Tax Lawyer Q&A: Strategies To Save You THOUSANDS In Taxes

Never redeem points for a business expense. This is going to be the difference maker in your retirement.

There's only two situations that I ever want the spouse to be on payroll.

Do not go out and set up a new entity just to do your tax and representation work.

If something happens in one of the businesses and they sue, they're going to be able to sue your other businesses. So now you have that separation. You get the asset protection, but you also get the tax savings.

That's one issue, but you got about 10 issues. Welcome, everybody, to another episode of the Main Street Business Podcast. My name is Mark Kohler and I'm here with a special guest, Ashley Burr, attorney, superstar Kid Wonder. Because she looks like she's about 22, but she's like 40. No, you're not. But anyway, she's an attorney here at kqs. Lawyers from upstate New York. Just a Buffalo Bills fan, right? Yeah.

Go Bills.

Yeah. How are they doing?

They're the super bowl winners this year. Watch out.

You think they're coming? They're gonna repeat.

Yeah.

Okay.

We're gonna kick Mahomes butt. That's all I gotta say.

I love it. I love it. Well, glad you' and Ashley has been speaking at more and more conferences for us around the country. She does a fantastic job on consultations and just helping so many Main street business owners. So today the people show the open forum. She's gone through our list of questions coming in and cherry picked all the easy ones. Damn it. So I have to take the hard ones. No, I'm just joking. We're gonna have fun today, so we're gonna just dive into it. And for those of you that are new to the show, welcome. Glad to have you here. About every third episode, we're just. We just go to our webpage and answer questions from three or four categories. If you ever want to get there, please head over to mainstreetbusinesspodcast.com and submit a question. So, Ashley, you get to go first. What's our first question? I'm excited to hear.

Our first question is from Holly Lynn. It is about Roth conversions. So Holly is currently a W2 employee. She will be leaving her job next year. She has a ton of money sitting in her traditional 401k. A little over a million. She wants to get that all converted over to Roth so once she retires, she can roll that into a self directed Roth IRA and start investing, taking control of her retirement. So she wants to do this whole tax hit in one year. So convert that entire 1.5 million in one year. Take the hit in one year. So as you guys know that if you are converting traditional dollars to Roth dollars, it's gonna be a tax bill event that'll get added to your taxable income in the year you do that conversion. So Holly Lynn wants to get hit all in one year. Sometimes we recommend chunking where you just do a little bit every year, just enough to not push you into the next tax bracket. But Holly wants to wing it. She wants to do it all at once. She said that her plan is to then fund the conversion tax bill by selling her house to the newly formed Roth IRA llc. So this will be hers.

Oh, would that be nice?

Yes. Yes. So then she to use the SAL proceeds to pay the tax bill and then remain living in the house as her Roth IRA owns it. Yes. So her question is, is this doable?

Wow. Who gets to be the bad guy here?

I'll be the bad guy.

Okay, okay. All right. Well, there's some good here. So far the conversion's a good idea and she's got to pay for it. But the problem is the buyer.

Yes, exactly. So when you're investing with your retirement accounts, there are certain rules that the IRS has implemented because people who invest with their retirement account have huge advantage over people that don't that tax free growth. So the IRS has implemented these rules to kind of keep things more fair for people. And the big thing is you cannot commit prohibited transactions. And that means transacting with people who are disqualified parties to you. And people who are disqualified are you yourself are prohibited from transacting with your retirement. Your spouse is also a disqualified party. And then think of your lineage, anyone above you and below you, off limits. Parents, grandparents, kids and their spouses, grandkids cannot transact with them. People to the side of you, brothers, sisters, cousins, you're okay. But in this situation, Holly Lynn, you are trying to purchase your own home with your Roth IRA llc. That would be a prohibited transaction as you are disqualified from doing so. So it's a great idea thinking outside the box, but unfortunately you will not be allowed to do that.

Now if you were, sell the property to a third party, take that money and pay off the conversion. That's great, but yeah, you're not going to be able to live in it. I'm trying to think of. And the problem is we got to think it creatively. And this is what we love doing at kqs, Lawyers is trying to find a solution for her. And what she's trying to do is Keep the house.

Right.

She's trying to harvest the money in

the house and mitigate the tax burden from the conversion. There are ways to mitigate that. And if you are into real estate, there are a lot of big real estate strategies that you can use to offset this taxable income. So it's not a loss. There are strategies. If you would want to come in and kind of talk about those strategies, I can help you out and figure out how to mitigate that. So your tax bill isn't as high.

Well, I. Yeah, for sure. So you could offset it with some other investment. I was also thinking she could borrow against the equity of the home. Sure. If she has that. If you've got that much of a gain in sitting in the home that you could use to pay the tax. I know interest rates might not excite you right now, but you could borrow against the equity in the home, pay the tax, and now you're just paying that tax really through a mortgage payment with some interest. And when you have another windfall, you could pay that mortgage off. You could sell the property down the road, but that allows you to stay in the property and get this conversion done.

Exactly.

So I think there's, there's a few options there. Okay, well, let's move on. I got a question here from Logan, and this is a great one and I love this topic and Logan did the research for me and Logan just needs a, A high five here. I think he's just nervous. And this is a great question. And it basically, I will summarize it this way. Are credit card points taxable? When I redeem credit card points for anything for business, personal use, whatever. When I redeem those points, is it taxable? The answer is no. Now let me tell you how cool this is. I can use my Amex, pay for a business trip, buy business equipment, business furniture, business marketing expenses, spend $10,000 on a bunch of crap on Amex for business, take a tax write off and then have, let's say 10,000 points or whatever. The equation is double points, triple point, whatever. Let's just say I get 10,000 points out of that. I can then a month later, a year later, whatever, take those 10,000 points and redeem them. Redeem them for a flight to Costa Rica, no tax. There is no tax. When you dream points, you can redeem it for a personal trip, redeem for a business trip, redeem it for product or crap, whatever you want. Logan was so kind to send us 2002-18 IRS pronouncement that goes through this. And I know it sounds wishy washy because Logan's like, hold it. It doesn't say that directly. It just says the IRS is not enforcing this. And the IRS doesn't tax it generally, but they're pretty quiet on it. Well, let me assure you, Logan, in my 20 plus year career, I have never seen the IRS pursue this. They don't. Never heard of it. Every practitioner knows this. This is one of the best loopholes. I don't even know if you call it a loophole. It's just because it sounds like it's some trick the IRS isn't aware of. They're aware of this. It's good. It's cool. So Logan, and all of you out there, this is such a cool strategy. I have an app that tracks my points on all of my hotel usage, rental cars, airlines. I love to redeem points. It's tax free and so the technique, never redeem points for a business expense, redeeming all those points for personal things that are not a write off. So if it's a business trip, pay for it with the credit card. If it's a personal trip, redeem points. Because you're not going to get a write off if you redeem points. You can't write off the trip by redeeming points. So use it for personal. So I don't know. It's an awesome strategy.

Yeah, it's great. Yeah. I think the IRS just deems it as a discount rather than taxable income. So you're good.

Yeah. Good, good, good. All right, what do you got? Next question.

I've got a question from China. F71. All right, so it sounds like they, they had a rental property. They were just filing taxes on their schedule E under their personal name. But it looks like they've got some good advice because now they have a rental llc. They have that property owned by their LLC rather than their individual name. So they said both husband and wife are owners of this llc. So multi member. So now she's confused. Do they file a 1065 or do they just report the income on their schedule? Either. So when you have an llc, you have members and you have managers. Members means owners. Managers are just to manage the llc. And just because you're a manager doesn't mean you're also a member or an owner. So when it comes to spousal relationships, I typically don't recommend the partnership route. Especially when you're a single tax filer. You file jointly because then that requires a 1065 partnership return. Whereas if you're just a Single Member Disregarded LLC. There's no extra tax return just reported on your 1040. So I typically don't like my clients to have to pay for that additional tax return if they don't need to. Ideally you guys would have a revocable living trust that you guys are both trustees of and that would be the member of this LLC to keep it single member. You guys are trustees of this trust. And then I would also make you both managers of this llc. So it's single member disregarded, owned by your trust. But you guys still get to run the show because I make my entities manager managed, so the manager has all the signing power. So now both spouses get to operate the business, but there's no additional tax return for you guys.

Love it.

Yeah.

Good stuff.

Yeah. So to answer your question, so if you are both listed as members, there would be a partnership tax return. Unless you live in one of those community property states that don't require that for spouses. But either way it's gonna end up on your schedule E. You'll file that 1065, that'll spit out K1s and then that K1's reported on your schedule E.

So but save the money, you don't need to have that extra return. It is less chance of an audit to file a 1065. But any self respecting accountant, enrolled agent, CPA, they're gonna charge 1000 bucks for that return at least. And if someone's doing it for cheaper than that, I'd be nervous of the quality of that return. So I think you're gonna save money, still get the protection. There's really no need to do that unless you're being really with write offs and you want it on a 1065. All right, well let's go over to Lindsay McIntyre. One, two, three. I love this question. She's like just being a great mom with her entrepreneur kids. She says my 7 year old wants to own a food truck for kids. Well, that seven year old, he's cranking. I don't even think Huck Finn or Tom Sawyer were that industry at age 7 to sell things like little toys, cotton candy, da da da. I am happy to help him as he has always been a salesman. Wow. In his seven year career, he's always been a salesman. Yeah. I love your optimism, Lindsay. I can open up an LLC in my name and transfer the LLC to him when he becomes 18. True, but because most of the venues that want that are going to allow for a food truck, whatever are going to Want a company and they're not going to lease to a seven year old. But anyway. But I'm worried about him running and working. If he it like he wants to, is it legal for him to run it and work it? I love the idea of a tiny truck by a kid for kids. I can only imagine all the other children he could inspire. I'm just trying to figure out how to make it legal. Well, I'll just tell you this. It is legal for a kid to open up a lemonade stand. Now that's in general. There's no federal law that says kids can't open up lemonade stands. And I use that example of lemonade stand because it's the same damn thing. I don't care if it's a tonka truck, Ford F150, whatever, the kid's going to be selling stuff on the side of the road or at a weekend food fair, whatever. It's not his, it's going to be yours. He's under age 18. He's the face of it. That's cool. He's your little Lizzie McGuire and he's going to be out there, you know, selling food, hawking it. That's great. Whenever you start, if there's going to be food involved, you could have food licensing type issues. It is funny. I've seen on social media kids that open up at a lemonade stand and then the local food inspector comes by and shuts them down. I'm like, oh my gosh. But other than that, there's no, I would not be concerned at all about your son wanting to sell things from a little toy truck, whatever truck. And I think it's a great idea. Now, do you really need an llc? If you're going big, get the LLC rolling. You know, whether it's again, these farmers markets or wherever you're going to be going, flea markets to set up this little operation, you're going to want an llc, I guess. But I don't know, with a seven year old I'd be kind of like, let's just have a test of product here, get out there and do a few weekends of this. He may be bored of this real quick. So before I want you to spend money on an llc, even with our office, and believe it or not, we're not dirty, we're not scoundrel attorneys that are just going to sell you an LLC for the hell of it, I go out and get proof of product, see if the kids enjoying it, do it. See if it's making any money at all have some fun with it. And if it starts to evolve, I. That's great. This is great for a teenager. I wish your kid was 12, 13 years old, not 7. But maybe he's a little prodigy, I guess. Yeah. So I hope that helps. Lindsay, go for it. Do it. Get them engaged. I don't see a legal issue. Just don't spend a lot of money or waste a lot of time on it until you see how this little guy does.

If you have your own business, get them involved in your business as well. And that's going to open you up to some awesome tax strategies and still keep the entrepreneurship blood rolling. So yeah.

And if you already have an LLC for another business, just cannibalize this and set up a dba. So you don't need to have a new LLC for it, that's for sure. Okay, next question.

All right, so it looks like lurch82 has just recently opened up an HSA self directed and is wondering if the rules apply with an IRA to an hsa. So prohibited transactions and UBIT and UDFI and whatnot. So HSA is a powerful wealth building bucket that I always recommend to people.

What's an hsa?

HSA is a health savings account.

Okay. Just making sure for those listeners that are like, what gibberish are you talking about? Okay, yes, Health savings account.

Yes. So if you have a high deductible health insurance plan plan that is HSA eligible, I absolutely always recommend to my clients, open up this account. It's like a traditional IRA in that anything you put in there contribute to your HSA will be tax deductible. And then it's like a Roth IRA in that anything you take out for medical purpose is totally tax free. So and these are the, the numbers for 2024. For an individual, you can contribute up to 4,150. For a family, you can contribute up to 8,300. So if you max that out, put that full 8,000 into your HSA, you're red reducing your taxable income by $8,000. So it's really great. And then we're also all going to have medical bills throughout our life. That's actually the number one reason people dip into their retirement early is to pay for medical bills. So it's just awesome to have this account that you're putting money into it, you get the tax deduction and then you get to take it out for any medical purpose, tax free. So and to answer your question, you can absolutely self direct your HSA just like you can your ira, you can go buy real estate, own a startup business, whatever you want. But the rules will be the same. An ira, there are prohibited transactions, there's disqualified parties. If it's part owner of a startup, you're going to be subject to ubit. If you're using debt to leverage your deal, there's going to be UDFI. So same rules apply to an HSA as they do an IRA or a solo 401k.

My next question is from Pam and this just touches my heart. I'm really glad that Pam submitted this question. She says, I'm 74, a retired teacher, earn 2,000amonth with state retirement and have Social Security. I have no savings, nothing financially illiterate. I bought a piece of property in Costa Rica some decades ago that threw me off. That's pretty cool, Pam. And I'm selling it. Will probably get 500,000 plus cash and have in caps. No idea how to protect it or what I should do with it. Pam, what a godsend that you made that investment years ago. This is going to be the difference maker in your retirement. Absolutely. Obviously right now I want to talk about the word protect and I'm interested to hear what you think too, too. Ashley, is it? When she says I have no idea how to protect it, we might off the cuff think, oh, protect it from a lawsuit, protect it in some sort of LLC or protected in some sort of trust. I don't care about that, Pam. I care about some financial advisor that's going to sell you crap you don't need. And because they get a fee of some sort or commission maybe on the product they might be selling. And just like there's bad contractors out there, there's bad dentists, there's bad lawyers, there's bad financial advisors. So I'm not picking on the financial advisory industry. The point being is you've got to choose the right advisor to help you turn that 500,000 into the right amount of cash flow that you need for the rest of your life. I don't know, your health, I don't know that's going to play into this. Your cost of living, maybe you kept it very simple with your sources of income, but I don't know your what your budget is every month. So the way you're going to protect this, Pam, long story short, is getting the right advisor to not sell you crap. That's the trick here. It's not an llc, it's not a trust. I doubt you're out there driving a race car down the road or doing a Bungee jumping school or a paragliding school or you're delivering babies. As a obgyn, you don't have a lot of liability exposure at age 74, I suspect. So I'm not worried about asset protection. I'm worried about bad advisors.

Right.

So I'm going to just say this, Pam. I'll even alert my personal assistant if you email me and say this is Pam from the podcast. I will make a recommendation of a couple advisors I trust that I know you can interview and talk with and do a discovery call and look at options. But I would get two or three points of view and be careful of anything you're committing to for the long run like an annuity or some. Not that annuities are bad, but sometimes you can get locked into something and whether it's life insurance or annuities where there's just your lack of control, you lose it and just be careful.

Yeah, my brain went in the same spot. You wouldn't want to put that money in something like an LLC because you're not trying to protect yourself from that money, you're trying to protect that money from others. So just talking to a true independent financial advisor. Have a good legal team cpa. You just need to have a good team behind you that are going to steer you in the right direction.

I don't think it's unrealistic, Pam, to expect at least 8% in cash on cash return and you could easily do over 10 with the right type of advisor. Ignite funding that comes to every one of our events. Does hard money lending with first trust deeds on real real estate deals and they pay 10% in points around the clock. Michael Maselli doing oil and gas at all of our events. Money markets pay frickin 5% right now because of the high interest rate. High interest rates are the best thing that ever happened to you right now, Pam, because you're going to get more money. So think about that 500 grand. You should be making at least 40 to 50,000 a year on that. Divide that by 12, girl. There's another 4 grand a month in income. That 500 grand should be giving you 4 grand a month and you might even dip into the principal a little bit because you're 74 for crying out loud. I want you to flip that last coin out when they close the coffin. I used to have a professor that said, mark, I'm going to die and they're going to shut that guy. But I'm going to flip my last quarter out of the coffin. My kids get nothing. And I'm like, damn straight. That's. That's your money, Pam. So you use it. So that's what I'd worry about. Send me an email. It's Mark. MarkJ Kohler.com Pam. And I'll send you some. A couple advisors. Boy, if any of you are like, Mark, I want to interview a couple of your advisors that you trust. Just put that in the subject line, Mark. Send them to me and I'll send you the same two or three referrals and do your discovery call, talk to them. It's got to feel right in your gut and in your mind. And Pam, you listening to this show tells me you are not financially illiterate. Do not put that label on yourself. Just the fact you're listening to this show means you're trying to get literate and you're learning and growing and you can learn at 74, you can learn at age 14. So you keep it up and just keep digesting quality podcasts and books.

Good luck. Let us know if we can help you with anything.

Yep. Yep. Okay. Your question.

All right, so Sean Young. So this is. He's talking about the Mega Backdoor Roth. He's wondering if he can hire his wife as his only employee and double all of their contributions.

Who do you think? Oh, contributions?

Yes.

I thought it was inside the.

Yes, yes.

Keep thinking all these people wanted to hire each other. I'm like, what's going on here?

Yeah, and that's a good point because there's only two situations that I ever want the spouse to be on payroll. So the one situation would be that your spouse materially participates in your business. If she's another face of your company, talking to clients, showing face every day, you got to put her on payroll. She's got to have a W2. The other reason is if your spouse wants to participate in a solo 401k, so you would qualify for that solo 401k. If you own a business with 0 non family employees, we're talking W2 employees. But if your wife wants to participate in your solo 401k that you qualify for, stick around the W2 and she would actually open up her own account within your same plan and she would be able to contribute up to the lesser of her W2 or $69,000 for this year. So if her W2 was at least 69,000, your W2 is at least 69,000, you both can contribute 69,000 to this solo 401k. So you are correct. If you add her as an employee you both can make those contributions.

Well I'm going to jump over to small business category. I'm just taking it. I'm just going to see what we come up with here. So this is from Hengsler says I'm a Realtor in Florida and have a for my real estate sales and work I recently became an IRS enrolled agent. To be able to do tax and representation work, do I need to open a new entity to do tax and representation work or is there a way I can convert my PA to be able to do both real estate and tax work? Very interesting. Yeah. Okay. Well I would just say this for everybody listening and our and Hengsler here. I I normally don't recommend the PA Professional association. Gosh, I haven't seen someone set one of those up in 10 plus years. I don't know recommended that. That's fine. But whatever you're I'm hoping you've made an S election so it's taxed as an S corporation. So let's that's what really matters. So if you're going to be a PA, PC, pllc, there's so many frickin Alphabet soup of entities out there. I just like to stay in the professional corp, the Inc or the LLC lane that dominates 98% of the entities out there. So but anyway so setting the PA entity aside, you should be an S corporation. And to answer your second question issue, you can absolutely do your tax work in the same entity. Absolutely. I have one S corp in my life. One I've got URLs, book deals, I own parts of a law firm. I'm doing all sorts of projects with my S corporation which is a PC. It's a piece a professional corp for me, not a pa. But anyway, do not go out and set up a new entity just to do your tax and representation work. Please look at my Main Street Tax Pros program. Oh my gosh. We're helping so many new tax advisors up level their practice, helping them get clients. It is so so powerful. So if you haven't done a demo on that, get over to markjcohler.com sign up as a real person to do a demo of our tax pro training and you'll be a certified advisors getting clients from around us around the country. If any of you are looking for a certified tax advisor you can go to markjkoler.com and click on the network. And these are all people that have passed 80 tests in 80 plus areas, 12 modules and do weekly training with me to be on that list. So you would love it. And, and Hengsler, I think you would love it. So keep the same entity, make sure it's an S corp, Go for it, brand yourself, set up a dba, all those goodies, and hopefully we'll see you over at the TaxPro network. Anything you want to add to that?

Yeah, I actually had a similar question pulled up, too. I'll just kind of add on my 2 cents to that. You can, of course, run multiple businesses through one entity. You just need to take in consideration that if something happens in one of the businesses and they sue, they're going to be able to sue. Your other businesses, you're running through the same entity because it's just one entity being sued. So I typically recommend to my clients, when you're just starting off, have them run through the same entity. You don't want to have to manage a whole bunch of different entities when the time's not right. But eventually, when the new business starts taking off, it starts earning a significant amount of income. Go ahead, stick that in its own llc. Keep it disregarded, single member, owned by your S corporation. So now you have that separation. You get the asset protection, but you also get the tax savings because it's all just going to flow down to your S Corp. You take 1W2, and that encompasses your income in all of your different operational businesses owned by your S corp.

Okay. Love it. Love it. You got another question?

Sure.

Okay.

Yeah. So this is from Sandy AMC. So Sandy is 67 years old. So it looks like she's going to have to start taking her minimum distribution requirements. So she's wondering what she can do to offset reduce that tax billing.

Can you explain what minimum distribution requirements requirements are?

Yeah. So when you have a traditional IRA, I believe it's 72. 72. You are required to start taking minimum distributions from that traditional ira. And anything you take from that traditional IRA will be taxable income. So Sandy's at that point where she has to start taking those distributions and those will be added to her taxable income. So she's wondering how to offset that.

And they're called, sometimes you hear them out there, RMDs required minimum distributions, and you may be like, what the hell? It's my ira. Why do I have to start taking money out? Well, the. The IRS has kicked the can down the road a little bit with some new legislation. It's now age 72. But the point is, the IRS doesn't want you to die with money in your traditional ira. They're going to say, start taking the fricking money, go on a cruise, do something. So, so the RMDs are kind of a pain because you've got to start taking them and paying tax on them whether you like it or not. And so what do you suggest?

Yeah, well, so it looks like that she owns a bunch of rental properties and also a real estate agent. So she's very into real estate, which there's going to be some awesome strategies. One, I would look into becoming a real estate professional to see if you qualify for that. That is the ideal tax status that you can become. So see, if you qualify for that, you would have to work 750 hours in some sort of business such as development, construction, acquisition, brokerage, leasing, and then you must materially participate in the properties. But if you materially participate in those properties, you have a ton of losses and you qualify for real estate professional status. You'll be able to offset any of your other income through these property losses. So that's one route you can look. And then there's also the short term rental loophole, since you have properties on Airbnb and things like that. Look at getting a short term rental. There's qualifications. The two main prongs are you have to have a true short term rental, which the IRS deems as an average guest day of seven days or less. And then again, you must materially participate on that property, which basically just means you spend more time than anyone else on that property, painting it, listing it, putting in carpets, whatever it is. Then you get a cost segregation on that property. You have a huge paper loss. And now if you qualify for this loophole, you get to use that huge paper loss to offset any of your other income, including the RMDs.

Love it. Another idea to especially I know you went down that path because Sandy said she was in real estate. And if you're in real estate, that does open up a whole new world of ideas. The other thing I would say too, and we've talked about it earlier on the show here, is maybe you want to do a Roth conversion with just get rid of the whole damn thing, turn it all into a Roth. You'll never pay tax again. Rip the band aid off. Now, you don't have to take RMDs with a Roth. You can invest it, grow it, go buy real estate with the Roth. And it's like a tax free ATM at that point. So sometimes just getting over the pain and anguish of this stupid thing, and I'll tell you over time, the Roth is going to win the Roth will win. So I love just getting the issue off the table.

Yeah.

So that could work too.

Love it.

All right, I'm going over to SCJ1226 says I am funding the purchase of a business and will be forming an LLC for this new venture. Initially, my son and nephew will manage the daily operations for minimum compensation with the agreement that they will both earn up to 24.5% equity over a period of several years. Could you advise on how to structure their early comp and any potential adverse tax implications as they reach their maximum equity positions? That's one issue. But you got about 10 issues here. And I. Bless your heart. And I. And Scott. Sorry. Last he says. Thank you, Scott. So Scott, this is a whole section, not just a chapter in my book Financial Freedom, on how to pass on a business to the next generation. And a lot of those same issues and considerations are, are going to apply here. So we're talking about a really strong operating agreement of what they earn, when they earn it, how they earn it. And you've got to look at worst case scenarios. Let's say one of these kids doesn't come through, one of them has a divorce, one of them has a problem, one of them is they, they don't get along. What, what are your, what is your protection here of you putting money in this thing and then you've, you've let the train leave the station and you don't control the. The engineer. Not a good idea. So be very, very careful on how you structure this transfer of ownership with a lot of strings and bells and whistles and protection for them as much as you. Because you don't want to create a lawsuit in a family by just slapping it together. Yeah, I'm going to give you guys 5% a year for the next five years. Let's go. You know. Whoa, whoa, whoa. It's sun shining right now, blue skies, but I'll promise you the rain clouds are going to come. There may not be enough money one year. There may be a need to put more money in. And they're like, well, we're not putting more money in.

Whoa, whoa, whoa.

This is your business. I'm trying to build this business for you and you guys want me to fund it all? Whoa, that wasn't part of the deal. You have got to go through every possible good case and worst case scenario and document it. Then we can get to the tax issues then. The tax issues are actually the easy part here as you transfer ownership that you could have gift Tax issues. I don't know the value of the company. If you transfer ownership. This partnership law is so technical, you might be 1099 in them for the value of the partnership interest that you're transferring to them of which you get a tax write off, they claim income. Or you might just transfer ownership and it's not taxable to them and it's not a tax deduction to you, but you're claiming all the income. And you've got to worry about yourself in this scenario as much as you worry about them because you're going to be getting phantom income and there's so much here. I the, the practice group at our office. The practice group leader on this issue would be FETs. We call it Mark Fetzer and he helps people buying businesses and selling businesses structure them properly. And I would really, really recommend if you don't have an attorney already working through every with a tax background, mind you, if you don't have someone already walking you through every aspect of what I just threw out, get a second opinion, say hey Jahire, Mark for an hour and just we call them FETs around the office. There's two marks here, so call up and go, I need FETS for at least an hour and let them know the direction you're headed. And you've got to make sure you've got your accountant on board understanding how this transfer is going to take place. Is it gifting? Is it a 1099 comp? Is it not? And once they become partners they're not going to be able to take a W2 so they're going to need their own S corporations. You cannot 1099 them once they're a partner. Once you give them at least 1%. Now you're doing a 1065 and K1s. There are, I mean we could do a two hour seminar just on this fact pattern. So Scott, lots to do. Get some quality advice.

Yeah, I'm, I'm always hesitant when my clients come in and they, they say hey, in 10 years I'm going to transfer some ownership to my employees as an incentive to stay around. I don't like that. There are other creative strategies we can come up with where they can still earn compensation for their work and still incentivize them. There's profit sharing agreements and things like that. So don't jump to just transferring ownership unless you have a plan with the right team. There are other strategies you can implement and things like that. So just gotta talk to the right people.

A couple more questions. You take one and I'll take one. What do you got?

Sounds good. All right, so I'll end this one with it's a commingling question, pretty much piercing the corporate val. So Lynette Killy, she has a business bank account, but sometimes people are paying her personally, sometimes she's paying for expenses personally. So she's just wondering how this would affect her corporate val. So that's what this, the LLC or your entity or S Corp. That's what it provides you, your corporate val, that imaginary layer of protection that if something happens in the business, they're not suing you personally, they're suing the business. But if you go to court, it's going to be that plaintiff's attorney's job to do whatever they can to pierce that corporate vow because they want to sue you personally and come at everything jerks. Yeah. So it's you on the defense to come up with every argument you can to keep that intact. And commingling is the biggest one that will get clients that corporate val pierced. So it's super, super important you maintain that separation. That business bank account should be accepting all income related to that business. That business account should be paying for all expenses. Now, sometimes mistakes happen. You don't have your business card, you forget it. Don't make it a habit. But if that does happen, maybe even reimburse yourself from the business account. List that as an owner reimbursement. But you really should focus on making sure all expenses come from that business account. I typically recommend don't keep a ton of cash in the business account because if it's sued, they're going to come at everything, including cash in the bank. So I typically recommend keep enough cover expenses operations, push everything else back to yourself. And if there's, there's not enough in that bank account to cover an expense, simply just make an owner capital contribution. Put some more money in that business account. You're allowed to do that. That doesn't mess anything up with your corporate valve. Fill it back up. Just make sure the business pays for that expense, not you personally.

I'll say it one other way again. Commingling, not representing yourself separately from the business, creating confusion for customers or employees or partners, and you're just, just kind of disorganized. A plaintiff attorney is going to pierce the veil in a heartbeat. They're just going to be like, judge, this client didn't respect the veil. Why should we? Boom. And they're in. So great question. And it's such some of the easiest, cheapest asset protection just maintain the crap you set up. You don't need to go against some crazy LLC in Wyoming or some trust in the Virgin Islands or go spend 10,000 on some asset protection plan. We don't even sell crap like that. Just take care of of what you already set up. It's that easy isn't it? Funny like this is the easiest things in life are right there in front of you but we overcomplicate think we got to spend money to get it. All right Doran Tax this is Tony says. Hey, my understanding has always been to convert an LLC to an S Corp once the business starts to make 40 to 50k in net income. Love it. Totally agree. Then take about 50% and reasonable comp adjust down as the business makes more money like that. I might even go up 40% at the level you talked about. I recently read a LinkedIn post that said this can be bad advice because the reasonable salary takes away from the QBI deduction. So I am curious how do you guys balance taking a salary from an S corp with the QBI deduction for your clients? Love seeing you both in Salt Lake City making plans for Arizona this December. For those that don't know about it, in first week of December we'll be holding our tax and legal 360 conference again every six months. This December it'll be in Phoenix. We're taking down the entire Scott Hotel on Scottsdale Road Road. It's a beautiful little resort and it's going to be awesome. 3 to 400 geeky small business owners, accountants, real estate investors, tax attorneys. We're all going to be together. It's going to be awesome. So get to tax legal360.com I'll be

there co hosting the main stage so come check it out.

Dropping it. Okay. That's right. Ashley's going to be on Main Stage as Co MC for the three days. It's going to be so cool. Glad you're going to be there. Now the QBI deduction is a qualified business income deduction. It was passed back with the Tax Cuts and Jobs act. The first round Trump was in office and it was to help small businesses get an extra deduction off the business net income. That's the qbi. Well when you go to the S Corp your QBI deduction goes down because they're wanting to nail all of your all of your active income in your LLC or your Schedule C. It's going to get this cool deduction. Guess what comes with that? You're paying self employment tax out the rear so drives me crazy. The only people that are making this argument that the QBI is so important you shouldn't be at S Corp are the same people that hate S Corps anyway. They're trying to find some stupid reason to make you take higher comp. They're not a fan of reasonable comp or pushing it down and they think S Corps don't work for some stupid reason. They've been around for 40, 50 years. They're great. And there's this undercurrent of just this weird, weird group out there. I'm sorry, I'm just going to say it. That thinks the S Corp's a bad idea and they're trying to find any reason to poo poo it. I do not get it. So the technical answer here is the QBI is a deduction. Self employment tax is assessed on every dollar. Every time. I do a spreadsheet on this every time. And I've taught class after class on this. By converting to an S Corp. Yeah, your QBI deduction goes down, but your savings on self employment tax goes up, up and it offsets it every time. The savings on self employment tax is better than the deduction on QBI and there's a net effect. I won't lie to you. You're right. You're going to. You may say lose 2000 in QBI, but then you're going to save 8 grand in self employment tax. And when you do the right balancing act, and there's an equation to this, you want to. It's an art. But every tax advisor in our Main Street Tax Pro program, all of our tax lawyers know this. We do the math. Math, it works. So do not get led astray thinking, oh, I'm going to leave QBI on the table. Yeah, you're also going to leave three times that of self employment tax on the table if you do it right. So you're okay, Tony. Just go for it. I need to teach a class on QBI in the Main Street Tax Pro program. It came up yesterday, as you heard, so we're going to do more of that. The QBI is just a weird little thing. We'll see how it goes with the Tax Cuts and Jobs Act. All right, well, did you have any final words of wisdom for our listeners?

Final words of wisdom. Be out there, protect your assets. Make sure your, your entity structure is where it needs to be. That's what we're here for. To make sure you're, you're set up properly for both asset protection and tax savings. Love talking about this stuff, and I'd love to help anybody who has questions, so feel free to always reach out.

Well, thanks so much. And thank you, all of you, the listeners, for being here. Hope you had a great experience today on the Open Forum. Post your questions for the next Open forum@mainstreet businesspodcast.com and we'll see you next week for another episode.