How to Get the MOST out of YOUR TRUST in 2023!

Thankfully Joe Biden. Did I just hear those words come out of your mouth?

I know, I know. The 1031 and the opportunity Zone or the yin and yang of capital gain. They're so fun. We just went E rated. We just went E rated. You know Matt, you just.

It'll probably get us more listens.

Actually that's true.

They see corporate Inc. At the end and they're like, don't need to worry about 1099. Welcome everyone to the Main Street Business podcast. This is Matt Sorensen joined by the incredible Mark J. Kohler. We are delighted to be with you answering your your tax legal wealth building questions here on open forum.

Woo. I am so excited to be here today. We've got a great open forum show. The questions, we get some of them I skip and then I go research. I'm like, man, that's a great question. I want to know. We're only answering the softballs here. Yeah. Oh my gosh. Such good stuff. Well, welcome everybody. We hope that you're going to learn something hearing about these questions from others around the country. It really does help to hear what others are going through.

Yeah. And if you got questions, remember you can get over podcast.mainstreetbusiness.com just google main Street Business podcast. You'll find it there. Submit a question and there's lots of people commenting other people's questions. Vote them up if you like them that we're more likely to read the question because we can't get to all of them. But we love engaging and people connecting on the website too. And I'm ready to lead off bat if you'll indulge me.

All right, sounds good. I will take that. I will follow your lead here. Alright.

This is from td. Ach, I don't tdac. I don't know. TDAC says I have a new small rental business with liability. I don't know what that means. That I structured under my S corp taxed as an llc. Okay, I'm already. Whoa. Here we go. My LLC and S Corp both have separate bank accounts. Okay, that's good. How should I pass on revenue to the S Corp?

Whoa.

Is it acceptable to transfer all of my profit from my LLC to my S Corp. To issue salary and shareholder distributions from the S Corp and avoid self employment tax as intended when I set this up. Thanks.

Whoa. Whoo. Tdac.

You are lost my friend. And we will bring you back. Let me bring you back Bring you

back to the promised land. And by the way tdac, I'm going to say this too. You have got to get a consult with one of our tax lawyers for an hour. Get a tax plan, a comprehensive consult that brings. There are so many embedded things that you're just thinking are facts and the way it should be done and not done. We're going to answer a little bit. But yeah, get a consult.

So let me, let me go through this because there's a number of things that he says here that I want to correct. But there are teachable moments. Guys, there's teachable moments here. First teachable moment. TDAC says I have an S corp taxed as an llc. Impossible. Tdac, you do not. There's no such thing. You cannot have an S corp taxed as an llc. You may have an LLC that is taxed as an S corp and that's totally okay. You could do that, but we'd only do that for operational businesses. You're selling goods or services. You're going to have ordinary income where you need to pay self employment tax. What you said you have. TDAC is a rental business. I presume this is real estate rental. You don't say. But let's presume that's real estate rental business. You should just have a regular llc, not taxed as an S corp, just disregarded entity. It goes down to your personal return because you don't pay self employment tax on rental income. So your next question about well, should I send the money from my LLC to my S corp and then pay it from the S corp to me? No, you only use the S corp with income that would be subject to self employment tax, rental real estate income or capital gain income when you sell the property is already exempt from from self employment tax 100% that's just going to flow down on your personal return. So that's where you need to go. Tdac, I think you're a little messed up like Mark said. I'd totally recommend a consult with one of our amazing attorneys. But don't overcomplicate this. If it's an LLC with a rental business, you don't need the S corp. You don't need to move money over

to an S corp. Now I almost thought he also was going was trying to go with I'm trying to move money over to the S corp so I could fund a 401k or get some retirement plan contributions. Some people want an S corp so they can do a 401k when they have a rental exclusive rental business. We call that the side door 401k. Another topic that you might be Alluding to. And that's why a consult is going to be a big deal. That will really help you out a lot to kind of bring together your master plan. If we don't save you 10 times what you pay us to just get a plan in place, that's it. We failed. And we just see it time after time. Clients are like, oh my gosh, this saved me for so many years to come and it'll be so well worth it. And you don't have to fire your accountant. You might learn that your accountant is a little janky. Or if you're trying to do your own return in a situation like this, we've got to get you in our tax pro network, get you a better advisor.

So.

All right, I've got a question. Matt here from. Okay, you're going to mark that. This is episode 445 people. So if you're. We're trying to send you in our responses here to your questions to that episode so you can make sure you get that your question answered and hear us talk about it. This was from D. Lindquist said in January of 2022. So we're like a year and a half ago we purchased a home to be rehabbed and used as a short term rental. The initial purchase was funded with a hard money rehab bridge loan in our business name. We were kind of slow with the rehab, 50 grand in costs. And then the loan was finally refinanced in a DSCR rental loan with that same company in May of 23. So a year and oh wow, four months later they finally get their hard, their hard money out and they get a long term loan. Okay, that's cool. My question is regarding the tax deductions and how this works, we did get an extension for 2022. Are we able to deduct any of the expenses for 2022, such as loan fees, mortgage interest costs, mileage, food, real estate taxes. Da, da da, da. Okay, now slow down. You didn't tell me the most important question, Deanna. When did you rent this? You told me when you got the loan finalized. I don't care how much you had in loan. I don't care when you got the loan, when you finalized the loan, when you refinanced the loan, when we needed this property placed in service. Now for any of you listening, you can't deduct a rental property until it's placed in service. Now in a long term rental, that means it's available for rent. In a short term rental strategy, you've got to have days rented. So it's a big rush for a lot of people to hurry and get some tenants in there in November or December, at least for a few days so that they can show it was placed in service. Now, I'm assuming here, Deanna, because you're saying we got our final loan in place in May of 23, that you did not have renters in 22. This makes it tough because. And again, I don't know your whole picture. Very similar to our last question, you could benefit from a comprehensive consult where we look at everything going on in your life. Because if this is the only property in your life, you, you don't have any other side hustle, any other rentals, then all of these costs are going to be considered as part of the rehab and will be added to basis and will be added to the purchase price on the books, if you will. Because I can't deduct operational costs. Because you don't have operations in 22. All you had was improvements. So can you deduct mileage, food, home, office, and all these things as you were doing your improvement? Yes, but they're going to be capitalized. You're not going to get a benefit in 2022, and you're not going to be able to depreciate it in 2022 either, because you didn't place it in service, meaning you had it ready for rent as a long term rental or rental and in a short term format. So don't be frustrated. I want you to add up all your expenses related to this project in 2022 and at the very least, add them to your accountant will be able to do that. It's going to add to the depreciation in the future and you can still do a cost seg down the road. You know, if it's a short term rental, that's going to be a great strategy. Possibly. But again, we don't know all your numbers, your situation, how much time you're spending here, here, there, wherever. And so keep plugging along. Hopefully that helps. You're on the right track.

All right, next question's up. This is from Alice asking about tax of a trust. She says, what is the filing form for a trust? And trust capital gain is not preferential question mark. I felt like Ron Burgundy. I'm Ron Burgundy. Someone throws a question mark at the end of that. But okay, good question, Alice. Now, I want to make sure everyone understands what type of trust. There's different types of trust and they could have a different tax return if we're talking about the main revocable living trust. What we throw into our trifecta. What 99% of our clients should be using a revocable living trust for their estate plan. That's just flowing under your 1040. There's no separate tax return for a revocable living trust. Even domestic asset protection trust, those are going to still just flow all down to your 1040. Now, if you do have an irrevocable trust or you had a revocable trust and the second a spouse died or the, you know, now it's getting distributed beneficiaries or it's covered, contains assets with income, you will file what's called a 1041. That is the actual tax return that's filed. Now to your question about preferential capital gain treatment. A trust technically has the highest tax rates out there in the tax code, but it does still have a capital gains rate max of 20%. So you could still get the capital gains rate, but nine times out of 10, our clients with trusts, or most people out there with trusts, it's flowing down to your 1040. It's just a revocable living trust. Like I said, if it's the irrevocable or a revocable trust that now become irrevocable because of passing, it would be a 1041. And you could get capital gains rates there of 20%.

Okay, I like it. Great job, my fine fellow.

Thank you, sir.

You're welcome.

I was just seeing if, you know,

if we don't pat each other on the back. Yeah, I love you. All right. Okay. So Logan, 22, he said this question about deducting interest. What's deductible when it comes to interest? Expense. Said, hey, guys, been thinking about interest and when it can be deducted. I keep seeing business purpose, which seems like it can be defined pretty loosely. How liberal can we be with this? Is there any case law or guidance? Yes, lots of case law, lots of guidance. And it's not that loose per se. It's pretty easy. So he says, example is a partnership paying back a partner from his or her capital account using a loan considered a business purpose. All right, bless your heart, Logan. You're. If you start paying back a partner's capital account, that's not a loan. So, for example, let's say Matt and I start a business. Matt, not Matt, puts in 20 grand, I put in 20 grand, and we go start a business. All of a sudden we realized we need 10,000 more. I'm like, I don't have any Money to put in. Matt, you want to put that money in? He's like, I can do it. We need it. And I said, okay, let's book it as a loan. We will pay you back that 10 grand before we take any profit. Has nothing to do with capital accounts. You rarely would ever. You wouldn't pay back someone's capital account anyway. That's upon disillusion. So if I put in 10 grand and Matt puts in 10 grand and then we're going to. He's going to put another 10,000. No, we both put in 20 and he's going to put in 10 as a loan. Then the partnership has a loan payable to Matt. When we pay him back with interest, which we should, then that interest is deductible to the partnership. Very common. So remember, capital accounts are not loans and you don't pay back capital accounts. You can take distributions in a K1 scenario. And Logan, you're going to want to talk to your CPA that's doing your partnership tax return. Because when you take distributions, you may say, well, I'm taking back my capital account. Okay, that's not a loan. And you're taxed on your income from the partnership, which is not a loan. Capital account is something else. Partnerships are so tricky. So, okay, that's point number one. Then he says, money is fungible. Okay, Is there a way to move, Allocate the money to create a paper trail that can allow it to be deductible without committing fraud? Of course.

Sure.

Call it a loan. And you'll say, well, I want my capital camp back and he wants his back too. Well, then that's just distribution. That's not a loan and you're not paying interest.

Yeah.

So does it matter? Then he says, does it matter the type of loan, Mortgage, line of credit, plain old term loan. Well, now you're bringing up mortgages, lines of credit that are with a bank has nothing to do with your partner or capital account. And by the way, Logan, you don't want to pay interest unless you're the one getting the interest. But yeah. Okay, so then he gives one other example. Is equity stripping a piece of real estate a business purpose or can it be made one? If these things are acceptable for deducting the interest? Is there anything that isn't acceptable besides outright using the loan for personal expenses? Okay, Logan, now I like where you're going with that. When you're finally getting it. Okay, everybody, last point. So let's say Logan has his own home. He has his own home. It's worth 400 grand. He has a mortgage for 200 grand. So he has equity of 200. And he says, option one, I'm going to take some money out of my home and go start a landscaping business. I need $50,000 to go buy a trailer and get some equipment. This is going to be great. So he does equity stripping from his own house to start a business. The business can pay back Logan and take an interest deduction in the business. Another option is Logan's landscaping business may pay the mortgage payment on that HELOC and just make the payment for him and deduct the interest. So even though it came out of your home, the purpose of the loan is for business. So therefore the business, not Logan, but the business, can deduct the interest that is paying for this loan to start up the landscaping business. And now if, let's say scenario two, Logan goes, well, I'm going to pull out 50 grand and I'm going to take my family on a cruise around the world and we're going to spend 50 grand on Royal Caribbean or some luxury cruise ship. Okay, Do I get to deduct the interest on that equity strip? No, because it was for personal use. The purpose of the loan matters. So again, the partnership thing, early on, very much, very complicated. Talk to your accountant of how you want to take money out of the partnership and if one partner's loaning in and interest payments, if any exist at all. I think your understanding of how partnership tax law works is you need to get a little tutorial on that. But then taking out a HELOC equity strip and using it for business, very common, totally deductible in the business. Matt, anything you add.

Yeah, and I think one thing on, on Logan's question is a lot of people have this misunderstanding that if I leave money in my business, I'm not taxed on it. And. Or if I can think of some creative way to get money from my business bank account, to me personally, it's not taxable, like a loan or something, or like I'm like repaying my capital account. Well, again, like Mark saying, that's not how it works. What's your net income in the business? What's your income minus expenses? That's what you're taxed on. In an llc, that's eventually a sole proprietorship or even an S corp or a partnership. All right? And so now if you have assets in there, it's a little different. You're buying an asset like real estate. You get basis in that and stuff. So But I want to just make sure every understands this misconception. It's not like you say, well, if I leave it in the business, I don't get taxed on it. No, that's not how it works. We're just taking income and expense. Whether you leave it in the business or pay yourself, you're getting taxed the same.

All right.

Okay, let me hit. All right, this is a question from Walt Kim. Walt Kim asked about asset allocation or segregation. How is this reported on a seller or buyer in closing statements? All right, so I presume this is talking about buying a business or selling a business. There was a section on this, by the way. It marks tax and legal360, buying or selling a business. Tax and legal stuff. It was freaking awesome. Mark Fetzer is an attorney in our law firm at kqs. Lawyers that spoke on that topic worked a lot in this space. He talked about this. He went in depth onto this issue about how you allocate purchase price in a business. See, when you're someone buying a business, you typically want to do what's called an asset purchase agreement. You don't want to buy a stock purchase and buy their business, which could include all the liabilities. I don't want to buy some existing businesses liabilities. So we don't buy the entity itself. We go buy their assets and we let them keep all the liabilities. Okay, so you go and buy the assets of the business. Well, the assets of the business are going to be like the goodwill, the customers, maybe there's equipment or inventory. And so when you buy those assets, it could be the name, all these things, you allocate what they are on the purchase price. And this is part of a business purchase process. There's actually a form that gets filed for tax purposes where you specify this because there's some tax benefits to you. Because if I bought this equipment, let's say that's really good, I can depreciate that and expense that much faster. Write that off, I should say. Then I could, you know, the goodwill of the business. If I allocate some of the purchase price to a consulting agreement with the seller to help transition the business, I can expense that immediately. So there's a lot of tax benefits. You want to make sure you're working with a good tax law firm or tax advisor in the business purchase process. Because all these little decisions, I mean, there's every little thing you're allocating here can have tens, if not hundreds of thousands of dollars in tax consequences. So make sure you Know what you're doing there. The nice thing is, if you're the buyer in a business, you can drive this. You know, you can make the decisions. You're making the offer. You're typically controlling the documents. So lots to learn there. Hope that helps. But there is an allocation of purchase price typically done. And there is a tax form filed. Mark might know the tax form number. He's smarter at this stuff than me. But there is an actual form number that you get that gets filed by the buyer and seller.

Yes, I just typed it on a slide a few days ago when we were at 360 something. Yeah, I'll get it here. Okay. Well, you can look it up. The asset allocation form, Sale of business. While I answer this question. All right. This is s good sale. And by the way, that form, people, is included by on the buyer's tax return and on the seller's tax return. And they both agree to it in the purchase of the business. So it can be a big deal because some buyers want to play with that form and make it benefit them. The seller wants to play with it on their end. And they don't think the IRS compares. They do, because they look for the matching form on the other person's tax return. And you're referring to each other on that form. So you've got to talk about it with the buyer or seller. It's a big deal.

That's form 8594.

8594. Love it. Okay. This is S. Goodsale 514. Hey, Mark and Matt. Love your show on the East Coast. Notice how he pointed out Mark, then. Matt, I just wanted to say that. Just. I don't want to make you feel bad, Matt, but that's okay.

Yeah, you're number one in my book.

Well, you're number one in my book. And I just want to tell you I love you. Okay. All right. Following your great advice, my only sibling and I powers of attorney, set up a revocable trust for our widowed mother. Mom. Her assets are spread across IRAs and taxable brokerage accounts. Post Secure act. Does it make more sense to have the two of us individuals named as 50, 50 beneficiaries of the IRAs while keeping the trust the beneficiary of the taxable accounts, or vice versa, since the beneficiary designation avoids probate. Anyway, should the trust be named the beneficiary of all accounts, or should we be named 50, 50 of all the accounts and keep the trust only for our mom's tangible Goods. So in the real estate. So lots of issues here and it's tricky. So I love this. Goodsdale S. Goodale. We'll call her Good. Dale Goodale. Set up a trust for mom and there's two children now. It sounds like they're older, they have power of attorney for mom. So here's the first. You've got two options here. Option one is, let's do the easy option. They set up the trust. There are 50, 50 beneficiaries at the trust. You make the trust the beneficiary of everything, put it on title to the real estate, the taxable accounts, make it the beneficiary of the IRAs, just everything. It's just kind of simple. You just make sure the trust is a beneficiary of everything. And you can feel confident doing that because the two children know that they're 50, 50 in the trust. So they can just say check, check, check, check, check. We just, we made the trust the beneficiary of everything and the owner of all the real estate. And when mom dies, the trust will step in and they'll get 50, 50 of all those assets. There is no extra tax. They're still going to get stepped up basis on the real estate. Pretty straightforward. Now option two. Now there's pros and cons to option one and two. Here option two is we just use the trust for the taxable accounts and the real estate. It makes it easy in the sense that there's no probate on the real estate. At that point, the taxable accounts will be just distributed to the trust. Easy schmeasy. The IRA accounts. It's actually easier to make brother and sister the beneficiaries of the IRA accounts. And, and when they die, they can do a rollover. And there's different rules of a beneficiary IRA so they can kind of play with it and not have to go through the extra step of the trust being in the middle of it. It doesn't make the trust bad. It's just there's an extra step when the trust is in the middle of that. So efficiency Sake would say make them 50, 50 on the IRAs individually, but then put the trust everywhere else. Okay, now where are the pros and cons? If the kids are under age 18 or act like they're under age 18, financially, they could be 40 and still have financial challenges. Having the trust be the beneficiary of everything under option one could be a lifesaver because you want the trustee to take that IRA money and maybe not hand it out. Maybe we don't want to give that IRA money to a 16 year old or someone that's 36 with in rehab or something. So we want to make sure that the trust is a backstop before the kids get that money. But option two is super efficient and like it. If the two adult children are financially mature, then let's go option two. So in different situations, you're going to choose option one or two based on the financial maturity of the children. But if they're mature, I like option two. If they're not, I like option one. Matt, would you add to that? What do you think?

Dang, dude, that was an amazing answer. I was just like nodding my head the whole time. Yeah, yeah, yeah. Because it is a little nuanced, right? You got an option. There's not necessarily a right or wrong way to do it. And everybody's family situation dynamics different. Who are your beneficiaries? How old are they? Are they financially mature? I mean, I don't even. That was like Elton John just finished his set and they're like, all right, you're up, Matt.

Oh, you flatter me. Oh, I'm not.

I'm good. I just. That was great. I got nothing to add to that.

Oh, go, go. Okay. All right, well, I will. I'm going to ra ra ra your next answer, I'm sure. Yeah, only if it's.

Only if it's good.

You know what's funny is some of our shows were just ripping on each other today. We're like, just hugging each other. High five. And I don't know what it is. We're just feeling the love.

So I just have a senior. I mean, I saw the tax legal360, but anyways, I just love being with you.

Yeah. All right, who's. Our next question?

Okay, we got e Thunder E Funder asked in the mega Roth, after I make my employee contribution with after tax dollars, is that 39,500 company match from my S corp tax deductible to the company. This is a good question. And he kind of answers it in his own question here. But let me. Let's unpack this here. The mega Roth, which would you do in a 401k? Is where you can get over 66 grand a year in Roth dollars out of a 401k solo k or maybe even your day job. 401k, small business, 401k. You could be doing up to 66 grand in this thing. All Roth dollars. Now this mega Roth process is what it's known as is you're making an after tax employee contribution. This is on your W2. So yes, in a way the company's expensing this because this was payroll to you but you picked it up as income on your W2. So to you it's income on your tax return. Now when you convert it because you're going to convert this after tax contribution to Roth, there's no tax on the conversion because you already paid the tax. But so if you think about it, it's compensation from the company, your S corp which is you're expensing over there, but it's picking up on your W2 which you're personally paying taxes on that you're going to have a larger W2 more on your 1040 of of wage income. So, so that's how it would work. There's not, it's not a company match. If you were doing a company match, that is an expense for an employee contribution on your 1120s your S Corp. And, and, and that's, that's a different scenario. But this after tax thing is actually compensation to you as an employee that's on your W2.

Would you. Well, I love.

Disagree.

Nope, totally agree. I'm going to add an X factor and thank you to the Joe Biden administration and better buy back bill. But whatever. Last summer what's the name of the

billy password Secure 2.0 Build back better luckily died and cruel death because it should have but thankfully Joe Biden. Did I just hear those words come out of your mouth?

I know, I know. Secure Act 2.0 got passed and there

was some, a couple of good things in it.

You know and here's the thing. I've said this before. I don't, I think everybody that's in business and files taxes knows that you generally get a little more favorable treatment from the Republican Party when it comes to saving taxes. They're more about give people their money, incentivize them through tax savings. Let's build our wealth. And people that own a small business or want to build wealth, the Republican Party's your friend. But you may hate other things about the Republican Party. There's no perfect solution. But on the Democrat side too, I mean we need to know that when the government does something good for us tax wise, I want to recognize it whether it's the Democrats or Republicans and we've got to. It's a little harder for the Democrats to get tax legislation through that's beneficial, but they do. So this is one Where Secure Act 2.0 correct me if I'm wrong, Matt, they just passed last year where that company match or contribution? I'm. Matt, I'm interested to hear your comment. Could actually be Roth.

Yes.

So if the, if you want to, if you're going to do a mega backdoor Roth on day two, you're converting to Roth, can't the company just do Roth right out of the gate?

Absolutely. But remember, it's going to come as a match. So. And it's this employer contribution, which is 25% of your W2. So if you want to throw this other 39,500 in, you know, you've got to have about $160,000 W2. So the factor on how much you can put in is employer contribution. Roth is based on 25% of your total W2. So after tax, mega process, I can get more Roth dollars in off of lower W2.

Okay, so this is a good. I'm learning this. This is so awesome. I always learn something when Matt answers a question on this topic. It's so complex. So everybody. Okay, let me put this in 8th grade terms for everybody. So I'm a small business owner. S corporate say that's typically, typically the case when I'm funding a solo 401k. This client says I want to sock away the maximum amount, which is my 22. 5 and then another 39. He's under age 50. She or she under age 50 and wants to throw down. The goal with this mega backdoor Roth strategy is you want to end up in a Roth position when the dust settles. So you do your Roth contribution, then this after tax contribution that Matt just said, if you have enough payroll, you do an after tax contribution and you pay tax on it and then convert to Roth on day two. That's, that's option one. Right. But let's say you don't want to put in the whole $39,000. Let's say your salary is 80, 25% of that is 20. And you're like, yeah, I could put in another 20 and be pretty happy. Okay, so you put in your 22,5 and then the company matches 20 grand and it could go straight in as Roth. So it almost saves you a step. Depending on how much you want to put in. It might be easier to just do the match Roth. But if you're going to go all Roth and do more than the match, then probably go after tax and convert on day two. Again, different ways to skin the cat, would you say?

Yeah, yeah. And I think I was even at a conference in D.C. iRS representatives were there. And every. There's all retirement account companies that everyone's asking, well, how does this company match? That's Roth dollars get reported? And it kind of gets at this question that was asked of like, is the company expensing us? Because if it's in, if you're doing Roth dollars on the employer side, the company is paying the money. And don't think about you small business owners, think of the company as a thousand employees allowing this. Well, they want to expense it. Right. This is a company match. They paid employees they put into their retirement account. They're going to expense it. So it's likely going to have to get picked up on the W2 of the employee so that it does get taxed. Because this is Roth dollars. This is after you've paid tax type dollars. So even on just that employer match. So now that was what was asked and that was like, that's even what I told them they should be doing. That's what we're looking at doing. Not that I'm like, you know, the wizard on this, but. But they still don't freaking know. And I still haven't heard how they're going to do it. Despite the fact that we've got hundreds, thousands of clients doing Roth employer contributions now they're kind of like, well, how am I going to report this at the end of the year? Because it's effective January 1, 2023.

Well, I'm going to do a prediction. I think it's going to be one of the codes that'll fall onto the other box on the W2, because it's not going to any of you employees out there. Don't be scared in the sense that it's going to add to your income. Well, I don't. They aren't going to add it to box one. Or would they? You're already getting paid.

But it is added to your income, right?

Yeah, it would be added to your income, but tax now rather than later. Yeah, right. But it's not subject to fica, though. That's the tricky part. So it's going to be in box. Some of you payroll experts out there know. Oh, Mark, it's box four. That's obvious. It's whatever, you know, because it's. It's not subject to fica, but you got to pick it up as income. This will be interesting. So. Well, thank you, Matt. Great comment. Great, Great question, folks.

You know, I'd grab a Roth question. I couldn't help it.

Yeah, you had to grab some Roth. All Right. Okay, so we got another partnership question. This tends to be a bit a theme today. LB or Benjamin? Benjamin. Ben. Ben. Ben. All right, I'm just going to call him Ben. I started a construction company with my brother. We are a multi member LLC partnership started in May. We won't make enough money to have an S corp this year. Well, geez, Ben, that's not positive thinking. Come on, get out there and kick some butt. Let's believe it. But anyway, says my question is if we have been taking owner draws, how do we backdate an S corp election? Okay, so secondly, all of accounts are listed. Okay, we'll go to the next one in another minute. So Ben sounds a little contradictory. On one hand he goes, we're not going to make enough money to be an S election this year. Then he says, but if we've been taking owner draws, how do we backdate into an S election? Well, which is it? Are you going to be an S election or not? But here's a bigger topic, Ben. Do not do an S election. That's the part that's freaking me out because if once you do an S election on that partnership, it is jacked up. I have a whole chapter this in my book. This was another topic at our tax and legal 36360 last week. By the way, everybody, the tax and legal360.com you can get tickets to the December. It's November 30th, December 1st and 2nd in Phoenix. Incredible. Again, 45 classes, 36 topics. It was just. This is one of them, how to handle partnerships. So. Don't make an S election on the multi member llc. Get an LLC for you and your brother right away and make it the owners of this multi member llc. Then each of you will make an S election when the time is right. This is allowing both of you to take more write offs individually and in the partnership. Once you make an S election, you can't do that. So we've got to make sure each of you have your own S corp. Please meet with one of my tax lawyers at the firm. We can bundle this up, save you some money, do a consult together with you and your brother and reorganize this so that you're not up against the wall come November or December. We need to know how much money you've made this year so far and tackle this proactively. Then he said, secondly, all of the accounts are listed as bare necessities nrc. I don't know what that means. If we move to an S corp, do I Have to change all those accounts. I don't know if he means bare necessities, but he spelled it as in bear the animal.

But that's the name of the company.

I don't know. And so, Ben, you threw me off here a little bit. So here's the thing. You're going to want an accountant here helping adjust your chart of accounts. We've got to get your S election done. And if you meet with one of the tax lawyers, they're going to answer these questions and ones you don't even know to ask. This is really a big deal. So any of you out there in a partnership, this is where listening to the Open Forum can be so helpful that if you're operating in a partnership, the last thing you want is an S Corp. As a partnership, you each want your own S Corp. And the tax savings is so, so incredible.

So that's what Mark and I do ourselves. By the way, Mark and I aren't partners or S Corps are partners.

Yeah.

All right, all right. This is a question from Grant. He says, is it correct that you're supposed to use your Social Security number when filling out your W9 if your LLC is single member, not an S Corp or partnership? You said recently to always use your LLC's EINM in these forms, but the W9 instructions require me to use my SSN, and it seems the IRS instructions do this as well. Until my LLC files as an S corp, hopefully soon, is it right to use the SSN on my W9? Any problems to look out for? So, yes, Grant, that is correct. On the W9, you should be using your Social Security number. That is what the instructions say. Because. And here's why the IRS is asking that. See, your W9 is what you're giving to other vendors that are like, hey, we need a W9 to pay you. And they're required to do this because they're going to 1099 your business because you're providing service to another business many times. And so they got a 1099.

You.

Well, for the IRS, they're like, well, where is this 1099 going to show up to us? If you're a single member llc, you're not filing an LLC tax return, you're not filing a partnership, you're not filing an S Corp tax return, you're filing a personal return. This is going in your personal 1040. And how does the IRS track that with your Social Security number. So for any of you who are single member LLCs, you're basically taxed as a sole Proprietorship, it's going on schedule C or even your for your rental properties is all just hitting your 1040 under your Social Security number. Now, if you do make the s selection, your W9 will change and you will just use the EIN. Your Social Security number is not on a W9 because that s corporation files a separate tax return. Same thing if you're in a partnership, that EIN is going to be on the W9. That's everyone's going to 1099 you at and that is that LLC is going to file a partnership tax return. So the IRS can match that up with the ein. So that's the rationale behind it. Sometimes there is some logic behind the tax code. This is one instance where there is a little bit and that's the reason why.

Love it. Great comment, the 1099. One thing I've told people too is on the W9, if you know you're making the S election, remember people, you might have a single member LLC and say, oh, I got to fill out the W9 and check the box. Single member LLC and use my social. But hold it, everybody. Once you make an S election or you think you're going to make an S election that year, then you check the box Corp and put the EIN in. If you're on the bubble and it truly is a single member LLC and you don't think you're going to make that S election, put in your social and go the route Matt just said. But always keep in the back of your mind that you will ultimately, hopefully, as you make more money, you're going to convert to an S corp and that's the year when you want to use the w9ein of the entity. So there's a transition at some point. Just the single member LLC can be elusive. Everybody thinks, oh, my social. And then I'll go, is it an S corp? Yeah. Well, then it's not, you know, that is an S corp. All right. All right. Rafi. Oh, I love him. Great. He's coming here on a question. It's a couple months old, but I want to hit it. Said, hey, Mark and Matt, Officer and a gentleman. Or vice versa. Ha. Love you. Seriously, love you guys. Quick question. I have an operating LLC business as a single member LLC in Georgia. Hmm. Just similar. We just talked about that. Purchasing an Airbnb 635K in Tennessee in two weeks. Keep the same LLC and file foreign in Tennessee to incorporate the Airbnb operation in Tennessee or file an entire new single purpose LLC in Tennessee. Now I'm Embarrassed because this. We didn't catch this question back. It wasn't timely enough. I know Rafi's a client. He probably had the attorneys help him out. But this is a really good question for everybody to hear too. And maybe Rafi, it's still outstanding. He said, I have an operating real estate business as a single member LLC in Georgia. So let me ask everybody out there, do you want to put rentals. I don't care what state do you want to put rentals in an operating business? I don't care if it's an operating restaurant business, operating real estate business, operating hair salon business, you know, no. Now, we do not want to put rentals ever in a LLC that's operational because ultimately, again, you might be making that s election. And we also don't want to expose that property to liability in the operation. So he's purchasing of Airbnb in Tennessee. So we want to have a Tennessee LLC along with that Tennessee Christmas, but both go so well together. Tennessee LLC and a Tennessee Christmas. And we're going to make a fonts exemption. Filing a fonts F O N C E means family owned entity to get around the non corporate entity is what it stands for. Family owned non corporate entity exemption. And that gets you around the excise tax in Tennessee. Anybody that has an LLC in Tennessee, you've got to file for that every year. So, Rafi, make sure you look at that if you haven't already and set up a separate llc when you go to do rentals separate from the llc, you do your operational business. So if you haven't got that done yet, Rafi, I know the law firm team will help you with there. Don't put this in your own name. You'll close in your own name, keep the mortgage company happy, then deed that sucker out.

All right. Awesome, awesome answer there. I'm just going to leave it at that. This was a question asked by Jack a while ago and we passed on it because, man, it was a long question, Jack. But let me hit a couple points in this because I do think it was a good question people could learn from. And I'm going to summarize Jack's situation. Husband and wife and wife in Southern California, both physicians. Wife is self employed. Husband's W2 at the job. They have a 2 year old baby. They have some money in some 401ks. They've got some money. They've got a rental property with some income, about four grand a month. They've got savings, they got their, you know, they got their Roth IRA with 200k, they got a brokerage account with 90k. They're kind of starting to start accumulating some assets now. Jack asks and I think this is a really good question. He says our life goals are to maximize free time while in our income earning years own rentals and other cash flowing businesses. Retire as early as possible, enjoy my daughter as early as possible. I love those goals, Jack, I love them. But there's trade offs, I'll be honest, I'm just going to give you some honest advice here. Your ability, you are in a high income earning profession and you're, you might be at the height of it, you might make more money later. But I mean you're a physician, your spouse is, you guys are making lots of money, you have a two year old daughter you want to spend more time with. What you need to do is take as much of your income as possible and get it over to investments. We want your assets in the trifecta. Mark likes to say this, we want your assets working for you, not your ass working for you.

Okay?

Because over on the op side we

just went E rated, we just went E rated. You know Matt, you just, it'll probably

get us more listens.

Actually that's true.

I think we'll get some more listens. What are these guys talking about? I'm interested, but on the offside, this is, even if it's a small business, guys, a lot of people think, oh, I'm a business owner, I want this financial freedom. There's some freedom in owning a business, but you got to work your butt off. And even a physician, a lawyer, I don't care what you are, you still got to operate that business. Now you can grow and get other people to work underneath you and maximize that type of organization as you scale and grow it. But I don't want you to have a misconception that you can have it all. You can get as close as you can to maximizing time with your daughter, to having financial freedom. But what I think you need to focus on, and this is the beauty of the trifecta, earn as much income as possible and get it over to that asset side. Now you're going to be trading time for money right now, right? You're a physician, I'm a lawyer. Like we trade time for money, but you can start the savings and getting over. That's why we love the retirement account. Maxing those out, we get tax benefits, we get perks, we get tax deductions. It grows and comes out tax free. You're already doing rental properties. I love that. Accumulate more of those. Start building more assets on this side. As you gain more assets over there, they produce income for you that you don't got to show up on the other side on your operations side, if you don't want to. If you want to spend the time with your kids, go ahead and do it. You've got the assets and you've built it. But you will pay a price to get over there.

And I'll just say this now, it's kind of a great plan to start now because once they're teenagers, you won't want to spend time with them. And then you can get back to your other plan then when they turn in their 20s and and they really do care about you and love and listen to what you say, then you're going to want to spend time with them again so you can help them find the right person that's going to raise your grandson or granddaughter. So it's just an evolution of different relationships there, that's all.

Yeah. This is the seasons of parenthood.

Okay, now I want to get back to this 1099 thing and the W9. The GI Doc had another question. Very similar, but let's just clarify this for everybody. He said, I have an LLC and we'll have multiple 1099s this year. Okay, GI Doc. So, okay. Then he said, I will be taxed as an S corp. All right, thank you. See, notice how he did that. He had an LLC going to get multiple 1099s. I will be taxed as an S corp. Then he said, should the various 1099s be sent to me as an individual under my Social Security number because I have the single member LLC and then have them flow through my. My 1040 over to my S Corp. Or should the 1099 be sent to my LLC EIN, and then flow through the S corp the way it should down to my 1040? Does it matter? Yes, it matters. It will save you a headache with your accountant. It'll save you time and money. The end result, if your accountant knows what they're doing, we're going to get you the same tax result either way. But what the efficient thing to do is on all those W9s, reach out to all the people this year that are going to send you a 1099 and say, hey, here's a new W9. Check the box. S Corp. Give them an EIN. Done. What you're going to find out too is pay yours are not required to 1099. A corporation. So the beauty is those 1099s aren't even going to show up because they're going to go, hey, this guy's an S corp. Because again, the LLC doesn't matter once you make that S election. So you're going to get fewer 1099s anyway, and it's going to make life easier. So get your new W9 updated out there. Check the box. S Corp. And you'll be off to the races.

Yeah, and that's. This is one of the things for people that are LLC taxes. S Corp West. A lot of times we're like, we just do an S corp out of the gate if we know you got the income. Because for everyone else, including people sending you 1099s, they see corporate Inc. At the end, and they're like, don't need to worry about 1099s. They see LLC at the end. They're like, we have to have a W9. And even if you check on that W9, that you are an S corp for tax purposes, they still freaking 1099 you even though they don't have to. And so that is one of the benefits of just doing an S corp out of the gate if you got the income for it.

So, yeah. Okay. I've got one other question. Matt, why don't you take one, and I could wrap it up with one last one. You want to do that? Okay.

All right. You got one ready?

Yeah, I do. Okay.

This is good.

I just worked on at the. At the 360 Conference. I had to be substitute teacher. I kind of had, like, Van Halen throwback, you know, hot for teacher. I was hoping someone was hot for the teacher in there, but it was just me. Anyway, I was substitute teaching. Don't you guys all. Don't you all, ladies and men? There was one substitute teacher, right? It was just hot, you know? You guys know who she was. You ladies know who that young substitute teacher was? You're, like, just dreamy, right? You know, substitute teachers have something going for them. They fly in, they show, they look great, and then they're gone. And everybody's like, there's no homework.

You know, we're just gonna watch a movie today. Awesome. And you're hot.

I know. Just like ships passing in the night. And we're like, whatever happened to that teacher? And then the next day, your crappy other old man or old woman comes in, and you're like, bam. Then you go back to Van Halen hot for teacher, and just suck it up. So anyway, I Taught the class on opportunity zones as substitute teacher on the three Buzzkill.

That was a question.

That was a good point. You know, I was substitute teacher on opportunity zones. Womp, womp, womp. Okay, so we did not just watch a movie anyway. I should have done that. I should have walked in and said, I'm your substitute teacher. We're going to watch, you know, an old 80s flick. We're going to watch Turner and Hooch today. All right, so Jeremy asks, and this is going to relate to my substitute teaching, he says, can you 1031 the profits from one real estate syndication into another real estate syndication? The answer is no. You have to go from titled real property to other real property. And so in a syndication, they're not going to kick out a titleable, you know, interest or a tick because they're called tenant and common interest in that syndication just for you. So when you sell that syndication. No, 1031, but my dumb story of substitute teacher is now going to pay off what I would suggest you consider is the opportunity zone. So when you sell out of that real estate syndication, calculate your gain, 50 grand, 100 grand, 20 grand, whatever it is, you can go take that profit, that gain and roll it into a Opportunity zone real estate syndication. They're all over the country. Syndicators have figured out, man, if we do a syndication on a real estate development in an opportunity Zone, we've got all these people looking to save taxes, and we just a whole other range of buyers or investors for their syndication. So if you're in a current multifamily syndication in who knows where and you sell, take that same money and you can find an opportunity zone real estate syndication and not pay any tax for three years on that gain. And if you hold that syndication 10 years, you. You'll never pay tax again on that money. Huge topic. It was again, a class at our 360. It'll be a class in December. Keep studying on that, folks. The 1031 and the opportunity Zone are the yin and yang of capital gain. They're so fun. So love it.

That was so good. Turner and Hooch, huh?

Oh, dude, I. I'm a sucker for one.

Who is that? Tom Hanks and the dog.

Yeah, he did Money Pit that year. And tuner Turner and Hooch. And those are the good old Tom Hank yours.

Yeah.

Then he got into Private Ryan and, you know, they're just a little darker, you know. But I. I did love Private.

I love that, though. That was good.

That's good.

All right, last question.

You get Back cleanup.

Okay. This is kind of an easy one, but this, it's been out there and I. I like it. It's a good question. Asia Music says, I'm forming a partnership. We will both have our LLCs. S Corps own our stake. All right, so they both have an llc, taxes and S Corp doing a partnership llc. Okay, great. You got that down. We both live in separate states, working in the same business. What are the best business online banking options we can set up for our partnership? Okay.

Wow, you went right past a bunch of questions I was gonna have.

Yeah, a lot of questions.

I'll go back to those. You did the banking. I'll come back to the other elephant in the room.

I wanted to close it out with this easy bank question, my part. I'll let you throw in some other observations there. But let me answer your specific question. Agent. And this is like kind of. This is a nuanced answer. And I mean, I hate to say it, but sometimes it depends. Are you a tech person? Are you good with online banking? Is. And you also got to say, here is your partner, because you're going to receive the income in the LLC tax as a partnership, and then you're likely going to be transferring it from that business partnership account to your S Corp bank account, from your S corp bank account down to your personal account. Okay. Now if you have all your bank accounts at the same place, that's going to be a lot simpler. I don't know where your partner banks. I don't know where you bank already, but you might want to think there. And here's a second alternative is doing an online banking company like Titan Bank. They sponsor our events. You've seen them, they do a great job with an online service. And you can transfer money from the partnership LLC to your S corps from the S corps here individually. You can even link bank accounts outside of there. And so whatever bank you're looking at, make sure if you and your partner bank at different banks individually, that that bank has the option to transfer online without doing wires. Or you can just transfer online to another bank, which most of the smart banks that have a high tech enabled platform like Titan have that option. So those would be the considerations I'd look at.

Yeah, that's great answer, Matt. I won't add to it. Some good options there, folks. Online banking is the wave of the future for a lot of businesses. It makes a lot of sense, but. Okay, here's another observation. This is where I thought the question was going. They both have the rest corps and they have their partnership llc. That's wonderful. Then they said we do business in different states or they're both living in different states.

They live in different states. In different states, but we work in the same business.

Okay, so that opens up a whole can of worms because you're now doing. At least two different state tax returns, possibly three, depending on where that partnership's located as well. So let me give an example. Matt and I both have S Corps in different states. And so I have to file a tax return in my state for my S Corp and my 1040 because that's where I take my W2. See, I'm going to take my W2 out of my S Corp and then I have to claim it on my 1040. So that's going to be in the same state where I live. Wherever I live, I've got to take that W2 because the W2 is. Is resident kind of domicile determined. Now, if I'm working for another company in another state, they're going to issue a W2 according to where I work, my state, where I live, like say corporate offices, Alabama, but I live in Idaho. They're going to issue me a W2 out of Idaho because that's where I live. Well, the corporate office is in Alabama. Yeah, but you don't work in Alabama. You live in Idaho and work in Idaho. You just have a home office. So that's why companies that are doing remote workers, it's kind of a pain for them because they have to set up payroll where the person lives, not where the corporate office is. So that's one area. I thought you were going to ask a question. And then the other issue is where do you register these entities? The partnership entity, what state is that in that's actually doing business? That's the primary state where the partnership needs to be registered. Then the S Corp has to be registered where you live, but it doesn't. The S Corps do not have to be registered where the LLC is doing business unless the S Corp does business directly in that state. So that's where I thought this question was going because there are some nuances to that. And if, if you're listening or when you listen to this, our caller, make sure you get a consult with the tax lawyer team to be efficient here because those annual filing fees can add up quick. And if you do the wrong W2 in the wrong state, oh, that ends up being a pain. So get a second opinion on your structure just to make sure that you're not out in right field on this

so great tips there. Well, all right, well, thanks everyone for all these incredible questions. We love answering them. Make sure you're getting over to ask those questions. Questions. Hit the submit a question button podcast, Main street business dot com. And we're going to be back next week. Some more amazing topics, some interviews we're going to give, some tips From Tax Legal360 conference, some of the huge takeaways. Guys, you freaking missed it. If you weren't there, like, what are you even doing with your life? Why weren't you there? All right.

I mean, yeah, Friday night we had a band and an open bar for 200 accountants. I mean, it was lit. It was just. It was nuts. People are jumping in the pool, taking their clothes out. I mean, it was nuts. When you get those accounts, get a couple drinks in them. It's just, man, it's next level accountants gone wild. But other than that, in the band, Matt and I both got to play. I played the drums for a couple songs. Matt got up and played the guitar. We were rocking it. It seemed to go okay. If you're on our Instagram, you saw some drone footage.

Turns out I should be drinking two rock stars a day, though, if I really want to be one. I was a little. I was only half rock star.

Well, the band didn't give us the support we needed. You know, a band.

You know, if Bono just left us up there. Yeah, like, were we supposed to bring our own band? Geez. I know.

She's. I mean, Bono can only do so much. He needs you two there. You know, he's got to have the whole ensemble. You know, they give us one little bass player and say, good luck. I mean, yeah, you know, some of you may watch it and go, that wasn't that great. Let me just remind you, that was with no practice. That was no warm up. That's me jumping up on the drums and playing REM and if that's what you get when you play people, I hand it to you. I mean, it's tough. Anyway, it was fun. Yeah, it was good. Well, thanks, everybody again and we love and appreciate you. Thanks for being a part of this. Please share this podcast with others and give us a five star review wherever you hear this podcast and we'll see you next week for another episode. Thanks, everyone.