Tax Strategies for Real Estate Investors, Business Owners, and Side Hustlers - Open Forum Show

Foreign. Welcome everyone to the Main Street Business Podcast with Matt Sorenson and Mark Kohler. Excited to be with you. This is Open Forum Week. This is my favorite time to podcast Open Forum Week.

That was a different intro. I thought it was Mark Kohler with Matt Sorenson.

Matthew before Mark in the Bible.

Yeah.

Just keeping it biblical today.

Yeah. I don't know. Did Christ actually shout out to Mark or Matthew first too? I don't know. But he definitely got. Matthew got preference in the layout of the Bible.

I mean, that's just what's what we know all I know.

Well, welcome everybody. Today is the opportunity we have to try and do our best to answer your questions from around the country on tax, legal, business questions. Just building that American dream. So we've got. Oh my gosh, so many questions from email, Instagram, Facebook and The website itself, mainstreetbusiness.com I don't know which one gets priority. Are we just going to. Let's just, you know, be equally distribute the questions.

So let's do that. I'll start with the website one.

Okay.

I thought this one was kind of interesting.

Yeah. And I'll say this. Welcome everybody, to a format that usually includes a tax and legal tip. But when we do open forum, we just want to dive into questions. And ironically it tends. It seems to be one of the most popular episodes we have is the open forum. People just want to hear what fellow business owners around the country are asking.

It's kind of like the call in show without people calling in. It's writing in. You know, we're answering your questions and I guess you guys don't like to hear what Mark and I plan to talk about. So. Yeah, talk about what you want. We get it.

Okay.

This was from Chris.

Okay.

Okay. I thought this was an interesting question. Gets a couple things to talk about. You got to hang in with me on this one.

This is a long one too. Is this I see the Seymour I buy.

I buy my neighbor's house, that one and rent it back to her. And she buys my house and rents it back to me. Have wished we just created business. And tax deductions for any expenses that would arise at the house anyways, such as repairs, lawn care, etc. Such expenses would not be deductible to me on my own home. But I leave. I believe they become deductible on a rental property. The business purpose is to diversify my capital out of my current home and gain experience with real estate investing. Does the result change if I want to do the Same thing. And swap ownership of houses with someone across town, across the country, or my brother lives in a different state. Nevermind any trust relationship, interest that could rise. I'm interested in any tax and legal impacts. Okay. Now this. Gotta love this. You can actually like other people's questions, by the way, and those ones will be more likely to get to. I see this one. Got some likes. So. Okay, Chris, I like where you're going, but not how you're getting there.

Ooh, nice way of putting that.

All right, all right, I like what you're saying. Like, all right, I want to get some of these tax and business deductions from owning rental real estate. But it's not an either or. It's not like you don't you have to sell your house that you live in to then buy a rental property to get tax and business expenses. Just buy a rental property. You're going to have a cost of living somewhere anyways, whether it's your home or whether it's somewhere you rent where you live. There's always going to be a cost of wherever you're going to live. Having another cost like a rental property, which can create income is a secondary thing. So don't think of it as switching one for the other. But let's. Let me. Let's focus on why I don't like the switch. Remember, in your home, when that property appreciates and you sell it, there's no gain on 250,000 or more. Sorry, 250,000 or less if you're single, 500,000 or less if you're married. So you can have up to a $500,000 gain on that property. Never pay tax on it if you're married. You're never going to get that on a rental property. Okay. So that's a huge benefit to homeownership. You're deducting the interest, probably on. Because mortgage interest is deductible on your home. And so, yeah, some repairs and stuff. You're not going to get any tax benefit on that at your home. But that's a cost of living, you know, like that's built into your rent when you're renting from someone else that you'd have to pay anyways. So I don't know, It's. Neither are. What do you think?

Well, this is a tricky one. Let's. I like how Kris says at the end, take out trust issues, take out relationship issues.

Yeah.

Now let's make another major assumption. Your house is worth exactly 200,000 and your neighbor's house is worth exactly 200,000. They're both in the exact same condition. They're both going to. You're both going to pay the exact same amount of rent. And then we have to take another major leap of assumption here that the repairs and maintenance are going to be exactly the same because if any of those are different, there's going to be a winner and a loser. And you say, well, we'll square it up on the back end or something like that. Now you're getting even more precarious with tax ramifications. But, but I like where Kris is going again. So let's just assume you can the stars align and everything's the exact same. You are going to get tax write offs. True. Because you have a rental property and you're going to depreciate it and you're going to get write offs and that could offset your other income. If you make too much income, Kris, those losses are going to get carried forward and you're not going to see an immediate benefit. Then when you go to sell, you're going to have a gain. So I'll take a little different approach than Matt and I'll say assuming everything is equal on both sides of the transaction and assuming your income is under 150 grand and that you're getting write offs right now on your tax return that you can calculate and go, I am saving taxes. Yes, that is a benefit. But then when you go to sell it, you're going to have to capture the gain on any appreciation and depreciation recapture. And I just have to think building all of that equity up in your home and selling tax free down the road will be a bigger bang for your buck in the long run than trying to play time value of money with an equation that inherently is not going to be equal on both sides of the transaction. So Kris, I will summarize with this. I like what Matt said. It's not an either or. Build equity in your home tax free and go buy another rental down the street. Do the same thing. Do both. Don't just turn your home into a rental and rent from someone else.

Do both.

And I think you've got the right concept, but you're operating in a vacuum.

Yeah. And you can turn your home into a rental. I've done that multiple times. I still have old homes of mine that I, that were homes I lived in that are rentals. But you then make the decision, okay, where do I want to live? Do I want to rent? And maybe you're in California where you where the Rental market's terrible. Or you're moving to somewhere where the cost of ownership is so high you may want to rent anyways, you're in New York or wherever. And so I get that. Then rent in that scenario and own rentals in other markets that are great rental markets.

But. Okay, I like that.

That's a good. That's a good warm up, Chris.

That was a hard question. I don't know about warm up. All right. Okay, well, let's go with another Chris question now. These questions now we're taking at the very moment are captured@mainstreetbusinesspodcast.com and if you go to mainstreetbusiness.com you'll be able to get to where you just says, ask a question, submit a question. And there's a list there of all the questions that have been submitted. And when we reply, I type in there, hey, we covered it on the show today. So you know which show to go back and listen to to hear the answer to your question. So again, if any of you would like to submit on that site, that would be a great place to go. But we're going to hit the other ones, Instagram and Facebook here. And emails just to Matt and I personally. Okay. Chris Shakard says this is an easy schmeasy one. This affects everybody. Everybody listening to the show. Chris's question will help you. Could I use an old cell phone connected to Google Voice, which comes with a phone number as my home phone, in order to write off my cell phone completely as a business expense? Now, Kris didn't put it in the word completely. I did, but that's what he's asking. Now, the IRS rule is that if you can show you have a home phone line dedicated for personal use or another cell phone. And Walter White had a cell phone dedicated for personal and one to dedicated to business. A very powerful scene when he's under anesthetic and he turns to Skylar and says, where's my cell phone? And she goes, it's right here. And he goes, no, my other cell phone. And the episode ends for that week and you're on pins and needles. So, Kris, yes, another cell phone attached to Google Voice would allow you to write off your cell phone that you use for business 100%. But keep in mind, what is Google Voice? Google Voice is Internet. Now, where I may have wanted to write off half of your Internet bill as business and half as personal, which I think is a fair approach with most people. Well, now your Internet is serving as your home phone.

Line.

What I would suggest is you add another line to your cell phone plan that might be 20 or 30 bucks a month, call that line your personal cell phone, and the Internet charge per month might be greater than that. And then so you look at the overall cost of Internet and the ability to write some of that off on your business compared to another cell phone on your cell phone plan. But you're on the right track, Chris.

Yeah. And for those of you that already have a burner phone out there or everything, you guys are already ready to go. Ready to go. All right, let's go to. I had an Instagram question. This is from Simply Jess. Simply Jess said there's multiple S's there. That's why I'm emphasizing. She says, for E commerce, if I'm starting an Amazon and a Walmart store, is it both to have one LLC for both? All right.

Okay. You give the answer, and I'll tell you a technical legal term, but okay,

tell the answer first. Okay. Now I would just do one llc. You can run both the Amazon store and the Walmart store and an Etsy shop, and you could, you know, sell. Sell, you know, tacos. It's. It is Cinco de Mayo. So, you know, whatever. Out of that one llc.

Yep. The answer to your question in legal terms is absolutely freaking lutely. Yeah.

Yeah. You don't have a separate entity for the separate things that you do. Now, you may. Maybe you have a different partner in one of those businesses and your llc. Maybe that's the. That's the Walmart store. Maybe you have a partner in the Amazon store. And so your LLC owns the Walmart store, owns half of the Amazon store, llc. So you may have partner structures like that, or you might have certain liability reasons why you want them separate. I don't know for E Commerce, the products you're selling. So if it's a liability issue, you may want to separate those businesses out so that if one business or stream of income has an issue, it doesn't affect or pollute the other. But don't think like you have to have separate businesses. If they're pretty straightforward E commerce businesses, I'd run them through the same entity.

Yeah. And I'll say this very quickly in 30 seconds or less, me, Mark Kohler, I have one S Corp. That's it. Some of you may think, oh, you're a lawyer, you got paralegals and accountants. You'd have multiple S corps. Nope, I have one March A Kohler Inc. And it is the receptacle of all my partnership, LLCs, and even some of my own projects. I want One S Corp or One LLC taxed as an S corp for all those operations. Saves time and money. Okay. Jumping over to Facebook. This is a really good question, Matt, and it's kind of up your alley. Okay.

Okay.

I'm going to adjust my seat here. I want to have my head the same height as yours.

Okay. You don't want to look taller.

No, I. I want to be. Thank you. A partner in. In fairness, same size, same shape, you know.

Okay.

I don't need a bigger head than you on camera.

Okay.

Okay. For Those watching on YouTube. Okay. On camera. I mean, off camera I have a bigger head, right?

Yeah. Down.

The head's the size of a melody.

The size of an orange on a toothpick. Yeah.

I've got a Breaking Bad and a so I married Ax Murder quote today in already. And I don't think you've done one decent quote yet. So.

Yeah. Okay. Yeah, I'm dying.

Okay.

I'll get that.

Darlene says. Now this is a hard. This is a heartfelt question, too. During 2020, when Covid was wreaking havoc on our finances throughout America, the irs, under the Tax Certainty Disaster Relief act, said that people could take a distribution out of their 401k for up to $100,000 or an IRA. We talked a lot about that last year. Yeah, well, it's now coming back to haunt us because you either have to pay it back or pay tax on it. Now, what's interesting, Darlene's question is how to replace a CARES distribution into a self directed ira. So what Darlene is alluding to here, she didn't give us a lot to work with, but it appears she took a distribution from an IRA and she wants to put it back. I don't think I'd use the word replace. I'd use the I got to pay it back or you got to pay tax. One of the two. And secondly, she says into a self directed ira. I don't think that's a necessary comment either. If you took it out of an IRA, whether it's self directed, regular IRA, Roth IRA, 401k, doesn't matter. You got to put it back, yada, yada. Now, this is a dangerous question because we can open a whole can of worms on how that process worked. But, Matt, I'm going to let you take first stab at it. What would you tell Darlene that stressed about getting that money back into her Iraq? Okay, so I have a couple ideas.

Yeah, Let me ask I was going to look up the. Because I want to give a specific answer on the timing. There's a taxability issue that you can stretch out over three years on this. So you can take it in one third hits if you can't get it back in. But you're going to need to get it back in in cash. So why don't you hit your item? I'm just gonna. I'm actually going back to my own dang article that I wrote on this.

We should put that in the show notes too. If you get the article link, just text it or email it to Corey here in the studio and he'll put it in the show notes. Matt wrote a whole article on how this law worked. If some of you took money out of your retirement account last year, now it's time to pay the maker, pay the piper. Okay, here's my idea. Everybody sit back, think about it. This is like a 60 day rollover. If you take money out of your IRA, you have 60 days to put it back. If you don't, you pay penalty in tax. If you're under age 59 and a half. If you're over age 59 and a half, you just pay tax. So it's called a 60 day rollover. Very similar. You got 60 days to put the money back. In this situation, you could spread it out over three years or you could just do put it all back in one lump sum. Here's what's the goal here, people. It is better to have money in your retirement account for the long haul than it is to pay the tax on it. Unless you've got millions sitting in your retirement accounts and you need to divest it a little bit, you need to spend it down because you're just going to end up giving it to your family anyway. For 99% of us, we're going to need that money when we hit the 50s, the 60s, the 70s, years of our lives. So my goal would for Darlene and for any of you that took an early distribution during the cares year, we want to get it back. So Darlene, you're thinking properly. Some people may go, well, I'll just pay the tax on it. No, no, no, no. She wants to get it back. My first idea, Matt, is worst case scenario, go borrow the money. Go borrow from someone else. Really what you're doing is borrowing it from your retirement account and you got this window where you can put it back with no penalty and no tax. And I think you should borrow from equity in your home, borrow from family, borrow from anyone you can and put that money back. If Dire Straits hit and you can't pay the loan back, take the money back out. I mean now, I guess you'd have a penalty at that point, but I don't know. I just think if a loan is possible, that might be a good option to get the money back. That's option one.

Yeah. So this is what I wanted to confirm. So this, this is in my article, by the way. You can get it at my website, sdrahandbook.com or it's on Entrepreneur under my articles. So under the rule, you had three years to pay it back. So you could pay it back all at the end of three years from when you took it. So you don't have to pay anything in now. Now what you will have to do is take one third of that. Let's say you took 100 the full out. You'll have to take 33,333 into income for 2020. Okay? That's going to be on your tax return. You're going to pay tax on that. You don't have the 10% early withdrawal penalty now, let's say later, two years down the road now, three years total, you have the money to get back in the whole hundred. Well, now you would amend, you'd have to go back and amend and you'd get that tax back essentially for the tax you paid on the 33,000. Now. So if you can't get it back in now, and really if you didn't get it back in in 2020, you're paying one third of the tax anyway. That's going to happen. The penalty got waived. But you're going to have to at least pay one third of the tax. Now if your 2020 was a really financially tough year, that's good, that's a good thing, right? You should, I mean in terms of the tax situation here, because you should be in a low tax bracket, ideally or lower than you typically are. But I just keep in mind you got three years to get it back in, but you're going to be paying at least 1/3 of the tax for 2020, 2021 and 2022.

I get some, anybody in this predicament, get some outside opinions from licensed professionals, family, friends, business partners, because you do have multiple options. And Darlene, the best way to replace it would be to just make more money between now and that three year deadline and try to get it in

there,

borrow, sell something, whatever you can do. We wish you the best. Okay, here's kind of A touchy feely question. I like this one. This is from Bo from in Phoenix. And this is off the website having numerous conversations with my cpa. It has become clear she is of a particular political persuasion. I don't know what that is, but says normally I could care less. However, her comments make me question if she will fight for me to see to it I pay my fair share. I think I need a new CPA that puts me at ease. Or am I overly dramatic? Now when I first read this, it sounded like his CPA was saying you need to pay your fair share. They were being conservative, right?

That.

Oh yeah. But now go ahead.

This seems like he's saying, however, her comments make me question if she will fight for me or see to it I pay my fair share.

Which sounds like she might be too aggressive like to see to it that or see to it I pay my fair share. Like is she going to be too aggressive and not make me pay my fair share? So but let's do this people. Whether the CPA is overly conservative or overly aggressive, here is the touchy feely answer. Yeah, and that answer is.

Sorry, when you say conservative, I thought you're talking liberal conservative, not aggressive conservative. Those are different conservative.

They are. They are. Yeah. You might be aggressive tax planning conservative, but liberal politically conservative. I want to pay my fair. I don't know. So let's not go there. But let's say this. Here's the big takeaway, everybody. You want a CPA that is at the same risk tolerance you are. Now, I don't maybe I don't care about the political persuasion. You might have a liberal or conservative CPA on the political spectrum. I don't care. But what I do care about is they are the proper aggressive level. Not too conservative, not too aggressive for you. I have some clients that come to me and like I want to write this off and this off and this off. And I'm like, man, I consider myself pretty aggressive. But dude, slow down. We're not going to do that. We're not going to write. I don't want to go you to go to jail or me to get in trouble for signing off on something too aggressive. Then I have clients that come in that are so conservative from a tax deducted standpoint that I go, come on, we can write off some more home office, you know, grow a pair. Come on, let's just get this going. And so I think so you want to shop around and make sure that you find someone that is going to help you out and do that we

got a live caller.

Do we have a live caller? I'm rejecting this live caller.

Okay.

And follow the format, guys.

Go to mainstreetbusiness.com submit a question.

Yeah, yeah. So. But anyway, Matt, anything on finding the right. I mean, it takes interviewing most CPAs, but don't stay with someone that's driving you crazy.

Yeah, I like to find the person has the similar risk tolerance that you have, and that's hard to find, actually, so. And I think with any professional you have, you know, I don't care if it's the professional that cuts your hair or it's the one who does your taxes or the one that's going to operate on you. You know, you're not going to be a hundred percent match. And in any of those things, you got to take control of what's happening. How do you want your hair to look? You know, what surgery do you want? You'll need to take a little bit of control on how you want those services delivered and find the right person that fits that and can deliver that for you. And sometimes it's not a good fit. Like I tell clients, I. Not a lot, but every once in a while I'm like, I just don't think we're gonna be a good fit. I can just tell. I just can feel it. And I don't want to frustrate them. And I think on the other side, being the business owner, investor, getting professional services, you should be able to size that up, too, and say, nah, this person's just not gonna be a good fit. Yeah.

And just ladies. Matt's advice. I know it hurts because I think of all the ladies he's said that to over the years, and it's. It's. It's tough to take sometimes, but, yeah, it's not me.

It's not. It's not you, it's me.

That's right. It's not you, It's Matt.

Yeah. So George is from Seinfeld. If you remember, George Costanza, his girlfriend told him that. Yeah. When she broke up with them. She says. She said, it's not you, George. It's me. And he's like, what? You're given that it's not you, it's me routine. I invented that. She's like. She's like, what? Oh, she's like, fine. You're right. It is you. You're damn right it is.

He walks away. That was a good one. Oh, my gosh. All right. Do you want to pick a question?

Yes. So, all right, this is A question from Mark.

Sounds like an intelligent man already. Yeah, I like his style.

Yeah. Okay, Mark, you got one thing right. He says 1099. Can 1099, income paid to my name, unable to use an entity, flow into an S corp now. Yes, it can. This isn't the preferred way. Generally, for those of you that are receiving 1099 and have an S corp, you want your S corp to be on the W9. You want your S corp to get the 1099. Right. And in fact, a lot of places you go don't need the 1099. You. Because you are an S corp, Right? Yeah. Corporations, including S Corps, did not have to receive 1099. So. So, so just keep that in mind. But in terms of getting the 1099, if it goes to you, but you want it in your S corp, there is a way to kind of nominee. That's the right word, Mark. Yes, yes.

It's called nominee income. And let's just. We can move up quickly through this. I'll just say it too. Nominee income. Talk to your accountant. Basically, you're going to 1099, your S corp. So the 1099 comes into your schedule C and then right back out to your S corp. Talk to your accountant. If they don't know how to do it, you got the wrong accountant. And all of you realtors out there, where in some states your broker is afraid of their own shadow, or the state division of real estate doesn't like 1099 to go to an S corp, you haven't lost the battle. Just move that money to your S corp through nominee income. You're good to go.

There's another good question on the website from Dan. Unless you got one.

No, no. I'll hit some Instagram and Facebook. Soon as you hit Dan.

Okay. All right. Dan says, I just opened up my own salon in July of 2020. I own that saloon or salon. Saloon or salon. I don't know. Okay. I mean, let's. Let's. Let's roll with it both ways.

Yeah. I've been watching Yellowstone lately, and I.

Okay.

I just. The saloon sounds a little.

You did. Mark did get me hooked on Yellowstone. That's. It is. It is pretty great. I've been having to hear about it for years, and I finally got into it.

Okay.

It took me going to Mark's house.

Yeah. I finally had to just strap him into a chair.

And I'm so glad you did. It was. I actually watched an episode last night. I'm in season two.

Wow. You made some headway. Yeah.

Yeah, Good.

Good man.

So, okay, so Dan owns a salon he just opened July of last year. Has a disregarded entity. Okay. Probably an LLC taxed as a sole proprietorship, going on to schedule C. I want to know if I need, if I needed to get braces or Invisalign, can I write that off as a cost? Can I write off the cost as a business expense?

Oh, now see. Oh, this is good. See, if this was a saloon and he broke up a bar fight and someone punched him in the face, that would be a medical expense to get those teeth fixed. Yeah, now I can. I got options.

Yeah.

But if I must have seen. Yeah, so I think, Dan, what you really meant is you opened a saloon and you had to break up a bar fight and you need braces or Invisalign because you got hurt in a fight. Sounds a little more tough too. But if you opened a salon, better story, Dan. Yeah, but if you opened up a salon and now you're doing this for cosmetic reasons, a lot more difficult to write off.

Yeah. I don't see how you're going to have a justifiable business reason to write the cost of that off. You know, even things like uniforms and things you may wear to work, unless it's, you know, required in the place of work and you got your company name on it and all that. Like, like what you're wearing is, you know, not going to be a business expense. So I don't see in the salon industry how that would be any type of, of write off. Maybe if you were a model or something, I don't know, you could have an arguable case there, but I don't see it.

Yeah, and I will say there is what's called an entertainer deduction, where if you have an IMDb profile and you're an actor, actress, and it's legit there, there are write offs for hair, makeup, cosmetic surgery and things of that nature. There's still going to be some boundaries, but if you're in the entertainment business, we've got more options, but not just owning a salon. Now, I did pull up Publication 502 for all of you that wonder, well, what is a deduction that could be medical. And in the publication 502 is where you go, any of you can Google this and this will tell you if it's a medical expense. And where I would go with this, everybody is an HSA or an hra. So it's not a business deduction, it's a medical deduction that we backdoor in 100%. So let me just go through this real quick. You can include. This is on page seven of Pub 502. You can include in medical expenses the amounts you pay for the prevention and alleviation of dental disease. Preventative treatment, blah blah, blah, blah blah. Teeth cleaning, sealants, fluoride treatments, da da da. Treatment to alleviate dental disease includes services of a dentist for procedures such as X rays, fillings, braces, extractions, dentures and other dental ailments. Now, teeth whitening is considered cosmetic and is not deductible. You have to go over to page 17 for that. But I think with braces you're going to have a shot as a medical expense. So I would go that route, Dan, and look at the HSA or the hra. I got a whole chapter in my book on that.

Great point. All right, what you got? You got a social media question?

Yes, I do. This is called. This is just a fast one. Let's get some quickies. This is Carolyn Bsnrn on Facebook. She says better to Purchase desktop software, etc. Through a business or personal and lease it to the business 100% of the time. Buy it in your business. Don't even try to do this lease back crap. What you do is generate leasing income for yourself and you're back where you started. It's more headache than it's worth. There are some very, very unique situations for large end businesses where we might buy trucks or semis or major equipment and lease back to a group or. But that's going to be 1% of the time. So everybody out there. Let me just suggest if you're buying equipment, supplies, software for your business, just let the business pay for it. Write them off, go for it, be done with it. I don't do this and I have the skills and the wherewithal and it's still a waste of time for me too. Okay. Matt, could I call. Yeah. Okay.

This was a email question that came in. This is from Vlad. Vlad says hi, Mark and Mac. Mark and Matt. He did put Mark first. I have a simple question. We have a Florida corporation, C Corp. With physical operations and office in Illinois. Where should we file tax returns? Federal. Illinois, Florida. Question mark. Thank you. You guys are awesome.

Okay, repeat that for me too. So say that one more time. He has what? Operations.

He had a Florida. Florida corporation to C Corp. With physical off operations and office in Illinois. Where should we file tax returns?

Florida. C Corp.

Right.

Oh man.

Obviously you would file federal. You know, I mean that's. Yeah, that's obviously. Now you're going to file in Illinois because that's where the income is being generated. Now, Florida actually doesn't have a corporate tax, so you're going to have corporate filings there in terms of the entity, but there's not a corporate return because there's not corporate tax in Florida. So you're gonna have corporate. You're gonna have corporate filings, but not tax returns in Florida. So you're. In the end, you're gonna be filing in Illinois and obviously federally. Right. I mean, I. And I don't know how you started a Florida corp that does business in Illinois. It's not helping you in a tax situation when you're doing business in Illinois.

In fact, it's hurting you. And what was their first name?

Vlad.

Vlad. I just wanted to bond with him here and show a little of emotion and empathy. Vlad, you got ripped off. There's no way around it, and I'm sorry to say it, and I'll stand by that. If you're doing business in Illinois, there is no reason on this green earth that you need a C corp in Florida. And whoever the bozo was that sold it to you took advantage of you. I will give one caveat or two. If you're going public someday and you're going to be the next Facebook, fine. You need to raise capital. You need to be a C Corp. Or number two, your business literally is making $20,000 or less, and you want to be a C corp until you make an S election. Possibly. But I would just get with an accountant right away and try to unravel this. And I feel bad. I'm sorry. Vlad, you're filing in Illinois. In fact, if you don't, it's going to be hellfire and damnation from the Illinois Treasury. You don't want to deal with that.

Yeah, yeah. And we know what they do in Illinois. So, you know. Yeah. I mean, that's Al Capone, you know, went to prison for not paying taxes. So.

Yeah.

Okay.

I've got a 401k question for you. May I?

Oh, yeah.

Okay. This is from Sam via email. Told him we'd cover this today. Now, this is related to the article of yours that I bugged you over the weekend on.

Oh, okay.

About 2020 contributions.

Yeah.

So this is tricky. So get your be thinking of that.

Yep.

Sam says, can you still deduct dollar for dollar the funds you put in a solo 401k from your income this year, but take the write off for 2020 tax year? So I had business in 2020 and I want to put money in my 401k now and get the write off for 2020. Yeah, that's question one. I'm breaking Sam's into two questions.

Yes.

And number two, even if my business had a loss last year, can I do that? So let's just do contributions into a retirement account for 2020 right now.

Okay, so 2020. Right. Just keep in mind IRAs and everything. You got till May 17 right now. Okay. That got extended for just Covid the year. Usually it's April 15th. Now, solo case, for which this also follows the general 401k rule. Solo case got changed by the secure act, which allows you now to set up a solo K plan right now in 2021 for 2020. Okay. You still have that time up until the company return deadline. So let's say you're a sole proprietorship. Your company returns now May 17th. Okay. You'd still be good to do a solo case, set up a plan. Now, you used to have to get this done by December 31st in 2020 if you wanted to make any SOLO K 2020 deductions or contributions. Now, because of the Secure act, you have until the tax return deadline or extension.

Yeah. So until October 15th, that example.

Yep.

Okay. Now, for U.S. corp owners, that would be. For your S corp owners, that'd be September 15th.

If you extend. If you extend it.

Yeah.

Okay.

All right.

Now keep going. All right, so we could still. You could still set up a solo K. And we're still helping clients set those up. Even they want to make 2020 contributions. However, you cannot make the employee piece of the contribution. You can only make employer contributions. So you know you can put 57,000 in for 2020 contributions. 19. 5 of that 57 is employee contributions. The other 36,500 is employer contributions. So you can still get in the employer part. 36,500 for 2020, setting up the plan today in 2021, you're still good. You're within your return deadlines.

Dollar for dollar, people. Dollar for dollar. Now, here's the tricky part. A lot of times people would use a SEP right now because they missed the 401 setup deadline. And we tell them, just do a SEP, which is 25% of your salary, and then roll it into a 401K. Now, the employer portion is still based on the W2. If you were an S Corp, Matt, or if you were a sole proprietor or a Single Member LLC, the 25% employer contribution is based on 25% of your profit, Correct?

Right. Your net profit. So. So that's basically. Yeah. So if you had a loss, there's nothing to make an employer contribution on. You can't. You. You could have an S corp with the loss and you have your W2 and you're making contributions still. Right. That's totally fine. But you can't have a sole proprietorship, single member LLC with the loss and make any retirement plan contributions.

Yeah. So what are your options, Sam?

Well, for 2020, there's nothing you're going to be able to put in because

you can't solo 401k. Yeah.

Not in a solo 401k.

Yeah, but I'd still consider an IRA or Roth contribution, Sam,

which you have

until May 17th and you have an HSA contribution you could do up until May 17th. I just don't see any deduction for you in a retirement account other than an IRA for 2020 because your business was at a loss. And that's just the way the cookie crumbles. Okay, that just came to me.

Yeah, that was. I just thought, man, I'm hungry for lunch.

Yeah, that's what I was thinking. Okay, I threw that out for you. Marzia, I've got to get into crypto mining question because I love these. Marja off Instagram says, where are the startup. What are the startup costs for crypto mining? Well, you have to realize that startup costs going to take a different approach on those in a personal tax planning situation versus a Roth IRA crypto mining situation. Because if you're just a person out there starting to crypto mine, your startup costs are going to include a lot more of expenses you may be incurred getting up to the point of mining. Equipment, supplies, training, who knows. But when your retirement account goes to crypto mine, I would argue there are no startup costs. You're literally going out funding the retirement account, funding the LLC owned by the retirement account, buying the equipment, turning it on the end, and you're going to 179 expense the equipment that you bought the day you turn on the mine. So I margia, if your retirement account was set up with funds and you were involving it people from an Arm's Lake standpoint, gearing up to crypto mine, there might be some startup costs, but I would say your question is fairly unique. I would not see any. I had no startup costs in my crypto mine and my Roth. This is a good opportunity for me to remind all of you, if you missed our semiannual self directed IRA summit which was held 2, 3 weeks ago, please get to sdirahandbook.com you can pick up the 2 day recording of almost 12 hours content for 199 bucks. It's a killer deal. Watch it over and over again. It comes with a workbook. And before you set up a console and pay more than $199 for some time with one of our tax lawyers, watch every second of that conference and you'll freakin love it. Write down your questions, then you go in more prepared for your consultation with the attorney. Okay, Matt, your question. Oh, Matt's on mute. Let me see if we get him off mute.

Matt, you're there? I'm there. Okay, this question from Jerry, he asked what type of entity do you set up to avoid capital gains taxes on the sale of real estate other than living in a property for two years as your primary residence? Okay, Jerry, now this is. I think a lot of people have a misunderstanding of entities and how they work. Okay? Now, LLCs are entities very commonly used in real estate. You know, Nicki Minaj has a great song about why llcs are so cool. And you know how you basically you're nobody until you have an llc.

Yep, I was nobody until. Thanks, Nicki.

Until you had your first LLC. So. But LLCs, Jerry, do not save taxes. That's a Mark Kohler quote. You know, you're not going to save taxes just because you have an entity. In fact, LLCs, S Corps, all those entities are what are called flow through entities or pass through entities. They just pass the tax burden down to the owner. And so on a capital gain, you're not saving tax by putting it into an entity. Now you could, there's C corporations, but C corporations pay a 21% tax that's higher than the capital gains rates. So we're never using entities as a way to avoid capital gains tax on the sale of real estate. Now there's other tax strategies like 1031 exchanges where if you're going to buy another piece of investment real estate because this isn't your home, you've mentioned that. So we know your home. You got sell a home exemption, investment property or business property rentals, whatever, you can sell that and repurchase a property of a similar or greater price and pay no capital gains tax, that capital gain gets deferred and rolled into the next property. So there's more tax strategies rather than what entity do I use? Don't worry about the entity. Think of the tax strategies. The 1031 exchange being probably the most common and hopefully that doesn't go away with the biden tax plan which is on the chopping block. Just everybody knows the look at tax strategies. Don't worry about the entity for selling real estate.

Yeah, I, I would say one other thing. Matt's exactly right and I don't want to say it any other different way, but I will add this. What's interesting is you're trying to. Someone called the other day too and said, how do I get out of capital gains tax? My clients are trying to get capital gains tax most of the time. So we don't want self employment income, which is the worst. We don't want C corp tax income, which is terrible. And we don't. Ordinary income is taxed at ordinary rates. So right now capital gains is a wonderful thing.

Yeah.

So keep that in mind. Except like Matt said, President Biden wants to increase the capital gains tax for those that have income over a certain level. For the far majority of Americans, you're still going to have a great capital gains rate. If you're a 1 percenter or 2 or 3 percenter, we'll see where that line is. You might have a capital gains tax rate that's dramatically increased. So keep that in mind. Okay. Marty said Marid5 says on Instagram, what is the best way to set up a family management company? It's just a sole proprietorship. Going to the bank. Tell them I'm setting up a janitorial business. I want a sole proprietorship. Here's my social. You need articles. No, I don't. I need an ein. No, you don't. Well, I need something. No, you don't. My name is in the name of the company. Call your manager. The bank is going to make this difficult. Give there on a need to know basis. Don't tell them you're setting up a family management company. You're setting up a sole proprietorship to do janitorial work. It is called Mark Kohler Janitorial. And I can go over to Wells Fargo right now and set that up. Now if I want to call it the best cleaning service in town Janitorial, then they're going to want at least a DBA so that I'm not taking someone else's name. But you don't need an entity, you don't need an ein. Just go into the fricking bank, set it up and start paying your kids or implementing an hra. Matt, your question.

Okay, this was another CARES act question. Well, maybe that was the same one actually that you already read. Never mind, skip that. Oh, I had a good question. Yeah, this is in email. I had a question about the self employment taxes and the savings on an S corp when you're making this. This client was having over 500,000 of income already this year in an LLC and the question was this is net income 500 grand already this year. Should I be making an S election and going for S corp tax treatment in the llc? Because I'm already making, you know, I'm going to phase out on the tax savings. That's about at 137,000 approximately on self employment tax where the. On the Social Security part.

That sounds good.

That does sound good. I'll have that. So let me give a quick rundown on that.

All right.

Self employment tax is 15.3%. 12.4 of that is Social Security. So the remaining 2.9% is Medicare. The Medicare does not phase out. So when you hit this 137,000, that's the number at least for 2020. It's probably a little updated for 2021. You know, your 12.4 is done. You don't pay it anymore. But the 2.9, you sure do. And that 3% for someone at, you know, 500,000, maybe take 100,000 salary, 400,000 of net profit or dividend. You're going to be saving 3% on 400 grand. That's still over 10,000 bucks in tax savings. So the S corp is. And the S election still makes sense in that scenario. Absolutely. You're saving more taxes because you have greater income. It's just at a smaller rate. I get it. You're not saving on the 15.3 anymore, but you're still saving on the 3. And you've got a heck of a lot more money at that rate to save on.

Here's my take on this. Matt, great statement. That was Pulitzer prize winning. But I would just say this, everybody, whenever you're like, when in doubt, should I do an S corp or not? Run the freaking numbers. Just call one of my tax attorneys. They're awesome. Just give them a call and just go, hey, here's what my day job is, here's what my spouse does, here's how much money I'm making. Should I do an S corp or not? And there's your savings and you figure it out.

That sounded like. Keep in mind, the phase out is where most people get hung up. People realize that they're like I'm phasing out so. Well, not on all of it. Okay, yeah, that there's 3%, 2.9. I should say that never goes away.

Okay, well how Much more time. Do we have Corey, one or two more questions? Okay, I get to choose a question and Matt Sorensen gets to choose a question.

All right.

All right, this is Dinara. She says, can an S Corp employer contribute to an HSA or is it the employee's job? So you guys, we have the attorneys here in the office. They're rocking. Give them a call. So we had the live studio here for a bit.

Oh, yeah, I like special guests too.

Yeah, it's good stuff. Okay, so the question was, can S Corp employers contribute to a health savings account on behalf of their employees? I think is what Dinar is saying, or is it the employee's job? It's Dinar. Is one or both or either or whatever you want. Some employers say, I'll put some money in your hsa. It is a perk. It's just kind of. And it's a write off to the employer. It's a tax free event for the employee. Some employers can do it if they want, and employees can contribute to their HSA if they have a qualifying plan or they can't or they don't want to. So it's either or both. So here's the real crux, everybody. I love the health savings account. It's a tax deduction at any income level. It doesn't phase out. It's on the front page of your return. Love it. Anybody can do an hsa. If you have a high deductible plan that qualifies. Your employer may not have that type of plan, so you're screwed. You can't do it on your own. Your employer may have that plan. You may have your own plan. Your employer may put money in for you, they may not. But as long as you have the plan, you can play in the game. You got a ticket to the party. So go, enjoy, partake.

There you go. All right.

Okay.

Like it. All right, my last question. This came out of this. This I'm just gonna end on it here.

Oh, this sounds like a disclaimer of sorts that this is.

Yeah, I'm gonna get on a little. I'm get on a soapbox here for a second.

Oh, okay.

Okay. Someone asked about. Explain business trust organizations.

Okay.

I don't know the right analogy.

You can't swear.

Yeah, I know.

Oh, I think this is a Tommy boy quote.

Okay,

maybe, maybe not.

Maybe not here. There could be.

Yeah, it could be a box example here. I don't know.

Yeah, that could be. Yeah, yeah. So, all right. Business trust organizations. I don't know where this Started. I don't know the genesis of this. All we know is that we got a heck of a lot of people that come to us thinking they need a business trust rather than an LLC or an S corp or they want to need a business trust rather than an ira. Llc. Most of these people are in California and they've got sold on one thing getting.

I know that one.

$800 fee.

Yep.

If you use a business Trust, there's no $800 fee in California and you don't want to pay the $800 fee to the state of California. And I know there's a lot of people hell bent on that $800 fee. They will do anything. They will spend $900 to save an $800 fee. Let me just to make a couple points. I don't know any attorney that really sets up business trusts for the typical small business for rental properties for IRAs that stands by them.

I just don't run into them.

You never hear other lawyers talk about them. We don't see super high net worth clients, any sophisticated clients using them. The only ones we see using them or that bring it up are ones that got sold it from someone who's not an attorney, who sells at a Holiday Inn. Trusts for asset protection and all this, they don't work. I can't tell you how many issues I've had with clients that have set these up, that have bought properties with them. They go to sell them. No one knows what the hell it is. This, the title company's like, what is this? This state doesn't have business trust. I know it's a Delaware business trust. Okay, but you're in California. I had an Arizona client with that. They're like, yeah, we don't recognize that here. They wouldn't transfer the property. The person had to unwind the whole thing, deed the property back to the person they bought the property for, have them deed it back to them into a new. Into their personal name actually. Then they were able to sell the property. It was a total nightmare. Tens of thousands in legal fees to fix. These things are clunky. Some people what's happening is they're selling you a business trust, but they're setting up a revocable trust. And so everyone's confused on what the heck it is. So it kind of works because like the title company or the bank or something's like, oh, this is just like a revocable living trust, like for your estate plan. Yeah, okay. All right. And so somehow it's working in certain instances. But it's really not. That's not what it is. Right. Like it's not a trust that when you die someone gets this. And, and so these business trusts, I don't recommend them, we don't set them up. If you want an IRA to own one, just get an opinion from an attorney that's setting them up. We require that for IRLCs anyways. Not only our law firm, lots of other lawyers that set up IR LLCs here with us. I don't see one that'll put a letter together for a business trust owned by an ira. So watch out for the business trusts. If you have one, I'd probably look at getting rid of it. And if you're considering one, I would take a step back and get a professional opinion or the person who's setting it up. Ask them what their credentials are. Are they a lawyer? Are they really standing by this and setting things up for their clients every day? Or is this someone that you met at a seminar? Hawken Trust is estate plan as asset protection and they sell you on it because you don't have to pay 800 bucks to the state of California. Yeah, I, that was, I didn't love that. I didn't love that. That wasn't good fun for me. Sorry guys.

Now let me throw out a couple other thoughts. When Matt said some of you are really upset, maybe going, well, you guys don't know what you're doing. When Matt said he doesn't know where these came from. Okay, now what Matt means by that, and I'll put words in Matt's mouth here is where someone came up with the idea that business trusts could save taxes. That's, that's that genesis of some nut job that we're talking about. Business trusts have been around since like the 1890s when large conglomerates started to use business trusts to consolidate operations and holdings. John D. Rockefeller used a business trust, but it wasn't to save on taxes. It was. And then they got under attack for abusive conglomerate. What do they call it? Anti trust issues of controlling monopolies through these trusts. So business trusts have been around a long time. Matt and I know what business trusts are, but they weren't set up to avoid taxes. Number two, business trusts are also on the IRS dirty dozen on a regular basis. These complex trusts to somehow avoid taxes are consistently on. The taxpayers should be aware that this is right off the IRS dirty dozen. Abusive tax evasion arrangements involving trusts will not produce the tax benefits advertised by their promoters. This could be foreign trusts. It could be onshore trusts. And this is exactly why people go to jail, because someone talked them into this structure. So just freaking. We want to be aggressive. We want to save taxes. We want to try to find the best loopholes for our clients that are legit. But when someone's trying to sell you into an irrevocable trust, just remember the word irrevocable. Very difficult to unwind. They can cause a lot of problems. And. And the IRS is not a fan, which I'm not trying to be. Get the IRS to follow me on Instagram. But just be. Be careful, people. There's my.

Yeah, yeah. And I just say, I know people be like, well, I. Look, Matt, it's a Delaware business statutory business trust. Okay. Are you in Delaware now? I'm in California.

Okay.

And here's the California franchise tax guidance. They say they don't charge an $800 fee to business trusts. Okay. Does that mean that that structure is a legit way of operating in California? I mean, I just. It's not. It's not answering the question. I'm just saying you never see professional attorneys or, you know, recommending this. It's kind of just like a. I don't know. I don't love it. You'll never be happy at the end. I just. I just feel like I'm. I'm, like cleaning them up more than I'm ever seeing anyone happy with it.

The same thing with the C Corps in Nevada or Florida or around. Okay, well, gosh, we finished on kind of a Debbie Downer. Sorry. But you know what? Our show is about protecting you from schemes and problems as well as giving you ideas to implement. And I feel bad that we were not able to get to so many questions here. Please resubmit your questions on the website. We'll try to get in and answer them on the website@mainstreetbusiness.com so for those on Instagram or Facebook where we weren't able to get to your question, please be patient. We do also a Facebook YouTube Live on Thursdays at 4 O' Clock Mountain. And if you subscribe on YouTube and hit the bell icon when I go live, you'll get a ping so you can come on. And we're going to cover live Q and A there. And also every week we do our directed IRA podcast. And I think it's open forum week this. This week as well, Matt, is it not?

Yeah, yeah. And I already have some IRA questions queued up, so, yeah, let's. We're doing open format directed IRA podcast, too.

Yep. So two podcasts we encourage you to subscribe to. Please give us a five star rating if you find it helpful. We want to tell you thank you for listening.

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