Like all things in this world, it helps to know a few of the rules. Toby Mathis and Jeff Webb of Anderson Advisors are here to help. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- What rate am I taxed at for my LLC? It depends; you choose how it will be taxed on SS-4
- Can I buy personal items or pay off personal bills with my business credit card? Yes, but the entity type dictates how it’s taxed
- What investment opportunities can be considered that have no tax liability, minimum risk, and at least a 10% annual return? Doesn’t exist; try investment real estate, IUL insurance
- Can I deduct real estate education expenses, even though I don’t have any profits? Yes, it’s not necessarily about profits, but how long you’ve been in the business
- Can my LLC create its own self-directed IRA? No, vice versa; self-directed IRA would create LLC, or it’s a prohibited transaction
- What constitutes being a real estate professional? 750 hours of professional time in real estate and material participation in real estate activities
- Do you have to be a real estate professional to do a cost segregation at tax time? No, but if you have losses in excess of your real estate income, then be a real estate professional to offset your other income and pay less in taxes
- If I were to have an online health coaching business where people can complete purchase transactions through an automated Website, how will the income produced be taxed? It’s not always ordinary income; depends on what you’re selling
- How old does a child have to be before putting the business in their name? 18 years old
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Resources
Index Universal Life (IUL) Insurance
Uniform Gift to Minors Act (UGMA)
Form 5695 for Solar Tax Credit
Form 4562 – Depreciation and Amortization
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript:
Toby: Hey, guys. Welcome to Tax Tuesdays. This is Toby Mathis, and…
Jeff: Jeff Webb.
Toby: Going to kick off another Tax Tuesday, so happy Tuesday to everybody. There’s a few hellos to Jerry, Sherry, to folks out there. If you have not been a part of a Tax Tuesday, then I’ll just give you the real idea, bringing tax knowledge to the masses. This is educational, it’s meant to be fast and furious. We usually answer about 200 questions. There’s a lot of questions that were going back and forth on. I tried to grab the questions that are relevant to the questions that I’m going to be answering first off and then we’ll get into certain activities.
Some people ask very personal questions. I tend to say kick those via the Tax Tuesday Anderson advisers because I don’t want to breach your confidentiality or I don’t want to give you a really bad answer where it may be a negative response. I usually say just email those in. If you need a detailed response, become a platinum client. It’s very inexpensive, or a tax client. Platinum is a whopping $35 a month. You can ask all the questions if you like. This is fast, fun, and educational. Like all things in this world, it helps to know a few of the rules and that’s what we’re going over.
If you want to follow us on Youtube and Facebook, it’s really easy. Go to andersonadvisers.com/ either facebook or youtube. We have lots and lots of videos, we put out lots of content that were constantly putting it out.
I see a question that already came up. Michelle, I’ll try to answer your question before we’re out. Opening questions, we have a whole bunch of questions that we’re going to answer today. Actually, I have four pages of these. We’re going to answer, “What rate I’m taxed for my LLC?” That’s kind of weird, but, “What’s my tax rate for my LLC?” “Can I buy personal items or pay off personal bills with my business credit card?” “Among the following expenses start up operation inventory capital, which business entity is best to deduct the most in order to save on taxes for nearly formed business?” We’ll answer that.
“What investment opportunities can be considered that have no tax liability, minimum risk, and at least 10% annual return.” If we could give you that answer, we’d all be gazillionaires, but we can give you some stuff that’s statistically is close but yeah, no risk, 10% at least, no tax. You’ve got to be kidding me, right? Well, there are some things that are close. Let me tell you some great things now. There’s nothing out there like that, but there’s some things close.
“Can I add the carrying cost, interest, insurance, utilities, to the basis of a property that is flipped?” “Can I deduct real estate education expenses even though I don’t have any profits?” “What happens if you extended but didn’t pay your estimated tax by April 15th?” Oh my God. I’m just kidding. I think that’s funny. Have they come to your home yet? No, I’m just kidding.
Jeff: Yeah. Don’t scare them any worse than they already are.
Toby: Do you have knocking at midnight? It’s not Freddy Krueger, it’s the IRS. “I had a real estate school for 15 years and had bought and sold properties. Can I write off the training expenses incurred since I have a strong background in training academy and made investments?” I’m going to assume that’s real estate training, but we’ll answer that one.
“I have two 529 plans, I would like to cash out or reallocate. The funds were not used for college. How do I do this?” Let’s see. “Can a corporation or LLC have a self-directed Roth 401K and hold foreign currency as an option?” We’ll answer that. We have a lot of these guys. This is going to be a nice long one. I know we’re going to have lots of questions because you guys are already asking a whole bunch of questions. My page is already filling up.
“I am 73 and have a self-directed IRA in a brokerage account. I have lots of real estate loses. Can I roll part of my IRA into my Roth, and is there a limit to how much I can roll over?” We’ll answer that. “If I buy a mobile home park, are the tax benefits the same as buying a residential stick brick property with the depreciation?” We’ll go on to that for sure. “If I were to have an online health coaching business where people can complete purchase transactions through an automated website, how will the income produced be taxed?” We’ll go for that. Let’s just jump right on in.
“What rate am I taxed at for my LLC?” The answer is, it depends. Here is how it works. An LLC does not exist for tax purposes. It is a state entity. You choose how it will be taxed, and you choose that on your SS form. It is actually when you’re requesting your employer identification. What rate? It is going to depend on what you pick there. If it is a disregarded entity, it will be taxed at the owner’s tax rate. So, if it’s you, then the profit or loss will flow onto your personal return. If it is a corporation, it will go on to the corporation’s return. If it’s an S Corp, it will flow down to the shareholders. If it is the C Corp, it will be taxed at the C Corp level, assuming that it’s not expensed out through other means. If it is a partnership, then the LLC will file a partnership return and hand K-1s which is the allocation of income or loss to each partner and it will depend on that partner’s tax rate. If it is the trust that owns the LLC, then it will be the trust. If it is something like a IRA or a 401K, then it will be taxed at that rate as well, which could be zero. It all depends on how you choose to tax that LLC and who owns it. I hope that is helpful. Jeff, do you want to?
Jeff: No. I mean, it goes back to what we often say that an LLC is not recognized by the IRS so we have to actually look to see how it’s being taxed, as what type of entity, and I’m not going to go rigmarole again since you just did that.
Toby: Yup, so it always depends. It’s kind of fun. So I hope you realize, an LLC to me is a Swiss army entity. Iit can be anything you want it to be, that’s why they’re so versatile and so highly used. I can assure that in non-traditional business. If you’re an investor, or you’re small, or you’re holding assets, the LLC is probably 90% of that business. If you’re going public is a C Corp. Only if you’re filing a non-profit, it’s going to be a corporation almost always. Otherwise, chances are, you’re going to see LLC being used.
Since 1978 they have been around. They were really fully accepted and on jurisdictions around 2003 where we actually had guidance from the IRS as to how to tax single owners. There’s still fairly new kids on the block and that’s why you have a lot of accountants still not completely up-to-speed on them. I say ‘new kid on the block’ but it’s been sixteen years since we had the opinion on single owner, but it takes them a while to get the memo sometimes.
“Can I buy personal items or pay out personal bills with my business credit card?” The answer is absolutely. However, depending on the type of entity, it’s going to dictate whether that’s taxed as just non-deductible personal expense, so it’s non-deductible to the corporation, or whether that’s going to be treated as payroll to you and be subject to withholding. Old age debt survivors, Medicare, […], these other workmen’s comp, all these fun stuff. Like all things taxed, there’s implications to it. So you’ve got to be a little bit careful. When you buy personal items, make sure that it’s not buying it through the C Corp or the S Corp.
Jeff: Yeah. You can buy personal items and pay off personal bills but that’s an expense to you personally, not your business.
Toby: Yup. If the business is paying you, they may as well just written you a check.
Jeff: Right, and to be honest it makes it a little complicated if you’re not paying that credit off monthly. The interest and all involved, some of it is personal, some of it is business.
Toby: Tom just asked, “Why an S Corp? Why you got to worry about an S Corp?” Well, because if I just move money to a shareholder, ordinarily you have profits and you would just subtract that out of profits as a non-deductible expense. But if it is not, and you just paid yourself, chances are, the IRS is going to classify that as either distribution and excess to bases or just flat out payroll. So, you got to be a little careful there.
That’s why I say, whenever you’re in an employer-employee relationship, it’s fantastic from a tax standpoint if you’re reimbursing, but it’s horrendous if you’re taking assets or cash willy-nilly without understanding the implications of what you’re doing. That’s why we never distribute real estate out of a corporation because any appreciation is considered wages. There’s implications to these things. If it’s just a partnership or a sole proprietorship, we don’t care, you are the same asset.
Now, as an asset protection attorney, I would say that would be something that somebody could argue, “Hey, you’re not respecting the entity.” If you’re tracking it, and you treat it as a personal payment, you’re going to be okay. I have never seen that one actually trip somebody up but certainly, you’re giving somebody arrows for their quiver.
I’m going to get a bunch of these questions. This is fun. Somebody’s asking, “Can I use money from my C Corp to pay personal credit cards used to fund pay for start up and training?” Bernesia, you can, and that would sound to me like a reimbursement where there’s no tax implications to it, because it is from a S Corp or C Corp, it would qualify as an accountable plan and they could just pay you back. If we set you up at C Corp and the C Corp reimburses or pays for the training, reimburses you, pays your personal credit card, then it’s not taxable to you. That’s what actually 25CFR162-2. That’s just bizarre that it popped into my head. That’s weird, I must have been looking at it recently because I usually forget everything I read. Alright, let’s see. Only if I have been drinking.
“What investment opportunity can be considered,” this is my favorite question, a unicorn.
Jeff: I was hoping you have the answer for this.
Toby: Yeah. “What investment opportunities can be considered that have no tax liability, minimum risk, and at least a 10% annual return?” All right, so the answer is, there’s no such thing. Otherwise, everybody will be selling it. But the attorney accountant answer, Jeff, what’s the best investment that you’re probably not going to pay tax on, in fact we have a high degree of control, whether we ever pay tax on it, you can never pay tax ever on this type of investment if you didn’t want to, what would it be?
Jeff: I would probably say real estate.
Toby: Real estate. Absolutely. I would say the average that we know be rich. I would say that it’s in best in real estate specifically, because we can depreciate the improvement on the property to offset our taxes. The historical risk in real estate, every 10 years it’s up, you’re going to have a hard time finding me a ten year period where real estate lost money over that ten year stretch. Even if you look at the last recession in 2007, the properties in 2017 were above it, everywhere I look. I did not see a single place including Vegas, where we had a massive crushing blow, 75% lost. We were already back. We were back about two years prior. That would be it.
The other one that might work is something called Indexed Universal Life, where you are pairing it with life insurance, where the cash value grows with no tax liability, that’s 26USC7702. The minimum risk is you can’t go below zero. The 10% annual return is the only part where I have a problem. I think the historical return in those 7%, so you’re not quite at […] but you have to have the life insurance components, so there’s that cost of the death benefit.
Jeff: Now one thing I want to add about the no tax liability, I can think of nothing that has no eventual tax liability with one exception.
Toby: What is that?
Jeff: You have to die.
Toby: Yeah, well, that’s real estate or Indexed Universal Life because the proceeds of a life insurance policy are not taxed. If you accessed the cash value, it’s not taxed. Anyway, those were the two that I’d looked at and those are two that I invest in, so I can just say that this is not just figuratively speaking. Yeah, we’d all be rich. Somebody said a wholesale life insurance, that’s a whole life probably that same thing. That was wholesale life insurance policies in the 80s. That’s probably true. Let’s see if there’s anything else, nobody else really responded to that.
“Infinite banking, and whole life, and mutual companies?” Samuel, that’s exactly what we’re talking about Indexed Universal Life and whole life. Those are the ones that are close. Somebody says, “What about a Roth?” Yeah, but there’s still risk in the 10% return. The beautiful part about some of the financial vehicles is, you can’t go below zero. They buy options, so your worst case scenario is, you didn’t make enough money that year, but they cap you usually about 13% of what you make. If you look at it historically, there are 7%, so I’m not going to tell you it’s 10%.
In real estate, you can keep rolling real estate and do amazing things but the qualified opportunity zones, there’s some things you can do there to minimize risk, you will have tax liabilities the only problem because even on the opportunity zone, you’re deferring taxes for seven years and then you paid nothing if you can hold for at least 10. There’s nothing more, there’s no tax liability, no risk. There’s always going to be a degree of risk. That 10% is just…
Jeff: And I would strongly suggest that if somebody’s offering to sell you a unicorn, you should really do your homework on these things.
Toby: Make sure it’s not a donkey with a cone attached to its head.
Jeff: Right.
Toby: “What about 702(j)?” I’m not sure, I think it’s 7702. That’s I think we’re talking about. Is there a 702(j)?
Jeff: No, 702 is partnership rules.
Toby: Partnership rules. Yup, so I don’t think so. “Can I add the carrying cost, insurance, interest, utilities, to a basis of a property that is flipped?” Jeff, do you want to knock this?
Jeff: Yeah. Actually, you not only can. You’re required to add those carryinging cost on your slip. You can’t deduct anything that directly relates to a property that you’re going to sell. It has to be included in your carrying cost which would go into your inventory cost when you sell the property. You do end up getting the deducted in the same fashion once you actually sell the property.
Toby: Yes, so you’re adding it. “Can I add?” Yes, you’re required to add, not only can you, but you should. That’s the big difference when you flipped your car lot. You’re buying cars to resell cars.
This is interesting, I just had a couple of things that popped through and I’m sorry, some of you guys asked questions and we’ll get to them but this is really interesting to me. Somebody asked, “Will it be better to have the personal credit card?” This goes back to the question we answered earlier, the personal credit card transfer to business credit card to be able to bring out a personal credit score. This is something Christine and I dealt with years ago.
They were really struggling on their personal credit score because they had a business credit card that was not really a business credit card. The business credit card was in their personal names, so it’s bringing down their personal credit. As a result, they could not qualify for a low interest loan on their house, on their personal residence.
What we did is we set up a company, an S Corp, it reduced their taxes. The tax savings alone were about $10,000 a year. Then what we did is, they had an IRA. We rolled that in to a 401-K and we loaned the money out of the 401-K to pay off their credit card. Period. They just paid off all of the credit cards. Then I had them open business credit cards. If they were going to use credit, it was only to use the business credit card not the personal credit card.
What was surprising to me is their credit score jumped 70 points in the first month, and they were actually able to reduce their interest. It was almost a half of percent off the basis points on their loan, but it was a big house up in Bellevue, Washington. It was pretty sizeable. So, I never underestimate what having your personal credit score affected by your business credit card does.
I would actually open up American Express, or open up a card in the name of the business and not report it to your personal credit. Easy-peasy. I know Capital One does, but you have to be above $100,000. I think you have to go through some steps there. But even if you did have some credit and you’re using it for you business, just make sure you’re not exceeding 20%. What really blows you up is when you are using a large amount of credit in your credit line to using up what you have accessible. That’s what really hammers you.
If you only have personal credit cards, then my thing to you is to make sure you have a business and then to establish credit cards in that business that do not report to your personal credit.
That’s going to be Transunion, Equifax, or Experion. Again, I could tell you for sure that American Express has those just because I have three in my pocket that do not report to my personal. I’ve had them for almost 20 years now. I have some others too that are just business, so they do not report my personal. I don’t have much personal credit at all. It would be devastating if I did.
Alright, next one. There was another cool question, but I don’t want to keep going crazy. Alright, here’s one that was from before. “Can you deduct expenses to see a property you have passively invested?” This kind of links in with the previous question, even links into this one. If you have investment expenses, you can offset your investment period, right? If you have a passive investment at something and you go see it you can write it off against that income. If you have more expenses than you have income, then you have losses. If you’re passive, then you have restrictions on taking the loss, you can’t offset.
Jeff: Correct.
Toby: Somebody just said, “Why would it be devastating to have a lot of personal credit?” If you’re using personal credit. If I had a business credit card, for example, I can actually give you real life example. A client was running their business expenses on a credit card. They got a credit card; it was a $100,000 credit card. Actually, I know the exact scenario. It was an American Express and they rolled it over to Capital One. They used that Capital One for the expenses and it was like $70,000 of the $100,000. It lowered their credit score by almost 50 points the first month because you’re using such a substantial portion of it. That’s just how it works.
Jeff: When you’re looking at your FICO score or your credit score, how much credit you have is actually a very low impact on the score.
Toby: It’s how much you’re using.
Jeff: How much of that you’ve use has a very high impact on the score.
Toby: Yup.
Jeff: And they typically, if you have excellent credit, they’re wanting you to have used maybe less than 10% of your total credit.
Toby: Yup. 10%-20% is the magic number.
Jeff: Right.
Toby: You know, I have a crystal ball, I can just tell you from what I see. Alright. “Can I deduct real estate education expenses even though I don’t have any profits?” Jeff, what say you?
Jeff: It’s not really all about your profits. It’s how long you’ve been in the business. I mean, you may have been in the real estate business for three or four years and you just haven’t done anything in the current year, but you did get some real estate education.
Toby: Well, that magic word profit, there’s two things that it triggers. First off, if I don’t have profits, are you saying that the education is going to create a loss, then you’re going to have restrictions if it’s passive. If it’s active, say, to your real estate agent, you’ll be able to use that education expense as a loss. If it’s, I’m investing in properties for the long haul and I’m not a real estate professional, which a real estate professional—just as on a side—means 750 hours in the field of real estate buying and selling. You’re either a broker, a real estate agent involved in those transactions, you’re a construction guy or something, and that’s the #1 use of your business title. If you can’t qualify for it then your spouse has to qualify for it, and you have to materially participate in your investment activities. You hit those; you’ll have active losses even though you have passive income. That’s the holy grail for people that are investors in real estate because you want to be the real estate professional so you can offset all of your other income.
I used the example of my buddy who is an attorney in Savannah, Georgia, who offset about $3 million one year of his attorney practice income. He offset it all with his commercial property depreciation because his wife qualifies as a real estate professional. There’s that. If you are a brand-new investor and you did real estate education, I’m going to tell you need to have a C-Corp. You’re going to want to make sure that you’re in there.
Jeff: Running a real estate is a passive activity, unless like you said, you’re a real estate professional. When that makes a difference is, you’re limited at $25,000 of losses from your passive activity—real estate passive activity.
Toby: But that’s only if you make $150,000.
Jeff: Actually, it’s $120,000 starts […] and at $150,000, it’s gone. You get no losses if you make more than $150,000. That’s why it’s important that if you can legitimately do it, that you have a real estate professional, either you or your spouse.
Toby: And a real estate agent, you’re fine.
Jeff: Yeah. Then you get to deduct all your losses against your other income.
Toby: Yeah. And then there’s the rule, it’s 26 U.S.C. § 183 that everybody calls the hobby loss rules and there’s a presumption that if you don’t make money three out of five years that you’re a hobby. What they do is they say, “You can still deduct your expenses then even then. You just can’t create losses against your active income.” But that’s only if you don’t overcome the presumption. If you show that you’re trying to make money, then you can still overcome it. There’s a great tax case with a guy, 15 years loss money, and he bought off losses every year and he was able to write it all off.
Jeff: I think there’s a list of like a dozen or 15 different…
Toby: Uh-oh. Somebody asked a […] account question. “Why would you recommend a C-Corp for real estate investors? There’s also a chance of double taxation.” Yes. Here’s how it works. If you’re going to be a real estate investor and you have expenses that would not be deductible to you. We have this Woodley case that says, “Hey, if you don’t own the real estate yet, you can’t write off the educational expenses.” We’re going to grab it as a startup expense and there’s only one type of entity that we can do that in, it’s the C-Corp. That C-Corp is also ongoing to be the manager of the LLCs that own the real estate. What that allow us to do is move any profit that would ordinarily flow under my personal return and use it to the corporation so that we can grab all of our expenses that’s why we do it.
“Is there a risk of a double tax?” Yeah, there’s that risk of a double tax at a C-Corp but only if you show profit and then it will be taxed to 21% at the Corp rate and then it will be taxed a year long-term capital gains rate which could be 0%, 15% or 20%. It depends on what your income is. I always say, “Hey, that double tax. I control how much income that’s going in there.” I have a lot to say about it.
I’m never worried. About 80% of our companies, for example, about 80% of the C-Corps at least are zero out. Is that a fair assessment? Jeff is the head of the accounting department. They do over 6000 returns a year, some ridiculous number and yeah, the vast majority are zeroed out.
“How long can you claim a startup cost for your business?” You can go back indefinitely as long as you can tie it into the startup of your business and you can carry those losses, what, 20 years, on a corporate…
Jeff: No, it’s indefinite now.
Toby: Oh, it’s indefinite? There. Forever. But what I would usually do is if I have a C-Corp, I’m probably going to kill it if it’s not making any money and I have losses trapped in it. I can use those losses under a 1244 stock loss election against my personal income. I’m going to take that at some point. Yes, if you use Anderson, we make that election on all of our businesses.
Alright. We have a lot of questions. “We plan to use the corporation for several hundred thousand a year, and we have W2 employees trying about 25% of that. Does that still work well? Just giving numbers for an idea.” Jennifer, under that, you’re probably worse off as a C-Corp if you’re showing profit there. I would more than likely be making you an S-Corp under those circumstances. But I want to do a little comparison. Again, it depends.
If you’re only taking 25% of the salary then the rest of it is either going to be taxed corp which if you leave it in the corp, chances are you’re going to be fine. If you take it out of the corp, then you have to worry. If you’re building up your business, and you’re really going to carry that thing forward for many years, then you’re probably better of being a C-Corp. if you’re living off the money, then you’re probably better off as an S-Corp. In either case, I’d be looking at a retirement plan as well to shelter a bunch of that income. Anyway, that’s fund.
Alright. “What happens if you extended or didn’t pay your estimated tax for April 15?” Here’s a fun one. Your tax return isn’t do until after your extension. Whenever somebody says, “My taxes are due on April 15th.” I say, “That’s not correct. That’s the first deadline but you have an absolute right to go to October 15th.” But your taxes are supposed to be paid by April 15th. This is a question where they’re saying, “Hey, I extended.” Their tax return is not yet due, but their taxes were due back in April 15th. The IRS assesses you .05% a month.
Jeff: .5%.
Toby: .5? It’s half of percent, right?
Jeff: It’s half of percent. Too many zeros.
Toby: Too many zeros. Isn’t it .1 is 10%? So, .5 would be 5%. So, .05 would be half of a percent. You’re talking to a lawyer. I’m just teasing you. It’s half of a percent. We would look at it as .05 but across multiple […] like $100,000 half of a percent or .05%.
Jeff: It’s .005%.
Toby: .05.
Jeff: It’s 5%.
Toby: No.
Jeff: Are we losing people?
Toby: Yeah. I get it. It’s half of a percent.
Jeff: It’s half percent. We agree on that.
Toby: 6% would be for three years. Somebody says, “I thought taxes were due when you start your business.” You’re supposed to be paying your taxes if you’re having a bill, if you’re going to own, you pay-as-you-go. But if you owe taxes, if you have quarterly, you’re going to have underpayments too. If they’re anticipating that they’re going to have a big tax bill, what is it, first year, do they have to file the quarterlies?
Jeff: Yes. Corporation aren’t exempt from, there’s no safe harbor for them. They have to pay an estimate based on whenever they make a core and then if […] if you earn less than $1000, there’s no requirement for estimate.
Toby: There we go. Philip is saving us. 1% is .01, half a percent is .005 or .5. You’re making Jeff feel all warm and fuzzy. I just add zeros to things, guys. With education expenses, how do you delineate those expenses and what is acceptable? It’s just an ordinary, necessary expense if it’s education, right?
Jeff: Right.
Toby: The question is, “Is it something that’s improving your job skill or is it required to keep your licensing?” For example, I’m a lawyer so continuing legal education is immediately expansible or is it something that creates a new job skill opportunity? That’s why we always look at it and say, if you’re an investor, the IRS says, “Oh, you don’t get to write that stuff off.” Or, “If you didn’t already have real estate, we’re not going to let you personally write it off. We’re just going to say no until you’re actually are in that business. You don’t get to deduct it.” That’s why we always set up a C-Corp because it’s called a startup expense, a help to get started and then we grab it.
But if you go to school to become an accountant, an accountant is a great example. If you go to school to become accountant, you can’t write that off. But if you’re an accountant and you go back to school to increase your skills, then you can. There’s a whole bunch of stuff.
“I’m a full time real estate agent and took an education-related expense against an apartment investment which is a significant amount, can we use this as an expense?” The answer is yeah according to the IRS. If you’re already in that business, then you can write it off. Even if you are a sole proprietor, you’re going to be okay as long as you’re already into that plus, you’re an active business. I wouldn’t be a sole proprietor though as a real estate agent. I certainly wouldn’t make a bunch of money as a real estate agent as a sole proprietor. You have about 700% chance more of being audited than your S-Corp counterpart and you’re paying more tax. About every $100,000 it’s somewhere in the $7000 range. Half a percentage over what time period, that’s half a percent per month.
Oh my god. Somebody is saying, “The truth is no one including businesses are really legally required to pay any income taxes.” Don’t read that stuff. You’ll end up in jail.
Jeff: All of that information that you see about taxes being illegal is being written from jail.
Toby: Do not do that. Please don’t. Oh my god. Some people are getting into this stuff. Stop that. The Supreme Court already made their decision and they’re the law of the land. Yeah, don’t try to raise constitutional arguments with this one. Alright.
“I had a real estate school for 15 years and have bought and sold properties. Can I write off the training and expenses incurred since I have a strong background in a training academy and made investments?” This is an interesting question. If it’s the existing business, then absolutely. If the training is related to real estate and it’s the existing business, then absolutely. If you don’t have any investments and then you take training even though you have a background in it, the IRS is going to say, “No. It’s just the nature of investments.” Unless you set it up, make it a C-Corp.
“I would like to cash out or reallocate funds that were not used for college. How do I do this?” Jeff, you love 529 plans.
Jeff: I also have two 529 plan for my grandchildren. A problem is, what happens if they don’t go to college?
Toby: Yup. If you don’t go to college and you don’t meet one of the exceptions. There are two exceptions, one is…
Jeff: The beneficiary passes.
Toby: The beneficiary passes away. Number two is they get a scholarship. Three is I put it to somebody else.
Jeff: Right. 529 plans are really flexible. You can change beneficiaries very easily because what often happens is you have money put aside for one child and they don’t go to school.
Toby: Somebody just said, “Get an IUL instead.” Israel, yes, that’s exactly what I’d do and that’s what I’d recommend.
Jeff: Now, one significant change to the 529 plans beginning at 18 is that can now be used for high school and elementary education.
Toby: Yup. Any education expense even when they’re in—yeah, everybody is sending their kids to private school. It’s just crazy. I went to public school.
Jeff: I went to public school too.
Toby: Anyway, here’s something else. Your 529 plan, you put in after tax dollars. If you just want to take the money out like, “Forget this 529 plan.” Because my guess is you’re making about 3% a year or something…
Jeff: Yeah, returns and all.
Toby: But the market going up over the last few years, you’d think you’re doing great, so that’s good. But the historical has been stinky. But you can take the money out, you get a 10% penalty on the earnings beyond what you put into it and you have to pay income tax on it.
Jeff: On the earnings.
Toby: On the earnings only, not what you put in. Remember, you didn’t get a tax deduction for putting it in. It’s just the earnings. If these things were anemic and they didn’t make a ton of money, you got hammered in 2007 and it’s just now recovering, you may not really have much earnings and you may be able to just take the money out.
Jeff: And another thing, even when you take the money, say you’re the grantor on this thing and you take it out, you’re going to […] child to pay for their tuition, if you take it out yourself and pay it, you’re probably going to end up with an IRS notice that you’d have to explain that, “No. It was paid directly to the school.” Or, “Paid indirectly to the school.” Just something to be aware of if you do that. The easiest way is to have it pay directly to the school for tuition fees.
Toby: Much easier. Here’s a question. Somebody says, “You can use it for grade schools too, right?”
Jeff: I believe so.
Toby: Yeah, I believe it’s for anything. They’re really loosened them up, by the way guys. Just because they were anemic. It was basically a way to sell mutual funds, so they came up with another way to sell you a financial product where they take 70% of the growth and give you 30% and tell you that they’re doing you a favor.
Jeff: You can buy a computer with it if your kid needs one.
Toby: Yeah, computers, all the laptop, all their books. Books are probably more than the tuition nowadays. “Can’t you just take out the principal and leave the earnings, no penalty no tax?”
Jeff: That’s kind of how the Roth works.
Toby: I’m not sure if you can do it.
Jeff: I’m not sure if you can do it on a 529 plan.
Toby: Alyssa, that’s a good question. I’m not certain. Somebody said, “Uniforms?” I believe so. But it’s something that we’d have to look at. I would email that in, Jimmy, so we can actually get you an actual answer. We do grab the questions and shoot them back.
Alright, next one. “I am 73 and I have a self-directed IRA brokerage account.” Why are you doing a self-directed IRA and a brokerage? Stop doing that because self-directed IRA means you’re paying somebody for it. Unless it’s free, I would just open up an IRA in a T&D [33:26]. I have a lot of real estate losses. “Can I roll part of my IRA into my Roth? Is there a limit to how much I can roll?” First off, 73. Can you roll an IRA into a Roth?
Jeff: Yeah.
Toby: “Can I roll my IRA into my Roth?” Yes. It’s taxable to you when you do it. If you have real estate losses—this is how real estate losses are kind of funky—if you’re an investor, then no. those real estate losses are not going to offset your traditional income tax burden from rolling the IRA into a Roth. You would actually be assessed the income tax rolling it over and you’d have to get real estate losses which you can’t use to offset that income that you keep carrying forward. If you are a real estate professional, then those losses would offset it. This is where tax planning really becomes important. If you can qualify as a real estate professional this year, then you can roll over as much of that IRA into a Roth that you want, and you can offset it all.
Jeff: Right. Losses from rental properties, it’s not going to work; losses from flipping, that would work because it’s considered ordinary income.
Toby: Losses from flipping, yeah. A lot of real estate losses. We’d have to look and see what kind of real estate losses…
Jeff: And then the third is if you have capital losses from real estate investing. That’s not going to work either because you need capital gains to offset those capital losses.
Toby: Yep. We’d have to know a little bit of those losses. The answer is always going to be…
Jeff: Oh, can I say it depends?
Toby: No. I wasn’t going to say it depends, but you have control. The answer is always going to be it’s up to you. Do you want to take the actions necessary to make it deductible to you? If you have a previous real estate losses, and then you can qualify as real estate professional, you could still offset it, right? You just have to pick a year to become a real estate…
Jeff: No. I believe if you have passive losses…
Toby: Oh, previous passive losses.
Jeff: They stay trapped until you sell the property.
Toby: We have to really look at those real estate losses. Then it’s maybe something where we sell some things with gain because hey, you don’t have to pay tax on, and then you use that to pay the tax on the roll of the IRA into the Roth.
A bunch of people ask questions about this. The 529. That’s not deductible. Those are post-tax benefits. “Can my LLC create its own self-directed IRA and vice versa?” The self-directed would create the LLC. Otherwise, it’s prohibited transaction and you disqualify the self-directed IRA. “What constitutes real estate professional?” I’ve answered that a couple of times but it’s 750 hours of your professional time, number one, use of your professional time in the field of real estate, the buying and selling of real estate, construction, any of that stuff would fall underneath that category. You have to material participate in your real estate activities. Material participation can be 100 hours for the number one use of hours.
Jeff: Like we just said, I think at one time, we may not want to do that if we have substantial losses, passive losses already.
Toby: “If I buy a mobile home park,” and we’re seeing a lot of these now, “are the tax benefits the same as buying a residential stick brick property with the depreciation?” First off, Jeff, you see a lot of these. What are people usually buying when they buy a mobile home park?
Jeff: Well, it’s either one of two things. They’re buying just the property not the mobile homes. In that case, the value is going to be divided between land and what we call land improvement which is 15-year a property.
Toby: You have a nice big plot with these little pads on it for the mobile home and then you have the little mobile home that sit on it. They’re either personal property, they’re vehicles, or if they’re attached to the ground then they become real estate. But they’re the improvement. That’s our realm. When we look at the land, the pads, then the roads and the wiring, all of the things that you do to improve it…
Jeff: And even the pads themselves.
Toby: Even the pads themselves will be 15-year property which means, yeah, we can write those off but the land itself, we can’t. it’s non-depreciable. We have to do a cost segregation on the land to determine which portion of it is depreciable and which one is not.
Jeff: You typically have some type of landlord building on the property that’s probably going to be a 39-year property. Some of them I don’t think would last 39 years that I’ve seen.
Toby: Well, that’s where your cost segregation comes in. That’s where you look at it and say, “Alright, what is really structure?” What’s less than 39-year property? If it’s less than 20 then you get to write it off this year. You get the bonus depreciation.
Jeff: But where the big difference comes in is who actually owns the mobiles homes in the mobile home park.
Toby: Yes. Well, let’s get back to breaking it down. You have the land, you have the pad, and then you have the piece of structure on it. If it’s attached to the ground, then it’s the same thing as the stick brick property. You can depreciate the improvement but if it’s attached to the ground and you don’t own it, it’s somebody else’s then you can’t or if it’s not attached to the ground but you own it, it’s definitely not real estate but it’s definitely personal property. How would you handle that? You just write that off, wouldn’t you?
Jeff: Yeah. If they have a fairly short life. They have a weird life.
Toby: But it’s than 20 so you’d bonus depreciate it. The answer is, man, it really depends. It’s fact-based but you can get more tax benefits by buying the mobile home park. We’re just goofing around mobile home parks before and when you start doing cost seg, there’s places that are going as high as 50% of the land value for the improvement of like having to put pads down and everything else. If it was just a lot, it’s not worth anything.
“Do you have to be a real estate professional to do a cost segregation at tax time?” No, Chris. But if you do cost segregation, it usually creates losses. If you have losses in excess of your real estate income, then you’d want to be a real estate professional to offset your other income with those losses. If I create a $30,000 loss and I’m just an investor, I carry that $30,000 loss forward. If I’m a real estate professional, then it offsets my other income and I pay a lot less tax.
“Is there any good strategy to take out a 401(k) distribution and invest from real estate?” Yeah, you loan it out. “With bonus depreciation, can we offset the 401(k) distribution?” Well, if you take the money out too early, you’re going to have a 10% penalty or in a tax it then yeah, you could use the bonus depreciation, perhaps offset it, or you can borrow up to $50,000.
Jeff: What if we just left the money in the plan…
Toby: Invest it in plan?
Jeff: …and invest it that way?
Toby: You could do that too. What Jeff is saying is that you could use the 401(k) itself and purchase the real estate. You just got to be careful not to buy it within the rules, the disqualified party rules and all that.
Alright, we’ve got a few more to go through. It is, with a current employer, they’re not going to let you touch it. You might be able to borrow against it but if you’re with the current employer, they’re going be very restrictive on what you can do.
“If I were to have an online health coaching business where people can complete purchased transactions through an automated website, how will the income produced be taxed?” This is fun because this looks like a really straightforward question. You’d normally say, “Hey, it’s a health coaching business. It’s ordinary income.” But it really does depend on what you’re selling. If you’re selling a book for example, then it really depends on whether who actually is selling the book and whether you’re going to be getting a royalty, then yeah. It will still be ordinary income, but it wouldn’t be self-employment tax. Now we’re getting queued. It’s an ordinary income. Let’s just call it that. It’s all going to be active. Just because it’s through an automated website and you’re not doing much, they’re still figure that you’re working, you’re making it happen.
Jeff: It’s not actually what’s being asked but sales tax rules are changing on website sales.
Toby: Oh, they’re hitting everybody. They have […] was the Supreme Court decision that came out of Wisconsin.
Jeff: With the decision last year, the various states now have the opportunity to rewrite their rules and start taxing some of these website sales.
Toby: Yup. They said it. It’s basically, “Selling in a state, they can assess the sales tax.” It used to be that unless you have actual contact with that state, you didn’t. I’ve got a bunch of questions to go through. This is the end of the set questions. We’re going to have to back in and we’re going through all your questions that we answered live.
Somebody just asked, “What do you charge for services as a tax attorney?” Chris, if you become platinum, it’s $35 a month. If you want accounting help and representations, then it depends. There’s a simple package, it’s $2500 to get starter or just do the platinum. You’re going to be able to get so much out of that. If you need a detailed representation, we can charge you based off of what the work is. I hate charging hourly, so we can’t tell.
It’s a cool specials for you guys. I offer this every time so don’t feel like this is a one-time only. It’s the Tax-Wise Workshops, doing three of them this year. They’re a two-day tax intensive workshops. We go over 30 tax strategies. You get access to all the recordings and two livestreams. It’s andersonadvisors.com/341. The total price is $197. It’s insanely cheap. The only thing that doesn’t include is attending live. You can watch livestream and you can watch all the recordings.
People say why do I do three because I change them up. Because at the beginning of the year, we’re looking at forward planning. Middle of the year, we are going over all the regs and everything that’s changed and some strategies for this year. End of the year, we are doing stuff that is about closing the year out. In November, it’s all end of year tax strategy. You go through an entire year; you are going to kick some tail.
Other things, just because we feel like being very generous, more free stuff. You guys moped my website last time I did this. We have put it on a more robust server. It’s the infinityinvestingworkshops/signup. You get the Infinity Investing Workshop for free. It’s an 11-part workshop. It will show you how to create infinite wealth. The idea is that in my world, I don’t really care about somebody’s net worth, I care about how many days they could live without having to work. You could be worth $1 million but if you have a high burn rate, you’re going to last 10 months.
You can actually sign up, it’s free. Free Tax–just use that as the code. Go through it, share it with younger people. I’m just going to say that, not that you guys aren’t awesome, but I’ll just tell you that people, if you can get to them before they have gotten into too much debt, before they’ve gone through school and got an English degree for $300,000, it’s just a different mindset. It’s really helpful because you learn what’s actually a good investment, what’s not a good investment by some simple rules that you can put things through to litmus test. It’s free. It is truly a lot in there.
The only thing that you can do as an Infinity investor is we have a mastermind group that’s a whopping $100 a month that I use to do annual […] even below that where we go over a whole bunch of different investments. I just want people to make more money, keep more money, save more money. For us, frankly, it’s better for society that you get it because you tend to do better stuff with it than the government does with that. That is political as I get.
iTunes, you can go on and get our podcast, they are free. You’re going to see there’s a ton of different topics. You get all the Tax Tuesday. We break them into two pieces always and you can listen to it while you are sweating doing your elliptical or your treadmill or yoga or whatever you’re doing. You can get some great tax knowledge that motivates you.
Let’s see, if you have questions, send them in taxtuesday@andersonadvisors.com or visit andersonadvisors.com, subscribe. You guys rock!
Now, lots more questions. Here’s the question. “Can a newly formed 501C3 non-profit foundation, father […] 990 and when it’s application for a tax exempts that is status, it’s still pending, and it has no assets no revenues. Does it need to use another form?” No. You can use the […] it takes about five minutes. Those are for those if it’s less than $50,000 that you gave it, you can actually use the 990-N.
Jeff: Correct. Unless, you exceed […] than $50,000.
Toby: Yup. Somebody says, “Working out at the gym while I listen and learn.” Yup. You are like a lot of folks actually. One of my guys here, Corey…
Jeff: As long as he doesn’t say his sweating […] all these meaning us.
Toby: Oh my god. Who was that guy? The guy who…
Jeff: Richard Simmons?
Toby: Simmons, yes. Welcome to the oldies. My mom used to do that. This is like bad visuals. Remember the 80s when they would wear the whole-body leotard thing, it was […] in a movie or something, that was my mom. She decided she wanted this all. Bad things. Don’t do that. Don’t wear a unitard in the gym.
“Is the Tax Wise Workshop a live workshop?” Yup. You can come live, it’s on our website, or the live cast is $197 for all three and all the recordings. The only problem we always sell out and my room only holds so many people and I don’t want to do it too big. I like having about 50 people live although we always go above that, but I like to have it as a smaller group because frankly, it’s like this, I like questions. We can answer questions all day long. I am not thinking like you and you don’t think like me. I’d rather you ask the question as what’s relevant to you rather than me trying to guess what’s relevant to you.
Jeff: It’s a really good experience but like you said, it’s limited to people we can have actually in person.
Toby: Yup. And we like tax. You may start throwing stuff at us like, “Stop it. Stop talking about tax.”
Jeff: Oh mean, attendants throwing shoes at us.
Toby: Yeah. “What is the best way to pay out bonus to employees based on a collection goal?” It’s interesting, Michelle. A lot of people say, “I want to make an employee a partner. I want to incentivize employees.” Here’s the deal. You use the magic word called bonus which means it’s not commission and the reason this is important too as from a business owner’s standpoint is that commissions are entitled, bonus can be contingent, you can out a contingent on things. If somebody, the day before you pay the bonus, you find out they’ve been stealing from you, you’re not required to write that check. A commission, you still have to. Ain’t that messed-up?
If I was doing it on a collection goal, I would just do it that way. I would say, “Based off of certain incentives…” You have the right. I would always use something that’s subjective. Because there are people that hit certain goal, but they undo certain values that are really important to your business. It’s not about the money, let’s just put it that way. The money is usually secondary after your values. If they’re violating your values, then I don’t really want to. They can be […] hurt in ways where they would still say they’re entitled to it.
Jeff: I’ve seen that where the potential for bonuses can change people’s behavior because they’re then working towards the bonus and not for the greater good.
Toby: Right. To answer her question, “Is the bonus taxable to the S-Corp to the and the employee?” No, it’s a deduction. It’s taxable to the employee. Anytime you give an employee compensation, and this is the one that accountants get wrong. In my experience, probably 99% of the time. Compensation is not cash. That is one type of compensation but compensation I could give you car, it’s taxable. I could give you a trip, it’s taxable. I could give you a stack of $100 bills, it’s taxable. I have to do the withholding and run it through payroll. There’s no such thing as, “Hey, I have you cash on the downlow and I can deduct it.” You want to make sure that you’re running it.
Another Michelle is asking about the 199, the 20% deductions. You’re asking about the $315,000 of income. Michelle is asking a question about phasing out of the 20% deductions. I’ll go through this with you, Michelle, so that it makes sense. The 199-A deduction is this 20% deduction against qualified business income or 20% of your taxable income, whichever is less. What they do is if there’s a phase out for specified service businesses that’s absolute. $315,000 I believe is the phase out on the…
Jeff: That’s where it starts and goes up to $400,000.
Toby: $415,000 on the married couple or it’s $157,000-$215,000 or something like that on the single. The phase out is over a period of time. Now, only if you are a professional or in entertainment, if it’s your reputational skill like a doctor, accountant, attorney, veterinarian, engineer, you’re a specified service business, and you’ve phased out completely. For example, for you, it’d be at $415,000. You’d be done completely. Underneath that, you’d get a partial deduction if you are a specified service business. If you’re just a regular business, then they apply to other test and those two other tests are the 20% or 50% of all W2 wages paid by the business whichever is less. Or, you compare that 50% and you compare it 25% of the wages or 2.5% of all the assets
Jeff: And 2.5% of all the assets.
Toby: Yeah. You added the 25% plus the 2.5% of the undepreciated basis of the property. If you have a bunch of real estate, you can have a big one. It’s somewhat convoluted. I used a little chart. Jeff uses a chart. I know that we always start off with, “Is it a specified service business? Do we have to worry?” If you are not a specified service business, you’re just traditional Dairy Queen—real estate by the way qualifies as qualified business income, as long as it’s not tripling its lease [..] in commercial property. If you have a bunch of single-family residences and stuff, you still get the 20%. All of those things are non-specified service business.
But if you go above your income, not even the qualified business, your income goes above that $315,000, we got to start applying the secondary test. It’s impossible to do that if you’re just a partnership or a sole proprietor. You really have to have an S-Corp where there is a wage being paid out. If you’re saying, “Why not a C-Corp?” It’s because that doesn’t flow through. 199-A is only for pass through entities. I just gave you a thumbnail sketch.
Jeff: Some people are going to have both that specified industry and non-specified. You could be a doctor and your spouse could be running a surf shop. While that’s specified income may be excluded; the other income won’t necessarily be excluded.
Toby: Good one. Somebody said, “Hey, I filed a C-Corp in September of 2018. I do not know when my corporate taxes are due.” If it’s a C-Corp, chances are you’re either at a September year end or a June year end. In either case, your tax will not be due until more than likely next year because we have an extension of six months. Let’s just it was a September year end, it’s due in the middle of December. […] January 15th now, it’s four months, isn’t it?
Jeff: Right.
Toby: It’ll actually be due in October of 2021.
Jeff: No, if it’s January, then that’s got a weird year.
Toby: Oh, yeah. That’s three months […], so then it would be a September 15th or March 15th of 2021.
Jeff: It would still be 10 months. This is what we deal with.
Toby: The IRS keeps changing the rules or I should say, Congress keeps changing the rules. But Roger, you can relax. It’s a long time from now but if you want to find out, Patty will grab your information and we’ll let you know.
Somebody says that, “It’s spandex now.” Yes. You know what guys are wearing now? They’re wearing Lululemon.
Jeff: I don’t really want to hear this.
Toby: They’re wearing Lululemon and they’re admitting it. Clint, my partner, he always wears Lululemon now. I’m like, “That’s yoga gear. Stop that.”
Jeff: I’m going to have to drink heavily to get this picture out of my mind.
Toby: Yes. He’s wearing capri pants. That was really disturbing. “Can you use your personal home in repairs, equipment and materials, on a personal home as a loss if you’re currently working on it under your business?” That’s interesting. Christine, the answer to your question is really, we always look at a home. Let’s say that you’re using it. You have a corporation that’s reimbursing you for an administrative office or home office, that’s really what you’re going to need to do. You have direct expenses and you have indirect expenses. Direct expenses, you can write-off completely.
If it’s fixing up an area of your house, then yes. If it’s not fixing up an area and you’re just doing regular home repairs, then you can reimburse the portion of the home that is being used for business. A lot of people use square footage, I am not one of those people. I use the room method which I say, “How many rooms are there?” I take whatever. I have one room that is business and there are six rooms in the house then I’m taking 1/6th. I’m reimbursing myself for all the expenses. If it’s computers and things like that that are used for the business, then I can do 100% of them but if it’s utilities, then I will do a portion.
Somebody says, “Exterior painting, gutters, masonry.” Probably not, Christine. You’d get the portion, that’s the benefit is whatever you put under the house—you even get the depreciation; you get the portion of the depreciation. What you’d want us to do is to email it in. We’d get some facts from you and be able to say what it is. It’s probably going to be around 20%.
“Is the HOA portion reimbursable?” Yeah, everything as an indirect expense, so you’re going to grab anything that’s related to that home. The only one that’s not typically added in is if you’re doing exterior maintenance like you have a landscaper. Unless you have people showing up at your house for meetings. If you’re a realtor and you’re doing real estate deals and you have a team that shows up, then you can write it off.
Jeff: Pool maintenance is not likely to be a deductible.
Toby: Nope, not the pool but everything else. “How old does a child have to be before you can put the business in their name?” If it’s a child you want to actually have them own the business, a, I’d probably wouldn’t do that but 18 is…
Jeff: I was thinking about that earlier today. Do we really want to put a business in the name of somebody, can’t legally be bounding contracts?
Toby: Nope. If they’re under the age of 13, absolutely not. We can’t do that. What you can do however is have an UGMA, either a Uniform Gift to Minors Act or a trust with them as beneficiary—somebody’s popping that up too—and then you would be the trustee, then you could do things on their behalf.
If you remember Donald Trump’s story and the dad putting stuff in their name as kids. That’s what’s he’s doing is he’s basically saying, “I will control it but you’ll be the owner.” And there he’s making gifts to his children. It’s driving the press crazy. Donald did not write the loss. His dad did not write the loss. He’s probably just using them to the extent humanly possible, maybe twisting a few things but chances are it’s all black and white. It’s like, “Hey, somebody wrote it.”
“If a portion of admin office expenses reimbursable from the C-Corp, are there any other expenses that pass through for my LLC loss?” Not sure what that means. The home office expense, you could only be reimbursed once on an expense–that’s the first thing. If I am reimbursing expenses on my house, for example, if I’m taking 25% and I’m applying it to my cable bill, then your company can’t go up and reimburse that same cable bill again because that would be income to at least the 20% portion. What I’d do is I’d be breaking out saying, “This is a direct expense related to my business.” I would reimburse that. You do not have to report that income, it’s deductible to the company.
Cell phones are the greatest examples I can think of. It could reimburse 100% of your cell phone even though you’re on it 90% of the time. You do not have to report that as income, it’s an expense to the company, and creates a little bit of a loss.
“Where do I put a deduction for a K1 on an S-Corp personal return and under 1120S.” Susan, I’m not sure. The S-Corp goes on page two of your schedule […] of your 1040. The deductions are on the actual 1120S, that’s where you put it. If you have a loss and it passes through, you can write off your losses from your S-Corp up to your basis.
“I have two commercial buildings inside of a Florida LLC. How can I protect this asset? How can I make it publicly private?” If you have two commercial buildings, there is a way to do it. You have to have a Wyoming LLC set-up an in-state, so in this case, it’s Florida LLC, your name is not on it, you can do that, make it a member managed business in Florida managed by the Wyoming or Nevada LLC either state will work. I would put it in two separate commercial buildings. That’s how you’d protect the asset from you and from each other. You’d probably want to pull some equity out either with a friendly lien or something to make sure that it’s not completely exposed. It’s always the equity that’s exposed inside, outside it’d be really tough for somebody to get that. If you did something personally that got you sued, they wouldn’t be able to take it.
“For a starting real estate investor, wholesalers especially, what do you suggest for a business entity and how is it taxed?” I’m almost always, for a wholesaler, that’s an active business. I’m probably going to start that with a C-Corp, maybe an S, depending on the facts and circumstances. But a C-Corp is usually where you start. You can make your S selection. Jeff, I don’t want to say that’s out of–but you can make that S selection next year, right?
Jeff: Right. You could do a […] on.
Toby: You could relate it back too if you screw it up. There’s ways to make late elections up to when you file a return. I always start with a C because I can always go to an S but if start with an S, then it’s hard to go back to a C, and if I do then I have a five-year waiting period anyway. I tend to start with C-Corp.
“If you invest in a qualified opportunity zone funds that owns real estate and you sell the real estate in 10 years, getting the gain tax free, how does that gain show up on your tax return? Does it affect your AGI? If it does, is there a way to smooth out that AGI?” It’s excluded. You don’t have to report it.
Jeff: I’m assuming that it’s going to be the same way that you exclude the gain when you first put it in. You report it but there’s an exclusion cover that should wipe it out.
Toby: Yup. It’s actually the fun. The inside asset, this is what’s weird, they just gave us Regs that said, “If you sell the asset inside the qualified opportunity zone, as long as you reinvest it in a year, no tax.” It’s almost like a 1031 Exchange inside the fund. As long as it’s qualified opportunity zone property. They literally gave us another 180-pages about three weeks ago of Regs.
Jeff: I could sell my property and then buy the one across the street.
Toby: Yup. Let’s say you fix up some old apartment or something and then you go do another one, even though you’ve only owned it for four years, as long as you roll it into more opportunity zone properties, you’re going to be fine. As long as you meet the test of improving it if it’s real estate or if it’s a business, you just buy another.
“I want to get entered income so I can have credits for SSA. I have a C-Corp that is the GP of my LP. Do I take the income from the C-Corp as W2 or 10-99?” You would want to a W2. If you want to have credits for your social security, you’re either going to be an S-Corp or a C-Corp. Those are your choices. You cannot do that through a partnership, you cannot do that through a sole proprietorship as wages. You could do it as a sole proprietor if it’s all active income. It sounds like if I see a GP of an LP, it sounds like it’s an investment partnership.
“Franchise, tax, no tax due, what do we need to submit or file?” Dude, I don’t know where you’re at. If it’s Texas, you’d file a form. Otherwise, the only other franchise tax that I really deal with is California, […].
Jeff: Right. Tennessee is about the same way with their franchise tax.
Toby: Tennessee has the funds exclusions which is a non-corporate entity. It has to be a LLC. You just have to own it.
“What’s your opinion on Ray Reynolds and how he structures umbrella corporations with subdivisions and says that by structuring, you wouldn’t have to pay any taxes legally.” He’s wrong. You don’t. that’s not true. Maybe I’m missing something. I don’t know Ray Reynolds but there’s no such thing as subdivisions and not paying tax. You always have a tax.
Jeff: I think it’s one of those unicorn subdivisions.
Toby: It’s weird stuff. If you’re talking subdivisions as in land subdivisions, and massively depreciating the subdivision improvement, again, there’s no way to not have the tax on the land but again, I’d have to look at this. Guys, if something sounds too good to be true, run it by somebody else. That’s all. Things should be able to pass scrutiny. In my world, Jeff, we do the tax returns. Lots of people will tell you to do something but they’re not actually on the hook personally with the advice they’re giving you. Whereas, we’ve been doing this for 27 years. We’ve filed so many returns. We’ve defended so few audits.
If you do this stuff right, I hope you’re starting to catch on, there’s not a lot of reporting, and the IRS isn’t really interested in the small corporation world, they want to make sure that if you have an S-Corp you’re paying a salary for taking money but that’s about it. A small C-Corp, there’s just not much for them to get because there’s so many ways to write things off, that’s why they’re incentivized to that. You do things right; you really don’t have too many problems.
Let’s see, are there other fun questions. I had one weird which was, “Could you use solo credit to offset social security taxes?” I didn’t know that off the top of my head.
Jeff: I’m not sure how to do that.
Toby: You get a tax credit, and it’s federal tax credit […] due. It’s kind of weird but it would offset any tax you would have.
Jeff: Are you saying tax on social security?
Toby: Yeah, I know. Tax on social security or the actual OASDI.
Jeff: That’s a withholding so there’s no way to offset that.
Toby: I’m talking about if you’re a business and you have a solar credit.
Jeff: Oh, okay.
Toby: If you’re a sole proprietor or you’re in a partnership or whatever or you’re in anything where you get a tax credit, it’s just tax credit, so it’s against all taxes that are federal. From where I can see, you get the tax credit. It’s pretty awesome.
By the way, in the Tax Wie workshop, I’m going to do a solar section. I think that’s a huge area that I think has not been hit by the investors in the world out there, the rental owners, single-family residence where you have tenants. I think you get a 30% tax credit plus you get to write off 85% of the improvement again.
Jeff: I would’ve thought it will be 70%, that only makes sense to me. But it’s 85%?
Toby: It’s 85%. You get half of the credit…
Jeff: That you can depreciate.
Toby: … that you can depreciate. The way they phrase it is the opposite. They say that you have to reduce the fair market value of whatever you purchase.
“I’m a platinum member, how would you structure the use of Whole Life into the real estate investing business?” I’d use it as a bank. If you have a Whole Life policy, I’d use it as a bank absolutely. I would pay it that smaller interest rate and I would write it off the interest that you pay as investment interest, and I would make a kill in doing that.
“I’m running a computerized trading program that trades futures and it makes a lot of profit and there are enough trades to exceed the minimum number to qualify as a trader. Would it be passive income?” No. Craig, you could actually do that. That’s the beautiful part about being a trader. It’s really tough to meet but if you’re doing a ton, then it’s just how much time you’re spending doing it and you better not have another job.
“Are Whole Life policies FDIC insured guaranteed?” No. But not a single insurance company went out of business during the downturn when all the banks ran out of business.
Somebody says, “I always kind of looked at it like, the one thing that insurance companies are really good at is calculating risks.”
Jeff: Yes.
Toby: Sorry this is late, but I have called Anderson with this question. “Do I need to send my federal form 45-62 along with form 100 to California franchise tax […]
Jeff: California actually has their own depreciation form. I don’t recall off the top of my head what the form number is.
Toby: Yep. You would end up doing that on the California form and I don’t know what it is.
Jeff: California actually requires you to send your entire federal return with the California return. They’re getting that 45-62 on your wife.
Toby: It says, “Is it true that I can only deduct $3000 per year for education with a C-Corp?” No. I’ll make that easy. That is not true. You can write off all the education you need to on your C-Corp. What are you thinking about?
Jeff: Capital losses.
Toby: Capital losses?
Jeff: Are $100 to $3000 a year. Other than that, I’ve got nothing.
Toby: Yup, I can’t see it. But it’s not with the C-Corp. C-Corp doesn’t have capital losses.
Jeff: We’ll stick to the answer being, no, that’s not correct.
Toby: Yeah, you can write it off. “Can you please explain the method of deducting luxury SUV in an LLC as a real estate investor?” There’s not really a luxury SUV, it’s a luxury car or an SUV. SUV over $65,000 is equipment.
Jeff: It doesn’t get limited under the luxury vehicle, […] rules.
Toby: Yup. But it really depends on how much you’re using it. I tend to keep cars out of my business and I just do mileage. It’s so much easier […].
“Looking to start a fishing charter business, can I depreciate the full cost of the boat?”
Jeff: Actually, you can. I believe that boats are seven-year […]?
Toby: Yeah, it’s about that. I was just going to lease out their luxury boat, but they were really going to spend more time on it. It was kind of like, “Hey, it’s not quite that easy.” But if it’s a fishing charter business, that’s what you’re using it for, then yeah, you can write the whole thing off. But it really depends on how much of it are you using personally.
Jeff: The cases that I’ve seen lately where they’re attacking is the use if the boat because I think a recent case, they tried to make it a rental and they rented out a couple of times a year but they were primarily using it for personal use.
Toby: Adam, if you’re going to do a fishing charter, you need to let me know. I used to live on a boat. We will come out and we will fish with you. We support our clients even if it means going fishing with them. Hopefully, it’s not some place horrible.
“Can I use any part of a lump sum payment from a pension without tax consequences before rolling the remaining payment into an IRA?” Leonard, the way you do that is not a lump sum payment, but you roll it all into a 401(k). Typically, if it’s a pension from an employer and it would roll into an IRA and then you’d roll that into a solo 401(k). You can borrow up to $50,000 for five years per participant up to half of that.
Jeff: Distributions that aren’t rolled over into some other type of retirement plan are always going to be taxed no matter how old you are or how much it is. There are some exceptions for the penalty if you’re under 59 ½, I’m not going to go into all of those but there’s a number of different exceptions for first time homebuyers, education, […], hopefully, you won’t need it for that. But yeah, otherwise, there’s always going to be tax consequences through distribution.
Toby: If we can loan it out, then there’s that or if you do the investment inside it then you don’t have to worry. We have required minimum distribution. There’s a way to not pay tax in required minimum distributions and that’s to give it to your own non-profit. It’s kind of evil but can do up to $100,000 a year. You don’t have to worry about recognizing it.
“How much are we allowed for research and development?” There’s no limit that I’m aware of.
“You’re saying R&D, is there anything that you’re thinking of?”
Jeff: No. there’s a […] on the credit you can take. I don’t have the numbers off the top of my head.
Toby: But if you’re just, as a corporation, and you’re doing research and development or any business and you’re trying to improve your business, there’s no limitation there. It’s only if you’re looking for, like Jeff said, “There is a credit that’s floating around out there for companies that are spending a lot of time.”
Somebody said, “For the new Trump Tax law of depreciating luxury cars and SUV of 100%, is that better or more money car depreciating the mileage?” Ralph, I’m going to go back over this. Luxury cars isn’t a big deal. It’s the weight of the vehicle and the use of the vehicle. If I had a vehicle that I’m using for more than 50% in my business, then I can write it off in the business. But then I have personal use that I have to pay tax on.
Let’s say I have a $50,000 SUV and I write it all off and I get a $50,000 deduction but I’m using it for 51% of the time in the business. That means that I would have to allocate the lease value, and they publish this list every year, that will be about $12,000 or $13,000 that’s going to get allocated to me as taxable income. I get a $50,000 deduction in the business, but I have to recognize $12,000 or $13,000 as an individual. And you have to do that every year after that except you don’t get the $50,000 deduction anymore. You just have the tax hit every year. If you drop below 50%, you have to recognize that $50,000 again as income. If you are using it in your business, then it’s definitely a business vehicle, then I’d put it in the business.
Otherwise, I don’t care what the value of the car is, I don’t care which car it is, any car that you’re driving that’s yours, even if you lease it or you buy it. I used to have a 1989 Chevy […], it’s 58 cents a mile. I don’t have to worry about which car I was driving. I just get it. I’ll use mileIQ and wrote that off. If I’m doing 20,000 miles a year, I’m getting a nice check for $12,600 that I write myself tax-free and I’m not worried about depreciating the things anymore. That’s why I tend to be a little weird.
“What is the difference between cost segregation and a seller rated depreciation for new business acquisitions?” It’s the same thing. That’s going to lead us to, we’re over 4:30, I’m going to say to everybody, Jeff, unless you want to jump in…
Jeff: Nope.
Toby: … that I want to thank you. For those of you who are emailing questions in the last few days, I have a list that I’m going to start for the next Tax Tuesday. I’m afraid that I might be running around in Ohio on the next Tax Tuesday. We will be doing it remotely, but I’ll have you here and I’ll make sure that I get on it assuming that I can get my butt on the Tax Tuesday. We will get here. Thank you, guys, for joining us. Jeff, do you have anything else?
Jeff: No. You guys have a good couple of weeks. We’ll see you next Tuesday.
Toby: Yup. Come up with some great questions for next time. If I didn’t get your question, I apologize. We always get like 300 and so I’m piecing through them. If there’s a question that we can get to, just email it into Tax Tuesday and we’ll have somebody jump on it. Thank you, guys. Until next time!
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