In this Tax Tuesday episode, Anderson Business Advisors’ Barley Bowler and Eliot Thomas, Esq., tackle complex listener questions covering bonus depreciation regulations, short-term to long-term rental property transitions, and the intricate tax ordering rules for combining stock losses with real estate gains. They explore nonprofit structures for foster care services, explain 1031 exchange debt requirements for orthodontic practice sales, and provide guidance on entity selection between partnerships and S-corporations for different business types. You’ll hear how and when to handle Ponzi scheme theft loss deductions, corporate trading structures for stock income reduction, and the critical tax implications of providing company cars to family employees for personal use. Tune in for expert insights on these advanced tax strategies and planning considerations!
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Highlights/Topics:
- “Regarding section 168 bonus depreciation, it says to qualify for 100% the property must have been purchased after January 20th, 2025. Does that mean property purchased in 24 but not put into use till 2025 would not qualify?” –This is proposed legislation, not current law yet.
- “What are the tax implications of shifting properties from short-term rental to long-term rental after leveraging cost segregation reports to accelerate depreciation to offset some W2 income?” – Cannot do both in same year; changes passive loss treatment.
- “Can you use short-term stock loss carryover to offset real estate depreciation recapture and capital gains?” – Yes, but only after specific tax code ordering rules.
- “In the state of Florida, could parent fostering be conducted as a nonprofit business entity?” – Cannot earmark nonprofit funds for specific individuals or children.
- “My husband’s selling his orthodontic practice using a 1031 option. Can he pay off the existing loan before reinvesting the profit?” – Yes, QI will pay off debt; need equal/greater replacement debt.
- “My S corporation business doesn’t have cash flow to reimburse me for all benefits. Can I add unpaid reimbursements to my balance sheet like an owner loan?” – Need specific analysis of cash flow and reimbursement timing.
- “My wife and I have a holding company LLC and multiple subsidiary LLCs currently taxed as partnerships. Should they be changed to S-corp?” – Real estate stays partnership; operating businesses – consider S-corp election.
- “In a Ponzi scheme, does the discovery year have to be the year charges are filed?” – Discovery year when you become aware through government notification.
- “Would establishing an LLC help me reduce tax on income from stock trading?” – Consider corporate trading partner structure for meaningful capital gains.
- “Our C corp employs our son part-time. What are the tax implications of buying him a car for personal use only?” – Buy in his name, increase salary; avoid corporate ownership.
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Full Episode Transcript:
This is the Anderson Business Advisors podcast, the show for real estate investors, stock traders, and business owners. We help you keep more of what you earn and protect what you’ve built. Let’s get started.
Barley: Hey everyone. Welcome back to Anderson Business Advisors. My name’s Barley Buller. I’m one of the CPAs here at Anderson. Very happy to have you back. I’m joined by the manager of the tax advising department, Mr. Eliot Thomas. Hello,
Eliot: Sir. Hello. Hello. Good to be here. Yeah.
Barley: Tell him what we’re doing today.
Eliot: Today we’re answering some questions. Questions that come from you. Exactly right, we got them from our clients.
Barley: That’s right. And you know, we, we kinda have a little bit of an approach here. We’ll look at the most commonly asked questions. We like to throw in unique questions. Maybe ones that cover a lot of ground, right. With some, we hear a lot of the same kind of questions all. So, all your questions though is the bottom line, very happy to have you guys here. Yeah. Tune in. Where are we? We got the Q and A, let’s give us a shout out. Where are you tuning in from? If you can’t, you know you got any technical difficulties or any questions for the team in the background, let us know there. Otherwise we can post. We got a Q and A right?
Eliot: Yep. In the chat, if you have, again, if you have any tech, tech issues or Yeah, if you just wanna tell us where you’re coming from. Watching, where you’re tuning in from=and then if you have any questions, put it in the q and a if you would. We’re gonna, we have our crack team there. We got Patty, Amanda, George, Jeffrey, and Troy right now.
Barley: Nice. So you got a couple CPAs in the q and a plus legal plus our, our whole Anderson process team in there. We’re gonna be going through some fun material today. Keep the questions coming. Stay engaged. It is, you know, tax stuff. We got to put the extra mental effort to wrap our head around some of these concepts. But I’m very happy to have you guys here. A couple of the bullets here, if you need a detailed response, we really like doing these formats guys. ’cause We can, we’re trying to bring you as much information, fire hose blast, you know, free of charge for, you know, for those of you that are clients as possible. That said, if we’re looking for calculations or we have a, you know, a, a lot of moving pieces or you need a detailed analysis of a situation, set up a tax call, become a tax client, we’re already tax clients. We can set up a tax call with one of the advisors here simply ’cause we, you know, we just don’t wanna steer you off in the wrong direction here, here live.
Eliot: Like sure.
Barley: To give you as much guidance as we can, but if there’s specific guidance needed set up a separate call. But yep, fast, fun and educational.
Eliot: And I think as you can see, we get people from all over. We got Detroit, Seattle, North Carolina, Wisconsin.
Barley: Nice, great. Yeah, and I love this last part. We want to give back and help educate. Of course we’d love it if you became clients or many of you are already clients, but really this stuff, we kind of just have to get this out to the masses guys. No, it seems like this wasn’t taught in public school. A lot of this financial literacy and how do we handle taxes and bookkeeping and you know, all this handle our finances. We want to give back and help educate. Certainly one of the missions here. That’s one of the reasons I’m here at Anderson. I consider I’m, I have an MBA and I’m a CPA also, but taxes and accounting, boy, that’s some, that’s some petty stuff.
Eliot: Good stuff, Huh?
Barley: I learned that just so I could interact with business owners. I really like the educational aspect of what we do here at Anderson. Really appreciate that. I hope you guys get a lot out of it. That said,
Eliot: Got to have the debits sequel to credits. That’s right. Keeps us straight
Barley: When it comes down to it. it’s got to, just got to balance it all out. That’s right. What you own and what you owe. Let’s hop right in. Anything else we wanna touch on before we,
Eliot: No, just again, some questions. We appreciate you bringing in the questions. Had some great ones and I picked up some that covered, maybe we had five or seven in a certain area, I’d pick one from that area and we’ll see what we got.
Barley: We’re gonna skim through the questions real quick to just give you guys an idea of what we’re working with here and then topping with a lot more detail, here we go. Regarding section 1 68, bonus depreciation. Ooh, that’s a good one. Right? 1 68 bonus depreciation. It says to qualify for 100% the property must have been purchased after January 20th, 2025. It sounds like we’re talking about some new regulations here. Does that mean the property purchased in 24 but not put into use till 2025 would not qualify? Great question. We’re gonna be going over that
Eliot: Next one. What are the tax implications of shifting properties from the short-term rental to a long-term rental after leveraging cost segregation reports to accelerate depreciation offset some W2 income. We’ve materially participated with the short term rentals for the past two years, we got to mixing it up there.
Barley: Yep. Got some buzzwords in there. Can you use short term stock, less carryover to offset real estate depreciation, recapturing capital gains, right. And short and long-term stock and how. Capital gains, capital assets
Eliot: In the state of Florida. Could parent fostering be conducted as a nonprofit business entity? I was considering getting licensed and want to evaluate the possibilities within this field.
Barley: You know, I’m glad you picked that. It is kind of one of more our more obscure ones today. . But boy this is going to be a big issue.
Eliot: Yes.
Barley: Moving forward for all of us, huh?
Eliot: Nonprofits.
Barley: Right and taking care of our seniors. Yes. My husband’s selling his orthodontic practice using a 1031 option. Obviously for the real estate portion. My question is, can he pay off the existing, or rather, should he pay off the existing loan before reinvesting the profit or before doing the 1031 exchange? Great question.
Eliot: My S corporation business doesn’t have the cash flow to reimburse me for all the benefits I should be receiving. That says something for an S-corp. It’s good at giving reimbursements.
Barley: Yep.
Eliot: As an example, home office travel reimbursement for my main physical business and the Augusta rule where I rent my home out to the business for 14 days. Can I add the unpaid reimbursements to align on my balance sheet like unpaid loan owner loan?
Barley: Good question. Very common question too. My wife and I have a holding company, LLC and multiple subsidiary LLCs. They currently taxed as partnerships, should they be changed to scorp? We’re gonna talk about entities, right? We’ve got this, this kind of whole list of stuff. Disregarded, LLCs, S corp, C corp partnerships. How do we make sense of that maze in a Ponzi scheme? Does the discovery year have to be the year the charges are filed? We’ll rely on Eliot’s. Well, more legal, legal mind for that one. As far as I’m concerned from accounting, right? You report them. We’ll tax them when they get reported.
Would establishing an LLC help me reduce tax on income from stock trading? Possibly, we’re gonna introduce a corporation there. A lot of good benefits there. And finally, our C corp employees, our son on a part-time basis, his tax bracket after the standard deduction is zero. We’re planning on buying or leasing him a car for personal use. Oh, ding ding, ding.
Eliot: Yep.
Barley: We’re planning for personal use. There will be no business use for the car. What are the payroll or other tax implications of each of the following scenarios? And don’t worry guys, Eliot’s not dying over here.
Eliot: That was Amanda weeks ago.
Barley: A good pollen dump here. We love having the spring and the flowers, but boy, it, it really, it rains falling here in, in the desert, but a monthly lease on the car, payments on his own. Buy the car in his name or put the car in the corporation’s name. Deduct the monthly payments as the corporation expense. But then we got this, it will be for his personal use only. Ding, ding, ding that my Q is a on what the answer is. So we got a lot of great questions to go over today guys. And with all these, you know, we can go so many different directions within each of these questions. Just trying to steer this in the way that we can offer the most value to you. Keep it, keep it relevant, keep it useful. As usual guys, make sure you tune into Toby and Clint’s YouTube pages. Toby hit the thousand video mark. Tons of great content on there. That is put in the promise room in a thousand videos about tax planning. He
Eliot: Only has 493,000 subscribers. So he is not at half a million yet.
Barley: Come on guys, boost those numbers up. Get those numbers up. Of course, Toby focuses more on the tax planning side, Clint, more on the asset protection of tons of crossover, right? But we kind of distinguish those two, two areas of tax and law. Again, Clint focusing on asset protection, both of them with great interviews as you guys know, great interviews with industry leaders, et cetera. I got some events coming up. What do we got here?
Eliot: Yeah, it looks like our live event here in Vegas, $99.
Barley: Coming up, end of this month.
Eliot: Yeah. June 26th through the 28th.
Barley: I’m assuming it was at like a Thursday, Friday, Saturday. I might get a business trip out of that, right?
Eliot: Exactly. Yeah. Might be deductible.
Barley: Yeah, that’s right. We’d love to have you guys. This is the Tax and Asset protection workshop. Yep. Join us live. Great time to come to Las Vegas,
Eliot: Meet other people, get that networking going on. Learn a little bit.
Barley: Absolutely. Yep. Lot of synergy there. Tax and asset protection workshop. What’s the difference here? Texas Live workshop and then we got the virtual here. Any questions on any of these registration dates, how you register, where any of the costs, anything like that. Please post it in the Q and A, we’ll get you more information.
Eliot: Before we get into that, we do have, what is it to think? The June 12th and June 16th we have the nonprofit workshop coming up, starting and running a nonprofit. Kareem’s gonna be putting that on. We’ll talk more about that as we get to a particular question that we have here.
Barley: Okay. Super. Well you guys ready to dive right in? Let’s tackle your tax questions. Alright, regarding section 1 68, bonus depreciation. That’s a big one, right? Bonus depreciation, that’s that. That can result in some pretty serious deduction there. It says to qualify for a hundred percent the property must have been purchased after January 20th, 2025. Does that, and this obviously this is queuing us off guys, that we’re talking about proposed regulations here, right? Does that mean the property purchased in 24 but not put into use until after January, 2025 would not qualify? What’s the user?
Eliot: I just wanna point out exactly what Barley said. He is absolutely right, this is proposed legislation. What’s happening, we’re hearing this a lot, hey, I heard that we get a hundred percent, et cetera. It hasn’t passed the Senate yet, what we have going on here is a confusion. This doesn’t exist yet. This is not a thing. And it very well might not be, even if they go through with the legislation, open it up. It may not be written the same way as it was. But what we can tell you is what happened between 2017 and currently under the Tax Cut and Jobs Act. What that said is that if you did buy a property, let’s say in 2018 when it was a hundred percent bonus depreciation, and then maybe it was in 2019 when you put it into service or maybe it’s gone down a little bit and we had, let’s say only 80%.
That wasn’t actually the case, but let’s just say it was, then you would actually go back to the year that you purchased it and you would qualify for a hundred percent bonus depreciation. What we can say is that that treatment has been accepted in the past, but again, that was only during the current tax cut and Jobs Act portion. We don’t have any idea what’s gonna be finally voted through on the Senate, et cetera. And if it will indeed have the same language, and we may, it’s possible we may have to wait for regs from the IRS before we even know, depending on what they write us.
Barley: Sure. Right. The final set had to do that, implementing it all right?
Eliot: It took forever for just the 1 99A deduction. I remember we waited, it was over a year, I think before we had final regs, maybe a couple years. Took forever. So it could be a while.
Barley: Yeah. And now to your guys’ credit, there’s so many YouTube videos, clickbait kind of like law pat, you know, here’s what’s gonna happen or whatever. It’s like they’re suck. Try to see all those videos on there. But yeah, we just, we can’t, we can’t give guidance until the law changes. Now that’s it, we’re gonna try and keep you up to date and impressive if any changes as we see them. But we want to give guidance that you guys can rely on a hundred percent. If we’re still speculating about what’s gonna happen in the building, we gotta just wait. Good points there, that’s the purchase BRI date of what year you purchase the properties generally gonna determine that percentage bonus depreciation. If and when these new laws go into place, that’s what you will use to determine that percentage bonus.
Eliot: Yep. Exactly.
Barley: And 1 68 K bonus depreciation. That’s our friend. Alright, what are the tax implications of shifting properties from short-term rental to long-term rental after leg leveraging a cost segregation study to accelerate the depreciation in offset W2 income? Great question. And ding ding ding, we’ve materially participated in the short-term rentals for the past two tax years. So it sounds like you already got some good deductions there. Alright, so first of all, what are the tax implications of shifting a property from a short term to a long-term rental? Well, we’ll come back to this in a second, but you can’t have both in the same year. Just FYI. Right? It’s either a short term or long term. It’s calendar year one to, to the end of the year that’s gonna determine the status short term or long term status. If that’s the scenario, that’s kind of the answer. You can’t really have a short-term rental half the year then make it long term the rest of the year. That will by default generally default to making the property long-term rental. Just to want to throw that out right off the bat.
Eliot: And also I think what we want to look at here is the concept of short versus long. What you’re gonna have here with a short-term rental that’s called commercial use. Typically the building’s gonna be divided by 39 years and you depreciate a little bit each year. Straight line depreciation, long-term rental, typically it’s gonna be 27 and a half years now where the whole accelerated depreciation comes in. We’re gonna have to have something done. Some kind of study done. Yes.
Barley: Right.Cost segregation study. Exactly separate, all segregate each of the asset classes, right?
Eliot: Effectively what we’re, we’re, we’re breaking that property into pieces, as I call it. We may have, you know, like again I look around the studio here, we got lights, certainly we got lights, we got no AC though, but we got lights, we got wires, carpet, what have you. And of course we have the building. All those have on their own their own depreciation life. Cost segregation study breaks into those pieces. You have some five year properties, some 10 year or what have you, and then some 27 and a half or 39 year property depending on if it’s commercial or short-term rental. What they did is that they did a cost seg study broken in these pieces. Imagine if they’d spent 30,000 with the value of the purchase of that building towards carpet. Instead of being a little bit deducted over 27 and a half years or 39 years, it was all sped up for five years to be deducted.
That’s gonna cause a lot more depreciation right away. And you take all those assets that have that shortened lifespan and you get a lot more deduction upfront. That’s what there is going on here. Now, short term rentals, simply for our purposes today just means that the average rent was seven days or less per year. And again, it’s over January 1st to December 31st calendar year. We don’t just as Barley pointed out, we’re not going to break it into you. You can’t do one for six months, the other for another six months. It’s going to be one or other treatment throughout the year. And that’s how we get long, otherwise it’s a long-term rental. Now they also mentioned that they materially participated as a short-term rental. They started with short-term rental and they materially participated. What’s going on there?
Barley: Right? Well with the short-term rental, kind of unique, not technically a rental, more like just an active business. If we’re materially participating, short-term rental, we don’t have to have that real estate professional status test that the much larger 750 hour test would only need to meet the material participation test.
Eliot: And why do we care?
Barley: Because if we want to go the other way, we care because we could recharacterize the losses.
Eliot: Exactly.
Barley: Is potentially large depreciation losses. But going the other way, I have a short-term rental. I’m materially participating and getting these great benefits. I’m gonna make it a long-term rental. Same thing, right? Not really. That’s where we need the real estate professional status to then be able to materially participate. That’s for a long-term rental. Short-Term rental, you only need to meet that material participation test. But yet that will recharacterize these typically large depreciation losses from passive where they could typically only offset other passive income to active losses eligible to offset all other forms of income.
Eliot: Exactly right.
Barley: That’s what we want.
Eliot: What we started with in this scenario is a short term rental that we did materially participate. The shorter, the easier test if you will, as Barley points out. They did the cost seg, it created all this depreciation deduction, gave them a huge loss. That loss because they materially participated, became an active loss. It offset their W-2 income. It’s a win situation for them. They got a great deduction. Now they say, well Eliot, I did that for two years and now I want to turn it into a long-term rental. What’s going to go on? Well as Barley points out, if they become a long-term rental, they’re not gonna get that same non-passive activity unless they real estate professional or they get the real estate professional sets, which is a much more involved typically test. They may not get that and they may not care if they got all the deductions early on, that might be fine with them and they just wanna turn it into a passive back.
Barley:It won’t change into your previous active losses.
Eliot: Exactly right. It could have been a very good play for them, right? They got all the deduction up front. They don’t care if they get a few passive losses, they get trapped later on. They’re happy with that.
Barley: Turn it over to a manager.
Eliot: Yep. But they certainly wanna be aware just so that they know. Now another thing that’s going to happen here is as a short term rental, it was the, the building that is, was what we call a 1250 property. And that’s gonna be divided over 39 years and you take a little bit again each year when it becomes a long-term rental, that same 1250 property, which is just the building, it’s going to be over 27 and a half years. They would take over whatever remaining balances left in the building as far as that hasn’t been depreciated yet. And they’ll divide by 27 and a half, take a little bit each year there. But when they did the study, it broke it from 1250 to 1245 property. Again the 5, 7, 12, 15, whatever years of property, tangible personal property, 1245 that, how are we gonna depreciate that? If it was five-year property and they had two years, what happens then? Any ideas?
Barley: You just keep it going.
Eliot: Exactly right, they had two years of the five-year property, the carpet being deducted,
Barley: Five-Year property.
Eliot: Exactly. And still gonna be five-year property. Right. And they just continue on that as was so really easy there. It’s the 1250 they have to worry about later on.
Barley: Yeah. And just reiterate guys, the depreciation, remember it all pans out to be the same at the end of the building life. We’re trying to accelerate it. Why? because a dollar today is worth more than a dollar tomorrow. Maybe we’re in a higher income tax bracket right now. We wanna lower that income as much as we can. You know, if we’re getting less depreciation expense in 20 years when we’ve retired, maybe that isn’t such of a big deal. Kind of bottom line. This all goes back to tax planning, right? And it’s this, this one little fact can change the whole pattern, right? This pertains to you then let us know. We can certainly provide more guidance here, but yeah, I, and that’s kind of heavy stuff guys. The 1245, 1250 properties, kind of the separate pieces of the house. If you think about it, you got the house with the roof, the foundation that’s being depreciated over X amount of time. It’s got all these smaller components in here that are also being depreciated over that long period of time. If we can speed that up, we get a benefit today. That’s kind of a complicated tax concept, isn’t it?
Eliot: It is. But it’s a good one.
Barley: It is a good one. Accelerated depreciation.
Eliot: A lot packed into that question.
Barley: Yep, just throw another little layer of detail on there for you. Those of you that are really into this and we accelerated depreciation, that’s just, that’s we’re just correcting the depreciation, getting it to where it’s supposed to be. We can even add bonus, take even more in the current period. We get a bunch of good deductions when we talk about depreciation through real estate. And [inaudible 00:19:48] do you wanna go any questions or,
Eliot: No, I think this leads us well into the next one.
Barley: Yeah. All right. This is a good one. Let’s put on the tax hats here. Can you use short term stock loss carryover, right? We’ve got capital loss carryover is what we’re talking about. Capital losses are limited to offsetting capital income, the balance can carry forward to offset real estate. Can we use stock loss carryover to offset real estate depreciation? Recapture, like we were just talking about and like other capital gains is what’s kind of implied here and yes, kind of. It’s an ordering operation ready to have some fun.
Eliot:Yep and it is. Barley and I were going through an example here and I think we’ll, we’ll go with that. Yeah. I think that worked really well.
Barley: $10 Capital gain.
Eliot: Excuse me. Yes. We have a situation where Barley listened to Eliot for some stock advice. Okay. And of course he lost his shirt on. He’s got oodles of stock loss. No problem there but fortunately he listened to Toby for some real estate as well. Made a lot of money.
Barley: Made a little back.
Eliot: Exactly. Made a lot back. Okay. What happens when he tries to combine the two? Well when it comes to the real estate, let’s just say we had $10 a gain. There’s a lot of things that ordering, I think that was a perfect description there. We got an ordering of how this happens on the return or in the tax code, $10 of gain on the sell of the building. Okay. We’re just talking about the real estate gain right now. Let’s say $1. First of all, we gotta accept, we got to take in any passive loss that that rental had created.
Let’s say he’d run a rental and it created some passive losses. Well those are released once he sells that building. Let’s say that was $1.Okay, now we have, we had $10 a gain. We got $1 offset with some passive losses directly related to that building. We have $9 left. Then you take all your other passive losses out there. Let’s say that was $2- $9 minus two, that leaves us with $7 left. We have $7 of, at this point we’ll call technical capital gain. But then the code stops us and it says you got to do depreciation recapture that gets,
Barley: Before going to step three.
Eliot: Exactly. But it gets all the way back to where we started on the progression of these first couple questions where maybe he’s done a cost segregation. He has 1250, 1245 property.
He’s gonna have to, let’s say there’s $2 worth of depreciation recapture, he’s gonna have to pay tax on that. Whether it’s two 50 or 1245 will determine how much. If it’s 1250 property, he’ll pay a maximum of 25% depending on his tax bracket. And if it’s 1245 after a study’s been done, it will be taxed at his ordinary tax bracket. Now we’ve taken care of nine minus two on that seven. The depreciation recapture, I think now we’re down to $5 total.
Barley: Yeah. Four bucks.
Eliot: We got five left I think.
Barley: Okay.
Eliot: Now let’s say he has $2 of capital loss. What we have left is just capital, pure capital gain, I’ll call it $4 or $5 wherever our math left us. He now can use those stock losses from what I advised him to invest in. He can marry that up and offset the rest of the gain.
Barley: Right.
Eliot: Now all of a sudden, yes it really is, we can get to where we can use those losses, but we have to go through a lot of steps first. Right? We got to go through the order, how the code draws us or the path it takes us through. And that’s what we, first we got to do all the passive losses directly related to the building. Number two, all other passive losses, depreciation, recapture. And then finally whatever’s left over for gain, we can use other capital losses to offset that capital gain.
Barley: Wow. That’s a lot in one question there.
Eliot: It is.
Barley: That’s a good one.
Eliot: But it, yeah, it is.
Barley: And for those of you following along in your tax returns, you can open schedule D, right? Top half is Schedule D for reporting capital sale of capital assets, short-term gain, long-term gain. Flip the page right over there. There’s that total at the top. And then we add in that 1245, 1250 recapture part. And then we get that total. You can either have the capital gain or you will have a capital loss up to 3000. Offset your other income in the current period. The balance carries forward. Right. You know the rules from there. Alright, any questions? Should we keep it moving? Yeah,
Eliot: I think we’re good.
Barley: Alright. Oh, here’s a go. This sounds kind of legally, State of Florida could parent fostering be conducted as a nonprofit business entity? I was considering getting licensed and want to evaluate the possibilities within this field. Great question, obviously you’re thinking about, you know, giving back, potentially maybe setting up some sort of nonprofit. How do we know if this categorized and we can get that deduction or not?
Eliot: Will this work? Well we went straight to the top. We went to Kareem actually. Yeah. Went straight. We had our ideas of what the answer was, but we knew we had ACE in the hole. So we talked to Kareem about this. Who hands, you know, handles our nonprofit department, worked for the IRS for a significant period of time.
We can’t really do it as described in this question. And what I mean by that, if you can imagine that you’re gonna be a, have a foster child, we can’t have a deduction directly in a nonprofit for that child, for our operation. You set it perfectly when we were talking about this. You can’t really set up a nonprofit for a specific person. You can’t for a specific cause, you know, with a general populace out there. But we can’t earmark for one particular individual, which is what we’re asking here in that sense. Well, flat out is what they’re asking. If I wanted to be a foster parent for, you know, it’s gonna be for a child or two, I can’t really do that through a nonprofit because I’m earmarking it towards those children.
Precisely. And we can’t do that with a nonprofit. It has to be open to the larger group. No, that won’t work. But what could work is if you were just helping out that, that purpose of a parent fostering, helping foster children as more of a, you know, investment in the, the structure and other improvements, the, the support of that nonprofit purpose. There may be other things that they need funding for, you know, as a general purpose. You could set up that kind of a nonprofit. Money goes in there, and as a general, you have a general purpose for the funds, and you spread it out to the greater, the greater good, if you will, not a particular person. Then you could probably work with that. If at the end, of course you wanna talk to somebody who does do this.
Kareem is a good example of that. I think we have, what is it, every week on Thursday at 10 o’clock we have the nonprofit hour.
Barley: Ten, 11, yep.
Eliot: Yeah. The public knowledge room. We do have, as we mentioned earlier, we have, he’s gonna have the start and running of a nonprofit from nine to one on June 12th and June 16th. If you have any questions about how to get there, just look at our website. Maybe Patty has the links, perhaps, I don’t know if they’re up on the website or not, but those are two areas where you could learn a lot more about nonprofits.
Barley: Yeah. All the basics plus you, you’ll have a really good idea of what you need to do from there. We went through this with a lot, with the, the fires, the wildfires. You know, I want to give some money to my neighbor to help them rebuild their house. Is that a nonprofit or a tax deduction? Generally not, but you could give that money to a local nonprofit that helps people rebuild their homes after fires. Or in this case that helps, you know, provide foster care for whoever, you know, you could donate to a local or you could set up your own nonprofit that does that. It wouldn’t just be an individual service, it would be a service offer to the general public. But yeah, we have a killer team here, Kareem, Savannah. Let us know if you have any questions on that. Plus, yeah, like Eliot mentioned, every Thursday, 10 to 11:00 AM Pacific time. Every Thursday our nonprofit Open office hour. Exactly. All right. Keep it moving?
Eliot: Keep it moving.
Barley: All right. My husband’s selling his orthodontic practice utilizing the 1031 option. My question is, can he pay off the existing loan before reinvesting the profit? Well, you certainly can. Do we want to though? Well, so are there, are there tax benefits to it, obviously, is your question there, right?
Eliot: Yeah. We’re selling a practice and we bring up 1031. What that’s telling us is that there was a building involved. Because 1031 is the light kind exchange provision, but it’s only for real estate. We know there’s a building involved here and not just the practice and, perhaps, selling to the patients, you know, the, the, the client list or whatever client list and what have you.
Barley: Patient list. Yeah.
Eliot: And outstanding invoices, et cetera. The building part, 1031, they’re trying to exchange that. What happens there when that actually goes on, you, first of all, you wanna have a qualified intermediary called a QI. They are kind of the quarterback that oversees everything, but maybe better described as the referee because they don’t really represent any one party, but they will receive the funds from the selling of the building. In other words, we had the doctors building or orthodontics building.
It was sold, money was received by the qualified intermediary, you can’t touch it as the seller. Okay? The qualified intermediary, the QI receives the cash and they’re gonna be obligated probably to pay off the loan on that building. I think that’s what we’re asking here. The existing loan, can we pay that off? Yeah, they’re gonna take it out to that cash.
But in order to have full deferment, what that means is, in order to defer the gain on the sale, you’re gonna have to pick up a building. We have to buy another building or buildings with the cash from the sale. If we sold it a million, basically we have to pick up another million and you have to pick up equal or more debt. In other words, if we sold a billion for a million dollars and it had 300,000 of mortgage on it. They’re gonna pay off that mortgage. I don’t think you have an option. I think they’re gonna require that be paid off,
Barley: Clear the title and
Eliot: Exactly. When you buy the new properties, the replacement properties, you’re gonna have to spend at least a million. And guess what? You’re gonna have to pick up more debt, at least 300,000 if you fail to do that, you’re gonna have some boot, as we call it in this, in the 1031 calculation. That means gain, you’re gonna have some taxable gain. If our goal is to have full deferment, we gotta buy a building with the same, basically the same or more fair market value, if you will and the same or greater debt is kind of the simplistic way of describing it. If we have full deferment, can they pay off? Yes. In fact, I think they’d probably be required to pay off the debt, the pre-existing debt, and they’re gonna have to pick up more debt with the replacement properties.
Barley: Yep. Handle it through the QI. Set up a tax call if you want to cross the T’s dot the, i’s, you know, if you have any concerns or, or whatever. We can certainly go over these a lot.
Eliot: And we do have a recommended qualified intermediary as well. That has done very well by our clients.
Barley: Yeah. Great question. And of course, business use real estate. Oh, what’s this? Got a workshop coming up. Tax Tuesday, use code tax Tuesday. Yes, join us live, June 22nd, 28th. Come on, join us guys. Tax and asset protection workshop. Also, if you want, you can schedule a strategy session and meet with our team. Talk about your blueprint. Let us know if you want more information on that. Obviously this is a lot of the goal here is just to give you guys information. If this pertains to you and you say, this is, this relates to me and I need to know more about this, submit us a platinum portal question. Set up a call, let us know how we guide you further. Lot of options. All right. My wife and I have a holding company LLC. What’s an LLC and multiple subsidiary LLCs. They’re currently taxed as partnerships, oh, well that answers my question. They’re taxed as partnerships. Should those be changed to an S corp? Well, a lot of ways you can answer this question, right? It’s very general. But let’s talk about it from a couple different perspectives. Let’s go real estate first. What do we think about?
Eliot: Again, to your question on LLC limited liability company, we always ask, well, how’s it taxed? Fortunately here we were told it is taxed as a partnership. Because it can be taxed in many different ways. But partnership, you know, what we wanna know is what are we doing with the business or with the LLC, excuse me. If it is a business, an operating business, Toby’s pizza shop, we might wanna run that in through an S corporation. Okay? But if it’s rental property, you go out and get three rentals that we likely wanna have in a partnership. Why? Well, rentals, appreciable real estate property like that, we never wanna put in a corporation S or C that has tax consequences down the line that you may, you just don’t run into as favorable a position as you would by keeping it in a partnership if it’s real estate.
We wouldn’t do it there. Now, Toby’s pizza shop, the building, Toby goes out and buys a building, Hey, I’m gonna set up my pizza shop in there. We might put the building in a partnership, but the actual running of the business, you know, we got Amanda managing, we got you handling the clients, you know, the customers and I’m making the pies getting everybody sick. That operational part might be in an S corporation and that’s typically where we make that decision. We really wanna know what are you doing. In your business. I think to make that decision, would we ever make a change? Let’s just say that it was a business, an operational business, and it was a partnership. Would we ever recommend going to an S corporation? Well, I think, yes. And any idea is why,
Barley: Usually just flat out income numbers, you’re subject to self-employment tax from all that income. You’re not considered an employee. The business C can’t really do all these great reimbursements that we talk about a lot. At least not as, not as easily, a lot of benefits to be when you’re, when you own and control an incorporated entity, you’re the own, you’re considered the employer and employee. Now all of a sudden you can be reimbursed as an employee, you can max out a retirement plan from both sides, you wear both of those hats. That kind of inherently creates this whole benefit. You know, that’s with a corporate structure. Partnerships, like Eliot said, they’re perfect for real estate. We can put real estate, we can put it in and out, take it back out. Same with a disregarded LLC, very, very flexible for holding assets, holding real estate, holding. Yeah. Income producing assets.
Eliot: Just as a thought, let’s look at that. Let’s say Toby’s running this pizza shop and it is a partnership. Well, he can pay us as staff and that will be a deduction. He can even, and people will always misunderstand what I say here, but oh boy, he can, because he has employees, he can set up an accountable plan reimbursements for us employees, but he can’t for himself.
Barley: Yeah. Oh, I thought you were gonna go into up, right
Eliot: I was like, no, no.
Barley: Right. You can have employees, a sole proprietorship can have employees, a partnership can have employees. You’re just not considered an employee of the business. Just changes things a little bit there.
Eliot: We got no 280A, any of that business going on. Right. But now let’s say he’s an S corporation. Well now all of a sudden Toby can do 280A off the top, get a deduction there. He can do his reimbursements for himself and a lot of that’s a discrimination plan. He doesn’t have to worry about, he doesn’t have to give it to us. You know, he can just keep it himself to his 280A et cetera.
Barley: Reimburse, whoever you want.
Eliot: He’s a pretty good guy. I don’t think he’d do that to us. But anyway, he can do that and that’s just gonna put him in a far more favorable tax position by being an S corporation for running that business. Hopefully what you can all draw from this is that the decision between being one or the other, of course we’re gonna look at a lot of facts, but there are some broad highways that send us one way. If it’s real estate, we’re gonna go partnership. If it’s an operating business, we’re gonna try and get in that S-corporation branch.
Barley: And just structurally, you can’t have like a S-corp has these rules about who can even be an owner. Oh, the partnership can’t even own an S-corp technically. Has to be individual shareholders with, with even other restrictions other than that. Alright, good on that one.
Eliot: Yeah, I think so.
Barley: Okay. Ponzi scheme. The old Madoff in a Ponzi scheme. Does the discovery year have to be the year charges are filed?
Eliot: All right, so a tip.
Barley: It’s a discovery year. That must be a key term in there, huh?
Eliot: It is. As far as when you found out about it is typically the year you can deduct it. Now to get to Ponzi, you basically have to have the government telling you that it is a Ponzi. In my experience, when I’ve had clients come to it, they’ve had letters from the FBI things I didn’t want to read, you know first see that and you’re just like, whoa. And then you realize it had nothing to do with me, I was happy to read it , but you, you’re gonna have some kind of governmental federal government form or you know, even a court docket I’ve seen on others showing that hey, this is a charge of a Ponzi scheme and you become aware of it. And that’s typically what they say, you know, once you become aware of it, yes, you can go ahead and take a deduction that year. That is the general practice. Now, if it doesn’t get that government approval, I’m not so sure it qualifies. And what we’re looking at is a theft loss where we may not get much of a deduction as an individual. So that’s why it’s important.
Barley: Right.We can’t decide if it’s a, it’s, it has to be some sort of official ruling from the government. Saying it’s an actual Ponzi scheme.
Eliot: Yeah. So I’ve seen clients have to wait on that. Well then that’s when they can typically, you know, go ahead and take the deduction. Now if it’s already been declared a Ponzi scheme, there is what they call a safe harbor as well. It’s a little bit of a different idea. We know it’s a Ponzi scheme where in the year that it was filed, you can go ahead and take a 95% of the amount lost deduction right away that year. In other words, court cases could take forever. Okay, if you’re, if you’re going after a third party, they’ll let you go ahead and take the majority of it 95% as deduction right away in that year. As long as you’re going after a third party, if there’s ever any, if you, if you gain anything, they find it settle or whatever, you get money back, well then it comes back and adjusted accordingly. Also, there could be a 75% amount you could take right away if they’re not going after a third party. That’s, there’s some specific rules with the Ponzi, but those are kind of the guiding rules that I would go with as far as determining if you can even get started down this path.
Barley: Right. Yeah. Those would be looking at a capital loss with the related limitations.
Eliot: You may not get any loss depending on what, what happens. Yeah. Right. The Ponzi, that’s why the Ponzi labeling is so critical. So that you can get that ordinary loss.
Barley: Right. Great question, alright. Would establishing an LLC help you reduce tax on income from stock trading? I like this question. I’m a big fan of our, what we call our trade structure. If you have regular capital gains coming in, you know, more than a few thousand bucks and, and especially if that’s kind of, you know, a good source of income for you, there’s a lot of benefits here to potentially setting up a trade structure trading, using a corporation as a trading partner. But let’s start from the basics here. Would establishing an LLC help me reduce tax on income for stock trading? Not necessarily inherently say we have a big crypto or brokerage account, we can put that in a disregarded LLC just for kind of safe keeping more of a legal treatment than a tax treatment, right?
Eliot: Yes sir.
Barley: But in the case of we’re actually trying to reduce taxes. We can get, it’s not active in terms of material participation, but we can get a little more active involved in here. We can set up a corporation as a trading partner. And essentially that just means we set up a partnership and you’re one partner in the, the C-corp that you own and control is the other partner. Why would we do that? ’cause Of these corporate benefits we’ve been talking about these reimbursements, shifting income to the corporation, charging a guaranteed payment, having it manage the portfolio for you.
Bottom line, big picture. When we get to the very end here, you can either have a hundred dollars of capital gains hitting your personal tax return on Schedule D and all of it being taxable. Or you can have $90 of capital gains hitting your taxable return and $10 of that coming back into your pocket as a reimbursement, like we touched on earlier. Essentially shifting a chunk of money up to the corporation, but before that’s taxed Right. Reimburses much of that back into our pocket tax free as a reimbursement. It kind of just takes a chunk of that income that would normally hit your return, makes it tax free.
Eliot: Can it help reduce taxes? It could, but really what you wanna do is calculate, calculate, calculate to see how much that projected savings that Barley’s just talking about, well is that savings? Is it worth the cost of setting up the trading structure, the added tax returns? Because you’re gonna have two, you got a partnership return and now you got a C corporation return.
Barley: And the related bookkeeping.
Eliot: Yes, exactly. And so it might be worth it, but we have to calculate that out.
Barley: For those of you that are all in on this stock trading stuff, making decent capital gains, you likely heard of this option. This is a great option potentially. Now, we’re talking about, so shifting capital gains, but we’re also talking about using a corporation as a trade partner. Disregarding the whole trade aspect of it, now you have a C corporation also that can pay you a W2 set up a, so sponsor a qualified retirement plan like a solo 401k Right. It can reimburse you for your medical expenses. Right. It just opens up a lot of doors. And we have a corporation as a trading partner,
Eliot: Which certainly does.
Barley: Yeah. Lots more on that one. Guys. Let us know if you have any questions on that. There’s a guaranteed payment portion to that. It kind of gets a little nerdy, but again, there’s the, you know, the whole W2 qualified retirement plan. You can set up medical reimbursements through a C corporation. None of this is in the question, but when you’re talking about how do we reduce taxes from stock trading, that’s gonna be generally the first thing we think of.
Eliot: We’re nerdy, huh?
Barley: Yeah, somebody’s got to do it. Well let’s see how much time we doing right on time?
Eliot: Alright, we won’t after this one though.
Barley: Our C corp employs our son on a part-time basis, which we talk about a lot. Hiring the kids right. Put ’em on payroll. Lots of benefits there. Pay them less than the standard deduction. They generally won’t own any tax then they’ll have earned income eligible to be contributed to a Roth. Plus they can learn about financial literacy and business operations and taxes and bookkeeping, all that fun stuff.. His tax bracket after the standard deduction is zero. We’re planning on buying or leasing him a car for personal use, spoiler alert.
Eliot: Kinda wanna circle that in red
Barley: Spoiler. Yeah. Skipping right to the end here. There will be no business use for the car. I guess we could circle well.
Eliot: Yeah.
Barley: That kind of answers it, but let’s go through the question. What are the payroll or other tax implications of each of the following scenarios? One, we buy the car in his name, increase his part-time salary so that he’ll be able to make the lease payments or two, buy the car in the corporation’s name so we can deduct the monthly payments as a corporate expense provided so he can use it and report the monthly lease or loan payments as a benefit to him. Note the car will not be used for the corp business, it’ll be for his personal use only. I like how they’re reiterated there
Eliot: Made a clear
Barley: Catch that part there. Obviously we, you know, we’re talking about personal use assets within a corporation, but let’s start from the top.
Eliot: I think on the number one you’re basically buying the car personally in the child’s name and just increasing the salary. Well there you have, you have a legitimate way of doing things. You just simply paid the child more so they could pay for the car. That’s great because then the child’s paying for it. Taxes are paid accordingly, nobody has a problem with that and they’re not using the car at all for business anyway, why would we want to connect the two? Okay. And that’s, you know, and this keeps us out of a jumpsuit I think, you know, not that it’s really criminal, but it certainly keeps it out of the red for an audit.
Barley: Cards are just one of those things. Highly audit, lots of liability.
Eliot: Right, exactly. We wanna be careful with the vehicle. I like number one right away. I’ll tell you that. See, feel the same way on there.
Barley: I think we’re on the same page there.
Eliot: The corporation’s gonna get a deduction for that salary, you’re going to get some in effect, you know, in the way that the corp is getting to pay for it if you will. Although the child actually pays for it, but you will get the salary deduction. This number two though by the card, the C corp name right there. I mean no because we have no business purpose or desire or we’re not going to use it at all as a business. I think we get more into the legal aspect here. Potentially, you know, you got this vehicle and, and you’re really mixing personal asset and use with corporate. Yeah. And that might pierce the corporate veil maybe, maybe not. I don’t know, I’’m not familiar with up to date with the cases on that, but it’s certainly a road I would not want to go down
Barley:. Yeah, it sure sounds like something we’d say a lot. Hey, if you use your corporation to buy yourself a personal vehicle that’s piercing that or at least commingling of assets, right?
Eliot: And, and so you’re really putting the whole structure into jeopardy. For no real purpose. If you’d just take an option one, we wouldn’t even be having to worry about this, you know, and, and reporting the monthly lease or loan payments as a benefit to him. I just don’t like it, I don’t like an asset being put under the C corp that’s not being used for the C corp. I just think that gets you into trouble.
Barley: Now if the car’s in his name personally a hundred percent personally use asset and you said he is an employee of the C Corp, if he had to do a business trip or something with the car, you could potentially reimburse him for mileage, right?
Eliot: Under the right circumstances. Mileage might be reimbursable. What are those circumstances? Well, excuse me. You know, if he has to drive from one, from the office building of the C corp to somewhere to make a, a supplies run or something like that, that’d be reimbursable. We could probably get the mileage in there.
Barley: Think. Yeah, just, just throwing it out there, you know,
Eliot: You’re right too.
Barley: I think you would. Yeah. You’re definitely going to want to keep it in your personal name. No, change the fact pattern. We’re buying a car, it’s going to be for a hundred percent business use. It’s a plumber van full, all that stuff that rattles around all day, that well you’d likely wouldn’t be allowed if it’s a business use vehicle, there will be a lot of regulations, county and state city regulations likely requiring you to license a business vehicle in the name of the business. But obviously that’s not what we’re talking about here. No business use, ahundred percent personal. Keep it in your name. That’s gonna be the easiest in most cases anyway.
Eliot: Yep.
Barley: Alright, well how we doing in here? We got any questions we can answer?
Eliot: I think that’s about it.
Barley: The team’s knocking ’em out. Yeah, they got them. Good work. Yeah, we got a, well, a couple of our tax reps, attorneys, CPAs.
Eliot: Yeah, Patty, Amanda, George, Harry, Jared, Jeffrey, Tanya and Troy again just kicking it out.
Barley: Good. I hope you guys got a bunch of good answers to your questions. Now again, just to reiterate, anything we covered today, if you want more detail on it, submit a platinum portal question, set up a call. You always go way further into the weeds.
Eliot: Oh yeah, yeah we can,
Barley: Yeah. And all these topics can just.
Eliot: We can totally ruin your day. Yeah, right. We can waste all kinds of your,
Barley: Obviously just want to, expose you to the Concepts Pro. Provide as much of this educational material as you can. If this applies to you, please let us know. We can give you a lot more guidance where that comes from. Alright guys, well just kind of wrapping up, please make sure you subscribe to the YouTube pages. Just a ton of good information on there. Can’t stress that enough.
Eliot: The man himself, right?
Barley: The man of help lot, A lot of good more real estate stuff recently as well too. Starting to, you know, plan for what’s coming up in 2025 and check out Clint’s page and of course join us for the live events. Well Tax Tuesday, we got this every other week guys. And just to stress, this really is kind of about your general questions, so please submit questions that we, we, we really like seeing all the different types of questions.
Eliot: We certainly brought it this week.
Barley: Well we brought it this week. Yeah, so the email to submit questions. You guys know the deal every two weeks we’ll go over this and we’ll keep it coming. Also, please keep an eye out for emails on quarterly tax planning seminars, live stream webinars as well. And of course the Platinum Knowledge Room. Five days a week, five hours a day. Please take advantage of that service. I know I certainly would. You got the attorneys CPAs in there five hours a day, five days a week. You got old professional services team on call. Please use that service as well.
Eliot: Yeah, I think on the last page we get there we go.
Barley: Go. Yeah, there is our email
Eliot: Tax Tuesday at Anderson Advisors. I look at every question.
Barley: Yep, he does. It’s been every single one.
Eliot: Since I ever skipped over any, not that I’d ever admit to it, I guess I just did, but it’s been a long time since I ever did that. I read every one of them and they’re good. They’re thoughtful.
Barley: Appreciate it. Gives us a good beat on what is important to you guys too. Exactly. And not just to you, but I mean, you guys have the same concerns the market has. We’re all kind of facing the same concerns here in this environment. Really like going over your prizes question, it gives us a good idea of the kind of the pulse on the market too, so. All right guys, anything else?
Eliot: I think that’s it. Thank you so much.
Barley: Thank you. Great work today. Definitely commend you guys for learning tax and legal all at once. Drinking out of the fire hose. We’ll be back here in two weeks. Please keep an eye out for upcoming webinars, live events. Really would love to see you guys. Come and join us here in Las Vegas and we’ll see you next time. Bye. Thanks team.\
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