Filing Taxes for Your Side Hustle - Don't pay more than you have to!

Welcome everybody to an exciting live broadcast. Please don't go anywhere for a moment and let me tell you what this broadcast is all about. This could be extremely valuable and save you thousands of dollars, literally. Today's broadcast is simply titled how do I report on my taxes? My side hustle. Now estimates are now three over one in three Americans have a side hustle side gig that could be driving Uber, selling something on Etsy, being an affiliate marketer on Amazon, doing a little side consulting, running a little landscape business on the weekends. All the above. And with the 2020 nightmare of COVID pandemic more even, they estimate close to 20 million Americans have tried to pick up a little side gig to make ends meet when their day job put them on leave. So if you received a 1099 for 2020, any work you may have done on the side, you may be going, what the freak do I do with this? We could save you thousands in this simple conversation we're going to have today on how you report that on your 1040. And I'm going to go through the actual forms. I'm going to try to write down everything you need to know to do your taxes yourself, what to look out for if you're going to hire a CPA or someone to do your tax returns for you. Thanks, Whitney. I want to say thanks to my staff. I've got my personal assistant, Corey here is my producer Ali running Instagram Live. And Darren Charrington, another attorney in our office is on the live chat. So if any of you have any questions for this next hour, we're all yours. That's the law firm of KQS Lawyers, the accounting firm of Kohler and Air, and the trust company directed ira. So I really hope that we can be a resource to you. I'm a cpa, attorney, best selling author, radio show host, podcaster, and a big thank you to also Entrepreneur magazine that allow us to go live on their Facebook every week answering your difficult tax and legal questions. So if you have a question, I'm going to do my best to answer it here while we're in the show and go through this tax stuff. So we looking good. Look at this. Oh my gosh, I see so many good comments here. RJ Grimshaw, already, how do I file? I think you meant file, not find. Maybe I should ask you to clarify that. Rj, are you saying, oh, how do I fund my llc? It wasn't file or find. Fund my llc. Wow, okay. And lots of comments. Today is yet another day. Thanks, Ann. All right, well, aloha from Mark in Hawaii. Okay. Is that bitcoin? BTC is that was stolen. You had your bitcoin stolen, the freak. All right, boy, all sorts of good questions. Let's jump into an rj. I won't forget your question. We'll come back to that. Ali, do I have my books up here behind me? Do I have an eight steps? Will you grab all those books for me? I've got several books here that are going to be a resource for many of you. This is not an infomercial for me to sell stuff, but I do want to be a major resource for many of you. So as we dive into this, let me say I have my weekly newsletter that's free with multiple blog articles every week, special deadlines that are always announced. I've got two podcasts every week, the Main Street Business podcast and the self directed Ira podcast. Both are free, of course. And YouTube videos, lots on YouTube. Now over 100 videos and 6 million views on different tax and legal topics. Even though some of them may be 2 to 3 years old, they're still applicable. And I'm trying to reshoot videos when they need to be reshot. If not, I'm trying to deal with the most practical up to date topics as I need to. I will highlight some of these books that might be a resource and especially on funding your llc. Okay, so let's just talk about your side hustle, everybody. That's the topic today. And then I'll deal with any other side topics as well. So I suspect if you're watching this pod, this live broadcast, you had a small business in 2020, so here's where you're going to go. I think many of you will probably be able to do your own tax return. So let's assume you're going on to tax layer, TurboTax or the H and R Block site, or multiple sites to provide online tax preparation. So you're going to go, oh, thank you so much. So we're going to go into that process. You're going to get online and you're going to start reporting your W2, that you may have had a day job, maybe some unemployment compensation, and that side hustle on your 1040. So let's throw this up. Here's your 1040. So your 1040 tax return has several lines coming into it. Line one is going to be where your wages go, your W2. Now don't stress out everybody. I'm not going to get that boring here, but I just want to give you a little perspective. So here's your W2 coming in. What's happening is your, your side hustle is really a schedule C. A schedule C? C as in Charlie. This is where your side hustle or side gig is going to be reported. This is where all of your 1099s come in. So if any of you received a 1099 maybe from PayPal, Square, Etsy, any of those ali that when you were selling on Etsy, that's where it came through for you, right? You're selling on Etsy, you got a 1099 that showed all of your cells. Okay? My daughter here has a side gig selling clothing on Etsy and she been very successful at that. So here's your side. Let's make sure I'm saying typing this or writing this properly so you guys can all read my gosh darn handwriting. So this is your side gig. Side hustle. It's really going to get reported on a schedule C. Now I'm going to try to keep today funny and lively. I've got the new copy of the Star and Us magazine. Jen and Brad are back together. I'm so excited. We'll get into that later. But here for fun, we've got to get your side hustle taken care of. So you're going to put your Uber 1099 or whatever you had is going to go into the schedule C. Now when you go through your tax document, your tax software is going to say, did you have 1099 income? That's your side hustle. Now what's cool is you're going to get to take all sorts of write offs against it. Now take a breath everyone. Here's where this is cool. If you have a W2 and you make 10 grand, you're going to pay taxes on the whole 10 grand. There's no write offs against that. But if you have 10 grand from Uber or Etsy or PayPal, from doing a little side gig or Venmo, now you get to take write offs against that 10 grand. You're going to be able to take auto, cell phone, travel, dining, computers, electronics, cameras, laptops, speakers, headphones, books, subscriptions, legal, accounting, all of that is a write off against your 1099. So if you've got a side hustle or side gig, it gives me, the accountant, something to work with. That's why we're talking about this, because I don't want you to just plug in the 1099 and pay taxes on the whole thing. I want you to create what's oftentimes called a profit and loss, a Little P and L just Ally, right. Just yesterday we were talking about Ali's P and L. She's got to look at all of her 1099s that came in, all of her write offs, and then we're going to pay taxes on the net. That's the beauty of having a side hustle or side gig. You pay less tax on that. So when you're going through your tax software, I'm going to kind of show you where all this ends up going. But you're going to have interest dividends. So interest dividends, wages, all of this comes in right on the front end of your tax return on the front page. Well, here's what's interesting. If any of you are doing bitcoin or you're buying and selling stock, that comes in on line seven. And that's a Schedule D. Schedule D. Schedule D is where you report all of your bitcoin gains from selling or buying and trading cryptocurrency stocks that may have given you a 1099 div. Or you had capital gain. So this is kind of your cap gain, short term capital gain, and long term capital gain if you held it more than 12 months. All right, now the next line that is the big one is your, what they call Schedule A. So down here on, sorry, Schedule C. Oh my gosh, I'm all jacked up here. Schedule one, Schedule one. Now schedule one is kind of the catch. All of all these little extra things that have come in, unemployment income, others that you might have coming into play. And this Schedule 1 also includes your Schedule C. So I know this sounds like a pain. Hang on, is your side hustle is reported here? That goes into schedule one. That comes up to line eight. That's where it's all coming into play. And so we're wanting to make sure that we write off all these expenses against your 1099. And then this is going to be your net income that you're going to come in onto. Schedule one, line three, that comes up here to line eight. Now, whatever's left here, this is your adjusted gross income. And then you take your standard deduction or your itemized deduction, and then you have itemized. Sorry, this is ugly. Itemized deduction. Then you have your taxable income. So some of you, this may drive you crazy and you haven't really cared about your tax return before, but you've got to be the captain of your own ship. Just dropping off your crap at a strip mall to do your taxes may be the worst thing you're doing. You've got to make sure you review it and all of your write offs are in there that you want. So on your basic 1040, you've got schedule D that's feeded in for your cryptocurrency or stock sales. You may have interest or dividends as well. Your W2 day job. And then this schedule one that grabs your schedule C. This my friends, and I'm going to put it in red, is your small business. And this is where things get good. Now I'm going to ask you, Alison, Darren, Corey, if anything of this is like Mark, you got to explain it different or you're not making sense, you just holler. Because I know Allison, who's had a small business for years, want her as a small business owner to go, hey, you know, Mark, you could explain this a little differently maybe, but this schedule C is where we want to be and all of these expenses are what we want to take advantage of on this schedule C. So sometimes the way we look at this on a schedule C is you've got your gross income. So if we really zoom in on a schedule C. Hang with me people. I'm going to do all your questions down here below. And I see, look it, some of you are already looking at vehicles and writing off filing joint neatly and all this stuff. I'm going to answer these questions. But let me get this out. Schedule C, your first thing that you're going to look at is all of your gross receipts. And gross receipts are all of your 1099s. Now I know a question that's got to be on the list. If you didn't get a 1099, that doesn't mean you can't, you don't have to report it. If you made money and people paid you, that's gross income, that's receipts. And if you go, well, they didn't give me a 1099, I can get away with it. If you get audited, the IRS is going to jack you up. That's not, that's avoiding, that's evasion. You're evading taxes by not reporting your income. And you go, well, I heard that if I didn't get a 1099, you don't have to claim it. Whoever told you that, have them sign your tax return and if you get audited, let them pay the bill. See, I know you're going to find out there on the web that someone says, well, if you didn't get a 1099, you're okay, B.S. that's a lie. And if they are saying that ask them to sign your tax return and you're going to find them disappear real quick. So you've got to report all your earnings, earnings from your little small business that's going to go here in gross receipts. Now there's a little thing here called cost of goods sold. If some of you buy product like, is this okay? I'm picking on you, Ali. You're good. I should have her come jump in the camera. Do you want to come jump in the camera? Let me highlight you. Get over here. So this is my daughter who is a small business owner. Now you're going to see her go, oh yeah, she's trendy. She knows what she's doing. Look at how cute she is. Is that cool? Look at that hat. See, she buys and sells vintage clothing. So why don't you tell her where do you go buy your clothing? This is a small business.

Come on, tell everybody at thrift stores.

Okay, so.

Or vintage antique shops.

And what do you do with it? Speak loud for the money.

I turn around and I sell it on Etsy or Instagram and just to all my followers and a little bit on my website too, but mostly Etsy.

Okay, now when she buys product, that's called cost of goods sold. So sometimes you've done fairs too where people just show up in cash?

Yeah.

What was it, as long as an affair? What was it?

It was a pop up shop that I did with a bunch of other vintage sellers in Salt Lake City.

Okay. Isn't she adorable? Look at this. Okay, now so if Allie has gross receipts from her pop up shop or Venmo or Square or Etsy, that's her right here. See, that's her gross receipts. So let's look at that. That's her gross receipts. Then if she buys product. You're trying to get out of here already, stay up here. Now if she goes and buys product, that's cost of goods sold. So if she buys clothes for 100 bucks and sells them for 200 bucks, what's left is called gross income. And gross income goes on. Okay, I don't want to make sure I've got this line seven. So this is line seven. Then we do all of our regular expenses. So when I ask Allie what's your cost of goods sold, she might say, well, I bought it for 100 bucks. You're just barely out of camera. Okay, she might say, I bought it for all this clothing at a, at a thrift store, Salvation army for a hundred or two hundred bucks. And then she sold around and Told it, sold it for 3 or 400. That's her gross profit. You were making 500 bucks maybe a month or whatever. And hey, what a fun job. You get to go shopping.

Yeah, I gotta keep all the good stuff.

Okay, thank you, Allie. Alright, so that's my daughter Alison. She's running one of the cameras over here. And so she had gross income. Then we take all of our other expenses. Now let me just give you a few items. Cell phone, your cell phone, service cords, laptops, iPads, all this stuff that helps you build your business is a write off auto which you might go actual or mileage. Marketing, website costs, web design, legal, accounting.

What else would you say our expenses and write offs the same.

Are expenses and write offs the same thing? Yes. And you're going to try, maybe some of you are using Quicken or some sort of program online or you just have a spreadsheet of all your expenses. You don't have to have an llc, you don't have to have a corporation. I just want you to show me a spreadsheet of all your expenses and then I can write them off. That's what the accountant needs. So when you go on TurboTax or Tax Slayer and you're writing off all your expenses, then you're going to have your net income. That net income, sometimes called a peer at P and L is your profit or loss. Now if you brought in ten grand on Uber and I can write off ten grand worth of expenses, guess what? You paid zero tax. Now boom. That's what we're talking about. So your schedule C now this was a kind of a zoom in on it. This was a zoom on your schedule C, your Schedule C net goes to line three and then schedule one, you know, adds up and then that goes up here to line eight and this ultimately gives you your adjusted gross income. Then you do standard or itemized, then you have your taxable income. So see, you get to me as an accountant, I get to play with this. Your W2 boom AGI standard deduction taxes. I want to try to avoid as many taxes I can legally with all of these write offs, all of these expenses. Do you have to have all the receipts? I'd like you to, but I don't want you to show them to me. I just want you to go on and Excel and like here, maybe I even have an example here of some of those write offs right here that I could even throw out. Anyway, I have someone's Excel spreadsheet just here on my laptop is going to show you But I just want a little, right, a list of all your write offs. You can go through your credit cards, you can go through your bank statements. And that's why I don't like you using cash. Because I don't want you to lose those write offs. Like if Allison went to a thrift store, don't use cash. Use your debit card so I know how much you spent on your clothing. Corey, were you going to say something? Are we good? No, we're good. Okay. What happens if you get paid in cash often, like for your side hustle? Okay, Cory's question was, let's say on your side hustle, you get paid in cash. This is where some people say, oh, it got came in under the table. So you don't claim it. You just say, cash in my pocket. Now, you may save taxes with that, but someday you're going to have to go through the pearly gates. Yeah. And St. Peter's going to go, did you cheat on your taxes? And you're like, no. And he's going to go, let's look at that little book of life, because I have a video camera of you for your whole life. I saw you keep that cash and put it in your pocket. And you go, oh, yeah. So now not only did you cheat on your taxes, you just lied to me. I didn't mean to. And then you get to go on that escalator going down. You're like, now I'm going to hell because I cheated on my taxes. No, you don't want to do that. So you want to claim all of that cash that you earned. Be honest, be good. Because you don't want to go to hell someday. Now some of you are like, mark, you're getting too religious on me. I'm just joking. Chill out. Some of you are happy to cheat on your taxes. I don't want you to go to jail. All right, so. So that's it. That's it. Now I'm going to answer questions. It's that easy. I'm going to diagram this one more time. You've got your 1040. You're going to do a schedule C. And the schedule C is your small business. You're going to report all your income. 1099s are cash, any cost of goods sold, a product you may have bought, some of your services. So that's it then. You're going to write off all your expenses. You're going to have a gain or a loss. It comes over here onto schedule one. And then on schedule one, it's on line three. Then it's got unemployment income and some other things, alimony, all sorts of little things that might come into play. Then whatever's left goes up here to line 8 on your 1040. That's it. Then you've got your adjusted gross income, which all the bankers want to know. When you go borrow a. A car or buy a home. Then you've got your standard deduction or your itemized. And your standard deduction last year was $12,400 if you're single and then you have your taxable income. And if they withheld enough from your W2 or whatever, you might get a refund or you owe. That's it. That's why I'm an accountant. I love it. Everything's added up in life. There's meaning to life. It all adds up. Either yo taxes. You don't. Don't you have closure now I feel good and life is complete. Okay, now I'm going to jump into questions. Okay, Donna says, what are sole proprietors? This is you. You are a sole proprietor. You are sole proprietor. Now, is schedule C a Schedule C could be a llc, or it could just be you. Either way, you're a sole proprietor. See, that's cool, Donna, right? An LLC does not save you taxes, people. An LLC protects you. You got to watch my other video on S Corps and other strategies. But an LLC doesn't save you taxes. A tax that you might have here that sucks is called self employment tax. And I'll say this, okay, this is a side note, not for today's podcast or, sorry, live broadcast. Whatever you netted, you pay self employment tax of 15.3%. Then it goes over here, then it goes over here. And then you pay state or federal income tax, state or fed. But the first tax you're going to pay is this dreaded self employment tax. If you're making more than 30 or 40 grand on your schedule C, I want you to go watch my video on when to convert to an S corp. All right? Okay. Oh, so, Donna, you're a sole proprietor. Schedule C is a sole proprietor, an LLC owned by you, sole proprietor. If you make an S election, then you're an S corp. Different rule, Brandon says. Funny guy. I appreciate that, Brandon. Give me some love, baby. Thanks, Brandon. Okay, now let's see. Is there a question you want me to hit, Darren? One that you really liked, or should I just bounce through some of these?

John Tennyson on YouTube asked, can expenses be written off against unearned income?

So John asks on YouTube if expenses could be written off against unearned income. Do you guys want the. Here's the short answer. Yes, indirectly. Should I give them a reader's digest version of the technical answer? Do you guys want the technical. Should I throw it out there a little? Okay, okay, I'm going to explain the difference. Okay everybody, you ready? This is deep. Okay, all right, hang with me. I'm going to ask you guys. You know what? I'm going to give away a book to the first person on chat that tells me what unearned income is. I'm going to give away a book what your CPA isn't telling you. What is an example of unearned income? Okay, give me some love. I need to see an answer on YouTube or Facebook. What is unearned income? Give me an example. Okay, let's look. Look at, this is amazing. This is dividends. Kfir, TV view. You just want a book. Okay, dividends. That is an example of unearned income. So live chat Corey here, whatever the crap you do, you techies and you could talk and you get kvi, Keffer, TV view, tvue. I want to give you a book. He's going to get your mailing information and I'm going to sign it right here. Oh okay. You need to email Corey. Okay, I'm going to give away some more books here. I'm going to ask you some questions. So corey. Dot com mark@markjcohler.com youm just email Corey and he'll get your info. I'm going to sign this right here. Boom. This book is yours. Okay, next, alright, here is unearned income everybody. So let's say this is your 1040. Oh, now look at what's unearned. We've got rental, right? We've got rental or interest, right? Good job Michael. Good job. Answer Perky investments. Yes. All of that stock growth, that's unearned income. Now everybody look at, this is tricky. You've got schedule D that comes in and that is dividends or interest or capital gain. And then you've got so many complicated things here. You've got rental properties that are on schedule E. So you got rentals. Now you're going to have expenses against rentals but it's still considered unearned income. So here's the tricky answer. Let's say you have a schedule C and you have a loss. Let's say you were driving through Uber Eats and you got all sorts of write offs and you had a loss. Can I use that loss against my W2 against my dividends, against my capital gain, against my rentals. The answer is yes, you can take a schedule C loss and use it against any other income. But here's the risk. If you have too many losses and it's really, really high, the IRS is going to go, what the hell is this person got? Are they really dumb? Why do they have all these losses? And you might get audited? So we don't want to be too greedy. Also, if you have losses for more than two years, they may classify it as a hobby loss. So if you start your small business and let's say in 2020, you have a loss, all right, that's cool. Maybe five grand. And then in 2021, you have another loss and it's maybe eight to ten grand. Okay, cool. In 2022, you've got to show a profit. If you don't show a profit, the IRS is going to call it possibly a hobby. Now, that's not a guarantee, but you could get audited. So you can only show losses two years out of five, and then the IRS is really going to question you. So back to. Was it David or John? Was it? Who was that Question? John, you can have a loss in your Schedule C that you can use against all your other income. But I don't want to do be greedy and do it for more than two years in a row. All right? Okay. Now let's see. Do you have another question or should I hit up here? John Tennyson says 1099. 1099 is earned income. Now, you might have a 1099. Okay, there's a good one. The new. Okay, this is good. A 1099 NEC is the new earned income that goes on a schedule C. Some of you might have a 1099 div. That's a dividend. Some might have a 1099 miss. Or a 1099 int, which is interest. A 1099 is a retirement. Is 1099 retail. Is that right? That's an IRA or whatever. I apologize. So you might have different 1099s that are unearned income. They don't go on a schedule C. What we're looking for is the 1099 NEC, which is the new form. What happened to the startup rule? Well, the startup rule is, and that's from Nicholas. You're allowed to write off, let's say some of you out there start a lemonade stand. You start a lemonade stand, and you got sugar and ice and cups and all sorts of expenses, and you spend $4,000 getting going, that's called a startup cost. Well, I can write off the first five grand, no problem. But you're not in business till you make your first sale. Once you make a sale, all these startup costs now turn into ordinary expenses and you're okay. But John, sorry, who was that that asked the startup cost expense? Nicholas, Nicholas. The thing is, is you get to take those startup costs that occur before your first sale. The first five right away. The rest you have to amateurize. But here's my point, people. You don't want to show a loss every year. You got your first two years where you're okay, but then you got to start showing a profit or the IRS is going to get ticked. Okay, Someone said perky says, do I need a schedule E and a schedule C to capture home office deduction? Let's take a breath. Everybody take a breath. I know this topic could be crazy. I'm a geek. I love this. Let's just talk about this. Everybody take a chill pill. Don't worry about schedule C or Schedule E for a minute. Here's the main goal. Any of you that have a side hustle or a side gig or a small business want you to just think of all the income you made and you're going to report that on your income line, maybe create a little spreadsheet. Then I want you to think of all the expenses we can write off against it. So everybody don't worry if you're an LLC or a sole prop or an S corp. Think of this as your business. And I just want to know what are all the expenses. It could be a rental business or it could be an operational business. One of those expenses is home office. I have a whole video on YouTube on how to write off home office. One of them is going to be auto. I have a whole video on auto. Some of you might be writing off cell phone or electronics. Have a whole video on cell phone free. You can get over to YouTube and start writing off some of these expenses. So you want to start thinking of all the expenses that you incurred trying to get your business off the ground, whether you spent with cash, a credit card, your checking account, a business account, a personal account. I don't like the co mingling. I want you to get away from that. But when I go to do your taxes, I want to grab these write offs from everywhere I can. And then they're going to go on this Schedule C if it's a business, a schedule E if it's a rental, a schedule F if it's a Farm. That's where they go. All right. Okay. Thanks, Perky. By the way, if you watch the movie the Accountant with Ben Affleck, the first thing he talks about is the home office deduction with that little couple. I love it. All right, is there another question? You guys want me to hit Ali on Instagram? Darren, I'm going to just grab one up here. Go ahead, Darren.

Okay. On Facebook or sorry, YouTube, Tom Oliver asks, how far along in the year is it viable to change from sole proprietorship to an S corp? Because income is going to be much higher than expected.

Alright, Tom asks a very important question. Now, everybody, I'm glad you're here. I just love this stuff. Please don't go anywhere. This is what you need to learn as a small business owner is how to manage your business. You're the captain of your ship. I shoot so many videos that are free and easy to understand on YouTube and my podcast is fun. Here's my eight steps workbook. And this is where I was going to go back to the very beginning when cj, I think, said, how do I fund my business? I have a whole chapter here that's titled, you're going to love this. Building financials and raising capital. And I have little QR codes with videos that you can watch and list your startup costs. Do your financials and the seven most common ways to raise money for your business. Also on entrepreneur.com last month I shot a webinar and I did 18 ways to raise money for your business. If you go to entrepreneur.com, go up to webinars and look at the most recent. You'll go see that ways to raise money for your business. And that's my webinar I did last month. Go watch it. It's free. Now the books, my workbooks, 99 bucks. Same thing Dave Ramsey charges for Financial Peace University. But it's got 60 videos. It comes with a business plan, a marketing plan. If you think it'd help, you go check it out on Amazon. But again, this is not an infomercial. I just want to give you places to go. Now. Okay, what was the question again? What was it?

How long? In a year.

Okay, how long? In a year. Okay, now watch this. I can't keep up. I'm excited. Okay, now there's three ways to organize your business. Now, everybody check this out. You could be a sole proprietorship like Sandra was. I think it was Sandra there. Okay, Sole prop. No llc. You're just a dba. That stands for doing business as you reserve your Little name. You take your Social Security number and you go down to the bank and get a bank account. Boom, you're in business. Okay, that's option one. Option two, back in the day you would set up a C corp. That's all you could do 100 years ago. 80 years ago you'd set up a C corp. Now you get protection. But let's say you bring in the same money. You bring in 100 grand in your sole prop or in your C Corp. You spend 25 grand on expenses and you net 75. You spend 25 grand on expenses. Now think of expenses as like auto marketing, travel, dining, home office, electronics, computers. Same thing, same expenses. You don't get any extra expenses in a C Corp. Don't let anybody sell you otherwise. So you net 75. Well here's the problem. In a sole proprietor, you pay self employment tax of 15.3. Now this is getting to the question Tom asked. Hang tight everybody. In a C Corp you play corporate corporate tax of 21%. So both of these suck. So your only other options were 50 years ago came into play. The S corp, the S corp said hey, I get the same protection. Now this was before LLCs even existed, so don't go anywhere. So here's my S corp. If I bring in 100 grand, I spend the same 25 on expenses. I net 75. Check this out. No self employment tax, no corporate tax and no Obamacare. That's pretty awesome. But here's the catch. You have to take a salary. So what we do is we take this 75 grand that you're going to make. And on paper you don't have to wait around for a paycheck. But we claim maybe half of this or a good chunk of it as dividend kind of pass through. So this is dividend or K1 pass through income, which is no self employment tax, no corporate tax. But up here you have to take a W2 for a reasonable amount. Now in most equations we're doing a 30 to 40% allocation. And I go to all the reasonable comp seminars around the country. I teach classes to other CPAs. I interview IRS agents. I am licensed to represent clients before the US Tax court. We make sure no client gets penalized for taking too low of a salary. But I have a matrix that helps you choose. So you might take a 25 grand salary and take 50 grand as pass through. This just saved me 15% on 50 grand. That's $7,500. Now why did I bring all this up? People, you need to Know, as a small business owner, the difference between a sole prop, a C corp and an S corp, most of my business is in the long run, I don't want to be a sole prop, I don't want to be a C corp. So we lean towards this S corporation and that's what Tom is asking. He's saying, Mark, in a given year, should I set up my S corp halfway through the year or should I just stay a sole proprietor through the rest of the year? Well, here's the S corp insurance that I want to give you. Right here is what you can do is set up an LLC that doesn't say taxes. LLC's don't say taxes. But I can convert it to an S corp retroactively anytime during the year. So if you're a brand new small business owner in 2021, what I'd recommend, if you think you might make 10, 20, 30, 40, 50 grand or more, start out as an LLC, which is the same thing as a sole proprietor. Just see how the year goes. If you end up making a lot of money later on in the year, you can call me up and go, mark, mark, I made 40, 50 grand. That's when I think it makes a lot of sense to switch to an S corp and I can back date an S election. We charge 150 bucks super cheap to go back and be an S corp. So here's what I recommend for a lot of clients. This is the trifecta that I've been teaching for years. You start out as a sole proprietorship with your little side hustle. So here's your side hustle. You start out as a sole proprietor or an LLC and then you convert to an S corp when the time is right. On this side, this is your investment side. This is where we put your IRA 401k and we put your LLC for your rentals. So your LLC is owned by your trust and your LLC here is owned by your trust or your S corp. Down here is your 1040 and a river runs through it. Brad Pitt, you know what I'm saying? So here we take your passive income and over here we have your earned income. This is what I do for every dentist, plumber, electrician, contractor, realtor, broker, attorney, cpa, online marketer, fix and flipper. We all become S Corps in the long run. Then we use LLC's for our rentals and it comes down owned by our trust, married or single. This trifecta is what 90% of our clients are coming to us for to help get organized and you don't have to come to my law firm. You don't have to come to my accounting firm. But this is what I want you to know when you go to meet with your professional. Now, can you do your own tax return as a sole proprietor with your side hustle? Yes. That's what I'm talking about. It's a schedule C. We can help you do that. But then you're going to graduate as your business grows over to the S Corp. And Tom asked, when should I switch? When you know you're going to make at least 40 grand net. When you're going to net at least 40 grand. So maybe you grow 60 right off 20, but you know you're going to net 40. I want you to be an S corp. So, Tom, start out as an llc and then let's see how the year goes. When you start making money, call your mom and then call me. Woo. You know what I'm saying? All right, now I want to give away some more books. What should I do? What question should I ask? I'm going to ask. Okay, I'm going to ask a question to see if you guys were listening. What form do you use on your 1040 for a rental property? What form do you use on your 1040? It's a schedule for your rental property. The first one to answer is my financial freedom book on where to put your profits. Okay, let's see. What schedule do you use for a rental property? There it is. I saw the winner. Okay, it is Las Vegas Living. Baby schedules. E. You guys are awesome. Las Vegas Living. You email Corey. Cory's going to write this down. Corey, C o R E yarkjcohler.com man, my handwriting just sucks. Jeez. Corey. Kohler.com. so Las Vegas Living, you won. I'm also going to give away eight steps here. Right now I'm going to give away at eight steps. What question should I ask? What's a good one? Okay, I'm going to ask this. What does DBA stand for? When you go to set up your small business and make the bank happy, what does a DBA stand for? You're going to win my $99 book. The eight steps for starting or growing your business. And Corey, I'm going crazy. It's coming. We got to wrap it up. Why? I'm just having fun. Have we already got a whole hour? We didn't start till 4.

15.

Is this. Are we having problems otherwise? Okay, we're having some technical difficulties. Okay, we have a winner on Instagram. Who's the winner. Anna Catoni.

Doing business as.

Doing business as dba. Anna Catoni is the winner. Anna, you emailed corey@markchkohler.com. okay, Darren, give me some questions. We got two more questions. I guess we're having some technical difficulties. Okay.

Chrissy Oz. From Facebook or from YouTube. I have an S corp in Texas to run rentals that are owned in LLCs. Can I duplicate this structure in another state and form a second S corp to run short term rentals in that state?

First name again?

Chrissy.

Okay, Chrissy has an S corp in Texas, so I'm presuming she lives in Texas. Better. You better not set up an S corp in a state where you don't live. And then she has LLCs that own rental properties. And she says, I have an S corp to manage my LLC owned rental properties. Okay, everybody, this is important. She also threw out an interesting point. She said these are short term rentals. Short term rentals. So she's doing Airbnb and all that kind of stuff, which I'm okay with. Anna. No, no, what's her name again?

Chrissy.

Chrissy. All right, Chrissy. Everybody listening? We use an S corp when you're creating ordinary income. 1099 sales, a product, services. That's where I want this S corp to be used for. This is what it's used for, Krissy. I rarely set up an S corp to manage your own LLCs. The only reason I do that is to set up a 401K. And if you go to manage properties in another state, do not. Do not go set up a new S corp in another state. Okay? Cory's helping me out here. My poor producer, who does an amazing job. Corey, he's about ready to jump out of a window right now. We're having a few technical problems, but I think we're okay. We're still live, right? Okay, so. All right, so in this little diagram, I think it should be up here. There we go. Thanks, Corey. An S corp in Texas to manage short term rentals in other states or other LLCs. I'm okay with that. Chrissy, go to the YouTube and type in backdoor 401k. Backdoor 401k. I talk about the structure, but that's the only time I do it. You do not need more S corps. I only have one S corp in my life. Don't do it. Okay. Another question, Ali.

How do we cancel an S corp application after applying? I talked to the lawyer and he said it is better to keep the LLC for now.

Okay, first name.

Brazilian Mom Adventures.

Brazilian Mom Adventures. Whoo. Sounds good. Brazilian Mom Adventure said, I already have an S corp and I shouldn't have made the election. You're probably not making enough money to make the S Corp make sense. So she says, how do I undo it? It's called an S Corp revocation. Our accounting firm can help you with that. You would normally go to the accountant or lawyer that set this up and tell them to freaking undo it because they were idiots. Now, no offense, if you were the one that filed the 2553, you've either got to pay an accountant to help you do the S election revocation back to the date you filed it, or you could go through the IRS website yourself and try to learn how to pull the, you know, quote the right reg and send in the right letter. But to be honest with you, I wouldn't even do it myself. I've got an ex IRS agent, Rick Taylor, that works in my accounting firm, and Rick can do it for you. So I'm just going to tell you. Brazilian Mom. Write down the word, the names, Rick Taylor. Call up my accounting firm, and the main number is 435-865-5866. Talk to Rick Taylor and tell him you need to do an S election revocation, and we can help get that done. It'll save you a lot of time and money down the road. Okay, Darren, another question or Ali's got one on Instagram. Go ahead.

J Rod 39 asked. Going to buy my grandparents two buildings downtown. Which book describes the proper way to buy?

Okay, I don't think I have a tax and legal playbook in here, do I? So J Rod says he's going to go buy two rentals from his grandpa and grandma. And the. He said. What book should I get to understand this? Get the tax and legal playbook. The tax and legal playbook. And I'm going to give away a tax and legal playbook right now. This would be our last giveaway for today. What is the number one expense with a rental property? It's going to be your best friend with a rental property. Darren, you're seeing all the feed, right? Tell me what Sue's first. What's the best expense? The biggest expense with a rental property? Do we have a winner? You know, it's. It's not Dallas. You know what I'm talking about. This is the big D. And I don't mean Dallas. Who's our first winner?

Depreciation.

Boom. Do I see it? Oh, Honedaron hone tron. Depreciation. Home tran is depreciation. Now some of you may say it's maintenance because you got a crappy renter and you got to go in and fix up the place. It's not going to outpace depreciation. Depreciation is your number one write off. I want repairs, maintenance, hoa, travel, electricity, utilities. But depreciation is the ability to write off the building over time. You might even be able to do a cost seg analysis and write off depreciation even faster. Everybody. You guys are great. Mortgage amortization. The interest expense is a big one, but depreciation is usually going to outpace it every time. 27 and a half years, baby. You got it. Okay, now Corey, are we calling it? Corey's about ready to go crazy. We got to call it. My producer says we got to wrap it up. If you would like to subscribe to my newsletter and get regular posts on all of our strategies and help hometran, you email Corey again and he'll hook you up with your free book the Tax and Legal Playbook. So that's cory@markjcohler.com everybody. Thanks for being here. Next Thursday I'll be here at 4 o' clock to go live and help you with any of your small business questions. Please get over to mainstreetbusiness.com for our podcast. Pick up my books at Amazon markjkohler.com tons of info there and a free ebook if you sign up for my newsletter. Thanks everybody. Don't give up on the American Dream. I'm sorry if I didn't get to your questions. Make sure you submit them for our podcast for our Open Forum show. Thanks everyone.