In this Tax Tuesday episode, Anderson Advisors’ Barley Bowler, CPA, and Eliot Thomas, Esq., tackle ten listener questions covering essential tax strategies for business owners and real estate investors. They break down the enhanced contribution limits for solo 401(k)s, including the new employer Roth contributions and age-based catch-up provisions. The attorneys explain proper loan structures between shareholders and corporations, emphasizing documentation requirements and interest rate compliance. They cover installment payment reporting for private money loans, clarify the Augusta Rule (280A) for tax-free rental income from home meetings, and distinguish between deductible business expenses versus personal costs. Investment structuring strategies for AI and energy stocks are explored, along with C-corporation real estate ownership considerations. The episode concludes with discussions on the expanded SALT deduction limits, pass-through entity tax workarounds for high-tax states, and the new research and development tax benefits under recent legislation.

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

• “What is the maximum that can be contributed to a solo 401k Roth as the employee and employer of my own business, what do I need to do to handle payroll for myself?” – Employee limits: $23,500 (under 50), $31,000 (50-59), $34,750 (60-63). Employer: 25% of compensation. Use professional payroll services.
• “I want to loan cash for my business to myself, since my spouse and I have regular W2 jobs that push our incomes into high, the highest tax brackets. Other than loaning money to myself to pay for rental property. Are there any other uses for those loan funds? What are the issues on the backend for repayment rights?” – Must have written documentation, regular payments, and applicable federal rate interest (4.22% for 2025).
• “I’m receiving installment payments on a private money loan from my borrower. Are these payments listed as income, even though the entire principal balance and interest haven’t been paid yet? How do you show this on a tax return?” – Interest portion is taxable income as received. Principal repayment is not taxable. Report on Schedule B.
• “I have a C Corp and two LLCs. Can you clarify the tax allowance on Augusta meetings, please? Also known as 280A. I believe I was informed that I can deduct up to $1000 per month on these monthly meetings when held, is this still the case for 2024 and 2025?” – Fourteen days maximum per year regardless of entity count. Get three local quotes for reasonable rates.
• “Are the paid fees for business essentials and the Living Trust deductible as startup costs or operating costs?” – Business essentials are deductible (startup vs operating depends on timing). Living trust is personal expense, not deductible.
• “What strategies should I set to invest in AI or energy stocks?” – Wyoming LLC for passive investing. Trading partnership with C-corp for active trading and tax benefits.
• “A C corporation owns a disregarded LLC, which in turn owns real estate. The real estate is sold for capital gains that is incurred by the C Corp. Is this the best way to be structured?” – Never put appreciable real estate in C-corp unless flipping. For buy-and-hold, use Wyoming holding company structure.
• “Does the SALT (state and local tax) deduction of $40,000 apply to a joint tax return?” – Yes, $40,000 limit applies to joint returns. Phases out at $500,000 AGI but maintains $10,000 floor.
• “How does the new PTET (pass through entity tax) SALT (state and local tax) deduction work around policy work for high tax states like California? Are certain entities included like SSTBs (specialized service trader businesses)?” – Pass-through entities can pay state tax for federal deduction. Complex structures and publicly traded partnerships excluded.
• “How might the research and development (R&D) tax credit that’s been affected by the big beautiful bill help me as a small business owner?” – Domestic R&D expenses can be deducted immediately (100%) or over five years. Foreign expenses still 15 years.

Resources:

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Toby Mathis YouTube

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Clint Coons YouTube

Full Episode Transcript:

 Barley: All right, we’re live. Welcome to Tax Tuesdays, guys. We’re still working out a little bit of visual. I hope everybody can see us okay here.

Eliot: Wouldn’t want to miss us.

Barley: Yeah, you wouldn’t want to miss our pretty faces up here. It’s not about the tax knowledge, it’s about us telling you tax jokes. Welcome everyone to Tax Tuesdays. We’re bringing tax knowledge to the masses. You guys know the buzz line. I’m Barley Bowler. I’m the one of the CPAs here at Anderson, one of the tax advisors. We’re joined by Mr. Eliot Thomas.

Eliot: Hello.

Barley: We are back every other Tuesday. You guys know the drill. This is your questions submitted. As we always say, Eliot reads all of your questions, he really does.

Elio: I do.

Barley: Put them in a pile.

Eliot: It’s for a great Friday night in Vegas.

Barley: Totally. You want to know what we do? We’re sitting down at the blackjack table on the side or count your tax questions. Of course, Eliot always does such a great job of compiling them in a way that is has a little bit of a flow. This tax stuff is hard enough, right, guys? We want to try and hash it out in a way where it follows some congruency, a little bit of consistency as far as the questions go. We’re always attempting that.

As usual, these are your questions. Thank you for submitting them. We really love this kind of engagement. This particular forum, Tax Tuesday, has been going on for a little while now.

Eliot: It’s about 11 years almost.

Barley: Right, one of the more longstanding formats that we’ve delivered consistency for you guys. What that really tells me is it’s a good format for you guys. Instead of just, we’re just going to go over some broad tax concepts today, it’s more like the rubber hits the road a little bit. This is my specific situation, specific question. The chances of you being the only one in that situation are very low. We got a lot of people, small business, real estate, a lot of the same needs.

Eliot: A lot of these questions, they are repetitive questions, along the same lines. That’s another factor what gets them on the show.

Barley: Yup. That said, we got our Tax Tuesday. You got the lay of the land here. We got the live Q&A feature in Zoom. Please submit any questions there as we go. Any questions you have, put them on topic and we’ll try to discuss them as a group. Anything that comes to mind, you can certainly shout out in the chat there.

Just of course, as an aside here, you have the platinum portal for submitting written questions as well. We like that because we can look up your client profile to get some more detail there. Of course, we have the live Platinum Knowledge room five days a week, five hours a day. Yes, that does mean you have a CPA and an attorney on call five hours a day, five days a week. Brag to your friends about that and then use that service.

Come in and ask any questions you have. Tax, legal, all of the above. We got a nonprofit open office hour, bookkeeping open office hour, how to be a good landlord open office hour, tons of great material there. Platinum Knowledge room. As far as tax Tuesdays goes, let us know what questions you have in the Q&A. Any feedback for us in the chat? If you can’t hear us, can’t see us, or I guess if you can’t hear us, then you can wave your arms or something, I guess.

Eliot: Speaking of the PQs we have, just to run through, of course Patty’s always helping out in the background. We got Dutch, Harry, Jared, Jeffrey, Tanya, and Troy. I think Troy’s doing our YouTube, so we’re there too. We’re everywhere.

Barley: Right, yeah. YouTube, fast paced on there. I know you guys have a lot of great questions on there. Yeah, thanks to the team in the background. Got some great experience in the background here, guys, from tax preparation all across the board, CPAs, EAs in the chat answering your questions.

If you need a more detailed response, we will suggest that you become a tax client. You can do one-on-one tax planning with us. Anytime you hear somebody say you want to do tax planning with a CPA, you can do that with us if you’re a tax client here. It’s certainly a service that we offer. Fast, fun, and educational. You guys know the deal.

Toby, Clint, and Michael really did start this. We’re just going to tell you all the information that we know about this. Again, if you have a specific situation, hire us for your services. This is how they approach this from back in the day, but Toby’s got a thousand videos on YouTube. Tons of educational content, all free of course.

Eliot: Water, please meet our friend, fire hose.

Barley: Right. If you need some educational materials, and of course we commend you guys for learning legal and tax all at once. It’s certainly a lot. That said, any announcements we want to make, anything we want to hop over there?

Eliot: Just a reminder, we’re going to have our Vegas TAP event coming up live.

Barley: Less than a month away.

Eliot: Yeah. I believe it starts on the 11th, 12th, and 13th. It’s Thursday, Friday, Saturday. It’s going to be at our Durango Casino, brand new. We’ll be there.

Barley: That’s right. We’ll be there answering questions. I’ll be there on Saturday, maybe during the week too. It’s going to be fun. Lots of questions, lots of synergy. Come meet your tax advisors plus your fellow entrepreneurs.

Eliot: Absolutely. It’s a great time. All right.

Barley: All right. Any other announcements there we want to go over? Good to go?

Eliot: Nothing that we want to admit to.

Barley: Right. Let’s hop into the opening question. We’re going to read through the questions here guys, just to give you an idea of what we’re going over today, and then we will hop right in and get into the details.

“What is the maximum that can be contributed to a solo 401(k) Roth?” That’s where we get these massive contribution limits on as the employee and employer, because remember, you’re both for a corporation that you own and control of my own business. “What do I need to do to handle payroll for myself?” Not handle payroll for yourself, but we’ll definitely be covering that. What have we got next?

Eliot: “I went to loan cash from my business to myself since my spouse and I have regular W-2 jobs that push our incomes into the highest tax brackets. Other than loaning money to myself to pay for rental property, are there any other uses for those loan funds? What are the issues on the backend for repayment?” Tough little question. We see that come around a lot.

Barley: Yup. I’m receiving installment payments on a private money loan from my borrower. Are these payments listed as income, even though the entire principal balance and interest haven’t been paid yet?” We’re talking about installment payments. There are components of that payment. You get one check, but there are two or three different components there. “How do you show this on a tax return?” I think they’re in the right place for that one.

Eliot: Yup, exactly. Sounds taxi to me. “I have a C-corp and two LLCs. Can you clarify the tax allowance on Augusta meetings, please?” Also known as 280A. We refer to it as such quite a bit. “I believe I was informed that I can deduct up to $1000 per month on these monthly meetings are the paid when held. Is this still the case for 2024 and 2025?” We’re going to clarify that.

Barley: Certainly go over that. Yup. “Are the paid fees for business essentials and the living trust…” A couple products and services here at Anderson. I got a couple of these Anderson products and services. “Are they deductible as startup costs or operating costs?” Great question.

Eliot: “What strategies should I set to invest in AI or energy stocks?”

Barley: Nice, good. That’s number 10. Excellent. We’re going to be diving into the detail here in just a moment, guys. Make sure you tune in to Toby and Clint’s YouTube pages. Toby, of course, tax attorney, focusing more on the tax side of things, Clint, more on the asset protection. Of course, there’s just a ton of cross over there, blended lines there. Tons of great content on there. Check those out.

I always say this, but I really, especially like Toby’s industry interviews with successful people, various captains of industry, I guess is one term, one term, people successful in their various industries. It’s great information. Just real practical, tangible, and applicable information. There’s Toby’s page. We’ll get to that in just a second.

All right, the rest of the questions here. “A C-corporation owns a disregarded LLC, which in turn owns real estate. The real estate is sold for capital gains that is incurred by the C-corp.” A little different structure there. “Is this the best way to be structured?” We’ll definitely discuss that.

Eliot: “Does the SALT, state and local tax deduction of $40,000 apply to a joint tax return?

Barley: Got an increase limit there. “How does the new PTET pass through entity tax…” We have a pass-through entities, S-corp and partnerships. Those are our pass through entities. “How does this new PTET pass through entity tax, SALT, the state and local tax…” We talk in acronyms, guys. If we talk in acronyms and tax code, we’ll just talk numbers and acronyms all day, and we’ll know what we’re talking about. “How does this new pass-through entity tax, state and local tax deduction work around policy work for high tax states like California?” Great question.

“Are certain entities included like SSTBs, specialized service trader businesses?” Yeah, lots of acronyms, guys. We’ll definitely be going over it. That’s a confusing area. We’re going to drill down on that, and there’s been some changes there too. And finally?

Eliot: Yeah. It’s going to be a day of definitions today. “How might the research and development help me as a small business owner?” We’re going to dive into that one. That is our final one there.

Barley: Yup. Here’s Toby’s page. Tune into the YouTube pages, guys. As you can see, I’m subscribed. Are you?

Eliot: Crazy amounts of videos and subscribers. Good stuff.

Barley: Great content there. Yeah, we got events. Scan the QR code, more information. If you want more information on any of these upcoming events, definitely let us know. Tax and Asset Protection Workshop. This is the one on September, right?

Eliot: That is correct. This is the weekend one here on September 6th. That’s going to be just the video one.

Barley: No, this is the video one?

Eliot: Yeah. On the 6th will be the video, and then the live here in Vegas TAP event will be the September 11th through the 13th. That’s Thursday, Friday, Saturday. Again, the one that Barley and I will certainly be in attendance at. Anxious to see you guys.

Barley: You got the virtual video version, or you can show up live. Of course we want you to show up live, but if you can’t.

Eliot: You just can’t beat all the give and take that happens at these events. It’s really the experience.

Barley: Yeah, that’s true. I totally agree, plus, mid September’s not a bad time to come to Vegas. QR code, you can set up a strategy session right now, guys. If you need to, again, order of operations, submit written questions to the platinum portal, you can go to the Platinum Knowledge room and talk to a CPA or a tax attorney, not quite yet anymore. Five hours a day till 2:00 PM Pacific is when that closes, or you can set up a one-on-one call with a CPA or tax advisor. Let us know. Scan that code and we can get that set up. Should we hop right in?

Eliot: Let’s do it.

Barley: All right. Let’s talk tax questions. This is a great question. I love starting off with this one because we’ve had some recent changes in this area, plus for all of you business owners, a solo 401(k), you hear about this a lot, this is one of these massive, massive contribution limits. Individual retirement arrangement, we get maybe $7000 or so, depending on the age. Solo 401(k),10x that, $70,000 or more every year that we can contribute, each spouse and taxpayer. If you’re looking to max out tax free savings, this might be one of the first things we look at.

“What’s the maximum that can be contributed to a solo 401(k) as the employee and employer of my own business? What do I need to do to handle payroll for myself?” Let’s talk about the limits first, contribution limits.

Eliot: Of course, like everything, it’s a good thing, but it’s got limits. We’re going to take away just the concept of the Roth here and just in general, look at the 401(k) because it’s the same. As far as overall limit, $70,000 if we’re under 50.

There’s going to be an employer contribution as well as the employee contribution. Employee gets to put in $23,500. These numbers adjust basically every year or every other year. Employee can put in $23,500. The balance, which will be $46,500, could be put in by the employer. There might be some other limitations on the employer. We’ll get to that here in a second, but those are the limits you would have there. If we’re 50 to 59, then we can put a little bit more, a little catch up going on, another $7500 for a total of $31,000 as the employee. Again, it would be still $46,500 from the employer.

Lastly, new with the big, beautiful bill, they have this unique category if you’re 60 to 63. There, you can actually put in an additional $11,250, that is an additional amount to the regular plan amount of $23,500 for the employer. That boosts us all the way up to $34,750 and again, still the employer is putting in $46,500. When we talk about the employer component, there are some limits there, 25%. What do we got going on there?

Barley: Yeah, it’s a percentage limit on the employer side and a dollar limit on the employee side. Essentially, whatever you pay yourself in compensation, it’s roughly going to be 20% of that. There’s a slight adjustment for payroll taxes, but essentially if you pay yourself a hundred thousand, we can assume roughly 25% of that’s going to be eligible to be contributed over to your solo 401(k).

Eliot: Yeah, so we just look for your W-2. What was your compensation? We take that times 0.25. That same amount the employer with the total maximum amount of those contributions of, again, $77,500 or $81,250, depending on where we fall.

Barley: Depending on your age. What Eliot was saying is that the overall contribution limit will stay the same. It changes obviously with our age, but that’s the part we’ll look to adjust. We get to max out employee dollar amount, and then we just looked to write out the balance as the employer.

You got to write yourself a pretty decent sized W-2 paycheck to max this out, but you don’t have to max out. You don’t have to contribute to the max. You can contribute as much or as little as you want. When we’re talking about north of $80,000 a year that we can contribute to a solo 401(k) to grow tax free, we definitely want to pay attention to that.

Eliot: We know if we’re going with an S-corporation, we know we can put in 25% of whatever the earned income was. We just looked to that employer limits, which we now know is $46,500. We just divide that by 0.251. It says, as long as you’re getting paid compensation of $186,000, that’s where you’re going to be able to maximize both the employee and employer portion and hit the max amount.

Barley: Yeah, absolutely. How should we address the Roth component of this?

Eliot: There, it does get interesting. This is a different story in 2025 than it was in previous years. In previous years, what you would do is your employer wouldn’t contribute to a Roth. Just to back up, you have the traditional portion, which is a deferment or a deduction, if you will, to the employee or the employer, whichever is putting in. Then you’d have that Roth component, where we wouldn’t get a deduction. The reason why, in traditional contributions, they grow. You’re not taxed on them, but you get taxed when you later take them out at retirement, not so with the Roth component. You don’t get a deduction going in, but it grows tax free. When you take out later on in retirement, you don’t have to pay any tax. That’s the real play here.

Specifically, our question is asking about the Roth component. Back in 2022 or so, or before that, the employer could not contribute into that Roth component, but they changed that, allowed it. It took us a while to hear from them about how they wanted to really do it.

Basically all is happening is if the employer puts in a portion of let’s say $10,000, into it, let’s say Barley’s making a hundred thousand on a Zest Corporation, he wants this employer to max out that $20,000, and we know it’s going to be $25,000 is the max, whatever amount it was, let’s just say it was $10,000 going in, we add it to his payroll that the employer’s putting in. That $10,000, we add to his paycheck, his compensation, $10,000. Barley shows it as taxable income, that $10,000, so he has to pay more tax on that on his personal return, his 1040.

The business doesn’t get a deduction necessarily just for the contribution to the Roth, but it does get a deduction because that extra $10,000 is part of his salary. The business gets a deduction in the sense that I paid a paycheck for an extra $10,000 to Barley. Barley pays tax on it, so we don’t offend any of the rules. In that sense, it was after tax. The money goes into the plan, grows tax free, but we will still have those overall limits up to 25% of compensation for the employer to put in. We have the overall limits of how much that we walk through, of how much the employee can put in, and then it’s always countered by how much the employer can put in.

Barley: A lot there, obviously. A lot to think about there, especially with the new Roth component. Remember, we used to do these Roth conversions. We’d have a traditional, we convert it to a Roth to grow tax free. That’d be a taxable event. Now we have an option to  start chipping away, adding to the Roth amount via our paycheck. Yeah, the deduction part of that gets pretty exciting. Who’s taking the deduction? Which part of its tax deduction? Which part of it’s not? Speaking of that, let’s skip right to the second part of this question.

Eliot: Yeah. We get to the payroll.

Barley: Because this is where it happens.

Eliot: Yes, absolutely.

Barley: This is where all of these little entries and balancing things have to happen.

Eliot: It’s going to happen on the paycheck. When asked about what’s the best way to do it is, as you said, don’t do it. I would never do payroll myself I used to for a company. I will never go back to that. Never say never, but I’m saying never. It’s tough. There are certain people who are wired to do that, and they all work for payroll companies like Gusto or whatever it is. They sucked them all up and they hired everybody who knows how to do it.

Barley: Right, yes. No one left out here.

Eliot: I wouldn’t do it for yourself, but if so inclined, there are some key elements to it. We have some reporting requirements. We got a federal form. Was it the 990?

Barley: 941 is our annual 940, our quarterly.

Eliot: Yeah. You got to do those every quarter. The quarterly is going to cover how much is your federal income tax, all the social security, Medicaid, all of that. Then we got that one at the end of the year, that’s going to be your FUT, federal unemployment tax. These reporting requirements, if you don’t know what you’re doing, again, this is where you probably want a professional to do it. It’s worth it. If nothing else, just look at what they do. If you feel so energized that you want to take this on, pay someone to do it for a while and then copy them.

Barley: Right. That’s a great suggestion.

Eliot: I would still not do it myself.

Barley: I like that with bookkeeping maybe a little better.

Eliot: That’s what you need to do. Those are some components. We got that quarterly and annual reporting, which is very important. They’re going to track you down. They’re going to give you some grief, give you some pain if you don’t get those in. That’s part of it. Certainly you got to make these checks on a regular basis and make sure they’re withholding.

I can tell you from having done it, that federal holding has to get turned into the government so they get their money. You actually can get personally held liable for that, even though you are an officer of a company. There’s lots of incentive not to do this yourself, but that is a unique place. It’s one of the few places as an officer you can be tagged with a lawsuit if you mess this up because you’re doing withholdings on behalf of employees.

Barley: Even if you’re the only employee, it doesn’t matter. You can still get in trouble for that. Just FYI, Gusto, places like that, you can look for a scaled down payroll service. You don’t have to do every two weeks. You can extend that out a little bit to probably save some money there, less bells and whistles. ADP is going to charge you the full price for every two week payroll or whatever, but you can get away with doing that less frequently.

Eliot: Yeah. A lot of clients do it quarterly. As tax advisors, we get hit up all the time with, well, what should I do by the end of the year. We’ll look at how much you’ve paid in. Maybe sometimes we say, hey, you don’t need to do a fourth quarter payment. You’ve done enough wage. Other times we say, hey, we got to bounce it up a little bit more. That’s fine, we can do that. There is a lot of tax planning in this potentially. However, I’m going to recommend you have someone else do it if possible.

Barley: Yeah. Payroll and bookkeeping is just one of those things. You know why I like it too is because that really is the foundation of our operations. It gives us so much information. You don’t have to think about it, and you got good books and records. It’s going to tremendously help you just view your business through a lens of what’s profitable, what’s working, and what’s not, very, very important. Any questions we want to go over on that one?

Eliot: No, I think we’re good there.

Barley: Yeah, we got the whole team in the background. Rachel’s in there now. We should get there more. Yeah. You guys are in good hands there in the Q&A, so just keep them busy. You have some really capable professionals in the chat or in the Q&A. Ask some questions.

All right, let’s move on here. We handle everything on there. We could go more into the weeds on the payroll 401(k) stuff, guys. As usual, you guys have all heard me say this before. If this applies to your specific situation, let us know. We can drill into your specific situation a lot more. Send us a platinum portal question, set up a tax consult, whatever the case may be.

Eliot: As Troy pointed out into the webinar chat, we do have a new payroll partner, Newtek. He put conveniently the link on there. Thank you, Troy.

Barley: Good Okay, they’re doing payroll now too. Also banking stuff, I think too.

Eliot: We’re telling them they are.

Barley: All right, next question. Let’s go.

Eliot: Is this our of loan one? Here, we’re going to get into some loans. We deal a lot with loans between companies and things like that, shareholders, and back and forth. Thought we’d brief some clarity to the issue.

“I want to loan cash for my business to myself, since my spouse and I have regular W-2 jobs that push our incomes into the highest bracket. The idea here is, well, I don’t want another payroll for my company, or I don’t want a dividend because we’re already in the highest bracket. What if we just take the money out as a loan? Other than loaning money to myself to pay for rental property, are there other uses for the loan funds? What are the issues on the backend for repayments?” A lot of details going on there, and we’ll tear that apart here.

First of all, a lot of you are familiar with the loans from shareholders. That’s where a shareholder lends to a C-corporation, let’s say. We have a certain arrangement that we set up. This is a little bit different. This is you have money cash in your business and you want to loan it out. Now I’m thinking probably corporation here, CRS corporation.

The unique thing here that the IRS really gets all nervous about is you’re taking money out of a corporation probably from profits of some nature that’s why it’s there. You’re giving it to yourself without paying any tax on it because it’s a loan.

The IRS, as you can imagine, gets bustly about that. We got to make sure we go with formality. We got to have this written out. You need to have some  written document for what this loan agreement is. You need to have regular payments. Indeed, those payments have to have an interest component. How much? We usually go with applicable federal rate. We can find that.

We go with a blended rate typically. That comes out every July each year. This year for July 2025, I believe it was 4.22%. That’s going to be imputed, added on to that amount. It’s usually what happens if there is no payment going on. As I stressed just a moment ago, this is very different than a loan you may make to your C-corporation. This is you as an individual taking money out of the C-corporation.

We don’t get that lax of whether or not a payment’s made or anything like that because this is money coming to you. You must make a payment. You must have a payment schedule, let’s say every month. Amount is being paid back on that loan, again, with that interest rate of 4.22% for 2025. That blended rate, we got to make that payment. Otherwise, this is nothing more than hidden compensation to you, and the IRS will do so.

Barley: I’ll make it a dividend or a W-2.

Eliot: Yes, sir. Exactly right. We get right back to where you were trying to avoid because you’re in the highest bracket. That’s fine, take the loan. That’s okay. It’s going to be you personally. Again, you got to pay that interest back in.

When it does that, when you pay the interest instantly, before we get to that part of it, what the uses are for the loan funds? You take that on personally. You can probably do whatever you want with it. Certainly a business venture, put it into stocks or something like that, that’s fine. There’s no real condition, but I would suggest not doing it for your personal use. There’s really nothing out there that says you can’t, but it might give that shade of inference that maybe this was just compensation you took out, you use it to go on vacation or something like that.

If you’re not really careful on the repayment, I think there you’re going to really run into some problems with the IRS under audit. I would suggest keep it for business purposes, but there’s nothing in the code that says it has to be. Any thoughts on that?

Barley: No, I like the strategy. Borrowing is not income, paying it back is not an expense. You’re certainly right. I guess maybe I would just suggest, make sure you have a pretty clear idea of what you want with the funds and when you could pay it back. That will allow you to structure your note a really airtight way. We’re borrowing this much, we’re going to pay it back over this timeline. I don’t know what else to add to that. I don’t love it, but it’s a good strategy for higher income people.

Eliot: Especially when we’re in the era of maybe higher rates.

Barley: Right. Why borrow from anyone else?

Eliot: A lot of debate on that one. Are we actually in an era of higher rates? Maybe compared to where we were 10 years ago, but historically, really the rates aren’t that bad. We’re actually quite spoiled. I know nobody likes to hear that, but then they’re just not that bad.

Barley: Sure, you can borrow money at 5% or something.

Eliot: Right. I was just listening to somebody from the Fed Reserve, and they were talking about how their parents had to take an 18% note to get their house back in the 80s and the 70s. It’s been worse. I think probably this is a better plan when we do have lower interest rates because you’re not paying as much an interest. It all keeps you out of that highest bracket.

Just to your point, you have a good use for how you’ve planned on how you’re going to use these funds. You have a good payment strategy to put it back in. I think that’s just fine, but just make sure you’ve documented everything. You got a true note out there in writing, payment schedule, we’re making the schedule, and it has interest.

Barley: Issues on the backend, you are going to borrow money and owe interest to the corporation. The corporation will report interest income, just FYI. That’s about the only taxable repercussion there.

Eliot: Yeah. Just the biggest issue is that you do make payments. So many people will say, well, just between me and my business.

Barley: Who’s going to know?

Eliot: Yeah, well, they’re going to know. You want to make sure you do all the compliance. It could be that you have to send out some forms for how much. We deal a lot with 1099, INTs, and things like that. It could be some reporting like that as well.

Barley: Right. That’s a great point. We got, obviously, as most of you know, the forms library plus the document review process. Those two things combined right there, that’s a great service. Pull a form from our library, fill it out, and then have one of the attorneys let you know if you filled it out right. Take advantage of that.

Eliot: You just want to be really careful of this image that you’re an employee or an officer of your own C-corp and you’re taking money out. You’re not declaring it as income. That’s what the IRS is very suspicious of.  Having that payment schedule with respectable interest rates and following through on it is going to be critical.

Barley: Any questions you want to go over?

Eliot: I think that’s it.

Barley: All right. Okay. “I am receiving installment payments on a private money loan from my borrower. Are these payments listed as income, even though the entire principal balance and interest haven’t been paid back yet? How do you show this on a tax return?”

Eliot: It’s a great question. It’s a nice follow up from getting into the area of loans here. First of all, when you’re lending out, now you’re getting paid back, lending in and of itself is not a taxable event. Barley lends me a hundred thousand dollars. Bad idea, maybe, but it’s not income to me that I take it, nor is it a deduction that he did so until it’s considered a bad debt.

Barley: We just have a note or some instrument to record the loan.

Eliot: Exactly, but of course there’s interest on this. That’s going to be income to him, certainly, just like we saw on the previous question. Even though the entire amount, if I start paying them back regular payments, there’s going to be a component of interest in those payments. We see that on a mortgage or anything like that. We have these schedules that show your payment’s amortization tables on your repayment on loans and things like that. It’s no different here. We’d want to have that going on.

A portion of each payment is going to be repayment of balance. Likewise, that’s not income to him, he’s just getting his money back, nor is a deduction to me because I’m just paying back what I owe him. The interest component, that’s something else. That is going to be income to him.

I guess whether or not how I handle things will depend on how I spent that money, is whether or not it’s a deduction to me. If I went out and took the funds and spent it, that’s a whole different consideration. If I use it for some worthy business project, I might have some deductions going on there, but my repayment to him is certainly not a tax event with the exception of the interest. That’s one thing.

Even though the whole amount hasn’t been paid back, you’re just going to take a small portion. Typically, you take 10% annually or something like that, you divide it up over 12 months, and you take your little bit of interest payment on each one. How are we going to show it on the tax return? If you’re getting this interest income, where do we put that?

Barley: There’s an installment sale. I think it’s 6252. I wrote it down somewhere. It’s an installment sale request form or something like that. You’re exactly right. Even though the entire principal interest hasn’t been paid back yet, that’s the benefit. That’s why we do these.

This will typically benefit the buyer or the seller, but that’s going to be one of the benefits in some of the cases. You don’t have to report that income in full. You report it as you receive it. That can be very, very beneficial. Add in the interest rate considerations there and there can be a lot of upside here. How do we show that on a tax return? You have an installment sale form. You have to do this in the year of the sale. I don’t know many other restrictions on that form.

Eliot: Also, you don’t want to mix this up with an installment payments where you sold something. It’s a little bit different there. That can have a component of gain.

Barley: That’s what I’m talking about. Thank you, Eliot. Yeah. No, that’s for selling, not receiving payments.

Eliot: We’re still going to have components here. We have interest in the principle being paid back. We might put the interest here on a Schedule B. We do that often. We see a lot of interest. If you’re receiving the interest, we could put it there. Barley’s right. It’s the still the same concept of an installment in that it’s just not going to have a gain component because we’re just getting interest in principal back. That’s both sides of what we look at for these various notes. Again, documentation is so critical.

Barley: Right. Very fact intensive, the loan and borrowing portion.

Eliot: Yeah. Again, where we show it on the return? We mentioned Schedule B. That’s where a lot of interest. If you’re a bank, and this is really your number one business, this is what I do, this is the only thing I do, I lend all day long, you might be putting it in some different places, it could maybe conceivably be a Schedule C type business if that’s really what you do, your core business. That’s few and very rare to see that, so I think we’d be looking at Schedule B.

Barley: Probably a highly regulated industry.

Eliot: Yes. You got to watch out. Usually, rates, we talked about those.They’re quite steep.

Barley: We’re in Nevada. You can do whatever the heck you want here. Somebody will pay the rate, you can charge it.

Eliot: The user rates are a little bit different. Lose fingers.

Barley: Any questions on that? Moving on?

Eliot: I think we’re ready to go.

Barley: Excellent. All right. “I have a C-corp and two LLCs, limited liability companies. Can you clarify the tax allowance on Augusta meetings, please?” The Augusta Rule, 280A meetings. “I believe I was informed that I can deduct up to a thousand per month for monthly meetings. When held, is this still the case for 2024 and 2025?” Great question.

What we’re talking about, the 280A, Augusta Rule, this is low hanging fruit. Easy money, guys, for pulling cash out of your corporation tax free. Remember the win-win here, it’s a legitimate business deduction to your corporation. Corporate meeting expense or something like that on the profit loss. Legitimate business deduction, lowering taxable income at the business. This, when it hits your pocket, like a reimbursement, it’s technically rental income, but we just don’t have to report it if we meet the test, if we meet the requirements.

Eliot: We certainly don’t have to pay tax on it.

Barley: You certainly don’t have to pay tax on it.

Eliot: Just stepping back, this 280A, that’s the code section. This is found under. It’s also known as the Augusta rule because it comes out of a case from down in Augusta. This has nothing to do with C-corps, nothing to do with LLCs or anything like this. This is a provision to you as an individual. Barley can do it, I can do it. Troy, anybody out there can do this for their personal residence. You can rent it out up to 14 days a calendar year. You can’t go over that, but the income you receive is tax free.

If you do happen to rent it out for 15 days, well, then all of it becomes taxable even that initial 14 days. That’s why we’re so stressed. If you’re going to do this, keep your rental under 14 days or less.

Where does the businesses come in? Let’s just pretend that if I was going to go to Barley’s place and I said, well, hey, here’s a thousand bucks, I’m going to be staying at your place, well, he’s going in two hours if less. He doesn’t want me there. Better than that, what he can do is he can have his own corporation, rent his home out, have a meeting in his place, in his home. That’s where you hear about, maybe it’s a thousand dollars or something like that. That’s where we start bringing in corporations and businesses.

In this case, we have the C-corporation. We would typically do it on the C-corporation. These LLCs, we don’t know how they’re taxed. We’ve talked often about that. It depends how they’re taxed, but it’s going to be your corporations, your S-corporations or C-corporations, that generally take advantage of this because they’re required to have meetings. They can have a meeting in your home. Pays you a reasonable amount. What’s reasonable? We got to do some background. How do we determine reasonable on one of these?

Barley: Right, and we got a whole kit on this and videos on it as well. Three local quotes. Go to the local hotel with a conference room and say, hi, I want to rent your conference room for a day. Audio, visual, how much is that going to be? Get it on an estimate, an invoice, or an email with some corporate letterhead on it. Make it look official. Get three of those, take the average. That’s how much you can charge your corporations. You’re going to charge rent to your corporation.

Again, just like Eliot said, as long as you do this less than 14 days, you don’t have to pay tax on the income. The Augusta rule, the Master’s Golf Tournament and down in Georgia, this tiny town of Augusta, hundreds of thousands of people descend on this tiny town, they were essentially like, hey, we’re being forced out of here, I’m not in the business of renting my house. I’m being kicked out of town, I’m going to rent my house out to people, they’re going to pay me these exorbitant prices, and then I’m going to come back when the whole mess has been cleaned up.

The IRS is like, all right, you’re not in the business of renting your house. You’re being forced to do this. We’re going to say, as long as you do this less than two weeks, less than 14 days, you don’t have to pay tax on the income. We’re just applying that to our situation here. Again, the quotes, you get three local quotes.

Local is important. If you live in the Midwest, you don’t get quotes from the San Francisco Bay Area or something like that. Have to be local, reasonable quotes. Just for a regular sized conference room, eight to 10 people, whatever, just keep it reasonable. Audio, visual for the day, get three of those quotes. Take the average. Essentially, yeah, your corporation is just going to pay you rent to rent your house, rent your living room and kitchen. You guys are going to hold the board meeting. Whatever you do, again, as long as you do that less than 14 times, you don’t have to pay tax on that income, but still a tax deduction of the business.

Eliot: We get asked this a lot. It is confusing in the code, but it’s 14 days or less, so you can do it 14. We mentioned some other LLCs. If those were corporations as well, we get asked a lot. Can I do 14 on each one of them? Each of my corporations? No, it’s a total of 14 because that’s you, the individual, renting out your home, we could do seven and seven, two and 12, zero and 14. Any combination of 14, we just can’t go over 14.

Barley: The limit is at the personal level. If you’re already renting a room in your house to somebody, you can’t take advantage of the 280A, generally speaking. Just to clarify that, the limitation is at the individual level, exactly.

Eliot: Again, sweeping up a little bit here, it’s not that there’s anything magical about a thousand, we just throw that out there because a lot of places we hear from our clients, well, they’re getting quotes for about a thousand that’s why we use it. It’s certainly different depending on where you live. San Francisco is going to be a very different price than Missouri, small towns, or something like that. You’re going to see a great variety, but typically we see anywhere from 750 to 1500. We usually just go with a thousand. That’s what they’re referring to. It’s not a matter of 2024, 2025, it’s just whatever the quotes are for that year.

Barley: Good for estimate purposes. How much can I pull out my corporation? Throw a thousand bucks a meeting is a great place to start for an estimate.

Eliot: Could be lower, but that’s on the low end of what we’ve seen out there.

Barley: Yeah, excellent.

Eliot: Yeah, great question. Hope that brings some clarity there.

Barley: Yes, this is still available for 2024, 2025. This part of the code didn’t really change. We can take advantage of this every single year. That’s going to be a point for a lot of these guys. Wash, rinse, repeat. We want to put these on autopilot. Reimbursing for your home office, your 280A meetings. Set it and forget it. That’s the idea here. Set it and forget it. You can get these deductions.

Eliot: Just make sure we’re making the payments because that’s how you get the deduction. I would say this that sometimes we talked to people. I know back in 2017, I’d have some conversation. We used to consult with a client and go over this. They get busy, COVID happened, all these things, and then they come back in 2022, 2023. We never really started that. That’s fine. Hey, today’s a perfect time to start then.

Just imagine, with four years, if you were doing this, how much now we’re talking about? How much tax savings in cash? I don’t know anybody who doesn’t want $14,000 of cash tax free in their pocket. If you don’t want it, we’ll be happy to take it. I’ll split it with Barley.

Barley: We can talk about gifts’ taxes tax free.

Eliot: Yeah, exactly. Give it to your favorite tax advisors. It adds up. You really want to take advantage. You mentioned it’s the low hanging fruit. This fruit, it’s not even hanging anymore. It’s just on the ground. It’s plain and easy.

Barley: Yeah. Did you mention cash has to change hands?

Eliot: Just briefly hit that again. Yeah.

Barley: Just say it again, verbatim. To substantiate the deduction, we get the $14,000 check in our pocket that we don’t have to pay taxes on. Yay. How do we substantiate that? The corporation has to actually write us a check to take that. How do we substantiate that? I have to turn in three invoices, take an average quote, and come up with some  rental agreement from my corporation. We’ve got to trace this all the way back. We have to follow those steps. Again, you’re going to be doing the exact same thing next year. Just put it on autopilot, put it on repeat. Cash has to change hands.

Eliot: Because we’re doing meeting minutes for a corporation, that’s why it’s renting typically, you do want to make sure you have those meeting minutes written up as well. If you’re one of our CAP program clients, that’s our company assistance program, all you have to do is go in and log in to our website, get into your platinum portal. There it says corporate meetings. Just type in the information. What entity? My C-corp. Where at? It was at 123 Main Street, my home address. What was talked about in the meeting? Throw that all in there and hit send online. Just hit enter and it comes onto us digitally. We’re going to fill out your meeting minutes for you for free.

Barley: Now you’re in compliance with your board meetings.

Eliot: I don’t think we could make this any less stressful.

Barley: Right, yeah. This is a great example of the easy money part of it. Yeah, absolutely. Anything else on there? Let us know if you have questions on that one, guys. This doesn’t have to be monthly. If you had 14 days left in the year, would you hold 14 meetings? I don’t know. That might be pushing it a little bit.

Eliot: How many we go to? We have all kinds.

Barley: That’s actually true. We do several a day. A little bit of reasonableness there, but it doesn’t have to be monthly. You get 14 meetings a year, that’s it. You use it however you want.

Eliot: Did we mention this guy?

Barley: Did we mention this guy? Did we mention that you should subscribe? Did we mention that we’re up to a thousand videos? Did we mention that we’re also a half a million subscribers? Almost a million between the three. Excellent. Make sure you tune into the YouTube channels, guys, as most of you know.

For anyone that hasn’t been there, just go there right now. There’s just so many cool different topics. All sorts of entrepreneurs out there are doing the thing. Listen to what they’re talking about. Great advice.

Of course, scan the QR code right now. We can set up a strategy session. If you have specific, you want us to crunch some numbers, specific guidance, anything like that, let us know. We can set up a call to do that. Of course, we want you to show up at the live event here. I’ll be there Saturday. Can’t wait to meet you guys. Scan this code, come on down to Las Vegas. The Durango really is nice. It’s beautiful, beautiful. That’s a local family too. That station casinos or something like that?

Eliot: Yeah, I believe so.

Barley: They’ve been around a long time. Look forward to see you guys then. Back to the taxes.

Eliot: Yes.

Barley: All right. What do we got?

Eliot: “Are the paid fees for business essentials and living trust deductibles startup costs or operating costs?” We get this a lot. This question is a great question, so I thought it was time. We’ve answered this maybe a long time ago. It’s time to bring this thing up.

These type of things, business essentials, those are the packages that you’re using to help operate your business. That’s why we call them essential. That is a business expense. Yeah, that’s deductible. Is it a startup cost or operating cost? It just depends. If you paid for it prior to starting up and to actually starting your business, probably going to put it in the startup column towards that.

If it was after the fact, then it’s going to be an operating, probably deduct the whole thing right away that year. That gets into a little complexity. That’s more how the tax preparer’s going to have to present it per the rules for startup costs and things of that nature. It’s going to be really a factor of were you already in business already up and running when you incurred the cost as to whether it’s going to be one or the other.

The only difference between them, startup costs you may have to amortize. That’s a possibility on startup costs because we can deduct $5000 typically right away. The rest would be amortized, generally speaking. Operating costs, we don’t have that problem. You deduct immediately. Again, that’s for your business essentials. Indeed, just about anything you pay with Anderson for, we’re a business service, it’s probably going to be deductible with one exception. What’s that?

Barley: The living trust, and you’ll hear us say this a lot too, it’s not tax. There’s no tax repercussion there. I set up a living trust. How’s that going to affect my taxes? Until you pass, it’s not really going to affect your taxes at all. This is for personal legacy planning, personal wealth planning, therefore a personal expense.

Eliot: Yeah, so we typically don’t deduct the living trust expense. It’d be neither startup nor operating.

Barley: Like Eliot said, these are a couple of services and products offered here at Anderson, business essentials package, living trusts. The benefit, if we do your taxes here, any dollar you pay us, we’re going to put somewhere. Living trust, that may not be deductible, likely not deductible for most of us. Your platinum subscription fees, all your entity fees, we’ll do all of that allocation if we’re doing your tax prep. Just FYI. If you want to skip that part of the bookkeeping, any dollars you’ve paid for us, if we’re doing your tax prep, we’ll allocate all that stuff for you and show you the breakdown of it.

Eliot; I don’t think we’ve gone over one thing today that’s a personal expense. Just about everything we advise on, the vast majority of it is business related.

Barley: Isn’t that part of the whole point of why you guys are here? I pay all my utilities, cell phone, and internet billed house, how do we turn part of that? It already is, in essence, a partially business expense. How do we get a deduction for it?

Eliot: How do we get it to cross the line where it actually is? We get that deduction. That’s exactly why we’re here.

Barley: Legitimate business expense to the business and a tax free reimbursement to you. Yeah, absolutely. Yeah, that recharacterization of those expenses, absolutely. Great question.

This is a good one too. “What strategies should I set up to invest in AI, artificial intelligence, and energy stocks?” Eliot and I of course talked about these before. What I did with this question, I just took AI and energy out of there.

What structure do we advise to investing in trading stocks? I don’t want to totally disregard that. Of course we’re talking about energy. You might be talking about oil and gas. We could maybe structure that a certain way. If you have your own business, closely held stock in some business, that might be treated as a certain way. What we’re assuming here is you’re buying and selling equities and stock in AI companies and energy companies. What do we recommend?

Eliot: We got a couple different paths we can take. If it’s something that you’re not really an active trader, this is not what you do all day long. You’re not trading stocks, you’re not following the market. You just made an investment. Three years from now, you go, oh, yeah, I did make that investment. We’re probably going to just put that in a Wyoming LLC, what we call safe assets.

You often hear Clint speaking on structure. They talk a lot about that. Those are assets that don’t do anything. They’re not going to get you sued. The fact that you invested in stock A, B, or C isn’t going to get you sued until you start giving away trading secrets or something like that.

Barley: Right. Yeah, but no one’s going to trip over your brokerage account and sue you.

Eliot: Right, exactly.

Barley: Safe asset.

Eliot: Just put in that LLC, you’re good to go. That typically has no operations. It’s going to get that box, that Wyoming LLC is sued. We’re good. What if we are doing a little more active trading, then okay, maybe it’s time to look for some tax advantages. We do have a trading partnership.

We often talk about setting up a partnership. Put the trade in the brokerage account into that. It’s no longer owned by you, but it’s now owned by the partnership. Why do we do that? Barley invests in something. He makes a hundred dollars a gain, right now all of it is going to hit is 1040, a hundred dollars taxed on his 1040. The minute we put it into that partnership though and then we started there, and let’s say 10% owned by a C-corporation, 90 by him, immediately that a hundred dollars got split. $10 to the C-corp, $90 to him. We’ve already saved the tax on $10 off of his 1040.

Barley: Right. Reduced by taxable income.

Eliot: We all know, oh, hey, Eliot, you still have the $10 taxed at 21% on that C-corp. That’s right, but what do we have in a C-corp to help us out there?

Barley: Reimbursements, tax free.

Eliot: Totally. Didn’t we just talk about one?

Barley: Home office, 280A.

Eliot: 280A, Augusta rule, all of that, maybe medical reimbursement. What do we got going on with medical?

Barley: Yes, unique to a C-corp. We can reimburse you plus spouse, plus dependence, for 100% of your out-of-pocket qualified medically.

Eliot: Absolutely. He can use all those things to get that $10 out of that C-corporation back to him tax free. He’s got $10 tax free in his pocket, didn’t have to pay tax on his 1040 for it, zeroed it out on the C-corporation because these were all deductible reimbursements from the C-corp. That, you can’t beat. There’s win-win. That is win to the nth degree. It’s a really great play. We always want to look at the numbers.

What if he had enough money coming into that C-corporation as far as gains? It wasn’t $10, maybe it was $10,000, or maybe it was $20,000. He only had so much gain coming in $20,000. Let’s say he had expenses for $30,000. If he’d done his 280A, he did his administrative office, he did his medical, let’s say those expenses are $30,000, he has a budget in his mind about how much he could take out of that C-corp.

He only had $10,000 of gain, let’s say, or $20,000 maybe from his trading. Can we get any more just the corporation’s percentage ownership from getting more income? We can’t. Partnership has a very special payment that we can do.

Barley: C-corp.

Eliot: The partnership has the payment, but it’s the C-corp that’s going to earn it. It’s a guaranteed payment.

Barley: I thought you’re talking about loan shareholder.

Eliot: Yeah, to get more money in earned income into our C-corp. Can you walk through it?

Barley: Yeah, right. The first part we’re talking about there is the K-1 one split. Set up a partnership. I’m $90, C-corp is $10. Right there, we’re going to have the K-1split, $90 to me, $10 to the C-corp. There are other ways we can get cash to the C-corp. Like Eliot just mentioned, the guaranteed payment. This is unique to a partnership, it’s called a guaranteed payment to a partner. It’s to reimburse for services provided or capital provided.

The unique part about this is that this is ordinary income to the C-corp, so now it has some earned income over there. That creates some special advantages there, but also it just gets more cash to the corp.

Eliot: Exactly. If we have that deficit, he has far more he can do in his reimbursements than what is budgeted in the C-corp. We can get more in there as long as it’s all reasonable. You certainly want to have it written out what exactly those services are that the C-corporation is going to provide. It could be marketing services. It could be bookkeeping, making sure the tax returns are done, any number of things. The key here is that this is a way he can shift significant amounts of money off of his return into the C-corp and get it back tax free, or we just leave it all on this personal return and it just gets all taxed there.

Barley: Right. All we’re proposing here is I have some capital gains. I either have a hundred dollars capital gained income. It’s either all going to hit my personal return or we set up a trade structure. I have $90 capital gain to hit my personal return and $10 in my pocket that I don’t have to pay tax on. Obviously the more zeros we add to this, the more it’s going to make sense. It’s certainly something we want to take a look at now.

Conversely, I know we got to keep it moving a little bit, but let’s say we’d have a killer year and a bunch of money in the C-corp. That’s where we could go all the way back to our first slide and look at a solo 401(k), and have a qualified retirement plan sponsored by the corporation. Huge benefits to this. You’re not going to likely going to have employees in your trade structure. If you have employees in another business you control, that will obviously affect this.

For those of you really killing it out there with the stocks, I know there are some of you, you got a bunch of money in the C-corp. You can put yourself on payroll. That C-corp can reimburse your medical bills, your home office expenses, put you on payroll, qualified retirement plan. This is a win-win certainly for our closely held family held corporations.

Eliot: To bring it all back 360, we’re doing so well. We got all these transactions going on. That will justify you getting that bookkeeping, and they’ll handle your payroll for you. There you go, which is deductible.

Barley: Once you’re getting all the good capital gains from the AI and energy stocks. Exactly. Great questions.

Eliot: Again, no activity, very limited activity, just put it in a Wyoming safe LLC, safe assets. Little bit more activity, think about that partnership. Of course, we want to talk this out. You want to have a consult so we can see that the numbers make sense. If the money doesn’t make sense, don’t do it. Hopefully that just explains how we make those decisions.

Barley: Yeah, that’s a great way. You’re going to have an extra tax return, some extra bookkeeping, two extra tax returns in the case of a trade structure. If we can reimburse $20,000-$30,000 back in your pocket, we’re going to boost your arm and make you do that. All right, keep moving.

Eliot: Keep moving.

Barley: “C-corporation owns a disregarded LLC, which in turn owns real estate. The real estate is sold for capital gains taxes incurred by the C-corp. Is this the best way to be structured?” Of course, here at Anderson, you’ve seen two basic structures, one for long-term buy and hold, passive, typically long-term buy and hold real estate. Another for flipping properties through a C-corporation, we consider that inventory flips through the C-corporation. In this question, we have a little bit of combination of both. Let’s untangle that a little bit here.

Eliot: You’re exactly right. Disregarded, we can just forget about it. Pretend it doesn’t exist because it doesn’t as far as in tax perspective. It’s really the C-corp that owns the real estate for all intents and purposes. We’re not going to have capital.

We would never recommend ever putting appreciable real estate into a corporation, S or C. There’s one exception to that. That’s when it’s your primary residence. Maybe we may tell you to put it into an S-corporation, but we’re not dealing with that here. That’s not at all in play here. You’re never going to do this.

We’re never going to recommend this situation unless you’re going to flip. If it was a flip, it’s not capital gains, it’s ordinary income. I think you mentioned inventory. It’s exactly what it is. Because Barley’s selling off some inventory, that’s ordinary. It’s not going to be capital gains treatment. That’s why I like these questions, where maybe we get a couple different concepts confused a little bit. We’ll see that in another one here on a little bit. If it is a flip, that’s the perfect place for it to be. You want it in a C-corporation.

Barley: In a disregarded LLC, just like you have it.

Eliot: Exactly. I wouldn’t do anything different. Only question would be, do you want S or C? That’s another story. Either way, it’s going to be in a corporation. Disregard, flip it, you’re good, but it’s just not going to be capital gains.

If it is something that you’re holding long term, as Barley pointed out, that’s probably going to be a rental or something like that, we would never recommend putting that a C-corporation. There, we would not have a C-corporation if we’re structuring properly. There, we want all that activity flowing to our personal return. Very different structure.

Barley: Via a Wyoming holding company. That’s what you’ll use to hold these passive investments.

Eliot: Exactly right. All going to come through your 1040. There, we would have capital gains if we held it as an investment.

Barley: We touched on this installment sale thing earlier. Just if we can’t do installment sales on inventory, I think that’s a flip property in your C-corporation, what I think might be happening here, you may have flipped a property in your C-corp. The income, you’re calling it capital gains just because that’s what you think when you sell a property. You just assume it’s capital gain, isn’t it? But if it’s inventory, it would be considered ordinary gain.

Benefit though, the C-corp’s only paying the 21%. Remember, before you pay any tax on any of that income, reimburse yourself for all those expenses. Those were all legitimate business deductions, lowering the taxable income of the business. Take advantage of all that first.

Eliot: I would just say, jumping back to what you said about the flipping and installment, I think that is probably the most misunderstood area that I see when it comes to flipping. Most people don’t understand that you can’t do an installment. You can take payments over time. I guess you call that installment, but you have to recognize all the gain in the year you sold it.

Barley: You can’t receive a tax benefit? That’s the whole point.

Eliot: The whole point of an installment is to defer tax. You could be in a situation, where if I sell inventory to barley for a thousand dollars a year for the next 10 years, I have to pay tax on all my gain immediately that year. I don’t get to wait until he pays me a thousand dollars over time if it’s inventory. That can be a real stunner to some people. They got this huge tax bill that they weren’t expecting. We wanted to make sure we threw that one out there. I think we’re good here.

Barley: Yeah, I think so. Does the SALT deduction of $40,000 new upper limit?

Eliot: Yeah.

Barley: Does that apply to a joint tax return?

Eliot: It applies everywhere.

Barley: I’m so assuming you’re talking about a married filing joint tax return here.

Eliot: Yup. This comes back from originally $10,000 limit during the Tax Cut and Jobs Act. It got recently upped to $40,000. What is our state and local tax? That’s just it. When we’re itemizing the state and local tax, how much did you pay? Maybe property taxes for your personal residence or something like that, sales tax could be part of it. If you have any tax based on the value, ad valorem local taxes, those are all things that add up.

You were only able to deduct up to $10,000, now it’s $40,000. That applies to a married filing joint or a single return. If you’re married filing separately, that does get cut in half to $20,000, but it does phase out at half a million dollars. That is if your adjusted gross income is over $50,000, then we start to see it reverse a little bit basically at 30%. Whatever your amount is, over half a million, subtract that.

Barley: $500,000.

Eliot: Excuse me. Yeah, $50,000. What did I say?

Barley: $50,000

Eliot: Yeah, no. Yeah, $500,000. Just know that.

Barley: Even after the phase out, you still get the $10,000, right?

Eliot: Yeah, we get a basement there, a floor of $10,000. You won’t go below that. You’ll still get your $10,000.

Barley: We didn’t get as high of a upper limit as we wanted, but we didn’t lose the lower limit.

Eliot: Exactly right.

Barley: A little bit of a trade off there.

Eliot: Yeah. For every dollar over half a million, take 30¢ off. That $30,000, that’s over $10,000 is what’s going to happen. By a hundred thousand, basically it’s done.

Barley: For those of you that are following along in the tax returns, Schedule A, your itemized to deductions, that’s where this will show up. Right at the top, there’s your medical. The next section underneath that, state and local taxes, that’s where that limitation shows up. For those of you in California or something with an S-corp or maybe just a high W-2 paying job, and we had some NFL players paying $120,000 in state tax, they got to deduct $10,000, terrible. Brutal. This helps a little bit. It’s not going to help with the NFL and NBA players in California, but it’s going to help a lot of us in the middle.

Eliot: Yeah. If we go on the next one, we’ll pull this all together. If you got that limit of $40,000, is there any way around it? The pass-through entity tax deduction work around. How does that work for high state tax states like California? Are there any entities that get excluded from this? Our pass-through entity tax, what are we taxing?

Barley:  Pass-through entity. First we need to define that as the S corp and partnership. Essentially, they’re going to file a tax return with the Fed, but they don’t pay tax to the treasury. They don’t pay any federal tax. They might pay state fees, state taxes, and stuff like that.

The tax burden is passed through to the owner a lot like a disregarded LLC . The pass-through entity is your S-corp or partnership. The tax burden passes through to your tax return via form K-1. Those of you with a partnership in the S-corp, you know how that works. You get a K-1 reporting that income.

The thing that’s happening here is on that K-1 is all of your income there. We pay the tax individually on a personal level. What we’re proposing here is that we shift a part of that tax burden back up to the entity and actually pay the state. The states are allowing us to do this now.

Eliot: Yeah. If Barley has an S-corp and he’s going to have his W-2, and let’s say his state taxes are at $40,000, he’s maxed out, he’s in California, high taxes, but he still has the K-1 coming through the pass-through amount, the distribution coming into his 1040, and let’s say it’s a hundred thousand, if he doesn’t do anything, nothing changes. He’s limited to $40,000 on the SALT tax, and he has a hundred thousand hitting his return.

Barley: Yeah, I’ll get that a hundred thousand income. The additional tax, I won’t get any credit for.

Eliot: Nothing going on there for him to help him out. Now if his S-corporation pays California, and let’s just say it’s 10% tax for California on that hundred thousand, the S-corporation now pays tax. Wait, wait, you just said they don’t pay tax. That’s right, but we’re doing something different now. Now it’s going to pay the state $10,000. That’s a deduction at the federal level.

Now what’s going to come through this 1040 is not a hundred thousand. It’s only going to be $90,000 for federal purposes, and California’s going to give him credit, where that $10,000 is being paid. The delta, whatever is 10%, you subtract that state tax rate, subtract that from its federal bracket. If he’s in the 37% tax bracket, he comes out 27% ahead on that $10,000. That’s your tax savings with this.

This is a way around the SALT tax limitation. It’s going to come through a pass-through entity. It’s going to be your partnerships and S-corporations, as you mentioned earlier. They ask if there are certain entities that are excluded. I love the way you’re thinking here. You mentioned specified services, trader businesses. That’s actually a different concept that comes on another tax strategy called section 190A. I like that you’re thinking.

There are certain things that don’t count here. Yeah, there are. If you have publicly traded partnerships, they’re not going to count. They’re not eligible for this. If you have complex entity structures, which we do, we just talked about one, that trading structure, you bring a C-corporation in there, that’s considered complex by most states. Now we’re not going to be able to take advantage of this.

The trading partnership we talked about earlier could not pay this and take advantage of it, typically. It’s going to be things like that. It’s few and far in between. Usually, you’re going to be able to take advantage of this, but if you have any questions, you just got to ask your tax prepared to see if you’re eligible for that.

Barley: Yeah, that’s a fun one. There are a lot in there. I don’t know if it’s a binding election.

Elion: It’s binding.

Barley: Yeah. Hard to go back on that one. Again, of course if this applies to you, you’ve heard about this, you think it might apply to your business, let us know. Shoot us a question, again, just to reiterate pass-through entity tax is PTET, state and local tax is SALT, and then SSTB, Specialized Service Trader businesses. If there are any questions on that, please be sure to let us know. Last one. Want to hit before we move in here? We’re doing good?

Eliot: I think we’re good.

Barley: Yeah, We don’t want to take away from the team there. Thanks, team.

Eliot: Yes. Who’s Carl? Hey, Carl. He’s an owner. Good to see you, buddy. This is a different one. I like this one. Backing up half a step, the big beautiful bill, a lot of stuff in there that looks we might get some  interesting changes here in this country in the next 10 years or so as far as manufacturing. There’s going to be a lot of really interesting manufacturing credits, expansion of qualified opportunity zones into rural areas I think for that exact same purpose, I think all this stuff is hitting from different angles, all attacking the same basic concept here.

One of the things we’re looking at is this research and development tax credit. Just FYI guys, this isn’t something our firm really specializes in as far as your product development, some of you are doing that. We don’t have a research and development tax department or anything like that. Sell us short here, but we’re just trying to give you information on this. Where should we start on this one?

Eliot: Yeah. I think the real question is, what happened to the big, beautiful bill to this area? Just so you know, there is the tax credit portion. There’s also the deductions for expenses. Which is better? It just depends. We’re going, for a few moments, talk of them together because if tax credit’s built up by how much you expended in that area, likewise, if you’re taking it as a deduction, that’s also, again, of course going to be dependent on the expenditures you have in the R&D area.

We’re just going to  put them together for the areas here where they mesh and it’s the same topic, if you will. Same results on things. We’ve really got to define what that is. This is going to be your domestic research or experimental expenditures. How does the IRS talk about that? That’s anything for development or improvement costs of a product.

It makes a big difference if you’re incurring those expenses here in the US versus international. If they’re done in the US, you could amortize until recently over five years, and that’s fine. As a foreign, it’s 15 years. Clearly they’re trying to incentivize, as Barley pointed out, to get things back on shore in this area. Now they doubled it down to where you can actually deduct the whole thing right away, a hundred percent of it, and you don’t have to amortize over five years again if it’s domestic.

If you have one of these, research and development expenditures, that are based here in the US,  you have the option to do it over five years, or you could expend it right away. That’s what this really gets at. If you take the credit, tax credit, that just means a direct reduction in your tax liability as opposed to an expenditure or deduction, which just lowers your taxable income. One’s not necessarily better than the other. We often say if you’re given the choice, the same dollar amount takes the tax credit because again, that’s lowering directly the amount you pay.

You do want to do some research on here because you might have game plans out for five years or something like that. You may want to amortize, you may not want to deduct all the time. This is where it takes significant tax planning to see the consequences of your moves, but it’s nice to have that flexibility. This is a big one.

Again, it’s going to be for certain types of products and things like that. This does not include land. Why? Because we have depreciation when it comes to buildings and things like that. We have sections 167, 168, bonus depreciation, things for buildings, and things like that.

We’re not going to be able to use that. Likewise, we can’t do it in areas of depletion. If you’ve got minerals and things like that, we have a whole system to help with that different part of the code. This is your machines and things like that, cost related to that, testing and things like that, things that don’t count efficiency. If you’re looking to see if you’re spending expenditures to see how efficient something changed in your product development is, typically you can’t deduct that.

The point to that is that this gets really technical really fast. You’re going to want to talk to experts on it to see which expenses do qualify here. It’s always going to be in the technical realm. It’s not going to count for some expense that isn’t really related to technology or something of that nature, typically. Again, you want to talk and have it get researched to see what area it will include.

Exploration and things like that, that’s not going to count. There are certain limits that they have put to this. Although once we’re in there, we’re doing a product, and we have a technical advance in that product development. More than likely have an R&D going on. If you’re state side, you can deduct immediately or over five years. If it’s foreign, it’s going to be 15 years. That’s the real key about the amendment that went on.

Barley: Again, I think this is all just to incentivize business. The first thing that pops into my head is this chip manufacturing.

Eliot: No doubt about it. That’s part of it.

Barley: They want to get these guys in here, invest trillions of dollars, and have them be able to take these massive tax deductions. How does this apply to you guys? Maybe one of you guys is developing an app or something like that. You might incur some of these costs, so we definitely just want to throw it out there.

Eliot: We have a lot of clients who do software development. This is exactly built for that.

Barley: There wasn’t a retroactive part of this, was there? There was. I don’t really know how that applies. I don’t have enough experience with that, but there is a retroactive portion of that. Anyone who’s been doing this for the last five years or so, maybe set up a tax console, see if there’s anything that we can help you with there. Certainly want to look at any available options.

Eliot: I think that’s it.

Barley: That’s it. We got to the end. Have you guys seen this picture yet? Make sure you subscribe. Toby and Clint, you guys know, the partners, they’re out there doing it. We love them. Scan the code, you know the deal. Come to our live event. I’ll be there Saturday. Eliot will be there Saturday, maybe, one of the days, all three of the days.

Eliot: I’ll be there for a bit.

Barley: Whenever he can make it. Whenever we can drag him down there. You can schedule a free question right now, scan that code and take it from there. We can sign you up right now. Yeah, well, we made some pretty good progress today.

Eliot: We did get those questions in. I will review them. I review every one, no joke. I want to thank our team.

Barley: Taxtuesday@andersonadvisors.com

Eliot: Yeah, we got 140 already answered. A couple left there. They’re getting that. Again, thanks to Patty running everything. We got Carl in there. It’s always good to see him. And Dutch, Harry, Jared, Jeffrey, Rachel, Tanya, and Troy.

Barley: The big brands are in the back.

Eliot: Absolutely. Yeah. Kenny and Zion running everything. Appreciate their help.

Barley: Yeah, thanks team. Thanks to all of you, you guys. This is your resource. These are your questions. We all try to keep it in the family here. We really love seeing you guys at all of these different workshops and live events. Just again, platinum portal, platinum Knowledge room. Please come five days a week. Come join us in there, ask any questions you have, and we’ll see you again in two weeks. All right. Thanks guys. Tune it next time.