Live Q&A with Top Tax Lawyers

Foreign.

Welcome, everybody, to another live broadcast where we talk about Main Street America. Saving taxes, building wealth, protecting our assets. My name is Mark Trey Kohler, CPA attorney, author, and an investor and entrepreneur. A rental property owner myself. I love saving taxes and building wealth. And so I'm here to help answer your questions today. And I have a special guest, Bobby Bodnar, enrolled agent, owner of Breadify, and also in the process of wrapping up a CPA exam as a master's in tax from Purdue. This guy's legit. Also a homesteader, and he's got the most beautiful family. We were talking about my cows and his goats and chickens, and we got it all, man. We're just living the dream. Bobby, thanks for joining me today.

Absolutely. I'm happy to be here.

Yeah. What I love about Bobby being here, everyone, is he adds another perspective as a tax advisor. He's a certified tax advisor in our Main Street Pro. He's also on the board of directors. He's helped and taught so many of our members incredible tax strategy, legal, financial. And when you have two different ways to see something or hear it, it sometimes clicks in a different way. And that's what we want today. Now, we've got so many questions already on our Main Street Business podcast, and I want all of you, wherever you're watching or listening, at YouTube, Twitter, Instagram and TikTok. We got all four live right now, so please type in your questions. We're. We'll try to get to you. We'll go rapid fire. We'll go till the top of the hour. And we're here for you now. Bobby, you ready? Cause you never know what's coming your direction. It's gonna be good.

That's right. I'm ready. Hit me with it.

Okay, we're gonna play Pictionary, too. So while you're talking, I'll draw, you know, so everybody can kind of get a visual here. All right, so this is from the Main Street Business podcast page. Any of you, if you're not already a listener, please get over to mainstreetbusinesspodcast.com to submit questions. And also, it's on Spotify and iTunes, YouTube and. And please make it one of your favorite podcasts. I know it will bless your life. All right, so this is Collins. M13 just submitted this question 10 hours ago on the podcast. So. And this is a good one. So, Bobby, this is for you. He says, hey, can you explain exactly how distributions from business work regarding taxes set up as an S corporation? Is there a distribution percentage you recommend taking quarterly or what advice can you provide? How do I take money out of my business? Sure. Appreciate you. Well, thanks, Collins. Bobby, you run with it, baby. Here, I'll draw what you're saying.

All right, awesome. So there's a few different things to touch on here. But the first thing to realize about distributions is that is not ultimately what you are being taxed on, right? Like if you are an S corporation, you're going to be getting a K1 from that S corporation to you individually, right. So that K1 is going to get reported onto your individual 1040 tax return and that amount that you took in distributions is going to show up on that K1. However, that is not the amount you are being taxed on. What you are being taxed on is the actual net taxable income flowing through from the entity. So the easiest way to think about it is you might have $100,000 of gross income and then you might have $20,000 of expenses, leaving you with a net of $80,000 of net taxable income. That is what you are going to be taxed on regardless of whether you take that full $80,000 out of the business and put it into your personal account or if you leave that full $80,000 in the business. So the first thing to realize is it's not a tax strategy right now. It's simply of realizing that you are getting taxed on the net income, net taxable income, not on what you are taking as distributions. And then the next question is, well,

if I can add, Bobby, if I can add. I like that everybody, I want to say it like we're going to say this different ways. Bobby's going to be commenting on my comments too is taking. Everybody taking money out of the business is different than profit. You can leave your profit in it or you can take it. And that's the distribution part. And we want to be strategic about that. But just know first more, we want to rack up as many write offs as we can get and that's going to tell you your profit. Some of you might be in startup mode where you just leave the money in there, but you're still going to be taxed on it. And you don't want to go to a C corporation. Do not get bamboozled with that. We're going to stay with the S Corp for a reason. So anyway, just another way of saying it, okay, so Bobby, I got 80 grand in profit. What are my options for distributions or how do I really carve this up?

Yeah. So the first thing to Then look at is what is reasonable compensation because you are going to be required to take what the IRS calls reasonable compensation. And yes, that is vague, I guess, by definition. Right. There is no definition of what is reasonable, but there are different ways of determining the reasonable compensation amount. So one of the time tested ways that we've all come to love with Mark is his payroll matrix. Right. So Mark has proprieted a matrix to help you determine. All right. I love that we got the Pictionary going that essentially you are going to have some form of depending on how much money you take out of the business, it's going to help determine how much you need to take as reasonable comp on a W2. So when you have your S corporation, you're going to be getting two different documents that flow onto your 1040 tax return. One is the K1 that we were just talking about. That's showing your net income, that's showing the distributions. And then you're also going to have a W2. This W2 is required. It's not optional to take a W2 or unless. And this is the one caveat, unless you take zero distributions. So if you take zero money out of the business, you actually can get away with taking zero reasonable comp on a W2. However, most people are living off this money. Most people are running a business and they need to take the money out of the business to pay for their grocery bill, to pay for their mortgage, to pay for, you know, their family expenses and their underwear and their. All this stuff, right? So most of the time, unless you have another business or maybe the spouse has the business, you're going to be taking money out of your S corporation. When you do that, you are now required to take a W2 reasonable compensation. So the payroll matrix would be the first place that I would point you towards. And there are other methods as well, right? You could look at what is the job that you are doing, where are you located, Right. What is the rate that an accountant would make in the state of Texas in the Austin area versus what would you be making in, you know, Los Angeles? Or maybe you're a plumber and you're not an accountant. Right. So you would. You're looking at the job you're doing and what the reasonable compensation tied to that job is. And you can help determine a reasonable compensation figure. But I will.

Let me throw out, Bobby, we got about 30 questions already piled up here. We could talk about this for an hour. So we got to hit the highlights. I'm going to say this to everybody. The reason why Collins 13 is doing this is if you do a sole proprietorship or an llc, you're going to pay self employment tax on every dollar that's coming out and we don't want to pay that. So you want to convert to the S Corp to save taxes. And the break even point is generally when you're making 50 grand or more, you at least want to be starting to talk about it. So in this point and I'll let you explain the matrix quickly here in a moment, Bobby, is everybody, we're going to take this W2 and do it on paper. We're just going to claim how much our W2 is on paper, but you can take distributions anytime you want. So I want to just say this in summary for Colin and anybody out there. If you have an LLC and you make an election to be an S corp and you take out money every week, every month or whatever, keep doing that, that's okay. It's your business. Take as many write offs as you can. Take profit out anytime you want. Whatever's left at the end of the year as profit is going to be on that K1 after all the write offs, home, office, auto and all that, your distributions is going to be a different number, but we're going to take a percentage of those distributions and call it payroll. And when we do that, you only pay FICA on this amount, the F word. So either you pay it on everything as a sole proprietor or LLC or we only pay it on this portion. So if we have 80 grand in distributions, let's say we take it all out. Where do you go, Bobby? Let's wrap it up with an allocation that you think would be, you know, kind of average here, right?

I mean based off your matrix you'd be looking somewhere around a 60, 40 split, right? So essentially, yeah, like that. So the way that this matrix works is you're going to have a based off how much money you're taking out of the business, you're going to have a percentage that you're going to need to take on a W2 as compensation. But the more money you take out of the business, you're going to take more on the W2 but it's less of a total percentage. So it'll be easier rather than me trying to explain it right now just due to time to just google this. It's all over Mark's page. Take a look at the payroll matrix and this will help guide you at what is the minimum amount you need to take on a W2 to remain reasonable in the eyes of the IRS.

Yep. And so we might see kind of a 32, a 40% allocation, which would be around $32,000 in W2 and another 50 notes, that'd be 48 in K1. And so when you do this, you're saving this 15.3%, the self employment tax. Oh, sorry, everybody flipped around there. Okay. I don't know why it's doing that. Sorry. Oh, this thing here. Okay, we're going to skip the white board. But basically on that 80 grand, you take about 30 or 40,000 in payroll and about 40,000 in net income. So now we just save 15% on that. So everybody out there, you'd save 6, $7,000 by doing an S Corp. So the bottom line is you've got to have a procedure. You're going to take some payroll, it's going to be a flow through, you're going to save money. And that's why we convert to an S Corp. Every landscaper, online influencer, dentist, doctor, accountant, lawyer, contractor, realtor, we're all S corporations. It's not hard to figure out. Bobby's got good videos on this. I got videos on this. You can study up on it. It'll be great. Any final words, Bobby?

Nope, that's it. But I think the last thing I'll just leave people with is remember, it's not about the top line. Right. In this, that example, it's 100k. It's about what it is after expenses. Right. So if you have 100k, but you also have 80 grand of expenses and you have a net of 20, the cost benefit might not make sense for an S corp yet. So remember, it's the net income you're basing this on, not the top line.

Okay, now I'm going to do one more question from our podcast and then we'll jump to the live questions that any of you are asking right now. This is Ranjit it and Ranjit, it says, I've got two LLCs. Each have a trading account. I find many times I'm doing the same trades in each account. My question is, can I close one LLC and transfer the trading account of the LLC to the other and just keep the LLC I want? If I can, will there be any tax consequences? Very interesting question. Now, what I'd like to do is put this in our trifecta. So if I was talking to Rand here, I'd say, all right, let's divide your life in half. Over here is your operations, and you're going to have like Maybe a day job W2 or a side hustle LLC or maybe an S corp, whatever. We don't care about that. But on the asset side, Rand says, Well, I have two LLCs and I'm trading. They have a trading account. Maybe it's crypto, maybe it's stock, I don't know. And so you've got this crypto or stock, either one. And you haven't been an LLC. It all flows down into your 1040 tax return. Very common ran. I don't even know if you need two LLCs. There's no tax consequences to combine the LLCs. There's no tax consequence. If you close down one LLC and move everything over here, can we leave it on the whiteboard while I'm explaining this? So you could close down the crypto or stock here and move it over to the other one. You could get rid of both llc. Here's the thing, you are not saving taxes anyway. You might be doing this for asset protection because you don't want to get sued. I, I don't even know what state you're in because half of the states aren't even going to protect your crypto or stock from you texting and driving. So Rand, I would get a consult with one of the tax lawyers or your tax advisor at our network and just say why do I even have these LLCs? And I have a feeling he's going to say, oh, I'm a trader. I want trader status. Bobby, what's your thoughts on trader status?

Yeah, so that would be the first thing. Everything you just said, I would completely agree with those LLCs are not doing them any good from a tax perspective. Assuming they are just buying and selling stocks, crypto, whatever. Right. But if they are trying to rise to the level of a trader business and say that I am going to be a full time day trader, then you're basically on your trifecta. You'd be switching that over from the right side over to the left side. And you're treating my buys and sells of buying stocks, crypto, whatever it is, as my full time job and it's rising to the level of a trader business. Which means now I can offset ordinary and necessary expenses against this trading income. However, in 99 out of 100 cases, one, this is more hassle than it's worth. Two, you're not actually going to qualify unless all you do all day is buy and sell day trading stocks, crypto notes, whatever it is you're doing. Right? Like you are day trading by definition. And it's Likely not going to rise to the level of a trade or business. And in that case, the LLCs are doing nothing for you unless you possibly have asset protection and co protection with it.

Yep. Love it. So be careful. Ran anybody out there that's doing day trading thinking they're getting write offs or forming LLCs for day trading. A lot of times there's companies selling this strategy and they're not even going to be around to file your tax return or break the bad news to you later that it was a waste.

So be careful. The other thing I'll just say about this really quick is I think this goes back to one of your base principles that you teach, which is LLCs do not save money on taxes. Right. So the LLC in and of itself is a, to limit your liability, a limited liability company. And I've heard just from talking to people and clients that people are pitching, well, if you put your stocks, your crypto, whatever in an llc, well now you have a business and that has nothing to do with it. Right. That has absolutely nothing to do with whether it rises to the level of a trade or business. And I feel like people are pitching that. So it's just a concept to understand is that the LLC in and of itself will have zero impact on whether you reach that trader status.

Gotcha. I love it. I love it. Okay, well, Dana, what questions do you have for us now?

First thing we have is we have a lot of people wanting to know about the boi.

Wow. Okay, quick update. So the BOI is the Business Owner Information Report. It's been on, it's been off, it's been on, it's been off. This was a law passed three years ago by Congress to try to prevent fraud and people getting ripped off through LLCs and drug trafficking, money laundering. It's just there's a lot of crooks out there that hide behind LLCs. So the government said let's require everybody to file a Business Owner Information Report and we'll find out who really owns all these entities. Well, because of all the lawsuits and everybody freaking out about more regulation and more headaches as small business owners and more costs, the Trump administration says we are not going to enforce this law. It's not necessary. It's going to be a waste of time anyway. It's not going to get the result we all are hoping for, which we would all love to get rid of all these crooks. But having us as business owners spend more time and money reporting, is it really going to have that effect? So let me say this. And Bob, you can have any perspective you want to share on this too. The BOI report is dead. You can file it if you want. We'll file it for you when you do, your entity at the law firm. But you don't have to, don't worry about it. You heard it here, don't stress about it. You're okay. Bobby, can. I don't know if there's another way to say it to make more.

No, I don't know if there's. You were pretty clear on that. But this has been a source of constant confusion and it's at no fault of the tax professional or the taxpayer. This is the government flip flopping, going back and forth on ruling, something getting fought out in court. And basically what you just said is as of now, the current standing right, you do not need to. They are not going to enforce the fines and penalties, however. I mean they just keep flip flopping. So who knows what it's going to be. And I will just leave it with this. If you do in fact want to just not have to worry about it anymore, just get your initial filing in. It takes 10, 15 minutes. They already have this information on you anyways. So if you don't want to have to worry about the flip flopping possibly going forward into the future, then maybe just file it. But you know, some people don't want to do that. So it's completely your call. But as of now, Mark is correct, that is the stamp.

Don't worry about it. You can go to FinCEN website, financial enforcement Crimes Network and check it out and do it yourself. It's not the end of the world. Okay, quick question.

Okay, up next we have. My dad is retiring and receiving a large deferred comp payout next year. How can we use real estate to avoid the huge tax bill?

Well, this is so nice of you to be trying to help your dad out. And this is actually a topic that Bobby is an expert in. I sometimes end up calling Bobby to get advice on this. And so I'll just tee it up for Bobby and say this. Any of you out there at any age with additional income and trying to save taxes and build wealth and have any interest in rental real estate as a investment tool, a wealth building tool, there very well could be some good tax benefits that could offset income in a variety of areas. Whether it's selling stock, selling a business, additional W2 income, or in this case deferred comp at retirement. The fact that you are going into retirement could open the door to a Better opportunity to take advantage of real estate. So Bobby, what would you say the main options would be? And maybe I'll take a. Write a couple notes out here while you're explaining.

Yeah, I think that the most important thing to understand as a taxpayer is the difference between passive and non passive activities, because that is what the tax code is built on. Okay. And there's only two types of passive activities. That's all rentals, regardless of how much time you spend. And then any business that you do not materially participate. That's just a fancy word for saying I'm spending a lot of time actually doing this. And, and yes, there are tests. We're not going to go down that right now. But the first thing to understand is you have to figure out what type of income is this deferred compensation. So that'd be. My first thing is like, what is this? Is he receiving this on a W2 is like one final payout. Is he, you know what, what is he getting? Because if the goal is to offset this and assuming he's getting this deferred compensation, as you know this, he received this for working in the business for X number of years, that is going to be non passive income. That non passive income is not going to be able to be directly offset by passive losses, which is what real estate generates. Remember I just said all rentals passive. Okay. So it's. I would lean more towards what Mark is saying where take the money you're going to get, you're probably going to pay some taxes on it now, but take those proceeds and now you're retired. So now the door is open to investing in more real estate that's passive. And then you can go invest in other people's businesses. Right? That's other passive sources. You're not working in the business. You're going to have some passive income coming in from those things. Think of it like Shark Tank. All right, now you have passive income coming in from those sources and they can be directly offset from losses from your real estate. And you don't need to worry about material participation because it's all passive to you anyways. So it always comes back to understanding what is the income I'm getting and is it passive or non passive? That will then lead you down of like, well, what can I do to offset this type of income? So in your scenario it's most likely non passive and real estate in and of itself won't help you unless you qualify for reps. Yeah.

So great, great introduction to this next piece is that if Any of you want to find real estate deductions through depreciation, which is the typical strategy where you're creating cash flow in real estate, it's growing in value, but on paper you're getting write offs. That's what I think this person's asking about is, I've heard I could buy real estate and get write offs to offset this income. So if you've got ordinary income w2 this deferred comp, any of you with a business generally, you're going to have to qualify as a real estate professional or your spouse use a loophole like short term rental real estate. Now, it's a big conversation, but I'll say if your dad is interested in investing in short term rentals, kind of that Airbnb strategy and throwing on a tool belt and that's in his wheelhouse and he loves rental real estate and he lives in an area where short term rentals have some traction, you know, it's typically going to be more of a, a destination type location where people want to rent short term rental. If that's an option and dad's willing to go there, then let's talk about the short term rental loophole. Google it. Bobby's got information on it. I've got information on it, plenty of podcasts of mine and videos on my YouTube channel on the short term rental loophole. If your dad is married and so your mom and dad are going to go in together on this, there might even be more flexibility to serve as a real estate professional, meaning they're going to go down the long term rental route. They're going to put in 750 out of years at 5,750 hours a year. They're going to one of a mom or dad is going to make real estate their primary occupation being a real estate investor. Maybe they're going to get licensed as a Realtor later on in life and do some real estate sales. Now they could go down the long term rental strategy as a real estate professional, which could unlock again those write offs. So whether it's a long term rental strategy as a professional or a short term rental loophole, and they're willing to put in some hours to kind of manage that project, they could really unlock some write offs and offset dad's income. So I think there's some options there. Talk with mom and dad, see what they're interested in. Any final words on that, Bobby?

No, I mean, I think that's the main thing. But the thing I would point out is what hitting retirement is the Holy Grail. Right. Because now you don't have that extra job. So it opens up the door. Maybe I do want to go do reps and I want to spend 750 hours being a real estate agent or a fix and flip or whatever maybe that has. You have no interest in that at all. What you could do is what I was just suggesting, which is take the proceeds you're getting, take your retirement funds, the funds that you have, and invest those in passive activities. That is real estate. That is any other business where you're going to be receiving like flow through income. You can go invest in a hair salon or any sort of business where you're not working in it, you're the capital partner and you're going to get a K1, hopefully that's generating income. Right. So you're getting distributions in the mail and you can use the losses from real estate against it. Right. So that now you don't have to worry about working at all. No material participation requirement. And you've got money that's able to offset and that is the foundation of all tax planning. You have money coming in from this source. How do I offset it? Well, I can offset it with this loss. Great. That is how you make money. Not pay tax on it. The other way to not pay taxes don't make money. And that's called being poor. That's not fun for anyone. Right. So that's the idea of tax planning, is I'm making money over here. How do I offset it with losses from over here.

I love it. And also what Bobby is referring to is more of the long term play. Let's use dad's deferred comp in the most strategic way. Let's generate income with it. Let's not let the tax tail wag the dog. Let's not go chase a bunch of write offs this year. And it's stuff that dad and mom are not committed to. And it's a bad financial decision, even though it may be good for taxes. So we want to make sure we're doing some good planning there. Next question.

Dana, would you still consider a Roth 401k even if you are in one of the higher tax brackets? And if so, why?

Oh my gosh. Yes. I think you can never go wrong putting first of all a Roth IRA and a Roth 401K. You can have both, you can combine them, you can stack them and start building that tax free wealth. So that's how the Roth 401K and Roth IRA can be used in combination or individually. If you have a day job, you can elect to have it as a Roth 401K. If you have a small business, you can create your own solo 401k and elect it to be Roth. I love the strategy. That's point number one. Point number two is any type of saving is a good idea. We as Americans are not great savers. And I don't care if you're rich or poor, young or old. Always putting away some money, and especially in a Roth format that's never going to be taxed is super powerful. And especially for those in higher tax brackets, one of the best. I thought Bobby was going to say this earlier, but one of the best ways to save taxes is, is to not make money. Another way is to let your retirement account money make it for you and do it tax free. And so the third point would be learning about self directing and letting that Roth IRA Roth 401k be self directed. So, I mean, Bobby, do you recommend your wealthy clients to still do a Roth or oh, you're wealthy now, don't save.

No, no, no. Okay. So I mean, I would just think about it as you want the flexibility to have the Roth option. You don't need to put the money in the Roth this year. Maybe you're making a lot of money this year and you're gonna put it traditional because maybe you're in the 37% tax bracket Fed, maybe you live in a high income tax state like New York or California or Hawaii or wherever, and now you're pushing up against 50% taxes. That might make sense to you. Let's hold off on the Roth this year. Let's put it in the tax deferred account for this year. You're getting a tax deduction. It's still in a tax preferred account.

Right.

So you can invest it completely tax deferred. But what's better than paying taxes later? Paying taxes never. Right. I mean, that's ultimately the goal is get as much money in the Roth or the tax free accounts as possible. So my suggestion is, if it's available, just know that like you can put some of the money in the Roth section and then you can put some of the money in the traditional section. You can play around with it from year to year. So I would always have it be an option, but that doesn't mean you need to always put the money in the Roth. Maybe you want to do some tax deferred now because you're in a very high tax bracket and then maybe chunk away later when you're in a lower tax bracket. So it's always a flexibility. And I wouldn't say it's this one way for everyone, but that's the way I would think about is having the option is the key part.

Bobby, great perspective. And everyone, this is the beauty of being here today with Bobby is that I come at it in one way, he comes at it in another way. And that's right, that's I'm sure why that listener was asking, I'm in a high tax bracket, I shouldn't do Roth. They were implying probably I should do traditional. And Bobby's right, maybe this year it's traditional. Next year you convert back, chunk at it when your tax rate's lower. So love it. And I like also what you just said, Bobby too. There's no, we don't do things in a vacuum. It's like this is always what I should do or I should never do this. It's being nimble and being flexible and doing some planning. And I know that drives some of you crazy, but if you meet with a certified tax advisor, they should be saving you 10 times whatever you're paying them. And I mean that. And if you want to get to our network, go over to markjkohler.com, go to services. Right there is the Main Street Tax Pro network. You can interview, do as many discovery calls as you want and find a tax advisor in your area or across the country. Just make sure they understand you and speak your language. If you need a consult with one of the lawyers you that you can get a link to get to the law firm. We've got our trust company where you can self direct. Bobby on occasion will take new clients. Get in line because you want to be a client of Bobby's if you can. So I mean, how long's your wait list? It's not too bad, is it?

Yeah, I mean, right now we're just trying to survive tax season, but once we get through April 15, we'll be opening the doors again.

And on that note, everyone, you actually reduce your chances of an audit filing an extension. If you're not happy with your tax preparer or tax advisor and you think you're going to owe, send in a little bit of money, file an extension and get in line and start interviewing with some of these tax advisors that can give you actionable things to do this year. And maybe Bobby in the summer's like, all right, we're opening up for a few more clients and now you're getting with a real advisor. That's Going to bring you ideas and not shoot down ideas. So, Bobby, I'm your biggest fan. All right, next question.

Next question. Is a loan from an irrevocable living trust or sorry, is a loan from an irrevocable trust is all it says to a beneficiary considered a distribution?

No, but I mean, how many irrevocable trusts do you even work on, let alone set up or manage or help clients? I mean, out of a thousand clients, I might have five of them that have an irrevocable trust. I mean, Bobby, I don't know. I just. It's almost like I feel like a consumer advocate warning people not to be into an irrevocable trust.

Yeah. And so what I'll say about irrevocable trust is like this. What we are talking about here is Main street tax man, literally right behind you. Main street tax pro. Right? That is the irrevocable trust. When you start going down that path, that is much higher end tax. Tax planning. Typically, some people might get miss sold in irrevocable trust when they didn't actually need one. But in the grand scheme of things, for the majority, the vast majority of Main street taxpayers, the irrevocable trust is a path that you would only be going down in very unique situations. So I, I would just leave it there. And if you do want to consult with, you know, Mark's firm or a firm that is an attorney at his firm, that's who. I would look at that in more detail to figure out what this district or what the loan was. Was it an arm's length transaction? Why was this happening? And that would help determine how the taxability of what that.

Interest to pay for an hour and just say, hey, tell me why I'm doing this and get someone's opinion that didn't sell it to you. And all of you should have a revocable living trust. I have one. In fact, I just got married two months ago with Patty. I love her. Little shout out to my bride. I just. I cannot. I'm like still in heaven, just enjoying this beautiful ride of being newly married. And she and I are working on our new trust together. And all of you should have a trust. Young or old, kids or no kids. It just helps you stay organized. It can provide privacy. So, so powerful. All right, next question. Did you have something, Kirby or No. Yeah, they can hear me. Okay. Yeah, go ahead, Dana. Next question then.

Bobby, can we. Can we hear Mark?

Yep. He cut out for a second, but I hear him. Yeah. Okay, great. Okay, you're Good.

All right, thank you for that. Next question. Selling a house with seller finance to defer capital gains. How can I not pay taxes on a down payment? Say the Sales price is $998,500 with 20 or 30% down.

Wow. Okay, great question. Let's have a little bit of fun with that. Let's go to the board. And I hope I'm doing this because I want you people to know we're not taking just the easy questions. We want to dive into the detail here too. So we have a owner that has a house they want to sell. Now we're going to talk about strategies to save taxes on this. You said the sales price was a million dollars, 990 something. So a million dollar sales price and

they're down paying or what, 20 or 30% down payment.

Okay, So a buyer is going to come along and give them a 20%, let's say 25% down payment. We're saying 20 to 30%. So they're going to put down 250 grand and then they're going to sign a note for 750 grand and start making payments to the owner which are going to include principal and interest. All right, now I'm going to actually tee this up for you to share some strategy. I'm just going to at least tell them what the current situation is. Bobby. So the buyer under a, this is a seller finance deal. So the fact pattern is this is baseline. The I don't know if this is the best thing you should do, but let's assume this is your option. One, you're going to do seller finance. You're going to sell this property, you're going to take 250 grand up front in cash and we're going to assume you have no other mortgage because you're selling it as seller financed. Maybe you're going to pay off a mortgage, I don't know. And then you're going to get this note with principal and interest. To answer this question, we're missing some facts, so I'm going to make some assumptions. Let's say you bought this thing for 600 grand. That's your basis. I don't care what your loan is. I don't care if you sell or finance whatever. If you own it and you bought it for 600 grand, you're selling it for a million, you have a gain of $400,000. So what you have to do is recognize this gain over time. And so what we're going to do is start spreading that gain out over the down payment and over the note and you're going to elect as installment sale. This is a whole case study in and of itself. And I just, I just want to say this, that doing seller financing, you end up being the bank. Yeah. You spread out the gain over time. But I wouldn't say it's a strategy that moves the needle in a big way. So, Bobby, talk strategy. What, what are some options here? What do you think of this?

I think we're missing a key part here. Right? So if he is doing the seller financing and he is selling this property and going for the installment sale strategy, well, what was this property? Was this a primary residence? Was this a rental property? Like what are we even talking about here? Because that is going to be a huge difference on what is happening here.

Fair enough.

Because. Because the first thing I would say is like, let's just say that this is a rental property. Okay? Let's just assume that for the scenario, if this is a rental property, then that property has been getting depreciated to some capacity. So you are going to be whether just depreciating the building, maybe you have improvements, Maybe you have 5 and 15 year property like personal property or land improvements. Okay? What happens is if you do an installment sale like this, you have to recapture all depreciation in the year of sale, regardless of what you get. Okay? So even if you're going to be deferring capital gains, which is what this could be in excess of your basis, your adjusted basis, you still have to recapture your depreciation in the year of sale. So I've seen this actually backfire on people where they think they're making a smart tax decision, but they're selling a property that has a whole bunch of depreciation that they have to recapture. And they don't even have the income from the sale because they're getting it in future years because they've depreciated this thing into the ground because they've held it for a long time. So that's the first thing is like, is this a rental property? Because now, yes, it is.

They did report that it's a rental. It's a rental.

Okay? So that would be the first part, because that's a huge problem for you if you do in fact not, you're not even getting enough money coming in from the sale in that first year to pay your tax liability. Right? So that would be the first part that I would look at is understanding that you have to recapture depreciation in the first year, regardless. You can Only defer the capital gains portion of this sale.

Yeah, I would throw this out here too. Everybody. When this guy goes to sell the property, they're gonna. We got this depreciation recapture on this cash right out of the gate. So most of that cash is going to be probably taxable. And then as you receive payments, you're going to divide it up into principal interest, the capital gain and any remaining depreciation recapture. So you've got all of this carve out. And here's the thing, a lot of people that are selling a home as a seller financed, they think it's attractive to be getting this interest payment and it's mailbox money is sometimes what the note world would call it. And you're going to be in first trust deed position, we would assume. So if they ever default, you get the property back. I here's what I want to say. So let's go back to me. I would not see seller financing as a, as a really incredible tax strategy. It's more of an investment strategy that you want to move from being a rental property owner to a bank and you want to collect interest and you want to move to that mailbox money relationship. And I will say when seller financing typically works the most for my clients is when they want to sell a property, they're not able to get as much as a sales price as they want. So they're willing to get a better price because they're willing to take terms. And so when a buyer is out there willing to pay more if they'll play bank because they can't get a regular loan and you're willing to take that risk, you might be able to get a better selling price, get some mailbox money and if they default, you get the property back. And so it's more of a strategy play, not a tax strategy. I might go 10:31 exchange in a heartbeat and just get into a better property. Any other strategy you might throw out there from a strategy take.

No, I think you're right where the installment sale is most often seen as a way of acquiring a different type of property or it's more to help the buyer or you know, it's. It's a way to get in and out of a transaction. It's not really a tax strategy, especially on a heavily depreciated asset. So what I would go back to is your tax return. Okay, you want to look at the depreciation schedule and that's basically going to show you what your basis was, your starting point, what you paid for it. Plus any improvements and then how much depreciation have you taken on this property? And you're going to arrive at an adjusted basis. That is what the calculation of what you are going to have to pay in tax is. And if you have a heavily depreciated asset, the installment sale may not make sense for you due to having to recapture it all in that first year. So that would be the main thing to look at first before going down that path.

Got it.

Love it.

Okay, we've got another question here from Kirby managing the chat. I'll repeat it.

Can you elect pass through entity tax retroactive for 2024 and have the escort paid personal state income.

Ooh, this is a great. Oh, and then the personal state income tax strategy. Okay, Kirby just asked a question. Here's our one of our team members here helping us here. This I'm already thinking through the question and answer. The question is can I go back and claim S Corp status for my LLC in 2024? How would I do that? And then third, could I write off the state tax expense in my state under the S Corp? Very unique strategy, which I love. Okay, first let's say you've got someone that's an LLC for last year and this is 2024 and they haven't become an S Corp yet. And let's say, Bobby, let's go back and let's say they were netting 100 grand, kind of like back to one of our first questions of the day. So they brought in 140 grand, they had 40 grand in expenses and now we're going to have 100 grand net. And let's say they drain the LLC, whatever. So now we've got 100 grand and in 2024 they're going to spend 15,000 in self employment tax then state and fed. So this is going to add up quick. If they've got a 5% state, a 20% fed, I mean gosh, they're at 40% in taxes and this is a shocker for a lot of small business owners. So they hear, well I'm going to go back in time and I'm going to claim S corp status for 2024 by filing a 2553 and backdate it to or file it with a back in time to 11:24. I'm going to say yes, you can do that. The workaround though is you've got to take this salary and it's too late. So you've got to do a workaround. And the state tax issue we can talk about too Bobby, do you want to explain the workaround and that it's not impossible and how someone could maybe do this and we could lean on that 40% allocation of what it might look like. Walk us through it.

Yeah. So the basically this is a band aid. Okay. That's probably the easiest. This is not something you should be doing every year. And doing it this way is a one year. My bad, I made a mistake. I'm trying to fix it and still pay my fair share of payroll taxes or self employment tax in this first year. So yes, it is possible. With the special revenue ruling it's RevProc 2013-30 and you can go back in time. So the other key point here is when was this LLC set up? Because if this LLC was set up, call it 7124, this RevProc will only let you go back to the start of the LLC date, which is 7:1. So any income you generated 1:1 to 6:30 would still not be able to flow through your new S corporation. So assuming this LLC was established and set up 1124, you could file the revenue procedure in the 2553 to go back in time and say I meant to be an s Corporation starting 1124. And effectively what you're going to have to do is push some money out of the S corporation and instead of putting it on the W2 like you're supposed to do, you're going to put it onto a 1099 and then put it onto your schedule C as in Charlie on your 1040. And that way you're picking up money. So basically the S corp gets the deduction. So you're not paying double tax on this. But let's just say you push out 50, 60 grand. And I would also recommend you're probably going to want to push out more than you would normally take as reasonable comp just to raise less issues with this strategy in the first year because you're not doing it the way you're technically supposed to. So let's say you push out the 50k, you get the 50k deduction on the S corp. That 50k then goes over to the individual tax return. You're going to pay the 15.3% tax on that 50k. That's effectively taking the place of the payroll taxes you should have been paying on the W2 and then next year. So right now if we're in 25, you'd want to get right on payroll right away, register for the state withholdings, whatever state you're living and Working in a withholding tax id, an unemployment tax ID and start running payroll normally going forward. So this is like a one year, my bad, I messed up strategy. And then going forward you're going to be doing it correctly on the W2.

And the beauty of this, everyone is we really are creating savings of at least $7,500 and, and you're getting on track in 2025 to even save more and do it properly with the W2. So this is just a simple example. Everybody's facts are going to be in. Circumstances could be different, but it's definitely a possibility. You want to work with the tax advisor that knows what they're doing and you're going to still be able to implement this for 2024. I love it. I think it's a wonderful strategy. Now the state tax deduction through the S Corp is a very unique strategy. I'm actually pretty impressed this person asked that. But since you did not pay for those state taxes in 2024 out of the S Corp, I don't see it as a viable option for 2024. You'll be able to use the state tax deduction strategy. It's a workaround for the SALT deduction. A lot of people can't deduct their state taxes on their personal 1040 anymore. But if you are an S corp owner and your S corp pays for it, you got it. There's a workaround to get that deduction and you have to have a tax advisor that understands it and you've got to make sure you pay for out of the S corp during the year you're trying to take it. I think it's too late for 2024, but you could still do the retro election and take the FICA savings. Bobby, would you agree?

Yeah. Yeah. So it's definitely too late for 24. That strategy will not work. These require election. You would need to know what state you're in. So every state is a little bit different, but there is a deadline to make. It's called PTE is like the acronym for it, but it's a pass through entities tax. And like Mark said, it is the workaround. It's basically the state saying, well, you know, we don't agree that they're capping the taxes paid on the 1040 at the federal level. So we're going to let you flow it through your business as a tax deduction, paying business tax. And it's so that's like high level what it is. But it requires an election in the year you want to do it. So is it possible? Yes, but it would not work for 24. Your best bet would be for 25. And even then those deadlines come up. I believe New York is like March 15th of the year. You want to do that, which is like in two days. So basically this isn't like something you can decide later. You have to make the election and then pay the tax. So you have to really know what you're doing and be on top of it to use this strategy. But it is real. And the other thing to note is it might be going away because the tax code is about to be changing and the Tax Cuts and Jobs act is set to phase out at the end of next year. Right. So basically we don't even know what this is going to be. And this pass through entity tax strategy may not even be viable going forward in the future. So it won't work for 24. But you can do the backdated S election if you want.

Great comments, Bob. You nailed it. Maybe one last question here. What do you have, Dan?

We have one here says I'm 60 years old. Can I get a Mega Backdoor Roth without an LLC or any type of business?

No. The Mega Backdoor Roth, just so you guys all know, is an incredible and it's a wonderful strategy. And I don't know at age 60 if I'd be plowing a ton into the Roth, I'd still be doing the Roth. Like I said earlier, I think saving money and doing a Roth is a powerful strategy. But if we go back to your trifecta and I want to. A Mega Backdoor Roth is think of it like a big cylinder here. And I want to stack my Roth contribution, which would be eight grand for this individual. And then I want to put money into my 401k and then I want to also bring in profit sharing from my business and. Or call it a match if you will. Well, this is a big number. I mean, I'll pull up my stats for this year in our calendar. This is a great strategy, but you're going to have to. Well, I'll just say this. You're looking at between 70 to 80 grand that you could make all Roth. But the only way you get there is with this 401k and the profit sharing. Well, you got to have a business to do this. And now clients that have rental property, we might pay a management fee and we call it a backdoor contribution. And so you could do a solo 401k as a property manager of your own rentals. And that was a fact pattern, though you didn't share listener. But I. You were not able to do this without. Even without having a substantial rental property business or an ongoing operational business. But the backdoor Roth is incredible. We got to give Bobby one more question. Come on. Throw one more question out for Bobby and then we'll. We'll call it a day.

Well, Mark, can I, can I get one comment on that last one that you just. Oh, yeah, yeah. So, because. So there, there's the business route, which is typically where this is seen. But really what you need is earned income. Okay? So even if you have a W2, I have seen some employers not only offer the Roth, but they offer the voluntary after tax contribution. So if you have a W2 day job that has an employer that allows you to do this, it is. You might not be able to get the full amount in, but you could still get the 8k in the IRA, the Roth, and then you could also put a bunch of money through the voluntary after tax and your employer, the employee, match as Roth. So it is possible without the business, but you need earned income in some capacity. And most employers don't allow for the voluntary after tax. So that's why it doesn't typically work for W2 employees. But it is possible. I have seen it.

I love it. Okay, one last question, and this is a good juicy one. And the listener says, hey, I'm thinking of buying a G wagon at the end of the month for my birthday. Was it for the birthday, too? And I presume for their business because they said they want to take advantage of the 179. Is this a good tax strategy or a viable tax rate or what can I take as a deduction?

Is it best to buy the vehicle outright or finance?

Okay, then he says, is it best to buy outright or finance it? Now, I threw in the guess, the extra one of, is this a good strategy and should I do it? And then said, should I finance or buy it with cash? Well, I'm glad to hear they could buy a G wagon with cash because that answers one of my questions. You better not be buying an effing G Wagon if you don't have the financial wherewithal to do that. So I'm going to make a presumption here that they're fairly well off and they've got a fairly successful business. I'll let you comment for a minute before I tag back in. You got to tag me back in on this.

Yeah, yeah. So I think all this chalks up to what I Like to call TikTok tax advice and the gym G wagon. People loving the G wagon, not because G wagons get special tax treatment, but because they fall into a different class of vehicles. So there's the 6,000 pound gross vehicle weight. So vehicles fall into different categories of which if your passenger vehicle is over £6,000, it falls into a more beneficial bucket from a tax perspective. So is it possible to do what you're doing? Yes. However, are you going to get the tax benefits that you think you're going to get? Most likely, no. And it can, it can actually cause more problems, especially if you're doing this in something like an S corporation. If you do this in an S corporation, well, you better hope that you have enough basis to take this loss in the first place. And without going into too much detail here, 179 is very commonly misunderstood and it's often capped at what you can actually take. So if your hope is not to use bonus because bonus is less now and you're hoping to take 179 on this asset, then it's a very good possibility that you're not even going to have enough basis in your business. By depreciating this 100, $150,000 vehicle to zero or as low as you can business use percentage, you're not going to have the basis to actually take that loss anyways. And the 179. And with this vehicle, I honestly don't encourage this at all. And I honestly don't like having clients put business vehicles on the books unless it is a 100% business vehicle. I'm talking like a delivery truck. I'm talking like a vehicle that is used to, you know, like you're a contractor and it's your work truck and you're driving it all day for business. Because when you start putting mixed use vehicles, listed asset vehicles on your balance sheet, you're going to cause a lot of problems from a tax perspective and a basis issue.

Great comments. And I want to answer your question, by the way. I don't care if you do cash or finance. From a tax perspective, it's irrelevant. The IRS does not care if you wrap the vehicle with vinyl. They do not. And you know some cool phone number that does not increase the write off. And financing or cash does not change the write off either. It's do you use it for business and how much as a percentage of business use versus personal. Now I'm not trying to talk down to you. I am so excited that if you have the financial wherewithal to Buy a G wagon with cash and it's your birthday and you've got a successful business and you can sustain that as a cost. Knock yourself out, enjoy. You know what? God bless you. If you're trying to do this with some sort of expectation for a tax benefit, it could be very precarious. And I would also just encourage you, even the most successful and wealthy clients of mine, let's think twice before buying a vehicle of this nature. I hope you're not buying new. Hopefully you're buying used. There's going to be a massive depreciation value. Kick on this. Buying new, driving it off the lot. I'd be very careful with that. And last point, if Donald Trump gets his wishes and we have bonus depreciation back to 100%, that's going to change this whole equation, too. Now, I'm much more interested in this because if you're leaning on 179 wholly for this strategy, not good like Bobby said. But if the Tax Cuts and Jobs act is brought back in almost its full effect and force and Congress gets their crap together and Trump gets what he wants, you might have a bonus depreciation strategy that could blow this out of the, make us even better. But we don't know yet. I might say have it, you know, go to, go to Cabo for your birthday and just wait and watch. Maybe the G wagon could be a viable strategy in the summer. Bobby.

Well, yeah, I think it's another reason to extend as well because we don't know there is a possibility. It's a small possibility, but you could retroactively change the tax code in the 2024 tax year. And if you already filed and you could have taken a larger bonus than you did because it was 40% or 60% when you filed and now it's back up to 100, you'll have to amend or file a superseding return. So basically filing an extension this year with all of the up in the air going on with Congress and a new president and what they're going to change, it might make sense for you and as well as what Mark said about possibly lowering your potential for, you know, a random audit. So I would just, I would just not buy a Do not buy vehicles for tax benefits. Buy vehicles because you need a vehicle in your business and just understand what you're doing by being in this bucket of it's greater than £6,000. So I have a possibility for a larger deduction, but that doesn't necessarily mean one. You can take it because it Might get capped due to basis issues or just business income issues. So I would just be. Just go into it with your eyes open. So that's, that's where I'll leave that.

I like that. Well, I want to do this with everyone. Every time I talk about tax strategies is always give them another idea or another option. I was just meeting with our tax pros today in a training and I said, hey, whenever your client asks a question, if you have to say yes or no, give them, no matter what, another idea to go with it. So I would say this to my G Wagon buyer, hey, it's your birthday, you obviously have a business or you wouldn't be asking this question. Do a tax deductible board meeting. Make sure you've got your board of advisors, set up board of directors, Go down to Mexico, go away for two or three days and have a business mastermind retreat with some really quality meetings. Doing your planning for the new year and take a tax write off for that. That would be an awesome birthday gift that you could give yourself. Sit back and wait and see what happens with the new tax legislation. Pull the trigger on a vehicle a little later in the year when you have more clarity on that strategy. But you could still have an awesome tax deductible birthday with a board meeting. And I love that strategy. Get your entities cleaned up, get new director minutes, get new bylaws done. Clean it up, call the law firm, let's get it done. Right. I think that'd be great. Any final strategies you want to give the crew today?

No, I. The other thing is like it's a listed asset, so if this thing ever falls below 50%, you're going to have to recapture your depreciation on it anyways. And I guess the one strategy I will throw out with this vehicle is you have a better chance of buying this vehicle later in a tax year where there's not that many days left in the year if you're trying because you have to track miles for sure no matter what. But if you buy this thing, call it today. You have to go the rest of this year not even using this thing personally at all. Every mile you drive personally is going to reduce the business use percentage. But if you buy this thing, call it November 1st. Well, now you only have to worry about two months of the year to rack up your miles of what is business versus personal. So it's just something else to be aware of. But if you do not actually plan on using this thing heavily in your business, and you don't need it for your business and you're looking for a tax strategy, I would look at other things that Mark teaches like you just mentioned.

I love it. Well, Bobby, thanks for joining me today. Tell your wife thank you for sharing you. I know you're in a different time zone. Everybody. Thanks for being here, being a part of the Main street idea of just having a small business and living your American dream as a real estate investor, as a business owner, I want to say thanks to my team, Kirby Danan. Thank you so much for being here and helping make this happen. And we'll see all of you for another live broadcast here in the coming days. I'm trying to get on the out there as quickly as possible when we see tax policy evolving. So, Bobby, thanks again. Thanks for being here.

Happy to be here anytime.

Thanks, everyone. See you soon.