Tax Lawyer Q&A: How To Legally Minimize Your Taxes

I had this little grandma come to my office and she's like, the IRS is coming after me. I'm like, why is the IRS coming after you? She goes, I don't know. I pay my taxes every year. And we started pour through her tax returns. We started to pour through the IRS letters. And I go, what are they doing? And we finally found out they're trying to lien her house. I'm like, oh, my gosh. And I look at her deed and I go, why is your son on the deed? Guess what? They're coming after your house because you put his name on your deed.

The LLC is like the shield. They can't come after you or any of your assets, period. Stop. You're done.

Your poor accountant is wrong. Look for a new accountant. They are wrong.

Welcome everyone to the Main Street Business podcast. This is Matt Sorenson, joined by the incredible Mark J. Kohler, and you are listening to the People Show.

Whoa. The People Show. I like that. It is open forum where we are going to field the questions that have been submitted on the site. We've got lots of questions, more than we can cover.

Yeah.

So that allows us to pick and choose.

So, yeah, so if you had a good question, we're going to answer it. And if your question sucked and it sounded like you needed a consultation because you wrote a novel, we're going to skip those.

Yeah. But no, there's not many of those. So sorry, we don't want to shame our listeners too badly, but no, we've got some good stuff.

It's Steve, 41 from Tulsa, Oklahoma. I was talking to you.

I like it. I like it. Yeah, no, a lot of our listeners love this show. It's got. The Open Forum show has historically more listens or views than any other topic because you just don't know what to. You don't know. Like you just hear people ask questions around the country and you're like, oh my gosh, I didn't even think to ask that. So it can be fun. Yeah, it's good stuff.

And it's also nice to hear other people's problems.

You don't feel as bad.

They're struggling with this too.

Yeah. Yeah.

All right, you want to go?

You can lead off. All right.

I'll be the lead off here.

All right. All right.

This is from catch 22. Mo.

I don't know.

All right. Says both my parents and mother in law are worried that they will lose their houses if they go into a nursing home. Would the following scenario work? My wife and I purchased Both homes with seller financing and they my parents and my mother in law then rent the house back for the same amount of the mortgage payment. My other question is what happens upon their deaths. Okay, catch 22 mo I do not love this idea. Couple things to think about. One is there's something called the Medicaid clawback that says let's say your parents do go into a nursing home and Medicaid's paying all this money for them while they're in the nursing home or Medicare even. But your parents have significant assets. Well they could go after those assets. They're going to say you need to deplete these assets before you start drawing on Medicaid for it being in a nursing home. However, one of the exempt assets typically and this can be a state by state issue that states actually have different rules on this but one of the exempt assets is your home. So don't worry about the home typically. And some states might have limits on the amount of equity but that's one I would not look to really sell. And a couple other things. Why we don't love that, I don't know. Do your parents have other siblings? This could create a whole estate plan mess of who's getting what assets.

Who?

One kid buys the house for mom and dad and lets them stay in it and pay them rent and then they're paying the mortgage and there's a seller finance note. It can create some estate planning messes and mismatches. And then the third thing is I don't know how much equity your parents have in the home, but if it's over $500,000, the sale of home exemption, which by the way may not apply when selling to family, but if it's over $500,000 of equity, you're going to lose the step up in basis when they die. So you don't typically want to inherit assets rather than have them gifted to you during your lifetime if they're appreciated. So there's a lot of equity in the home, let them die. Get the step up in basis, you inherit it and there's no capital gain even if it's over $500,000.

And I'd like to add to this question in Matt's comments if I could. This is another term for this is elder law planning. There is an Elder Law national association, elder law attorneys in every town that you could find through the Elder Law network, blah blah blah. I would get a consultation from a couple of them because they're going to have differing strategies and it is also very state Specific. Like Matt said, I've heard that the clawback can go after the equity in the home. It's exempt in order to get Medicaid, but upon death, I've heard in some states they can go back and get some equity. So it's very state driven and it's something we haven't really practiced here in our office over our careers. Cause it's just, it's a hard area because a lot of people are trying to. They're in a tough situation financially sometimes already they're trying to cut corners and that's okay, but it's not something a lawyer oftentimes has the time for and you don't want to get taken advantage of either. So get a couple opinions, go to an elder law attorney.

And I would say if your parents have significant assets, that's the last asset they're going to go after, typically is the home. So, and, and generally when you have the larger assets is when they actually try to do the clawbacks. But keep in mind the family transfers. There are clawback rules that say, hey, you just transferred this and sold it to your kids or gifted it to them three years ago. We're pulling that back anyways, even if it's out of their name.

Yeah. And there's, gosh, there's so much here. There's what assets are exempt to get Medicaid and then there's what assets do you might. The state's going to come after to get reimbursed after they die. And so there's just so much involved. Get with an elder law attorney in your state and it'll go a long way. Now, Matt, I just want to point out how proud I am of this moment. Sometimes we get questions and we answer them three months after they are posted. This one was posted an hour ago. I mean, this is a record for us.

We are on it.

Yeah. So, John Pina, I wanted to say this one's for you. Yeah.

We're on the job.

We're on the job, he says. Hello, Matt and Mark. I watched your podcast last week on investing with HSAs. I have a health savings account and considered changing my insurance plan for next year so I could fund another one. However, after looking into it, one has to have a high deductible health plan. Yes. I am expecting at least one procedure next year, so I didn't enroll in the high deductible plan. Can one fund an existing HSA without having to open a high deductible plan? No, you have to have a high deductible plan in the year you want to fund your hsa. And with my current hsa, how do I invest with it? Do I need to roll it into my self directed IRA first? Okay, so before we get to the last sentence and John, these are great questions, what's interesting. You say you have an HSA and considered changing my insurance plan for next year so I could fund another one. What I think you mean is I have an HSA and I want to fund it next year. So I wanted to get a hydraulical plan so I could do that. You wouldn't set up another hsa. You would just fund the one you already have. Typically that's a perspective. And everyone out there, you have to have the high deductible plan in order to fund an hsa. Just because you have an HSA doesn't mean you can keep putting money into it. You can keep investing it and building it, but the only years you can put new money in is when you have a high deductible plan that year. So finally, John, you said with my current hsa, how do I invest with it? Please get over to our Directed IRA podcast. Directed Ira podcast. It's our sister podcast. The link should be down in the show notes as well as it's easy to find with a little search on multiple platforms. We have podcasts on that particular very topic. But you're going to invest with it just like you would a self directed ira. And you're going to want to learn the rules of how to self direct. You will need to set up a self directed HSA account at our trust company, Directed IRA to do that. But dive into some podcasts over on that other platform. You're going to love it. Do I need to roll it into my self directed IRA first? No, you can't. A self directed IRA is a self directed ira. A self directed HSA is a self directed hsa. There are two different accounts. You can open both and invest both. In fact, you could make both partners in an llc. That's another topic on one of the shows on the podcast over there as well. So you've got lots to do here. I'm excited for you. I think you're going to really have a good time playing with that hsa. I think it's a great strategy. Matt, the floor is yours.

All right. This is from Doubleplays. Doubleplays? Asks Matt. Mark, thanks for all you do. I recently set up my revocable living Trust. Did the LLC cleanup. Three new LLCs with your firm so far. And Happy and hopefully I can do more soon. Awesome. Thank you for your awesome business there. Said, I have a question about Ladybird deeds. My parents own their home in Florida and they have added me as a new Ladybird Deed. We're going to come explain what that is. My understanding is that the house will easily transfer to me once they both pass. As a result, at least this asset will transfer easily and avoid probate. I'm assuming a trust along with the will is a better option. But what do you think of this Lady Bird process? Is it available in all states? Okay, great question. Let me explain what the Ladybird deed is. What? The Ladybird deed is basically a deed where you can transfer the property out of your current name into a new form of title that says, hey, during my lifetime, I own this property, but I have and I have retained what they call a life estate. This gets back to, you know, law school, real property. 101. First year of law school, you have a life estate in the property, which means you have a right to live and enjoy the property during your life. But upon your passing, it is the property of whoever you put on this Lady Bird deed, your kids, whoever it may be. So double play is asking here. Hey, my parents just added me. Technically, you're owning that property. A future interest in the property once they pass away. Now, one of the reasons people do this is to get around probate and

not do a trust.

Yeah. And to get around to trust their question.

We'll tell you in a moment why the trust is still better, but keep going.

So, yes, you can do that. And to answer your specific question, it is available in a handful of states. I believe there's five or six states that allow this still. This is kind of a, you know, not a common strategy anymore. But Florida is one of the states that does still have this Ladybird deed. Okay, now, here's why I don't like the Lady Bird deed. I want you to have a trust anyways, or your parents have a trust anyways. Now, I don't know what other assets they have. Maybe they have $1,000 in the bank account and the property and that's it. And they have really nothing special that they think they want to do. Okay, Maybe you can get away with the will. There's a lot of ifs and questions I got there. Maybe you can get away with the will and doing this Ladybird deed process. But it's so much easier to just do a trust. Sometimes the workaround like you're doing here is more complicated than doing the Tried and true method of just doing a fricking trust. Because there's a lot of contingencies I want to have in this trust. And what other documents do your parents need as part of the estate plan? Do they need a financial power of attorney? Do they need a health care directive that says, pull the plug if I'm in a vegetative state? Like, do they have burial instructions? Like what? Who's getting their personal property? Who's getting the jewelry or the musical instruments or the guns or whatever personal, you know, things that might have in your family. Like, this is what's happening in a full estate plan that includes a trust. And then it's so much simpler because the property is just deeded to the trust and it's going to avoid probate. Plus, the trust in your estate plan is doing all those other things. This is a little workaround. Could it work? Yes.

Not recommended.

Not our style.

I've got two major problems with this, too. First, I understand you do not get stepped up in basis on this because when your parents deed it to you and keep a life estate, they have essentially transferred the home to you. So now you do not get a full stepped up basis. So, my friend, you're going to pay more tax when you sell mom and dad's house when they die, and then you decide to disperse it. So sign up for more taxes is what you're doing. Number two, I got asset protection concerns. I remember this vividly. It was about 15 years ago. I had this little grandma come to my office, and she's like, the IRS is coming after me. I'm like, why is IRS coming after you? She goes, I don't know. I pay my taxes every year. And we started to pour through her tax returns. We started to pour through the IRS letters. And I go, what are they doing? And we finally found out they're trying to lien her house, the irs. And I'm like, oh, my gosh. And then I look at her deed and I go, why is your son on the deed? Well, because I wanted to avoid probate and I didn't want to do a trust. Okay. Does your son have IRS problems? Rue went silent. She started to cry. Yeah, guess what? They're coming after your house because you put his name on your deed. So when you start putting other people's names, even a ladybird deed, now, if they get in a car accident, if they have a lawsuit, they're going to come after the house, too. And mom and Dad's like, well, I have a life estate in that too bad. It's not going to. It's ugly. So just do a freaking revocable living trust. You're going to love it. All right, DB2027 says hello. I am an owner of an S Corporation and I am looking to increase. I am not looking to increase my taxable income on my W2 due to annual earning restrictions. Am I able to take a bonus from the S Corp and place it in my 401k or simple IRA without increasing the W2 wages from the S Corp? Generally? No. Now, I've got some ideas for you, though. Here's why some of you might be thinking DB2027 is doing this. If you have SSDI, disability, Social Security, you can only earn so much and it's adjusted by inflation each year or your, your disability benefits will decrease. Right now it's about $18,000. So if you earn more than $18,000, it's going to affect your SSDI. So that could be a situation. And there's other reasons, but that's a good example for all of us to get our head around here. So, db, there's some problems here though. If, if you start to make good profit in this S Corp and you don't take the salary level you're supposed to, you're going to get audited by the IRS and owe more in taxes and they're going to restate your earned income. So be careful of that. I don't know what level of profit you're expecting in this S Corp, but please review our matrix on payroll, the Kohler payroll matrix, as I've termed it over the years. Number two, the 401k is freaking awesome in that you can get that head start of close to 23,000. Well, $23,000 this year if you're under age 50, 30,500 if you're 50 or older. So I don't know what W2 you are taking, but you could defer that whole paycheck. Now, if you do a deferral, that comes off box one of the W2. So that's going to reduce your earned income from a on the W2. And I don't know again why you're trying to keep your income down on the W2. But doing a deferred 401k contribution rather than a Roth 401k contribution could maybe impact that issue you're facing. And I think the 401k, the Solo 401k is awesome. And you can still do 25% of whatever your W2 is so if your W2 is 20 grand, you could sock the whole 20 grand in a 401k and put an additional 5 from your S corp into your 401k. So you're at 25 grand right there. So I think, DB there's solutions here. We're doing 401ks right now up until December 15th for this year, and charging a thousand dollars. And you meet with an attorney, and they will answer all these questions and more. So any of you that are looking to plow money into a 401k next year, you don't even have to put the money in until next year, but you got to have the 401k set up in the next six weeks. So. Great question. You want to add to that my 401k expert, Matt Sorenson?

I have nothing more to add. Perfect. An. All right. All right. This is from. What's their name here? L. Turner. L. Turner, okay. Asks. I'm a small business owner with a sole proprietorship. I have a reputable tax accountant. That's a solid start. Who only allows me to deduct mileage for business expenses. I've asked why I can't deduct my car payment and all related expenses. Is it because my business is a sole proprietor versus an llc? Thank you. Great question. Your account is giving you solid advice. It's either or.

Okay?

You're either taking mileage for the business miles you have, which gives you a deduction. And it's the easy way because you just track. All right, I drove 10,000 miles this year.

What's the.

What's the mileage rate for 20, 24?

It's in the 50s. I don't have it here in front of me. Sorry.

Let's say it's 60 cents. Okay? You drove 10,000 miles for the year. You get a $6,000 deduction. That's pretty awesome. That's a lot of miles. Maybe you're a realtor, a real estate investor. You've got to drive around to properties or whatever your business is.

Okay?

So. But let's say that to you, okay, that's a huge deduction, but that's taking into account your car payment, your gas, your insurance, your maintenance. It's meant to be an all inclusive thing. When you take mileage now, you don't have to do mileage. You could say I want to take actual expense because of the amount of gas I have, my maintenance cost, my insurance, my lease payment. If I'm leasing, okay, like if I bought the car, I'm depreciating. It over time, that might give me more bang for my buck. Now, most of our clients will do mileage because it's easier, but you might want to have a conversation with your accountant about doing actual instead of. I don't know your situation, but let's say that that car is used 100% for business. Then we're taking 100% of those expenses. If it's used, 60% for business, you only take 60% of the maintenance or the insurance or whatever those actual costs are. So it's either one or the other. Alternate. Sounds like your account's on the right page here. But you could switch over to actual if you want. Most people stick with mileage. Yeah, it's very difficult.

Everything you said, I would just say it's very difficult to move from one method to another once you choose one

with the existing car with the same car.

Now, you can have multiple cars in your household. One's mileage, one's actual, one's leasing, one's other methods. Sorry, I was gonna throw out a few other ideas that are on the fringe, but this is one thing you did say in there that I wanna clarify for everyone else is the difference between an LLC and a sole prop does not change your tax situation. You said, oh, if I was an llc, it'd be better. No, everybody remember, llcs do not save taxes. They do not save taxes. S. Corporations can save us taxes when we're in the right situation. So don't worry about that. Just keep track of all your records as best you can. Your accountant, like Matt said, it's got you on the right conversation. Well, this is from Jay Griffith. This is kind of fun. He said, I just want a house in a charity raffle valued at $725,000. Wow. Yeah. I have to pay 24% federal taxes and 11% state taxes. Sounds like you live in California. At closing, my intentions are to sell the house, which is allowed. I have several questions, so. Well, congratulations on this win. And, folks, if you win an asset like this in a. In a raffle or charity, you've got to pay tax on the value of what you receive, the fair market value. So he's going to pay taxes on 725,000. And he's done the math of his tax bracket and how much tax he's going to pay. Now, he asked three questions. What is the best way to title?

Can I hold? I mean, yeah, 24%. Really? Only if that's $725 in value.

I sounds a little low. Yeah, it does sound low. And I, I'm just going to take it on face value. Jake Griffith, maybe you have some write offs in other areas. Now, by the way, when you say you have to pay 24% in federal taxes and 11 at closing here, this is what's going on. I'm glad you said that, Matt. That's what they're withholding. Yeah, because the government doesn't know what tax bracket you're going to be in. So they just are withholding at 24%. Your tax could very well be, let's just look real quick of the tax brackets and. You're looking at easily. You're going to be in the 37% bracket period, 750 grand. You just went into the 1 percenters. So you're going to probably pay 37% federal. They withheld 11 on state and that's probably where you'll be as well. In fact, if you're in California, you could be paying as high as 12% or 13%. So, Jay Griffith, my first wake up call here. And Matt, I'm glad you phrased it the way you did and question that is that's how much they're withholding, that's not how much you're going to pay in tax. I'd meet with your accountant right away and find out what the tax bill really is. All right. Now you said what is the best way to title the house? Well, it depends on what your plan is. If you're going to move into it and live there, put it in your trust, your family trust. If you're going to make it a rental property and Airbnb it or rent it out long term, you're going to put it in an llc. You're not going to put it in your personal name at all. So that's, we don't want to go there. Number two, should I hold the house for a while and use it as a rental to reduce capital gains? Well, using it as a rental is not going to change your capital gains. When you do go to sell it, it's your holding period. So if you were to you win this house on January 1st, you take title, you hold it all year until January 2nd of the following year. You've now held it 12 months. Sell it, you'll get a capital, you'll pay capital gains, a lower tax rate, any appreciation over the year. Now, just to hold it for a year to sell it, to get capital you don't need, you're already paying tax on 725. So if you turn around and Sell it. On day two, you don't pay tax. So you've already paid tax on 725. That's your basis. So if you sold it a month from now for 750, you're going to pay tax on $25,000. And not capital gain, by the way. You'd have to hold it a year. So holding period is what affects capital gains. And any appreciat basis is 725. And what will the capital gains be if I sell right away? I just answered that. So zero. Assuming you sell it for 725. If you sell it for any more than 725, you're going to be in whatever tax bracket you're in. If you're in this 37% bracket this year and you turn around and sell it, I hope there's no appreciation. Or maybe you can. You got to meet with one of our tax advisors, Jay Griffith. You got.

Yeah, yeah.

Be happy you won this. You're going to be pissed about the taxes.

Yeah, yeah. This is like the. Everyone who wins the lottery, right? You're like, all right, I won $10 million on the lottery. You're like, that's actually 6 million. What do I get? You don't get 10 million. You get 6, maybe 50, depending on the state you live in, maybe 5.5. So, Jason, this is. This is you. It's just you won property, which is really the same as getting cash. It's taxable to you, and so don't think of it as 725. If you can think about that, then you're going to be okay. Otherwise, you're going to be hating it. But still, don't be mad about that. Right? You won. You're still a winner.

Okay. All right.

This question from Denise Vance. She said, mark and Matt, you make the world a better place.

Oh, wow, that's so nice. Wow. Thank you.

And she says, thank you for that. Says, I have an LLC set up through KKOS. That's our law firm, guys. You can get your LLC, your estate plan, your solo 401k A plan. So our law firm is doing every day for clients across the country. She says, but I set up the LLC for purposes of holding the rentals. My mother and I are 50, 50 owners. Awesome mother daughter combo on. On setting up rentals. And she says, I'm working on launching my bookkeeping business in January of 2025. Mom isn't part of that business. Should I run the bookkeeping business as a DBA through the LLC until the Business has generated enough of its own revenue or set up an S corp for the bookkeeping biz from the start. Thank you both for what you do. Okay, excellent question, Denise. This is the perfect scenario of our trifecta, Denise. And the lawyer that you worked with on setting up the LLC can help you on this next business question and setting up the bookkeeping business. So here's what we want to do. We always separate your life onto two sides. Acquiring assets on the right and your operations and business activities on the left. We do that for two reasons. The first reason is I want your assets separate from your operations. I don't want something in your operational business where you have a lawsuit affecting what goes on with your assets and your rental properties, where you're building equity and generating passive income. So you want those things separate from a liability standpoint. Okay. The second reason is they're taxed differently, right? Like the rental income I get from my rental properties or my investment assets is taxed differently. There's no self employment tax on it. I get capital gain income, which is a lower tax rate. When I sell it, I'm not paying into medicare and Social Security tax on it. But over here on the left side with my business income, I'm paying into self employment tax. For your bookkeeping business, your consulting business, you're a real estate agent getting commissions. You got a, you know, a storefront, you're selling services. I don't care what you are that self employment income and you do have to pay a medicare and Social Security tax on that. So what I would do, Denise, is I set up an LLC for your bookkeeping business. Now this is separate from the LLC with your mom. And even if your mom wasn't involved, they'd probably separate it out anyways. But we have the separate LLC to start this bookkeeping business. Now you asked about setting up an S corporation. You could do that if you knew this business was going to be busy

out of the gate.

But I like setting up the LLC first because we can add the S election later. See, the S election and being an S corp only saves you once you're at about 40 or 50,000 of net income. If you're making 10 or 20,000 net a year. I don't know if this is full time side hustle and getting started. It might take you a while to have a profit. But at first the LLC simpler goes on to schedule C. If you have 10 or 20 grand of income, you're not paying a lot of self employment tax, but you're not doing payroll, you're not doing a corporate tax return. It's a simpler setup, but you still have the entity. You have the asset protection. If something goes wrong, get the official structure and we can add the S selection to it whenever we want. So if you hit it out of the gate and you're super profitable, you're making 40 or 50,000 net after all your expenses, we can just add the S selection there and that's when you're saving taxes and the tax return and the payroll you're going to have to start doing because the S election will be worth it.

Love it. Great answer, Mr. Sorensen. This is from Sgoodale514 says I have I think it's a she here, but not sure. So forgive me, I'll just say good ale. Goodell says, I have a lump in my throat just writing this query, but when my good friend came to me in search of tax advice, I could not think of a better place to turn than to the Dynamic Duo. I think that's you and me, whose podcast, emails and YouTube videos. Yeah, Batman and Robin. We've got his number. We'll send it over to you. Dynamic Duo whose podcast, emails and YouTube videos truly never get old. So here it goes. Thank you. So nice. Friend is a house painter and insists that she can be structured as a sole proprietor in order to avoid the administrative requirements of maintaining an llc registering with the state. Boi la la la. When I told her about the unlimited personal liability, she says, oh, that's okay. I have a $2 million business insurance policy. So to be fair, she is a small business. Her family's net worth is probably less than 2 million. But my question for Mark and Matt, or is it Matt and Mark? I think it's Mark and Matt is as follows. Is she correct in that an adequate insurance policy negates the benefits of structuring as an llc? Thank you both. Well, Goodell, I am glad you're asking this, and hopefully you'll be able to clip this podcast portion or get your friend to listen to the whole show today. But this is. This is a good one. And the answer is no. An adequate insurance policy does not negate the benefits of structuring as an llc. And let me tell you, two or three reasons. First of all, have you made an insurance claim lately? Oh my gosh, it's so fun. And let me just assure you, Good L. They're just going to rush to your side. They're going to pay whatever claim you have. They're not going to figure out ways to get out of it. And they're going to pay policy limits and oh my gosh, they're just going to rush in and make your life so much easier. Do you feel the sarcasm? Now, I'm not saying don't get insurance, and I hope the insurance company might do that, but holy crap, you're putting your entire family's net worth in the hands of an insurance company that its goal has a 30 page insurance document you've never read before. And heaven forbid you're talking about an umbrella policy, because umbrella policies are the worst. You know why they're so cheap? Because they rarely pay out. They only pay out after all the other insurance does. If even insurance, other insurance covers it. Number two, this. Can you fathom all the different types of liability that could occur with a painting business? If you're negligent at all and you're painting and paint falls on the ground and someone slips and falls, or this that, you have a worker on a ladder, you have this, that and another, and there's a problem, the insurance company may go, oh, we don't cover that and you're toast. So please do both. We do both. Every client should do both. They should have insurance and the llc. And now let me just talk about tax planning. Holy crap. You want the llc? The LLC is going to save you money. Administrative headache. Yeah, it's called an annual meeting that you can hold on a trip and write off the travel and the dining and everything involved. You should be having annual meetings with that family llc. And third, you can convert it to an S corporation when the time's right. You're a painter. If you're making 50 grand or more, you should already be an S corp. If you're making $50,000 or more, I hope you are. Or if you want to get there and all of a sudden you get there and you're not an llc, you're screwed. Now you're paying even more in taxes, far more than you're paying insurance premiums. I don't know, am I emphatic enough here that just do the freaking llc. It will save you money, protect you from any possible lawsuit that could shield you when insurance may not come to your rescue. Anything else I'm missing? Yeah.

What I would say is think of the LLC is like the shield. Like the LLC is a law in every state that says if something happens in the business, they can only sue the llc. They'll only be able to get your painting business. They can't come after you or any of your assets, period. Stop. You're done. I don't have to worry about where the insurance policy is covering this. Let me just give you an example. This is one I had to help a client through years ago. Guy had a rental property with an llc, had an insurance policy. Okay. Tenant slips and falls walking up the stairs to the front door of this little single family rental. Has pretty significant injuries and sued my client. Well, what did the insurance company do? Denied the claim. Why? Because they could. That's doing a good job if you work for the insurance company. Okay, all right. That adjuster got a pat on the back. And the person who wrote that policy, they're like, we didn't have to pay on that one. Okay, here's why. There was like five or six steps up to the front door of the property. There was a handrail on one side, but not on the other. Code in that city said, hey, if you have steps this width, this many, you have to have a handrail on both sides. So they said, this wasn't in compliance with code. Because it wasn't in compliance with code. We are not covering it. You are in violation of the terms of the insurance policy. We're not covered. Well, thank goodness the client had an LLC because they did have other assets they were concerned about, and they were able to negotiate and settle the claim for a reduced amount because all their assets weren't exposed. So don't rely too heavily on the insurance policy. Yes, we want to have it. It does cover sometimes. I'm not saying insurance policies don't pay out. We've certainly been in those scenarios too. But I think if you're building wealth and you're an entrepreneur, you do have some risks in your business. We want to make sure that those risks are limited and barred to only be in the business so that you can grow and build your assets. Love it.

Aries commented and said this would take two seconds. Matt, I know you've got a question. She said, I signed up with your firm to set up an entity for my business or businesses. I will be serving as a transactional broker between real estate investors and lenders and La, la, la. There's certain states that allow this, certain states that don't. I'm excited to get set up. I want to get my proper trifecta in business. Please help. And. But. And I love your question, or I don't know what the question is, except please help. And then at the beginning, you said you already signed up to do an entity with us. So, Aries, I think you're good to Go in that consultation, any questions or issues you have about why you're setting up, how to set up all these issues from state to state. Our attorneys are going to be able to help guide you and point you in the right direction. So I am grateful for your comment and that you've already made an appointment with our firm. So I'm just going to leave it at that and see if that gets you off to the races. So here's a question from Dale Purcell. Hello Mark and Matt. What is your recommendation for when I to file a conversion of an LLC to an S corp? Thank you, Dale. Dale, easy question. Sorry Dale. He posed this a few months ago. I just popped up. I missed it. But Dale, you still have time and any of you this year have that have had more than 40 to 50 thousand dollars of net income. I just referenced that with the painter we just talked about. If you are making more than 40 to 50,000 net, you're pulling that money out of your business for profit. You are a candidate for an S corporation. We firmly believe that. We've been doing this for 20 plus years. We've never had a client audited for making a decision like that. And there are tax savings on the table with reasonable comp. It is very straightforward. Please get with one of our tax advisors and you can either call our law firm to help you with the conversion or go to markjcoller.com and click on our tax advisor network as one of our services there and find an accountant that can help you in this whole process. We love the strategy and Dale, you're off to the races and anybody that's listening that made 40 or $50,000 this year in an LLC and you're not an S corp, we can still backdate you into A S Corp 1124 and you've got to do it in the next six to eight weeks because you have to kick out payroll in January. So you got to hurry so get on it. And Dale, thank you so much for the question. All right.

Workman 1966 asks. I hear Mark often touting the benefits of an S corp election for everyone. But I need a little help getting my head around this this in our situation. My wife and I are blessed with day gigs that are about 250k. We are also the primary owners of three different consulting partnerships each with their own LLC. Our consulting partnerships net out about 200k each in self employment income. Since we each max out FICA in our day gigs. This is the Social Security part of fica. Is it really in Our best interest, to consolidate the LLCs into an S Corp structure. Aside from our reduced audit risk, in addition to the expenses of setting up, probably insignificant. I also think the S election would limit our solo K employer contributions. Maybe making this all awash and not worth the trouble. Am I thinking about this incorrectly? Okay, it is a little more tricky in your scenario work with 1966 because you are already paying out the max in Social Security portion of FICA because you and your spouse are both high income. So there's no Social Security savings to be had when doing the S corporation strategy. But there's other benefits still to be had there. Okay, the Medicare portion of it. Right. We have 15.3%, 12 point whatever is Social Security. The other 3% is Medicare. And so for every $100,000, let's say I'm, I'm, I'm designating. I mean you're saving three grand. You're saving, you're saving three grand. Okay.

We've got Obamacare in there. So ADA is going to kick in for another percent and a half. And so there's savings and you just have to do the math. Sometimes 100, 200 grand could save you three or five, six grand.

Yeah. And I think it. I broke one of these down. I did a video on YouTube about this for high income earners on using the S Corporation. And you know who I used as my example? Jill Biden. Jill Biden had an S corporation. She's running a million bucks through it, but also had like a, I don't know, she's like a community college professor or something. I forgot but. And so I ran the numbers on, on saving. And so a lot of high income people have this question where they think, well I'm already maxing out my Social Security. They forget Medicare and ADA forget the rest. There's still savings to be had. And honestly, the more money you make on these consulting partnerships, the more tax savings there are. And my guess is workman 1966, you're planning to make more money. Yeah, it's only going to save you more the more money you make.

And couldn't you start looking in that S Corp for profit sharing 401H DB plan. A lot of other things.

A lot of other things. And I will say you asked the question about would the S corporation limit our solo K employer contribution? No, it increases them.

Yeah.

It makes it simpler.

Yeah. You do a mega backdoor Roth. I look at that too. And one side note is that our tax and legal360 event, that's in 15 days. It will be December 5th, 6th and 7th, three day event. We have an entire class on tax strategies for the 1%. And it was a big hit back in the summer. And, and I think you would really benefit from that class. You can sign up for the virtual attendee as a virtual attendee and catch that class and others. So even if you're a business owner and not a tax advisor, these classes can give you a leg up to find the right tax advisor. So please check out tax and legal360.com the virtual cost is like 500 bucks and you get 30 classes that you can watch on the recordings. And many of you would really benefit from it. Okay, this is Tony Track. Now, Matt, I'm going to see if I can answer this one correctly. It's a Roth IRA question. Okay, we got the guru Matt here.

I'm paying attention.

If someone has a Roth IRA with an LLC and the LLC owns a crypto wallet. Now we've taught this over at Directed Ira podcast. So your Roth IRA opens an LLC and that LLC goes and opens a Metamask wallet. So you can maybe buy some coins that the Gemini platform @directed Ira doesn't offer. Okay, what happens if some random, random crypto project decides to airdrop you crypto? Then it sounds like in that wallet that's owned by the Roth llc. Then what if the airdrop crypto project eventually has value, say $1,000? How would this be handled in the Roth IRA since Roth money was not used to purchase this cryptocurrency? Well, what you've done. Okay, here's. I'm gonna give it a shot. You have made a disallowed contribution to the Roth with this random transfer into the wallet owned by the crypto llc. Roth IRA llc. You would want to take that money out right away and put it in a personal wallet because you did not acquire that currency with your Roth money. Think of it as a gift. Think of it as earned or whatever. You can't just pop it into a Roth wallet. It's not good.

Yeah. Now if Tony Trek, the airdrop was because the Roth purchased something or did something with this llc and this was about the Roth's crypto, then that airdrop could go into it like staking or something, and it would be income into the Roth LLC and would be okay. Now if it's under 1000 bucks, you don't have to worry about UBIT or UBTI. But the IRS did come out with some guidance saying airdrops or mining income for crypto would cause UBTI for your ira, including your Roth ira. That'd be the only issue there. You might have a UBTI tax issue if it's over $1,000 in value, but I'm making some assumptions there. Now the other thing I'll say right now is, you know, we have a lot of clients that have crypto Roth IRAs, traditional IRAs, HSAs, at directed IRA. It's been an incredible product and some of them are using the LLC structure. But that crypto Roth IRA with Gemini has been very popular. And there's a lot of happy clients right now. A lot of happy clients right now.

Set that up.

And there's a lot of people running it in now, being like, I better get on this train now too. So. But just know you can buy crypto in your ira. You buy real estate in your ira. It takes a self directed ira. It's what we do at directed ira, our trust company and self directed business where we're helping clients invest in what they know. So for those of you that aren't savvy to that, Mark owns crypto in his ira. Roth ira. I own crypto, my Roth M IHSA and real estate, other private companies. So these are things you can be doing if you're like, wait a second, this guy did crypto in his Roth ira? Yeah, he did. You can too.

You can too, get over to direct. Com and open up a crypto Roth a crypto hsa, crypto ira, crypto esa. It's all there, folks.

Heck yeah.

Okay, you have a question or I've got one here or you go?

Nope, I'm still behind. Sorry. Okay. I was trying to be ready. For what? The one you read me. I was.

All right, so this is from Chuck's 437. He says background, if relevant. I'm a chiropractor with an S corp for my practice. I have a separate LLC which owns my building and rents it to my S corp. Make sure, Chuck, you're doing the Dash 4 election. You could even do a cost seg on that. Very powerful strategy. I live in the country about 20 miles from my business, which is an actual town with stores. I commute to work six days a week. I don't include commuting in my business mileage, but when I go buy things for my business, I track that mileage from home to the store and back 40 miles and use it toward the standard tax deduction. And I think you mean the mileage deduction for your small business. But anyway, question does going to the bank, count toward the mileage deduction as I need to drop off business deposits multiple times per week. I've never seen this specifically included in past videos. Are there broader things you could mention? Oh, my gosh, Chuck, yes. And here's the way I say it. Anytime you are driving in your car, your spouse's car, your kid's car, your motorcycle, your rv, you're driving in any vehicle to go do any type of business. Go meet with a client, go have lunch, go pick up supplies, go to Staples, go to the Apple store, go to the bank, go duh, duh, duh, duh, duh. All of that mileage is a write off. I want you thinking outside the box. The only mileage that's not a write off is, is personal mileage to go to the grocery store or the movies, go to the lake, and commuting mileage to go from the house to your practice. That's it. I would like to see you throw in the kitchen sink on any business mileage that you can think of if you're out and about, not specifically the commute and not strictly a personal excursion. So lots of options there. And Chuck, oh, my gosh, there are so many little things like electronics, cell phones, computers, equipment, travel, hotel, airfare, Airbnbs. Writing off your annual meeting, you could have quarterly meetings, your board of advisors, board of directors, your 401. I mean, the list goes on and on. We do a comprehensive tax consultation with almost 50 different strategies to help clients find that edge. If you haven't done one in the last year or two, please call the law firm and ask for a comprehensive tax plan. We'll build you a trifecta, go through your tax return, and if we don't find you a tax break in there that pays five times what you paid us, we failed somewhere, like, we always find something good. So check that out, Chuck, and Great question. All right, Matt, I think it's time to say one last question each.

Here's my last question. This is from Mark. Mark says, I was told that I can no long HSA contributions after age 65. Is that true? Well, it depends, Mark, did you take Medicare? Okay. And generally at age 65, you need to sign up for Medicare. And if you have Medicare, you don't qualify for an HSA because that is not a high deductible qualifying plan. However, if you are still working and you have not taken Medicare yet because you are still working and you have a covered policy through your employer, it is possible that you could still make contributions to the HSA past 65. This is an exception. And so you got to meet those exceptions and those rules. A lot of people are going to take Medicare at age 65, meaning they no longer contribute to the HSA. But you might fit into that exception if you're still working. You have a high deductible qualifying plan provided by an employer. Short and simple.

I like it. This is from Lily Creek Ranch. The last question, and this is a good one, is putting kids on payroll. So Lily regrettably sent this right before filing their personal return for 2023. But Lily, this is still going to help you for 2024. And any of you with children, please listen up. She says, I was under the assumption I don't need to provide my kid a 1099 for working on our farm. Legitimate work was done. Obviously, I would like to deduct this expense $7,000 for 2023 and I filed an extension. I hope it would be more than that, Lilly Creek, but I ramped that one up anyway. Current tax preparer says I need the 1099 for them. Should I pay the fee and file a late 1099? Also, what do you recommend for 2024? Thanks. Okay, there's one critical piece of information we're missing here and I'm going to give both answers. Is this child under age 18 or 18 and older? If they are 18 and older, yes, you need to issue them a 1099. That's the rule. Good. If they are under age 18, please tell your tax preparer to join our Tax Pro certification and learn the strategies that work and are street smart that will save them so much money and their clients. They are wrong. And I have put this in writing on multiple articles and books. I teach CE on this. I am so sorry. I'm not trying to be rude to your tax preparer and hopefully they listen to this. But when you pay your children under age 18 in your business, and I'm not talking about an S corporation, we have a workaround for that. But in a farm like this, you are going to pay them as outside labor. No W2, no 1099, it is not required. Now, in some states where the standard deduction is greater than the $14,000 and change this year, or in some states where the standard deduction is less than the 14,000 and change this year, I would want to issue a W2. All the withholding boxes and FICA boxes are zero so they can file a state tax return if needed. And they could be paying their kids a lot more than this. Too, depending on the services they're providing. So do not ever, ever, ever issue a 1099 to a child under age 18. And you might do a W2, but certainly no withholdings or FICO withholdings. It's not required. And I would. I don't think I've ever issued my kids a W2 under age 18 for years and years. And I've never, ever in 25 years had a client audited under this. Go to Circular 230. Study up on this. Your poor accountant is wrong. Look for a new accountant or get them to join our program and level up. Yeah.

And if you want to take it to the next level, why don't you set up a kids Roth IRA for your kids and instead of paying them and reimbursing your expenses that you have for them and taking it back or letting your kids actually have it, why don't we put it in a Roth IRA for them? Teach them how to invest and how their money can work for them. Then wouldn't you wish that your parents did that for you? I wish my parents did that for me. But that's another cool strategy a lot of our clients do. Again, one of the strategies that a tax professional from the Main Street Tax Bill program would know tell you to take it to the next level. Well, thank you everyone for your questions today. If you want to ask questions, by the way, for the podcast, you're like, I got a question. Well, go to mainstreetbusinesspodcast.com hit the submit a question button and we'll hit on the next Open Forum podcast. Try to keep it, you know, in our lane of tax and legal. Don't ask us who's going to win the super bowl this year or, you know, something outside of our lane.

We'll still tell you. We'll still tell you. I don't know if I'd put money on it, but no, I'd go with chiefs. All right, go ahead.

There you go. That was worthless advice. But you know what? All of our advice today was free and hopefully you find some value in it, though. But we truly love doing this, teaching clients tax and legal planning how to grow and build wealth. We'll see you next time on the Masonry Business Podcast.

Thanks, everyone. See you next week.