jump on it as quickly as possible. What I will say is we’re having a ton of success with our lenders. We’re using some FinTechs, we’re using some local banks. You want to talk to us, we’re happy to help. The small amount goes to your local bank.
“I found 2019 taxes too late. The IRS used my 2018 which was too high. Can I call someone to see if they will use the 2019 return?” This is for the stimulus. You can still file the 2019. You will get the money more likely […] paper check. You will get it, it’ll be this summer. It’s kind of crazy.
Somebody says, “I missed the webinar on Saturday for Tax and Asset Protection Workshop. How can I watch the material again?” We did a one-day Tax and Asset Protection event on Saturday. If you want to get the replay, I have no problem with you guys giving it and sharing it out. We will be teaching one again in June. I just don’t know what date.
Actually, I think we’re going to be doing one that’s focused on residential assisted living. I’ll just be real clear with you guys. You probably want to get this material. Happy to share it out. I don’t think we offered it but we’ve been teaching a lot live. Actually, live stream events that are broadcasted out.
Somebody else says, “Is the stimulus check retroactive for people if they file it in 2019?” Yes. You guys asked almost the same question, two different people.
“How long will the stimulus check be available to the public?” Until the end of the year.
Jeff: Yeah. The plan is all the way through December 31st.
Toby: Yeah. If you guys want to get access to the Tax and Asset Protection event we just taught, Susan, if you’re out there, can you make yourself heard so we can have this conversation on the fly. If these guys want it, I have no problem sharing that out if you have it. If you have the link.
Susan: I do not have it as a link but they can email events@andersonadvisors.com. One of our event advisors will get the copy for them.
Toby: You guys can send it to events@andersonadvisors.com.
Here’s what’s going on with the live events, guys. We love teaching live. You guys know I’m a chatty cat. I’ll talk to anybody. They are putting one person for every six-foot table. They’re going to have to basically have a stadium to talk to a group of 100 people. It’s something ridiculous. We’ll make sure that we can get it out to you guys. Hey, Patty, if you can just send it out to just everybody, I don’t know how to do it. I’m not smart enough.
“I own a dental practice. I am purchasing a new commercial building through a new LLC to add a new location and then rent it back to the business which operates as an S Corp,” which is perfect. “The building purchase will be cheaper than the rehab. With the new CARES Act changes, what are the best tax benefits to this situation?” First off, if you buy a property and you qualify for improvement, you can write that off over 15 years or you could accelerate that depreciation by making a 3115 election. We would treat it as bonus depreciation. We’ll write it all in year one.
Here’s where it’s beneficial to the S Corp. If you are self-renting, you can treat your dental practice and the property as one activity. It’s called grouping. You group the active trader business with the rental property to it. You can take the losses from your rental property and use it to offset your S corporation income.
This is the exception to the rule. There are basically two exceptions. Exception number one is being a real estate professional. Exception number two is grouping an active business that is self-renting. So long as the ownership is identical and you’re renting it back to your own active trade or business, then they will group your rental activity as that trade or business and we will bring it all in.
In order to make this work, you’re going to need to do cost segregation. I think you have to. Although, I suppose you could just do the rehab that qualifies the improvement of property and treat it as 15-year property, then do an accounting change. But I would do the cost segregation on it.
Jeff: Another way to do this is to have the dental practice actually do the rehabbing and the improvements.
Toby: Yes, actually. I didn’t think about that. You have the S corp.
Somebody’s saying this idea of work with mixed-use property to operate their S corp with one of the available commercial spaces. What if it’s a partial? Then the grouping might be for that portion of the building. Usually, you have to have the whole thing on.
Jeff: Yeah. You’re going to end up having to segregate the part you use from everything else.
Toby: Yeah. What you might end up doing again is getting to rent the whole thing and sublet out a portion of it. It sounds stupid but it might be worth it, so lend to someone you should talk about. Anyway, you’re going to be able to write this off. This is going to be a huge benefit to you, by the way. To anybody out there, you can substitute in dental practice for any sort of business. When you rent to yourself, you’re going to get a huge first-year benefit. The number will be on a million-dollar building. You’re talking about a $300,000 loss in year one on average by doing cost segregation. You can absolutely get a nice big fat tax benefit.
If you want good people for cost segs, I have a few folks I can send you to. You probably heard me, I just did a webinar with one and then Eric over Cost Seg Authority. There are some really good folks we can send you to. It depends on where you’re located. If you reach out to me and you say this is where I’m located, I could probably tie you with somebody who knows what they’re doing.
“Is it too late to do a cost seg in the fourth year going in the building?” No, it is not. It’s whatever year you decide to do the cost seg and then you change your accounting. I don’t want to get too deep in this because I know we’re going long, but I always use the carpet as an example. You have carpet and you have the structure of the building. The carpet isn’t going to last 39 years. The building is going to last 39 years. If I seg it, I can break out my carpet, the electric system, the lights, the panels, the ceilings, the cabinets, and the walls. I can break all those out and write those all off right away. You can write that off and you can accelerate that depreciation in one year.
You can absolutely write that off either over 5, 7, or 15 years or you can just choose to do bonus depreciation on any of those items. I can state my five-year property. I can write it all this year. Or my 15-year property, I can write it all of this year, or I can spread it out for 15 years. You get to decide. Once you have those numbers, you’ll be able to sit down and decide whether it’s beneficial.
Somebody says, “Clarifying, just group […] ownership of the building and ownership of the active businesses are identical?” Yes, that has to be the same ownership.
“Will there be a penalty forgiveness tax for paying an employee more than the average 2019 salary calculated on the PPP because of overtime or to catch up with pension plan payments, et cetera?”
Jeff: The answer’s no. There’s no penalty. It can actually help in your forgiveness calculation.
Toby: They say that you can’t pay them more than the average.
Jeff: No, was that just for owners? I would say that was directed to owners.
Toby: It was directed directly at sole proprietors. The question was, “Could I pay somebody in advance? Could I double up my payment?” They said that it has to be the average. I don’t know how they’re going to know that.
Jeff: Yeah. You can’t prepay anything.
Toby: Yeah, but is there a penalty? No, there is no penalty. I’ll probably use their average amounts to pay to use my forgiveness amounts. Now, it’s up to you to do the certification. I haven’t even seen it.
Jeff: I’m pretty sure that this certification is going to go through the lenders. We don’t know exactly what SBA’s going to tell them that they have to collect. I think we have another question. It talks about what they’re looking at for forgiveness.
Toby: I’m going to show you guys the exact rules, so it’s going to come out here in a little bit.
Here’s another one. This is a live question. “I’ve applied for an EIDL loan. […] was issued a confirmation number on the 8th of April and I haven’t heard anything. Every time I call the SBA, they keep telling me that as long as I haven’t got a denial letter, I am good. They’re just working through the backlog. Is there any way to find out what my status is?”
[…], you are in the same boat as everybody else. At least, you got to apply for it. They haven’t even opened it up for the second tranche which is six times as big as the first tranche. You’re dealing with the SBA that is just overwhelmed. They do not have enough bodies. They need to outsource this.
Write to your Congressman. I’m not joking, guys. Write your Congressperson, write your local SBA office, and say, “Will you guys please kick this out to the lending institutions?” Pay somebody. I’ll actually pay it to a FinTech company and let them process it like a PayPal or somebody else that has systems that they can just program it out and get that funds out because it’s ridiculous how long this has been taking.
You’re talking about loans that were applied for a month and a half have not been approved. It’s not that money. Come on, this is ridiculous. It’s a fraction of what the PPP was able to issue when you went to the banks. In Congress, they didn’t make it better the second time but they’re dumping more money on the problem. You actually need it.
Again, I feel for you. We’re on the same boat. We’re looking for all sorts of other funds. We do that too.
Somebody says, “My second home was free and clear. If I rented it to my LLC, any fixed expense can be deducted, right? Also, can I get home equity out on the second home for reinvestment?” This sounds like somebody has a second house and may want to rent it so they can write off the expenses out of his personal property if it’s a second home. Renting it to yourself doesn’t count. I’ll make that easy.
Rent it to third parties, rent it for more than 14 days. What would it be if you rent it from more than 14? Then, you’ll get at least an apportionment on the expenses. You start dividing it up between personal and by the number of days that you use it.
Somebody says, “If the money from a 401(k) is taken out during the CARES Act, isn’t that a loss due to the stock market?” No, Grace. When you have money loss on a retirement plan, it doesn’t do you any good. What you could do, though, is convert that into a Roth. If you have money on a 401(k) and you have control on it, you may want to convert that on a Roth 401(k) inside your plan and roll that out to a Roth IRA. Just convert it. That way, you’ll pay tax on a reduced amount but you don’t get to write off the loss. I’m just giving you a little way to do it.
Somebody says, “If you purchase vacant unimproved land with the intent to build or develop homes for sale or rent within one to three years, what tax advantages can be taken? Are the LLC business expenses for it, as well as interest or taxes from the loan, able to be included on a Schedule E like a normal rent property?”
Jeff: This is land that is intended to be developed, not rented. It will not go on Schedule E. Your LLC business expenses are always deductible. However, some of these other expenses like interest, taxes on the property, you really have to make a choice of where you’re going to apply those. You can elect to capitalize some of the cost of the land which is pretty prevalent, or you can elect to deduct them through the LLC. Interest is fine. The problem comes with taxes. It’s what we call a separately stated item. It goes on Schedule A along with any other taxes you pay and maybe limited due to the $10,000 limitation on taxes.
Toby: If you’re going to develop land which do you just want to do? A corp?
Jeff: Yeah, I probably would. I will probably be capitalizing all these expenses that are directly related to the land.
Toby: When he says capitalize, it means you don’t get to deduct it now. When you develop and sell, it’s going to increase your basis. You’re going to get to write it off by not paying tax on the gain, but it’s going to be ordinary income because this is not an investment. This is actually, when you start developing, you’re going to the realm of an active trader business.
Jeff: Correct.
Toby: I’d be looking at it. I agree with Jeff. This is not when you say with the intent to build, develop, for sale, that’s dealer activity. That is not investment.
Somebody says, “What if the intent is to rent it? I have a rental plan and I’m just renting it out or I’m just going to build something on it and rent it.”
Jeff: Here’s the bad news here. It goes on Schedule E but it comes back right off. Rental of anything that is less than 60% depreciable is considered portfolio income, not rental income.
Toby: Even offset the rents you’re receiving?
Jeff: No, I don’t think it will because it’s not considered passive anymore.
Toby: That’s why people don’t usually rent land. There you go. Don’t do that.
Jeff: Here’s the extra bad news.
Toby: What if we built on it? If we built on it then we can depreciate the item that […]?
Jeff: Let’s say that he’s running out this vacant land. Somebody put a cell tower up or something. He makes income. That income is a portfolio income. He loses money on this rental, it’s passive loss. It becomes the worst of both worlds. You’re talking about putting the building up on it. As long as we can reach that 40% depreciation amount, the 40% of the value is in depreciable property. Then, it changes its character back to rental.
Toby: You’re going to get it as long as you build something on it, you can go around rental property.
Jeff: Correct.
Toby: What Jeff is saying in non-tax English is built on that property. Don’t just leave it as land because when it’s portfolio income, it’s not.
Jeff: Like I said it can offset any of your passive losses.
Toby: Right, what Jeff said.
All right. “I own a C Corp registered in Delaware with an extension in, it’s […] in California. I’m in the process of moving to Austin. I would like to operate from Texas. What are the steps I need for moving from C Corp to Texas? Can you […]?” No. What I’ll be doing is you need to keep it in Delaware. What you do is in California you’d have to do two things. You’re going to file a final tax return with the franchise tax board as soon as you’re out of there, so that they don’t come looking for you and five years trying to hit you with an $800 a year franchise tax because that’s what they will do, unless you actually cancel with them. They will follow you around forever even if you’re not there because they said, “Hey, you registered here once. You must be doing this every year.” It’s the stupidest thing.
The second thing that you’re going to do is cancel it with California, then you can register in Texas. If you want to just set it up in Texas, there’s two ways to do it. Usually, you just redomesticate it so you’re going to convert it to Texas if Texas has that statute—I don’t know at the top of my head—or you set up a new C Corp in Texas and you transfer your shares of Delaware into Texas and then you do a reverse merger where you merge the Delaware into the Texas. The easiest is probably just to keep it in Delaware and register it as doing business in Texas is probably the easiest.
“I’m in my house for more than 25 years. It’s time to make repairs. Can I write off repairs in my house?” No, you can’t write-off the repairs expense on personal property, so you’re not going to get any benefit from it.
“LLC owns mortgage notes. Can the LLC file for EIDL to recoup nonpayment loss?” Any LLC can file that was in business on February 15th, can apply for an EIDL. You just can’t do it right now because it’s shut down because when they ran out of money the first time they closed it and they haven’t reopened. But yes, you can still get it.
The way that they calculate the EIDL amount—I’ll just tell you what we’ve seen—number one, they’ll give you $1000 if you don’t have employees or if you have just one employee they give you $1000. Under the emergency grant they’ll give you $1000 per employee up to $10,000 as an emergency grant. If you get a PPP, it comes off the forgiveness portion there. There’s some question as to how great it is, but if all you’re doing is the EIDL loan, that’s good.
Then they’re going to give you one half of your gross profit. Not your gross income, but your income minus your cost of goods sold and that’s what we’ve seen. They’ll give you 50% so that was on the loans that we’ve actually had done and seen, which, if they’re trying to work their way through the backlog, it is hit or miss and it is few and far between.
Somebody says, “I heard South Dakota is better protection than Wyoming.” You heard wrong. South Dakota is great for asset protection trust. They are ranked number two on the power rankings. They are almost as good as Nevada simply because Nevada, the asset protection trust protects you from child support and alimony. It’s the only state to do so. Otherwise, South Dakota is great. But as far as protection with LLCs, Wyoming and Nevada have identical statutes.
Wyoming doesn’t list your name, just the incorporator and Nevada lets you use the nominee. Wyoming is cheaper. Nevada is more expensive by a few hundred dollars a year, so we are right now giving the push to Wyoming, but we like both Wyoming and Nevada. That’s about as good as you can get and if you want a bazooka, you get a Nevada asset protection trust but that again is a bazooka and usually, you don’t necessarily need that.
They’re a little expensive to operate and they’re a little clunky. If you’re just running a business and you just want a really good asset protection, use an LLC. Wyoming is worth its weight in gold.
These are more questions being asked online. I’m just going to answer this real quick. “It was verified on the idea of receiving a grant, do I need to reapply?” No. They are still working through […] and up getting to you and they’ll give you your loan. I had one. It’s a half-million-dollar loan that’s been approved. We’ve been waiting for the paperwork forever and I’ve talked to them. Again, we work on behalf of a lot of clients and it’s just […] your head against the wall and they said they’ll send you the email out when it gets to you.
I had a client get half a million dollars and there’s no rhyme nor reason they were done within days of each other. It’s just the SBA. I wish I could tell you that I had better news for you. We’ve done quite literally almost a thousand of these in units all over the place. Just sit back and watch your email. I would type in sba.gov and see if you’ve got anything in your spam, too, because what they do is they email you a long paperwork and their verification is weak. It just freaks me out that they’re giving money out without verifying even the number of employees. They’ll just prosecute you if you lie so it’s kind of weird.
“Can a rental loss on Schedule E carryover be deducted by a capital gain from a property sale in the future? Or deducted by any other passive income?” No. When you sell a property, that’s disposal of a business asset and it’s an ordinary loss so you don’t have to worry about that. That ordinary loss will offset your other income. If you have capital gain, will the passive loss offset that capital gain?
Jeff: Once you sell that property, the passive loss is no longer suspended and it gets used again.
Toby: But you can use it against anything.
Jeff: Yeah, it becomes nonpassive.
Toby: Then it becomes an ordinary loss to offset your W-2 […].
Jeff: Also, any gain on the sale of that asset is also considered passive. You could use any gain from the sale that asset offset other passive loss.
Toby: So the answer is yes.
“I used to work for New York State and had a 457(b). I left the state job five years ago. Is there a way to withdraw all of the 457 funds?” It’s a state fund, right? “I don’t want the 457(b) amount to count towards $100,000.”
Jeff: I would think if you’re no longer employed by the state, you should have the right to withdraw that money.
Toby: And I would roll that into a 401(k). I’ll just be straight with you because you could borrow out $100,000 and pay it back over six years and I could take a $100,000 out that I paid back in three years. One is an early withdrawal and one is a loan. I’ll just tell you that’s what I ‘d be doing if I was you, the 403(b).
Jeff: That’s a charitable.
Toby: Is that for charity?
Jeff: That’s charitable.
Toby: I guess, yeah. 403(b) is a charitable so it’s up to your plan administrator if they’re going to let you take the $100,000 early out and it’s up to your plan administrator if they’re going to let you do a $100,000 loan. If you roll you’re 457(b) from a past employer into a 401(k), you are the administrator.
Jeff: And not every retirement plan has a loan provision set up in it so you really need to talk to your plan administrator.
Toby: The numbers we’ve had back from the administrator’s associations for these big groups are about 60% of the plans are allowing you to do the early withdrawal and about 60% allowing you to do the $100,000 loan. But again, if you just roll it into your own, you don’t have to.
“Can cost segregation of a new property count against the profit of selling other assets that failed through a 1031 exchange?” The answer is I have a 1031 exchange. If it fails, then just have capital gains depreciation.
Jeff: Right, it’s like it never happened.
Toby: Then if I have cost segregation then that’s going to create a passive loss. If you’re a real estate professional, I know the answer is yes, but they’d still be able to do anything on cost seg, on capital?
Jeff: It could possibly change your gains and losses.
Toby: They had a failed 1031 exchange, they’re going to have a capital gain, and they’re going to have depreciation recapture.
Jeff: But if they did a cost seg on the old property, they could have pulled some of that out into 1245 property.
Toby: I think they’re doing after. That’s when you email it in and let’s get some facts.
Jeff: If it’s an after, you may need them to revise your numbers.
Toby: Somebody else says, “Does early withdraw apply to the TSP accounts?” They still won’t tell us, so the first savings plans said that they’re going to but they said they’re going to get written guidance but they haven’t. At least I looked yesterday and I hadn’t seen it. They’ve been saying that since March 27th.
Jeff: I think we’re going to need guidance from TSP itself of what they’re going to allow.
Toby: Yup, and that’s what they keep saying they’re going to do. It has nothing to do with the CARES Act. It has nothing to do with anybody other than TSP. They keep saying they’re going to decide.
Jeff: We’ll get back to you.
Toby: They’re like, “Oh, just hang on for a second,” then they wait […]. “If I pay my home personal internet bill with a personal credit card and then pay the personal credit card with a business checking account, is this considered piercing the corporate veil?” The answer is…
Jeff: Not really. No. I would actually do this just a little differently. I would have the company reimburse me for my expenses on my credit card rather than paying the bills directly.
Toby: That’s easier but I think that it’s not going to hurt you to have the company. As long as you’re giving an expense report and it says, “Hey, could you pay this?” then yes.
“If my C Corp reimburses for vehicle mileage, how do I then do my personal and C Corp taxes?” If you have an accountable plan which you will have if you have a C corp through Anderson then it is 25 CFR 162-2, I believe, that’s where you have an accountable plan. Then you don’t have to report it on your personal so it’s zero under a 1040 and it says Business Expense under your 1120. 1120 is just an ordinary and unnecessary 162 expense.
Jeff: My C Corp gives me $100 from my vehicle mileage. C Corp deducts $100. I don’t have anything to my income.
Toby: It doesn’t do anything. It’s non […] that’s why we like it.
Somebody says, “I’m using a series LLC. I’m a passive investor in apartments, so Series A has apartment 1, B has apartment 2. Each series has its own EIN. It’s a single-member LLC,” so there is no K-1. I’m just going to say that. That’s what I saw originally. If it’s a single member, then there is no K-1. The fact that it’s using your personal, I would still get an EIN but it’s not going to impact you at all.
“My question is if a renter tries to sue me, would a good lawyer reach into these LLCs because the government associated my Social Security?” No. I’ll make it really simple for you. That’s not going to be important at all. The question is going to be, did you pay for the series? Did you keep compliant? Did you keep separate books and records? Did you co-mingle?
“Can I write off passive loss with any taxable income under the CARES Act?”
Jeff: No. The rules for passive loss haven’t changed since 1987, so there are a couple of things we talked about in the past. The $25,000 rule for active real estate rentals under certain AGI. The real estate professional has different rules, but the CARES Act did not change any of that.
Toby: I’m just going to say, if you’re under $100,000 W-2, then you can do this $25,000 and it phases out in the next $50,000. If you’re $125,000, you’re going to get half of it. You’re going to get $12,500 passive loss against your active income or what’s called a real estate professional. Otherwise, no. Real estate passive losses do not offset.
Jeff: You have to have passive gains to offset passive losses.
Toby: Yup and stock is capital so it doesn’t work or W-2 is active. Keep paying attention to us.
“What is the PPP forgiveness criteria?” A lot of you guys were asking about this. This is it, over the eight weeks. It’s eight weeks after you get the money and they give you that money, you have eight weeks from that day and it’s whatever you spend on payroll cost, interest on any covered mortgages, so it’s the interest for that period so you can’t prepay a year but it’s payroll cost and any payment to cover rent or utilities.
They add all that up and payroll cost (by the way) will include health and retirement benefits that are paid. Employers pay retirement benefits and help healthcare costs. The only thing that is capped is up to $100,000 annual wages. You get up to $8333 per month so you multiply that by 2, plus any retirement plan contributions by the employer, plus any healthcare group plans by the employer. You add all that up, then you reduce it by this proportionality. The average number of full-time equivalent employees.
Jeff: Which they still not have defined. […] it’s going to be 40 hours, but it could be anywhere between 32 and 40.
Toby: I think they’ve […].
Jeff: Last I saw there was no guidance.
Toby: It’s in the FAQ where they said the equivalence, but I believe I’m maybe stretching it, if you have a 30-hour employee that is full-time, and then if you have two employees doing…
Jeff: Twenty hours each I would assume that would also be…
Toby: Full-time. I think that’s what they said but I could be completely wrong. I may be thinking of something else, but I believe they did. Then the FBA created this weird 75/25 split with 75 being salary, 25 being non-salary, and Congress is ticked about it.
“Can I use 100% of my PPP loan forgiveness towards payroll?” Yes. In order to get 100%, you have to get 100% of the number of full-time equivalent employees so you need to hire people before June 30th or you need to try to hire back your staff with a written offer to come back so if they reject you, they still get counted as an employee.
“Even before this whole virus situation hit, we have a few tenants who skipped town early on their lease while owing back rent. The total amount in this case, for example, is two months.” I’ll make this really easy. “What do we have to do in order to claim this as a loss?” You’ll have to recognize it as income, which you’re not going to do. Either way, then you’d say the loss minus the loss will equal zero or you just don’t recognize it as income, in which case you don’t get the loss. It gets you to zero too.
I’ll make that really easy. You don’t get a loss. You only get to write off the actual hard expenses associated with that so it sucks when a tenant skips town on rent, you don’t get to recognize it as income and you don’t get to write off the loss.
Somebody says, “The maximum forgiveness under PPP?” This is clarification on this one. “How is forgiveness for the owner’s salary?” It’s up to $100,000 a year divided by 12 so it’s $8333, which is the maximum amount for months. You have two months of that so you’re going to be right around $16,666, whatever that is.
Jeff: Yeah. The owner is treated like any other employee for the PPP.
Toby: If you’re a sole proprietor, then it’s whatever you’ve been taking out over the last 12 months prior to the end of January. It will be January going back to February or if you just set it up, it will be January and February on average.
“My mom is 83 and when she dies, she wants to leave her house to me and my three siblings. She currently has about $100,000 in equity.” Basically you sell the house, we’re not worried about the tax. Actually, when she passes, the basis is going to step-up. You’re not going to owe any tax so you’re going to get pretty close to the $100,000. If you use a realtor, you’re probably going to be paying somewhere in the neighborhood of $8000 total so you get $92,000 divided by 4, whatever that is, so $24,000 is about right.
If you transfer it to a revocable trust, you will avoid probate. If your brother and she are their trustees, she would be the master trustee and she’s going to have a co-trustee that she could toss to your brother whatever she wants. It’s not going to reduce tax liabilities other than she’s going to step-up in basis. Her house, if she’s living in it to the last five years, would have the big exclusion that $250,000 for her if she’s single.
Jeff: But only if she’s still alive when it’s sold.
Toby: If she sells it right after, don’t they allow you?
Jeff: No because you get to step-up in basis.
Toby: Oh, that’s right. Your step-up in basis. That is immaterial. Step-up in basis just means if she bought it for $10,000 and it’s worth a million, you pay zero tax because the new basis is a million dollars. If you sell it after she passes, you have zero tax.
Jeff: Here’s what you don’t want to do because my mom did it, put it in an irrevocable trust.
Toby: Yeah, don’t do that.
Jeff: Because you’re getting no step-up in basis. You get no $500,000 exclusion. Zilch.
Toby: Don’t do that. The other thing you don’t do is give your kids the property right before you pass.
Jeff: No.
Toby: Because they get your basis and we actually saw that happen, too. When everybody is all worried up, all the estate taxes are going to come back. A nice gentleman gave his kids the entity that held a building and completely lost the step-up in basis. Kids were like, “Why did the accountant do that?” I said, “Because they wanted to make money out of dad.” Freaked up, which only counts out there you can identify with. The sky was falling and they did something that caused their kids a lot of money. It’s not actionable. You’re not going to even sue the guy over, but you’re still looking at it going. You were worried about the estate tax and at that time, I think that he passed it in the year where there wasn’t even on the estate tax. It’s like…
Jeff: 2010.
Toby: 2010. That’s about it. All right. “Purchased rental property. Did a cost segregation,” very smart. “Property appreciated greatly. Did a 1031 exchange after 10 years. Wouldn’t the fair market value of the 1045 property have to separate out and the gain recapture as ordinary income?” You would think except because the 1031 does not apply to 1045—
Jeff: 1245.
Toby: It’s 1045.
Jeff: No, it’s 1245 for property.
Toby: You know what? You’re absolutely 100% right. […]
Jeff: No, I saw the question come in. That’s why […].
Toby: What you’re worried about is otherwise everything else is 1250 property that’s regular. That’s the structure itself and that is okay. We’re going to give it a smiley face for a 1031 and 1245 isn’t as negative, but when you’re talking about personal property and a 1031 exchange, we use the state definition which is anything added to a property is not considered personal property so you don’t have to worry about it. It’s going to be included in your 1031 exchange unless it’s like some furniture sitting around.
Jeff: Yeah. Here’s the thing about 1245 recapture. 1245 recapture is limited to your gain on that 1245 property. Most of the 1245 property is going to be worth close to zero, so you’re not going to have any gain on that 1245 property. Nobody is actually paying you for it.
Toby: No worries, unless you held it for 10 years. So, here’s the concern. Let’s say I cost seg and wrote off 100% of my 15-year property. So in theory, there’s ⅓ of it left, right? You think that I’m not going to be able to 1031 exchange. Yes, you are because 1245 property is not the same definition.
The definition under 1031 says let’s look at the state. The state does not have a definition of 1245. They have the definition of personal property that is attached to a structure is the structure. If you would damage it to remove it, it’s part of the structure. Then we don’t have to care about it. That’s a tricky one. I love it when somebody comes in and has those types of questions because it’s like those weird little nuances.
Somebody says, “Wouldn’t they want to create a revocable trust to avoid the probate and the time delay?” Yes, Jake. We do the revocable trust. We do this. This is okay, smiley face. But it doesn’t do anything for the taxes at all. We don’t care about it. We are not going to give it away early.
Somebody says, “What about a Lady Bird Deed?” Use for the house before the parent passes, you’d still lose the step-up. Some people do the Lady Bird Deed which is they’re allowed to stay in it then it goes to somebody else.
Jeff: I’m not familiar with that.
Toby: There are two different types of deeds. I want to make sure I’m not forgetting it. It’s almost paid on death. There’s a Lady Bird where they have the right to stay in it and it’s excluded for medicare purposes. Then there’s another one where it’s a, you have to look it up because […].
Jeff: I would think of the QPRT Trust though, the Qualified Principal Residence Trust.
Toby: Yup, it’s a life estate deed where they get to stay in it. I don’t do that stuff and if you do a revocable trust, don’t you file a tax return for it every year? No. You don’t even have to because it’s a guarantor trust so it’s you until somebody passes.
You guys have really stuck in there. I’m sorry. I knew that I grabbed too many but you guys are troopers. Always feel free to jump into our podcast. I feel bad for Susan and Patty because they have to sit through this. Transfer on debt deed or life estate, that’s a Lady Bird. We’re not going to keep worrying about that. Use a revocable trust.
All right. Replays in your Platinum Portal. We always send them out or go to our iTunes and grab our podcast. Google Play, we break this out. You can listen to them. You can suggest […]. One of these days, we’re going to start doing a video, we have a room for it.
Jeff: I need to get a new picture for our front page.
Toby: And look at that. You can always jump us on social media. Send your questions to taxtuesday@andersonadvisors.com. Visit us at andersonadvisors.com. Stay safe. Call people that are in quarantine. Make sure that they have someone to talk to. All right, guys. Thanks. Be safe and have a good one guys. Let’s all make sure that we’re helping the small businesses that start to reopen because they took the brunt of this. Hopefully, we get through this. Hopefully, we get some sanity and you guys will be able to do okay. Everybody’s really feeling it so do nice to all the little business and if you need to get your nails done, Jeff, usually gets a pedicure and a mani and does business with these folks because they just got leveled by most of the states.
We won’t talk about the constitutionality of shutting somebody down, but I know we all need to get through all of this. Just help everybody that you can. All right, guys. Thanks.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
Additional Resources:
- Claim your FREE Strategy Session, and learn how Anderson Advisors can protect your assets.
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- For all things investing, check out the Infinity Investing YouTube channel
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates
