The Solo 401k, Using an LLC or S-Corp, Tax Strategies, & More - The Open Forum Show

You know, let's just take pride that we can have a small business.

Yeah. It is called the American Dream.

The message we do have is stay calm and know the facts. Some companies may be claiming bankruptcy. It doesn't mean always that their doors are shut. They may be reorganizing. So what you want to do is get the facts. So I always start there. So when any of you are thinking, I want to put away the most money in my 401k, you got to start with your baseline of how much payroll do I really have to take to begin with.

Welcome, everyone, to the Main Street Business Podcast with Mark Holder and Matt Sorenson. We are delighted to be with you today in the Open Forum episode. This is. This is the people show. This episode where we filled your tax and legal questions. Building wealth, save money on taxes, all that good stuff. We try to fill some other questions, but if you stay in that lane, you're gonna have a lot more success. Yeah, that's right.

We're gonna give you a lot better answers rather than your questions about life. But this is for you, you Main Streeters in America. It's so awesome, Matt. I was driving here to the studio, and on the country station, it was noon, and they said, it's time to play. They do it every day at noon. They played the national anthem, and I was just like, you know what? I love America.

You know, only small town America country station is going to do that. And that's pretty cool, actually.

Yeah. It's too bad. I know that many of you that might be on either side of the aisle, and it gets frustrating with a lot of politics going on in the Supreme Court right now and everything. Sometimes we just have to sit back and go, you know, what with all the different arguments out there and issues, America's still pretty cool. And it's okay to listen to the national anthem. It doesn't mean right side or left sides, right or wrong or bad. We got a pretty cool country. And so it's fourth of July week. I just want to say welcome to everybody. You know, let's just take pride that we can have a small business.

Yeah. It is called the American Dream. Yeah. I mean, you know, it's the American dream to. I don't know, for some people, I think that's like owning your own home or maybe being financially secure. For other people, it's just living in a cool country or owning a small business.

Yep, yep, yep. Now, also lots of other things in the news this week. There's some companies are claiming bankruptcy. You know in different sectors. And Matt and I are not here to tell you to boy, stay on, pull out, whatever. Lots of different things happen in a recession. Different companies come and go, and we want to be careful not to help any of you lose your money further by telling you something we should have. So we're just going. But. But the message we do have is stay calm and know the facts. Just. Just stay calm. Study, learn, look at trends. And acting irrationally when things are heated or happening quickly is oftentimes not the right move. And that's not giving any crazy financial advice. So I want to give an example here. Matt.

Yeah.

What am I holding for those on YouTube? You see this?

But that's a Twinkie. There's not been eaten yet, surprisingly.

Yeah, yeah. I've been waiting for this show to

eat that on camera.

Oh, yeah. What am I now doing with this Twinkie?

Oh, you need that Twinkie. You know that?

I even have a glass of milk with me to help wash it down. That's really good. Now here's what I want to tell everybody. This Twinkie represents something. It's called bankruptcy law. Now, back in 2004, Twinkie, we thought we were never going to get a Twinkie again.

He's going somewhere with this. He's going somewhere with.

I'm going somewhere with this. I'm going to hang in there.

Hang in there.

Yeah, I'm going to eat the rest of this Twinkie is where I'm going. Um, but in 2004, Twinkie claimed bankruptcy, and everybody thought, we got to go buy Twinkies. Now, they did have a shelf life of, like, 80 years. So we thought, let's load up. No, but anyway, we thought we'd never have another Twinkie in our lives again. But they claimed what is called Chapter 11 bankruptcy, which gives companies five years to get their crap together. A trustee comes in and says, whoa, whoa, whoa, creditors. You can't come in and shut things down. And let's find out what's in the bank and let's figure things out. So bankruptcy law, it's called the Chapter 11 reorg, is what companies do to say, hey, we're. We're drowning here. We need. We need a timeout. You know, it's kind of when your kids. When you're a little kid, your brother'd be on, and you have pounding and you're on the chest, and you're like, time out, you know? So bankruptcy is kind of like, you get a breather to kind of put things together. So as you see out in different industries during the recession, some companies may be claiming bankruptcy. It doesn't mean always that their doors are shut and they may be reorganizing. So what you want to do is get the facts, study up, learn, see what's going on. And that's the benefit of a Chapter 11 bankruptcy. So that we as consumers don't. Stockholders, shareholders, customers, whatever it may be, we don't make rash decisions and make it worse for ourselves, acting like a mob and just being crazy. So, Matt, any thoughts? Touch the subject.

Yeah, yeah, I'm just gonna let that. That. Just let it lie, you know, just let it lie. All right, so let's get into your guys' questions though, and why not start off with a great question from Lee Richter.

Oh, gotta love ready.

Says I have a single member S Corp. So he's. I guess he means sole owner of an S Corporation with a 401k. I have one part time worker that might put in 10 hours a month doing my billing. I wanted to confirm what I thought I heard you say a few weeks back about 401ks and part time workers. Did you say that the rule chain not work part time for over three years, no matter how many hours they work, where the owner can still have a solo 401k? All right, let me clarify that and answer Lee's question. Many of you that have an S corp who are self employed can do a solo 401k, which is what Lee's talking about here. We have your own 401k plan. You can put in 60 grand a year. It's an awesome retirement account. You can self direct it, you can buy real estate, you can do Roth. So many cool things. We got lots of different podcast episodes on that. But the Solo 401k only works if you have no other employees that are full time. Or does the rule change recently that are part time that have worked for you for at least three years. So in your scenario week, you may have a problem looming here. If you've got someone working 10 hours a week, which is part time, and if they end up working for you as an employee for three years, so this is going to cause an issue, unfortunately, Lee, and your solo K is once that person has been there three years, the solo K is now going to have to turn into a regular 401k where you have to offer it to your employee, you can still do it for yourself, but it might have to convert at that time out of a Solo 401K. Now you might have some options if this is a billing or bookkeeping person, let's say maybe it's someone you 1099, if you can legitimately do that. I mean, maybe they're not even coming into your place of work.

I don't know.

And let's get them off of your payroll. As an actual W2 employee, I love it.

Matt. I was just going to go there. And by the way, for those a little annoyed, not by me eating a Twinkie, because I know many of you appreciate that. But if I'm coughing here as I'm battling the tail end of COVID and so one of millions of Americans that gets to have the little Covid experience even after being vaccinated, whatever. So if I cough a little bit here, I'll keep drinking my water and milk here to help alleviate that. But I. Everybody listen to what Lee said. 10. He used a key word. I only have one part time worker. Notice he didn't say the word employee and he didn't say contractor or whatever. I don't know what Lee meant by that. So in plus 10 hours a month. Oh my gosh, that looks like a 1099 bookkeeper to me. They're just doing minimum work they in. And I've got articles on what classifies a worker as an employee versus a sub. And I think, Lee, that's your escape hatch right there. So.

Yeah, yep, just like, you know, a Top Gun quote. I was like, like Maverick and Goose with the escape hatch. But that actually didn't end well. Sorry.

Yeah, you gotta quote something from the new Top Gun because that ended well, you know.

But that same thing happened, didn't it?

Yeah, but no one died in the new Top Gun.

I know, but Maverick and then Goose's son, what was his name?

Oh yeah, I know. Boy. Spoiler alert, everybody. Spoiler alert.

I mean, if you haven't seen, you know, Maverick, the new Top Gun. Yeah, that's your fault.

Yeah, that's true.

You deserve to get a spoiler alert.

All right, I'm going to jump over to a question from Gerald says I am a recent listener and love the podcast. Thank you, Gerald. I had a quick question concerning LLCs in regards to podcast episode 377 LLC Myths. What yout need to Know. That was so studious of him. To quote an actual title of our show. Love it. What are your thoughts? Recommendations on which type of LLC structure is best suited for setting up an international consulting syndicate? No, I'm just joking. He said business. Okay. It just sounded cool. Syndicate sounded cool. Whenever you say the word international. Anyway, I live in Maryland, but would consult for both companies that are based in the US as well as abroad, non US based entities. The projects would, at least initially all be international projects. Thanks again. Keep up the good work. Now some of you may think this is totally complex. Oh my gosh, he's in Maryland and he's helping international customers and clients and international consulting guys. Super easy answer. He's an American living in the United States doing business in Maryland. I don't care if your customer lives on Mars, lives in Australia, lives in England or lives in New Jersey. If you're a US citizen providing services to anyone in the world or this universe and they pay you, you have to recognize that income as a U.S. citizen. You're living in Maryland, your butt's in Maryland. So you're going to be filing a tax return there. And you would want an S corporation. Now if you haven't already filed your llc, I'd go straight to an S Corp, Gerald. I mean just go straight to the heart of the matter. But if you have an llc, you would want to do an S election when the time is right. And I'm assuming you're going to have enough income to justify the S corp, but, but you're just going to be an LLC taxed as an S corp. I don't care where your income's coming from, you're going to have to pay self employment tax on a regular llc, no matter who your customers are, wherever they're at. So it's actually an easy answer. Matt.

Yeah, the only caveat I'd add to that Gerald, is if you had a foreign customer that's like, let's say they're in the UK and they're like, yeah, we're only going to do business with you if you come register in the uk. We don't want to do business with a foreign entity, so we want you to come register here. Now the nice thing about the U.S. lots of people love dealing with U.S. entities. They're okay with that. And you may not have to file all the way in the foreign entity, the UK or wherever it may be. So, but you may run into that if you have a customer, particularly a large corporation or something. Generally if you're freelancing though or stuff like that, they're not going to care.

And also I'll say, Gerald, if you start living abroad and become what they call an expat, where you're living the majority of the year in another country, you're going to get into a whole nother realm of tax Rules. But from now on, I mean from, from what you said, you're just going to be in Maryland servicing clients around the world. So claim your income, just do your thing.

Yeah.

All right, Matt.

Okay. All right. Galen Witt asked a great question. This is a follow up, I think, to last week's show on Roth options and all the different ways you can get to Roth, whether it's Roth IRAs, Roth 401ks. So Galen's question was, as I understand it, I have three options for getting money into Roth accounts, maybe more. But he's like, let's keep it simple. You're right. There's really three. Galen, you're on it. He says, my employee deferral, meaning what you can put in as an employee company match, profit sharing, employer contributions, and for mega backdoor Roth purposes that after tax, non employee contribution. Love it. Galen, you're doing great. Says, if I understand correctly, the only one of these that avoids self employment tax is the employer contribution. We're keeping it simple. Let me get to his question. You got another one?

Well, there's number four, which is your personal Roth.

Oh, okay. All right. Well that we're talking about the Roth on the Roth Solo 401.

Oh, he says, I've got a Solo 401K. So the only three ways to get it into the solo solo. But when, okay, you can also do

the backdoor Roth on top of this.

Yeah. So Galen, when you talk about the mega back door, you're adding the bonus of the personal Roth. So don't forget that as well. So I'd say that's number four. You got the three into the solo and then the fourth being on the side. Okay, keep going.

So he wants to avoid self employment question here. Okay. He asked a kind of a tricky question. He says, if I understand correctly, the only one of these that avoids self employment tax is the employer contribution. Correct. Because when you make an employee deferral, or even if it's your regular Roth contribution from your, you know, your W2 or it's the mega backdoor after tax contribution that gets converted to Roth that is also going to be subject, that's part of self employment tax, has to be on your W2. So the only dollars that do not get self employment tax on them when they're going into your Roth is the company match. So that's a great point. Now there's pros and cons to this because the company match is only 25% of what your total W2 is. So if you have a hundred thousand, let's say on a W2, you could only put in 25k of employer matching, but I had to pay $100,000 W2, so I paid all that self employment tax on that $100,000 W2. On the other hand, you could say, well, why don't I just pay myself 70 grand on my W2 and I can put that in as regular employee deferral and the rest could be the after tax employee contribution and I get there faster. Less self employment tax.

Yeah. Now this is where we have to talk about the sweet spot. And. But I saw that. I'm talking, I, I saw that. I'm talking about the sweet spot of a 401k. I don't, I. Unbelievable. You know, people, I tried to run a professional show here and I.

You know what's funny? What I was actually gonna say Unbelievable. Yeah. I wonder if you're gonna find the same sweet spot I did. Because in this scenario, in this example, there, there is a one and it's doing a, it's doing a few things there.

Oh my God. We are going down the wrong path on explaining this at this point now. Okay, but see, I wasn't going to go.

I'm curious where you're going to, what you're going to say, because I got an answer for this.

Here's the trick on this is there's a balancing act between keeping the IRS off your back for the, for the amount of payroll you need to take. So I always start there. So when any of you are thinking, I want to put away the most money in my 401k, you got to start with your baseline of how much payroll do I really have to take to begin with? Because that's going to drive a lot of the beginning part of your equation. Because if you're making enough money where you're required to take 100,000 in payroll. Okay, let's start there. But if you're running numbers in your company and you're looking at your draws and your net income and you're like, well, I'm only required to pay about 60 grand in payroll. Okay, we'll start there. Let's start with the maximum amount of FICA you've got to take. Then what Matt and I and all of our tax attorneys are going to ask you is how much do you have to put away? Yeah, it drives me nuts when clients are like, well, I want to put away. No, no, no, you want to. And you like talking about this because it sounds cool, but how much do you really have? Well, I Can only cough up 30. Okay, well let's figure out where we need to be to get 30 grand. So then you work backwards. And that's the sweet spot is kind of looking at how much can you put in, what's your payroll supposed to be, how much should the deferral be? And then you're trying to boom.

Yeah, that's when the. What I would. Yeah, what I would say is for Galen is go in that order of how you do it. Because this is going to be the most efficient way for self employment tax and everything. I like what Mark said about figuring out the right salary also. If you're able to max it out 60 grand a year, you've got to have some pretty good income and maybe you've got other income outside this entity that go in the order. Do the Roth contribution first. You know, you're that employee contribution. Then do the. The employer contribution and convert to Roth. Then do the after tax. Because that employer contribution I convert to Roth. I like what Galen's saying there. It's not subject to self employment tax. So the company's putting that in. I just converted. I pay income tax on it, but I got a deduction anyways out of the business. So it's a wash without self employment tax. So that's a little perk right there if you don't skip that.

Yeah, it's tricky. One major tip here is when you're trying to find this. Just take your time, you know, you never want to rush this process. Okay, I'm gonna move on to the next question. The phones are lighting up. They want us to continue to explain this process.

Anyone listening still?

Yeah, yeah. Okay, are you.

Are you ready?

Okay. Who are we going? Dan Patella.

I like. Dan's on the lease question.

Okay. All right, let's do that. So just hardcore contract work here. Okay, I'll pose the question, Matt, then you answer. I had just. I just signed a lease for the space of my. For my new business. We are opening a new custom automobile business. I purchased the name of the company from a franchise. Oh, there's so much there he's saying I would state differently. He basically bought a. Yeah, yeah, you started. He bought into a franchise. Not just the name, but anyway. That's okay, Dan. So he bought into a franchise. Let's think of Mako. You know people, we all know Mako. Where they paint your cars. I am currently doing all the build outs for the commercial space to be suitable for the business. Also, I had to travel to Florida to meet with the Franchisor to do my trainings for my new business. Love it. My question is, what costs am I able to completely write off? And what cost do I have to depreciate or amortize? Ooh, good one. Yeah, I like this.

Okay. All right, well, let's hit low hanging fruit. Dan. So you're gonna have a number of expenses that you're gonna take 100% right now. You get expensive, it's a write off. Then you're gonna have another category of ones that you're not gonna be able to do that to that you're gonna have to amortize or take over over time. So the easy ones are gonna be all that travel that you had. Well, actually, you're not in business yet. He hasn't even started the business.

I know. I was going to come in after and say, I think, yeah, we got to talk about the startup cost. Let's back up. Would that be okay if I explain

that hit the startup cost, so.

No, no, no, it's okay. Well, and I, I'd love to talk about this in the concept of a lemonade stand. Many of you have heard me talk about this at a workshop. You go out and set up your table, you buy your ice, your lemonade, you get your sign built, you're ready to go. Are you in business yet? No. And let's think of Dan.

Lemonade stands that buy ice. Those are luxury.

Yeah, yeah.

Nice, man.

Yeah. I've had a few more glasses of lemonade this summer. I'm telling the kids, up your game. It's a recession out here.

They could charge extra for it.

Yeah. I'm like, my mom said we don't get to give ice. I'm like, oh, my gosh. But okay. But anyway, so think of Dan here. He's setting up his quote unquote lemonade stand. He's going to Florida to learn. He's building out the shop. Has he even serviced an automobile yet? He's in startup mode now. The scary part here is that if Dan has no business operations at all, every expense he incurs until he does his first service is going to be a startup cost unless it's equipment. And we're going to come back to lease and leasehold improvements or equipment and things like that. But any of this travel costs or cell phone or computers or laptops and tape and anything that would normally be a supply or office, you know, all these goodies, dining, buying pizzas for the guys working there, building it out, that's all a startup cost. And until he sells his first cup of lemonade. Those are going to go into a bucket. You could write off five grand of those and immediately once you do your first service. But the rest are amateurized over 15 years. We don't want that. So, Matt, I think before you continue to talk about what's expensible and what's depreciable, I think one of the key strategies here, Dan, is open up shop in your garage. I mean like literally do a project in your garage, get someone's car in there and change out their tires, jack up their car somehow and mess it up, do whatever, change their oil, have a service. And you're like, well, the franchise, I haven't opened up the franchise. You're an auto body shop. Just because you slap the name of your franchise on the shop doesn't mean that's when you're in business. You're in business when you take your first dollar of service. So start doing some automobile repairs or services. So now you're out of that startup mode. And I think that would be the key first strategy.

Yeah, I mean, that'd be a great strategy. I don't know in your, you know, the history's already been written for you, Dan, on that. But maybe you did, maybe you had a little auto body you had friends paying you to help work on, on their cars. You might want to be claiming that income as being part of the auto business. So. All right, well, let me hit

well the hold up, we got to finish this questions. Right, so, okay, so once you're out of startup mode, then any expense that would normally be dining, travel, supplies, telephone, operational things, those are 100% deductible because those are just keeping the lights on. Just kind of like daily business stuff.

And for the franchise, like your royalty fee, your advertising fee, those are all going to be expense too.

Yeah. And so, but your franchise fee that you paid the franchisor is amortized over 15 years. There's no way around that. And then any equipment you buy is going to be typically a 3, 5, 7 or 15 year schedule. And your accountant's got a book they'll go through with you and talk about the amortization schedule that fits the category of these different types of equipment tools. Now the leasehold improvements are also another thing that will be amortized over the life of the lease. So if you're putting in drywall or AC or new flooring, who knows? So what you'd want to do is do what you've got to do, keep the cost down, but keep a really good Schedule of all your expenses and your accountant will go through with you and figure out what's deductible. Now, this year, too, you have what's called bonus depreciation. It's going to start changing and phasing out under the Tax Cuts and Jobs act, where a lot of these pieces of equipment or improvements, you might be able to bonus depreciate, which means depreciate all in one shot. You may have heard about 179. 179 is another way to write off equipment quickly. But you can only 179 up to the amount of income you have in a business. See, a bonus can drive you into a loss.179 can only take you to zero. So most accountants use bonus and 179 in a combination manner. And so talk to your accountant. Really be having conversations with them about this during the process. Keep good records and number one, do some services. Open up shop right away and get out of startup mode. All right. Yeah, thanks.

All right. Okay, we got a question here from Dean. He says, I recently formed an llc. I would like to be taxed as an S corp. My research says I'm not eligible for escort tax savings this year. As a window to apply ends March 15. Is there a way to be taxed as an S Corp for the 2022 tax year? All right, Dean, we've got good news for you. There's an exception to these rules out there. It's called the RevProc, and there's a certain number after the rev prop. But you're going to be able to go back to the date that LLC was formed where you can make an S selection on it. There's a procedure if you call our office, we do S selections for clients all the time on LLCs, and we can't go back before the LLC was set up. We can at least go back in time to when the LLC was set up, whenever that was this year. So you can get S election treatment and S corp tax status treatment that I'll see for 2022.

Love it. Good stuff. Okay.

All right. You want me to hit. I got one you want me to go for?

I'm going to go with Timothy. It's a quickie. He says, I love your show. Most taxpayers can no longer deduct moving expense, but can you deduct a portion if you have a home office? That's a really good question. Tim or Timothy? I. Wow. Okay, everybody, let's get the facts on the table. Up until 2018, when we got the Tax Cuts and Jobs act, everybody. Average Americans with their personal moving expenses could put a portion of them on a schedule A. And there was an itemized deduction for moving expenses. Well, in trying to simplify the tax return and increase the standard deduction, these got wiped out. The only, the only individual that could take the moving deduction were active military duty personnel that had to make a move of greater than 50 miles. They could take that write off. Other than that, none of us could do any sort of personal moving expense. But Matt, this is good. He says, what if I'm moving and I have a business, if I move my business, is that a personal move expense? Nope.

Yeah.

So the expenses on a move of my company are write off.

Yeah.

So what about what's going on your

schedule C or on your company's return? Depending on what it is? It's not going on, you know, schedule A or wherever the moving expenses go on your 1040.

So yeah, I, I think the process here would be, everybody, let's say that you're looking at the home office deduction, which we're a firm believer in. It's not a high risk item. Don't listen to your accountant. So let's say Your home is 10% home office.

You're an accountant. It's not. Don't listen to your accountant.

Don't listen to your, don't listen to your scared, scaredy cat accountant. You can listen to us. We're good accountants. Okay. All right, so let's say your home is 10% home office. So if you take the, the more I guess robust or the standard home office deduction, you're going to take 10% of your mortgage interest, 10% of utilities and da da, da, da, da. And so that would carry out that if you're going to move your home, you and relocate your home office at the same time to this new home, wherever it is, then 10% of your moving costs would be a business expense on your business return, whether like Matt said, Schedule C or 1120s or whatever it is. And so, and if there was specific costs related to the home office, maybe some networking, some, you know, higher end equipment that need a special moving. Yeah, I, I, I think that's great. I would take it but on the business return, not on your personal.

Yeah, I like it. Love it. All right. Bo falla, Mr. Bofala asks. Hello gents from Arizona. I have formed an LLC in Texas through kkos. Thank you, Bo, thank you. For rental property there. And we'll be setting up one in Arizona for Rentals as well. We have. Now, this is bo, your question gets a little complicated here. So it says we eventually want to form a holding or managing company. Those are two different things here. Just so that would be the single member to all of our llc. Let's come back to that too, because I want to talk about what that means. And we'll likely have four members or partners in the new company with varying equity stakes.

Oh, my God.

All right.

Okay.

Both slow down here. Do you recommend forming an LLC or an LP for this management company?

Oh, my gosh.

Thank you so much. Good time to like laughing here is you're all over the place with this question. This is tricky.

Okay, well, we're going to unpack it. Do you want to say what you're doing?

Right. Yeah, let's unpack this.

Okay.

I like what you're doing. You have you formed an LLC for. In Texas for rental property there.

Okay, check.

That's good. You also have rentals. Yep. That's good. You're setting up the LLC in the state where you got the properties. You're also doing an Arizona LLC for the rentals in Arizona as well. Great. And then you say we eventually want to form a holding or managing company. Let's talk about the difference between a holding and a managing company.

Yeah.

See, a whole company is going to own the. The business entity, let's say in this instance, the property entity that owns the property. So I've got my holding company that I own or you. You and partners could own. I got the holding company. That holding company doesn't own assets. It doesn't own a property directly. It doesn't do business directly. It just owns another company that then goes out and owns a property.

Okay, now the purpose of that, before we get to me. Yeah. And before we get to managing a holding, the purpose of a holding company, there's several, but the biggest one is, is creating another layer of asset protection. So you're typically, you're going to set up this holding LLC in a state that has what's called COPE protection, charging order protection, entity protection, which is a next level type asset protection in my tax and legal playbook. I will hold it up for the camera here. Shameless plug. I have a whole chapter on COPE entities, so you'd want to figure out which state would be best for that. So that COPE entity would hold these other LLC that actually own the property. The other benefit is kind of simplicity. You've got all these LLC flowing into one, maybe one tax return at that point. And for audit Protection. A lot of clients make that holding company A2 Member LLC. So it's on a 1065, so it's going to do its own separate tax return. So you're getting audit protection, simplicity, better asset protection. But that's the purpose of a holding entity.

And let me say, I'll just add on that for you, Bo, because you didn't start talking about partners later on here. Four partners. Okay, well, you might have those four partners all own the holding company and that holding company owns the property entities, which then owns the property. So you have one holding company, one partnership tax owning the separate property entities. Now, I know Bo throws a curveball here because he's got. We've got varying equity stakes. Okay, well that's not going to work. I'm just saying for everyone else, if, if you had like four partners, like hey, let's go in 25%, we're going to go on a bunch of property. You may have the one holding company you're all partners in that owns a property entity that owns a property. This one owns the Texas one, then it owns the Arizona one and whatever. That could be a strategy.

Yeah, I was going to go to the whiteboard, but that's only benefits are YouTube crowd. So we'll just, we'll kind of stay here on a verbal description. I, I think what I see more often, Bo, and for all of you listeners, is that when you have varying equity stakes, what he's saying is Matt and I are going to be partners on one rental in Texas, maybe 50. 50. But then in an Arizona property, we might be 75. 25. 75 for me, 25 for Matt. But in that situation, we might change. We might have different ownership percentages of the actual entity that holds the property. That's easier. And then I have my own holding company for asset protection. Matt has his own company for asset protection. Now, I'm not saying everybody has to do that either. This is based on the amount of real estate you have and operations and wealth. Because we don't need to go to this next level unless you really need it. But when you do, I would say that's more typical. You deal with property ownership stakes at the property level, not at the parent.

Yeah. And that's what, and that's why all these strategies and structures are different depending on the factors and the facts you have. So Bo, in your scenario, you might be doing just separate property entities. You may not be bringing in a holding company at all because of these different varying ownership stakes. You're going to have you're going to be doing different parts, partnership tax returns. But if that's the way you guys are cutting your deals and doing your deals, that that's, that's how the entities are going to break down. Now I want to talk about the managing entity.

Okay?

Now you might have a management entity. We don't necessarily do that in all of our structures, particularly for real estate deals. Where I do like to do a managing entity is let's say you're buying an apartment building, you're buying a bigger asset, maybe you're raising capital and you have a fundamental. And so you have a management entity involved. Generally though, we're just going to list you guys as the managers or maybe one or two of you if you're more actively involved, just personally as the managers. Or it could be a personal entity of yours, but you could form a management company if you wanted. But just remember, if there's four partners, that's another partnership tax return, all right? Plus you've got the partnership tax for the property holding entity itself. So it's going to increase your administrative costs and your expenses. Also your audit risk because now you got another return here with all these other partners in it.

Yeah. And Jack, can we go to the whiteboard? Could you put that up here? So for those of you that catch this show on YouTube and if you want to, you can take the show number from the podcast and plug it right into YouTube and you'll see it. It's on my channel. The directed Ira podcast is on Matt's YouTube channel. The main street podcast is on my Mark Kohler channel. So you shouldn't have a hard time finding it. So if you want to watch this diagram, I think it's just easier to show it this way. We've got this holding company down on the right that would be our cope that you and your spouse or if it's just you, your trust might be the 100% owner or it might be you and your spouse. So two little people down here then these little sub entities and I'm not talking about a sub series LLC, but excuse me, but these other little LLCs,

fashioned subsidiary, yeah, little good old fashioned

subsidiaries could be LLCs in other states and you're going to have differing owners over here. So if you're watching on, if you're just listening, I'm designing multiple little bubbles that are above your holding company that are just kind of falling into your holding company based on your ownership percentage. Now the only reason, and I'd say this all the time for a Management company, llc is that if over on the left side of your equation you want to do one thing and that is have a Roth Solo 401K. You've been dying to have a Solo 401K, but you don't have an operational business. All you've got is rental property. So you go, I'm going to set up what I call the side door 401k. So you're going to kind of set up this management company over on the side that's going to sponsor a 401k because your passive income from these rental properties cannot fund the 401k. You've got to have this little management company. So this little managing company is really useless from an asset protection standpoint. And you might hear companies out there try to set these up in Nevada for you. And I think it's a scam. I don't think maybe it helps you 1%. It's nowhere near worth the cost you pay for it. And that's my personal opinion. Yell at, write me a nasty email if you want people, you know who you are. But this managing LLC is gonna. The sole purpose is to fund this 401k and you zero it out. You're just gonna. From your holding company, the one you own, not the one with your partners. You're gonna pay a management fee over here and then just wipe it out with a manage with a 401k thing and W2 and blah blah, blah, and my handwriting sucks today. And then you're gonna zero this thing out. So it's really, it creates actually better tax write offs. You get a 401k out of the mix. But that's the only reason I'd set up a managing company.

Yeah, that was a great one. Love it.

Okay, now LP. Okay.

Oh yes, we gotta talk about LP.

Okay.

LP stands for Limited Partnership. LPs are kind of old school. LPs were around before LLCs. And so LPs kind of turn into the partnership entity of choice. You have corporations and limited partners. Partnerships. LPs. The thing about an LP is it requires a limited partner and a general partner. Limited partners don't have liability. General partners take liability for the entity. Now usually it's any sophisticated party's using an LP. The general partner in an LP owns like 1% or less and is another entity itself, like another LLC. So it doesn't have any liability because you get the LLC's liability protection. So LPs though, in general, where we rarely use them, we're going to go LLC for Property holding entities, much easier. One thing in real estate deals, LPs in particular, is it's hard to take losses out of an LP and use them to offset your other income. There's passive activity loss restrictions and LPs that LLCs don't have. So if you're actively involved in your real estate or even if you're just, you know, you're just buying single family rentals out here, big deals, small deals, the LP is going to limit your ability to take losses.

Matt said it perfectly. And the only time I'd like to see LPs is on a property. So they're good for properties, but non income producing properties. So like this, the family ranch or the family cabin or the family beach house, it's something you want to keep. It's like a legacy property. There's no losses coming out of it. You're not Airbnb in it. There's no depreciation. It's not like your rental portfolio. So it's this. I would really see it with farms and ranches and these beach houses or lake houses, lake cabin things. And then what you do is gifting. You're going to the clients that use the LPs, put a legacy property in it and then they start gifting pieces of it off every year or two through an appraisal and gifts. And they're trying to get around estate tax. So that's, that's when we see it the most.

So yeah, that's usually called an FOP family limited partnership, but there's also FLL fees, family limited liability companies. And that's where people have 10 million plus estates that like Mark said, are doing the gifting strategy. Otherwise, the only other people using LPs are maybe some people in funds like hedge funds or private equity funds or stuff where they don't care about passive activity loss rules because you're just an investor, you don't pay them anyways. Or just kind of old school crowd of people out there that just haven't caught on to the cool LLC grapes.

I don't know. All right, well, Jack, you can turn my whiteboard off.

Thanks, man.

All right, you want to take one more question? And I'll take one too.

All right, my last question. We'll be quick here. I've got this was from Rod and it was an IRA question and he says love the show, so I had to take it. Rod. Okay. Remember though, if you got your IRA questions get over directed ira.com podcast. You can submit your questions there. We'll hit those on the directed IRA podcast. But this is a good one I think for everyone. He says, I was under the impression you could contribute 6000 to a traditional IRA and 6000 to a Roth IRA. But it seems I was mistaken and it's either 6k to either one or a combination of 6k to both. If this is the case then that means I over contributed for last year. I haven't filed 2021 taxes yet. What do I do now? All right, great question, Ron. What you found out is correct. You can only do 6,000 in total to IRAs for yourself. So this could be 6,000 to a Roth or 6,000 traditional. Or you could break it up between the two as you said for a combination of 6,000 total. Now if you got a spouse, of course your spouse could be doing 6k as well. Now if you've over contributed here and that's what this is called, Roth, you've put in six to your traditional and six to your Roth. You're going to need to pull six out. Now I would pull six out of the traditional and you can do this without penalty since you haven't filed your taxes in 2021. So presume you've extended. So what you'll need to do is contact IRA custodian. We do these at directed IRA for clients that have to deal with this. It happens to all of us. Don't feel bad Rod. This is a common thing. So whether you're a Charles Schwab or Fidelity or directed Iraq, you know they'll be able to help you get that back out and that now you're going to get a 1099 but you're going to be able to put it on your return and saying this is an over contribution prior year, it's not taxable to you. Now if you made some money on it though you will pay tax on that, that will be taxable. So let's say that 6k turned into 7k. You will have to pay some tax on that. If you lost the money, let's say it was in the market that's now down. You know, I don't know that you to take that loss action. I'm pretty sure you don't. But if you made a little money you do have to pay a little tax on the difference.

Coming back up, great comment. Last question for I'll take is from Brandon and he has a three part question. It sounds like it's a lot but I'm going to truncate his question for everybody's benefit here so that hopefully someone gets something out of this. The first question is on a fixed term charitable remainder unit trust. I'm just going to say this Brandon, to you and anyone out there. I have, I've never even met someone or an advisor that have set one of these up because they just, they, they, they exist in concept but I want, my clients want money for the rest of their life and they want to be able to control the investments inside their crut, their General Rayner unit trust. And they don't want this fixed term. That is at the end it dies and they're still alive but their trust is gone and the money has gone to a charity. So I don't know the answer on how to design a flip crud 8 year fixed term structure. I probably have some referrals for you but I know even the experts I know would be scratching their head not only on how to do it, but why. So don't be offended. I think you're going to just enjoy the standard crude and get the benefit of that income disbursement for the rest of your life and give it away if you want every year. But have it there just in case. Number two. He says, I want to sell premiums on option contracts, basically naked equity option contracts inside a crt. But it requires a margin account which means debt. And you're not able to secure that margin account with a personal guarantee. And most charitable trust advisors are not going to allow you to enter into debt inside the CRT especially and certainly no sort of personal guarantee. And then you're going to have UBIT and unrelated business income tax because of udfi. It's a. I've just again, I've never even seen it. I would. You're asking really, really complex high end questions that I think take place in some conceptual context, but I've never even seen them before. So don't be offended. That's just, just being real now. I love his third question. This is what I can answer. Finally throws me a softball. He says, you have talked extensively about the power of creating side hustles inside businesses. Yes, but after these companies serve their purpose, what is the strategy for shutting down the business if there's nothing more to sell? Or I'm done doing my contracting or I'm done being a landscaper or a service provider, I'm done selling widgets. What do I do with the business? He says, for example, a family farm or a fishing pond that I no longer want to use as a business. Is there anything I need to that needs to be done or can I just. Or can it just sit as a dormant business? Yes, there's something that needs to be done and I would not leave it as a dormant business. First, let me say at the most simple level, you would just check the box. Last return, it's done, there's no more income coming in, it's over. Usually at this point, you've drained the bank account. If you have an LLC or corporation, you're going to follow the articles or the bylaws or the articles of the operating agreement and the articles on how the steps take place for that particular business. You're just going to wind it down is called. You're going to sell any assets, close any bank accounts, and on the final tax return, when there's no more income, you just check the box. Final return. Now I will say this, and accountants out there cringing with my simple answer is that if you have assets in this entity and you want to distribute them to yourself, so you've got a leftover forklift, you have a leftover truck or a leftover copy machine or something. If there, if you've depreciated it, which I assume you have, and there's any more useful lives on that asset based on the depreciation schedule your accountant set up, then you have to recapture that depreciation. It's kind of like you're taking it out of the business before it was fully, its useful life had expired. Now if you have assets that their useful life's expired, you've already depreciated the hell out of it. You're going to be able to distribute those. But there's different rules again for S. Corporations, C Corporations, sole proprietorships. But, but it isn't difficult. You just have to have a conversation with your accountant, look at the balance sheet, what's on the books. Nine times out of 10, you're not going to have any taxable income, but you do need to do some journal entries and just shut it down. It's good stuff. Yeah.

So let me just, let me just do a quick summary on that dissolve with the state. If you have an entity, file a final return with the irs. And if you have assets in there, equipment, real estate, things like that, know there might be some tax consequences in getting those assets out out, because you're personally going to take and own those assets now from the business. So there could be some tax consequences there. But we definitely like being more organized about it, winding it down, shutting it down. Don't think you can just like walk away and that it's like it automatically winds down. In fact, a lot of times you're going to get state fees and you're going to get notices and the IRS is going to start sending you stuff and being like, what the hell's going on?

Yeah.

You want to be organized about it, Shut it down the right way.

And this is a deeper issue, Brandon. When you break off a relationship, you need to have a conversation. You know, you just don't ghost someone that's not appropriate.

Right.

You got to tell them what happened. You get. The IRS is out there, they're wondering what happened to Brandon. What? He just ghosted me? I thought we had a great relationship here. He was taking me out every year with a tax return.

He was spending money every year.

You know, he was. He was a sugar daddy for me. I mean, we were making money off Brandon, and now he's just gone. They want some cl. They need closure. Brandon, you need to have that exit interview.

The nice thing is they don't make it hard. You just gotta check the box. Yeah. That's all you gotta do.

Yeah.

You know, so don't. Don't leave me. Yes. No.

Check the box and I'll tell you. It's not gonna go well. If you just ghost him, your car could end up getting keyed. There might be some eggs thrown at your house. I mean, you never know.

And Iris version of our egg in your house is putting a lien on your house.

Yeah. So, you know, do the respectable thing. You know, let him down easy, tell them what happened and part ways amicably. You never know when you might bump into him again.

Yeah.

All right, well, you've got.

Thank you.

That was really profound. You've got an ongoing relationship with the irs. You're going to. You're going to have to talk to him again.

Yeah, that's true. You never fully break up with them, change your relationship.

Yeah, we're just not on Friday nights anymore. We still going to be friends?

All right.

Yeah, we're just friends. You know what? Irs. It wasn't you, it was me. I.

I decided it's not you, it's me.

I. I invented that. Yeah. You know, okay, you're right.

It's you, it's you.

Then it gets even worse if you try to pull off the roommate switch. You know, you might say, I'm going to go from the US And I'm going to get taxed in the United Kingdom. I'm going to move teams. I mean. Oh. I mean, the IRS is not. It's hard to pull off. I mean, no one in the history of man. Yeah, we've covered a lot of ground. Yeah.

Yeah, we covered a lot of territory here. We appreciate you guys being on. Next week, we'll be back with another amazing episode, the Main Street Business Podcast. And if you got questions, we've got answers. Sometimes they're good, sometimes they're halfway decent, sometimes they're terrible. But we got answers. But get over to mainstreetbusiness.com you can submit your questions, and we'll have another open forum in just a few weeks. And until then, Stay calm. Happy 4th of July. July weekend. Go America. I don't know.

Go America. Love that. All right, see you next week, folks.

Till then,