Main Street Business

#548 Open Forum - How To Legally Minimize Your Taxes

• Mark J Kohler and Mat Sorensen

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In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen host an open forum, addressing your top tax and legal questions. They dive into why having an LLC is crucial for protecting your assets, how Medicaid clawbacks can impact your estate, and the benefits of elder law planning. Whether you're looking to safeguard your wealth or prepare for the future, this episode has essential insights.

Here are some of the highlights:

  • Mark & Mat Matt explain how Medicaid can go after significant assets if the parents have them, but the home is typically exempt.
  • Mat warns about potential estate planning issues if the parents sell the house to their children for less than market value.
  • Mark and Mat advise against using a Lady Bird Deed alone and recommend setting up a trust instead for a more comprehensive estate plan.
  • How you can either take mileage deductions or actual expenses, but an LLC provides better asset protection.
  • LLC provides asset protection and can be converted to an S corporation if needed.
  • Airdropped crypto is considered a disallowed contribution to the Roth IRA and should be moved to a personal wallet.
  • Children under age 18 do not require a 1099 or W-2, and paying them as outside labor is best.
  • Mat emphasizes the importance of understanding the tax rules for paying children and offers strategies for maximizing tax benefits.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling 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. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever.

Speaker 2:

Here is Mark and Matt. I had this little grandma come to my office and she's like the IRS is coming after me. I'm like why is the IRS coming after you? She goes I don't know. I pay my taxes every year and we started to pour through her tax returns. We started to pour through the IRS letters and I go, what are they doing? And we finally found out they're trying to lean her house. I'm like, oh my gosh. And I look at her deed and I go why is your son on the deed? Guess what? They're coming after your house because you put his name on your deed.

Speaker 3:

The LLC is like the shield they can't come after you or any of your assets. They can't come after you or any of your assets. Period Stop.

Speaker 2:

You're done. Your poor accountant is wrong. Look for a new accountant. They are wrong.

Speaker 3:

Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen, joined by the incredible Mark J Kohler, and you are listening to the People Show Ooh.

Speaker 2:

The People Show. I like that. It is open forum where we are going to field the questions that have been submitted on the site. We've got lots of questions, more than we can cover. Yeah, so that allows us to pick and choose.

Speaker 3:

Yeah, so if you had a good question, we're going to answer it, and if your question sucked and it sounded like you needed a consultation because you wrote a novel, we're going to skip those.

Speaker 2:

Yeah, like you needed a consultation because you wrote a novel, we're going to skip those. Yeah, but no, there's not many of those, so sorry, we don't want to shame our listeners too badly but no, we've got some good stuff.

Speaker 3:

Steve41 from Tulsa, oklahoma.

Speaker 2:

I was talking to you, I'm just kidding, I like it. I like it, yeah. No, a lot of our listeners love this show. No, I, a lot of our listeners love this show. It's got. The open forum show has historically more listens or views than any other topic. Because you just don't know what you don't know, like you just hear people ask questions around the country and you're like, oh my gosh, I didn't even think to ask that, so it can be fun. Yeah, it's good stuff.

Speaker 3:

And it's also nice to hear other people's problems.

Speaker 2:

You don't feel as bad. They're struggling with this too. Yeah, yeah, all right, we want to go.

Speaker 3:

You can lead off All right, I'll be the lead off hitter All right.

Speaker 3:

This is from catch 22, mo, I don't know All right. It says both my parents and mother-in-law are worried that they will lose their houses if they go into a nursing home with the following scenario work, my wife and I purchased both homes with seller financing and they my parents and my mother-in-law then rent the house back for the same amount of the mortgage payment. My other question is what happens upon their deaths? Okay, catch 22,. I do not love this idea. A couple of things to think about. One is there's something called the Medicaid clawbacks that says, let's say, your parents do go into a nursing home and Medicaid's paying all this money for them while they're in the nursing home, or Medicare even, but your parents have significant assets. Well, they could go after those assets. They're going to say you need to deplete these assets before you start drawing on Medicaid for it being in a nursing home. However, one of the exempt assets typically and this can be a state by state issue that states actually have different rules on this but one of the exempt assets is your home, so don't worry about the home.

Speaker 3:

Typically in some states might have limits on the amount of equity, but that's when I would not look to really sell and a couple other things why we don't love that. I don't know, do your parents have other siblings? This can create a whole estate plan mess of who's getting what assets. One kid buys the house for mom and dad and lets them stay in it and pay them rent and then they're paying the mortgage and there's a seller finance note. It can create some estate planning messes and mismatches.

Speaker 3:

And then the third thing is I don't know how much equity your parents have in the home, but if it's over $500,000, the sale of home exemption which, by the way, may not apply when selling to family. But if it's over $500,000 of equity, you're going to lose the step up in basis when they die. So you don't typically want to inherit assets rather than have them gifted to you during your lifetime if they're appreciated. So if there's a lot of equity in the home, let them die, get the step up in basis, you inherit it and there's no capital gain, even if it's over $500,000.

Speaker 2:

And I'd like to add to this question in Matt's comments, if I could. This is another term for this is elder law planning. There is an elder law national association, elder law attorneys in every town that you could find through the elder law network blah, blah, blah. I would get a consultation from a couple of them because they're going to have differing strategies and it is also very state specific. Like Matt said, I've heard that the clawback can go after the equity in the home. It's exempt in order to get Medicaid, but upon death, I've heard in some states they can go back and get some equity. So it's very state driven and it's something we haven't really practiced here in our office over our careers, because it's just. It's a hard area because a lot of people are trying to. They're in a tough situation financially, sometimes already they're trying to cut corners and that's okay, but it's not something a lawyer oftentimes has the time for and you don't want to get taken advantage of either. So get a couple of opinions, go to an elder law attorney.

Speaker 3:

And I would say, if your parents have significant assets, that's the last asset they're going to go after typically is the home, so and and generally when you have the larger assets is when they actually try to do the clawbacks. But keep in mind the family transfers. There are clawback rules that say, hey, you just transferred this and sold it to your kids or gifted it to them three years ago. We're pulling that back anyways, even if it's out of their name.

Speaker 2:

Yeah, and there's gosh, there's so much here. There's what assets are exempt to get Medicaid, and then there's what assets do you might the state's going to come after to get reimbursed after they die, and so there's just so much involved. Get with an elder law attorney in your state and it'll go a long way. Now, matt, I just want to point out how proud I am of this moment. Sometimes we get questions and we answer them three months after they are posted. This one was posted an hour ago. I mean, this is a record for us. We are on it, yeah. So, john Pina, I want to just say this one's for you.

Speaker 1:

All right, we're on the job. We're on the job.

Speaker 2:

He says hello, Matt and Mark, I watched your podcast last week on investing with HSAs. I have a health savings account and considered changing my insurance plan for next year so I could fund another one, changing my insurance plan for next year so I could fund another one. However, after looking into it, one has to have a high deductible health plan. Yes, I am expecting at least one procedure next year, so I didn't enroll in the high deductible plan. Can one fund an existing HSA without having to open a high deductible plan? No, you have to have a high deductible plan In the year you want to fund your HSA. And with my current HSA, how do I invest with it? Do I need to roll it into my self-directed IRA first? Okay, so before we get to the last sentence and John, these are great questions what's interesting? You say you have an HSA and consider changing my insurance plan for next year so I could fund another one. What I think you mean is I have an HSA and I want to fund it next year, so I wanted to get a high deductible plan so I could do that. You wouldn't set up another HSA, you would just fund the one you already have. Typically, that's a perspective and everyone out there, you have to have the high deductible plan in order to fund an HSA. Just because you have an HSA doesn't mean you can keep putting money into it. You can keep investing it and building it, but the only years you can put new money in is when you have a high deductible plan that year. So finally, John, you said with my current HSA, how do I invest with it?

Speaker 2:

Please get over to our Directed IRA Podcast. Directed IRA Podcast. It's our sister podcast. The link should be down in the show notes as well, as it's easy to find with a little search. On multiple platforms we have podcasts on that very topic. But you're going to invest with it just like you would a self-directed IRA, and you're going to want to learn the rules of how to self-direct. You will need to set up a self-directed HSA account at our trust company Directed IRA to do that. But dive into some podcasts over on that other platform. You're going to love it. Do I need to roll it into my self-directed IRA first? No, you can't.

Speaker 2:

A self-directed IRA is a self-directed IRA. A self-directed HSA is a self-directed HSA. They're two different accounts. You can open both and invest both. In fact, you could make both partners in an LLC. That's another topic on one of the shows on the podcast over there as well. So you've got lots to do here. I'm excited for you. I think you're going to really have a good time playing with that HSA. I think it's a great strategy. Matt, the floor is yours.

Speaker 3:

All right, this is from Double Plays. Double Plays asks Matt and Mark thanks. Plays has Matt. Mark, thanks for all you do. I recently set up my revocable living trust, did the LLC cleanup three new LLCs with your firm so far and have and hopefully I can do more soon Awesome. Thank you for your awesome business there.

Speaker 3:

So I have a question about ladybird deeds. My parents own their home in Florida and they have added me as a new ladybird deed. We're going to come explain what that is. My understanding is that the house will easily transfer to me once they both pass. As a result, at least this asset will transfer easily and avoid probate. I'm assuming a trust along with the will is a better option. But what do you think of this ladybird process? Is it available in all states? Okay, great question. Let me explain what the Ladybird deed is. What the Ladybird deed is basically a deed where you can transfer the property out of your current name into a new form of title that says, hey, during my lifetime I own this property, but I have and I have retained what they call a life estate. This gets back to, you know, law school real property 101, first year of law school.

Speaker 3:

You have a life estate in the property, which means you have a right to live and enjoy the property during your life. But upon your passing it is the property of whoever you put on this ladybird deed, your kids, whoever it may be. So double play is asking here. Hey, my parents just added me, technically you're owning that property of future interest in the property once they pass away. Now, one of the reasons people do this is to get around probate and not do a trust, yeah, and to get around a trust.

Speaker 2:

By the way, we'll tell you in a moment why the trust is still better, but keep going.

Speaker 3:

So yes, you can do that and, to answer your specific question, it is available in a handful of states. I believe there's five or six states that allow this still. This is kind of not a common strategy anymore, but Florida is one of the states that does still like the Lady Bird deed. I want you to have a trust anyways, or your parents have a trust anyways. Now I don't know what other assets they have. Maybe they have $1,000 in the bank account and the property and that's it and they have really nothing special that they think they want to do. Ok, maybe you can get away with the will. There's a lot of ifs and questions. I got there. Maybe you can get away with the will and doing this ladybird deed process, but it's so much easier to just do a trust.

Speaker 3:

Sometimes the workaround, like you're doing here, is more complicated than doing the tried and true method of just doing a freaking trust, because there's a lot of contingencies I want to have in this trust. And what other documents do your parents need as part of the estate plan? Do they need a financial power of attorney? Do they need a healthcare directive that says pull the plug of them in a vegetative state, like, do they have burial instructions Like what's who's getting their personal property, who's getting the jewelry or the musical instruments or the guns or whatever personal you know things, whatever personal things that might have in your family? This is what's happening in a full estate plan that includes a trust, and then it's so much simpler because the property is just deeded to the trust and it's going to avoid probate, plus, the trust in your estate plan is doing all those other things. This is a little workaround. Could it work? Yes, not recommended, not our style.

Speaker 2:

I've got two major problems with this too. First, I understand you do not get stepped up in basis on this because when your parents deed it to you and keep a life estate, they have essentially transferred the home to you. So now you do not get a full stepped up basis. So, my friend, you're going to pay more tax when you sell mom and dad's house, when they die and then you decide to disperse it. So sign up for more taxes is what you're doing. Number two I got asset protection concerns. I remember this vividly. It was about 15 years ago.

Speaker 2:

I had this little grandma come to my office and she's like the IRS is coming after me. I'm like why is the IRS coming after you? She goes I don't know. I pay my taxes every year and we started to pour through her tax returns. We started to pour through the IRS letters and I go, what are they doing? And we finally found out they're trying to lean her house, the IRS.

Speaker 2:

And I'm like, oh my gosh. And then I look at her deed and I go why is your son on the deed? Well, because I wanted to avoid probate and I don't want to do a trust. Okay, does your son have IRS problems? Room went silent. She started to cry yeah, guess what. They're coming after your house because you put his name on your deed. So when you start putting other people's names even a ladybird deed now if they get in a car accident, if they have a lawsuit, they're going to come after the house too. And mom and dad's like well, I have a life estate in that, too bad, it's ugly. So just do a freaking revocable living trust. You're going to love it.

Speaker 1:

All right.

Speaker 2:

DB2027 says hello, I am an owner of an S corporation and I am not looking to increase my taxable income on my W-2 due to annual earning restrictions. Am I able to take a bonus from the S-corp and place it in my 401k or simple IRA without increasing the W-2 wages from the S-corp? Generally, no. Now I've got some ideas for you, though. Here's why some of you might be thinking DB 2027 is doing this. If you have SSDI disability social security you can only earn so much, and it's adjusted by inflation each year, or your disability benefits will decrease. Right now it's about $18,000. So if you earn more than $18,000, it's going to affect your SSDI. So that could be a situation, and there's other reasons, but that's a good example for all of us to get our head around here. So, db, there's some problems here, though. If you start to make good profit in this S-corp and you don't take the salary level you're supposed to, you're going to get audited by the IRS and owe more in taxes, and they're going to restate your earned income. So be careful of that. I don't know what level of profit you're expecting in this S-corp, but please review our matrix on payroll the Kohler payroll matrix, as I've termed it over the years.

Speaker 2:

Number two, the 401k, is freaking awesome in that you can get that headstart of close to $23,000 this year if you're under age 50, $30,500 if you're 50 or older. So I don't know what W-2 you are taking, but you could defer that whole paycheck. Now if you do a deferral, that comes off box one of the W-2. So that's going to reduce your earned income on the W-2. And I don't know again why you're trying to keep your income down on the W-2, but doing a deferred 401k contribution rather than a Roth 401k contribution could maybe impact that issue you're facing.

Speaker 2:

And I think the 401k, the solo 401k, is awesome and you can still do 25% of whatever your W-2 is. So if your W-2 is 20 grand, you could sock the whole 20 grand on a 401k and put an additional five from your S-corp into your 401k. So you're at 25 grand right there. So I think, db, there's solutions here. We're doing 401ks right now, up until December 15th for this year, and charging a thousand dollars and you meet with an attorney and they will answer all these questions and more. So any of you that are looking to plow money into a 401k next year, you don't even have to put the money in until next year, but you got to have the 401k set up in the next six weeks. So great question. You want to add to that my 401k expert, matt.

Speaker 3:

I have nothing more to add. Perfect answer, all right, all right, this is from what's their name here.

Speaker 2:

L Turner, L Turner.

Speaker 3:

Okay, asked. I'm a small business owner with a sole proprietorship. I have a reputable tax accountant that's a solid start who only allows me to deduct mileage for business expenses. I've asked why I can't deduct my car payment and all related expenses. Is it because my business is a sole proprietor versus an LLC? Thank you, great question. Your account is giving you solid advice. It's either or You're either taking mileage for the business miles you have, which gives you a deduction, and it's the easy way, cause you just track All right, I wrote drove 10,000 miles this year. What's the? What's the mileage rate for 2024?

Speaker 2:

It's in the fifties. I don't have it here in front of me, Sorry.

Speaker 3:

Let's say it's 60 cents. Okay, you drove 10,000 miles for the year. You get a $6,000 deduction. That's pretty awesome. That's a lot of miles. Maybe you're a realtor, a real estate investor. You've got to drive around to properties or whatever. Your business is Okay. So, but let's say that's you Okay, that's a huge deduction. But that's taking into account your car payment, your gas, your insurance, your maintenance.

Speaker 3:

It's meant to be an all-inclusive thing when you take mileage. Now you, you don't have to do mileage. You could say I want to take actual expense because of the amount of gas I have, my maintenance costs, my insurance, my lease payment if I'm leasing. If I bought the car, I'm depreciating it over time. That might give me more bang for my buck. Now, most of our clients will do mileage because it's easier, but you might want to have a conversation with your account about doing actual instead. I don't know your situation, but let's say that that car is used 100% for business. Then we're taking 100% of those expenses. If it's used 60% for business, you only take 60% of the maintenance or the insurance or whatever those actual costs are. So it's either one or the other. L Turner, it sounds like your account's on the right page here, but you could switch over to actual if you want. Most people stick with mileage. Yeah, it's very difficult.

Speaker 2:

Everything you said, I would just say it's very difficult to move from one method to another once you choose one with the existing car with the same car.

Speaker 2:

So now you can have multiple cars in your household One's mileage, one's actual, one's leasing, one's other methods. Sorry, I was going to throw out a few other ideas that are on the fringe, but this is. And one thing you did say in there that I want to clarify for everyone else is the difference between an LLC and a sole prop does not change your tax situation. Yeah, you said. Oh, if I was an LLC it'd be better. No, everybody remember LLCs do not save taxes. They do not save taxes. S-corporations can save us taxes when we're in the right situation. So don't worry about that, just keep track of all your records as best you can. Your accountant is like Matt said. It's got you on the right conversation. Well, this is from Jay Griffith. This is kind of fun. He said I just won a house in a charity raffle valued at $725,000.

Speaker 3:

Wow.

Speaker 2:

Yeah, I have to pay 24% federal taxes and 11% state taxes. Sounds like you live in California. At closing, my intentions are to sell the house, which is allowed. I have several questions. So well, congratulations on this win. And, folks, if you win an asset like this in a raffle or charity, you've got to pay tax on the value of what you receive, the fair market value. So he's going to pay taxes on $725,000, and he's done the math of his tax bracket and how much tax he's going to pay Now. He asked three questions. What is the best way to title?

Speaker 3:

Can I hold? I mean 24%, really, only that's $725 in value. Sounds a little low. Yeah, it does sound low.

Speaker 2:

And I'm just going to take it on face value. Jay Griffith, maybe you have some write-offs in other areas. Now, by the way, when you say you have to pay 24% in federal taxes and 11 at closing, this is what's going on. I'm glad you said that, matt. That's what they're withholding, because the government doesn't know what tax bracket you're going to be in, so they just are withholding at 24%. Your tax could very well be. Let's just look real quick at the tax brackets and you're looking at easily. You're going to be in the 37% bracket period 750 grand. You just went into the one percenters. So you're going to probably pay 37% federal. They withheld 11 on state and that's probably where you'll be as well. In fact, if you're in California, you could be paying the highest, 12 or 13%. So, jay Griffith, my first wake-up call here and, matt, I'm glad you phrased it the way you did and questioned that is that's how much they're withholding, that's not how much you're going to pay in tax. I'd meet with your accountant right away and find out what the tax bill really is.

Speaker 2:

All right, now you said what is the best way to title the house? Well, it depends on what your plan is If you're going to move into it and live there, put it in your trust, your family trust. If you're going to make it a rental property, an Airbnb it or rent it out long-term, you're going to put it in an LLC. You're not going to put it in your personal name at all. So that's. We don't want to go there. Number two should I hold the house for a while and use it as a rental to reduce capital gains? Well, using it as a rental is not going to change your capital gains when you do go to sell it. It's your holding period.

Speaker 2:

So if you were to, you win this house on January 1st, you take title. You hold it all year until January 2nd of the following year. You've now held it 12 months. Sell it, you'll get a capital. You'll pay capital gains, a lower tax rate on any appreciation over the year. Capital gains, a lower tax rate on any appreciation over the year.

Speaker 2:

Now, just to hold it for a year, to sell it to get capital, you don't need. You're already paying tax on 725. So if you turn around and sell it on day two, you don't pay tax. So you've already paid tax on 725. That's your basis. So if you sold it a month from now for 750, you're going to pay tax on $25,000. And not capital gain. By the way, you'd have to hold it a year, so holding period is what affects capital gains and any appreciation. Your basis is $725,000. And what will the capital gains be if I sell right away? I just answered that. So zero, assuming you sell it for $725,000. If you sell it for any more than 725, you're going to be in whatever tax bracket you're in. If you're in this 37% bracket this year and you turn around and sell it, I hope there's no appreciation, or maybe you can. You got to meet with one of our tax advisors, jay Griffith.

Speaker 2:

You got be, happy you won this. You're going to be pissed about the taxes, yeah.

Speaker 3:

This is like everyone who wins the lottery. Right, You're like, all right, I won $10 million on the lottery. You're like, that's actually $6 million.

Speaker 2:

What do I?

Speaker 3:

get? You don't get $10 million, you get $6 million maybe $50 million.

Speaker 3:

depending on the state you live in, maybe $5.5 million. So, jason, this is you. It's just you won property, which is really the same as getting cash. It's taxable to you and so don't think of it as $725. If you can think about that, then you're going to be okay. Otherwise you're going to be hating it. But still don't be mad about that. Right you won. You're still a winner. Okay, all right. It's a question from Denise Vance. She said Mark and Matt, you make the world a better place.

Speaker 2:

Oh, wow, that's a good start. Wow, thank you.

Speaker 3:

And she says thank you for that. She says I have an LLC set up through KKOS. That's our law firm. Guys, you can get your LLC, your estate plan, your solo 401k, a tax plan. That's what our law firm is doing every day for clients across the country. She says but I set up the LLC for purposes of holding the rentals. My mother and I are 50-50 owners Awesome Mother-daughter combo on setting up rentals. And she says I'm working on launching my bookkeeping business in January of 2025. Mom isn't part of that business. Should I run the bookkeeping business as a DBA through the LLC until the business has generated enough of its own revenue, or set up an S-corp for the bookkeeping biz from the start? Thank you both for what you do. Okay, excellent question, denise. This is the perfect scenario of our trifecta. Denise and the lawyer that you worked with on setting up the LLC can help you on this next business question and setting up the bookkeeping business.

Speaker 3:

So here's what we want to do. We always separate your life onto two sides acquiring assets on the right and your operations and business activities on the left. We do that for two reasons. The first reason is I want your assets separate from your operations. I don't want something in your operational business where you have a lawsuit affecting what goes on with your assets and your rental properties, where you're building equity and generating passive income. So we want those things separate from a liability standpoint, okay. The second reason is they're taxed differently. Right, like the rental income I get from my rental properties or my investment assets is taxed differently. There's no self employment tax on it. I get capital gain income, which is a lower tax rate. When I sell it, I'm not paying into Medicare and Social Security tax on it. But over here on the left side, with my business income, I'm paying into self-employment tax for your bookkeeping business, your consulting business, your real estate agent getting commissions. You got a storefrontfront, you're selling services. I don't care what you are. That's self-employment income and you do have to pay into medicare and social security tax on that. So what I would do denise is I'd set up an llc for your bookkeeping business. Now this is separate from the llc with your mom, and even if your mom wasn't involved, I probably separated out anyways. But but we have the separate LLC to start this bookkeeping business Now.

Speaker 3:

You asked about setting up an S-corporation. You could do that if you knew this business was going to be busy out of the gate. But I like setting up the LLC first because we can add the S-selection later. See, the S-selection and being an S-corp only saves you once you're at about $40,000 or $50,000 of net income.

Speaker 3:

If you're making 10 or 20,000 net a year I don't know if this is full-time side hustle and getting started it might take you a while to have a profit. But at first the LLC is simpler. It goes on to Schedule C. If you have 10 or 20 grand of income you're not paying a lot of self-employment tax but you're not doing payroll, you're not doing a corporate tax return. It's a simpler setup but you still have the entity. You have the asset protection If something goes wrong, you get the official structure and we can add the S selection to it whenever we want. So if you hit it out of the gate and you're super profitable, you're making 40 or 50,000 net after all your expenses, we can just add the S selection there and that's when you're saving taxes and the tax return and the payroll you're going to have to start doing because the S-selection will be worth it.

Speaker 2:

Love it. Great answer, mr Sorensen. This is from SGoodale514. It says I have I think it's a she here, but not sure so forgive me, I'll just say Goodale. Goodale says I have a lump in my throat just writing this query, but when my good friend came to me in search of tax advice, I could not think of a better place to turn than to the dynamic duo I think that's you and me Whose podcast emails?

Speaker 3:

and YouTube videos Batman and.

Speaker 2:

Robin. Yeah, batman and Robin, we've got his number. We'll send it over to you. Dynamic duo, whose podcast emails and YouTube videos truly never get old. So here it goes, thank you. So nice Friend is a house painter and insists that she can be structured as a sole proprietor in order to avoid the administrative requirements of maintaining an LLC registering with the state. Boi la la la. When I told her about the unlimited personal liability, she says oh, that's okay, I have a $2 million business insurance policy. So, to be fair, she is a small business where family's net worth is probably less than 2 million. But my question for Mark and Matt, or is it Matt and Mark?

Speaker 2:

I think it's Mark, and Matt is as follows Is she correct in that an adequate insurance policy negates the benefits of structuring as an LLC? Thank you both. Well, goodale, I am glad you're asking this and hopefully you'll be able to clip this podcast portion or get your friend to listen to the whole show today. But this is a good one, and the answer is no. An adequate insurance policy does not negate the benefits of structuring as an LLC, and let me tell you two or three reasons why. First of all, have you made an insurance claim lately?

Speaker 2:

Oh my gosh, it's so fun. And let me just assure you, gidele, they're just going to rush to your side. They're going to pay whatever claim you have. They're not going to figure out ways to get out of it and they're going to pay policy limits. And, oh my gosh, they're just going to rush in and make your life so much easier. Do you feel the sarcasm?

Speaker 2:

Now I'm not saying don't get insurance, and I hope the insurance company might do that, but, holy crap, you're putting your entire family's net worth in the hands of an insurance company that its goal has a 30-page insurance document you've never read before. And, heaven forbid, you're talking about an umbrella policy, because umbrella policies are the worst. You know why they're so cheap Because they rarely pay out. They only pay out, after all, the other insurance does, if even other insurance covers it. Number two can you fathom all the different types of liability that could occur with a painting business? If you're negligent at all and you're painting and paint falls on the ground and someone slips and falls, or this. That you have a worker on a ladder, you have this, that and another and there's a problem, the insurance company may go oh, we don't cover that and you're toast. So please do both. We do both. Every client should do both. They should have insurance and the LLC.

Speaker 2:

And now let me just talk about tax planning. Holy crap, you want the LLC. The LLC is going to save you money. Administrative headache yeah, it's called an annual meeting that you can hold on a trip and write off the travel and the dining and everything involved. You should be having annual meetings with that family LLC. And third, you can convert it to an S corporation when the time's right. You're a painter. If you're making 50 grand or more, you should already be an S corp. If you're making $50,000 or more, I hope you are. Or if you want to get there and all of a sudden you get there and you're not an LLC, you're screwed. Now you're paying even more in taxes, far more than you're paying insurance premiums. I don't know, am I emphatic enough here? That just do the freaking LLC. It will save you money, protect you from any possible lawsuit that could shield you when insurance may not come to your rescue Anything else I'm missing.

Speaker 3:

Yeah, what I would say is think of the LLC as, like the shield, like the LLC is a law in every state that says if something happens in the business, they can only sue the LLC. They'll only be able to get your painting business. They can't come after you or any of your assets. Period, stop, you're done. I don't have to worry about whether the insurance policy is covering this. Let me just give you an example. This is when I had to help a client three years ago. Guy had a rental property with an LLC, had an insurance policy Okay, tenant slips and falls.

Speaker 3:

Walking up the stairs to the front door of this little single family rental has pretty significant injuries and sued my client. Well, what did the insurance company do? Denied the claim. Why? Because they could. That's doing a good job if you work for the insurance company. Okay, that adjuster got a pat on the back and the person who wrote that policy they're like we'd have to pay on that one. Okay, here's why.

Speaker 3:

There was like five or six steps up to the front door of the property. There was a handrail on one side but not on the other. Code in that city said hey, if you have steps this width, this many, you have to have a handrail on one side but not on the other. Code in that city said hey, if you have steps this width, this many, you have to have a handrail on both sides. So they said this wasn't in compliance with code. Because it wasn't in compliance with code, we are not covering it. You were in violation of the terms of the insurance policy. We're not covering it.

Speaker 3:

Well, thank goodness the client had an LLC, because they did have other assets they were concerned about and they were able to negotiate and settle the claim for a reduced amount because all their assets weren't exposed. So don't rely too heavily on the insurance policy. Yes, we want to have it. It does cover sometimes. I'm not saying insurance policies don't pay out. We've certainly been in those scenarios too. But I think if you're building wealth and you're an entrepreneur, you do have some risks in your business. We want to make sure that those risks are limited and barred, to only be in the business so that you can grow and build your assets. Love it.

Speaker 2:

Aries commented and said this would take two seconds. Matt, I know you've got a question. No, go for it. She said I signed up with your firm to set up an entity for my business or businesses. I will be serving as a transactional broker between real estate investors and lenders and, la la la, there are certain states that allow this, certain states that don't. I'm excited to get set up. I want to get my proper trifecta in business. Please help. And I love your question. I don't know what the question is, except please help. And then at the beginning you said you already signed up to do an entity with us. So, Aries, I think you're good to go In that consultation any questions or issues you have about why you're setting up, how to set up all these issues from state to state, our attorneys are going to be able to help guide you and point in the right direction. So I'm grateful for your comment and that you've already made an appointment with our firm. So I'm just going to leave it at that and see if that gets you off to the races.

Speaker 2:

So here's a question from Dale Purcell. Hello, mark and Matt, what is your recommendation for when I have to file a conversion of an LLC to an S-corp. Thank you, dale. Dale, easy question. Sorry, dale, he posed this a few months ago. I just popped up. I missed it. But, dale, you still have time and any of you this year that have had more than $40,000 to $50,000 of net income I just referenced that with the painter we just talked about If you're making more than $40,000 to $50,000 net, you're pulling that money out of your business for profit. You are a candidate for an S corporation.

Speaker 2:

We firmly believe that We've been doing this for 20 plus years. We've never had a client audited for making a decision like that and there are tax savings on the table with reasonable comp. It is very straightforward Please get with one of our tax advisors and you can either call our law firm to help you with the conversion or go to markjkohlercom and click on our tax advisor network as one of our services there and find an accountant that can help you in this whole process. We, uh, we love the strategy and, dale, you're, you're uh off to the races and anybody of you that's listening that made $40,000 or $50,000 this year in an LLC and you're not an S-Corp, we can still backdate you into an S-Corp 1-1-24. And you've got to do it in the next six to eight weeks because you have to kick out payroll in January, so you've got to hurry. So get on it and Dale. Thank you so much for the question.

Speaker 3:

All right. Workman 1966 asks I hear Mark often touting the benefits of an S-corp election for everyone, but I need a little help getting my head around this in our situation.

Speaker 3:

My wife and I are blessed with day gigs that are about 250K. We are also the primary owners of three different consulting partnerships, each with their own LLC. Our consulting partnerships net out about 200K each in self-employment income, since we each max out FICA in our day gigs. This is the social security part of FICA. Is it really in our best interest to consolidate the LLCs into an S-corp structure? Aside from our reduced audit risk structure, aside from our reduced audit risk, in addition to the expenses of setting up probably insignificant, I also think the S-selection would limit our solo K employer contributions, maybe making this all a wash and not worth the trouble.

Speaker 3:

Am I thinking about this incorrectly? Okay, it is a little more tricky in your scenario, workman 1966, because you are already paying out the max in social security portion of FICA because you and your spouse are both high income. So there's no Social Security savings to be had when doing the S-Corporation strategy. But there's other benefits still to be had there. Ok, the Medicare portion of it? Right? We have 15.3%. Yeah, 12 point. Whatever is social security.

Speaker 3:

The other 3% is is Medicare, and so for every a hundred thousand dollars, let's say I'm, I'm, I'm designating, uh, I mean you're saving three grand, you're saving three grand, okay, we've got Obamacare in there.

Speaker 2:

So ADA is going to kick in for another percent and a half and so there's savings and you just have to do the math Sometimes 100, 200 grand could save you three or five, six grand.

Speaker 3:

Yeah, and I think I broke one of these down. I did a video on YouTube about this for high income earners, on using the S corporation. And do you know who? I used as my example Jill Biden. Jill Biden had an S corporation. She was running a million bucks through it, but also had like a I don't know, it was just like a community college professor or something I forgot but and so I ran the numbers on on saving. And so a lot of high income people have this question where they think, well, I'm already maxing out my social security.

Speaker 2:

They forget Medicare and ADA.

Speaker 3:

You forget the rest. Okay, there's still savings to be had and, honestly, the more money you make on these consulting partnerships, the more tax savings there are. And my guess is workman 1966, you're planning to make more money. It's only going to save you more the more money you make.

Speaker 2:

And couldn't you start looking in that escort-Corp for profit sharing? 401h, a DB plan, a lot of other things, a lot of other things, and I will say you asked a question about would the S-Corporation limit our solo K employer contribution?

Speaker 3:

No, it increases them. It makes it simpler.

Speaker 2:

Yeah, they do a mega backdoor Roth. I'd look at that too. And one side note is that our tax and legal 360 event that's in 15 days it will be December 5th, 6th and 7th a three-day event we have an entire class on tax strategies for the 1% and it was a big hit back in the summer and I think you would really benefit from that class. You can sign up for the virtual attendee as a virtual attendee and catch that class and others. So even if you're a business owner and not a tax advisor, these classes can give you a leg up to find the right tax advisor. So please check out taxandlegal360.com. The virtual cost is like 500 bucks and you get 30 classes that you can watch on the recordings and many of you would really benefit from it.

Speaker 2:

Okay, this is Tony Trek. Now, matt, I'm going to see if I can answer this one correctly. It's a Roth IRA question. Okay, we got the do-er, matt, here. All right, I'm paying attention.

Speaker 2:

If someone has a Roth IRA with an LLC and the LLC owns a crypto wallet Now we've taught this over at Directed IRA Podcast so your Roth IRA opens an LLC and that LLC goes and opens a Metamask wallet so you can maybe buy some coins that the Gemini platform at Directed IRA doesn't offer. Okay, what happens if some random crypto project decides to airdrop you crypto? Then it sounds like in that wallet that's owned by the Roth LLC. Then what if the airdrop crypto project eventually has value, say $1,000? How would this be handled in the Roth IRA, since Roth money was not used to purchase this crypto cryptocurrency?

Speaker 2:

Well, what you've done? Okay, here's I'm going to give it a shot. You have made a disallowed contribution to the Roth with this random transfer into the wallet owned by the crypto LLC, roth IRA LLC. You would want to take that money out right away and put it in a personal wallet, because you did not acquire that currency with your Roth money. Think of it as a gift, think of it as earned or whatever. You can't just pop it into a Roth wallet. It's not good.

Speaker 3:

Yeah, Now if, Tony Trek, the airdrop was because the Roth purchased something or did something with this LLC and this was about the Roth's crypto, then that airdrop could go into it Like staking or something. If it's under $1,000, you don't have to worry about UBIT or UBTI. But the IRS did come out with some guidance saying airdrops or mining income for crypto would cause UBTI for your IRA, including your Roth IRA, so that would be the only issue there. You might have a UBTI tax issue if it's over $1,000 in value, but I'm making some assumptions there. Now, the other thing I'll say right now is you know, we have a lot of clients that have crypto Roth IRAs, traditional IRAs, HSAs, directed IRA. It's been an incredible product and some of them are using the LLC structure. But that crypto Roth IRA with Gemini has been very popular and there's a lot of happy clients right now, a lot of happy clients right now.

Speaker 3:

That set that up, and there's a lot of happy clients right now A lot of happy clients right now.

Speaker 3:

Yes, they are, and there's a lot of people running it now being like I better get on this train now too. But just know, you can buy crypto in your IRA. You buy real estate in your IRA. It takes a self-directed IRA. It's what we do at Directed IRA, our trust company and self-directed business, where we're helping clients invest in what they know. So for those of you that aren't savvy to that, mark owns crypto in his IRA Roth IRA. I own crypto in my Roth and my HSA and it's real estate other private companies so these are things you can be doing. If you're like, wait a second, this guy did crypto in his Roth IRA. Yeah, he did.

Speaker 2:

You can too. You can too, get over to directediracom and open up a crypto Roth, a crypto HSA, hsa, crypto IRA, crypto ESA. It's all there folks, heck, yeah, okay, do you have a question? I've got one here, you go.

Speaker 3:

Nope, I'm still behind.

Speaker 2:

Sorry.

Speaker 3:

I was trying to be ready for the one. You read me. I was All right.

Speaker 2:

So this is from Chuck's 437. He says background, if relevant. I'm a chiropractor with an S-corp for my practice. I have a separate LLC which owns my building and rents it to my S-corp. Make sure, Chuck, you're doing the dash four election. You could even do a cost seg on that Very powerful strategy.

Speaker 2:

I live in the country about 20 miles from my business, which is an actual town with stores. I commute to work six days a week. I don't include commuting in my business mileage, but when I go buy things for my business I track that mileage from home to the store and back 40 miles and use it toward the standard tax deduction. I think you mean the mileage deduction for your small business. But anyway, question does going to the bank count toward the mileage deduction, as I need to drop off business deposits multiple times per week? I've never seen this specifically included in past videos.

Speaker 2:

Are there broader things you could mention? Oh, my gosh, Chuck. Yes, and here's the way I say it Anytime you are driving in your car, your spouse's car, your kid's car, your motorcycle, your RV, you're driving in any vehicle to go do any type of business go meet with a client, go have lunch, go pick up supplies, go to Staples, go to the Apple store, go to the bank, go all of that mileage is a write-off. I want you thinking outside the box. The only mileage that's not a write-off is personal mileage to go to the grocery store or the movies, go to the lake, uh-uh. And commuting mileage to go from the house to your practice, that's it. I would like to see you throw in the kitchen sink on any business mileage that you can think of if you're out and about, not specifically the commute and not strictly a personal excursion. So lots of options there.

Speaker 2:

And, Chuck, oh my gosh, there are so many little things like electronics, cell phones, computers, equipment, travel, hotel airfare, Airbnbs, writing off your annual meeting. You could have quarterly meetings, your board of advisors, board of directors, your 401k, I mean, the list goes on and on. We do a comprehensive tax consultation with almost 50 different strategies to help clients find that edge. If you haven't done one in the last year or two, please call the law firm and ask for a comprehensive tax plan. We'll build you a trifecta go through your tax return and if we don't find you a tax break in there that pays five times what you paid us. We failed somewhere, Like we always find something good. So check that out, Chuck, and great question. All right, Matt. I think it's time to say one last question for each. All right, yeah, here's my last question.

Speaker 3:

This is from Mark. Mark says I was told that I can no longer make HSA contributions after age 65. Is that true? Well, it depends, mark. Did you take Medicare? Okay, and generally, at age 65, you need to sign up for Medicare, and if you have Medicare, you don't qualify for an HSA because that is not a high-deductible qualifying plan. However, if you are still working and you have not taken Medicare yet because you're still working and you have a covered policy through your employer, it is possible that you could still make contributions to the HSA past 65. This is an exception and so you got to meet those exceptions and those rules. A lot of people are going to take Medicare at age 65 and, meaning they are no longer could contribute to the HSA, but you might fit into that section If you're still working. You have a high deductible qualifying plan provided by an employer. Short and simple.

Speaker 2:

I like it. This is from Lily Creek Ranch. The last question, and this is a good one, is putting kids on payroll. So Lily regrettably sent this right before filing their personal return for 2023. But, lily, this is still going to help you for 2024. And any of you with children, please listen up.

Speaker 2:

She says I was under the assumption I don't need to provide my kid a 1099 for working on our farm. Legitimate work was done, obviously. I would like to deduct this expense $7,000 for 2023, and I filed an extension. I hope it would be more than that, lily Creek, but I'd ramp that one up. Anyway, current tax preparer says I need the 1099 for them. Should I pay the fee and file a late 1099? Also, what do you recommend for 2024? Thanks, okay, there's one critical piece of information we're missing here and I'm going to give both answers.

Speaker 2:

Is this child under age 18 or 18 and older? Answers Is this child under age 18 or 18 and older? If they are 18 and older, yes, you need to issue them a 1099. That's the rule. Good, if they are under age 18, please tell your tax preparer to join our tax pro certification and learn the strategies that work and are street smart that will save them so much money and their clients. They are wrong and I have put this in writing on multiple articles and books. I teach CE on this. I am so sorry. I'm not trying to be rude to your tax preparer and hopefully they listen to this, but when you pay your children under age 18 in your business and I'm not talking about an S corporation we have a workaround for that. But in a farm like this, you are going to pay them as outside labor.

Speaker 2:

No W-2, no 1099. It is not required. Now, in some states where the standard deduction is greater than the 14,000 and change this year, or in some states where that standard deduction is less than the 14,000 and change this year, I would want to issue a W-2. All the withholding boxes and FICA boxes are zero, so they can file a state tax return if needed, and they could be paying their kids a lot more than this too, depending on the services they're providing. So do not ever, ever, ever issue a 1099 to a child under age 18. And you might do a W-2, but certainly no withholdings or FICA withholdings. It's not required and I don't think I've ever issued my kids a W-2 under age 18 for years and years and I've never, ever in 25 years, had a client audit under this. Go to circular 230, study up on this. Your poor accountant is wrong. Look for a new accountant, or get them to join our program and level up. There you go, love it, yeah.

Speaker 3:

And if you want to take it to the next level, why don't you set up a kid's Roth IRA?

Speaker 3:

for your kids and instead of paying them and reimbursing your expenses that you have for them and taking it back or letting your kids actually have it, why don't we put it in a Roth IRA for them, teach them how to invest and how their money can work for them, don't? Wouldn't you wish that your parents did that for you? I wish my parents did that for me. But that's another cool strategy A lot of our clients do. Again, one of the strategies that a tax professional from the Main Street Tax Pro program would know and tell you to take it to the next level. Well, thank you everyone for your questions today. If you want to ask questions, by the way, for the podcast you're like I got a question. Well, go to MainStreetBusinessPodcastcom, hit the submit a question button and we'll hit it on the next open forum podcast. Try to keep it in our lane of tax and legal. Don't ask us who's going to win the.

Speaker 2:

Super Bowl this year, or something outside of our lane, we'll still tell you, we'll still tell you. I don't know if I'd put money on it, but I'd go with the chiefs.

Speaker 3:

All right, go ahead, there you go, there you go that was worthless advice, but you know what? All of our advice today was free, and hopefully you find some value in it, though, but we truly love doing this teaching clients, tax and legal planning how to grow and build wealth. We'll see you next time on the Main Street Business Podcast.

Speaker 2:

Thanks everyone, See you next week.

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Mark J. Kohler

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