Tax Strategies and Business Structures: Open Forum

You're trying to do the age old backdoor workaround switch.

It's the fan switch.

Every dentist and doctor for the last 50 years has tried to pull this off where they don't. They want a 401k for themselves, but they don't want to provide it for their nurses and admin pas. And that's not saying doctors are bad, but they've got. They're making a lot of money. They want to sock it away, but they don't want to do a group safe harbor for them.

Welcome everyone to the Main Street Business Podcast. This is Matt Joined my. My esteemed colleague Mark J. Kohler. Excited to be with you today answering your questions on Open Forum. The People show.

The People Show. This is a wonderful episode every few weeks. We haven't done one in a few weeks. We've got some questions that have piled up. We really could do more podcasts on the Q and A platform. We just. It does sometimes surprise me how people do a podcast every day. Some of these people that are just podcasters every day. But then I'm like, well, we got enough content. We could do two a week, maybe think about doing more of them. But we're grateful for many of you, our listeners. Thanks for being here. It's a lot of times interesting to see what other questions people have from around the country and you're like, oh my gosh, I never thought to ask that. So this is a very popular show. Please share it with your friends or family. Give us a five star if you enjoy it. We want to answer your tax legal business from a questions from a business law firm, tax advisory firm and see if we can help move the needle for you.

So yeah, we don't even like throw a bill in the mail or anything. This is free, you know, get your questions answered. So. All right, let me. You mind if I be the leadoff hitter?

Yeah. What do you got?

All right. This is from Amit78 in Virginia. Says, I own an LLC as an S Corp which operates a convenience store business. The property is in my personal name. I am planning to move the property to another LLC which I plan to have as a disregarded entity. I want to know, can I have my family of five as employees in this LLC and start a solo 401k in this? Can't do that in the S Corp as I have nine employees in that. Okay, let's unpack this from Amit because he's hitting a lot of great points. He's down the right path. He's got the Right structure and he's asking the right questions. This is why I love this question. Yeah, first of all, Amit's got a convenience store business. He's doing the right thing. He's got an LLC taxed as an S corp for that operating business. That's what we're going to recommend for all of our operating businesses. You got a convenience store, you're selling goods and services. I don't care what you are. That's the right entity. He's got that right. Now he's also going on the right path too, because he's like, I own the property in my personal name. Now notice the building where this community store is located. He doesn't own in the same llc. Taxes and S Corp don't do that. Don't own your business location in the same entity, you run your operations. That's an asset protection nightmare. It's also a tax problem. So he's going to set up a separate LLC which he says will be disregarded, which basically means it's just going to flow to his personal return. He's not doing s election on it because this is a rental property. So his operating businesses is going to rent the property from his LLC that is going to own the real estate. That's owning an asset. You guys see our trifecta Mark and I are always doing. He's going to have the property and building an LLC on the right, operations on the left.

Now, Matt, if I may add here, there's a. Before we get to this 401k conversation, there's another wonderful thing that he's doing here. And not only the asset protection piece, but he's doing what's called a self rental. When your property in a disregarded LLC is related to directly related to the operations, that's typically the majority leaseholder. So the building is integral to the operations and vice versa. That qualifies as a self rental. Now he can depreciate it cost, seg it bonus depreciate. And you don't even have to be a real estate professional. So I can be a convenience store owner, spouse could be a W2 corporate. And I'm still writing off all that depreciation because it qualifies as a dash for self rental. It's a special election. Again, accountants that know what they're doing should know very well how that works.

It's easy.

I see CPAs not even aware of that strategy. So make sure you're more educated as the captain of your ship to bring that up with your accountant if they look like deer in headlights. You got the wrong accountant, but that's called the self rental. Now this solo 401k issue, you're trying to do the age old backdoor workaround switch. Every dentist and doctor for the last last 50 years has tried to pull this off where they don't. They want a 401k for themselves, but they don't want to provide it for their nurses and admin pas. And that's not saying doctors are bad, but they've got, they're making a lot of money. They want to sock it away, but they don't want to do a group safe harbor. 401k. Yeah. And they're frustrated.

And that's what Amit's saying. He's like, I've got nine employees in my operating business, the convenience store, the llc, taxes and S Corp. I know if I do the solo K for me, I gotta offer it to all these employees, which I don't want to do. And solo K, frankly, doesn't work in that scenario. You'd have to do just a regular 401k, which is possible. And we're helping clients do those. If you just want to get a regular 401k, call the safe harbor. You can still put 20,000 plus a year away into it, self direct it. We're going to have more on that in future episodes coming up. But the sad part of this is, Amit, even though you got the right structure down, Mark threw out an awesome tip on the self rental there. I don't know if you had that in mind already, but the solo K is not going to work.

So now I want to say this to everybody out there that's frustrated. Don't go into the well, I'm going to do nothing position. Absolutely not. Here's some interesting facts. First, when you do a group 401k, the classic 98% of the time for the small business owner with less than 50 employees is going to do what is called the safe harbor. And they call it safe harbor because the code is putting you on a safe harbor from the storm of putting tons of money into your employees. 401ks, you don't want to do that. That scares you. You're like, I can't go out into the storm and it's going to cost me. Who knows how much. I want a safe harbor. Put me somewhere where I'm safe. Well, the safe harbor says, okay, you can max out your 401k and contributions. Your spouse can, your kids can, anywhere. Matt, be prepared. Run the numbers for us this year, it's always going up. And so you can put away, max it out, your 401k for your employees, you only have to put in up to 4% on average of whatever their salary is if they participate. Statistics have shown that around 40% of employees don't even participate. They're not even putting money in. So you don't have to do anything. And you only have to do 4% of their salary if they participate up to that amount. So if you have an employee at 50 grand, you're talking your max contribution would be 2 grand. And if they don't play in the game, you're down there, you don't have to. And if your employee, your employees don't even qualify until they've been there for a full year if they're full time, or three years if they're part time. So the cost to you is so nominal. And then you can still go and do a backdoor Roth IRA in combination with this. So do not be afraid of the Safe Harbor. They're so powerful.

Yeah. And Amit, I think this is important because you can do 22,500 as an employee, which you could pick to do traditional or Roth. Now, if you're 50 or older, you get another 7,500 bucks. That's 30 grand a year you can be throwing away into this 401k. I should say saving.

That sounded terrible.

But also to see this on the employee side, like Mark said, there is matching, but only if they choose to. But you know what? This is only for employees that have worked for you for a year longer, that are full time, part time, up to two years, they can start qualifying. But it's also a great employee benefit.

Right?

I mean, if you're having employees you're going to want to retain, you're wanting this business to operate and be smooth. Having these little benefits and perks is actually a nice thing. Employees look for this, frankly, they leave your, their employer if they don't have a lot of these things. And so don't think of it as a cost. Think of as an investment in your employees that can make your business better. Yeah.

The year we implemented our 401k for safe harbor, we told the employees we're not doing big raises this year. We're going to do a 401k for you. We're going to put money away for you. It was almost a net, it was literally a net cost to us if we were going to do raises anyway. But we pushed the money to the 401k. And so and then it opened the door for us, Matt and I as owners to be able to put away a lot more.

So plus I will say too, there is a tax credit right now for 2023 for OP that was in the last secure 2.0 bill at the end of last year that's in effect right now of up to five grand. And so we're going to be in another group 401k episode by the way, getting into this in more detail. But give us a call at the law firm. There's a couple lawyers, Kevin Kennedy being one that works on these quite a bit. We can start steering you down the right path on it.

Yeah. And here's the cool thing about using our law firm for your safe harbor. Don't just get up, call your Smith Barney person right now, don't slow down because they're going to put you right into corporate Wall street product. You can actually have a self directed safe harbor 401k talk with Kevin Kennedy. He's also speaking on this at Our Tax and Legal360 conference in Salt Lake next week which is recorded, which many of you can watch virtually. If you've missed it and you've listening to this podcast after the fact, go to taxandlegal360.com and this is one of 36 classes over three days to help you better live your American dream. If you don't save 10 to 20 times the cost of a little virtual ticket, I think it's like three or four hundred bucks. We failed so there is so much there. So Kevin will be teaching a class on this. Any small business owner that is doing well wants to save the safe harbor is a great choice. You can self direct, you can invest in what you know. It is just so, so powerful. And the tax credit, the government pays you to do it. There's a tax credit that covers the cost of doing it. It's just phenomenal. All right. Okay, Matt, can I throw one out And I'll let you take first bite at it too. I'll read it because I've been commenting on your question. Are we that long as you don't

read a crappy one. Don't give me a. Don't give me a. I've got one ready if you don't have one.

I got a good one. I got a good one. Okay, this is good. Dale 514 says hi. Love your podcast. Wow. Worship you as individuals. Wow. That is so nice. And I'm sure you each have beautiful children. I hope this Unique word gets on your. Oh, sick and funny or some sort of boy, I feel so uneducated. It's like this complex word question gets on the show. Well, we're doing it. My husband's parents give around $10,000 a year to each of their sons. Well under the. Well under the gifting exclusion. However, as they are retired teachers and medium net worth individuals, I have the impulse to swoop in and help them protect their hard earned assets. Good job, good deal. So if my husband is given 10 grand annually, can you turn around in 1099 his parents to the tune of 10k and in order to allow them to put their RMDs that's required minimum distributions from their retire an IRA back into a Roth and allow their income to continue to grow, they currently live on a pension and a 403. If not a Roth, is there a better way to reinvest this gifted money on their behalf? We love them and we don't want them to run out of money. So let me rephrase this. Good Dale saying, hey, mom and dad are gifting us ten grand a year. So let's say, and we don't need the money, we want them to save it. So first issue is don't let them gift you money, let them keep investing their own money. But then she's saying, but we want them to do a Roth and they don't have income. They're just on pension and Social Security. We need to create income for them so they can contribute to a Roth. We're going to cover that. And so can we just 1099 them back and give them the 10 grand back out of our small business and put them on our board of advisors. And so we're going to give them their money back, but let's give it back to them in a taxable way that allows them to do a Roth. So first, God bless you. Thanks for taking care of the parents. You're trying to get them their money back in a more unique way. First question, Matt. Do I have to have taxable earned income to contribute to a Roth or would my pension, Social Security and 403 allow me to contribute to a Roth? That's a question I have.

You have to have earned income. The Social Security retirement account distributions are not earned income that would qualify to then contribute. So which is the rub she's highlighting here is that you need to get income to them now you'd have to 1099 them, right, because they need something I guess you could put on a W2 but 1099 is probably the easiest.

Now.

They'd actually really have to be doing something for your business. Mark was throwing out some hints there of what you might do. Add them to your board of advisors in your small business, if you have one, and that. Make sure you're getting their input. Involve them on things going on in their business. So if the IRS knocks on their door and it's like, hey, you work for Vandalay Industries and you got a 1099 for 7500 bucks?

What.

What did you do for them?

Who's.

Mandalay Industries, llc.

You know what I mean?

Let them know what the hell's going on, okay? Get them involved in your business for real and get their advice. You know, these are parents you love. You probably value their advice. Okay. You could do 7,500 bucks to both of them, by the way, because I presume they're over 50 and do 7,500. They could put 7,500 bucks in a Roth IRA. There's no age restriction on Roth IRAs, no RMD on the Roth IRAs. They could put that income in. I presume they're below the income restrictions because you said they were middle income. And they're leaving off Social Security other retirement account distributions. So they could probably just go right through the front door with the Roth IRA contribution. So I don't hate this idea. I don't know that I love it either. Yeah, I get what you're trying to do, but they're going to have some tax on this. When you give them that 7,500, you might need to give them nine grand.

Well, and if we work backwards here, what you're trying to do is build up a Roth for them. Now, if they're already taking RMDs. What she's implying everyone is they're well into their 70s. And not that Roths aren't bad, because, boy, I'd love you kids to inherit their Roth that you're creating for them. That's an extra bonus here. So if they don't use the Roth before they die, it's going to come right back to you. So each, you know, that could be a really nice fit here. And you may go to the other brothers and go, hey, we're going to take our ten grand and give it back to mom and dad and fund a Roth. And then if they don't use it and they die, we get that Roth. So stay away from it. That's going to be outside of the estate and probably have them put it in a little Email, that's okay. So they don't sue you later because when that Roth's worth a lot of money, they're going to be mad, but so getting them earned income back is cool, but, but remember they're going to have to report on a schedule C. They'll have to take some write offs, they're going to have self employment tax. So now you're paying tax to put the money in the Roth and you have to say, okay, how old are mom and dad? How's their health? If we're only going to get a three to five year run out of this, is it really worth all this heartache and headache? So yeah, like Matt, Matt, I don't hate it, but I don't like it or love it. And if they're giving you 10 grand, tell them to stop it. But of course they're feeling special and they want to, I don't know, crazy.

It's a tough one.

So, okay, yeah, maybe do a consult with one of our. That's a good one for one of our tax lawyers. Maybe mom and dad don't have their estate plan done yet or your estate plan needs to get done. This is a great question. You could pop into that conversation. You know, get it, Get a call with an attorney, get the estate plan done and say we have one question that's kind of related to all this is mom and Dad's estate. You know, we want to, we want to pass on wealth, we want to take care of mom and dad. We got this Roth idea. What do you think? And I think you could beat that up in a great consult when you do your estate plan at the same time. So get over to the law firm, I think.

All right, I got a question here from ibjam and Ben. Great handle, says I started a construction company with my brother. We are a multi member LLC partnership started in May, just barely. We won't make enough money to have an S Corp election this year. My question is, if we have been taking owner draws, how do we backdate an S Corp election? Secondly, all of our accounts are listed as bare necessities nrc. I presume that's the name of your llc. If we move to an S Corp, do I have to change all of those accounts? Okay, now many of you know that one of the strategies we like to do is use an LLC to start out and adding an S selection to it later when your income justifies it. Now ibjam and Ben is doing this was a little twist to his scenario because it's a Partnership with his brother. Now you have a couple options here, but I'm going to. I'm going to. We're going to go through two options. Ibjam and Ben. Option one is you could just add the S selection to this multi member llc. And it sounds like you're not gonna have enough money to make it worth it for this year is what you're saying. So maybe that's to be effective January 1st of 2024. And then you start paying yourselves out as an S corp. You start taking the same salary. I presume you're 50, 50, I don't know. And you're taking the same draws and that's one way to do it. But that's not what I do. That's not what Mark and I do. What I would do is I would set up your own S corp. I would have your brother set up his own S corp. Your S corps each own this llc. This LLC is still a partnership llc. You're not making an S selection to this. Now those draws are going from the LLC to your S corp and you're paying yourself out of your S corp. Same thing with your brother. You each take your same payroll. You're writing off other things in your S corp that your brother doesn't care about or wouldn't spend money on. And you might have separate income coming into these S corps. That's the best way to do it in a partnership with. We don't like S corps as partnerships in general. We like to keep that as a partnership llc. And then each of the partners have their own S corp.

Absolutely. I won't re explain and Matt explained it wonderfully. I will just add this. You're on the right track. You're definitely thinking correctly. You've got a self employment tax problem coming down the pipe. And there's a second problem. I just talked about this in our tax advisor training yesterday. Um, if you're a tax advisor accountant enrolled agent cpa, we have the Main street tax Pro certification. I do two days a week of training and certification program. Please check it out@markjkohler.com this was our topic yesterday and that is when you do the S corp as a partnership, you eliminate a whole set of write offs you could take individually because now you don't get a second bite at the apple. There's no unreimbursed shareholder expense, unreimbursed employee expense. They don't exist. So at the LLC level, having that S corp model below, you're like, ugh, I don't want to add two more entities below. Oh, but you just unlocked thousands of write offs. Thousands of dollars in write offs. And so talk to one of the attorneys right away about a restructure and you're headed in the right direction. You're just looking at 2s Corps rather than the other. And you may lose some of the write offs this first six months of the year. I mean you may have a little bit more self employment tax the first six months of this year because you're not going to want to backdate that thing. But let's get some S Corps going right now. So the last four months of the year we're creating, we're sheltering some income. So great, great plan. Generally, let's get, let's fine tune.

Yeah, you're on the right act. Right, right path.

I mean Matt wouldn't have. Matt didn't want to tell you you're doing, but I wanted to give you a little love.

I mean Matt, me and Ibjam and Ben, we're like this.

All right.

Show today for sure.

Be jamming, be jamming. Okay, so LM Nation says Mark, I'm a W2 earner. My personal, not self directed Ira LLC owns a long term single family home and a college condo rental. So he's buying his rental properties. Him or her? He or she. Sorry. And I love it. My W2 income limits my full potential for immediate tax benefits. That's okay. You're buying rental real estate, you're building wealth, you're creating cash flow, but you're not getting a direct write off. You're just carrying forward losses. So he's brainstorming and he says if I purchased an RV for full time outdoorsy. We love outdoorsy. I've got on the agenda to interview the CEO of Outdoorsy on the Airbnb of RVs. Really, they're the number one out there. Does that unlock the short term rental tax benefit in addition to the RV write off options? By the way, I'm a customer Kkos and directed. I've worked with Mark Fetzer and he's been great. Just didn't want to bother him with this question. Thanks for putting this on the show and dropping it. Others might enjoy it. So here's the thing. An RV is going to unlock some great write offs. Absolutely. And what you're trying to accomplish, it's going to work. But let me tell you, it's not. An RV is not considered a short term rental because it's not real estate. So it's outside of that whole area. Of rules. When you rent an rv, it goes on a schedule C, as in Charlie. It's like you're renting a trailer, a truck, a car. You're renting personal property and so you don't even have to worry about the real estate professional classification. You're running a business and now it's going to be on a schedule C. You may even ultimately put it in an S Corp, depending on the profitability of this thing. But you would want to llc, buy the used rv. Don't you dare go buy a brand new one. Get a used rv, put it in outdoorsy, start making income just like some of you might be doing. Turo. And that revenue is going to drop into a schedule C. You've got expenses and in the first year you're going to depreciate the hell out of this thing. I want to see some good revenue on the rentals. Then you're going to bonus depreciate this thing and you're going to get an incredible write off. The first year you're two, three and four. You now have self employment tax because you're renting an RV on a schedule C. So you're going to want to be aggressive with your tax strategies. Find a good balance there. Really coordinate with your accountant. Hey, you're making money. I'm all for it. Do it. But just realize it's not treated like a standard rental property. It's personal property. So. Well, we're going to wrap up the show at this point. I know we've got a lot of questions, but Matt and I are on a tight schedule today and we're going to. I think we just need to hold another open forum this week, Matt. Maybe we can find a half hour, 45 minutes to jump on. And we got so many questions here.

Yeah, yeah, we got. We can do more open forums and there are so many questions here. There's a lot of self directed Ira questions in here, quite frankly, we're. Which we can do on the Directed IRA podcast. Make sure you're getting over to directed ira.com podcast for any of those self Directed IRA questions. We'll field those there. Let me just do one question. I'll lead off with this one.

Okay. And it's gotta be quick because I've got. We got another podcast I should be on two minutes ago. Okay. All right.

So this question from Demi, she says, and you know from Demi, if Demi Moore is going to ask a question on the podcast, I'm going to get to. It says I have an LLC that holds a rental property. My question is this LLC has a loss every year to its due to deduction plus depreciation. Will IRS eventually give me trouble on it or force it to close down?

No.

Now there is something called hobby Loss rules that would be more applicable to an operating business where you would have problems demi if you just kept having losses and losses and losses on like a Schedule C or other business. The IRS eventually looks at that and says is this really a business or is this some hobby? Now on a rental property they're not going to do that. It's very common actually for rentals to have losses even if you're cash flowing because of the depreciation expense. So I wouldn't stress about that to me. I think you're good. Don't worry about it. That's very common in the rental property space. The IRS sees it every day, so. All right, well, thanks everyone, of course, for being here for the Main Street Business Podcast. Like like Mark said, we'll be back doing more open forums. Make sure you're still getting your questions submitted in on the site Main Street Business Podcast website. We'll be fielding more of those and be back, of course, with another amazing episode, the Main Street Business Podcast.

Thanks everyone. See you soon.