STOP WAITING! How The Rich Use S-Corps To Avoid Tax...

We're taking the tax law and trying to put it in your favor. We're trying to apply this to you and the IRS is giving you this rev prop option. But a lot of people are like, well, it's messy. How do I execute and pull this out? This is how you do it. That's what we're trying to do. Advocating for small business owners, trying to save on taxes, finding the right way to do it. Do you feel good about it?

LLC is do not save taxes. You can go back in time and turn your LLC into an S Corp as of 11 24. You have got to reevaluate your risk tolerance and get educated. You're wrong. In 25 years, I never had a client audited for taking too low of comp.

So I see what you're doing there, man. I learned something.

Thank you.

Welcome everyone to the Main Street Business Podcast. This is Matt Sorenson joined by Mark J. Kohler. We are delighted to be with you today because we want to talk about saving you money.

Yeah. And the S Corporation election is a big question. A lot of people have. There's a lot of misinformation out there. I was just talking literally to a tax lawyer today that said, well, I missed the 75 day rule so I can't be an S corp for last year. I'm like, oh my gosh. And so this is an important topic. We're going to break it down. Many of you should still try to be an s Corporation for 2024. January of 2025 is not too late. We're going to talk about it.

Yeah. So what we're talking about here is making a late S selection.

Which is allowed.

Which is allowed if you know the secret code which we're going to give you today. Mark's been pionee for a while and of course many of you know Mark has given a ton of great tax strategies information and breaking through a lot of the chaos and misinformation out there. And so. But let me make sure you understand we're talking about here with an S corporation. Let's say you were an LLC last year and right now we're in 2025. Let's say you're an LLC in 2024 and you're like, man, I wish I did an S election. I didn't do that. I've heard about this S Corporation strategy and, and how I can save on self employment tax, but I didn't do it. So I'm sol. I'm out of luck.

And we're not talking statute of limitations and put some finer print on it. Let's say you made $100,000 net last year. So you were a realtor, owned a restaurant, you're a landscaper, a contractor, a dentist, a chiropractor, whatever. You brought in 150 grand. You had 50,000 in write offs and you made about 100 grand. You were taking home maybe 8 to $9,000 a month after tax, all your write offs. And you're like, I had a great year in 20. You were looking down the barrel at a 15.3% self employment tax. So that's 15% on 100 grand. You're looking at approximately $15,000 in tax

before you pay income tax. That's your self employment tax.

Then you're going to have Fed and state in the mix for at least another 20%. 15 plus 5. So now you're at 20 plus 15%. You're at a 35% tax rate. You wonder why people want to, you know, jump out of a window and go, I hate tax law. So that is because you are an llc. LLC is do not save taxes. So what is the option? And it's really straightforward. This is very simple, straightforward. Podcast today you can go back in time and turn your LLC into an S Corp as of 11 24. And we're going to, we're going to talk about how, but the why. Because now I can take that 100 grand of net income and at least split it in half. Let's just say I'm going to take 50 grand as a W2 or subject to FICA and 50 grand as pass through K1. Now I just split that $15,000 bill in half. I just saved $7,000. I don't care if you're in California. I don't care where you're at. $7,000 makes sense. You're gonna have to do an S corp tax return and do some payroll or talk to your accountant. Yeah, you might be off bucks or two grand. But Matt, here's a hard question. Spend two, save seven. Now hold on before you answer, I know this is a really hard question. Should I spend $2,000 in good tax planning and advice to save seven grand? I don't know.

I don't. Does it makes sense? Yeah, I think the math pencils out there and you're up five grand. And by the way, this is every year. Okay? So it's not just about getting this tax strategy right for the prior year and kind of doing the fix it strategy which we're focusing on today it's about the S Corporation strategy every year and saving that type of money. All right? And so we love this strategy. That's why we love talking about S corporations. This is for you operating business owners and all the examples Mark gave from the dentist to the realtor. Okay? Everyone in between, this is what we're talking about. This is not for your rental properties. You do LLCs for your rental properties for asset protection. But we're not talking about this S Corporation election. It doesn't matter there because you don't pay self employment tax on that passive investment rental income.

Okay? Now here's the crux of the issue for you tax accountants, advisors, tax professionals listening that may have saw this and said, all right, let's see what Mark and Matt are saying. What's the real crux of the issue? You know this. It's reasonable comp. How much of that hundred grand can you actually allocate to FICA wages through a W2 or a 1099 if you have to in year one, which we'll talk about that kind of workaround the first year you're dealing with this. But how much can I allocate to FICA and not get under get in problems with the irs? What is reasonable comp? Well, people, let me just say this right out of the gate, so much, and I'll say it quickly, in 25 years I have never had a client audited for taking too low of comp. I have taught CE class after CE class, countless classes on what is reasonable comp. I've got articles on it, videos on it. It's in my book and I'm a licensed CPA in multiple states, licensed with the or licensed a member of the AICP and on the board of the Arizona aicpa. I am not going to recommend something that's too aggressive. If you think a 5050 allocation of net income is too aggressive, you have got to reevaluate your risk tolerance and get educated. You're wrong. We have as an aside the Main Street Tax Pro certification that is now two years underway. We've now educated a thousand or more accountants, enrolled agents, CPAs and tax lawyers around the country with the certification. Get to my website, March, where I teach and stand behind this entire reasonable comp calculation. Now, it's beyond the scope of today, but let me just say everybody, you're in good hands. This is not high risk. And you accountants out there, do your research and come check out our Main Street Tax Pro certification and do a demo or a discovery call to See what it's all about. It will rock your world, change your life, and we will send you clients. And I don't take a piece of that. It's all your money. And we'll teach you how to be a real tax advisor. Okay, so let's just assume again, we're back to 100 grand. We're going to split it. We're going to save self employment tax, the retroactive esselection. Is it that hard, Matt? I mean, it's really expensive. How much do we charge at our firm?

I think it's a couple hundred bucks. I actually don't even know the price.

Highway robbery. $300 to do a retroactive S.L.

okay.

Yeah.

And you're going to save again, thousands. Now if you're like Matt and mark, I made $20,000 last year net after all my expenses. We're not worried about this yet. Okay? We're not doing this tax strategy. There's not enough savings there. But if you were in that example where mark talked about 100k, we're talking about $7,000 in savings. It might cost you a couple thousand maybe. Why would say it's your 40 or 50k net. We're looking at this and maybe looking to go back. So now there is something called a rev proc. Okay. There is actually a process and the IRS said, yep, you know what, if you want to go back in time to do this, we actually let you do this if you follow these steps.

Yep. Here's the steps. Three parts. You're going to fill out the 2553 elect S corp status on that form on the front page to be 1124. You're going to sign the second page. Now again, you can pay our law firm to do this. Still keep your account and talk to your account. I don't care. We charge like 300 bucks to do this for you. But you're going to fill out 2553. You're going to reference RevProc 2013-30, which is the revenue proclamation from the IRS that allows for this. And then you're going to put a cover letter on it and you're going to say, hey, under Reproc 2013-30, someone screwed up and didn't make this election back in 2024. So we're going to do it now. You send that into the irs. You can send it along with the tax return filing. I recommend you separate, send it separately, immediately, get it done with. You can still file an extension for the 1120s come March 15th and get to work on your 1120s tax return because now you're not filing as a schedule C or a 10 on your 1040. You're now going to file a different tax return. We'll come to that in a moment. But the first step is make this late election. Three steps.

Okay. What about payroll though? What do I got to do with payroll now? Because as a sole prop and I was going on schedule C, I was just dropping that net income. I had 100k but I was sending the IRS $15300. What am I doing differently now that I haven't done before?

So this is where the claiming the FICA income is critical. So step one, I make the election now. Think about it. You're now an s Corp for 2024. What does the IRS expect? They either they, what they Expect is a W2, that you're now an employee of that S corp and you're going to claim 15 grand in payroll. In our example. Well, the deadline for the W2s and the 941 was January 31st right now in 2025. So you have two options. One option is go file your 941 in time if you hear this podcast in time. Or file a late payroll processing procedure which will include some penalties. Not that bad. But some accounts are so anal they want to make sure they file that 941 and issue the W2 and the late W2 and the W3 and, and they're going to do all of that even if it's late because that's the way they should have done it. Okay, that's option one. I would not recommend it. Now that we're nearing the end of January, I would recommend a workaround. Option two, never had a problem with IRS agents over the last 25 years. What you're going to do is pick up that income on the 1120s, line 7 as compensation to officers or shareholders in the amount of $50,000. Then on your schedule C of your business owner, you're going to pick up that 50 grand of income with no expenses. So you're going to pay your self employment tax on that $50,000 on a Schedule C. So if the IRS comes and audit you, you're like I paid it. Whether it was a W2 or on my schedule C, I paid it. What's the problem? And the IRS goes dope and they're you're done, it's over. You paid your fair share. Now was it the right way to do it was a little clunky? Absolutely. With our new clients that come on board, you're never going to do that again. It' first year workaround.

Yeah. And if you think of like the spirit of the rev proc here is letting you come back in time to be able to do this and claim that s election status, it's just all right, this is kind of an exception to the normal way you would do an S selection. And so now the reporting on it gets a little clunky. So how do I do that to still give the IRS the same amount of money that I otherwise would have done meet the requirements of what I would owe which is what you're doing here. You're just doing it in a normal way now. You're not doing this next year. That's what we're doing in the fix it method with the RevProc. And as Mark walked you through it, what am I going to start doing in 2025 or this year forward as I fixed it now I'm going to doing quarterly payroll. I'm going to do a W2 at the year end. But this first year is a little clunky because you're going back in time using this RevProc.

Okay, now a couple other pieces and parts especially for you accountants listening. Okay big picture, doing the election going back in time. Now I'm an s Corp for 2024. You're going to start to file your 1120s tax return for last year following the normal deadlines, March 15 or September 15 with extensions on line seven on the front. You're going to claim the payroll amount you want to claim for your shareholder you and then you're going to pick it up on schedule C and pay your self employment tax. Now a couple other important notes. When you have schedule C income you pay your self employment tax. You also get what's called the QBI deduction, qualified business income credit or deduction. You want to not take that, you want to waive that because now you're double dipping on the qbi. You want to pay your fair share and not take the qbi. So you're going to take your self employment tax deficit was payroll and then say okay, I won't take the qbi. When you're taking the QBI on that schedule C income it's kind of like tongue in cheek. You're kind of getting extra little stab at the IRS at the end. Don't do it. Pay your self employment tax. Lick your wounds. You did it. It's cool. Pick up the schedule c. Do your 1040, do your 1120 house people you just save 70, 500 bucks the end.

That's a great point. I didn't even think about that. Okay. Because I could see someone doing that now. I'm still getting the QBI on the K1 coming out. But the QBI you don't get on the wage or salary. Right. But you get on the profit coming out. So I see what you're doing there. Okay, man, I learned something.

Thank you. So now one other thing to keep in mind here is there's other little strategies that you now want to come to aware you're now aware of with that 1120s and this little workaround you want to make sure you're writing off your health insurance premiums properly. You could do, you're going to claim it now on the schedule C or Schedule 1 or 2 on the 1040. You're not going to put it on the 1120s because you probably didn't pay for it out of the company. But these are little things that are going to be very fact driven based on your situation. But now you're playing at a whole other level. And as Matt said, moving forward you're going to use the payroll procedure and the more money you make, the more you save. So now you're at the big boys table. Every dentist, doctor, lawyer, accountant, engineer, restaurant owner, cpa. We're all escorts. Are you an escort?

Absolutely.

This is good.

Okay, so 20 years almost now as

an escort, not high risk. You're now just playing at a higher level.

Yeah, I love that. And you know, if you're like a business owner listening, it's like, oh crap man, that sounds pretty smart. I've never thought through that at a high level like this. Well, Mark Kohler is Main street tax pros are like, this is coming out of what you're doing in your trainings in the Main street tax pro network. And so you can go to markjcohler.com and find accounts and advisors that understand this. And then if you're a tax professional or someone that's like, dang, I've always worried how would I actually orchestrate that and pull this off for the client. This is how you do it.

I like that. Let's do some action items. Number one, you're a business owner with an accountant. Go talk to your accountant right away and say, hey, I think I want to make and do that retroactive s election and I think we're leaving money on the table. Your account is going to do one or two things. This is again group number one, your accountant's going to either Go, oh, that's way high to risk. And oh my gosh, you can't do that. Your reasonable comps got to be much more and there's no savings. And they're going to be freaking out. Why? Because they didn't bring the idea to you. They're nervous that you're going to say, why didn't we do this last year? And they're worried about liability, exposure, embarrassment and a whole host of issues. And guys, we do literally therapy with CPAs to get them over this issue. Or number two, your account is going to go, oh my gosh, Tom, thanks for bringing that. I love it. Where can I learn more about this? Or where did you hear about this? Oh, well, Mark Kohler, Matt Sorenson, their podcast Main Street. Let me send it over to you. By the way, Mark's got a best selling book on this, by the way. They've got podcasts on this and videos on this in depth. Can you get up to speed on this? We'd really like to work with you moving forward. Can you, can we work this out together? Remember, you're the captain of your ship. In group number one, you have an accountant. If they don't do what you say, get rid of them. This is your ship. They're just your first mate. Throw them overboard and find a better accountant. Which brings us to group number two. You mentioned the network.

Yeah, yeah. I mean that's, I think it's just even. It's funny, I was at a networking thing the other night and people are like, where do I go to find a good accountant? Like, they listen to the podcast and they're like. And I'm like, guys, there's a network of people that are getting certified and trained on this, that are helping clients strategize and plan and find these opportunities and do their tax work for them along the way too. And so that's where I send. And it's good Main street professionals. Or I know you get there from markjkuller.com but what's the other direct way to get.

I think that's the easiest. Just go to markjcohler.com up in services. Go to the Main Street Tax Pro network. And it's like just a list of like LinkedIn accountants, East Coast, West coast, young, old, big, small, EAs, CPA, everywhere in between. You can search for an accountant. They don't need to be down the street. So in group number two, you may have to go there if your accountant's not on board. But for those of you that don't have an accountant get over there and start interviewing, doing discovery calls, and find an accountant in the network and say, hey, I want to do this. Is there a major deadline that you need to stress about? I'd say March 15, because you got to file an extension for the 1120s. You're going to have to file for 20, 24.

Good points. I was thinking April 15, but you're going to be. You're trying to go back in time to say, actually, I was an S Corp last year. Which moves you from April 15th up to March.

Yes. If you don't do this by March 15, you are going to have penalties. Doesn't mean you still don't do the retro. But then the IRS is going to go, oh, you want to be a retro election? Where's your extension? Oh, I missed that. I was supposed to do it March 15.

I didn't think about that.

So make sure that you take action. And I'd say in the next four weeks, don't delay. Meet with an accountant, hire one. Tell them, let's get the election done. File your extension for March 15th. Breathe free and clear. You can still do the workaround when it's time to file.

That's freaking awesome. I was just like, I know we talked about this with our attorneys and we, you know, we have like a chat with all the attorneys and we meet and strategize and there's a little debate on some of this stuff. And, and that just like this is just a great summary of how to do it. And the reason why I love this strategy is we're taking the tax law and trying to put it in your favor. We're trying to apply this to you and the IRS is giving you this rev proc option. But a lot of people are like, well, it's messy. How do I execute and pull this out? This is how you do it. That's what we're trying to do. Advocating for small business owners. Whether you are a small business owner, listening, trying to save on taxes, finding the right way to do it. Do you feel good about it? That makes sense.

Yeah. Now I'm going to mention one last thing to the third group, which are your. You, the accountants out there, the tax professionals that got sent this recording, or you're just a regular listener follower. Okay, now let's get detailed here too. Not only do we not want to take the QBI and the schedule C because that's too aggressive, we're going to pay our fair share. Now let's, let's think through this a Little bit further, some of you are going to say well hold it Mark, you get a deduction for half of the self employment tax you paid. So If I pay 15,000 in self employment tax on schedule C, I get to deduct half of that? Yes, on the front page of your return and that's going to save you income tax. But I'm still paying the 15. I'd rather only pay 7 rather than get a deduction for 7. See when you start to put it in a spreadsheet that deductions helpful. It's true. It's not a clear I'm going to spend 15,000 or spend 7. When you spend the 15 you're going to save a little bit over on the state in federal income tax because you get a deduction. The second thing you may say, well Mark, I'm going to get a bigger QBI deduction on that 100 grand and a schedule C then if I do this split because now I'm only getting a QBI on 50 grand. Now remember, QBI is a 20% deduction. So I'm going to get a deduction of $20,000 or a deduction of $10,000. Again when you do the math on a deduction versus a tax saving, the tax is always better. So that 20% deduction, 10,000 that I miss, I'm going to well make up for with the savings in fica. So as you can imagine accountants, you start put this in on spreadsheet, I'll give it to you. Yeah, you're going to see some incremental little savings on that original 15. I get it. The QBI and the self employment tax deduction on the 1040 but it still doesn't beat the overall savings. And like Matt said, moving forward the savings starts to add up and go off the chart.

Yeah. Now this S Corporation strategy is something we've been teaching for years for clients and it is like just like the bread and butter really of small business owner. The trick is when everybody's coming in late on this, how do I get over there? Hopefully this helps you understand how you can get there. That's pretty detailed I have to say on how to do it but well thought through. That's meeting this rev proc requirement figuring out how to actually get this over to the irs. Pay your share so you can feel good about it but also get the advantage of the strategy in the prior year.

And it's not high risk, it's highly effective, it's smart and it's okay to save taxes. It's okay to plan. And we love this. We're grateful for you being here. We love Main street business owners all over the country. This is a bedrock strategy Matt and I have taught for years. Thank you for listening. Talk to your tax advisor or you tax advisors. Get over for a demo or discovery. Call@mortgagecohler.com thank you everybody for listening and we'll see you next week.