CPA Explains: Tax Strategies That Save You THOUSANDS

Once you leave an employer, 9 times out of 10 it can easily be rolled to an IRA, which can be self directed or you can roll it to a new 401k in your new small business. The person that told them that. I'm going to make a guess. It's either a person that has no idea about tax legal strategies and they're just having shared a beer on Friday night telling you what you should do. Yeah. Or is someone trying to sell you an llc? Yeah. Because this is not a good idea. Matt gets deduct three grand, I get deduct three grand, you get deducted. Grant. We split the deduction of the mortgage interest. It goes on our K1 as a write off. That's a. It shouldn't be screwing up your personal taxes, it should be helping your personal taxes. Welcome everybody to this week's episode of the Main Street Business podcast. Happy holidays here with the amazing Matt Sorenson. We're not wearing Christmas sweaters for those on the audio version, but you know, we're here in spirit.

Yeah, the office here did an ugly Christmas sweater party. Everybody was like, where's your ugly Christmas sweater? And I was like, I don't do ugly. That's. That's where that is.

Come on, it's fair, it's fair.

Plus, I can't win anyways. If we win, it's just not cool. Yeah, no, everybody's voting to piss up to the boss, but.

Well, better not participate.

Well, better yet, today we got open forum though. So we're super excited because we have your questions. We have a lot of your tax and legal questions. Question on building wealth, protecting assets. This is what the podcast is all about. Make sure you're submitting your questions. If you don't like these people's questions, where is yours? Submit your question. Yeah, but we've got a lot of great ones today and we might just go in rapid fire format. We'll see. I don't know, sometimes we punt, indicate.

But. And if you get to mainstreetbusinesspodcast.com and notice that it's under construction. We're trying to do a facelift, rebuild, refresh, whatever you want to call it for 2024, it's going to look great.

We put a little Botox in the. Not a whole facelift, we just a little Botox.

Yeah, I don't know. That site needed a little more than it needed some surgeries. I don't think that was an inpatient process service. So yeah, we need an anesthesiologist in here. So, yeah, we're getting a full something. But anyway, you can still submit question there. Just scroll down and you'll see the submit question section. We need to do more of these Q and A's. We really do. We may have to up these to one a week and then do some special topics here and there. Okay, let's dive into it. We got more questions that we can handle. I'm excited for this. This is always fun. It keeps me on my toes. I almost always learn something from Matt Sorenson here. Yeah, I said almost.

Almost. It's not guaranteed. Not a guarantee, but there's no guarantee on the box or anything here, guys.

All right, all right. So you want to go first? You got a good one. Yes.

I'll be the lead off hitter. I like it. This is from, I don't know. Says I have a 403B and a 401K in Vanguard with my former employer, I'd like to retain the money in the account and build wealth through real estate. Is there a way to use this money that is just sitting to purchase properties? Oh, and I do own a home which I want to rent out and paying on three land plots.

Aren't plots like you want to throw in anything else.

Okay, plots. I want to pass this estate to my children. I do own a home which I want to rent out and paying on the three land plots. Do I need an estate plan, an llc, a trust, a will what will cover everything and help help me build wealth through real estate and tax strategy? T. Micah, you know what you need a trifecta.

Oh, yes.

Because that's what you got going on here. You need to take care of your estate and plan for your estate. You need to make sure you're doing great tax planning. You want to use your retirement account to invest in real estate. That's one little piece of the trifecta. So we talk about the trifecta. This is a strategy and a plan for your overall life that brings together. How are you making money? Are you doing a tax efficient manner? How are your asset protected? How is this passing on to your kids? And so frankly, you need an hour consult at least on this with one of the tax lawyers here. We can help you at KQS lawyers, but the first question is 403B and 401K. Former employer. That's at Vanguard. All right. That money can be rolled to a self directed IRA at directed IRA directed IRA.com, we can help you. And that money can go buy real estate. You can go buy a Rental property. You can flip a property. You can lend other people money on real estate deals. You do not have to be buying Vanguard funds unless you want to. If you want to go buy real estate, you can use that money in the account, but it's got to be rolled to a self directed ira. If you call up Vanguard and say, hey, Vanguard, I want to buy a rental property in my 403B, they're like, you can't do it. And that's not because that retirement account money can't do it. That's because Vanguard doesn't let you do it. They're a broker dealer. They only let you buy what they sell, which is financial products. You need to move to directed ira. That's what we do every day. You can buy real estate right out of the retirement account. There's no penalty, there's no tax. You just have real estate in your retirement account as opposed to a mutual fund. Whole podcast dedicated to just that. The directed IRA podcast, our sister podcast,

and just one other bite at the apple. I'd say this. The tricky part of her question is, and this could be many of you, you leave an employer and you've got some four dot, dot, dot, 401k, 403b, 450 this, 498 that I don't know. And they can be deferred, comp plans, whatever. Once you leave an employer, 9 times out of 10, it can easily be rolled to an IRA, which can be self directed, or you can roll it to a new 401k and your new small business. But that's where Matt emphasized getting a consult, because it can be tricky based on a lot of factors. But the general answer is you can play with it, you can move it, it's just how. And we've got you. All right, next question from Jay with the fifth. I'm sorry. So did you just take your time? I know I lost it here. Cost basis of real estate and a trust. Forgive me, I apologize. Some of your guys's handles are so encrypted. Cost basis of real estate and a trust. So, great question. Does cost basis of real estate ever change upon death when held in a trust? I've always heard, defer, defer, defer, die when it comes to passing. Well, that's kind of a dismal outlook on life. You should enjoy, enjoy, enjoy, and then, you know, flip that coin out of the coffin at the end there, bud. But no, your question's a good one. So many of you may not know this. Upon your passing, all of Your assets in your name get stepped up to fair market value. So let's say you bought a home for 100 grand and upon your death it's worth 500 grand. It steps up. Steps up to 500 and your family can sell it. And they pay no tax because they've sold it at its fair market value. Now if they hold it another year and it goes up to 600, then they'll pay tax between the 500 and 600. So this is why inheritances are generally tax free. Because you inherit grandma's property, land, whatever, you inherit it at whatever the fair market value was upon grandma's death, grandpa's death, whoever. Now does the trust change, change that? No. Now that's your typical revocable living trust, which is what 99.9% of us, all of us have and what we recommend too. So don't worry about losing the stepped up basis. If this is property you want to keep in the family or you just want the cash flow from it until you die, maybe you don't want to sell and recycle. 1031, opportunity zone, whatever. You just want to keep that property in your name until you pass and enjoy the ride. Use the trust, avoid probate, and you'll still get stepped up basis. So you're good to go.

All right.

All right.

This is a question from Ali. She says, hi, Matt, Mark, I'm a huge fan of your show and work. I've been implementing your strategies to transform my family's financial future. Thank you so much Said. Recently we've moved from Florida to Texas and was wondering what would be the best way to move our S Corp from Texas to Florida. This is the S Corp that's a partner in our other companies and where we do all the expenses, home, office and all that. I like to do it Aesop and not wait till the end of the year because we've been here already working for a few months and I prefer to avoid the Texas franchise tax if possible. All right, thank you in advance. All right, Ali, great question. You can do what's called a domestication. So what you can do is if you have an entity in one state that's operational like you have here, your S Corp and you're moving to another state, move to Florida from Texas. So now you're in Florida, sorry. We can domesticate it and effectively open this exact same entity in Florida and close it out in Texas. The end result is you have a Florida S corp and the Texas one goes away. Same tax id, same bank account, same entity you don't need to change anything. But you've changed this organizational state that you have this adopted entity in now. There are some states that don't allow for domestication. I'm not sure on Florida, I believe they do, but I'm not 100% sure. I would think that they do. There are. It's always like the weird states like a Massachusetts or a Vermont or, you know, states like that that don't let you do domestication. But there is a different option there. If they don't allow a domestication, you can do what's called a dirty domestication.

Okay.

Okay. This is. We did a training on this with one of the lawy. Mark Fetzer came, says he's been doing a lot of domestications for clients like this that are moving around. And it's called a dirty domestication. And basically what that is is we set up a new entity in the exact same name in the new state, close out the one in the old state and we try to get the same effect. Even though the states don't allow you to officially move it. But it's kind of the dirty domestication option. So you might have to go that route. If Florida doesn't allow for it, but give law firm a call, we can handle the domestication. One of the lawyers will confirm whether you need to, whether you can do a regular domestication or whether you got to go the dirty domestication route.

There's some pun or joke.

You know, I was going to get the dirty domestication. I was hoping someone asked some question that I could grab the dirty destination.

I love it. I love it. Oh, it's such a cool name. All right. Us accountants and lawyers, we try to find any cool analogy or something we can to keep this lively. Which brings me to Carrie's question from Texas and she says, love your show and podcasts. You make dull tax topics exciting. Yes. Boom. Hence dirty domestications. All right.

Okay.

When to get. So the question is partnership versus S Corp. It's a unique question. Want to get your take on filing partnership versus S Corp? My CPA selected partnership last year as a strategy. See, this is the weird part. I would never compare partnership. Anyway, my children and I are co owners of a partnership, okay. And we split the self employment income. So each of us pays taxes on our split. Okay. Doesn't mean you're saving taxes, Kerry. Just you're still paying the damn same tax. You're just splitting it amongst multiple people. There's no tax savings there. Okay. Just, you know, tax savings seems higher than An S corp. Yeah, for you, maybe, but the family as a whole is still paying the same dumb tax. This is not a strategy. If your CPA said we're going to do a partnership as a strategy to save taxes, no, the IRS is still getting the same dollar amount. You just spread it over the rest of the family. That's not a fucking strategy. Pisses me off. Okay, the interesting point here, Kerry, is you said tax savings seems higher than an S corp if just myself files. So that kind of implies that you have that choice. Like it sounds like it's your business and you have the choice to just be an S corp. But for some reason your accountant said, let's add your kids as owners and split up the tax amongst multiple family members. Oh, my gosh. So here's the deal. What we want to do is save on the overall tax bill. I don't want to just spread it around amongst family. And especially I don't want your kids owning your fricking company unless they're really actively involved. Then I'm going to keep it a partnership and everybody's going to have their own S corporation. This is a chapter in my book, Tax and Legal Playbook. Chapter six on partnerships. Man, how many podcasts have we done on this partnership strategy?

Yeah.

So please go back and listen to the partnership podcast on this. The bottom line is, Carrie, if you have the choice to be an S corp and the only reason your kids are owners is for some dumb idea to save taxes, get those kids off, remove them. Dated 123123 if you could. I'd even backdate it to the beginning of the year, get rid of them and make the selection and start saving on tax. You're not saving when you split it up. Now, if the kids have to be owners because they are actually putting money in and participating and they're part of the business and that's what you want and that's the game plan, then look at individual S corporations for you or the children, depending on the income level. But the way it's structured now is not a tax saving strategy.

Yeah, and I want to make sure everybody understands, too. We love paying kids. We love getting kids involved in the business, but they're not owners. We're not putting them as an owner. We're putting them on a board of advisors or the board of directors or they're just an employee if they're under age 18. And we're. And we're using those tax strategies to pay them because they're in a lower tax bracket. We're trying to save income tax, but we don't need them to be an owner to do that. We expense it out of the business. I don't even know be an owner. So look at the paying your kids strategy and those podcast episodes. That's where I would focus. If your kids are even tangentially involved in the business, and that's a great income tax strategy because you're in a higher income tax bracket, you get expense income pay down to your kids. They pick it up there in a lower tax bracket. If any tax bracket at all, they might be at zero. All right, we got a question here from Mitch. He says is it beneficial to create a separate entity that leases vehicles, tools and equipment to my operating llc? I'm a contract mechanic and have created my llc. I was told to create a separate entity that owns my truck and my tools and equipment, then lease my truck, tools and equipment to my operating LLC where you're providing services. The reason is I'm just getting started. So I want to get my. Don't want my LLC to get sued and lose my truck, tools, and equipment.

Okay. Can I just say the person that told them that. I'm going to make a guess. Got Mitch. I'm going to guess it's either a person that has no idea about tax and legal strategies and they're just having shared a beer and on Friday night telling you what you should do. Yeah. Or is someone trying to sell you an llc. Yeah. Because this is not a good idea.

It's definitely a dumbass, whoever it is. That's why. That's one thing we're sure of. We don't know where this dumbass that avatar is.

Yeah.

But we know it's one. All right. And this is people who get a little, you know, they think they know LLC and business planning and everything like this. And here's why. This is a dumb idea. Now, where you're going, we like the idea separating assets from operations. We preach that we do that in our trifecta. We want to keep our assets separate, like our rental properties and stuff, separate from our operating businesses. But the tools and equipment used in your business, your truck, those are personal property. If you put those in another entity and then use them in your business, whether you choose lease or not, whether you lease it or not, your state is going to expect a sales tax. You're creating a sales tax to use your own equipment from one entity in another entity. It'd be totally stupid to do that. Do not do this. We do not recommend. This is not A common strategy. Plus, let me just say this. If you're a contract mechanic and you're doing work and you get sued, no one wants your equipment, no one wants your truck. I hate to say it, they don't. They don't want that stuff. They want cash, maybe real estate.

They want you to keep working. They want to lean against.

They're going to garnish your bank accounts. They're not going after your tools and equipment because frankly, that's what they know you need to make money to pay them off. So I wouldn't stress about this. First of all, I think it's a dumb strategy because of the sales tax issue. Second of all, I don't think you're. Those are the assets that are typically at risk. We're trying to protect equity in your home, your rental properties, your other real estate, that type of equity, your cash, your other investment accounts or retirement accounts. Those the assets we're trying to protect, not tools and equipment.

And I think even if your truck

is just a cool.

Yeah, yeah. And I think this is a great question because a lot of people think this is what to do. Put your personal property, not real estate, in another entity and lease it back. So I want to just say two things real quick, and one of those is an example. Here's the example. I'm going to lead with that. So I had this client, they were down in Nevada and it was a construction company. And they said, I've got all these backhoes and skid loaders and all these cool Tonka truck equipment for human size. And he's like, we're going to put these in an llc. And this lawyer down in Nevada was like, you need another llc, asset protection, blah, blah, blah. And so they put him over there and he started leasing it to his business. Now I'll come back to the administrative headache you just created in a moment. But they did this and for about three years and then all of a sudden there was a sales tax audit because of just other equipment and material in their company. And when the sales tax auditor for the state of Nevada saw, hold it, you've got this lease going, why isn't there sales tax being paid? And just like what Matt said, you're supposed to collect sales tax on the lease of personal property. If you go lease a BMW, there's going to be sales tax in your lease payment. It's just the way it is. And the auditor assessed a 30 plus thousand, $30,000 or more in sales tax for three years of not paying it. And the Client came to me to help get him out of it and we couldn't could get him out of it. Cost him 30 grand because some asset protection lawyer that didn't understand taxation screwed him over. Now the second point I wanted to make is you're also creating an administrative nightmare. You've got another tax return to do. Now, are you going to take depreciation over here and then hope the loss overcomes your income over here? Well, you can't take a 179 into a loss. So now you're that lease payment and all the administrative nightmare. And finally I will say this. Do huge, huge companies do this sometimes. And that's where this fallacy gets that it could work. You know, if you're a multibillion dollar conglomerate and you've got all this equipment over here, leasing it over here, you might do that. But again, it's not for the small business owner. So great, great question. It does come up a lot.

So, yeah, common misconception, common fumble.

That happens. Yeah. Yep, yep. Okay, well, I was rambling. I'm sure you got a.

Grab one, grab another one. Yeah, this is David from California. Yeah, I always love emphasizes from California. All right, I hear you guys talk about board of advisors and how you can place trusted family members who advise you. He says would respect in this board for your bit or in who you respect beyond your board for your business. I want to make sure you weren't talking about a board of directors because in California you've got to submit board of directors to the secretary of State, which may turn off some family members who want to protect their privacy. Is there a distinction between a board of advisors and board of directors in California for corporations. Love the pod. Okay, David, great question. Board of directors is what is for corporations. There is something actually called a board of directors. That is what we use for corporations.

Sorry. Yeah, this is good. I'm calling, I'm calling a. Help. I'm calling a.

Are you calling like phoning a friend or something?

I'm phoning a friend.

I know the answer to this.

I know. I'm just double checking it. You give me the answer. Becky Stanline, we're on the podcast. This is our director of company compliance.

All right. Okay. So for board of directors, this is a corporation thing. When you have a corporation, you have

a board of directors.

This could just be you. If you're the owner, you could have you and a spouse. We love adding family members to a board of directors. Now you can do what's called a board of advisors. Which is not something in statute. It's not something filed with the state. You can do in a corporation or an llc. There's no such thing as a board of directors for LLCs, but we create what's called a board of advisors. This is in your operating agreement or in your minutes of your entity that is private. It's in your. Your internal company documents. It's not filed with any state. So whether you have a corporation, David, or you have an LLC in California, you can just do board of advisors. If you have privacy concerns, you don't want them officially on the board of directors. There's some privacy concern there. Just do board of advisors. Don't worry about doing board of directors. But I do think the family businesses or people that are really involved in the business, have them be official. Put them on a board of directors. If you're a corporation, I mean, I get there's privacy concerns, but if they're really involved in the business.

Okay, I like that. That's a great angle. And let's get another answer. Is Becky Lloyd on the line? Phone a friend, the director of our compliance department, and Main Street Business Services. Becky, how are you today?

I'm good, thanks.

We're excited to have you here. Okay, here's our question. In the state of California, do you have to disclose the directors of your corporation on your annual filing, or is it just the officers? Just the. No, it's both. Okay, so corporation not in an llc, you have to disclose who your board of directors are in the state of California. Are there other states that come to mind that are that way as well? Oh, and it looks like we've lost her, so I'm right here.

I'm trying to think. I'm trying to think.

If nothing comes to mind, it's okay. We just wandered off the time. Okay. It's California, the weird state.

Definitely. A lot of states, you put it on your articles, though. A lot of states, it's on your initial articles and filing. Your actual board of directors.

Yes, yes.

So. And that is one thing corporations do have. More items you do file with the state, typically the board of directors being one that's unique that you don't even have an llc.

Thank you, Becky. And so for any of you, this is a great side note to point out that our company compliance program, Main Street Business Services, is phenomenal. A whole team of individuals helping companies stay current around the country in their states with annual filings. This is also the FinCEN reporting that starts this year. It's all included with a $200 a year fee, and all of it's taken care of. And whenever you have a question, do I disclose this or not, or whatever, you can call them just like we did, and they're just phenomenal. Becky runs that department. Here's one thing I want to point out, too. What's the big deal if your kids are on the board of directors and it's disclosed to the state there's no liability. So I'd ask, really, What's. What's going on there? Number two, I like how Matt uses that kind of a subtle trick of, they're not the board of directors, but they're a board of advisors. And you can even do that with a corporation. Just call a meeting to order and say, we're going to have a board of advisors. You're on board. You're writing off the trip, the food and the strategy, and you're paying your kids with a 1099 to serve on that board. So I think this is, again, a great question because everybody should be maintaining a board. And you want to make sure what's disclosed at the state. And you can always give a quick call to the team over at Main Street Business Services to find out. Great comment.

Yeah.

All right, what's that next one?

Okay, this is one from Stephanie. I might need to phone a friend here on this one, but I want to bring this one up. Stephanie says since we can't deduct our mortgage payment on our building, it ends up getting divided and put on all of our K1s as owners, and it ends up screwing us all on our personal taxes. I'm so tired of paying taxes on money I don't even have. Stephanie. I don't know why the hell this is happening. What am I missing here? This is a business used in your building, and you're paying mortgage interest, expense on this. I don't understand why you would have anything on your K1. What am I missing?

Okay, Stephanie. Yeah. I want to repeat this. So she's got a business. It's a building. So it sounds like a rental property holding company. And there's multiple partners because she said all of our K1s. So it's just not Stephanie. So this is like plain clue. You know, we're trying to figure out all the facts here. So we have a building in an LLC with multiple partners, and there's a mortgage with mortgage interest. And she goes, it keeps getting divided amongst all the partners on their K1s. Well, yeah, it's going to get divided because let's say you Stephanie, let's say you, me and Matt are partners in an llc. We own a building. The mortgage interest for the year was $9,000. Well, Matt gets deduct three grand, I get deduct three grand, you get deduct three grand. We split the deduction of the mortgage interest. It goes on our K1 as a write off. That's a good thing. It shouldn't be screwing up your personal taxes, it should be helping your personal taxes.

Yeah. This is why I don't know at the very beginning, since we can't deduct our mortgage payment on our building, I just don't know why that is. So Stephanie, stop right there.

Now her pain. She may be thinking payment versus interest.

Yes, your payment is. Yes, your payment's a combination of many things. It could be principal, interest, taxes, insurance. We don't know what's going through there. But the taxes, the insurance, the interest, that's all deductible. The principal pay down of the mortgage that you're paying, that's not deductible.

Never. Not even on your personal.

So yes. So which would make sense, you're paying down debt. So if you've gotten rental income on the property and let's say you have zero interest loan on it and you're using that income to pay down the loan, well, there's no interest to deduct. You're just receiving income and you're paying down debt which is growing an asset from you. But you should have depreciation expense. Make sure you're obviously taking that. That should be offsetting some of that cost of the building. But Stephanie, I just double check on your situation on why your mortgage interest is not deductible. Maybe you might have hit it with the rope in the study with the principal pay down. Maybe that's what your loan is. Could be a zero interest loan or significant portion of your payment is going to principal pay down only.

Totally. All right, this is a Great question from smtaylor34. How come you get all the easy handles? Stephanie, I get SM Taylor 34.

All right, I skipped SM Taylor 20. 34.

All right, well you know I'm, I

didn't SM Taylor 34.

Well, I'm, I'm for you SM Taylor. Okay, so the question is self rental of an office condo to our S corp. We are considering self purchasing an office condo in a new LLC and leasing it back to our small business S corp as an office. Do it, don't stop, go, quit paying rent to someone else. This is a great strategy. Okay, a financial strategy period. Now we'll get to the tax benefits. However, I've read online that the IRS does not treat self rentals favorably. Including treating the income as non passive and the expense as passive is as accurate. See the link below. And she refers to Bradford Tax Institute. Love Tom Bradford does a great job and talked to him before. Now should we instead purchase the condo in the S Corp? No, no, no.

That took a nasty turn.

Yeah, that took a nasty turn. Okay, so let me say this. The self rental is a great strategy and you're going to make the dash for election. Which doesn't make it passive. So if there's a loss in a self rental that is owned in the same percentages by the business owner and the building owner, that's called a self rental and you make a dash for election. Therefore the loss, any loss, would not be passive. Bradford doesn't go on to say that and he knows his stuff. You're just in one little article. This is a very deep topic. So we want that because you could go do a cost seg. You could do a great depreciation strategy in that first year and you could create a big loss on that self rental in the first year. And it is not passive when you make the proper election. Yes. On the flip side, the income is non passive and self employment tax. That's why you're going to pay yourself the exact amount of rent based on a triple net so that you don't have income in that llc. You're going to break it even. So you're paying rent to break even in the LLC and taking a loss in the first year with the depreciation. If you have a loss every year, that's still fine too if. If the lease payments don't exceed the expenses. So we love this strategy. Sorry, Matt Sorensen and I use it personally. We have so many clients using it. Do further research on this if you want to. You want to look at the dash for exception. We taught this at the 360 event just last month in Phoenix. And it's a. It's a whole strategy that deserves a discussion. So don't give up.

Okay, we've got Jody here. Jody, your handle is a little weird, but I'm just. You put your name in this and I appreciate that. Jody asked a question about cost basis in real estate says, does the cost basis of real estate ever change upon death when held in a trust?

Oh, that's the first one I did.

Oh, you already did that.

This one? Yeah. Yeah, but I didn't have Jody. That was the jewel.

I was like, you hire. I. I don't know.

Yeah, yeah. So no, that's. You were reading another question when.

Okay, hit that one.

Yeah.

All right.

So we're good.

Bottom line. Let me just add to that, Joe. The best thing to do is die. That's the best tax strategy. Die. You know, your loved ones will, you know they'll miss you, but they're going to love the tax benefits. All your. You get step up in basis on all your assets. They can then sell them immediately if they want. Zero tax.

Okay, I've got one here.

You've got one.

Okay, this is tax visionary handle. If I already have a W2 job that pays me to the point that I pay the full share of fica, is there another benefit to converting my side hustle to an S corp or leave it as a sole prop visionary? You run the numbers because you're still. Even if you say your FICA is maxed out on your W2, it's not. There's still Medicare and Obamacare kicks in at one point or aca, so. So you're going to still have an extra tax in there that you could block or minimize dramatically. With an S corp, it just comes down to numbers. I usually see if that side hustle is pushing over 80 grand in profit, you're still going to go with the S corp because you're going to save on Medicare and Obamacare because I already know Obamacare or ACA is going to hit you. Because if you're maxing out your W2 and you have a side hustle that's almost six figures or more, you're going to be in that range too. So you're looking at about a 3.8% savings on 100 grand. That's 3800 bucks. So you just start doing the math. In one year it may work, next year it doesn't. It's okay. But you can cough up savings of 2, 3, 4 grand or more. And I've seen clients save 5 or 10 grand when they've got a big side hustle in a day job.

So yeah, great question. That's a common people that do have a large W2 or a spouse. Well, actually your spouse one doesn't matter. Just yourself with a large W2 kind of run into that question. Now remember, for any of you with an S corp though, and this is your main hustle, I mean we're going to be doing that at 40 grand net income.

Yes.

This is just because a little unique other income Maxing out on self employment tax on other sides of your business. All right, A Colum asks, I'd love to hear you guys discuss tax treatment and options to reduce said taxes on equity grants for startups.

Did you say colon?

Cole ham.

Oh, Cole ham. Okay. I didn't know. We are familiar with the coloroscopy. We don't cover colonoscopies here. But it's cold ham. Okay.

Cole ham. Yeah, that's. Yeah, that's different.

The coloroscopy is a wonderful procedure to go through to really save taxes. It's really evasive, but yeah, you come out feeling so much better. Yeah, it's recommended.

And when you hit 40, yeah, you want to get in every other year thereafter just for a checkup, you know.

All right, so call him. I have you discuss equity grants.

Yeah. Let me say this, this is a little tricky thing for people that are starting up a business, your own business, you're the founder, I want you to just. We're not doing any equity grants or any, anything like that. You're the owner from the very beginning. You're going to put in some initial money to capitalize it. You own the stock, you're the owner of the business. When you sell it, you're going to get capital gain treatment. We've talked about different, the qualified small business stock option, which tax strategy, which sometimes works, it's a little oversold. We have a separate podcast episode where we discuss that. Now if you are giving, if you're receiving equity as a stock option, that is different. And there's different types of compensation where some highly compensated people, some people who are executives or stuff, may get different benefits to being in the business. But that might be a stock option grant, which there's ISO and NSO type stock options or different types of those. But basically what it is is they receive the option, they get a lower value to purchase that stock than they otherwise could. And this is given to them for their work and service in the business. And then they can sell that stock and get capital gain treatment or they can just cash flow the business and get ownership, you know, profit just like any other owner. So those are stock options. There's other types of phantom stock plans, long term incentive plans that are basically bonus compensation. It's subject to salary and self employment tax and all that. But it's still nice to get that if you're able to get that from an employer. But what I would say is if you are on the receiving end of this in a business, make sure you understand what it Is stock options can get better tax treatment than phantom stock or long term incentive plan or deferred comp plans even. And I think if you're trying to design this for employees in your business, lots of considerations there on what to do. Make sure you get a consult with it. We've even had to do this in our businesses before. Something that you definitely want to nail. And there are lots of options and pros and cons. Not everybody's gonna fit in the same box.

And I wanna take another take on this question and then move to the next one that's related from Darren C. This is the way a Culham says this. Equity grants to save taxes. Or is there a better way to deal with it? The key word in this is the word word equity. Whenever you see equity, it's not a write off and it's not income. So to me, I, I don't know what type of equity grant you're talking about, as Matt's doing. We're both kind of guessing at what that really meant in your fact pattern. But here's the bottom line. Equity, it's not income nor an expense. It signifies an owner. Like someone is now in your business. Maybe it's you, maybe it's someone else. I don't know where this equity grant is coming from. Also, the word grant can be loaded. Sometimes grants are a gift. They're not really income either. And sometimes they're many times non taxable. And it depends on what type of grant it is. So get some additional support there on that as you move forward.

And let me say this, let me chime in. One thing that you got to be careful of, and there's some tax traps to this, is some people are like, well, I want to consult for equity in a business. I don't want to, don't pay me, give me stock. Okay, well if they, if you consult with equity and they gave you, you know, 1% of your business and that 1% is worth a hundred grand, for example, like you need to take 100 grand into income and claim it on your taxes. Now you've got 100,000 in basis in that 1% of stock that you've got. So you've got to be a little careful on how you structure those things and what documents you leave behind. Evidence, you know what I mean? So you got to be careful on how you're structuring that. If you're exchanging services or consulting for equity, just know there could be a little tax, little phantom tax on that. Technically to you.

Yep. Now, Darren C. Has a great follow up. And this is so common for many of you small business owners out there. What if I need to invest, right. More money beyond the startup cost of my main llc into the new business from a personal account. How do I account for this and how does my business and or my purse and how do my business or personal taxes get affected? Your taxes are not affected. Again, you're just putting money into your business. And so we would book it as a capital contribution. It's not income and it's just on that equity line again. So when any of you are starting a small business, don't go, I'm going to loan money to my business and it'll pay me back and I will. I'll get it back tax free. Free. Yeah, but your business is going to pay taxes on the income to pay you back. There's no play there. There's no play with a loan. This sometimes gets misconstrued because of the C Corp strategy, which is a disaster in and of itself. But never. You're never going to really loan money to your business in an S Corp or LLC and you're just going to put money in when it's needed. It's a capital contribution. When you take money out, it's a draw. Has nothing to do with taxes. Put money in, take money out.

Out, yeah.

Then for taxes we're going to look at income minus expenses and that's where you pay tax. Just putting money, put, taking it out. Don't stress about it, it's not going to affect you.

Yeah, a lot of people think, well, I didn't take money out of my entity so I don't have to pay any taxes. Right. Or I put money into my business. Do I get a deduction for that? No, putting money in and out has nothing to do with it. Did you make money? Did you have income from selling goods or services, rental income, whatever it may be? Did you expend money and have a business expense? So Darren, if you're putting money into a new business, you know, how's this affected on your taxes? Well, I presume you spent that money and there's expenses for what you use that money for. You hired some employees, you bought some equipment, some materials, some marketing, some advertising. Those are all expenses that will net against your other income you might have in other businesses that you're doing. So it does come down and affect your taxes, but not just putting it in. It's what you do with it once it's there.

And I'm going to finish with this Question. For my portion of the show here, you might have one more you want to hit. But I. I want to. I think Matt brings up a great topic that everybody needs to hear and that's called phantom income. Let me give an example. Let's say you start a restaurant, you put 100 grand in, you start this little restaurant, could be a food truck or something like that, 100 grand, you start that business and you bring in 50 grand in sales and you have 40 grand in write offs. Okay? Just you put in 100. You had to buy equipment and all this stuff, and that's non taxable. You start working, you bring in 50 grand in sales, stripe, cash the register, whatever, and then you add 40 grand in write offs, food cost, labor, whatever. So you have ten grand in income and you're like, I'm not going to take it. I need to expand. I'm going to take that 10 grand and keep it in the business because I need a little cash flow in there. Okay, so I don't pay taxes, right? No, you had 10 grand of income. And so that 10 grand of income is picked up on your personal return even if you didn't take a distribution. It's called phantom income. So what we encourage our clients is to, when you have income in your business, at least set aside around 30% just as a safe harbor for federal or state taxes. And then at the end of the year, you've got that 30% to send in for taxes, even if you leave the money in the business. See, whether you take the money out or not is irrelevant. You had ten grand of income. And some people don't get tricked and go, well, I'll do a C corp then, because I don't want to claim the income. Now you're paying C corp tax, all right? And then when you do take it out, you're paying tax again. So don't go down the C corp route. Just embrace it. It's beautiful. It's one tax rate. Just know that it's there and set aside a little income. All right?

Amen.

Time of death or you got one last one?

No, that's great. I think we just end on that. End on a high note.

Note.

Thanks everyone for your awesome questions today. We appreciate it. Make sure you get over mainstreetbusinesspodcast.com where you can submit your questions. We want to hit those questions. Don't ask for relationship advice or the you know who to bet on this week. You know, for any bowl games or anything. Our answers are pretty worthless in that area.

Yeah.

In that area. Let me clarify in that area. So we love hitting your topics and questions that you're throwing in so please make sure you're getting those questions and make sure you're subscribed. Get subscribed already subscribe to the podcast YouTube channel. Make sure you're getting the updates on our shows coming out and we'll be back. Well maybe we won't be back next week. We're taking next week.

I think next week's off. We'll be back after the first of the year. So happy 2023. It's been a pleasure being with you. This year we are on 470 something podcasts. We're gonna hit 500 here in Q1 and by the summer I think I guess it's great. We're just so grateful for your patronage and following the show. 500 podcasts in on tax and legal. Bam.

Could you believe it?

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Have a good holiday.

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