Main Street Business Podcast | Open Forum

Welcome, everyone, to the Main Street Business podcast. This is Matt Sorenson along with my illustrious co host, Mark Kohler. That's me. Yeah. Now, well, I don't know if you knew this, but while you were away, I let everyone know you were, you know, off. And I explained that, Mark, that we're kind of like Maverick and Goose. You know, we co host the show, much like Maverick and Goose, you know, both fly the fighter jet, let them know that I was Maverick and you were Goose.

So that's what. You're Maverick and I'm Goose. Goose dies in the movie.

Goose dies. Forgot about that.

Yeah, but he has Megrind. I would have taken that.

That's true. That's true. Pros and cons. So. But it's obviously pleasure to be back and this week, pleasure to have you back, Mark. Sorry. Thank you. And this is the Open Forum show. This is one of our favorites.

Well, it is. And this is challenging. Matt and I were just sitting here going, whoo. Not only do we have a lot of questions, we have some hard questions. So we skip those, obviously. So sorry, people. We are going to do our best here to have some fun. It is very difficult for so many business owners to get a straight answer from a lawyer or an accountant. That makes sense. And if you'll put up with some of our dumb movie references or jokes or references to lyrics, and if we quote Jon Bon Jovi at some point, that's okay. You know, we're just going to have some fun. So please be patient. And we hope to wow you today. Open Forum.

Yeah. And if you. If you don't like it, we'll give you a full refund,

everything you paid for. Today. We will. In the past, we've done kind of a little tax and legal tip, but we're going to just jump into questions today. We have more questions than we'll be able to answer. We try to combine questions here and there when we can. Like, you know, John, Lorraine and Terrence had a similar question or something like that, and we're just gonna tag team here and go for it. We're also on YouTube. This broadcast tool is also on YouTube. For those that want to have a visual experience, you can switch from your phone if you're in the car and just switch over to the YouTube channel. The channel for this show is on my Mark Kohler YouTube channel. So just Google Main street business. Sorry, YouTube, search Kohler Main Street Business, and you'll. You'll get the channel. And right there, you're good to go.

Okay.

Any Other business.

No, I mean September 15th passed. I hope all of you that your partnerships or S corporations got your returns filed. It's September 16th now when we're recording this. So now the final stretch, October 15th for your personal returns or any of you sole proprietors. So just keep in mind those, those deadlines are looming. And I was also going to say, you know, we're starting to get a little more action on PPP with respect to forgiveness. So for those of you who did the PPP loans, you might be in the forgiveness process or thinking about finally getting ready to do that. We'll be doing a show upcoming on that or have some other content we'll be sharing on some of that PPP forgiveness. I know we have a few questions that came in on that too. I love it.

I agree. And I'm already starting to. So if you see us on the YouTube episode of this, we're going to be glancing down at our computers, pulling questions. We will have a audio question answering machine, if you will, that can help make it a little more entertaining with some of your voices with questions you pose in the future. But right now we're just doing email questions and we get a better recording and production so that it's more enjoyable to listen to while you're on the road. Matt, do you want to jump into a Covid Cares act question? It's kind of a part tax question, part 401k question. So can I pose it and then I'll answer the first part and throw the 401 part to you.

All right, let's do it.

Okay. This is from Mike. He says, I would like to know what the federal and state taxes do from the Cares act distribution, which will be from my 401k. Now I want to Mike, if you even got PPP or EIDL money, I want to hit that as well. But I will be. And then he says, I will be withdrawing the maximum of 100 grand. I live in California currently, but we'll be moving to Idaho next year. Good move, Mike. Save some taxes. Current AGI is $120,000 plus though AGI will be around 80 grand once I move there. I'm willing to pay the price to get out of California. Well, he's going to make less money moving to Idaho, but he's going to pay less in taxes and have a lower cost of living. Frankly, in my opinion, in certain parts of California, 120 grand AGI in California and your standard of living, it could be very equivalent. Well, equivalent to 80 grand. Adjust your gross income in Idaho, depending on where you go. Let me say this first, Matt, why don't you take the 401k piece? I don't want to talk too much. So when people get this 100 grand out of their 401k or IRA, could we say it that way?

Yep. Yeah. Now, the nice thing about this is you get to spread this over three years. So this distribution rule, this is for the CARES act for 2020 until December 31st. And by the way, the loan provision which allowed you to take a larger loan expires in like 10 days. Okay, that was seven to 10 days.

That.

That one goes out fast. But this distribution of 100k from a 401k or IRA, you can do over or you got until the end of the year. Now, there's no penalty to take it. So you get up to 100 grand. There's no early withdrawal penalty. So Mike won't be paying the 10% early withdrawal penalty. And he's going to get the tax to pay it over three years.

Can I ask Matt, I have a question of you. I can't is. It's either one or the other. I either pay all the tax on the 100 grand now in this year or on my 2020 return, or I have to spread it out over three years. I can't wait. And pay all the tax at once in three years.

Exactly. So you can opt to pay it all now. So if you did have a really crappy year, income wise, and that's why you're taking the distribution, you know, take it all this year. Now, Mike, I don't know your situation this year with future years, but you, you may want to stretch it out over three years because you'll be an Idaho resident for the next two years, which is gonna have a lower state income tax, because if you're paying that tax over three years, you're gonna get. Maybe this year you'll have to pay take. So you'll take 100k, you'll put 33,000 on your tax return for 2020, which you're probably gonna have to be a California resident. Right. And paying federal. And then 2021 and 2022, you'll take the next 33,000. The next 33,000. But those are going to be Idaho state income taxes, which will likely be less. Now, your income brackets might not be too big of a difference. I don't know. In the California brackets versus Idaho, I think Idaho's a little more flat. But that's how it's going to Work, you'll get it over three years. Like Mark said, you can take it all in lump sum in terms of paying tax on one year, or you can pay it in one thirds over a three year window. Now the other cool thing about this is you can put the money back in. Let's say you recover financially and you're like, oh, I actually don't need all this money anymore. You could put the money back in to the, to the, to the 401k or you can even set up a self directed IRA. Let's say you took it out from your old 401k or from your 401k, Mike, you could put it into an IRA next year. If you're like, oh, in fact, even up to the three year window, you can put it all back in.

Now I would also say last thing too. Like Matt said, you've got 10 days to make a major decision. Don't do a distribution, just do a loan. Just do a loan and then you bought yourself even more time to figure out. Now let's say, Matt, the loan, you

have to make quarterly payments though. That's the one thing.

The tax on a third of it probably.

Yeah.

Payments over a five year term though.

Yes.

Okay. Yeah, I don't know. I'd run the math both ways because if you did the loan over a five year term with quarterly payments, it's probably going to be less than the tax on a third of it. So do the math on a cash flow state basis. Let's say Mike wakes up, Matt, even a year from now, living in Idaho or two years from now and says, you know what, I can't make the loan payments, I'll just freaking take the distribution. Can he still get the CARES act treatment or would he have a 10% penalty?

Let's say he wakes up in by December 31st of 2020 and thinks that then I think he could default the loan. Call it a CARES act distribution. He'd have to work through his administrator. But if he did this In January of 2021, it's done. It's a loan. Paying it back over five years. You're not gonna be able to get it back in.

All right, now you can get it back in.

Sorry. You can get it back in on the loan, of course.

But yeah, I don't know. So, Mike, I think you've got some really big decisions to make here. And anybody that's wanting to pull money out of a 401k or an IRA, you can borrow from the 401k or take the 100 grand up to 100 grand. Borrow or take out up to 100 grand. And we've already explained those provisions with an Iraq, you can't borrow from it. You could take the 100 grand from an IRA and then have that same three year payback rule on the taxes. Okay, now here's another major point for everybody. We're still waiting to hear how this is going to play out with Congress and the irs. The IRS is kind of digging their heels in. When you got the PPP money. Let's say you're out there and you're a small business owner and you got a $25,000 PPP Paycheck Protection Program loan, you're probably now getting ready to do your application to get it forgiven. Matt and I will be holding some specific radio shows and webinars and probably some Facebook or YouTube lives on that itself just to help you out. If you'd like a consultation with one of our attorneys, you can always call and do that for a half hour and we'll bring you up to speed on your particular situation. But here's what's weird. Congress intended that paycheck protection loan to be given to you and then forgiven. And if you spent that money on payroll, rent, lease payments, blah, blah, blah, all the things we've talked about before, you get a write off for those items. But you don't have to claim this paycheck protection program check as income. Well, the IRS is like, now if you used any expense for which you use PPP money, you don't get a write off for that. Well, that's the same thing as saying the money that came in is taxable income. So Congress and IRS are both battling this out in the news and with statements back and forth, we don't know where it stands right now. Matt, have you heard anything?

No, I have not heard any updates. There was provisions and proposed bills in Congress that who knows if they were gonna make it into this last stimulus round that was going to fix that and clarify that PPP could be. Even though you used the money, it could and it was forgiven, you could expense it. But the problem was, yeah, the IRS came out with a position saying there's prior tax history and cases that say if you used money debt that was forgiven and you used it on business expenses, if the debt was forgiven, then you don't get a classified as a business expense. The problem was the CARES act itself specifically said there is no forgiveness of debt income on this money, which meant Congress intended this something different. So we'll track that. Obviously I'm waiting for the next stimulus bill to happen. We're going to write an article and give you an update, of course.

Gosh, we've got so many questions today. But one last thing on this is Mnuchin, the Treasury Secretary. He's in a quandary because when they give out this trillion dollars in benefits and then everybody gets a write off for a trillion dollars for the money that you don't have to claim as income, that's a big hit to the irs. So when everybody says, oh, the CARES act cost this much. If everybody gets a write off for what they were able to spend the money on, that means you got to do the math and go, it costs this plus the lost revenue on the deduction we gave everybody for income we

didn't make them claim.

Does that make sense? So it is kind of a crappy deal for all of us as American taxpayers. Cause we're gonna end up paying the bill somehow. I don't know.

Right.

Bigger picture, big picture stuff. Okay, Matt, you get to choose the next question.

Okay. This was from Scott in Michigan. He writes, I have four rental properties, each in an LLC. I presume he means separate LLCs. Can I place the four LLCs into a personal property trust, then place the personal property trust in the Wyoming llc. What would you charge for the personal property trust in the Wyoming llc? Okay, so let's go over the structure. So Scott's got four rentals, each has an LLC. He says each in an LLC. Presumably he's got four LLCs too. Now he wants the LLC. He says, Can I place the four LLCs into a personal property trust? Okay, so you have personal property trust, own an llc, and then the personal property trust owned by a Wyoming llc. And then presumably you finally own the Wyoming llc or your estate plan, your revocable living trust. Scott, let me say this is not our. This is not our shtick. This is not our style. The personal property trust thing here. I don't know. Someone gave you this idea. I don't love it. Why? That's my first question. Why? What's it gonna do?

Well, Matt, it's better asset protection. And the guy at the Holiday Inn scared the hell out of us and said this was the way to do it. And I bet you darn well, Scott, they're trying to charge you three to five grand to do this for you.

Yeah. No legit lawyer? None. Does these personal property trust structures or these land trust structures. It is a very unique scenario when you use them. And the typical Real estate investor owning rental properties is just not the general planning. It's generally people that basically sell a trust document. They're not attorneys out there pitching this. I like the Wyoming llc. You got four properties. Maybe you've got a lot of equity in those, Scott, and you want kind of this charging order protection from a Wyoming llc. So you've got the four rentals each in their own llc, and that's great. If something goes wrong on one property, the plaintiff can't sue you. They can't get over to the other LLCs that own separate properties. You've got really good barriers of asset protection there with your four properties, each owned in its own separate llc. I like that.

Yeah.

You could use the Wyoming llc. We do do that. That. That can give some privacy. It also could give some, what we call charging order protection. But I'd skip the personal property trust.

Yeah. And, Scott, I'll say this another way. When Matt says, this isn't our shtick. We know this. It's our shtick. We know what you're trying to do generally, I think, based on the limited facts you gave us, but we know this area. And I say this humbly, but this is what we do every day. And so what do you.

What.

I would rephrase it and say, we know this stuff, but we would never recommend what design you just proposed. And in fact, I don't think I've seen a client ever do it that way ever. Now, we're talking 20 years and thousands and thousands of clients. Now, I'm not trying to be talked down to you, Scott. Someone obviously proposed this to you, so I'd be very wary of who did that. And the last thing I would say is just get a consult with one of my tax attorneys. It's going to cost you 3, 400 bucks in one hour. They'll address your privacy concern, your protection concern, give you a proposed diagram that intuitively makes sense. I can bet you it's going to be cheaper than what you're doing now. And then you can say, I got a B, you want to go get a C, Go get a third opinion. But I'm not signing off on the first option. I don't like it. Okay. Got a question from Doug down in Florida, and he says, this is kind of interesting, Matt. He said, I have seen you talk about investing in businesses with your 401k or IRA, but the talk has always been limited to just taking a loan from it and paying it back. I don't know what talk that is. That's not us. Yeah, I'm not.

You could do that to start your own small business.

Yeah.

Obviously you can invest your IRA or 401k and other personal business, people's businesses, but your own personal business that's possibly doing a solo can alone. Yeah.

Yeah. I just want to say this to Doug when you say. But the talk has always been that may be out in your circles, but not in our circle. We would generally not want you to borrow from a 401k. We would rather have you invest it. Which brings us to part two of diversity. Doug's statement. He says, but what I want to know is, can the 401k IRA own in capital letters the business and therefore receive all the gains and it all goes into my retirement? Well, yes, Doug, that's what we talk about. That's what we want you to do. That is called self directing. It would be, he says it would be a C Corp. I don't need a salary or to be involved in a daily basis. Okay, now I presume you're talking C Corp, Doug, because it's an operational business. Let's think restaurant. And that's right, a C Corp would be the way to go. Yeah. We call that a blocker. C Corp. You can go to Matt's book, the SD IRA handbook. Go to the index and look up the word blocker Corporation. That's what this C Corp is you're talking about. And then, Matt, I'm going to shut up. I know you're the master of all this. But then he says, I know about the Robs option and everybody. I'm not going to go there. Guidant is the leader in this area out of Seattle. Do your homework on Robs if you want to look at it. We've even had the CEO of Guidant on our show. He says, I know about the Robs option, but it seems like I don't need that because I don't want a salary. I'm not involved. I'm not working at the restaurant, just looking to invest in what I know best. He says in caps, which is small business. Well, Doug, you probably have just bumped into us or found us and you're getting up to speed on our dialogue. But dude, we are cut from the same cloth. We want you to self direct out 401k. We like the C Corp as a blocker and yes, all the profits will go to your C Corp. Our attorneys are setting up those entities every day around the country for more affordable than you're going to find out there with a comfort letter. Explaining what the freak you just got. So we're on board. Dude, I don't know. Matt, did you want to say any. I didn't mean to steal the thunder there. Next question, jurors.

But I. Yeah, and Doug, Doug phrased his question right because he emphasized that he's not going to be involved on a daily basis and taking a salary. So many times people come to us and say, all right, I want my self directed IRA to buy this franchise and I'm going to work in it every day and be the manager and take a salary. Well, that's different. That's. There's some. And that's where you get into this Robs thing that Doug mentioned. But if you're like, no, I'm not going to work in it. I just want my IRA to make a good investment. I'm going to own the small business and I'm going to oversee it and make sure things are going right. But someone's going to run it. There's someone else that's gonna be the manager of this small business that's handling the things. I'm gonna have Michael Scott, regional manager run this thing. So that's absolutely fine. We love it. I like the C corp. You're thinking ahead too, if it's gonna have UBIT tax and an operational business. So yeah, let's do it. We can certainly help. We can help with the IRA at directed ira, of course, and then in KQS lawyers, we can help set up the C Corp. We usually do an LLC taxed as a C corp. Actually there's a couple reasons I like to do that. But we can do an LLC tax as a C corp and then you get the blocker. You can be manager to oversee things. Have someone run it on a daily basis. Don't take a salary, you're off the races. We do that once a week. I'm doing that once a week with someone.

Well, okay. Like Matt, your question.

You know, it's funny, I was looking at that same question too. So let me ask you this. This is what. This is an HSA question from Jenny.

Yeah, you're looking at Jenny in Texas. I'm looking at that one too.

Okay. She says, love listening to your show. Thank you. Thank you, Jenny. We do need a little, you know. We appreciate that. I'm wondering if we can still contribute to our HSA this year. Says even though my husband was laid off as of August of this year, can we still contribute until December 31st? Is there too late? Since he no longer has the high Deductible insurance. Thanks. Wow.

Jenny, I'm going to give you the, what I believe, the technical. Matt, is that okay if I give it a shot?

Yes, yes.

Matt knows I love HSAs. Matt's the authority on Roths and 401ks more so than I am. And we both are yoked equally in almost every topic. But we do have our areas of specialty, the health savings account. I think the technical answer is going to be on the day of your contribution, did you have a high deductible plan? I think if you were in a IRS audit court case, that would be probably the test. If you had the high deductible plan in the first six months of the year and then you went to go contribute to your HSA at the end of the year when you didn't have insurance, I think technically you'd have a problem. But I will say this practically, I haven't even heard. I haven't even seen an audit ever in any publication or CE on this type of issue. And I think the IRS and the government is more interested in you saving for health care, making contributions. It's in our. It's a policy issue that's good for our economy and our country for you to make that contribution. And I think if you did have a high deductible plan during the year and you hurry and make a contribution, I don't think your risk, your audit risk or exposure is dramatic at all. The worst case scenario is they just take away your HSA write off. So. And if your husband lost his job earlier in the year, making a contribution to the HSA and recycling it out for some expenses that you've had in medical would be appropriate because money's probably tight. So I think you're going to be okay, Jenny. But I just want to cover our butt too and tell you technically what the. I don't know, man.

Yeah, yeah. The other thing is like, I don't know if you did COBRA insurance on it or, you know, when they left the employer.

So.

Okay, you want to hit the next one you want me to bring up?

I got a. Your call, your call. It's all you.

Okay. This was from Curtis. Curtis says I have a self directed solo 401k. All the money is in a four in the 401k is Roth dollars. Now, we had a show last week on the solo K. We talked about this. So if you're like, what is a solo K? Last week's Main street business podcast, Kevin Kennedy and I went over. That is a pretty good Podcast have to say, even though we didn't have the amazing Mark Kohler, we did okay.

And I know that hurts even more because it was actually two weeks ago, because last week we recorded the. Protecting our personal residents. But that's okay.

If you got all that amazing.

Those amazing things I said in last week's show, it's fine.

This is true. All right. Life moves fast. All right. Says I only have one checking account. My question is, do I need to have two different checking accounts, a Roth account and a traditional account? I did roll traditional dollars into the 401k, but I quickly converted it all to Roth dollars and pay the taxes. I'm concerned I might have done the conversion wrong with only using one account. You do need to separate traditional and Roth dollars. So if you do have traditional dollars and Roth dollars, the guidance is set up a traditional bank account. Set up a Roth bank account in the Solo K, track those investment dollars separately. You know, the returns on those monies have to be treated separate. Now, if you converted everything to Roth, Curtis, let's say you set up the Solo K, you rolled over some traditional dollars, converted every penny of it to Roth, and it immediately was Roth, and then you made some new Roth contributions. I wouldn't stress about it, but if you had, at a point the account sitting with some traditional dollars, some Roth dollars, then you converted it, you kind of did it wrong. So. Because you're not supposed to mix them into a separate account. So my recommendation, anyone with Roth and traditional, even if you're going to convert, is have a separate bank account for traditional, move the money into it that's coming traditional, let's say, from an IRA or the 401k or even your new contributions, then convert them and transfer them over to the Roth account. Now, again, Curtis, if you just. The only money you ever had was this traditional that came in, that converted to Roth, don't worry about it. The bank account just basically became Roth. So I wouldn't stress too much about it either way, Curtis, though, but because as long as you can have some accounting and records, you'll be fine in an audit. You just might have some additional questions answered because you didn't keep it separate.

I like it. I'm not gonna add anything to that. It was wonderful. Now, we have a question from William in California. He says, what is your next book going to be about and when is it coming out? I'm sure William was talking to me, not Matt, for that question.

That was definitely. Mark's got four books, so he's a Prolific writer. Some would say prolific.

I got four books, plus the workbook, plus two ebooks. I'm out there, I'm writing. I love writing. My next book is. I really. It's been kind of formulating over the last few months really. And I want to do this is eight steps to start and grow your business. I want to do eight steps to start your financial foundation or build your financial foundation. I know I'm not a financial advisor licensed as a broker dealer agent under PfP, all the different things that you might be called. But definitely Matt and I are helping people with their finances every day, day in and day out. And people are asking me constantly, well, what type of account should I set up? Should I buy a rental property? How do I fund a retirement account? And I think if anybody should be answering the bulk of those questions, it's your accountant or your business advisor, not always your broker. Who's going to just trade stocks for you. I don't know. Now there's certified financial planners and advisors that are phenomenal. But I think for the average person, I'm going to give it a shot. So that's what I'm doing. I've got a book for Matt. I've been begging him to do

it's.

Anyway, I was going to make a dumb joke. I'll leave it alone. I was going to say Matt's got the SDIRA Handbook and that's the Self Directed IRA Handbook and sdirahandbook.com I would love Matt to write in his second edition the book. However, the SD the Self Directed 401k for small business owners. So it'd be the SD 401k handbook.com. that's the one I'd like Matt to write. And I think there's a lot of small business owners that would like that. Just like the Show Matt did two weeks ago on solo 401ks. But I don't know Matt. I. Did I put words in your mouth. Have you got a book in mind?

I do have a book, but that's not it. That is that my stuff. My solo K chapter is 52 pages in the self directed diary handbook. So people want that. There's. I mean that's the best content on solo case out there, I think.

So does your book involve wizards in prep school or vampires in the Northwest? I just don't know. Or is it. Yeah, any shade of gray, black or blue?

Yeah, it's a. I got a good book coming up. You'll. You'll hear about it. Basically a letter to my Daughters. Just things like a. It's like, what would I tell my kids, you know, as they're going into adulthood? I've been, I've been, I've been working it. I got a pretty good outline, some nuggets of wisdom to pass on.

I like it. I like it. I'll read it. Okay, next question from Anna in Montana or Ann. Sorry, I don't have my glasses right. So if you're watching the YouTube channel, you're seeing me squint crazily. I forgot my glasses on my home office desk and says for a higher W2 earner with a side hustle, do you recommend the S Corp? Hmm, great question. If I make 200 grand with my W2 and 150 grand net from my side hustle, won't the S corp mean I pay more self employment tax since my business will pay employer side Social Security when I won't pay. If I had a schedule SE on my 1040, is there a point you'd see an S corp not helping. Wow, I wish I could throw up a whiteboard. Matt, do you want to take a stab or do you want me to run some numbers real quick for. I got it.

Yeah, yeah, go ahead and run the numbers. But that's a great question. I like where she's going on this 150,000 net income on a side hustle is great. By the way, why are you working the day job making 200 grand? Do this side hustle is making 150 on the side. Just do that more I guess.

But now here's the problem. I don't know if she's married or single. And so that's going to change the equation. So I'm going to assume, since she didn't mention any sort of husband in the mix, I'm going to go with single. Now here's the math. Ann first, Ann has a fallacy. She says, well, won't the S corp mean I pay more in self employment tax? No. Self employment tax by its nature is built for you to pay less than self employment tax. It will help you pay less in self employment. The question is how much and is it worth setting up the S corp? But right out of the gate, if you don't do an S corp, you're going to pay more. It's going to go through your 1040 schedule SE and here's your rate.

Let me say it another way. The S. By adding the S corp you will not pay. You can never pay more self employment tax by having the S corp. That will not Cause more self employment tax than without it.

I like the way you said that. Now I've got to go to my calculator here and I'm gonna, I'm not gonna. If we had a webinar and I do webinars on my website, go sign up for them, they're 20 bucks a month. And I do a full webinar on all sorts of topics and I have one on this where I have a whiteboard and I go in more detail. But since this is our podcast, I'm just gonna tell you the Math on your 150,000. Even if you just do a Schedule SE or your LLC. Because remember, LLC don't save taxes. So if you just run it through as a sole prop side hustle or an LLC, you're going to pay 0.038. That's 3.8% on the 150,000. Okay, the 100, that is $5,700. Now if we did an S corp, I would want to understand again your family situation, the type of business, how much time you spend in it. But I think conservatively even I might do 50 grand in payroll. So in that, and I probably would even do be more aggressive than that, that means you're going to save $3,800. So in summary everybody, for Ann's situation with the side hustle, based on her numbers, if she's single starting an S corp, under our equation of a $50,000 salary in her S Corp and 100,000 in pass through, she would save $3,800. She has to ask herself, is setting up and maintaining and doing the tax return for $3,800 worth it? And that's what we do in a consult.

Yeah, let me hit a couple other things on that. Just everybody knows too. The context of her question is you phase out on certain self employment tax. So once you hit like 130. 130, you don't pay more in about the 15.3% goes to the 3.8, goes to 2.9. 2.9.

Okay. Up until 200 grand if you're single, 250 if you're married. Then after that you add 9% for Obamacare.

Oh yes. Okay.

So that's why in her situation, since she already has a 200,000 W2, everything above that is 3.8.

Okay.

So Matt, I love where Matt's going with this people. There's stages so we have to kind of carve out what's your rate going to be based on your day job? Keep going I love it, Matt.

Yeah. And so this is a little more nuanced planning for the small business owner that's like well it's all, all I do is I don't have a day job where I'm making 200 grand and basically getting to the lower self employment tax rates. You're always going to be better off in an S corp. Always. Okay. And here's another benefit though and audit risk. If you're a sole prop and all other things you're expensing on your sole prop you're like was it 10 to 13 times more likely to get audited in your sole prop on schedule C than your S corp tax return is? So you have some audit risk. You know, I don't know what the expenses and deductions and even if you're doing everything clean, squeaky clean, just having to get audited is a pain in the butt. So there's a little bit of audit protection by doing the S Corp too.

Yeah, I'd say a lot. It's 15 times I think you said Matt, 15 times less chance of an audit. So. And I'm going to want you to be very aggressive with your write offs and we're going to be aggressive with your payroll level and you got a day job for 200 grand, you're going to have a pretty good argument to take a smaller salary in that because who has 80 hours or 90 hours a week to work every week, you can't sustain that. So I think there's some good things there. Alright. Anyway and get a consult with us for 3,800 bucks in savings or more and the limitation and audit risk, I, I'd probably do it S corp but

I would think what's the future? Are you looking to build that business? Is that side hustle going to turn into your regular business? If so, I'm more inclined to do the S corp because eventually that day job is going to go away and that income and then you're just going to be doing your salary just out of the S corp and maybe at that point you're making a 400 grand and you're taking a, you know, $120,000 W2. You have a ton of self employment tax savings.

And for all of you listening here, here's a one last nuance that's important is we're almost at October 1st so if Ann called our office today, unless she has an llc, I can back date to an S corp. She didn't mention that, so I don't know. But if she doesn't have an LLC. I'm starting an S Corp October 1, so I'm only getting the benefit of three months. And because we want our clients to respect us and appreciate transparency and honesty, if she was to call us, our attorneys know to tell her, Ann, let's take all your info, make a plan, pull the trigger in December. So new s Corp starts January 1, 2021. And that's where Matt's question about what's the future hold is so important, because you can't set up an S corp today and save the whole year, Ann, Unless, again, you had this LLC going on. So this is where, again, that consultation will help you out. But more than likely, any of you listening? If you need an S corp, we can only create one for the last three months of the year. And a lot of times we'll create one in December. Depending on what income is coming in, an S corp could still make sense. It could still make sense on December 1st. Just depends on your income. Got to figure it out. Okay, Matt, I'll throw this one at you. This is from Gil down in New Orleans. Dodging hurricanes. That's what Gil says here. And God bless you. Are we dodging fires in California, hurricanes in Louisiana, or Covid on the streets of New York? We are living in a weird place, people. Okay, weird time. Gil says I keep hearing about the tax benefits of rental property, but what about owning a property like an empty lot or undeveloped acreage? Any benefit?

Okay, no tax benefit. So you would do it for investment purposes, though.

Thanks for letting him down easy, Matt, but kick him while he's down.

Yeah, well, I was trying to say, you know, giving him a kind of a. You call, I guess, a crap sandwich. I was. You know, there's some others. There's another side to this. You know, there's no tax benefits like a rental property. You get an expense and depreciate the cost of the property, the building, the infrastructure on it, over the life that you own it. You know, single family, where you get 27 years and so. So you're getting an auto deduction every year for having a rental property that gets to offset the rental income. It's great land, though. You don't get to depreciate land, so there's no tax benefit to it. If you, you know, I guess you could lease it out and have some income on it and maybe some expenses for it. You could take against that property taxes or maintenance of it. But if you're buying just raw land for investment purposes, you're simply doing it for a good investment. And Mark and I have done that. We have some land, you know, that we've bought for investment purposes and we're holding it. It's basically a zero coming through on the tax return. There's some expenses, but we don't get nothing out of that thing from a tax benefit. But we're not doing it for that. We bought it because we think it's going to be valuable in the future.

Yeah. And buying raw land in an IRA or a 401k could be a wonderful deal because it's so hands off. And buying raw land is not a bad thing. But don't do it for tax benefits. Another way to say it. Okay. Terrence from Pittsburgh, Pennsylvania sends a fairly lengthy question and I'm going to dodge it because at the beginning in the first sentence, he says, I can't wait to meet with Christy Parker for my cleanup next week and go over my entity. I did it myself. I need a cleanup now.

First.

Terrence, your question is quite involved. Christy's going to be able to answer that in your consultation and it would probably be inappropriate for the show to hijack it with this question. And I love your question, by the way. But this is two side notes for everybody listening. Thank you so much. For many of you that do use our law firm for some consulting from time to time. We have five associates that are just fantastic. Christy Parker is our newest associate. Last year we are looking to hire right now. We have someone already in the pipeline for next year. We're continuing to grow. We love being of help to so many Main street businesses. If any of you today feel like, oh my gosh, I, I need to talk, I need more. When you call the office, don't be frustrated if it's a one week to two week wait to get with one of the attorneys, but they're going to be able to do a better job not trying to cram too much into one day and overwhelming our staff and our attorneys. So be patient. We'll take care of you. If it's urgent, urgent, urgent, you tell the staff.

Let me say this just like any professional or anybody who's good at anything, if you can call them and they're available that day or the next day without having to work their schedule, that's a sign that they haven't done a good job in their business. People don't come back to them. So that's almost a red flag.

Yeah. If your brain surgeon's available tomorrow for surgery, maybe not the right brain surgeon. Just throwing that Out.

You're the only person in line waiting for that.

Everybody, like, go ahead, go ahead.

Number two, why you need brain surgery.

Yeah. Terrence also says, I'm doing my cleanup right now. We have a cleanup service where we take your old S Corp, or llc, that's a disaster. One sheet of paper in the drawer. And for 499 for one month out of the year, we do a discount and get that tidied up with bylaws and minutes and a book. Anything you need at the state or the irs. If there's a filing fee, we pass that on. But all the work and mailing is included in that 499. And you get a half hour, one of our tax attorneys to talk about whatever the heck you want. So that's what Terrence is going to take advantage of next week. And if any of you want that cleanup or need it and could do a half hour call on your tax or legal situation, take advantage of. It's a great deal. And you go to our website, kkoslawyers.com the links down below in the bar. You can see it there if you're on YouTube, kkoslawyers.com and get your cleanup started. All right, Matt, your question.

All right. This is from Michael from Washington. Says, my friend has an LLC in the state of California. My friend.

Yeah, my friend. Did he go, my friend has a corporation in California. Were you recently on American Greed? Okay, go ahead.

It's okay, Michael. It's okay. This is attorney client privilege. Don't worry.

She said no one else will know.

Yeah. She has never done business in California and doesn't have an ein for the LLC. For the past two years, she has paid the $800 franchise tax in California. She hasn't paid it this year since she's not sure she would have, whether she should have even paid it in the past. The main reason for the LLC was to preserve the name for a future business. Interesting. Okay, we'll come back to that two part question Harry's got. Does she need to pay the franchise tax in California? Let's hit that one first. Then we'll get question number two. What I would do immediately, Michael, dissolve the LLC immediately. I don't see any reason for it. There's no business happening right now. We're going to come back to the name. The whole purpose for setting up the LLC was the name, which is not the right way to do it. Not cost effective, as you're finding out now, better ways to do it. But for the franchise tax purposes, Mark. And correct me if I'm wrong, I mean, you're the cpa. Here is when you close out an llc, you can file and say on your final franchise tax return that, hey, we are no longer conducting business. We didn't have any business this year. And you can get out of the franchise tax. In the last year, I've seen clients that by certifying that they did not engage in any business. I don't know the timeframe on that. If there's windows that you have to meet on how far into the year you can be. Yeah, yeah.

It's not easy and to get that. But it's true. It's possible. But I was going to ask. Did he say she was a resident of California or that she lives in Washington with him?

Doesn't say.

Okay. But if there's not a foreseeable use for that entity would get rid of it right away. And I'll answer part B. Probably. Matt, you were gonna. Okay.

Yeah.

Is just do a DBA doing business has just reserve the name and sometimes the URL.

That's what they'll call in California. Fictitious name.

Yeah, fictitious name reservation. It's done at the county level, not the state level, but in. Our paralegals can help you with that. But it's not worth the $800. And it's more than that, too. The 800 is to the Franchise Tax Board. You still have the Secretary of State of California. You've got to file paperwork. And if you get behind on all this, there's penalties. This is going to be costing her a grand a year just to hold this darn thing together. And a fictitious name reservation is under 100 bucks.

So I would. Another thing too is if this is a. You know, something that was worth enough to get an LLC going with a name you may want to look at even doing a trademark. And that's another option.

I mean, you.

You could set up a whole trademark for fees of. You know, I think we charge. We charge 750 plus the USPTO filing fee is about 350. So you're like 1100 bucks for a full trademark. That's going to protect that name in all 50 states. See, that fictitious name is only going to protect you in California. It's not going to protect it outside of that.

Yeah. And call it. It's crazy. And call up danica patrick@godaddy.com and find out if. Do you even have the URL? If you don't have the URL, you might be chasing your tail anyway. In my opinion, from a marketing and business operational standpoint, if you don't have the URL, I don't care what the name of your entity is in Ohio, Nebraska or Arizona. Because the web is going to control what you really are able to market. The real question here is Michael, and let's get into it. Is this the girl for you? I know I. I have maintained the website taxmatch.com and I'd like to see her. I'd like to see your 1040. Is she a real estate professional? What's her income? Does she rent? Does she own?

Yeah.

I like the fact that she took the initiative to create an entity that shows some gumption. You know, Matt, that, that shows vision.

She's got a little bit of go getter in her. Yeah, yeah, that's good.

And apparently she's reaching out for help. That's good. You could look like her knight in shining armor. This could be a big turning point in the relationship, I would say. You know what? I really researched this out for you. And tell her that you called us, paid for a consultation, and you, you did her a solid. You went the extra mile for. I think that that could be a good move.

Yeah. So we hope that helps Michael.

Yeah. I like where you're going with her, though. You know, just be careful before you propose. Let's make sure there's a good tax match on the return.

Yeah. Okay.

That's what's more important.

Yeah.

I don't care if you love her.

Okay.

Okay.

All right. All right. I got a question here from Chuck from Chicago.

Chuck. I love the name Chuck. Cool name.

You know what I love too? Is Hank Henry. The same Hank. Yeah.

Chuck. I love it. I don't know how they ever went from Richard to the D word.

That one didn't. That's my grandpa, actually.

As he got older. Did they change it back to Richard?

No, he still. I mean, his friends and my grandma. Dick. Burt. Good, good, good guy. Anyway.

But Chuck, Chuck, we're on.

We're on Team Chuck. Yeah, that's a good one. He says, from a liability perspective, what are the disadvantages of using a solo K for investing purposes? How can an investor mitigate the potential risk to one substantial retirement retirement funds in a solo K if used. It's a good question. Couple things. When you're self directing your solo K, think of your solo K as it's not you. Right. But you're the trustee of it. You're making the decisions on it. So let's say you've got a Rental property that the solo K owns, someone slips and falls on it, who are they going to sue? They're going to sue the solo K that owns it and they're going to sue the trustee who's managing it, which is you personally. Now that can create liability for not only your solo K but for you personally. And that's happened. There's cases of that plans and the trustee getting sued. What we like, if you're doing certain liability producing investments like a rental property, it can create liabilities, you know, is use an llc just like we do an ira LLC or an llc. If you personally own a property that's going to protect the solo K and you personally as trustee from liability that happens on the property. So that's liability protection 101 from just protecting the solo K and you personally from risks that are caused by the assets that the solo K has. Now you might be doing a brokerage account or you're doing private notes, you know, and those are paper assets that don't generally create liabilities for the solo care you personally. The other side of that I was going to say is, what about you personally, Chuck? Someone coming, you know, you get a, you get a car accident, you default on a business loan you personally guaranteed somewhere and you got a creditor chasing you down personally that now wants to get into your retirement accounts. Now, solo Ks are kind of protected like IRAs in general. I've got an article on SDRA Handbook on this. They're not ERISA plans. They do not get ERISA creditor protection. So it's gonna come down to your state in Illinois and how they treat IRAs, essentially for creditor protection, which most states do a good job and protect. California being the one exception to that, preventing a creditor from getting into your solo 401k.

Okay, are you done with that answer yet, for crying out loud? Yeah.

Do you want to say something? I've done by the hour, you know, I get, I'm just giving a comprehensive.

We probably caused two car accidents during that answer somewhere. You know, now the studio's looking over at me like, you've got to quit petting your dog here. I'm going to show our next tax write off here. Here we go. This is our office comfort animal. Okay. I even bought the little vest that

says, I thought that was the watchdog. You can ride up under the security system for them.

Yeah, she's not a killer. This is Winnie.

For those that want, you know, I mean, most alarms just give a sound. They don't, you know.

Yeah, she'll just come up and lick you. She's not a killer. But here's the point. Your animal that does qualify as, as a comfort animal, if you get a prescription from your dog is a tax write off and paid for by your hsa. Could be an expensive dog that you had from a breeder. Their food, their vet bills. So Winnie just brings a lot of love to the studio. Right? We're getting thumbs up. Yeah, everybody's in on her. So she just follows me around and I'm trying to give this show and she's down there just looking up at me. Please hold me. Okay, now that was your other tax tip for the day, people. Okay, now I've got, I'm going to go. One last question, Matt, and you can choose one of your favorites. This is a, this is a hard one, emotionally. First, it's another listener named Mark with a K. So appreciate that Kindred spirit located in Boise, Idaho. And he says, we'd love to have your firm help us. Not sure how cross state legal advice works. Well, buddy Mark, we're helping cross country so you being in Boise is the least of our problems. So don't stress about that. We in fact want everybody to know. We're like, well, they did this podcast and they're out of Arizona and Idaho, California, Utah. We have more clients around the country than in California, Idaho and Arizona. So don't stress about that. The type of planning we do is so boundaryless, for lack of a better word, with business asset protection tax money. So he says, this is the sad part. He says my father in law was a businessman who just passed away from COVID He left a bit of a mess. He left it behind with a less left us behind with a business in the final stages of selling and more besides that. I'm working if there are, I'm wondering if there's any strategies that we can use to reduce the tax burden on my mother in law in the asset sale or if there is just any other advice you might have. We are expecting the sale to close in October. Then the company will be closed hopefully by the end of December. Those of us left behind are not as versed as my father in law was in the business. And grieving definitely clouds the mind from clear thinking. So Mark, our hearts go out to you. It's just again such an odd time that we're living in now in America, in this world. So I've got good news, Mark. All right. Now this is important, everybody. And this is something that President Biden has addressed in his tax plan for business owners.

Is he president already? Jeez. Did you just call the election?

Oh, no, I just said. Did I say President Biden? Oh my gosh. Oh my gosh. No, I'm not trying to provide any subliminal thoughts. My studio the other day said, dude, you can't because I want to say Vice President Biden or then what do you say? You can't say President Elect candidate Joe Biden. Candidate Joe Biden. That's what I meant. I did a pod of live YouTube Facebook last week for over an hour on Joe Biden's tax plan for small business owners. He may be great with the environment, he may be great in other ways. I'm not advocating for Trump, I'm just telling you, if you're a small business owner, it's not great. And you can see 30,000 other articles out there on that point.

That's mild, it's not great. That's a little mild.

But I don't know what to say. I mean, I'm not trying to, hey, Trump is a train wreck in some ways, he's great in others. Joe Biden great in some train wreck and others. Everybody has to decide what's important to them. So I'm just telling you from a tax standpoint what's going on. And he is dealing with this very issue in his tax plan. So here's what's going on. When Mark's father in law dies, so let's just call him dad, dad dies, the family gets a stepped up basis to the value of any assets dad owned. Now Dad's married, so we've got some community property or jointly owned property issues that we've got to deal with. But in some ways a good tax advisor. Depending on what documentation mom and dad have already done in their estate planning, we might be able to show that that entire business was Dad's. So what that means is all the assets in the business and the business itself is stepped up to this value. So let's say the business is worth a million dollars and that's what you're going to sell it for. But dad started it on a shoestring. He's depreciated the crap out of everything. And if dad was still alive and sold it, he'd pay tax on a million dollars. But one of the best tax strategies is dying. Now. I don't think Mark appreciates that joke. I'm sorry, Mark, but the point is when you die, your family gets stepped up basis. So when you go out to sell this business for dad, you're going to get a stepped up basis to fair market value. And there's zero tax.

Now, and the basis, everybody keep in mind, the basis is your starting line to determine your gain. So he started that business at a thousand bucks, and that's the only thing he has that he's put into it from day one because he did it on a shoestring and he built it over a lifetime. And now it's selling for a million. He's gonna have a $999,000 capital gain if he sold it. But now that he's passed, basis gets stepped up to fair market value at the date of his death, which is a million bucks. Now, when the family gets to sell it, they sell it for a million. They got. They have basis of a million, no tax. So that's why I'm just making sure what step up basis is.

Yep. And here's gonna be the precarious part. If you want to get your accountant involved right away, maybe our office with some help. I. Whatever you want to do. But the big issue is, did mom have a half interest in the business? Under Idaho law, under the state plan, I don't know all the facts. So worst case scenario, you get stepped up basis on half the assets. So when you sell. That's worst case. I'm giving you worst case. So if you sell it for a million, he had zero basis. Now you're only paying tax on 500 grand. Mom's half of the business, not dad's, because he got a stepped up basis. So you might want to look at your documentation in the drawer that was sitting there that indicates mom bequeathed all of her ownership in the business to dad under a postnuptial agreement because he was eating chips in bed and driving her crazy and she was ready to kick him out anyway. Mark, let's get real. So, really, there's probably a document sitting around somewhere where she said, you freaking take the business. You know, she'd had it with him. So now, I know these jokes are not appreciated by Mark or any. But I'm just. I'm just trying to keep it real. Man, Are you okay? Matt, you didn't even smile. I was trying to get you to smile.

I was kind of reading the next question, so I was.

Oh, okay. Sorry. You weren't even listening to me. Okay, fine. Worse. Yeah, whatever.

Being prepared, I was.

Okay, whatever. Now, there you go. I would just get. You're gonna have to do, since you're the other assets you're gonna have to appraise if you don't sell them. And you want to get some assistance there. So you should be doing good. I was gonna say something else. I forgot what it was. All right, you're good. Mark, get some help. You're gonna be okay. You're gonna get stepped. Oh, Joe Biden. Back to the Joe Biden point. Joe Biden wants to get rid of stepped up basis. Done.

Okay.

That's his plan.

You tied it back. There we go.

That. That's his plan.

Yeah.

In his tax plan on his website. And I interviewed one of his campaign managers last week. Their goal is. One of his goals is to get rid of stepped up basis because he feels it only helps the wealthy. So a business owner that's wanting to leave their business to the family without stepped up basis, Mark would pay more tax.

Yeah. Yeah.

Okay, last question.

Matt, this is last question from Donald from North Carolina. He says I'm under 59 and a half. I've got a work 401k. I also have a solo 401k and a solo Roth 401k. So he's got a solo K that's got a traditional account. Roth account. Earlier this. Move it. Earlier this year, I moved about 60,000 from the traditional to Roth. Trying to chunk it out. As Mark would say. Chunk it out. I don't think I've heard it that way. Move it out in chunks. Yeah, chunk it out.

That may sound like me duking it out on the boxing ring. Chunking it out. We're moving it out in chunks. That's what he meant to say.

Okay. Yes. He says. Then all this new coronavirus rules showed up. I like the idea of spreading things out tax wise over a three year period.

Me too.

Me too. Me too. I'm in.

I'm in.

Can I pay taxes over three years versus one?

Yeah.

Can I pull 100k out of the work 401k and in effect replace the 60k in my solo 401k presumably means traditional or can I only take 40k from the work 401k? He says. By the way, I'm very happy customer. Devin set me up last year and Solana takes care of me at directed. Thanks, Donald. We got. We do have some awesome people here. Okay, Donald, I think there's good news. The Roth conversion is different than the $100,000 distribution. So the 60,000 that you converted to Roth does not count in this 100,000 distribution under the CARES act for Covid. So you could take the whole hundred. You don't have to offset the 60 and only take 40. You could take a whole hundred out of the work 401k if you want. Now, you have to qualify which. One of the easiest ones is you live in a state that's had shelter in place at some place, I'm pretty sure North Carolina. Yeah, yeah. And you just have to say you've been financially affected by the pandemic. There's no test for that. It's certified by the account owner saying, I was financially affected by the pandemic. You'll get the 100k out of the work 401k. They're gonna send it to you personally. They won't send it to your solo K or to an ira. The Cares Act Distribution is a distribution to the account owners. They're gonna send you the money for 100k. Now you have 3 years to replace it and put it back in somewhere. So if you're like, I'm really just trying to get it back into my. Get into my solo K, you could do that. You can take the 100k out, do a distribution, redeposit into the solo K. You actually have three years to do it, but you could do it in the next. The next month. You know, you don't have to wait three years. And then you'll avoid the tax entirely on moving that 100k around. And you could do more Roth conversions and chunk it out next year, you

know, so is there. Is there any on the mount? Okay, so separate from the Roth, separate from the 401k, he's going to pull out at work and then drive it back into a solo, which I love. So now you can control that hundred grand. Everybody, listen, listen. Some of you are like, what are they talking about? I really like this strategy. I haven't even heard of this strategy.

We've got a lot of directed IRA clients have gotten money out of their work 401ks over here to self direct. Okay? Locked up.

Yeah, yeah, yeah. Let me explain it in layman's terms for everybody. Let's say you're like Ann, that had that question earlier, where you've got a day job and you've got a side business, okay? In the side business, you've created a little solo 401k because you're the only owner and the only employee, and you're going to put as much money as you can in there after you get your match at work. So you got your day job, you put money in, the company matches it, you get out and you go do your little side hustle like Ann. And then you put money in your solo 401k. Now which one do you like better, the work 401k or the solo? I would argue they're both good. And here's why. The work 401k, you're getting a match. You're doubling your money. Every time you put money in, it doubles because the company's going to match it. But after that, it kind of sucks because you can't control the investments. You get three choices of mutual funds. It sucks. We get it. But in the Solo 401K, you're really matching yourself. So it's not free money, but you get the write offs for it. But the beauty of the Solo 401k is you can control where you invest it. So when Covid hit, and as Matt's already mentioned, we have people that have a solo 401k at our office, hundreds of them, frankly, they're saying, hey, I got work 401k money. That's driving me crazy because I can't invest it the way I want. I'm not quitting my job. I haven't fully bested. I can't move it under any term of the 401k until Congress passed the CARES Act. Now I can go to my employer and go, hey, I got affected by Covid. My life sucks. I had a shelter in place. I'm hurt, self certifying and say, I want my hundred grand. The employer has to now give you 100 grand out of your 401k. Their stockbroker is pissed because they don't get to invest it anymore. You take your hundred grand and you go, well, I don't want to pay tax over it. Three years. If you move it and put it

right into your solo 401k or self directed IRA. If you don't have the solo K or small business, even if you just

have an ira, there is. It's considered a rollover at that point. So there's no contribution limit and you just got access to invest it in what you know best, no tax.

Done.

That's freaking awesome. It's a great. I'm glad I finished with that question. That's a good one.

Yeah. Yeah. Good job, Mark.

Thanks, man. Appreciate it.

Good closing. I like it. You finished strong.

Yeah, Finished strong.

All right.

I did have another point that I wanted to make, but I just jumped in there. I just see I'm double fisting rock stars today. Look at this, like freaking. I'm trying to get sponsored by Rockstar. And I thought, you know, if I'm double fisting. My restoration. Recovery. My recovery. Rock stars, they got to give me a shot. Steve Castrano has to drive his motorcycle over trucks and buses to get sponsored. I'm. I'm leaping over tax returns,

which is more difficult.

Yeah. This is so much more Steve Pastrano. Just throttle up and hold on, you know?

Yeah. Well, I think a true rock star would double fist him, so good job. I know.

So I can't remember what I was gonna say, but I love that last question. Good stuff.

Yeah. Yeah. Thank you, Donald. And thanks, everyone, for submitting all your questions. You can do them@mainstreetbusiness.com where we have the. You can type your questions into there. We're also going to have the audio recording up soon. So by Next Main Street Business podcast, you might be able to record and call in a number or do it on your phone or through your computer. Record your questions so we can play it so you don't have to have Mark and I mess it up when we try to read it back for the show. And thanks, of course, for being here. We will see you next week.