OPEN FORUM SHOW - Answering Difficult Tax, Legal & Business Questions

Foreign. To this Week's podcast episode, YouTube video of the open forum show for Main Street Business. This is Mark Kohler, yours truly, and I'm here with the amazing co host Matt Sorenson.

That was your lead, Matt Sorenson. Unfortunately he's on two today.

I was trying to slow it down so you could jump right in.

Yeah, okay. All right, you try that. Ease me in. All right, now you go. Thanks, everyone. This is your show. This is the people show where we answer your questions. If you're like, hey, you guys are answering some pretty dumb questions and why don't you answer my questions? Well, get over to mainstreetbusiness.com click the button, submit a question, that's where we're pulling them from today. And throw those in there and what we're going to hit. Some people have. Sometimes we can't hit all the questions, but some of the questions got some likes and loves from some other people. So if you're seeing other people's questions on there, you like hit those, let us know. So we know which ones to definitely try and hit during the conversation today. But we got lots of great questions and you know, I don't know about the answers will be any good, but we got great questions at least.

See? And that, you know, we've got it. Matt, that's nice, you know that you would say that. But I'm going to be more confident and excited for our listeners. We are trying to be the best in the country. We really are. And we've got such a great team of CPAs and attorneys and financial experts on our team. And here in the law firm, accounting firm and the trust company, we're going to kill it today. Matt, come on. That's what you need to say.

All right, all right. I like it. You know, I was trying to set low expectations so we can over deliver.

All right, all right. Well I'm going to start with our one of the first questions that. Right?

Yeah.

Okay. So this is from B. Primo. Now this is kind of a big long question so I'm going to kind of summarize it because it's a really good question that many of you small business owners are going to have. So here's basically what's going on in their life. They have a small business in construction and they brought in a couple hundred grand. But last year their CPA did not take a salary and it sounds like a draw. They call it a draft in their question, but I think they meant was draw. And so they didn't take any draws. They didn't take any salary. And what they did is just reinvest all the money into the business. That's kind of what I'm seeing, Matt. And then they said, well, this year we're already on track to do better and we want to take some money out. But why is our accountant not recommending a salary or a draw or whatever? And do we have to take a salary and do we have to take a draw? Okay, well, this is a, this is a. I think we've done a whole show just on this question. This is a really big one. So I'm just going to answer it distinctly here as best I can. And then any of you that are facing this situation, I want you to captain your ship, get your accountant reined in and talk to one of our tax lawyers and do a tax review. We have like this $1200 trifecta tax review service with some of our best tax attorneys on our team that are CPAs as well. We're sitting for the CPA exam. They have master's level tax training. They're going to be able to help you make a plan for this draw and payroll thing. And then you can present it to your CPA or tell your CPA do this if they're, you know, not wowing you. Okay, so here's the deal, everybody. If your LLC taxed as an S corp or your S corp is making money, but you want to reinvest all the profits, that's fine. You don't have to take a salary, you don't have to take a draw, reinvest it all. But beware, because if you make 200 grand in your small business and you don't turn around and spend it, the 200 grand on deductible expenses, you're going to have on the book some income. For example, let's say you take that 200 grand and you buy $100,000 worth of inventory. That inventory is not a write off until you sell it. So you still have 200 grand of income. You just shifted 100 of it into a balance sheet item, not an expense line. And it could be equipment, it could be property, it could be a rehab that you're doing in construction. And you don't get a direct write off until you sell the rehab. So what happens is you have what's called phantom income. You have a business.

Sounds scary.

We don't like phantoms and we don't like income. No, we like income Anyway, so what happens is on paper you have income, but there was no distribution or Draw. Well, when that happens, you got to pay the tax on that K1. And you're like, well, I didn't get any money to pay the tax. So if you take a draw now, you're taking money out, which requires you need to consider a salary. And it kind of creates this little domino effect. So if you're able to find money in other sources to pay the tax on any K1 income, that allows you to reinvest all the profit without a salary or a draw. Now, in summary, this year, as you're planning it to make more money, plan on taking out some money. And then the matrix, your payroll allocation is based on the draws you take, not the net income. So if you make 400 grand in your business, but you only take draws of 100 grand, the payroll is a derivative of the draw of 100, not the derivative of the overall net income. Now, some of you go, well, Mark, your matrix says net income. Well, my newer matrix is over the past three or four years. If you see a newer version, I try to say at the bottom, net income or draws, because we're trying to find that draw amount. And that's what you base your payroll. Big conversation. Get a tax return review. Talk to your cpa. Take control of the situation. Matt, any thoughts?

No, I just. I mean, that famine income didn't sound too scary once you explained it. Not scared. Yeah. Yeah. All right. Who are you going to call? Okay, Mike Wolf asks a good question. He says in the trifecta, should syndication investments be held in the LLC on the passive side of the diagram, or should the investment be held directly in the revocable trust? Now, he has a second question here, but let's hit this first one first. So, all right, should the syndication investment be held in the LLC or should the investment be held directly in the vocal trust? Now, let's think about the syndication. I would say, well, it depends. Every good lawyer's answer should start with, it depends on. Here's what's important to think about. As long as this is passive. Let's say it's a. Let's say it's an apartment building investment, okay? They're putting 20 investors, 50 investors, 100, whatever, into an LLC buying an apartment building. And you're one of the 50 investors. You own 5% of this thing. Let's say, okay, when you put your money in, do I need an LLC for that? Is it going to save me taxes? No. Is it going to give me asset protection? Not really. The investment itself is going to have an llc. So the Apartment building is going to have an LLC that, and I'm going to be one of the 50 members I'm going to get protected there. So you could go directly from your revocable living trust to be the owner for your piece of this, you know, your 5%, let's say, of this larger LLC that is the actual syndicated investment that owns the apartment building. And that would make sense. There's no tax difference on how you do that. You already have asset protection at the LLC level. Now, some clients do like to organize their syndications through a single LLC that their trust owns just for business purposes and organization, having it all funneled through their own holding company, llc. But there's no tax benefit to it. It's more just kind of an organizational way to structure. Maybe there could be some privacy purposes to that, depending on the name of your revocable living trust. But you're going to have asset protection, like I said, at the company level, the apartment building holding entity, and it's not going to change your tax side on the passive side. Now any, any comments on that? Mark, before I go to part two, Mike, is a good question on part part two?

No, it's good. You keep rolling. Okay, part two, he says.

All right, second question. He says, if I hold an equity interest in a minor syndication, should I still hold it in the S Corp on the operation side of the diagram or consider it a syndication investment like question one above? Okay, good question, Mike, and I'm glad you asked them separately because those are different. You might be syndicated in a operational business like a minor business or a startup that's an LLC that's passed through. And in those scenarios, if it's, let's say it's an LLC that's a minor crypto miner business, or it's a startup or any operating business that you're, you know, putting in as a partner. We want that on your S Corp side because that's going to be operational income that we want to run through an S corporation for tax purposes. It's not passive rental income over here like the apartment building deal that's over on the right side in the diagram. So yes, I would use the S corporation for the minor syndication or any other operational business when you're on that side of the diagram. Now, let's say that the syndication and sometimes this happens is a C Corp. A lot of startups and things like that are actually C corporations as opposed to LLCs, or they may be an LLC taxed as a C Corp. So if that's the Case, then we don't want the S Corp in one. In fact, the S Corp cannot be involved. Or I guess it can, but it'd be dumb. We would put this. If it's an operating business, a C corp, we're actually going to move that over to the right side. So let's say you invest in a, you know, you know, the next tech startup or whatever it is, that's a C corp that's out raising money and you know, all that stuff.

Cool.

You, that's generally going to be C Corp that'll be on your passive side, which you could own directly in your trust.

Okay, I like it.

So it depends, Mike. It depends.

Yeah, it can be really. It can be really confusing. It can be a lot of work. All right, let's see if there's one here that's hearted and okay, this one has a heart. So we're going to hit this one. This is from Grow blacktails Trails. Hello, Mark and Matt. You two are smart and adorable. I chose that comment just for that purpose.

Yeah, who cares what the question is?

I'm adorable. I love being adorable. Okay, how can I go. Thank you so much. How can I go about getting all in all caps, all my Roth and all of my mutual funds from First Command bank without taxes and penalties like I was told by the bank. I'm calling BS. I love you. Yes, you're correct. I've had my IRA since 2000. I converted to a Roth in 2015. I've had my mutual funds accounts as long as my 20 plus army career can. Thank you for your contributions by helping educate people. Thank you so much for your kind words. Well everybody, when you want to move money from your Roth or Ira and I could say 401k but if you're currently employed, you're going to have some problems. But let's say you have an IRA or a Roth account and you want to move it to a self directed format which I'm assuming this person's trying to do. They're saying, I want this money somewhere else so I can invest. Well, let me just say it briefly. Quick example. Let's say it's at First Command bank and you want to move it to Second Command bank or you want to. Or you want to move it to Merrill lynch or Fidelity.

You.

The bank is highly motivated to not see you do this. They want you to keep your money there because they make money off of it.

And so I was hoping to confuse you. Their. Their hope was they would confuse you actually.

Yeah, yeah. And a Command this is called propaganda or misdirection. Something Putin might do. Yeah, you know, Putin might.

Yeah.

So First Command here, they're using some military tactics to confuse you. Anyway, I'll quit the metaphors here. But the point is, they're going to say, you can't do that. You can't move your money. Now, it is true. In their defense, you may be saying it the wrong way. If you say, I want to withdraw this or move it, there's going to be taxes and penalties. What you want to do is say, I want to do a transfer. I want to transfer this account to a different financial company where it could be a Merrill lynch or something, or a Fidelity. And if you say I want to transfer it, they're going to be sad, but they're not going to say there's penalties in tax because there's not. All you're doing is firing them and you're moving the Roth account to a new Roth account over at another financial institution. It's called a transfer. Now, if you want to self direct your money, which is probably why you're putting this question out there, you would go to directed ira.com open a Roth first because you got to have a place where the money's going to go. So if it is really a Roth account, you'd open a new Roth with $10 in it. A hundred dollars, whatever. Open a new Roth and then tell the team over here, I got this money over at First Command Bank. I want you to transfer it over for me. There's no penalty, there's no tax, there's no problems. And then on day three, the money's here. Then you can call in a new tactical move. Tactical tactical strike. And you guys, I'm ready to move that money. Oh, poor, poor, grow black tails. They're like, these guys are idiots. And sometimes they're examples.

But anyway, I thought that was adorable, actually. Thank you, man. And smart.

Okay. All right. So what do you think? Anything? Did I nail it?

No, I mean, I think you nailed that. I would just, I don't know, I think try to think of a right affirmative statement to give from the military. I don't know what that would be, but job well done, mission accomplished. Okay, let me go to. This is a good question. David from a little town we call Los Angeles says, hi, Matt, Mark, you guys are turning into the tax guys version of Car talk. That's an old show, David, we actually like. That's a. That's a great compliment. I think.

Yes, it is. We have modeled after them.

Yeah, we love their format. That's a great show. And I don't even like cars. And, you know, probably nobody likes taxes, let's be honest. But we have to deal with our cars and taxes. So here we all are. He says, here's my question. I have an S corp. I'm the only employee for my services in a creative field. If I wanted to start a completely different business like selling hats online, could I get a DBA through my S corp, or would I have to do a DBA as a sole proprietorship through myself? Since my S corp is a completely different business, what are the pros and cons in each case? All right, awesome question, David. Just get the DBA in your S corp. Keep it simple. If it's going to be another operating business like selling hats, why would you want to throw that on schedule C? Schedule C is more likely to get audited. It's like 13 times more likely to audit than your S corp you're already operating at. You're already keeping all your expenses and income on your S corp. Just run this other stream of revenue. It's just a different stream of revenue and some different expenses through that same S corporation that you already have. Now, in California, they call it a fictitious name. A lot of states call it a DBA doing business as. And you get it at the state level. California, like many things, likes to do things different on DBAs. They call it a fictitious name and you actually get it at the county level. And our law firm can help. We do DBAs or fictitious names or Arizona calls them trade names. They're all. Everybody's got their different spin on it, but it can be done at the company level. So you can do it right at your S Corporation level. I think that's the slickest, easiest way to do. And that's what I do, David.

Now, what question was that on what date?

That's February 16th.

And that. What was his name?

David from a little town we call Los Angeles.

Okay, cool. So everybody knows when we reply. See, since we have a team of producers behind the scenes making this easy for you. No, this is Matt and I hacking this out with our limited time in our busy workday. So as your questions have been posted@mainstreetbusiness.com when we reply, I do a little reply to let you know what date we did that. So if you think. Mark, what are you doing? Are you multitasking on something completely irrelevant? I am not. I want to make sure that everybody that posed a question. We let you know when we Reply. Okay, so I'm going to jump over to. Oh my gosh. Well, let's have some fun with this. I don't know. This is from Sam. I have a large garden and chickens that we sell extra produce and eggs from. Love it. We don't do it for a profit just to recoup some of the costs since we have extra. I would love to be able to pay my kids for the labor they provide and allow them to have earned income to put in an Iraq. Self directed, of course. Love you, Sam. I have thought about setting up a business so I can pay them. But since we have no intentions to put the time and effort to make it profitable, I believe it would be considered a hobby business by the irs. Can my kids still have earned income from a hobby business that is taking a loss? If my kids can't get earned income in a hobby business, I can also. I am also starting another business as a consultant. That would be profitable. Can I operate the homestead business under the consulting business to get around that and allow for more tax deductions and blah blah, blah. All right. Well, Sam, when it comes to your kids services, everybody listening. We don't want to ever pay our kids under a sham or some sort of, you know, I'm paying my kids to do the dishes, so that's not good. We want to have a real business that we're paying our kids from everybody. Now in this situation, why I'm going to lean on the garden and chicken business. It's actually making money. The kids are helping with it. That justifies their labor. I mean, I want to have a legit service the kids are providing. If you're running a consulting business, the most you might get out of them is vacuuming your home office or emptying the garbage or shredding paper, which is going to be harder to really compensate them to the point where they're really funding an ira. So let's focus on the farming business. Okay, that's point number one. So everybody in that situation, think of a business where your kids are really materially participating. Now we get to, well, Mark, this business is really losing money. Am I going to have a hard time taking a loss on this? Okay, let me say this. Can you pay your kids in a hobby business where they have earned income and they form an ira? Yes. Just because it's a hobby business doesn't mean you have real expenses. The kids weren't it. You brought in money. The hobby business rule says if you have a loss in that hobby, even for paying your kids Legitimately, you can't use that hobby loss against your day job or your consulting business. It's just going to be suspended there doesn't mean you didn't have a business. You don't even have to form an llc. You're still going to just throw it on a schedule in your 1040 and just say, you know what, it's a loss. That's cool. Paid my kids, they have earned income. You follow our model and from our books and videos and training on how to pay your kids, you get your CP on board. That's cool. Pay your kids. It can be a loss to. Paying your kids in a hobby loss is not the problem. Taking the hobby loss against your other income is the problem. They're unrelated. Third point and final, farming has a different hobby loss rule. So you're going to be able to get away with some losses in a farming operation a little longer and be able to deduct that against your other income. Horses and farming and rental property, they all have different rules. But a basic schedule C is in Charlie, you're going to face that hobby loss problem sooner. So a schedule F is for farming. So you do it. Go for it. I think you're okay. Pay the kids, get some Roth IRAs. Make sure they're Roth IRAs for those kids.

Oh, yeah. All right. Love that. We've had some Roth IRA questions just to tack on to that. There was a question from amina. The Roth IRA annual limit is 6k, is that correct? Is this, is there an earned income limit to make this contribution? Or can anyone invest 6k annually? Yes, you do have to have earned income as Mark was talking about with the kids and that strategy of paying your kids in your business. But your kids could have, you know, a small business on the side. Your kids could be have a summer job, your teenagers or, you know, they could have other income that they may be spending. But if they have some earned income either from the family business or a summer job or something that can be legit to use to throw in a Roth IRA. But if they make 3,000 bucks, then they can put in three, you know, if they make 10, they can throw in six. It's just any amount of their earned income up to a total of six annually. Okay, let me hit this question, Christian. Pretty recent, but I like the, I like the question here. It gets into some business entity structuring and how to do it, some asset protection questions. So he says. Matt. Mark, huge fan of your content. I plan to invest in rental properties with one partner. The Properties are located out of our state of residence and we like COPE Asset protection. What is the best way to structure. I was thinking a COPE partnership LLC in a state that allows for such entity, if that's possible, given two members that will in turn own 100% of the LLCs in the state where the properties are located, and that will. And each of those LLCs will own the individual properties. Basically, states of residence, states where property located and the COPE state are all different. Okay, Christian, great question. Let's talk about just structuring how you're wanting to do this and then we'll get to the COPE issue, which is charging order protection. First of all, let me say I like where you're going. You have a partner and you're buying rentals together, multiple properties. I presume these have, you know, these are more than ten hundred thousand of equities. Have a lot of equity in them. Because you want to do separate LLC for each property. As a general rule of thumb, just everybody's on the same page. We don't say do a separate LLC for every property. It depends. Even if you have a partner, do I need a separate LLC for every property? Well, it depends. Do you have more than 250,000 of equity? So I'm assuming, Christian, you're between all these multiple properties you're planning to do. You guys are going to have more than 250,000 of equity amongst these properties. And you're wanting to do separate LLC for each property, but have a holding company that owns each one of those property holding llc. So I'm just giving some assumptions for everyone else. And I don't know where you're at, Christian, in terms of the type of equity and how big of properties these are. If these are meth lab rentals, you're buying for 50 grand apiece. Your One LLC for every one of those is overkill. But if these are multifamily or more expensive single family stuff, I get it. You could, I could justify the separate LLC for each property. Okay, so we started there. You have a separate LLC for each property. Now who's going to own it? If it's you and your partner, Christian, owning each one of those llc, you're going to have a partnership return on every one of those LLCs. Right, that administratively, that's a lot of work. That's three separate partnership returns for every LLC. Because then it's you and your partner and everyone. We don't like that. And I think you're already perceiving this, which is why you're going down this strategy. It might be one of the reasons. But I just fleshing this out for everyone. So why don't we do what you're proposing? Let's have a holding company, llc, that's the partnership and that LLC will own each property holding LLC 100%. Now we have one partnership tax return that's going to get filed. It's this holding company which you're referring to as the co partnership llc. And that holding company is going to report, you know, all the income from all three properties. If you did three, let's say and then each you and your partner get a K1 and we just got one nice easy partnership tax return. Okay.

Right. Anything else? Are we. Can we move on?

Well, let me say the COPE thing, Charging order protection Entity for asset protection. The COPE is something we really have to focus on the state of when it's just you, when it's single member, when you have a partner. Most states have charging order protection for partnership holding LLCs. So. And now Mark's book, the Tax and Legal Playbook. CASA is in there. Tax Legal Playbook.

And it's in the calendar, in the new calendar.

Oh, and it's in the new MJK calendar. So either one of those could be your reference point that shows what states have charging order protection for partnership. Now in the single member llc where it's just you, it's a very limited, you know, like Wyoming for example. But for the partnership scenario, most states actually give charging order protection to the partnership llc. Now, I don't even know if you want to get into charging order protection. Explain what that is, Mark.

No, I'm good.

You should probably do an asset protection episode here soon and kind of go over some of these strategies. We have them in prior podcasts for like, what the heck's a charging order protection? We've got a whole separate podcast on that.

Yeah. And for those of you that have significant assets in cryptocurrency or stocks or real estate, you want to have an asset protection review once a year? How, where, how are things structured? What happens if I was texting and driving? What happens if one of my kids was driving? Or maybe I had a lawsuit arise in my life? Get a review once a year. In my book, the Tax Legal Playbook, I have a whole section, two or three chapters just on asset protection that I think are really practical. There's a lot of scam artists out there. That's a strong word. They're scams to me. But companies that just charge exorbitant 5, 10 $20,000 for these, you know, bulletproof asset protection, C Corp, you know, just offshore crap. Really get a second or third opinion before you go down one of those rabbit holes. Okay, and that was who? Whose question was that?

That was Christian, most recent.

Okay. All right, I'm going to jump over to. This is Sam and. No, no, no. I just did Sam with check ins. This is Red. Okay. Ryan Reddinger. So Ryan says I just started my journey down the road of business ownership and have been devouring your content as fast as I can. Probably not fast enough. So let me truncate the rest of his message. He says, I formed an LLC this year. I want it to be now. He uses a very loaded term here, everybody, you want to be careful with this term. He says, I named it as a holding company because I plan to have it hold more LLC in the future. I did not make the election for S Corp status. Okay, now everybody, when you say Holding Company, LLC, and it's going to hold other LLCs, and you didn't make an S election, the first thing I think about, Ryan, is, okay, I'm going to put real estate in that. I'm going to put crypto, I'm going to put stocks, I'm going to put notes, I'm going to put precious metals, whatever. You're going to have these LLCs in partnerships with others. They're for the holding side. Remember the trifecta, everybody. We're on the right hand side. But then Ryan takes a very rapid turn here. I. I also started an electrical contracting business. My Holding LLC,/DBA, contractor name. My brother in laws are wanting to join me, my dad wants to join me, blah, blah, blah. Okay, now see right there, Ryan, you're blending an LLC that's built for holding, and it feels like you're trying to drag this LLC over to the operational side. Do not do that. Leave the holding LLC alone. Let it hold assets, let us do its job. Its job is for protection, organization, simplicity. Now he says, but I'm going to do this electrical contractor thing. My brothers are going to get in. My dad's going to get in. By the way, we're in Washington state, my dad's in South Dakota. And at the very end, he says, my dad wants to get in, maybe with his ira. I'm like, whoa, whoa, whoa. Okay. His real question buried in here is when the business is ready for my brothers to join, how should we structure the business? I'm thinking we form a new LLC with multiple members, with a dba. And I would want My holding LLC to be the owner of my share. No, no, no. Okay, so the first concept that we will all want to learn from Ryan on is leave your holding LLCs separate from your operational entities. Point number two, if you want to bring in partners, I'm going to ask are they on the partnership long term hold side or are they on the operational side? And he says they're going to be a part of this contracting business. And he's right. You should set up a new llc. Everybody should have their own entity, but not your holding company. Remember, that's over the bridge. That's on the other side of the wall. Leave it alone. So you're going to have your own S corp, Your brothers might have their own S corp, and you're going to go out and do construction or contracting or electrical. That's all good. So everybody keep that separation. I have a whole chapter on this in the tax legal playbook on partnerships. And I do diagrams. You can say, oh, here's the spark. President, partnership. Matt, what do you think about the dad wanting his IRA involved as a lender or an investor? And remember, this is dad helping out son and their brothers.

Yeah, yeah. So dad's IRA is not going to be able to play in this game, unfortunately. So dad's IRA can't lend because who owns the business? His son. Son's a disqualified person under the rules, whether it's you or your brother. So that's going to be prohibited for him to lend. Could he invest? Only if you guys are putting in cash. But this sounds like an operating business where you're going to get ownership for doing the work and services, probably. So I don't see the dad's SDIRA coming into the mix here. It's probably going to be prohibited because I think the way you'd want to use it as you first ask, is as a lender. And I don't see it working as an investor because when they invest, it's got to be cash for cash. You know, he puts in 100 grand, you put in 100 grand, your brother puts 100 grand. You each own one third of the business that possibly could work. But I don't think that's the thing. You're probably thinking of him as the cash investor with his SDIRA and you guys being the working partners. But I wanted to back up for one second here because when someone gets down this train of I'm starting a business, Ryan, and you're the one really doing this. You're the one getting out there first. You just Started your electrical contractor business. Great. Have an escort for that. All right, that's. Let's start there then think of how you want to include family and whether you even want to. Anyways. Now, I know it's like it's. Sometimes it's nice to have a brother or family or a partner, but just be careful adding them into the business. Are you guys going to be equal partners? Are there other ways you could work together? Maybe they form their own business and you work on things together. I don't know how. I just want to take a step back and say, should you partner, is it worth it? Are they going to bring in what you're going to be bringing in? Are they coming to this full time like you are? Just go through those things and think, do I really need them? And I think sometimes when you think of like your brother or some close family, you just think, oh, let's just throw it together. But honestly, those are the ones that sometimes turn out the worst. Because. Because people get a little too casual about it. They're like, ah, this is family. I can trust them. It's going to be easy. Well, once money gets thrown around and once someone's putting in their blood, sweat and tears and someone, Someone else isn't, and you got to split the money the same, let me just tell you, the family dynamics change real fast. And now you've not only messed up your business, you messed up your family situation. So just be careful. Family business, of course, can be successful. I just want to say, just tread carefully, make sure you have everybody's expectations in line of what it's going to take if they're getting involved in the business with you.

And who was that and what date?

I was Ryan. I was just.

Oh, that's still on. Ryan with Deb. Okay. All right. I didn't know if you evolved into another one. Okay, I pulled another question here. Thanks everybody. As we try to choose the most liked questions. And now Eric has a two part question. I'm going to only answer one half and explain why on the second half. So Eric says, Mark and Matt, thank you for your podcast trifecta in place. S Corp pays rent to llc. Now, what that means everybody is. He's probably got a building owned by an LLC that his operational business is using. So his S corp is paying rent to the. To an LLC that owns a building his S corp is using. That's. That would be the rest of the sentence. We're just going to assume I have increased rent about 3% per year with inflation. Do I want to raise rent 5 to 10%. Well, first, everybody, three weeks ago we covered a show on renting your own building to your business. And I thought it was, if I may so humbly say, I thought it was a phenomenal show. And Matt and I are a firm believer your first best renter is yourself. So if you're going to get into the rental market, find out what you're paid rent for. I'm sorry, Determine what you're paying. I'm sure you know, don't find out. Determine what you're paying rent for right now in your own business or your own life and see if you can create a rental building experience out of that and build some equity rather than paying rent to someone else. Please go back and listen to that show. But I don't know if we talked about raising rent in that show. So I kind of like Eric's question. I'll just say this. I don't know if there's a standard, what you should increase the rent by every year type of thing. I just want to say pay as much freaking rent as you can without letting the IRS get upset. Should you increase it every year? Probably. What rate? I don't know. Look at the market in your area. What's the average increase in market rents in your area? Don't be too far out of that realm because if you do get audited by the irs, they want it. They don't want the rent in a related party transaction to be too much because they know you're pushing ordinary income into a passive scenario. But can you do it? Yes. Is it okay to do it? Yes. Is it very common?

Yes.

Just don't get too greedy. Matt, would you agree with that? Any thoughts on rental increases? Sound okay.

I love that. And you should be doing that. In fact, it's funny, I was just talking to my dad about his rental properties and he's like, I'm not raising the rent for like 10 years. And he's like, I know, I just need to do it. He's I just let them renew their lease and I've just been the easygoing landlord. Well, now he's going to have. It's going to be painful for them as a tenant to have this rent shock because he was nice guy for 10 years. So in some ways, by just being meticulous about it year by year, you soften the blow on your tenant. You're at the market rate. You know, as long as you're a good landlord, they should be happy. And that's what the market Demands, you know, they should be. Hopefully they're working somewhere that's raising their wages to. But if you miss it then you're going to make it painful and you're going to have problems by trying to raise it and catch up to the market later.

Totally. And one side note, I just remembered I'm not sure if we covered it in our show last month approximately and that is just have a one or two page lease agreement between your company and your holding company llc. It's good for audit protection, it's good for asset protection. Make sure you're actually paying the rent. You just can't say you're doing it. Make sure you're actually paying it. The LLC should have a bank account and all those goodies. So really make it legit and increase the rent on a regular basis. I just don't know how much. Eric, look at your local market. The other thing you said. Oh yeah man. Yeah.

I just think everybody should be doing that. This is the business owner rent to themselves where you're getting a deduction for doing that. This is you landlord with someone else on the other side. The transaction is a tenant. Everybody should definitely be doing that.

Totally. Now he the second question which is a good one and I'm going to pun it and let everybody know what's going on. He said. Darren, one of our attorneys in our office was going to discuss leftover 529s and leftover Coverdell withdrawal options. These are college savings type strategies. 529 some Coverdells would. Coverdell is like an educational IRA freaking rock. He says, note that my children, grandchildren and family will not be using these funds. And I think the Coverdell has to be withdrawn. I got this 529 with money sitting in it. I don't want to pay the penalty and taxes and blah blah blah. What do I do? Well, I'm actually in the middle of an article on this right now. It's been on my desktop for about a month and it's what to do with 529 money and Coverdell money and where to move it. And if I one kid doesn't use it, can I move it to another kid? Can I use it for myself? And the one thing I'm going to tell you, please be on the lookout for that article. But just realize that when you have Coverdell or 529 money there's a lot of options to move it around in the family. It could be nieces or nephews. It could be yourself. You may want to go Back to school yourself and use some of that money. So don't jump on the 10% penalty tax bandwagon too quickly. We'll hopefully have more information for you in the future.

And let me say this too, because I had this conversation with some clients that have been in this situation and you kind of look at like on the COVID now. Well, what other qualifying relatives can I do?

Oh really?

I can do a niece or a nephew, but they're like, yeah, that's not my responsibility to cover their education. Am I really that annoyed with a 10% penalty pulling this out and the tax on the gains that I'm going to just send it to a niece or nephew sometimes? I know we always hate the word penalty or tax, but let's be honest. You had gains on this, you're paying this on the gains coming out on the, you know, and, and of course there's a 10% penalty, but sometimes throwing, I don't mean throwing it away is bad. When I say you're paying for a niece or nephew, but it's like, you know, this is meant for my kids or maybe my grandkids and, but none of them need it. And I'm at the point where there's, you know, there's no one left under 30. Maybe I could do a more distant family member, but I don't, you know, that's what it was meant for. Didn't cover. Bite the bullet, get the money out. And sometimes the penalty is just the only way out and, but sometimes you're also throwing it away by, you know, sending some ungrateful niece or nephew on the other hand too. So cool.

Do you have a question? I've got a couple here. A statement as well.

Yeah.

All right. I'm going to give a shout out to Beau Falla because she gives me a shout out. I'm so grateful. She says, gentlemen, I have more of a statement than a question this week. She says, I really love your planner, Mark. I actually customized it by cutting off the spine and use a snap close version to add and subtract pages as needed. That way I can bring pages forward of info for my 2021 planner. Love that idea. I also bought pre punched paper and use Word to print custom notes pages for each month. Works fantastic. Well, thank you so much and everybody. I know this is a shameless plug. Let's get real. But if you get over to Mark J. Cole or Dot Com, I usually sell out pretty soon here in the next month. This is our calendar for 2022. It's got a bunch of important tax deadlines, dates, reference material, building your ten year plan, all sorts of goodies. And Bo, I like that. And I'm going to just throw this out. If any of you buy the calendar, Bo, get in touch with my marketing team. We could even email it to you in PDF so that you can print it out and you don't feel like you're having to cut it off to get it into a three ring binder. So if that would help you out, I'll send you a PDF version. Girl. So I just love what you're doing with it. I'm actually literally right here on the corner of my desk. I'm carrying around my 2021 planner, deciding what I'm going to bring over into my 2022 calendar. So I have the same challenge. I actually cut some of those pages out and actually tape them or glue them into my 2022.

So I like what you're doing.

Rachel says, matt, I'm going to post this to you. I don't know, do you want to talk about Augusta or do you want me to? Or do you have a question I could finish with?

Yeah, yeah, you can finish on Augusta. I'll, I'll get my final question.

Okay, I'll finish with Augusta. Rachel Teal says, now this is good, everybody. She says, thank you for building up Main street market map. Thank you. My husband and I both own S corporations. Can we use the Augusta rule and each pay our household for one week of renting the house to our business for development and meetings. Does this work in addition to the home office deduction? Thank you, Rachel. And the Carolinas. The answer is yes and yes, it can be on top of the home office deduction. Now let me explain it for everybody else, what she's talking about. There's this little golf tournament in Augusta, Georgia every year called the Mazdas. And if you have a private jet, you can fly into Augusta and go to the Mazdas. Now what happened years ago is people would rent out their home for a couple weeks to all these huge corporations that want to throw a big party for all their employees. And people rent out some of their homes for 10, 20, $30,000 for a couple weeks. They stock it with drinks and food and cleaning. And a lot of people make just grundle on the rental of their home during the Masters. Well, years ago the IRS passed a law that said, hey, if you're going to rent out your home for just a couple of weeks, a lot of people did this in Salt Lake for the Olympics. A Lot of people in Atlanta did this for the Olympics. If you rent out your home for a couple of weeks, the IRS is like, you know what, Keep the damn money. You don't have to report on your taxes. It's too much of a headache. We don't want to deal with it. So if it's legit and it's only two weeks, you don't have to write it off. I mean, you don't have to claim the income. No, you don't get the write offs of what you paid for during the process, but you don't have to claim the income either. It's just off the books. Can you believe it? The IRS actually said in their rule, you can live off the books on this one. So people have kind of termed it the Augusta rule in relationship to the masters in the two weeks. Now here's where it gets abused. I'm not saying that's what Rachel's doing here, but some people go, well, I'm just going to rent my home to my business for two weeks or once a month or twice a month or whatever. I won't exceed 14 days, but I'm going to rent my house to my business and take a kick ass rental write off. My S Corp is going to write rent to my person and I don't have to claim it as income. That's a kick a butt write off for my S Corp. I'm just going to do that every year. Can you do that? Yes. But is it legitimate? Are you really doing the meetings? Is this business typical of that type of use of a home? Would it pass the mustard or smell test with the irs if you can pass those rules, that it's legit and it's not over the top or aggressive and it makes sense. And you're. And what I tell clients is make sure you keep a roll of kind of a little schedule of what you did that day. Did people attend your house? Did you close sales? Let me just say a Super bowl party for your board of directors ain't gonna cut it. You know, let's make sure this is legit.

So, yeah, what's your house worth? You know, and how long did that meeting go? Is it really a week? You know, was it really two weeks? Yeah. Okay, last question here is from Paul Sundays, which is two questions, but they're the same really. Says, when you're considered a real estate professional, do you take your deductions on schedule C or an S Corp? If so, how would I connect those deductions to my schedule E for the rental properties. As a Realtor, would you group your real estate selling activities with your real estate investing activities? Okay, so. Good question, Paul. Yes, they get combined, but not yet. So you're jumping the gun here. So if you're a sole proprietor real estate agent or you have an S corp, that's where you're tracking your income and expense for that real estate. That Realtor business that you have, it's all on your S corp for income and expense or it's on your Schedule C on your personal return. Now, your rental properties are still on schedule E. Income and expense on the rental properties are still over there. At the end of the day, you get a loss on your Schedule E and that can come over on your 1040 to offset the income from your Schedule C or your S corp, but you're still tracking those sets of income separately. You're still reporting the rental on schedule E. Your S corp is still going to have its own separate return, which would generally be the case here, where you're reporting your income and expense for your Realtor activities. Any comments on that, Mark?

No. I have a chapter on this in my book, Tax Legal Playbook again on the real estate professional. And Matt, I just. It was a really neat experience this week. I had a Marine JAG officer. Now, I hope I use the right choice. She was an attorney in the Marines. And I don't know if JAG applies to all of the branches of the military or is that just Air Force jag? I don't know. JAG means you're.

Yeah, every, every branch of the military has the JAG Judge Ad. Was it Judge General or something?

Yeah, something like that.

Yeah.

Now, in A Few Good Men, there was the Marines that were under investigation, but I think Tom Cruise.

The Navy, I think was. Does the Marines. I think she might be in the Navy then if she just. I don't know.

I don't know. But. No, but my client, she was in the Marines and she was a lawyer in the Marines and she said. And it was on this issue. So I just wanted to throw it out. It just reminded me and it was. I was having a hard day and it was a nice phone call to receive. And she said I was stationed abroad and in the barracks or. I'm sorry, in the. You call it the. Where the base. She goes in the base library. There was a. I don't know, I'm

like in the control center. I don't know. Where's the story going?

In the command center. She said in the base library. Your book was in there, what your CPA isn't telling you. And she goes, I was on the base, obviously extremely bored, in order to pick up my book. And she picked up my book, what your CPA isn't telling you, and snowballed by Warren Buffett. And she said, your book changed my life because I caught the vision of real estate professional. And I was just so flattering and I loved it. And I've called that book the gateway drug to tax planning. And so if you're thinking of real estate professional in the story of that book, it really kind of brings it alive. So anybody out there that's buying rental real estate is considered considering rental real estate. We just talked about it. Running your own damn building to yourself, that's. That's the topic that really is the theme of that book, along with self directing. So, yeah, anyway, take us out, man.

All right, thanks, everybody. This was awesome show. Appreciate everybody's questions. I hope the answers were helpful. If not, there's no refunds. Get over to mainstreetbusiness.com if you're like, man, I got a question for the show. Put it in there. Also, if you see some other questions of other listeners, you like, give it a heart or a love. We'll try to obviously get to those ones that have the most support from other people. And thanks, of course, for listening. Please subscribe, like, give us five stars, whatever thing you can do that says you like this show. And please share, of course, with your friends and family. And we'll be back next week with another amazing episode of the Main Street Business podcast.