413: You Need To Know These! | Q&A You've Got The Tax Questions We Have The Proper Answers!

People, if you own a small business and you pay any company for anything that's not a box store, you know, like if you're going to Walmart, Staples or whatever, that's a given. But if you're paying any private business owner business to business for services or product, you're going to ask for a W9. That W9 is the key to telling you whether or not you issue them a 1099. He's trying to get money in the 401k but keeping his FICA down. And believe it or not, the IRS is onto this.

Would it make sense to have my ownership interest be owned by an LLC taxed as an S corp? In that situation, would the IRS want my reasonable salary to at least be the guaranteed payments received from the partnership? Or could I have a lower salary and still meet the reasonable comp threshold? Welcome everyone to the Main Street Business Podcast with Mark Kohler and Matt Sorenson. Excited for today? The People's show open forum where we're answering your tax and legal questions.

Yes, this is the People Show. I like that. Nice take. If you're new to the show, someone's referred you here. Thank you for giving us a chance to wow you. We are both tax lawyers, small business owners, real estate investors. We have a law firm and a self directed IRA company to help people self direct their retirement accounts. We've written books, we've done this podcast for years, we have millions of downloads and I'm just trying to wow you people. I want you to know you're in the right spot. We're a believer in small business. Main Street America. We hate Wall street generally. Not that we both don't have products In S&P 500, you know, you got to have some there, you know. But we're here for you. So thanks for being here for our open Q and A. Yeah, and if

you're like, man, I want to get some questions answered, go to mainstreetbusinesspodcast.com you can submit your questions there. And that's where our questions are coming from. Sometimes we're getting them from social media, but most of the questions we're going to be filling are coming right off the website. So you can get over there to get your questions answered. I strongly recommend putting them down the tax legal retirement field. You know, you want a sports prediction or political question answered. Wrong show. Wrong show.

We are not talking about the NFL wild card playoffs. We're not. We don't. Now there are categories at the podcast page so you can choose the genre of your question, but sports is not. Not one of them. So let's get to it. And now for those that are regular listeners, you've learned to tolerate our humor and dry wit. That we are being generous. Calling it dry wit, some might just call it distractions, bad humor.

Yeah.

But we're. We're trying to keep it real. And it's kind of fun. I got a fun story to tell this during this podcast today of, you know, auto deduction. You know, I'm really trying to. It's a good auto deduction story. So.

Okay. All right, I'm ready to lead off here with some Roth 401K. Roth IRA questions. Small business owner trying to make contributions.

Okay. All right. Well, you throw it down now. This is in the retirement.

This one was in the. In the small business category, actually.

Okay, I'll type over here.

Roth ira. This is from Marky says, hi, Mark and Matt. I'm 40 years old, married, filing joint. I have my S corporation that provides services to clients. And I'm the only employee in the S Corp. Annual net profit is 65k. I took a salary of 22,000. Okay. And 43,000 was K1. I contributed 20,500 to my solo 401k Roth account for 2022, which he says, mega. I'm going to come back to this. Also match 25% of that 5500 and profit shared 35,000 to max out the contribution for the year 2022. How to calculate my W2 salary to account for my Roth 401k contributions. Okay, Marky, you're doing it wrong. Let me come back to this in a second here, boy.

You're the Mr. TLC today. Do you want to slap him while he's down?

Okay, I'm going to slowly try to tell you how to do this correctly, but I'm glad you're asking the question, and this is perfect time, because what's happening right now, everybody's trying to do their W2s, and this stuff's gotta be reported properly on the W2 and on your 1120s for your S Corp. So let me walk through this here and Mark, y' all get to your Roth IRA question here. Secondly. Cause that's a good one, too. All right? On the 401k. And this is for you solo 401k owners. This could apply to you even 401 at a day job sometimes. All right, you did 20,500 as a Roth contribution as an employee. Right. You had an annual salary of 22 grand. So you can put in the 20,500. That was the 22, 2022amount. And that's going right as just a Roth contribution on your W2. And that's on the W2. Even though you don't get a deduction for it, you still got to put the Roth contribution on the W2. Now, the match you did of 25% of the salary, which was 5,500, that's going to go on your 1120s. That's going to go on the company's tax return as an employee retirement plan contribution, you know, and that's a $5,500 deduction. Those are going to be traditional dollars. And Moving forward, in 2023 forward, these could be Roth dollars. But we're waiting for the IRS to give guidelines on how you're going to do that. But for your 2022 contributions here, that 5,500 is traditional from the employer match. It's on the company tax return, the 1120s, because you got an S Corp. Now, the rest you threw in of 35,000. You said referred to this as profit shared, the 35,000 to max out the contribution for the year 2022. I think you're trying to do the mega backdoor Roth. That is wrong. That is not how you do it. Okay? You cannot make a profit sharing contribution for the rest of that. What you have to do is an after tax employee contribution, which means you've got to have a salary now of, of at least this 6,500. I mean, this 6,500. Sorry, 65,000 you made. You cannot throw in 35,000 more off a $22,000 salary. Now, what you already threw in so far, fine. The employee contribution of, you know, and the match of 5,500, I'm fine with that. But this additional 35,000, that's employee contribution, which means it has to be salary. So you've got to bump up your salary another 35 grand here, which would put you at, what is that, 57,000 in order to get there. So let me. Justifiable. Yeah, you gotta bump up your salary. And this is an employee contribution, which is also on your W2.

And let me add this. Thanks, Matt, for letting me interject. Is that everybody? Here's what we know Markey's trying to do. He's trying to get money in the 401k but keeping his FICA down. And believe it or not, the IRS is onto this. So there's a rule in IRS code section 415 that says your 401 contribution is the lesser of your 401k wages or the contribution after tax matching everything. So the IRS says, hey, if you bump up your fica, you can do it, you know, up to these incredible backdoor Roth, mega backdoor Roth strategies. But you can't cram down your salary. We, all of our tax lawyers have a spreadsheet where we can back into the sweet spot. The sweet spot of where you want to be with your 401k. And because I'm an upstanding guy here and I try not to let my inside voice take over, I'm just going to leave the comment sweet spot hanging out there and not say anymore, because that would be inappropriate.

Yeah, I'm also not touching it. Don't lead into that comment either. All right, let me say that's what she.

Okay, go ahead.

All right, let me make a comment

about, you know, you know, you just, you are, you. You fell right into that one.

Dang. You know, boy.

Okay, okay. All right, now, any other comments for Marky?

Marky, in other words, on this Roth 401k, you're trying to do this mega backdoor max out. In other words, what Mark's saying there, too, is if you want to put the max 60,000, 65,000, whatever it is, for the year 66 and 2023, you better have 60,000 on your W2. They don't care about what's on your K1. It's what's going to be on your W2. So I know that sucks, and I know you're trying to keep your salary down, but if you want to get more in the retirement account to grow and come out tax free,

you're gonna

need to do this. Now, keep in mind, if you're doing the mega backdoor and you're doing this after tax contribution, to get past the 20,500 of Roth, you've also got to do a Roth conversion. You need to issue a 1099R. You need to put that on your tax return. All right? Now, this will be on 2023. Technically, it's kind of clunky, right? Because this is a 2022 contribution, but you're actually doing a Roth conversion in 2022, and so it ends up as Roth. Because this is employee after tax. It's not Roth yet, but you're going to convert it to Roth. There's just no tax on it. But you do got to run through these hurdles, okay? This is why it's a tax loophole. So if you're like, that sounds complicated. Guys, I don't love that. I mean, that's the tax code. All right? We're giving you ways to max out and get a ton of money in his Roth. This mega backdoor Roth. But you do got to thread the, you know, thread the yarn string through the holes. You know what I mean?

Yeah, yeah. Okay.

Okay. Now I did have Marky had a good question on the rock.

Oh, my word. Is this the marquee show? I think he's got a little too much love here.

That's a good question.

Oh, my.

Good question. Okay, and then you. You ready? This is the Markey Show. Marky Mark, I could see as I contributed 6,000 in my Roth IRA for 2022. Do I report my Roth IRA contribution on my W2? No. Okay. IRA contributions for Roth IRA, traditional IRA, those are not on UW2. That's just going to be on your 1040 personal return. Don't stress about that. How's it in and out fast on that one? Okay.

You know, you make doing the show really hard. I just, I.

First you're complaining about me going too long. You know,

stop talking in and out too long. You know, I just. I want to apologize to some of you out there that have kids in the car. Of course. This is going right over their head. Okay, Ethan says my wife and I are 5050 owners of our Rental Real Estate LLC. We live in a non community property state. Currently, we file a 1065 and receive K1s if we create a revocable living trust, which you should. In which my wife and I are grantors and beneficiaries and we transfer ownership of the LLC to the trust, which you should. Does this mean we can disregard the LLC and file our income from rentals on a schedule E? Yes, I would prefer not to file a 1065 if possible, despite the lower audit risk. Now, for everybody out there, really, one of the only reasons you would do a 1065, husband and wife, is because your audit risk goes through the floor. I mean, if you're being really aggressive on write offs. I love the 1065, but also, Ethan, you don't need a revocable living trust to do this. Unless you have a prenup or a postnup, it's going to be marital property anyway. So if you want to pop the LLC into a single member between the two of you and file a single member llc, feel free. Now, the trust is the creme lit. A creme. Just do the trust, make it the owner of the LLC and you're clean. So that's the route I'd go there. Okay, Matt, your question. Notice how I answer that quickly. And our other listeners appreciate that. I just want to throw that out so that we can cover as much.

I just like to take my time, you know? All right, Luke, you want to cover

as much ground as possible. I get it.

Yeah.

This is. This is a hot and heavy show. This is good. Okay.

All right. Luke says I have an opportunity to buy. This is in the Q&A LLC, taxes, S Corp and partnership. I have an opportunity to buy into a small percentage of my employer, which is a financial services partnership. Due to become a becoming a partner, my current W2 income will need to be shifted to guaranteed payment and distributions. Since my initial ownership percentage will be relatively small, a vast majority of my compensation will come in the form of guaranteed payment for services. I figure guaranteed payments will end up being 90k and distributions of maybe 5k. Would it make sense to have my ownership interest be owned by an LLC taxed as an S corp? In that situation, would the IRS want my reasonable salary to at least be the guaranteed payments received from the partnership, or could I have a lower salary and still meet the reasonable comp threshold? All right, great question, Luke. And you're on the right track. I would do exactly what you're saying. Get an S Corp, llc, taxes and S Corp or just an S Corp to own your percent in this partnership, LLC. Now, just because your K1 is going to have guaranteed payments on it versus net income doesn't mean you're stuck with that guaranteed payment as being your salary.

I love that comment, Matt. Good call.

Yes. So what I would do, Luke, whatever the heck you want. Take a reasonable salary from the escort based on your income that you're making in your situation. Don't get hung up on what's the guaranteed payment on the K1 versus the net profit.

Okay. And I'm going to put this on the whiteboard for those that are watching on YouTube and if you're catching this on a podcast portal and that's your preference, that's wonderful. What I'm doing here. For those watching on YouTube and all of you can get over to YouTube and just search Main Street Business Podcast and you'll see the playlist. I'm going to go to the whiteboard here and just diagram something that will visually bring this together. I'm going to bring in Markey's. Com or no, Ethan's comment from the last question where we have our trifecta with the trust at the bottom, which all of you that have business owners, married, single, usually all of you should be using a revocable living trust. They're affordable and they can last your entire life with some minor amendments every five to 10 years. The trust owns the LLC. On the right side. The LLC reports the rental property, whether it's a 1065 or Schedule E. You get to choose on the left side. I love this question by Luke. He's going to set up this LLC taxed as an S Corp or just go straight to an ink. Who cares? Just go Inc. And if you're a professional, you're probably going to go a PC, a professional corp. If you work with one of our lawyers, they'll walk you through which entity fits you best. We charge the same price whether it's an Inc, a PC or an llc. So you're going to. But ultimately it's definitely going to be taxed as an S Corp. And that S Corp is going to own the LLC which is at the top. So at the top of the food chain is this partnership LLC with all these partners. And then you're going to have a percentage of ownership. And like Matt said, you're going to get a guaranteed payment that should not be paid to you. It should be paid to the S Corp checking account. That's something that you're probably wondering about. The very specifics here of the kind of the mechanics. Make sure the guaranteed payment goes to the S Corp. And then any draws or profit distributions from the partnership will go to the S Corp as well. None of this money should go to you directly. Then the S Corp gives you a draw. And then after the fact, which we've talked about many times before, all of you get over to our podcast dedicated to S Corps. We have several. You'll do a salary on paper after the fact. You don't have to actually take a paycheck. And you get to designate your salary. And frankly, Ethan and all of you out there, I don't know what your salary's gonna be. We have to look at your overall income by the end of the year and your distributions. And like Matt said, just because you're guaranteed payments 90 doesn't mean your. Your payroll needs to be 90. And if some accountant's telling you it has to be, you got the wrong accountant. This is an art form and they're scared of their own shadow is what's going on. So tell them to strap a. Tell them to be okay. Anyway, so now we got our salary, a W2 and a draw.

Jumping in on these anymore.

I'M sorry, I can't say anything on this podcast. So you're going to get a K1 from the LLC to the S Corp and then a K1 from the S Corp to you. So that's what it looks like for those that wanted to watch on YouTube.

That was a pretty picture. I like it.

Well, thank you. I'm pretty mean Pictionary player. Just want to throw that out.

I know. All right.

Okay, James, let's pull the whiteboard and who's is it? My question. My turn.

Yeah, that was my question that you kind of, you know, volleyed back. But I got another one if you're ready for me to go and you want to

let me throw out. Yeah, okay, go ahead. That sounds good.

All right. This is from 1099. Ms. For KKOS. This is from Logan says. Hey, Mark and Matt. I'm the dummy who recently asked about 1099s when Mark did the solo Q and A. Thanks so much for the MDESK answer. It sparked a question. Follow up though. You mentioned any business you pay 600 plus during the year must get a 1099. I assume you meant service based businesses, but does that include something like your law firm talks about? An article you read that suggests attorneys and law firms are typically due at 1099 says, I guess I'm struggling to see where the line is. I appreciate you guys taking the time to do these Q and A's. Thanks. Okay. Yes, Logan, if you hired us to provide services for your business, we set up a new entity for you. We did some tax and business planning for you. We did your trademark, whatever. We just set up your solo K. You can, you should 1099 SK. You're expensing that in your business. And you can call our office to get our W9. Our EIN is also on our invoices if you need it. A lot of companies provide that, but you can get the W9 from our office. And 1099 is if you paid more than 600 bucks. Because that assuming this was for business services, which is mostly what we're providing to our clients. They're business owners. We're providing advice and tax legal services which you're going to expense in. In. In other words, send us a 1099.

Okay. And I will say this.

Just, you know.

Yeah, okay with that. Totally. And. And two thoughts. One is people, if you own a small business and you pay any company for anything that's not a box store, you know, like if you're going to Walmart, Staples or whatever, that's A given. But if you're paying any private business owner, business to business, for services or product, you're going to ask for a W9. That W9 is the key to telling you whether or not you issue them at 1099. Because if they check the box, they're a corporation. C or S, you're out of the woods generally. But law firms, ironically, are one of the few industries that are picked on. Maybe the IRS doesn't trust lawyers. I don't. And the IRS says, I don't care if the lawyers check the box. They're a corporation. You're still supposed to 1099 them. We don't trust them. But anyway, so everybody out there, you

need to be asking accountants, too, isn't it?

I don't think it's accountants. I got a double.

Oh, that just got us the lawyers.

Yeah, it's just the lawyers now. They trust accountants because they want to file tax returns with the irs. They got to stay clean. But I would say, everybody, please get over to my article on 1099s. It's@markjkohler.com, it's one of my most recent blog posts. It's one of the most popular downloaded POD posts of mine throughout the year. And I break it down in more detail. Deadlines, who gets a 1099, who doesn't. Links to the W9. Everything you need, make sure you're on top of it. And people, you got about a week and a half. The penalties for not issuing W9s are. I'm sorry, 1099s are ugly. And there are websites that will help you issue these 1099s quickly. Do not wait, and until January 30th, get on it. Yeah.

One thing I'll say, too, on the 1099s is let's say you're, like, traveling for business and you fly on American Airlines. All right? Like, oh, do I need to get a. I have a client. And then they go, stay at, you know, a Hilton hotel. And you're like, man, do I. And I. Those are all over 600 bucks. Am I, like, throwing a 1099 out everywhere I go? You know? No, Those are going to be the big corporations that are. You do not have to issue a 1099 for. Don't stress about that again. I think Mark said the best way, the business to business stuff is the one where you're going to want to track those and get those W9s. Yeah.

Which brings me to the travel deduction.

This nice little segue there.

Yeah. Those little Segway. A couple of weeks ago I took a travel write off for staying in Radiator Springs.

Oh, for those Disneyland?

Yeah. I hid under a tree and they locked the door at Disneyland and I stayed the night. No, I was traveling with my significant other. We were on business and someone forgot to fill up at the most recent gas station. That person will stay unnamed. And in the middle of the night driving to Phoenix. In the middle of the night. Let me just tell you, the drive from Vegas to Phoenix sucks. It is like two lane road, isn't it?

Terrible, man, it's the worst spot.

Yeah, yeah, they figured out LA to Vegas, easy schmeasy. Vegas to Phoenix takes a southwest flight, trust me. But anyway, so if you start to run out of gas or take a wrong turn again, someone should be unnamed on taking a wrong turn on the 40. You will end up looking for gas on the infamous Route 66. So 1:30 in the morning on literally zero on the odometer, we roll into the town. I'm not kidding that they modeled the movie cars and Radiator Springs of it was fascinating. Roadkill Cafe. Little black and white cop car from 1930s there. It was like a little antique town. It was literally historic. Route 66. I'd never been there and all the gas stations are closed. I took out a white fence turn in a corner and, you know, ended up staying the night in this little hotel and taking a travel deduction on Route 66, you know, valid traveling for business. So I got to write that off and had to stay a few weeks and work. Work off the fence I broke and, and. But it turned out, turned out fine. So you can make a movie about that? Theoretically. Just saying that.

What's the fence? Is that like, you know, you're flipping it like Back to the Future or something or where are we? Where was that?

That's. You don't know the movie reference, Sarah? Doc Holliday. Doc Holliday. But you were close because.

Right, I was close with, you know, the actor Michael J. Fox.

Michael J. Fox. Yeah. Doc Holliday. Cars was really, I thought, a play off of Doc Holliday. So Doc Hollywood. Doc Hollywood.

Sorry, Hollywood.

Doc Hollywood. Michael J. Fox. Okay, so let's get over to next question. This is from BRC Feelings. Longtime listener and client of KQS. Married with three dependents. Own a parent LLC taxed as an S corp that owns two LLCs, all operational. Have a solo K. More to come. So brc, loving your structure. We could go to the whiteboard and Everybody that would be left side, they have an S corp that owns two LLCs. Easy schmeasy. He says, here's what we're dealing with now. We are acquiring a commercial property for one of our LLC as expansion. We will be leasing part of the building to ourselves and out to others. Might have an on site manager that we will be hiring or contract to a third party, maybe my parents. We do not want to lose a solo K so this LLC can't be disregarded, pass through or worse to my S corp. Right. Will it be a number two? Will it be a problem with my primary solo K if this LLC investment elected to be an S corp. Let's say there's three. Okay, here's the big problem, brc. Your questions are assuming that your LLC owned by your S corp is also going to own the rental building. Do not do this. This is what's called a self rental. I love the self rental strategy. Matt and I, one of our law offices, we own the commercial building that our law office is in. It's actually a commercial condo in a big building. So when we pay rent we pay it to a separate LLC that owns the building. Our S corp should not in any way shape or form through the parent LLC or anything own that building. So let's go to the whiteboard. Let me just whiteboard this. So what you would do is everybody,

Mark, remember we have, we have two buildings.

That's true. Boy, Matt's out there bragging. Bragados, Matt.

Okay, I'll throw that out there.

Yeah, just throw that out. Okay.

Done this twice.

We've done this twice. This is very, very common in my certified tax network training. If you want to get certified as a tax advisor we do a weekly training. I've got 12 modules, 60, 80 videos somewhere in between, constantly releasing new content. Last night we talked about the self rental strategy and how it looks on a tax return. So that was what we worked on. So if you, if you want to get take your tax strategies to your for yourself or for your practice, practice to the next level. Please get over to markjcolder.com and look at my certification program. But this was our topic last night. So anyway if we look at the trifecta. So if you're visualize this for those of you that are on a podcast, we've got our trust down at the bottom. We got a line going straight up the paper right up the middle. On the left side we have our operations and let's imagine what BRC's world looks like. They've got an S Corp right in the middle on the left. And it owns two LLCs at the top that feed downward into the S Corp and they've got operations up here. That's great. Do not put the rental on the left side. It is a passive entity. And so over on the right side we will create a separate LLC just for holding the building. And this building is going to be leased to the subsidiary, S Corp. Llc. So the LLC owned by the S Corp will lease it from this other sister llc. And what this does, brc, it totally rips it out of any concern for payroll or S Corp analysis. It is a separate line of business. So under the code under it's not operational, you're going to. If you do on site property management, that's fine. More than likely they'd be part time and I would try to 1099 that out anyway. But it is not going to Threaten your solo 401k which is in the middle. And by the way, parents. Matt, aren't parents included in a solo 401k?

Yes, they could be if they work in the business.

Yeah. So heaven forbid, this would get classified as an affiliated group. You would not violate ERISA by excluding your parents. Cause your parents had the choice to play in the solo and they didn't. So you're. I think you've got lots of options there. But so everybody, the moral of the story is if you're gonna. Your number one best rental business is to own the building that you rent from yourself. In your business, don't pay someone else rent, pay yourself rent. That's number one. When clients go, yeah, I wanna get in the rental business, I go, are you paying rent anywhere else? Yeah, I got a storage unit. Buy a storage unit, Boom. Buy a building, buy an industrial building, buy a warehouse, buy a steel building. Rent from yourself. This building that I'm in right now, sitting right here shooting my YouTube video, is a metal building that I built just for my studio because I got sick of paying rent all across town at different locations. And I centralized all my storage and all my studio work to this building. And I'm paying rent to myself. So do that, but put it over on the right side. Do not include it in your S Corp model. Think that helps you out? Brc, get with one of our tax lawyers on the setup of the LLC and you can vet the details out. Anybody that needs an appointment, you can go to shelbykoslawyers.com Shelby is our new client service manager and she'll hook you up with One of our attorneys. Okay, let's go off the whiteboard. Thanks, guys. Okay, Matt, you choose the next question.

All right. Love this question coming up here from Ben Jamming. And jamming says, just so you know, I listen to your podcast instead of music every morning at the gym. Oh, that much?

Man, you're awesome.

Work it.

Work it. 4, 5, 6, 7, 8. Work it.

That just ruined it. We just lost him. We just lost him. All right, says, I own an S corp in Utah. And I love this part. I pull teeth in Utah, Texas and Arizona. Our clinical entities in Arizona and Texas pay my Utah S Corp as a 1099 contractor. But is there a way to categorize. Categorize my earnings in Texas and Arizona and pay the respective state taxes in each to lower my overall taxable state income?

Oh, I. I cannot wait to answer this.

I mean, I pulled this one so I could answer it.

Okay, you go first.

Second shot.

I'll back cleanup. Yeah, I'll do cleanup.

Then there is a way, but you gotta leave the Beehive State. You've gotta leave the great state of Utah. So long as you live there, they are gonna tax you at their flat tax rate of 4.85%. Let's basically just call it 5%. You make a hundred grand. I don't care if that's on Mars. In Texas, in Arizona, in Utah. Utah is going to tax you at 5%.

Okay.

Now you do allocate your income a little bit to Texas. You're going to allocate income to Arizona and allocate income to Utah based on, you know, your share of where your income's coming from. But at the end of the day, it's not like you can say, let me just allocate all of it to Texas and I'll skip having to pay Utah. Nah. Since you're still a resident of Utah, Sure. Texas, zero percent state income tax. Sure. Arizona is only two and a half percent now, state income tax. But the difference. Let's say Arizona, two and a half percent. You make 100 grand, you allocate to Arizona 2,500 bucks. You get a $2,500 credit in Utah, but they still make you pay the difference. Another 2,500 up to 5% in Utah. So no games unless you move out of Utah.

Yeah. Now I'm going to sticking with Matt's example, and then I'll give a different answer entirely. That might be a different perspective. But Matt's example, he said you had 100 grand. He's going to allocate you're going to pay 2.5% in Arizona and then get a credit in Utah for five grand. Actually, it'd be different. Let's say that you're a third. Third. Third. You're third in Utah, third in Arizona, third in Texas. So you're going to pay 2.5% on 33 grand and then go to Utah and go, well, I only pay 5% in Utah on the 33 grand allocated to Utah. Utah goes. You're a Utah resident, so we're going to tax you on the whole hundred. Now, if you allocated 33 grand to Arizona and pay 2.5% on that 33 grand, we'll give you 2.5% credit on the 33 grand and then you can. But you're still going to pay 5% on the whole Hyundai because you're a Utah resident. So just to clarify the math a little bit, Matt, for some of our accountants listening. Yeah.

And I think another way to think of it is if there was a 100,000, let's just say a hundred thousand and you paid 2,500 bucks to Arizona, yes, Utah is going to just charge you their 4.85%, but they'll give you a credit for that 2500 you paid to another state.

Yeah, yeah. Another way of saying I love it. Nice, safe save there. You know, just because.

Thanks. I'm just trying to.

Yeah. Matt's egos on the state on the line here. Okay, now I'm going to go with a different approach on the answer the question. The question was everybody, if I, if I'm correct, he said, can I allocate my income in a unique way between these three states to save on Utah, the answer is no. You can't allocate it. Even if there's a different way of saying this, that saying you don't have a choice in this. You're playing games saying, well, no, Arizona is 1099 in me. Guess what, Arizona and I'm, luckily we didn't say your whole name on this show. They are going to audit you. You need to be filing in Arizona. If you are working in Arizona and you are saying, well, it's a 1099. My S Corp's in Utah. Arizona does not care. You are earning money in Arizona. So here's the big shocker. What I'm saying is not going to cost you in tax because just like Matt said, Utah's going to give you a credit. But right now you're exposed in Arizona. Your S corp should be registered in Arizona and They should be paying your S corp. Your S corp should be registered in Texas. You've got liability exposure, pulling teeth in those states. Your S corp better be registered in those two states. And you're owing taxes in Arizona. Texas doesn't care. There's no state tax, but still have liability exposure. So you're. You're doing business in three states.

Yeah, I think he's already. I assume that's the case, but.

Well, he said he's getting. Yeah, good. Yeah.

But, yeah, there's no games to play. Like, it's kind of like you got to play the ball where it lies. Whatever time you're spending in Arizona or Texas is what income you allocate to those states. But for you, it's kind of a bummer because in the end of the day, you're in. You're in Utah. So they're going to tax everything at the 4.85%. Sure. They'll give you a credit if you pay Arizona. Let me say the opposite, though. Let's take an opposite scenario. Let's say you lived in Texas and you're working in Texas, Arizona, and Utah. Now, you might be playing some games, right? You might be like, oh, 99% of what I do is in Texas. Because if it's in Texas and you live in Texas, you know, you pay no income tax. But in your situation where you're in a state with income tax, albeit a reasonable one at Utah, 5%. There's no strategy around it because you live there. Yeah. Texas or Arizona.

Wow. There are so many questions. I want to apologize to everybody in advance that we just are not getting to. Going to be able to get to all of your questions today. Let me give a shot here. This is big BMP Enterprises. And Cleon replied on, quote, unquote, our behalf. And I don't mind CPAs popping in on this chat board. This is great. But let's just make sure Cleon was correct, too. So BMP says, I know you mentioned that in order to be a real estate professional with a W2 job, you need to work more in your real estate business than your W2. That's still A. A, that's still A leap because it's. The second part of the test is not only the hours you spend, but what's your primary occupation. It's hard to show the IRS that you work 41 hours a week doing real estate when your day job is being a chiropractor. I just. You're. Oh, and here we go. I am a paid firefighter. I work 24 hour shifts with three days off in between. We work an average of eight days a month with the amount of time off da da da da da. 36 hours a month off. I own 12 properties. I flip properties. I'm a real estate agent with 40 transactions last year. Okay, I'm liking the argument. I'm saying it's a tough uphill battle. But look at all this great feedback.

I love it.

I track my real estate time with Toggl. I worked in real estate 200 hours more than my fire department job this year. Will they reject my claim for real estate professional or is this something that is just logically because of my work schedule? Any input would be built. And by the way, my CPA says let's go for it, which I love. Thanks, Jason. CT Firefighter Kleon says your tax return won't get rejected per se. This issue is that if you were ever audited, you would need to prove that you met the hours requirement. And I would add to that Kleon, the primary occupation requirement. The records in the app would probably be sufficient. However, the more substantiated documentation, the stronger your argument. Further, it's probably wise to make the property grouping election. It's made by attaching a statement to your return similar to the following.469.9G3 or the af6 da da D okay, Cleon, I like your comment, but here's the reality people. When you check the box, I'm a real estate professional and I want the losses. You have to make that grouping election or it's worthless. It's not going to work. So I cleon my experiences and I could be wrong and you could. I'm always open. I don't have a huge ego here. But everybody when you say I'm a real estate professional, the you've got a two part test. Then you have to say I materially participate in the real estate which is the second half. And then by checking the box if you will. There's not a box you check per se, but you attach this election and that's the nail in the coffin. So when Cleon says it'd be wise to make the grouping election in our world, you're not there until you make that grouping election. That's my take, Cleon, and it's not gonna hurt. Maybe we're mincing here a little bit, but the point is you gotta make the election. And in our world over the years, the election is the final piece of the equation. So and I'll say in summary, I kind Of. I like your argument. The firefighters, you know, it'd be interesting, Matt. Think about all the firefighters and school teachers that we have that become really prolific real estate investors. They use that time when they're not in the classroom or at the fire station wisely. And firefighters are notoriously hard workers. They're not sitting around.

Just my grandfather as he was. He was a firefighter. He had a siding business. Let's talk about really side hustle. The sighting business.

I didn't know that. I didn't know that.

Yeah, a little. Little side siding hustle. Side side business. You know what I'm trying to say? So I was trying to get some little play on words there. Yeah, A lot of our. A lot of small business owners. I mean, I do have quite a bit of them, so.

Yeah,

great question. I love the question. And I like all the detail, too. Like you're ready, like you know what you're doing.

Yeah, boy, I'm gonna okay you. Where. What category should we go next?

You do.

Why don't you jump at return? Well, you got one. Go ahead.

Yeah, I got one in retirement planning.

That's where I wanted.

You maxed out 401k.

I love it.

Okay, this is going from Jason Brown. He says high income, W2 owner. I'm over the IRA income limits. Barely. I maxed out my employer 401k, the contribution limit. I also have several side gigs. Single member llc. Some come goes much higher than the IRA will allow. I cannot do an HSA at work because the insurance is low deductible. What else can I do for retirement? Not able to do IRA due to income. Not interested in a solo 401k. What's the next best step?

Oh, my gosh. Did you. Did you pay this guy to send this message?

I know. This is just like. He just, like, teed it up for me and cleared the fairway and.

Oh, man, I don't know how you're gonna.

Quiet, please. Signs are up.

I don't know how you're gonna go from the sweet spot to where you're going next, but you go for it. Good luck.

All right, Jason, I know what you're feeling right now. You're feeling like there's no way to get in the party for any more retirement contributions. You're feeling locked out. You didn't get an invite. You know what? Go around the back door, the backdoor, Roth ira, Jason. That's what else you can do. Okay? You're high income. You've maxed out your 401k. At work. Doesn't matter. You can still do the backdoor Roth IRA for six grand for 2022. Goes up to 6,500 for 2023. So that's what I do first, is do the backdoor Roth ira. We have a separate podcast episode just on the backdoor Roth ira. I've got some videos on it. Mark's got some videos on it. At directed ira we do them. If you want to self direct. We have all the details on how the backdoor Roth IRA works, so. But that's like me, Jason. I max out my 401k every year. I'm high income and can't do a front door Roth IRA or traditional IRA contribution, but every year doing a backdoor Roth.

Okay, now I'm going to give another alternative in this equation. Totally agree with Matt. But it was interesting what Jason said here. Not interested yet in a solo 401k. Why?

Why?

Okay, now they're not that expensive to set up and the control you have is incredible. So look at the very beginning, Jason says I max out my employer 401 the contribution limit. I doubt they're matching up to his entire contribution limit. So let's say right now, this year, contribution limit is 22,500. Let's say they're only matching Jason up to five grand. So you put in your five grand, you match, you double the money. Great. You've got another $17,500 to put in. Do you really enjoy the choices your employer's giving you in the 401k plan? Is that rocking your boat? Are you just like freaking loving it? Well, no, it's just easy. I just tell them to put the max in and they just withhold it from my W2. Dude, stop the insanity. Go open a solo 401k with your side hustles. You can take money from your day job, inject it into your side hustles if needs be, and take that 175 and put it over in a solo 401k of which you control. You can set up a 401k LLC, invest in notes and real estate and gold and silver and crypto and a hundred of things, or put it blindly into your employer's 401k where the fees are off the chart. Now, you still do the match because that 100% match is money in the bank. But match, get out, do your Roth IRA like Matt said. But before you go back and max it out at the employer, the Solo 401K could be incredible.

Yep. Another take. I would let me Another reason why on the solo K, even if you are maxing out the contribution at your employer 401k and doing 20,500, you can still do a solo K. All right, you still might have, I don't know how much the company's putting in, but you know, you can have a total of over 60 grand in a solo in 401ks in total. So you may have another 30 grand you can do. Now, we'd want to look at what are the profits and net income in your single member LLC from your side, your several side gigs. But I would consider the solo K. If you're looking at a SEP ira, you might as well just do a solo K because in the long haul, if you're trying to max out retirement contributions, the solo K is where it's going to be at. You might as well get the plan set up. Get on the right plan that has the most, gives you the most bang for your buck on what you can do. Now, I know you say in your example, do you want to reduce tax in this example? So you might say, but I'm not getting a tax deduction on the backdoor Roth. Well, you know what? You are getting tax free growth and it comes out tax free. That's saving tax too. But also you can do the solo K. So do backdoor Roth. Consider the solo 401k. If you have enough income now, maybe your net income after all these side gigs is five grand, then, then the solo K is not worth it. I don't know. But if you're like, no, it's 50 grand. Okay, I love it. We're going to get a lot more money in the solo K, which could be traditional, by the way, which could give you tax deductions now. All right, great question, Jason.

Yeah, yeah, good stuff. All right, I'm going to jump over. This is an older question, but I'm, I'm kind of liking this. This is Jerome and he said, any recommendations for a dirt cheap, high deductible health insurance plan? I can afford to max out my HSA every year, so I want to get a high deductible health insurance plan with low premiums. Cleon commented too, and said, I'm interested too. Now, I'm sorry, Jerome and Cleon, that this is belated information. You've certainly probably already made a decision on your health insurance choice, but this is such a great reminder for everybody. And I wish I would have caught this question a couple months ago when you had it, but notice what's going on with Jerome, he is healthy. I mean, he. He wouldn't be looking for dirt cheap, high deductible insurance if he really doesn't use his insurance. So why not get a plan where if he has to come out of pocket, he's willing to. Because he can always tap into his HSA if he needs to. The HSA is a tax deduction on the front page of your return at any age, at any income level.

Whoa, whoa.

Not any age. Sorry. Up until age 65, at any income level, you just need a high deductible plan. Now, what I would tell most people is based on your income, start with the state exchange or the federal exchange. Some states have their own health insurance exchange portal. Others just defer to the healthcare.gov and third, just call up a health insurance broker in your area and tell them what you're looking for. I used a health insurance broker myself, and I was excited. I just got my card. I don't have my wallet right here with me, but I got my Blue Cross Blue Shield high deductible HSA policy for this year, and I just got the card in the mail and I'm so excited. So now I can put money into my hsa. I've invested my HSA in a rental. I recently bought cows because I'm a Yellowstone fan. I sold those cows. I bought five who were pregnant, who had five more. So my investment doubled. We can talk about the birds and the bees for those that need that. And then I sold the 10 cows with the five being pregnant with, meaning five in the oven. So it was really a 15 cow sell. And I made money in my HSA in Kohler Dutton Livestock LLC. So, you know, Beth would have been proud, you know, because Beth knows the farm's gotta make money. You know, if you're not making money, you're gonna lose the farm, you're gonna lose the ranch. So I came through, my HSA made money. I sold the cows because some people get too emotionally attached to their livestock. They won't sell because they love the view, they love the livestock. Not me. I was like, beth, I'm on camp Beth. We gotta make money. So we sold. Did it all in my hsa.

So, you know, I freaking love that. Okay, is it my turn for a question? Because I got another one from Ben Jammin and I just. I usually. I like to give, you know, more love to other people, but this is a good question. Okay, what category's up quite a bit right now? He says, this is solo 401k, the unknown. Now What Benjamin says market Matt for President, 2024. Just saying. I'd vote for it now. See, Ben knows how to get us to. Yeah. You know, he knows what he's up to.

It' little foreplay never hurts, you know, it never does.

Yeah, it's working here. He's got a good question. He says, I have a solo 401k and had one since 2017. I have approximately 300k in it. And I want to stop for a second. He just started this thing in 2017. He's got 300k in it. That's only been five years, which you could totally get to that number by just maxing out your contributions and making some good investments. Not unrealistic and. But a lot of people, you know, are like, oh, I'm at zero, and I want to have hundreds of thousands of dollars. Okay, get started. Like Benjamin did in 2017.

Great example.

Now he says. He said, this year is the first year I own a business 100% with employees, which, as I understand now disqualifies me from contributing to my solo K. I know I can create retirement options for my employees and myself with a safe harbor 401k.

Okay.

He's been listening to the show. But what about my old Solo 401k? What happens to that? Do I have to roll it over into something else? Can I manage, invest it myself, just not contribute anymore? What are the limits now? Thanks for expertise. And y' all says, by the way, I did your tax attorney review and trifecta planning. Didn't get around to this question in it, but worth the money for sure to anyone on the fence. Also, love that endorsement. Wow.

Love you, Ben.

All right. Okay. Yeah. Okay. Now here's great question in here for any of you that have a solo K. Once you do have a qualifying employee where you. Which Ben has.

I'll come back to that one. Can I answer that part when we're ready?

Yeah.

Okay.

Is that.

Well, I won't do it right now, but once you have a qualifying employee, you keep going. I'll come back and tell everybody when that trigger occurs.

Okay, got it. Got it. Yep. Okay. So once you do have a qualifying employee, you can't do a solo key anymore because you've got to offer the Same super generous 401k with 25% matching to your employees that you're doing for yourself. No one does that. And so what happens is you have a couple options. One is we just freeze the plan. You actually have to document this and you freeze the plan and say hey, the plan isn't available to employees anymore, but you can still stay investing your funds in the solo K. Now, the IRS has not issued any guidance on how long you can have a frozen plan for. I like to tell clients a few years, don't sweat, don't worry about it. Past that I'm not sure. I've looked for guidance multiple times on this and how long we can get away with a frozen plan. But we do know what the IRS cares about. And I've seen clients audited. We had a client who did a solo K with some other provider and they had 14 employees in a related business that they thought didn't matter and they got audited. And you know what the IRS made them do? Go back and contribute for all these 14 employees over years of their work and put in money into their retirement accounts. We actually put them into IRAs for them. It's a complicated mess, but so don't mess around with this. You run a big risk on having to contribute for all these employees who qualified that you didn't offer the plan to. Okay, go with the freeze route. Buy yourself a few years. Consider what you might do in terms of the Safe Harbor Group 401K.

I'm going to provide a couple alternative. And one alternative point there too is shut down the 401k and just roll it out to an IRA. You can do that. You know, just so if some of you are like, what happens to my solo it you freeze it, keep investing in it, or roll it out to an Iraq and just keep rolling. Yeah. Now let me give you another alternative. Now, Benjamin said, this is the first year I own a business with 100%. I own 100% with employees. I don't have enough information to answer your question, Ben, because I want to know how long have you had that employee there? Are they full time? Are they part time? You might get another year out of this solo. The rule is once you have a full time employee that has an anniversary date of being with you a full year in that year they have their anniversary date, your solo's done. But let's say you just hired your full time employee right now and it's late January, you have until next January before they hit their one year anniversary. So you could still do your solo this year. And who knows if they're gonna be here all year, maybe they move on, maybe they whatever. Also, there's a part time rule now under the new inflation Reduction act, which I was so grateful for. I mean, inflation totally went down with that act. Biden was a genius.

Yeah. This is the omnibus bill, but yeah, okay.

Is that. Sorry I had to get in a little vent there.

Yeah.

I'm just so glad that bill was passed. I was so worried about inflation and it was just life changing.

It all got handled with that bill. Yeah.

Perfect. Bill is part time employees. If you have a part time employee for at least three years, so they're hitting their third year anniversary as a part time, that's the equivalent to a full time employee hitting their one year anniversary. But if you say yeah, I have employees and I'll say are they all part time? Yeah. Well you got three years, three years before you have to worry about this.

Two years starting in 2024 by the way. So it's a two year rule because in fact you're right, Mark. It was the original secure act which made it, well not inflation reduction act, but it was first moved to a three year rule. But now the omnibus bill which went into law like four weeks ago changed the rule to be a two year rule for part timers. But that starts in 2024.

I love it. And now here's the last thing for you old timer CPA accountants that love the SEP. There's only two reasons I do the SEP. One, I screwed up and didn't do a 401k last year and I still want to make a major contribution on top of my regular IRA or a bigger contribution so I do my sep. Or you have that one year anniversary of your employees. So let's say Benjamin goes. Well, the employees started last January and they're hitting their one year anniversary this year. So I've had a full time employee for a full year. I guess I can't do the solo. That's true. You either freeze it, roll it out to an ira, but guess what, you can do this SEP because it's a two year anniversary rule for the sep. So the SEP allows you to put away a lot more than a regular ira. I'm not a fan, but it's better than nothing. So go do the sep and then once you hit the two year anniversary with that same employee, you shut down the sep, roll it to the same damn IRA you rolled your solo to. So you're so keep the momentum going, Ben. There's options here. And by the way, the group safe harbor 401k is not as bad as it sounds. The matching is so low. It's a great way to retain employees. You get to still put away your max. You can't do a ton in matching for yourself. But it is beautiful and it's not that bad. And we are rolling out a self directed group 401k this year. The deadline is September 31st to set it up. We will be taking care of you. So if any of you want to do a safe harbor, you got employees and you want to self direct it or you got to close down that stupid fidelity 401k so you can self direct it, we got your back. So stay tuned. Well Matt, our time is up.

That was great time. Thanks everybody for all the awesome questions. Remember, get over to main streetbusinesspodcast.com where you can submit your questions. We do the open forum every three weeks or so so just throw it in there. We're always pulling back between the last show and the current time when we're doing the the current open forum. So get your questions in there. Appreciate all those who got the questions in today. Hope you learned something and if not, maybe Mark made you laugh. You're still listening right now. So.

So that's something went well.

Maybe give us a five star review or something like that for him.

I love it. Well Matt, thank you so much for your incredible insightful comments. Thanks everybody everybody for being here and we'll see time you next next week.