Main Street Business

#579 Tax Hacks the Wealthy Use (Attorneys Break it Down)

• Mark J Kohler and Mat Sorensen • Episode 579

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In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen take on your toughest tax and business questions in an open forum style. From setting up the right business structure to handling a home office deduction the smart way, they give you the tips you wish your accountant and attorney actually explained. It’s smart, fast-paced advice that real Main Street entrepreneurs can put into action.

Here are some of the highlights:


  • Mark and Mat discuss the benefits and drawbacks of not getting married and having a revocable living trust.


  • Mat shares his experience of owning real estate with a partner without a revocable living trust, emphasizing the importance of a buy-sell agreement.


  • Mark discusses the benefits of having an estate plan and provisions to take care of each other in case of death.


  • The options of treating the rental income as a gift or claiming it as rental income and expenses.


  • How an LLC allows for de minimis expense accounting, which can be beneficial for startups.


  • Emphasize having a home office deduction to qualify for other business-related deductions.


  • Importance of planning for the distribution of assets in a trust to minimize tax implications and ensure the beneficiaries' needs are met.


  • The limitations of umbrella insurance and focusing on proper insurance and asset protection through LLCs.


  • Advise being transparent with the spouse and choosing the right type of lawyer to minimize conflict and costs.



Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are bestselling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever. Here is Mark and Matt.

Speaker 2:

I would say 80% of the time married filing joint. You're going to save taxes too.

Speaker 3:

You're getting jack squat. You have nothing right now 180 grand. This year is subject to 15.3% in self-employment tax right out of the gate. The smart thing to do is to focus first on the assets and who's getting them. Second, think of the tax considerations.

Speaker 2:

Are there any advantages to mining the Bitcoin in the LLC or S-Corp and do you have any tax strategies or general advice when it comes to mining Bitcoin? Any crypto mining you're doing, you're going to want them. Welcome everybody to another episode of the Main Street Business Podcast. Excited to be here with you today. This is the People Show.

Speaker 3:

The People Show, where the people ask their questions and we are the two guys just giving you answers. They're free, it's for you, but they're worth more than that. At least you know pennies on the dollar.

Speaker 2:

Yeah, it's. I guess people show meaning it's for you, the people. Yeah, just trying. I'm excited to be here. We are both tax attorneys, been in the business now for 20 years plus doing small business, consulting, estate planning, business planning, asset protection, self-directing and retirement accounts. We try to bring all of these forces to bear for you trying to live the American dream. We need to do more of these podcasts with the open forum. We've just got so many questions today.

Speaker 3:

Yeah, and Mark and I have done the 10,000 hours with clients across the country answering these questions, obviously charging for our time providing these services, and we do it every day in our law firm with our team at KKOS Lawyers. So let's dig into the questions, though, and I mean I can be lead off.

Speaker 2:

Twitter or you know. Yeah, you go for it. I've got an interesting one here, Okay.

Speaker 3:

This was from K Tyler 98. Mark and Matt, thanks for all the information you provide on the podcast. It has definitely helped us in our journey through the small business ownership maze. My partner is a realtor and I'm a mortgage originator. The realtor partner purchased an investment property, loan and title solely in her name. After closing, the investment property was transferred to an LLC. Llc owns solely in her name as well. We have no plans to get married or have children in the future. We do not have a revocable living trust, but based on what I've learned listening to your show, that should probably be our next move.

Speaker 2:

We'll come back to that sounds like they've got a little woohoo going on.

Speaker 3:

Yeah, we're not getting married, but we are together and that's okay you know it's very, you know modern very modern you know they're gonna. I don't, I was gonna say they're in a committed relationship. We don't know that yet. Yeah, but they're in a committed relationship.

Speaker 2:

We don't know that yet. Yeah, but they're in a relationship.

Speaker 3:

This is a story that's unfolding. I'm excited here. Keep going please.

Speaker 2:

Very interesting. Where is it going to go?

Speaker 3:

All right, Now Kay Tyler says I was not able to originate this loan on the investment property due to conflicts of interest coming to funds, but we'd like to use this strategy in the future with a realtor partner as the purchaser and mortgage originator partner person asking as the lending agent to maximize income tax and strategies.

Speaker 2:

Now I know why they're not getting married. They're working the division of real estate over All right.

Speaker 3:

To do this, it seems that most lenders will require the realtor partner's assets income to be separate from the lender partners. It seems to me that a revocable living trust holds all the assets that will provide estate planning as well as another layer of liability privacy protection, but it will cause the same conflict of interest commingling issue if we are 50-50 holders of the trust. I'm sure we are missing some things and it's certainly possible there are ways. There may be other strategies that would work better for us we're not aware of. Your input would be greatly appreciated.

Speaker 2:

Wow, I know what they're trying to do. I'll say it in one sentence and you respond yeah, they are trying to have their cake and eat it too oh they, what good is cake if you don't eat it.

Speaker 2:

I know, I know that phrase is the worst. It is. It is well. The cake that they want is oh, you're a mortgage lender, oh, I'm a realtor. We can both be, be on the HUD and because we're not married and we don't commingle assets or have a revocable living trust, we can both get commissions and we can go get lenders involved. And lenders aren't going to see us as a unit, they see us as separate people for every piece of this transaction. Don't be offended, kay Tyler, if I'm missing this, but you want that flexibility because he says no commingling and we're not connected from the banker's point of view or the division of real estate's point of view. But on the other hand, they're together and they'd love a revocable living trust and they're not getting married, but they want to be together. So that's the eat apart.

Speaker 2:

They want to have a cake separation for every business plan. Eat it. We want to be together and not kind of, but we don't know how.

Speaker 3:

Yeah, and let me say this for partners in general is say, mark and I are partners, we own real estate together in multiple LLCs, different LLCs that own different properties. We do not have a revocable living trust or any trust together. Revocable living trust or any trust together. I've got a trust, mark has a trust.

Speaker 2:

Okay, now my ownership stake in the trust might go to my heirs, not Mark. Okay, let's say my 50%. What, yeah, just dropping that now huh.

Speaker 3:

Okay, I told you about this. Okay, all right, awkward, but what we do have is a buy sell agreement. Okay, that says, hey, in the event that I die, you get the business or, let's say, the property, but you're going to cash out my heirs or my estate so you can continue on with the business or property. So what I think you need most here is some partnership planning, some legal planning around what is our relationship going to be in terms of business partners? I don't care about your other relationship, whatever that may be or may become in the future, but if you're going into business together, for any unmarried couple and even married couples here, let's have a real business partnership discussion about what are the responsibilities and the roles here. If your partner here, if she has this LLC and it's solely in her name, and it's expected, you are actually partners in this property, but your name's not on anything, kay Tyler, you're getting jack squat. You have nothing right now.

Speaker 3:

The trust doesn't make sense unless you're married to do a joint revocable trust. So I think we need to unpack, like what is the actual relationship here? I think the secondary issue is this well, I want to still get the mortgage commissions on this. You might need to bypass that. I think that's short-term vision. On this, long-term, you're trying to build assets and grow wealth. You might want to think more big picture.

Speaker 2:

All right, kay Tyler. Okay, I'll respond if.

Speaker 3:

I may.

Speaker 2:

Kay Tyler, do you love this woman? I mean, I just I think that's. We need a response right now, because I think that would change a little bit of this equation, maybe? No, I'm just kidding, all right. All right, I'm just kidding. Here's I'm going to take just a different angle than Matt.

Speaker 2:

I just got married this last year and Patty and I were doing business together. Before we got married, we were investing in real estate, we were doing some business projects, and not being married did give us more flexibility in the self-directed IRA space. Oh man, her IRA could partner with me, my IRA or 401k could partner with her. It was a wild, wild west, and so I get. That's why I'm saying this is kind of a cake and eat it too. Because, kay Tyler, when you're not married, you're right.

Speaker 2:

Lenders, bankers, trust companies everybody sees you as two distinct, separate individuals, and even the IRS does so. There's some planning benefits there, but there's also some drawbacks, and I would throw out that I think you do need to both of you get your estate plan done and then have a provision where you take care of each other if you die. So I would presume Kurt Russell and Goldie Hawn have individual trusts. They're not married. Famous story of them and their love affair. They're totally in love, wonderful couple, but they have separate estate plans and I'm sure they take care of each other. If something were to happen to them in their individual estate plans, then you can go wild west partner up, and I like what Matt said too. On that level you definitely need some agreements too.

Speaker 3:

Yeah, here's a reason you may want to get married, though. One thing you mentioned was REPS I think you're meaning real estate professional status and the realtor partner here could get that. The mortgage originator partner can't. However, if you're married, the realtor partner is going to qualify and the mortgage originator partner will qualify too. You'll be combining your income, but you'll get the real estate professional designation status, so all these rental real estate losses will offset both your mortgage originator income and realtor income. You will only do that if you're married, so not that I'm trying to push you any way or another, but the IRS does have a little perk for you.

Speaker 2:

Yeah, and I would say 80% of the time married filing joint, you're going to save taxes too.

Speaker 1:

Yes, so I would run your tax returns both ways.

Speaker 2:

Yeah, Okay. Next question Boy. We took a little more time on that, but it really unpacked a lot for, I think, many of our listeners.

Speaker 3:

Yeah, we're billing 0.2 hours on that one Make a note.

Speaker 2:

Hey, tyler, you'll be getting an email with an invoice. You can pay via Venmo or Zelle. Okay, now I'm just joking. Just joking, all right.

Speaker 2:

Mr Holb says I am renting a property I own to my elderly mom. Okay, I've got some other family issues going on here, elderly mom, I've got some other family issues going on here. Renting property to your elderly mom. We're past Mother's Day now, so I guess he's hiking up the rent. I'm not sure. The annual rent is approximately 55% of fair market value. So he's giving her a deal and I'm concerned the IRS will view this as a not-for-profit rental.

Speaker 2:

I have to tell you, mr Holb and I'm always transparent, I don't know if I've ever heard the word not-for-profit rental phrase, but anyway he says I'm worried the IRS is going to call this discounted rent project a not-for-profit rental. Could you go over the rules for claiming expenses against a not-for-profit rental? Would you advise setting up the rental agreement to exclude portions of the property, say the garage or room or bathroom? Now you've got mom tied up in like this space that she can't she can't even use the garage man Thereby allowing for a proportional amount of rental expenses to be included against rental income and making it look more like a for-profit rental. Okay, mr Holt. And now, by the way, matt and I have done an entire podcast on renting property to your parents and doing some estate planning, some rental tax planning, when you might want to take ownership of the property of mom and dads and rent it back to them so they could qualify for Medicaid or some other things. There are some options there. Medicaid planning is so complex. But, mr Holt, I would say this and correct me if I don't know what a not-for-profit rental is Never heard of that. If you're collecting rental income, it's rental income. You have a rental property, you have rental expenses. Just because you're charging 55% of fair market value just means you're taking in less rent.

Speaker 2:

Now, I'm presuming, with the way this is framed, that this property is a standalone single family home. I can't determine if you're living there as well, if you're just renting to mom half of the property and you live there as well, or someone else, or if this is all of mom's property. I would suggest this. Have a consult with one of our tax lawyers to get this vetted and I would say you have two options. One don't worry about this percentage of firm work, just collect the rent. Write off the depreciation of the whole place, all the expenses. See where it lands on your tax return. Not knowing your situation, it could be a good thing, you know whatever. Option two just treat it as a gift. Your mom is gifting you some rental income. It's a gift and you're treated like a second home Because if you're not going, to take he's really gifting his mom some value.

Speaker 3:

Yeah, that's right. There's a discount, basically 45%, let's say mom some value.

Speaker 2:

Yeah, that's right, there's a discount basically, yeah, 45%, let's say yeah, but if you don't want to claim it as rental income, what mom is sending?

Speaker 3:

them has to be something. So I would oh, okay, yeah, but how does he claim the expense? He would oh, okay, I'm saying two ways. Yeah, either claim the rent, claim the expenses be legit.

Speaker 2:

Or number two, just let mom use your second home. Take the rent mom's paying you to help cover the costs, and that's understandable. Hey mom, I need you to help cover some of these costs. Don't claim it as income. The IRS is not going to come after you, oh, but you don't get any write-offs. So it's either gift mom's just using this extra home of mine until she passes whatever, or expenses and claim the income.

Speaker 3:

Your thoughts. She passes whatever can or expenses and claim the income. Your thought. What about an option three? Tell me what you think about this one just have her pay the damn market value of the rent. Take the expenses you're probably going to be, even with depreciation expense. You are going to be likely having a loss, a lot of cash flowing rentals where you're making money because after depreciation which is like a phantom loss, right right, you're not actually incurring it, it's a percent of the value of the property. Over time you have a tax loss. So let's say you have that and then just gift her back the money and that's going to be the gift back. Is that actual amount? You just pay her back because or you credit later on in the year and you can gift up to what is it? $17,000 a year without any gift tax consequences.

Speaker 2:

So I don't know another way to think about it, uh yeah, no, I do like option three would be for a tax strategy, I think. Uh, depending on what you where you fall with your adjusted gross income, real estate status, this, this, that and another. So that's why, yeah, so great, good point. So get a call with one of our attorneys because you want to nail this, but don't worry about this not-for-profit rental thing. Either it's going to be a rental property or it's going to be a family gig with gifting.

Speaker 3:

So all right, cool, all right. This is Sloan nine 20. This is not Sloan four 20. I love these handles. Okay, so, sloan nine 20,. Um says hello. I have a 10 99 job. I recently started training to become a Pilates instructor instructor. I'd like this to become my full-time work once.

Speaker 3:

Established for now buying equipment, training and other expenses. Established For now buying equipment, training and other expenses. Should I start an LLC or S Corp? What is the best tax strategy? I will be using a home, a room in my home, to train clients on the reformer. All right, sloan, this is a great question. Okay, all right, pilates instructor, you're going to be self-employed.

Speaker 3:

Now, keep in mind you don't need an entity, an LLC or corporation to be able to take an expense or a write-off for any of this equipment you're buying. I'm going to come back to this in a moment. We got bonus depreciation possibly on the table here under the current pending bill. We'll see but you don't need an entity to do that Now. I would do an LLC despite that, because you want to be legit. You're going to want to have this in the future. Llc despite that, because you want to be legit, you're going to want to have this in the future and we are going to want to add an S selection to that, possibly, depending on how much you make at this business. So here's what I want you to know Get an LLC now to get a legitimate entity. You're going to do business If somebody gets injured or something doing Pilates. I know you guys are doing weird things on Pilates. You want some liability protection, maybe things on Pilates. You want some liability protection maybe.

Speaker 3:

But the other benefit to it is, once you have more than $50,000 of net income I don't know if this is a side hustle, you're trying to make 10 grand. If this is going to be a main hustle, you're trying to make 100 grand plus. But if you've got more than 50K net income, you will save taxes by having an LLC taxed as an S Corp or an an S-corporation. The reason I'm saying do an LLC out of the gate is it's simple and easy. You don't have to do payroll reports or an S-corporation tax return. It'll flow onto Schedule C.

Speaker 3:

Maybe this first year you've got a lot of startup expenses. You don't have much net income or anything. There's not much taxable income. But next year you're really cranking. You're operating, you've got a good clientele and you're making more than $50K of net income, then we want to add the S selection to the LLC, which now you do have to start doing payroll, you do a corporate tax return, but if you're making $100,000 a year net income after expenses, with an LLC taxed as an S-corp, you will save about $9,000 in self-employment tax versus having no entity or just having a regular old LLC. So consider that in your situation. Give our law firm a call. By the way, if you've got these types of questions and scenarios, our team here at KQS Lawyers will help you get this set up. Spend your time growing the business, starting to market it, doing your training, teaching, pilates and charging someone. Let our team help you get this set up and structured properly.

Speaker 2:

I will offer a second option too. One thing that many business owners don't know is about the de minimis expense accounting policy. Under IRS code you can expense up to $2,500 of any invoice for equipment or supplies in your business without even relying on depreciation strategies. So you've got up to 2,500 you can write off in each pop. Now this has to be an accounting policy in your minutes and a statement on your tax return. So I'd love everything Matt said, but I would add get the LLC done, get an LLC, get legit, get the EIN and in those minutes for your LLC we put an accountable plan in every one of our minutes that has this accounting policy in it, so that now you're expensing all of those things you're going for in this first year or two. You may even have a loss the first couple of years, which is allowed under the hobby loss exception. So now you're taking losses, you're buying all this killer equipment, you're showing some income and you're saving taxes off your regular W-2. You've got an LLC to substantiate it.

Speaker 2:

I think this is the gateway drug to the American dream, frankly. So I love it. And this is 40 million Americans now have a side hustle and you, being a Pilates structure is part of the great formation. After the pandemic, people are like damn it, I'm going to make some extra income. I'm going to start this little side hobby into a business. I love it, but I'd formalize it with an LLC de minimis accounting policy provision. Get that accountable plan set up in your LLC.

Speaker 3:

You're going to be doing home office deductions, oh yeah, all these goodies, that separate piece of your home you're going to use to train clients, definitely taking home office, I love it. No-transcript. A lot of other expenses you're going to have, of course, in the business, so we can help you get that dialed in. And I was just looking up what a reformer costs. I don't know what's your guess on how much a reformer costs. This is like price is right, what do you bid?

Speaker 2:

I believe a reformer is some sort of equipment you'd use in PLIAT.

Speaker 3:

It's the thing you use to do Pilates. Have you seen people do Pilates?

Speaker 2:

do pilates?

Speaker 3:

I have not I try to avoid. Do you know what pilates is? Is it like yoga?

Speaker 1:

kind of is it like a?

Speaker 3:

row machine kind of. Yeah, it's like a machine, maybe like it's like yoga and on a machine, I don't know I mean I walked by some torture equipment at a gym the other day. Maybe that was it okay we're good on tax and legal stuff. I got. I got a little. I felt like I knew a little. I got a little overconfident on my Pilates.

Speaker 2:

I don't know. It was cool Reformer five grand. I don't know.

Speaker 3:

Yeah, turns out you could get them for under $2,500. There's different brands of this. I'm sure there's like a Mercedes and there's a Hyundai, you know, or Kia, whatever, you know, I don't know, there's a lower entry when there's the nice stuff.

Speaker 2:

I'm just a scrap it out guy at the gym. In fact I went to a boxing gym for a lot of years. I love to just hit the weights and all that. I kind of breeze past all of those torture equipment.

Speaker 3:

I forgot about the boxing gym where you fought a female cop.

Speaker 2:

Okay, we don't need to go there. It's called sparring and she was a very proficient female boxer, you know. Okay, we'll go tell that story another day.

Speaker 3:

Okay Now, it did not end well.

Speaker 2:

That's like this is a no-win situation, you don't?

Speaker 3:

knock out a girl. I told him I'm like what are you getting yourself into? If you beat her, you're going to feel like a jerk, and if you lose you're going to feel like a wimp. Yeah.

Speaker 2:

It ended up with a black eye and it wasn't on her. Okay, now, no pun intended there. That was okay, all right. Okay, here's another question. Let's transition. We don't need to talk about that. I can't. I shouldn't have opened that can of worms, all right. But this is a good transition to Sloan 920. Sloan, yeah, sloan 920.

Speaker 2:

Because, sloan, I'm going to want you to also take the home office deduction, which is going to be a space where I suspect you're doing some of your Pilates training in home. But I want the home office deduction. Here's why that's the starting point for you, as you take mileage to other gyms and doing personal training for others. Now you're not taking the being excluded from the commuting provision, but you can't write off commuting from your house to work. But when you have a home office and a training space for your Pilates business, now when you bop over to all these other gyms and you're meeting other customers and clients and la la la, now we're writing off the auto deduction. But you have to have a starting point for the auto deduction. Where is your starting point? Your home office.

Speaker 2:

So Collins M13 asks I'm going to use the home office simplified method for my tax return. My question is I have 122 square feet home office. Times $5, which is a simplified method, that's a $610 deduction. Is this amount to deduct the grand total for the year, or should I be multiplying the 610 times 12 months for a total of 7,320? Appreciate your clarification, oh Collins, if we can only wish it. So it is only $610 for the year which you're going to go.

Speaker 2:

That sucks, but, colin, this is why I brought up the auto deduction. This is one of the tricks in tax law planning that the home office I yeah, I want to write off 1500 bucks. You can write off $5 up to 300 square feet, 1500 bucks. No depreciation reca are done, but any specific expenses for the office like furniture, printers, cameras, lighting, anything that's specific to the office is going to be a write-off on top of that amount. And you just pegged your starting point for the auto deduction. So this really is a powerful thing to get this deduction, even if it's only $610 for the year. Sorry to break that bad news to you, but also let you know the glass is half full. This is a start again for your small business venture. That could become a main venture someday, and that's it's really exciting. All right, you got a good question, yeah.

Speaker 3:

From Wooden Shoe.

Speaker 3:

All right when she says let's assume, the makers of a revocable living trust have died and now the executor trustee here I think is what you meant must go through the assets single family rentals that were titled to land trusts and the land trusts are now owned by the living trust. All right, we typically just have LLCs here. But I'm with you. I'm with you so far, wooden Shoe. What's the best course of action? Keep the single family rentals which provide cash flow and reflect passive activity losses due to depreciation, and file a trust tax return each year, or be sure to divvy up all the single family rentals to the beneficiaries with the hope of not filing a trust tax return that first year or subsequent years. Discussions take us all up to the point of preparing a living trust. Inquiring minds want to know how to handle the aftermath in the most expeditious way possible to provide the best financial outcome for beneficiaries. A few of us will be executors of loved ones. Does anyone have an interest in providing direction? Well, wooden Shoe, I do. We have an interest in this. We want to help you out.

Speaker 3:

We've also, by the way, got our estate planning special at our law firm, kqs Lawyers. So get over there to get your estate plan done. If you're like man wouldn't choose on to something here, I'd like to know that. And if I plan my estate, if you don't have an estate plan, you do have an estate plan. It's just a crappy one. It's the one the government provides for you. You're going to probate court. Your family's going to be distressed. You've just died and you've given them this amazing opportunity to go fight about your assets because you never provided a plan. So get your fricking estate plan done. Everyone All right Back to wooden shoes, question.

Speaker 2:

I felt like I was out there.

Speaker 3:

Okay, cool, good job, good job, all right. Great question, though, cause a lot of people do worry. I'm like what happens when we do die and you can answer that Now? The trust.

Speaker 2:

Okay, whoa, whoa, whoa Pray to our assets. I love it. We have a question today what happens when you die? Okay, this out. I cracked the code and the dear near-death experience last night. Yeah, did you hear about that guy in prison just came out this last week.

Speaker 3:

It was so good. A guy no idea where you're going.

Speaker 2:

No, no, no, it's good this guy in prison okay has.

Speaker 3:

Uh, I'm already not interested in what he thinks, but no, no, this is good.

Speaker 2:

Has a near-death, whatever, whatever death experience. Okay, he has a death experience. Did he get shanked? No, no, okay.

Speaker 3:

Actually, I don't know the ailment that caused this but he goes into Natural causes. Okay, yeah, no.

Speaker 2:

It was verified. They went in and the paramedics show up in his cell, whatever. But he was dead. He was dead for about two minutes and they were able to defib, whatever, bring him back. He did not go to the pearly gates. I'm you know, and maybe maybe he was. You know he repented and you know he was okay.

Speaker 1:

Maybe peter met him and said you you know we've got an escalator choice here.

Speaker 2:

I don't know, yeah but here's the point he was dead for two minutes, verified, yeah, by the paramedics, brought him back to life. He filed an appeal and said I've served my life sentence. He did. He said I served my life sentence. I verifiably died. I'm back, Let me out. And they're struggling. It is still in court because they're like okay, we've got to follow the code here. He did die. Definition is I was like man, that was creative.

Speaker 3:

That's a great one. I mean, if I was the judge on that, you've got to like tip your hat to him. You know, now I don't know what he did to get there, so that would.

Speaker 2:

Life sentence is not a good sign.

Speaker 3:

Yeah, you probably didn't do something great. Yeah, but that's a great life sentence without parole.

Speaker 2:

Death experience for two minutes verified. And well, what's interesting? I was reading a case, believe it or not, last night on the home office expense. Where Wait a second?

Speaker 3:

You just said, I bring a case on the home office expense last night. What's interesting there?

Speaker 2:

Well, let me tell you Okay, dr Solomon, back in 1983, appealed it Because remember he said Was he a dentist? He was an anesthesiologist, okay.

Speaker 1:

You remember the case. This is good.

Speaker 2:

It's a beige burner, okay. And he's like I'm going to go to court and prove that I get to use my home office expense no-transcript, united States. And they said nope, definitely, it has to be your primary place of business. And it wasn't. But he's like but it should be. And they said the Supreme Court said you know what? You're right, you should be able to deduct that. But the code says it has to be your primary place and definitionally it is not your primary place to do business. And they said if you don't like it, change the law.

Speaker 2:

One year later he got his congressman to amend to get the IRS to change the code and allow for this administrative office exemption. But what is the point here? The Supreme Court was bound to the statutory wording. It said if it is not your primary place of business, then you are not allowed to take that deduction until the law changes. The same time, that night I see this case of this guy going died. I officially died, according to all definitions and records and according to the statute I served my life sentence and I'm like wow, okay, so that's. That was my perplexing.

Speaker 3:

I didn't sleep last night okay, I just want to point that out. You think that there's some congressman or senator that's going to stand up for this guy?

Speaker 2:

no, what I'm saying is the supreme court's going to go. The statute says you, you served a life sentence, you died that, so you're out. If you don't like it, prosecutor, go change the law. So they've got to go amend the law and say even if you have a death experience, you have to be dead for at least. But here's minutes, here's why here's?

Speaker 3:

here's why I disagree. This is Justice Matt Sorensen. If I was on the court, it's not you serve until death, it's you serve for life. He's still alive. It's maybe his second life, but it's life period.

Speaker 2:

Well, some people get two life sentences to serve concurrently. Maybe they were thinking about this when they said it. Yeah, maybe. All right, Back to the show.

Speaker 3:

Wooden Shoe, sorry about your question. We got on a little tangent there, but you know some interesting stuff. Okay, well worth it All. Right, here was Wooden Shoe's question. Okay, let's focus back here. The question was about when you die and you have assets in a trust. The trust becomes irrevocable. Okay, let's say you and your spouse, or you single, pass away. Now it's going to your heirs. Now the trust is irrevocable. It cannot be changed, which is what you want, right, because you want everyone to have to carry out all the wishes you had in your trust.

Speaker 3:

Wooden shoe's question is he or she, I don't know is what's best if we keep the assets, these rental properties, in the trust or we distribute them to the beneficiaries. Well, you should have decided that when you set up the trust. That should be a consideration when setting up the trust. Now, the smart thing to do is to focus first on the assets and who's getting them. Second, think of the tax considerations. If you focus first on the assets and who's getting them, let's look at the single family rentals. Let's say you've got a kid who's 16. That's going to get half of your estate. You have two kids. That's staying in trust. We're not giving that you actually can't, even if they were 18, we're not giving it to them either. That's going to stay in the trust and those rental properties will be managed by somebody. And, yes, you will be doing a trust tax return at higher trust tax rates. But when that kid becomes of age and as you, the provisions you put in the trust, maybe they're 25, they get some or over time they will start getting the benefits of the trust. So and the assets from it. So we want to think about who's getting the assets first.

Speaker 3:

Now, let's say that. So we want to think about who's getting the assets first. Now let's say that the people inheriting this are 50 years old, parents passed away in their 80s or whatever, and these kids are all. They are obviously now grown adults and I would just say zero reason to keep it in the trust, unless there's a creditor issue with one of them or something, but typically an alcohol or drug addiction or something. Again, these would be provisions we'd put in the trust to protect them from getting the assets and keep the trust assets. But, assuming everything's good, most people would say just distribute this outright to the beneficiaries, let them take the properties. They can still keep them as rental properties. They can sell them whatever they want to do. These are now their assets, but that's a little more tax efficient. You generally don't want to leave assets in a trust because you have higher trust tax rates, unless you're trying to do it to protect the assets from the beneficiary themselves or for some creditor of the beneficiary.

Speaker 2:

Very well stated. Totally agree. No amendments to the bill. I like it Without objection.

Speaker 3:

Without objection, please submit to the to the bill. All right, I like it. I like it without objection without objection.

Speaker 2:

Please submit to the record your honor. Okay now, uh, this is from gunshabilla, I can't even say it. Nokia, nokia, baboa, anyway hey, mark, I think you got it there.

Speaker 2:

Nokia baboa oh yeah, maybe I did. That's right, I love nokia. Okay, hey, mark and listener, first-time caller. Thanks for all the knowledge you provide.

Speaker 2:

My question is a two-parter. First, I had an S-corp I've used oh, I think I'm going to say have. I have an S-corp I've used for sales consulting work in Illinois for the past few years, but recently I've scaled it back. My efforts in my side hustle income has dropped. I am willingly spending more time at my W-2 for the commissions and I garner there and heading back into the big workforce. I am considering shutting down the S Corp completely versus converting it back to an LLC for something a bit more passive. It generates less than 40K. What is a good criteria for thinking about whether I should shut her down or convert it?

Speaker 2:

Number two the business I'm thinking of moving into is Bitcoin mining, not in my own home, but through a reputable provider. Are there any advantages to mining the Bitcoin in the LLC or S Corp, and do you have any tax strategies or general advice when it comes to mining Bitcoin, for instance, I have? There will be repairs needed, a depreciable life of the machines, la la, la. Well, you're in luck because I'm doing some crypto mining as we speak, literally making 32 cents an hour. I'm just killing it. I'm just killing it. No, I'm doing better.

Speaker 2:

Okay, first point I would not get rid of this S corporation. When you said you have less than 40,000 a year generating for you, that may seem like not worthwhile to keep the S corp. I think that's great. You're going to have a day job with a big fat W-2, that 40 grand that goes to the S corp. We're going to be able to drive down your reasonable comp even further so that that 40 grand is not subject to self-employment tax. Remember everybody your first $180,000 this year, $176,000, $180,000 this year is subject to 15.3% in self-employment tax right out of the gate. So unless your W-2 is paying you more than $175,000 a year, this $40,000 is going to take another 15% haircut. Just being a plain old LLC Remember, llcs do not save tax. So I would keep the S-Corporation for this additional 40 grand. The tax return for this S-Corp could be a thousand bucks, maybe 1500 at most, but you could save well more than that in even Medicare or even Obamacare ACA tax. That could be coming in over and above 180 grand. So I like the S-corp here If you were going to quit your side hustle altogether, then yeah, dissolve it, but maybe convert it back to an LLC if you're going to put a rental property in it.

Speaker 2:

But if you're going to have any side hustle income at all at this juncture, I'd keep it. Let it play out a year or two and then we'd revisit. Number two mining absolutely should go in the S corporation, and S corporation is going to well. Let me say it this way Mining Bitcoin or any sort of mining, my mind is doing soul, but I get paid in Bitcoin. The point is it is a service, it is a ordinary income generator. So you're going to want that Bitcoin mining, whatever mining you're doing I'll say crypto mining, any crypto mining you're doing you're going to want to funnel it through the S-corp. Let it buy the CPUs and the video cards, everything, pay the energy bill, the management bill, and I think it's a great strategy. I haven't regretted going down that path. Let the S-corp maintain that income and pile it in with the rest of your side hustle income. Love where you're headed, go for it.

Speaker 3:

I love it. No, nothing to add there. Mark is your guy on that question. That was right up Mark's alley. Okay, this question is from Derek. He says, and I haven't thought how to answer this one. So here we go. In the event of a divorce, okay, how do I protect my physical car wash operational business from my spouse? No prenup, not a community property state. I would absolutely make sure her and kids were taken care of tenfold.

Speaker 2:

Oh, I'm sure okay that's just so hard um, tricky question here.

Speaker 3:

Divorce is tough um, and we've definitely advised a lot of clients as business owners. Now here's the thing I don't care whether you're in a community property state or not. Um, your spouse is going to have half a claim on the business it's called marital property.

Speaker 2:

Yeah, so it's marital property.

Speaker 3:

So what's going to happen is, if you do get in this situation of divorce, she will have a claim for 50% of the business. Now, typically, what most business owners will do is, particularly if you're someone still working and operating this business. This isn't like Apple stock that you own, that you just split up 50%. This is like the business that requires you to show up every day. Typically, what's going to happen is you will keep the business and there will be some value put on the business and you are going to pay your spouse that value of the business through other assets you might have that you would otherwise split um or you will owe her over time. Okay, that's typically what's going to happen in the event of divorce.

Speaker 3:

Now, there's lots to be negotiated, of course, but I think, quite frankly, getting a really good divorce lawyer in this scenario would be critical, and also having a reality check, maybe, on what's possible. And and I mean this even I don't want to get to trying to avoid divorce. That's outside of my realm of what I could advise you on. But if you do have the spirit and intent of taking care of your spouse and and kids, I don't know where they come in the mix, or they. They must be under age 18. I don't know what you mean by that, because they wouldn't be getting assets right. You'd typically be paying child support, but um, but I would really get a good consult with a divorce lawyer. Now, that is not something we do. We can help you on the business side of things, of course, but this is really going to get down to your state and negotiating, and that's where the rubber is going to be thrown.

Speaker 2:

Yeah, and Derek, I'll say it another way too and just be even more direct. And I've been through this. You just need to go on. I would start here and then any news you might get this better. I would start here and then any news you might get, that's better. Don't expect it, but yeah, it'll be nice if it comes.

Speaker 2:

Everything you own, everything you've created, is going to be marital property to begin with. That's the assumption. Then you're able to peel things out. Maybe If it was inheritance or something you brought to the marriage, it doesn't sound like you alluded to that at all. So just assume the business and everything you guys own, retirement accounts, everything that's hers as well be half yours. Everything that's all yours that you have in your mindset is going to be half hers. And number two, it really does come out two different ways. You're going to have a spouse that's like, hey, this is cool, I was ready for a divorce myself. Let's do what's best financially and keep the cost down with attorneys and do what's best for each other and the kids Cool, that's tends to be the rare situation. The other one is going to be kind of a fight and the sad part is it's going to not depend what lawyer you choose. It's going to depend on your, she chooses.

Speaker 3:

Yeah.

Speaker 2:

And if this lawyer wants to stir the pot, they will. I would recommend, if you're going to go down this path, recognizing that right out of the gate and trying to ask your spouse to cooperate as much as possible and choose the right type of lawyer. What they don't realize a lot of times the spouse that chooses the crappy fighting lawyer that they're paying for. Half of that they are reducing the equitable estate with every legal fee they pay and at the end of the day, because it is still one big pot and these lawyers will suck it dry. So good luck. It's really difficult.

Speaker 3:

Yeah, the last thing I was at is you can do a post-nuptial agreement just because you don't have a prenup. There is something called a post-nuptial agreement. If you're in a maybe you're going through counseling or you're talking about the business and separating things and the end of divorce, you may want to create a plan now with that current spouse that you might divorce in the future, doing a post-nuptial agreement. This is classic amongst celebrities. You always hear them in the news So-and-so cheats on some other famous so-and-so celebrity. But they stay together. But there's a postnuptial agreement now in place about what happens for an impending divorce.

Speaker 2:

Well, I'll choose one more question than you yourself if you want.

Speaker 2:

So here's my last one. This will turn it to a better note I've got. Randiglia is happily married and her and her husband had traveled in their RV every year for nine to 10 months and they just got an offer to sell their home in Louisiana. What a blessing. I'm truncating this longer message a little bit. At this time we are traveling full-time. My husband's job allows him to work remote. We are loving life on the freedoms of the open road in our RV.

Speaker 2:

We have researched where we might want to plant our flag and establish new domicile. She said oh, we've heard great things about South Dakota. No state income tax, corporate tax, no investment tax on earnings or capital gains tax, low sales tax. Oh my gosh, it's amazing South Dakota, and as RVers, we would love to domicile there. My question is what is the best way to do this? We have three S-Corps. I would want to consolidate those. Please meet with one of our tax lawyers right away. You're spending way too. I don't, man. I have 26, 20 companies, whatever. One S-corp. You do not need three S-corps unless something weird is going on. I don't see any Main Street tax advisors in your directory in South Dakota. Don't worry about that. Any of you looking for a tax advisor that speaks Mark and Matt, get over to the Main Street Tax Pro Network, currently lodged at markjkohlercom. We're going to be launching more resources for that, but it doesn't matter if the tax pro is in South Dakota or not. We can help anybody anywhere. Oh, what do we do? We like the asset protection too. We've sold our home. La la la.

Speaker 2:

I'm going to try to restrict this comment to domicile. Many of you may want to change where you live. From one of the 41 states that impose a state tax, there is nine states that do not impose a state tax and a few others that throw in some other non-tax on retirement income or investment income, things like that. South Dakota is one of the great states that is pretty affordable to live in from a tax standpoint. The problem is you can't just say I live there. You can't say I got a PO box in South Dakota. Now I live in South Dakota. The laws in all the states are where did you live the most? You'll say well, we're not going to spend time anywhere for six months. Fine, did you spend 72 days somewhere and everyone else was less than 72 days? That's your domicile. Now you're like how are they going to know? Do they have a drone over our RV and they're tracking us? No, but you're going to have. It's going to be a hard time to get health insurance and driver's licenses and passports and the new real ID. By the way, if you've tried to travel lately, you've got all of these things that follow you. We are in a different society now where you can't just say I'm a gypsy and I live nowhere but everywhere, and so you're going to find that just saying you live in South Dakota without actually buying property there or renting some space and spending some time in South Dakota I've been there pheasant hunting in some time in South Dakota. I've been there Pheasant hunting in Kimball, south Dakota. It's amazing.

Speaker 2:

But just for any of you out there wanting to change your residency for state tax purposes, you've got to actually do it. You just can't say I'm going to do it. This is the age old problem in California where people are like oh, I rented a condo in Nevada, so I'm a resident of Nevada now. No, the California Franchise Tax Board will literally ping your cell phone and just figure out that you've spent 11 months out of the year in California. You just have a condo over there to try to save tax. It's not going to fly. So states are onto this. Be legit. Choose the state you want to be in. There's eight other states besides South Dakota that you might want to live in Washington, florida, Texas, tennessee, a few others. You're down in Louisiana anyway. You're just a hop skip and a jump away from Tennessee, but find a state where you can actually live a little bit to substantiate where you're going to go.

Speaker 3:

Yeah, great, love it. And I think you know Jeff Bezos, mark Wahlberg, a couple people. Bezos went from Washington to Florida, wahlberg went from California to Nevada and they physically moved. Ok, six months in a day I'm here. They might. You might have a second home somewhere else, back where you used to live because you got friends and family there, but you've got to get your butt over there and I think you got to go over that six month in a day to establish that over time. Now you might be on the road at some point later on in future years, but I think you got to get some establishment in for that first year where you're breaking free of whatever high state tax you're coming from.

Speaker 2:

Yeah, we teach classes in this in our Main Street Tax Pro Network. If any of you are a budding accountant and want to up your game as a tax advisor, please get to markjkohlercom right now, where it's our platform, where we'll tell you about it. But one of the classes on this and I'll just say it quickly is it's a two-part deal. You have to establish residency somewhere and you have to sever residency somewhere, residency somewhere, and so choosing the date you sever is very important too. You're going to say I moved out of the state on this date and you have to be able to show it like you sold your house, you did this, you quit your job, you changed your driver's license, so it's really a two-part thing. So I like the way you said that it's not just again saying you did it, and that's why the six months and one day of actual physical movement is very important.

Speaker 3:

Yeah, love it. Okay. Last question here for me. This is from Travis Asked some great questions here. Customer of Main Street Business Services. That's our sister company where we do your renewals. Your registered agent every year Email this in there. But he said, is there any benefit to putting personal vehicles into a revocable living trust? And they also do. And then, secondly, do you recommend a personal umbrella insurance policy? He said my attorney that set up my revocable living trust not us, that was your first mistake. Travel said you know, said said no to both because if there's an accident, the umbrella policy would just be a target now to go after and the car should stay personal because if it's in the trust they can now go after the trust. Florida, if it matters, okay. I don't agree with anything that other attorneys said in Florida.

Speaker 3:

I echo that Bless their heart, as Mark J Kohler would say Okay, all right.

Speaker 2:

First not that those answers. Yeah, the answer was wrong the reasoning.

Speaker 1:

The reasoning was about I actually agree with the answers, but the reasoning is off.

Speaker 3:

Okay, first one is there any benefit to putting personal vehicles into revocable living trust? Not really what typically we do with clients. Once we set up a trust, you've got to get your assets into the trust right. It's like your home. We're going to deed your home out of your name into the trust, your LLCs or corporations. We're going to transfer the ownership of those companies over to your trust as the owner. We're going to update beneficiary designations Listen to our Directed IRA podcast where we just went over this last week For your insurance, for your retirement accounts, your bank accounts. We're going to update beneficV or the motor vehicles, whatever it may be, in your state and taking a death certificate and being next of kin, surviving spouse, child of that person, and they will transfer ownership based on you signing off on some paperwork.

Speaker 3:

Now, the only time I would recommend vehicles in a revoked living trust is if you have, like a Rolls Royce or some very valuable collection of cars where you really want to make sure that they're in the trust. But even then, I don't know that it's necessary, because the trust itself can say hey, and we do this with our trust documents. We have an additional personal property document that says, hey, anything I didn't put into the trust I still want to follow according to my trust's terms. So my trustee still has say over that Rolls-Royce if it's worth 300 grand and how it's going to get distributed. And I got a minor kid now at 18, they're not going to come and get that Rolls-Royce. So you can still have some of those protections built in the trust even though that asset isn't in there. And the reason I would not focus too much on the vehicle is, again, it does not have to go through probate in most states. So but your other stuff does have to go through probate.

Speaker 2:

Yeah, before you answer, the next one is your real estate yeah, before you answer on the umbrella, I'll just say I'm trying to find a reason why I would want it in your trust. I wouldn't say it's going to hurt you putting it in the trust, it's just a pain in the ass yeah it, it's just a pain and it's going to expose more of your assets in a car accident. Hell. No, a revocable living trust does not provide asset protection.

Speaker 3:

The revocable living trust is just the same as you. On the title anyways, there's no difference it doesn't hurt you.

Speaker 2:

It doesn't help you yeah, the one might be is if you're single, older, some vehicles, and you want to make it easy on this niece or nephew or someone grandchild that's going to take care of your stuff. If you're married again and children next of kin is going to be right there, johnny, on the spot with your estate. So just very, very rare that I would really want you to stress about it. Okay, umbrella policies.

Speaker 3:

Yeah. Do you recommend a personal umbrella policy? My answer is typically no, because they're misunderstood and they don't cover anything new. I want to make sure everyone understands what an umbrella insurance policy is. All an umbrella policy does is it says hey, whatever insurance coverage you have your home, your auto policy, maybe you've got like a landlord tenant policy on a rental the umbrella policy comes on top of that and gives you more coverage. It doesn't cover anything new. Okay, I want to make sure you understand that.

Speaker 3:

A lot of people think an umbrella covers all these other things that you didn't have protection for. No, all an umbrella policy is is excess insurance that says hey, if your auto policy pays out on something and let's say you had a million dollar limit and you bought an umbrella policy with two million dollars, we will cover an additional two million. Only if that first insurance policy covered it and only if they paid out their full million, then were the umbrella policy even come into play. So it's barely rarely used. A lot of people are like, yeah, but it's only a hundred dollars a month. Yeah, because it never covers anything.

Speaker 2:

Yeah, I would say, do I have an umbrella policy? Right now I'm trying to even think if I do somewhere, maybe in some commercial scenarios. But I would say this if you are going with a lower policy limit auto policy type thing and then you can bundle it with an umbrella to give you that excess coverage and because of the bundling I think there's some commercials on that- yeah. You actually could save overall with your premium, maybe you get a discount.

Speaker 3:

Double check, yeah, yes, Something like that?

Speaker 2:

Yes, something like that. So you were able to use an umbrella policy that could enhance a lower level type policy and then, by doing so, you saved on premiums. Maybe Some people argue well, you want an umbrella policy from a different insurance company because then they come to bear, and now you have two insurance companies fighting on your behalf. But again, this is the only people that are usually selling this, are the ones that are explaining it this way, are trying to sell you an insurance policy and or justify not doing an llc or not doing quality estate, estate and tax and asset protection planning. So I just I think it's money wasted generally, and I know some insurance company is going to send me a nasty grant for that.

Speaker 3:

I like looking at your current policies and if you go into a low value policy with low coverage amounts, maybe use an umbrella, but I don't know we. I just saying we definitely see clients use their insurance every once in a while. I've seen a lot of clients not get coverage on stuff. I'm like really that wasn't covered. Which is why we like LLCs, because everything's covered unless you're doing fraudulent stuff, but otherwise everything that can happen is covered. You've got asset protection. They're stuck at the LLC. So the other mistake I want to make sure people don't make is don't buy an umbrella policy instead of an LLC for like your rental or your business, thinking oh, I solved the problem. No, you didn't. The umbrella policy will cover nothing except for the insurance you already had in place. In which case, why did you buy the umbrella? You should have just got the LLC, because it's like an absolute barrier.

Speaker 2:

Yeah, I remember when I was more of an advocate of it, when I had teenage drivers, I had more things going on. You have boats, you have kids driving under age 18, you've got this, you got that, and maybe there was a lack of proper coverage in one area that didn't have enough provided for. The umbrella could fill it in. Anyway, be careful. You have two or three opinions on that. Wow, what a great show today. All right, Lots of great questions.

Speaker 3:

Thanks everybody for the questions. Get over to mainstreetbusinesspodcastcom to submit your questions. We're going to be revamping the website, creating more of a community feel there and vibe Improving it. Mark and I need to update the photos on there from like 10 years ago. Those are terrible photos, but we're working on it and appreciate all of you submitted your questions. We back, of course, next week with another amazing main street business podcast episode. We'll see you then.

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Mark J. Kohler

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