In this episode of the Main Street Business Podcast, hosts Mark J Kohler and Mat Sorensen delve into a variety of tax topics, offering their valuable insights and addressing your burning questions. Follow along as they cover everything from key tax savings strategies to estate planning, property management, and more.
Here's what you can look forward to:
In this episode of the Main Street Business Podcast, hosts Mark J Kohler and Mat Sorensen delve into a variety of tax topics, offering their valuable insights and addressing your burning questions. Follow along as they cover everything from key tax savings strategies to estate planning, property management, and more.
Here's what you can look forward to:
I would really like to know why you are so hell bent on being a real estate professional. I have clients that are trying not to be a real estate professional. Yeah.
Mat Sorensen:And I wouldn't choose a business solely to get real estate professional status.
Mark J Kohler:Once you get your Augusta rule worked out and you're creating cash flow with the Airbnb, look out the days you wanna go there and work on the property fix up days are not personal use. So you're gonna be there tightening up a few screws on this and that and changing out light bulbs and painting this wall or whatever. You're now using that property tax free. It's a complete, 100% depreciable asset, is creating new cash flow. And you got the Augusta rule. You're getting the trifecta there. Welcome, everybody, to another episode of the Main Street Business podcast, one of our favorite episodes where we get to answer your questions, or at least try to. My name's Mark Kohler, CPA, attorney, entrepreneur, real estate investor, and just a prior lemonade stand owner, trying to live the dream here with Matt Sorensen. Did you have a lemonade stand?
Mat Sorensen:I didn't have lemonade stand, but I had a paper route. Lifeguard bus boy. You know, I did it all, guys. I did it all, but I would.
Mark J Kohler:Have went with lifeguard.
Mat Sorensen:Okay, lead with lifeguard.
Mark J Kohler:Well, no, I mean, that had to be one.
Mat Sorensen:I mean, you know, just think of David Hasselhoff, you know, on the beach in southern California. That was pretty much me. It was a water park on the side of a mountain in Utah. But, you know, pretty much. Pretty much the same.
Mark J Kohler:Pretty much. I mean, yeah, California beach, water park, and the desert. Yeah, very similar. Yeah.
Mat Sorensen:Well, today's show, you know, is not just about lifeguarding. I got some tips there, too, of course. But today's show, we're talking about tax and legal strategies, wealth building, entrepreneurship. Mark and I are experts in this field. We're doing it. We're in the trenches growing our own business. We happen to be taxing business. Lawyers help 10,000 plus clients, and this world can be confusing. There's a lot of questions, and lawyers are expensive. That's why we do this podcast. We want to get you the answers. So we've got all your answers. And by the way, you can go to mainstreetbusinesspodcast.com to submit answers. We're upgrading the website.
Mark J Kohler:Yeah, you can submit answers, too. We're taking anything we can get.
Mat Sorensen:Yeah, we could use some help here, guys. Don't leave it all on us.
Mark J Kohler:I was gonna say, you're being pretty bold. We have all your answers. Wow. Okay.
Mat Sorensen:I didn't say they were good. I just said their answers.
Mark J Kohler:All right, well, I love our first question today. This is a good one. I'll read it and then, Matt, you can have first bite of the apple if you want. Okay. My wife's grandparents.
Mat Sorensen:I'm gonna die. Is that coming next?
Mark J Kohler:It could be treacherous. Yeah. Okay. My wife's grandparents recently passed away. Okay, now let's get this. I don't wanna say this too quickly. My wife's grandparents recently passed away. They held their house in a trust. Good. She is entitled. So I believe this is the wife is entitled to 12.5% of the trust as a beneficiary. Okay. I believe from what I read in the trust, the only asset is the house in the trust. That's a point to be discussed. We could. And then the question is, how is the money taxed? Once we know this answer, we do have a few questions on how we would like to deploy the money. Pay off debt, six months emergency count down payment on another house, long term dollars in our IRA. Boy, he's setting all some great buzzwords. We just want to make the best call for tax savings on this next step. I think there's some other things to talk about here and it's going to be good. Ps, you both have helped me completely rebuild my business strategies over the past two years. I appreciate your education so much. Oh, thanks. Oh, gee, this is great. Okay, so, Matt, there's four or five conversations there. We don't want to go down too much of a rabbit hole today. Let's move quick. But what do you want to hit?
Mat Sorensen:The first thing is grandma did something right or mother, sorry. Mom did something right here. She had the property in a trust. And what's going to be nice about this, it's going to pass without probate. The trustee of the trust, maybe that's one of the kids that's taking over as trustee here, is going to be able to sell the house. Now, when the house sells, the cool thing about this, there will be no tax.
Mark J Kohler:At this juncture.
Mat Sorensen:At this juncture.
Mark J Kohler:Yeah, we got, there's.
Mat Sorensen:Yeah, but we're presuming you're gonna go sell the house and put up for sale. So even though mom may have bought that for property for 100 grand and now it's worth 500 grand, that whole 400,000 of gain is gonna get wiped out, not taxable at all. You get what's called a step up in basis so when you guys sell the property, where they're gonna look at date of death, the property's worth five hundred k, and then you sell within the next three to six months after she passes, you're likely gonna have no gain. And then there's no inheritance tax, there's no estate tax. Presumably you're under a 12 million estate here. Otherwise you could have estate tax. But don't stress about the tax. I think you're good here.
Mark J Kohler:Yeah, yeah. There shouldn't be any tax. And it is grandparents.
Mat Sorensen:Oh, grandparents, okay, sorry. Multitask.
Mark J Kohler:Yeah, there's multiple. It's interesting. Now, one thing that I like that you asked her, Og, is you said, so. I agree with Matt. Don't worry about the tax at this point. Now, if you kept the home in the trust for two or three more years and it went up in value from the date of death of grandparents, then you're gonna have a gain during that period. But if you sell, I like what Matt said, between three to six months after the date of death, the IR's is not gonna say there was any appreciation generally. Now, interesting points. Quickly, Og says, I believe from what I read in the trust, the only asset is the house and the trust. The trust isn't gonna tell you that you don't wanna read the trust just to know what's in it. You have to do kind of this estate audit. You're gonna start going through the mail. Are there brokerage accounts? Are there investment accounts? Is there crypto? Is there notes? Are there retirement accounts and life insurance in any other real estate? And come to find out, nine times out of ten, mom and dad also had a, or grandparents had a lot somewhere, or a house or a condo or a timeshare. I mean, you've got to go through everything in the house and you're going to. I did this with my own parents, and I thought I knew where everything. I started going through drawers when my dad died and I found another brokerage account, I'm like, oh, my gosh, it's not in the trust name or whatever. So you got to go through a whole audit there, and your wife being the grandchild at a 12.5% interest, I have a feeling you're not going to be in the driver's seat on all this. So you need to get involved with the trustee of the trust, and say, how can I help you? Let's figure out what else is going on. And you gotta have a consult with a tax lawyer on this, or an estate attorney, and they may be trying to knock it out simply.
Mat Sorensen:That's cool.
Mark J Kohler:And maybe it is only a house, but get a consult yourself. There's a lot here. Yeah.
Mat Sorensen:And I think as a beneficiary under the trust, you're entitled to know what the trust owns. So it might only reference the house and the trust documents itself. But like Mark said, all these other assets typically are supposed to fall into someone's trust. So, for example, did she list the trust as the beneficiary on the life insurance policy, on her bank account, on grandma's IRA or 401K, on her savings account? So there could be all these other assets that are supposed to be flowing into the trust. And you don't know that. Like, even us, when we draft state plans for our clients, unless the client has a specific provision about that asset going to someone instead of just everyone, you know, getting their. What is this? You know, one 8th percentage here they're 12.5% or one 9th, whatever that is. But, you know, we're not going to say and identify all the assets in the trust itself. So that's the job of the trustee to go find out. And as a beneficiary to grandma's trust, you're entitled to that information to know what it is.
Mark J Kohler:And I will say where you want to deploy the money. Kudos. Paying off debt, making an investment in real estate, funding your retirement account, having an emergency account. Oh, my gosh, I love that in there was not a big screen tv or a cruise in the Caribbean. So stay focused on using that money wisely. Grandparents are up and heaven looking down fondly on you. Media junkie. Can I go there?
Mat Sorensen:Yeah, go there.
Mark J Kohler:I'll pose it here again. Hi. I own 27 units and struggle to put in enough hours towards real estate professional status. I'd like to purchase some small businesses over the next year or two as well. I'd like to know which construction type business or other ones I can devote hours to that might help me qualify as a real estate professional. It seems to be a gray area, even though I know there are. All are eleven categories. Will a roofing company and landscape landscaping company qualify? I've heard an h vac company was denied. Are there IR's cases we can look up to be 100% certain a potential business may qualify for real estate professional status? All right, media juggie, I'm just going to leave this. Go for it. I would really like to know why you are so hell bent on being a real estate professional. I have clients that are trying not to be a real estate professional. So in a consultation, I'd be like, okay, what's your game plan here? Are you married or single? These 27 units, how many? That's 27 doors. How many actual structures? What is the cash flow from this? What is the depreciation from this? Do you have a day job? Are you trying to do a cost seg and a bonus strategy? What is the fixation? Which is fine. What is the fixation on real estate professional status first? And should you be chasing that? Because for someone to go into an entire business as a career just to be a real estate professional, you're letting the tax tail wag the dog, I may say. Yeah, you need to do metal building construction. Well, I hate that. Well, then don't do it. Let's worry about what makes sense in the long term for building wealth and what your passions are. Maybe real estate professional is a good idea, maybe it's not. Yeah.
Mat Sorensen:And I wouldn't choose a business solely to get real estate professional status. Like choose businesses to make the most money. The real estate professional status is a secondary benefit. Yes, it's bigger. I'm just like 27 units, and you can't get the real estate professional status now. Maybe you're single. You might want to get a spouse in the mix here and have your spouse be the real estate professional.
Mark J Kohler:Yeah. We could give you some dating advice.
Mat Sorensen:Yeah. Have them get a realtor's license or, you know, I don't know. Or have them manage more of the properties. You got enough there that it would definitely not be an audit flag for that many properties, for one of you guys to be a real estate professional, and then you both qualify, then you can have your full time business that's not a real estate professional business. So. All right, great question. Let me run over to Stephanie B, though. Stephanie B. I just want to say.
Mark J Kohler:As well, 27 units. I'm like, Matt, are those syndication units? Are they out of state? Why can't you qualify? Well, I have a day job. Well, then we're going to quit a day job to go start a business. Media junkie. Please make an appointment with one of our tax lawyers for just an hour. A comprehensive consult with a strategic plan and a trifecta, you might be out $1,500. They can save you ten times that. And a good plan. Please make an appointment at KKOS lawyers. Okay, go ahead.
Mat Sorensen:Yeah. All right. Stephanie B. Asks, I've started a YouTube channel and I'm wondering if I can write off expenses incurred for the business that also can be used personally. Example, garden equipment used for the video. But since it's home base, can we use the equipment in the future? Am I able to take 100% of the write off or do I need to do a percentage? All right, great question, Stephanie. So any of you that have a YouTube channel, as long as it is a business that you earn income from, Stephanie, you have to have a business associated this. Now, maybe you're getting revenue from YouTube. That's one of the nice things about YouTube that's maybe different than a podcast. You could be getting revenue directly from YouTube, which is taxable and which can count as a business in and of itself. Maybe you've got some affiliate income from selling gardening tools or equipment, or you got a training class or a course or a retreat. Whatever you're offering there, that creates income. That is a business. I'm just saying you've got to have income here before you can have any expenses that can qualify here. Now, yes, if you have gardening equipment that you're using, you know, you got a little, I don't know, I was gonna say a hoe, a rake. What are the gardening tool? A little. Some shovels.
Mark J Kohler:Yeah. Yeah. Like rototiller.
Mat Sorensen:Rototiller.
Mark J Kohler:You know, I don't know. Weed spray, little thing.
Mat Sorensen:Oh, the little sprayer for the hedge trimmer. Oh, a blower.
Mark J Kohler:Obviously, you have not been at Home Depot lately.
Mat Sorensen:I'm getting into more landscaping here. Not gardening, but, But yes, I think it's okay to have some reasonable personal use of it. Now, we, let's get to the real issue. If you were under audit here on these items that you're buying, is, was the reason you purchased this for business? If you're like, no, I really just happen to use it in the video. I mean, you might have to take a percentage there of personal use and business use, but I think if you're actually using this stuff in your videos, particularly if you're promoting these types of products and things like that, and you're buying, I'd absolutely be taking them as a deduction, but I wouldn't have some like, you know, it's in one video type use and you really have a massive garden in your backyard. And I think there's kind of, where's the intent here? And like, why did you buy this equipment?
Mark J Kohler:Yeah. And I'm going to be even more. There's so many, this is a new area in a way, where we have these YouTube personalities, and if they use a prop on the set, they're like, oh, it's a write off. Well, is that prop really relate to your business model. Are you teaching gardening? Are you talking about landscaping? Are you selling tools on a regular basis? Or you just had a hoe in there and a rake because wanted to talk about a business concept. And then to think that prop, that's, you're gonna take it home and then use it forever at home. I just got a write off. I think that could be a little aggressive. It's gotta, well, we're gonna keep it in the studio and use it for studio only. Okay, cool. I think you gotta find a balance here. Yeah.
Mat Sorensen:And I think today's podcast might keep it rated pg 13 or adult here for multiple references of the word ho.
Mark J Kohler:I love it. All right. Okay. Matt, I have to be careful because we have our inside voice and outside voice, so. Okay. I leave my inside voice alone on that. A follow up to that?
Mat Sorensen:Yeah.
Mark J Kohler:Okay. All right. Ccroft. Love the show and services you provide. Last year I used you to set up my trifecta and I am borderline obsessed with becoming as tax efficient as possible. I love it. There's nothing wrong with that. Saving taxes builds wealth. You ought to check out my tax pro certification@markjcoulder.com. Dot it's not just for professional advisors, it's for business owners that want to go next level. And I promise you're going to save whatever you pay me in taxes. Multiple so check that out. The main street tax pro certification. Seacroft then continues, my question is about putting advertising on my car. Now we're going to get into some marriage advice here too. Seems like some companies are legit and rapid fine your car and basically pay you twenty cents a mile from what I can tell. However, I know that the mileage deduction is about six and a half, which seems like this would be a tax loss right out of the gate. If I driving my car via my S corp with this wrap making twenty cents a mile, can I use something like this to create a tax loss to go against my other business income? I would not be ashamed of having an ad on my car, but my wife could be another story. All right, now we get to the core issue. See if he can go to his wife and say, honey, we're making money and this is a great write off. He has some ammo. Yeah, if he can't go to his wife with a good write off, she's gonna go hell no.
Mat Sorensen:Cause she's smart. Yeah, she manages the checkbook.
Mark J Kohler:So Ceecroft, do you want to be right or happy?
Mat Sorensen:You mean you can't have both in marriage.
Mark J Kohler:Just saying. You know, your wife might be right on this one. So I don't know. I would love your thoughts on this. Have you heard of people utilizing the side hustle to basically pay for gas and get a tax loss? Yes, I have heard of people using the wrap advertising fee, but not for a tax loss. Here's the issue and let's break this down. If someone wants to wrap your car and sell some lotion or potion and they're going to pay you twenty cents a mile to drive around town with their business name on the side of your car, great. Just because you're driving that car around does not make it a tax write off for that. That's now if, and I'll give a caveat, but the IR's says you can write off your vehicle when it's being used for business. Business errand. Going out with a customer, a client, an employee running an errand related to picking up supplies, delivering product. That's when you get to write off your vehicle. Just because it's wrapped with someone paying you is not going to make it a write off. Be careful. Whoever is telling you that say thank you. Will you sign my tax return? And if I get audited, will you pay the bill? They're going to run for the hills. So when does it work? And what are they twisting? They're twisting the Vegas model. When you're driving down the strip in Vegas and you see a truck go by that has this electronic ad on the side and it's like that's the truck's only purpose. So yes, they get to write off the truck or miles and yes, they're making money off those ad spends from others and they get a write off. But they're not driving the truck to the grocery store thinking it's a write off. It's exclusively used as a billboard. Your car is not being exclusively used as a billboard. You're going to go to the lake this weekend. You're going to go to the movies on Friday night. That's not a write off. So want to make twenty cents a mile? Rap it with whatever and your wife's good with it. Cool. But don't use the tax write off as the strategy. I don't see it. I would not be comfortable with it. I want to write off your vehicle related to the operations of your escort.
Mat Sorensen:Love it. Love it. Nothing more to say, but amen.
Mark J Kohler:There. All right.
Mat Sorensen:Okay.
Mark J Kohler:Susan B. Susan B.
Mat Sorensen:Asks, can I categorize 1099 miss settlement money that I received as capital gain greatly preferred, or is the money taxes ordinary income?
Mark J Kohler:Here's the situation, man. I'm impressed. You grabbed this one. I steered away from that one. Did you? That's a hard one.
Mat Sorensen:I think I got it. I think I got it. Reasonable answer. Okay, I'm gonna go capital gain. I'm gonna.
Mark J Kohler:That's.
Mat Sorensen:I'm just gonna. Let me just say that. And if anyone at the IR's wants to fight me on this, okay, I'm.
Mark J Kohler:Excited to hear this. Yeah.
Mat Sorensen:Because I think it's what it should be. Okay, well, we'll get to this.
Mark J Kohler:What it should be and what the IR's does. Two different things. Yeah, keep going. I want to see.
Mat Sorensen:Okay, so here's the situation. This is a good one. In 2022, I invested in a currency trading investment opportunity, which turned out to be a scam. Too bad it wasn't bitcoin. In 2012, when the company notified us that the investment money was gone and could only be partially returned, we withdrew our funds and showed a short term capital loss of $30,000 in 2012. To our surprise and delight, in 2020, 311 years later. That's the american court system. Took a decade to get a good answer on this case. We received a lawsuit settlement check for $16,000 and a 1099 misform. Additional tidbits. From 2012 to 2023, we continue to have short term and long term capital loss carryforwards for which we can only claim a three k loss per year.
Mark J Kohler:Okay.
Mat Sorensen:Which I'm assuming you're taking that loss to offset other ordinary income you have, not against other short term or capital gain losses or gains, I should say. I'm hoping the 16k settlement money can be shown as a long term capital gain. Here's the thing. What is the true nature of that money? I think if you got a 1099, miss, which a lot of people are going to think that's ordinary income, but why did you get that settlement? That's returning what money you lost, your basis in an investment that wasn't compensation for doing anything, that wasn't pain and suffering. So one of the things when you get a settlement, if you, let's say you were in a car accident and you get a settlement for $100,000, and it's like, you know, it's for pain and suffering, well, guess what, guys? That can be taxable, okay? But if it's for a settlement, for a loss of investment dollars, we got to go back to that. Was returning your basis or now we're looking here of, well, you did actually take a loss on your tax return. So now I would think you would pick it back up as a gain because you already claimed that loss. So I don't know, that's. I think the approach I would take on this. Be careful about settlements. Let's say you have a settlement for wages. You know, an employment case that's going to be taxable, obviously. Cause that's lost income or wages. In fact, let me say this, actually, pain and suffering is not taxable. Let me say that. Yeah, pain and suffering is not taxable. Lost wages is. And you have to get into analysis. If I got that 100,000 settlement from a car accident, how much was attributable to me losing work, how much was attributable to my pain and suffering and those different categories. So that's, I think why you got the ten to nine miss is that's just what happens on settlements. But I would still look at what's the true nature of the income here. This was a recovery of dollars lost in an investment. So I think you're in the capital gain realm. That would be my take.
Mark J Kohler:Yeah. This is tricky. You open? Yeah. By the way, you know I love you. I'm gonna try to. Let me reframe this conversation. Some of you that are listening, that might be tax advisors, could be going, whoa, whoa. Because this is complicated. First thing is, we've got two issues going on. One is a settlement from a lawsuit, which is a big conversation. Then we have a settlement from an investment gone bad, and that's a different conversation. So let me, let's just say judgments in general. And I was just quickly looking at the IR's website on this. Compensation from compensatory damages, including lost wages received from physical injury and this, that are excludable from gross income, with the exception of punitive damages. Punitive can be taxable, and then you got emotional distress versus physical harm. So it can be very complicated on the three categories of actual damages, emotional distress and punitive. So you. So if you're getting a settlement, you really need to consult with a tax advisor that understands this settlement aspect of. Of injury. And the IR's has all sorts of stuff on this. If you start looking at settlements and judgments, tax implications of settlements and judgments. Now let's go over to this. So I was going to say, Matt, I think you're pretty right, but it is an area that can get. You can step into some doo quickly. Yeah.
Mat Sorensen:So, and I would think, like, if it's the accident, the slip and fall, that type of stuff. We're more in the taxable world of things. On the investment side.
Mark J Kohler:Yeah. Now, on the investment side, here's the trick.
Mat Sorensen:I'm returning my investment. There's not punitive damages. I didn't get more than what I lost in the investment.
Mark J Kohler:Yeah. So I'm going to just say this. Let's say you do an investment and it goes bad, and you're getting your final check. That's how I take this question. We did this investment. We got a 1099, miss. We got our money. And you're asking, is it, how is it taxable? Well, I'm with Matt. It's an investment. You're not going to have it subject to self employment tax. But is it capital gain versus ordinary? Which means is it capital gain versus short term capital gain? There's so much here. So when you get that money, we have to look at your basis. So if you invested 50 grand and you only got back 30, you have a loss. And I think that's a lot of what you're asking here. First, how is this taxed if we're at a loss? See, if you invested 50 and got 30, it's not capital gain or miscellaneous income. It's not even ordinary income. You have a loss, you invested 50, you only got 30. Now, they sent you a 1099, miss, for 30 grand. Cool. You're going to put that on your schedule D, and then claim a basis of 50, you actually have a loss. Step two, how is that loss deductible? Well, Mark, I got ripped off. That's a serious loss. That's just not a loss of investment. Oh, really? Okay, so we're very. Iris is very clear on this. There's only. You get to deduct $3,000 a year of that loss. And you alluded this in your question, too. And you're like, well, what the hell? I've got this loss from getting ripped off.
Mat Sorensen:Not a bad investment.
Mark J Kohler:I got ripped off. This could be an FTX thing. Vanguard, we talked about this on a podcast last year. So when you get ripped off, then you have to ask, does it meet the Ponzi scheme exception? If there's a Ponzi scheme scenario where you literally got taken advantage of from a bad actor, then that loss becomes ordinary. And that's where I think you're going with all this. I got this money.
Mat Sorensen:I've got a loss.
Mark J Kohler:I want that loss ordinary. And to do that, you've got to meet the Ponzi scheme exception. And here's what the rule is the scheme promoter was charged under state or federal law for fraud, embezzlement, or similar crime. Okay, we got the FTX guy. Easy.
Mat Sorensen:By the way, the FTX people are getting all their money back.
Mark J Kohler:Oh, yeah.
Mat Sorensen:They're actually getting all their money back, which is crazy. But maybe the Voyager people or there's plenty of people that have lost money.
Mark J Kohler:But, yeah, no, it's crazy. Every situation is different, and just them going into bankruptcy doesn't mean it morphs your loss into ordinary. Either. You have to meet these three things. One of these three things charged with fraud, embezzlement, or crime, or the promoter was the subject of a state or federal criminal complaint alleging a crime doesn't have to be convicted. And so it's two and three. And either there was some evidence of an admission of guilt by the promoter or a trustee who was appointed to freeze the assets. So this has got to be a pretty big deal before that loss is going to morph out of this $3,000 a year rule into a completely deductible, ordinary situation.
Mat Sorensen:So for them, they got some income back, and they have all these losses still sitting on the books.
Mark J Kohler:True.
Mat Sorensen:So hopefully that I was like, I think you should be able to net that out in your specific situation. Cause this was lost from an investment. You put 30k in, you only got 16 back. You're still net. You know, you're still behind.
Mark J Kohler:Yeah.
Mat Sorensen:Do I have to put that as ordinary income on the 1099? I don't think so. And I, you know, kind of slaughtered some of the wind up here on the.
Mark J Kohler:Oh, no. You're good.
Mat Sorensen:Taxation of damages.
Mark J Kohler:But since it's an investment, that 1099 is going to go schedule D. It's going to. It's a gain or a loss. It was a return of an investment. So it's schedule D, as in David. And then you're gonna look at your basis, and in this situation, you're more likely gonna have a loss. And so then the real question is, how do you get to deduct that loss? Is it ordinary income? Yes, but then it's netted against your basis. Yada, yada. So tricky topic. Wow.
Mat Sorensen:You wanna do this one? I like this one, actually.
Mark J Kohler:You do? Yeah.
Mat Sorensen:Okay.
Mark J Kohler:I've been talking. You pose it.
Mat Sorensen:All right. Okay. This was. Can an S corporation purchase a residential property for personal employee use? Body shop diva asks, I want to have a home away from home for myself and my employees. We do an employee retreat, at a minimum, once a year. And I'd also like to offer the home as a benefit for a number, limited number of weeks per year per employee. I would also be using the home as my home office space while I was there. However, my business and insurance agent has nothing to do with real estate or rentals. All right, body shop, let me get you the bad news. And there's, I'll give a little good news here. You could buy this as a second home. I wouldn't buy it in your escort, by the way. We just set this up in a separate LLC and you could maybe use the Augusta rule for the week. You use it as a retreat for all of your team where you're actually renting it to your own business and getting to take that in as non taxable income. Look up the Augusta rule. There's some other stuff and content we've done on that, but this concept of using it yourself personally, letting your employees use it personally, do you know if you let your employees use this, you actually have to tax the value of it to them? If you're going to try and write it off, that's additional compensation. Just because there was an employee of yours doesn't mean, oh, this is an expense for you. Oh, it is an expense for you. Only if you make it taxable to them. Just saying, hey, I let my employees use it. This is business. This is all a write off for business. No. Are they using it for business? Are they meeting customers there? Are they having business meetings? Are they just using it for their family vacation or their own family retreat or personal use? So it's still going to get down to the, what is the actual use of the property? Is it business use or is it.
Mark J Kohler:Personal use of you or your employees?
Mat Sorensen:Yeah, you are. Yeah.
Mark J Kohler:So I agree with Matt and I want to summarize, point up and then offer an alternative. But his point being, if you have a second home, never buy real estate in your s corporation. Okay? Never. Now, we might be able to create a write off in your s corp through this experience with the self rental strategy or this, that, and another. But do not buy a piece of property in your s corp. Number one. Number two, I love the Augusta rule that you could write off the times you take your employees there for business retreats, not personal use for the you or them. And when you are there, if you do have a home office, we can write off a limited piece of this property under the home office rule. So I'm good with that. And if you have an S corporation, we're going to do what's called a rent reimbursement strategy. So it's not even, it's going to be a kind of a pseudo home office strategy. So I love all that. But let me give you an alternative. Airbnb. You're going to have to furnish this thing anyway. There you go. So furnish the damn thing, put it on Airbnb and block out the weeks that you're going to use it for the business and under the Augusta rule, so that you can take your employees there and take a. So it's complete write off for the business and it's still 100% rental number two, you're creating cash flow for the property when you're not there. You can even midterm it, maybe three months here or six months there. Both Matt and I have midterm and short term rentals, and I hate a home just sitting there not making me money. If I'm not using it better be making me freaking money. And then the third strategy in all this is once you get your Augusta rule worked out and you're creating cash flow with the Airbnb, book out the days you want to go there and work on the property. Fix up days are not personal use. So you're going to be there tightening up a few screws on this and that and putting, changing out light bulbs and painting this wall or whatever the home office becomes. Who cares about that? You're now using that property tax free. It's a complete, 100% depreciable asset, is creating new cash flow. And you've got the Augusta rule. You're getting the trifecta there. So I think that's the key.
Mat Sorensen:That was a great alternative approach to do it. Now just, I want to make sure everybody caught there because there's a little caveat in there. You can only have like 14 days of true personal use. So I'm listing it on Airbnb. I'm using it in the business. That's really business use. This just isn't an employee staying there for free for a week. But if you're there and having more than two weeks of personal use, it's really got to be maintenance days. Days. You're there to oversee or improve the property, meet a contract, or do those types of things, and then I think. I think you're good. But I love that. That could be a great little talk about threading the needle there. That's. That's how you do it.
Mark J Kohler:Oh, well, thank you. Now, I'm loving Bunny Lowe's question here on the daughter who's got an Amazon marketing business. Can we go there? Yes. Okay. So Bunny Lowe says, hey, guys, my 21 year old daughter wants to do an Amazon reselling business and wants to know if an online business, can she create the LLC in a less expensive state than New York? That is Delaware. It's a bit pricey here in New York. And if yes, which state would you recommend? We are also aware that New York residents, we do have to pay new York City on state taxes. Just wondering if it's okay to file for the LLC somewhere else so New York won't tax us. Thank you for the amazing, valuable content you share with us. Thank you, Bunny. Oh, my gosh. I just trained 120 accountants in our certified tax program on this topic yesterday. And this is a wonderful topic. I'm just going to hit a couple highlights. And, Matt, you can fill in the blanks here. There's a lot here. Number one, if you're a New York resident, you're going to be paying New York tax no matter where you set up the fricking LLC. So that's point number one. Your daughter's going to run this business from a basement. But you're like, it's in the web. It's in the metaverse. We're not really in New York running this business. Yes, you are. You're sitting on a chair in New York running this business. And LLC and any other state is not going to help with taxes. By the way, I feel your pain being in one of the five boroughs. You've got the city tax, you've got the state tax, and then you got the fed. Oh, my gosh. And I love the five boroughs, but you know what I'm talking about. So, number three, is an LLC even going to save you tax? With an online business, an LLC is not necessary unless you're going to convert to an S corp. So we need to find out, how much rev do you plan on making in this? How's she doing? And by the way, there's an s corp tax, in a sense, when you. Because they don't. The five boroughs, they do not recognize the S corporation. They're going to tax it like a C Corp. Ugh. So, actually doing an LLC and then converting to an S corp could hurt you as well. Here's my take. Get your daughter started. Have her set up. Maybe a dBA with an ein, maybe an LLC. I don't think it's necessary at this juncture. Let's prove the product. Let's get her out there making some money with this idea and strategy, setting up an LLC would be secondary to helping with their business plan or business model. I don't see you saving tax anywhere in particular with this strategy.
Mat Sorensen:You might want to look at moving.
Mark J Kohler:Yes.
Mat Sorensen:Across the border.
Mark J Kohler:Yeah. Move to Orange County, California, where the tax rate's 13.3%. There's another good idea.
Mat Sorensen:There's some options. You got some options. That's the tough part of this. And that's honestly why a lot of people move. We've seen a lot of migration patterns. Why are a lot of New Yorkers in Florida now? Why are a lot of Californians here in Arizona or Texas? You know, there's a. You know, there's some reasons there, and it starts with t. Okay, I love this question. Dude, you gotta check this question.
Mark J Kohler:Okay. All right.
Mat Sorensen:Where's it at? This is an asset protection category. Trying to lose the farm due to a bad egg, says Army EOD hide. The dynamic duo of my favorite business podcast. Hoping for that rockstar endorsement soon came.
Mark J Kohler:Look, if you're on screen, okay, this usually goes up on YouTube as well. I'm holding up my rockstar duffel bag. I got a duffel bag full of rockstars, and it did a box opening. I'm a partner with Rockstar now. I want to say sponsored, but that's a, you know, that's a very.
Mat Sorensen:They gave you some free drinks?
Mark J Kohler:They gave me some free drinks. They comment on all my rockstar videos. So I think we're pretty endorsement. I think that could qualify as endorsement.
Mat Sorensen:You guys are dating right now.
Mark J Kohler:We're dating.
Mat Sorensen:You know, you guys are dating. The start of a new relationship.
Mark J Kohler:Love and rockstar.
Mat Sorensen:Okay. So it says, I'm really struggling to figure out what to do to protect my farm. I have 29 acres in Oregon, and my house is on. The long term plan is to continue growing our nut and fruit orchard for an eventual you pick operation.
Mark J Kohler:Ooh. Love it. I've been there, done that. I love that in Oregon.
Mat Sorensen:But it'll take another five to seven years for my trees to produce. In the meantime, I'm throwing all kinds of spaghetti against the wall to generate cash flow. I have a number of trees in a nursery, Christmas trees in the ground for harvest in five to seven years. By the way, I worked in a tree. I sold Christmas trees. One of my favorite jobs ever. Oh, selling chicken eggs.
Mark J Kohler:And I've harvested chicken eggs in a chicken farm in Utah multiple times. Love this.
Mat Sorensen:Okay. Says eggs. Laying chicken. Raise the chicks, sell them once they start laying meat. Chickens raised to produce and sell on the farm and I sell a variety of vegetables on the farm paste. Tomatoes, garlic, blackberries.
Mark J Kohler:Oh, love it.
Mat Sorensen:Other than that, I have no idea what I'm doing. It's going well. I'm pretty much the Oregon version of the Dutton ranch, but with chickens. Eat your heart out.
Mark J Kohler:I love you, army eod.
Mat Sorensen:This is good. I'm currently operating as a dBA in Oregon, but I know I need to establish an llc for the farm sells. My question is, how do I maintain the veil between the farm and the property? Do I have to do anything or do I have to show some sort of transaction relationship? Is it as simple as getting set up as some rental agreement between the farm and me? If so, not how I capture this on schedule f. Interesting. Okay. For farms, all income currently being reported on my personal tax term as I running as a sole proprietorship.
Mark J Kohler:Do I get first stab?
Mat Sorensen:Yeah, whatever. Okay.
Mark J Kohler:All right. This is a perfect example of the trifecta. And I wish we could go to whiteboard, but what we're. Let me just visually do my best to create.
Mat Sorensen:Army knows the trifecta.
Mark J Kohler:Yeah. Yeah, that's right. Army knows the trifecta. So let me kind of create an image here with my words. On the left side of your trifecta is your operations as a farm that's going to be on a schedule f. Love it. On the right side is where we want to try to protect the land. And so if you're going to set up an LLC at all, the first LLC I would set up is to hold the land. Now you're saying, well, my house is on there, too. All right. Now we've muddied the waters there. Are you going to do a lot split? Can you peel off the land to a separate title, put that in.
Mat Sorensen:It is 29 acres. You might be able to piece that off, which I would love to be able to do. Get a parcel split.
Mark J Kohler:And it's going to create more value for the property, because if you can split off one acre for the home and go to the county commissioner or the city, wherever you're at located, I would, and it could take you a couple years to get that through. I talked to an engineer, go through the zoning and planning, and try to get your house split off from the land, which is huge.
Mat Sorensen:I'm doing this right now, actually one of my properties, doing a lot split. And there's different rules on this. Now, you're out in an agricultural area, so it might better. And let me just say army od. You know who would do that? John Dutton would do that.
Mark J Kohler:Oh, yeah. No, Beth would. Beth would take care of.
Mat Sorensen:Yeah, I don't know. Yeah, I don't know. Yeah, he would make sure it got done. Yeah, yeah, you get her done.
Mark J Kohler:So he knows the governor.
Mat Sorensen:He's got some strings to pull.
Mark J Kohler:Yeah. And let's get clear here. If you're trying to protect the farm from the operations, we do that all the time. We set up an entity for the potato operations, and then we set up an entity to hold the farm that where you plant everything. That's normal. But the problem is you've got your home in the middle of all this, so we got to deal with that issue. Can we split off the home from the land, put the land in an LLC? Now the operations. I keep him on a schedule f as a sole prop. Once you start having patrons come onto your property, that's when you have liability. There's nothing to do for tax planning here. An LLC is not going to save you taxes. So run the business as a farm, as a sole prop for now, maybe a dBA. And then when the time's right, you would set up an LLC for those operations. And if you're having people come on and pick, get on ladders, harvest people that you may be paying to subcontractors to come help harvest and all that's when the liability really ratchets it up. And we want an LLC for the farm operations still on a schedule f, and then an LLC for the land if we can pill off your home. So there's some long term planning involved here. Good luck to you. Agricultural. Once it hits, you're going to be making money and loving it five years from now. So just stick in there. Yeah.
Mat Sorensen:And what I'll say too is just know farming is a little unique and that schedule f is a little unique. You know, some people might be thinking, should I use an s corp or not? Well, that in the. Anybody in the agricultural space or a farm, it depends. That's where you do need to get the tax console and why. Mark's just saying, let's go with the llcs. And I like that for the property because I think that's where Army OD was coming from as an asset protection point at the beginning of the question. And I like that approach, too. And I think for planning of sell of this as a business, let's separate the home from the actual property where there's income being produced. It's going to be simpler from a tax standpoint, and also from a later standpoint, when you want to sell this operation. But I'd also just recommend getting a consultant with one of the tax lawyers. There's some in our firm that are familiar with the farming operations and have worked with a lot of clients in the farming space. You have a lot of actually unique write offs and stuff that not a lot of businesses have.
Mark J Kohler:Okay, I've got another inheritance question. Maybe that's a little bit of a theme today. This is from BB. Hello. I will be receiving a substantial inheritance, plus a property that's currently worth 350,000. I currently have a home in San Jose, California, that's worth a million dollars. And I'm currently under prop 13 for taxes on that house. I am currently retired. For those who don't know, prop 13 keeps your property taxes in check. It's almost like rent control. It's like property tax control. Prop 13. I would like to know how to avoid paying so much taxes on the property and how to go about putting this property and my current house in a trust. Not sure when I receive the inheritance, but should be coming up. I'm trying to get all my ducks in order before everything happens. Okay, well, first of all, let me throw out if you're inheriting a property and some other money, which you're. You haven't been too specific on what the other substantial piece is. Just like our prior conversation, if you're selling this property or receiving money in an inheritance, you're going to receive it at fair market value. Due to that stepped up basis rule, there should be no tax involved here at all. From an income tax standpoint or inheritance tax. Again, based on the limited facts you've given us, I would not worry about taxes in regards to receiving this money. Second point, you're receiving a home that's worth 350 and you're already assuming keeping it. Why? What's this property doing for you? Is it creating cash flow? Is it a rental property? Is it a second home? What the hell? And if it's in California, we're 350 grand. You better have a really good long term plan for that property. Now you're saying, well, I want to keep it under prop 13, that's going to be tough. When you inherit property, it's usually going to create a reset on property taxes. Now, there are some exceptions. If you're the exclusive beneficiary, you have to be a certain family member. But if you don't fit that little model, damn straight. The county's dying to increase the property tax on that. And putting this in a trust, easy shmeezy. That's the least of your worries. And there's no tax. It's what's the best move with its inheritance and how do I deploy that property and why and where. That's where I'd spend the time.
Mat Sorensen:Yeah. I think the nice thing, as we talked about some of the other question on this similar BB is don't stress about the taxes right now. I don't know how substantial the rest of this is. We, you know, this ride actually had a consult with Lee Chen. He's one of our attorneys in our California office. He's worked with a lot of people from the estate planning side, people inheriting. He's probated estates. He knows how to do that and can help you get through this. But then you're going to need your own trifecta, like we just talked about recently too, to separate this out. What are you going to use with that money? You're going to be have, a lot of stuff's going to be showing up on your asset side where you already have your home. You're going to have this other property that could be rental. Maybe you're going to sell it. We don't know. You have all these other substantial things you're inheriting. How are you then going to deploy that money into an investment strategy? So I think the nice thing is you've got some legal hoops to jump through to get here. But these are good things, right? These are the good problems to have. And we can help you get that structured properly so you're efficient moving forward, protected. The second thing I would say is you need to get your own estate plan going. And I love that part of this here. And guys, we set up over hundreds, we set up thousands of estate plans a year. And we're doing this with clients across the country. This is one of the things, and you can see in theme of these questions we've had today, we need to have estate plans.
Mark J Kohler:I was just at a funeral a.
Mat Sorensen:Couple of weeks ago. We are not invincible. We are going to pass one day. I'm actually updating my own estate plan right now. I met with my wife about it last week. We were just going through all the different provisions. We got the yours, mine and our stuff and just take the time to make a plan. For those of you that have a trust passing down assets, you're making it so much more simpler for your loved one to carry on, to know what your wishes are, to have it organized and outside of court and outside of probate. So just a couple quick tidbits there on estate planning and what to do. We have other shows just on estate planning. We're gonna have some more. We need to talk about estate planning more. Actually, we need to do a podcast just on how to do your estate plan properly. We have some in the prior shows, but we need a new one.
Mark J Kohler:I'm loving it. I would love to do it. Okay, this is Barrio Eric. He's very offensive in this comment or question, so I'm gonna have to hold back, he says, trying to keep this question example generic and applicable to your client base. Would a small business with a small number of full time or part time employees ever benefit from a PEO? Now that's a professional employment organization. It's kind of like setting up an entity to hire employees and lease them back to your business. And by doing that, this PEO might have economies of scale to get better health insurance plans, better manage a group 401K or some benefits of some sort of cafeteria plan. And so medium or larger businesses with multiple locations and may do a peo for the average small business owner. I would say no. They're very rare, frankly, for in our main street business pool and we've got clients that are making millions. It's just, it really has to be a unique situation with lots of employees, multiple locations, kind of a. I wouldn't say you need a PEO to get good health insurance or 401 ks either. Anyway, in prior podcasts, Mark has had the opinion in the lack of great, or offered the opinion of in the lack of great and affordable health insurance options and business owners that can't get coverage through a spouse. Yeah. Going out and getting independent plans can be good and bad. I don't know that I want to be characterized as always having the feeling that it's hard to get affordable health insurance whether you're a small business or not, insurance sucks. And the cost, very common scenario amongst your clients, waiting and needing to provide benefits. It's a tricky thing, but here's the part that's really hard to take. It says it's difficult to navigate and group health for a small, very small pool with owners closer to Mark's age than Matt's. Did you hear that? I did not hear that. Yeah, yeah. People closer to Mark's age than Matt's. I think he's implying that I'm older than you and that, you know, there's old people who are having a hard time getting healthcare.
Mat Sorensen:No comment, Barrio Eric.
Mark J Kohler:This is. This hurts. This really hurts.
Mat Sorensen:Do you see the gray in my beard? You know, it's coming in here.
Mark J Kohler:I'm just teasing. All right. Exploring options. I have pondered the PEO, but I have not heard this topic addressed by Mark and Matt. Or Matt and Mark. Oh, look at that.
Mat Sorensen:Is this because put two t's in there?
Mark J Kohler:Yeah, it's true. Is this because it's a bad idea, not commonly utilized or some other reason? Any insight you can provide not commonly utilized. Actually more expensive than just going after these fringe benefits in your current organization. I think it's worth a consultant and talking to one of our tax lawyers or someone in this arena, but don't go to someone that's selling it. Anybody that's trying to sell you on the PEO is going to give you every reason why doing it is a good idea. I'd find someone that's independent, that could care less either way you go, and that could be one of our tax advisors or attorneys. You go in with your eyes wide open. So I see your struggle trying to get good fringe benefits for your employees. But if you don't have a lot of employees in multiple locations that you're already working upstream to do a PEO.
Mat Sorensen:Yeah, I think some of the clients I've seen do it are, I would just say do this for business reasons more than I would say do it for tax or benefit reasons. I think the clients I've seen use it over the years are kind of like these smaller businesses. You have more than ten employees, but you're not like at a hundred. Sure. Like a good little operation where you have enough employees, where this is can be valuable to you, but you don't have enough where you want a whole HR team. But also, I see it more with businesses that have more turnover, more manufacturing or restaurants or things like that, where it could be higher turnover. And you just don't want to have to deal with all the hiring and firing and onboarding and all that. But the bottom line is you still have the obligation to train. These are still your employees. You have the obligations to offer good benefits to them. And that business, that PEO is trying to make money, too. So there's a cost to that you're going to pay, plus the bennet, the wages you're going to have to pay the employee. So I don't know. I don't think that I just myself, as I looked at this, I mean, a long time ago, it was like it just didn't make sense because there's more cost to it. And yes, they have benefits lined up. They've got it figured out. Yes. Is it more work on your end to do it. Yeah, but I don't know. It's a service, basically. I don't see a tax strategy in it, necessarily.
Mark J Kohler:Oh, for sure.
Mat Sorensen:So I know there's pros and cons. What I'm saying, it's not a strategy we typically recommend clients use. Let me just say that out of.
Mark J Kohler:The box for sure. And the people that are usually coming to us with this idea have been pitched the idea with someone selling something, be extra cautious and get a third opinion if needed. We might be too jaded. Okay, last question. Matt, what do you got?
Mat Sorensen:Oh, I didn't. I had an IRA question, which, by the way, all these IRA and 401K questions, guys, we love. We're going to hit a lot of these over on the directed IRA podcast. So go over to directed ira.com podcast to ask all your self directed IRA retirement account questions. But I'm going to answer at least one here. Okay, I want to hit one. This is from Star firm says, love the show and all the fantastic information you deliver. Thank you. I'm considering a new venture, and a specific question has come up. Can an S Corp with no employees that has a solo 401K own another percentage of an S corp that has full time employees or employees without putting its solo case status in jeopardy? Christopher, tough question here. So solo 401 ks are awesome. 401K plans for anyone who's self employed with no employees. Now, if you have that business that is a legitimate s corporation and you have no employees, great, go do a solo 401K. But if you have employees and other companies that you also own, this is where it starts getting tricky. And even amongst our lawyers, we all debate this and go through scenarios because it's super complicated. I'll give you the general rule of thumb, but I just want to say there's exceptions to this. If you really want to execute this and pull it off, I would get a consult with one of our lawyers, Kevin Darren. There's a number of them that have gone down the rabbit hole on this. There's controlled group rules, brother sisters stuff, and rules on this. But as a general rule of thumb, I would say if you own that other s corporation or business, doesn't matter the entity type, more than 50%, 50% or more, you're not gonna be able to execute on this. There might be an exception to that. If this is a very large business, as a rule of thumb, if you have another business with other employees that you own, 50% or more of, you're not gonna be able to do a solo k in a company where you have no employees.
Mark J Kohler:And when you're married, you might be able to involve your spouse in the other s corp, and there can be some kind of backdoor strategies with that. I won't repeat that again on the show, but we will just leave it there. And thank you for listening today. No, I think when you do your consultation and an attorney sees the big picture of your family and what you're trying to accomplish, your ownership in these other entities, there might be some workarounds.
Mat Sorensen:Yeah, it's got to be. That's a better way to say it'd be dicey, because this really does need to be, like, penciled out. We need some ownership percentages. And we also need to know, are these businesses separate? Do these businesses relate to each other? Are they have similar customers? Are these companies transacting between each other? Do they share employees? Or is this really an, like, you've got the dentist over here with their practice, and you got the spouse who has a real estate brokerage entity, or there's a real estate professional or something like that. Okay.
Mark J Kohler:Those are separate.
Mat Sorensen:And we can. I'm okay with the solo k there, so. But Christopher, I look to getting a consult on this sometimes. I have to say, guys, as this arc show has developed, we get more and more difficult questions than we used to. And I hate to say it, but sometimes it's just this might take an hour to go through. And so I'd love to answer it quickly on a podcast, but hopefully it gets you to where you need to go to get started or at least get the answer.
Mark J Kohler:Well, thank you again for being a part of an open forum here at the Main Street Business podcast. And it's a lot of times so interesting for our listeners to say. I never even thought of that question. And the more I know, the more I realize I don't know. And it's. It's so wonderful to be here with my incredible co host, Matt Sorensen. I learned so much from him. I want to thank everybody that helps produce the podcast in the studio and behind the scenes. You guys do a great job. And thank you most of all to you, the listener. If you're enjoying this, please give it a five star, share it with someone. And let's all work together on building our american dream. And it starts with good structure, foundational business principles, tax savings, because it's not worth it if you're going to lose it to taxes or a lawsuit. Let's get organized. Thanks, everybody.
Mat Sorensen:Thanks, guys.