Episode 20: Unlocking Tax Savings: Mastering S-Corp Strategies for Small Business Success

Is your small business missing out on valuable tax savings? Discover how you can leverage S-Corporation (S-Corp) status to potentially save thousands, as we break down the tax advantages and strategic considerations for small businesses. Comparing S-Corps to sole proprietorships and partnerships, we reveal how S-Corps can significantly reduce self-employment tax. We'll also guide you through the compliance requirements and discuss situations where an S-Corp might not be the optimal choice, especially when profitability is low.

Transitioning from a sole proprietorship to an S-Corp can be daunting, but we're here to simplify the process. Learn about the essential steps, such as setting up new accounts with your EIN and understanding the financial implications of becoming a pass-through entity. We emphasize the benefits for businesses with profits of $60,000 or more and explain how profits or losses pass through to shareholders via a K-1 form. Active financial management, including setting a reasonable salary and adjusting for variable income, is critical. Our conversation also highlights the potential tax benefits of reducing payroll taxes by only taxing a portion of your income.

Unlock further tax optimization strategies with tips on selling personal property to your S-Corp, leveraging home office reimbursements, and maximizing fringe benefit deductions. We delve into fair market value appraisals, the 14-day rental rule, and effective expense reimbursements. Plus, we're thrilled to announce the release of "The 4-Hour Bookkeeper," our latest book aimed at helping small business owners streamline their bookkeeping tasks. Tune in for actionable insights and practical advice to optimize your S-Corp's financial health and tax benefits!

To connect with us, visit the website: https://busybeeadvisors.com/

To purchase the book visit: https://www.amazon.com/4-Hour-Bookkeeper-Melissa-Broughton/dp/1962133737

Episode Highlights
(03:38 - 05:05) Tax Advantages of S-Corps
(08:17 - 08:50) Transitioning From Sole Proprietor to S-Corp
(13:19 - 14:39) S-Corp Payroll Requirements and Guidance
(19:29 - 20:40) Tax Strategy
(26:36 - 27:35) Selling Rental Property to S-Corp
(31:36 - 32:48) Rental Strategy for Personal Residence
(36:01 - 37:28) Reimbursing Vehicle Expenses for Tax Purposes

Chapter Summaries
(00:00) Tax Strategies for S-Corps
S-Corps offer tax advantages and strategic considerations for small businesses, but may not be best for all scenarios.

(08:02) S-Corp Tax Strategies Overview
S-Corp transition, financial cut-off point, separate business entities, pass-through entity, strategic advantages, K-1 distribution.

(11:52) S-Corp Tax Optimization Strategies
Managing finances as an S-Corp includes setting a reasonable salary, adjusting for variable income, and leveraging tax benefits.

(23:03) S-Corp Property Sale Strategy
Sell personal property to S-Corp to leverage home sale exclusion and extract tax-free value in the future.

(26:36) S-Corp Tax Optimization Strategies
Managing rental properties in an S-corp, fair market value considerations, home office reimbursements, and leveraging the 14-day rental rule.

(38:33) S-Corp Fringe Benefit Deductions
Nature's strategies for managing business expenses include reimbursing travel and cell phone costs for tax benefits.

(45:28) Bookkeeper Book Release Celebration
The 4-Hour Bookkeeper is now available for pre-order and aims to empower small business owners to manage finances efficiently.

Transcript

Eric Broughton: [00:00:00] Bear this in mind, I'm saying this very deliberately. If you are a company owner, sometimes it is best to buy your own stuff. And here's why. You go on a trip. and you haven't quite figured out how to way to incorporate business to it. 

Melissa Broughton: Okay, 

Eric Broughton: buy it on your personal credit card, continue to work on it. Let's say that you're there on the trip and you figured out, well, geez, Louise, this is how I could turn this into a business trip.

Or you figure it out the week before or something like that. I know how to make this a business trip. Fantastic. Continue to pay for everything on your own personal cards. And then once you get back home, submit to your own company, a reimbursement request for the travel expenses. That is one route to get travel expenses reimbursed back to you as an individual from the company.

Melissa Broughton: Hello and welcome to The Real Buzz [00:01:00] taking the sting out of taxes 

Eric Broughton: brought to you by Busy B Advisors. 

Melissa Broughton: I'm Melissa. 

Eric Broughton: I'm Eric. 

Melissa Broughton: He's my husband. 

Eric Broughton: She is my wife. 

Melissa Broughton: Together we're your hosts. informative and 

Eric Broughton: fun 

Melissa Broughton: podcast where we share forward thinking strategies 

Eric Broughton: to help you get organized, 

Melissa Broughton: plan ahead and ultimately 

Eric Broughton: pay less in taxes.

Melissa Broughton: Welcome to another episode of The Real Buzz. I am Melissa. 

Eric Broughton: I am Eric. 

Melissa Broughton: He is my husband. 

Eric Broughton: She is my wife. 

Melissa Broughton: So, our last episode we talked about some tax advantages for Schedule C. business entities and we gave some examples about those but today I thought it would be interesting to dive into some tax benefits or tax strategies for S Corps and in, I don't know, is it safe to say in [00:02:00] the majority of cases that we really Recommend S Corps for our clients?

Eric Broughton: Yeah, it's, it's a core strategy to move from being a sole proprietor or even a partnership over to an S Corp, if it makes sense for your company to do so, only because of the tax advantages of getting away from the. sole proprietor, self employment tax. 

Melissa Broughton: Right. That 15. 3%. 

Eric Broughton: Which is on all profits, not just what you're going to pay to yourself with big quotes, but all profits.

And then partnership is all money from the partnership, whether or not you've collected it, is taxed. 

Melissa Broughton: Right. 

Eric Broughton: So, you know, those are like 100 percent taxed up in advance and you, you may not have even collected that money. 

Melissa Broughton: So you said something interesting and, and I like that because I will talk to people and it's, I'll say alarming to me when I [00:03:00] talk to somebody and they say I'm an S Corp but I have no idea why.

And so that means, you know, somebody set them up with a corporation. Somebody convinced them that it was a good thing to do. It's totally possible that they've forgotten why, but I definitely think we provide a lot more hand holding and a lot more of an explanation to our clients. to make sure they understand the reason why they're electing an S Corp as their entity.

Eric Broughton: Well, whenever I help a client set up an S Corp, I always walk them through what I refer to as the do's and don'ts that specifically have to do with tax related stuff. And I, you know, I, I stay away from the realm of the whole giving legal advice and I'm not, that's not what we do, but what I do is I start walking them through what happens with an S corporation.

The expectations of the IRS and then the expectations of the state entity that they are interacting with because that's where their corporation is registered. 

Melissa Broughton: So you're talking about [00:04:00] compliance? 

Eric Broughton: Being in compliance and watching out for the red zones or pitfalls. That a lot of smaller corporate owners fall into where then the IRS or state agency says, you know, we're going to dissolve your corporation because you weren't, you weren't functioning within the parameters and you weren't acting as we have laid out the expectations for corporations.

And it's not like you're given an education on that if you go to like some online source and just open up a corporation. 

Melissa Broughton: They don't, they don't, 

Eric Broughton: they don't give you anything. They don't tell you nothing. Whether you're, they don't, they don't tell you the difference between an LLC and an S Corp. They don't tell you what you need to do to maintain an S Corp.

And they don't offer that because that falls into the realm of legal advice. I also don't give legal advice, but I give advice based upon it from a tax point of view. If you do this. You can maintain the corporation and maintain a positive tax structure. If you don't do this, the S Corporation has the possibility of being [00:05:00] dissolved and you will then suffer.

negatively in the taxes. So that's, that's, those are my major talking points. 

Melissa Broughton: So the S Corp straight off the bat gives somebody, or at least this is what I feel like listeners are going to hear, an S Corp gives somebody a 15. 3 percent tax break because they're no longer subject to self employment. That's great, of course.

However, there are some business owners who, you know, maybe an S corp isn't the best choice for them. And so let's talk about those because I know a lot of it is all about profitability, right? If your business hasn't hit a certain level of profitability, it doesn't necessarily make sense to become an S corp because the amount that you'll pay to, at least in California, the amount that you'll pay supersedes what you would be saving even with that 15.

3 percent savings. 

Eric Broughton: You know, I still think that I have not necessarily encountered a situation where it was [00:06:00] better for someone to stay as a sole proprietor versus an S Corp, unless it came down to how much that company made. 

Melissa Broughton: Okay. 

Eric Broughton: That's, that's more if, if the company is showing a level of profitability and you're getting over that 85, 000, 110, 000, 150, 000 range, then you should immediately be making a pivot from being a sole proprietor or a Schedule C filer.

And moving over to being an S Corp. Because an S Corp, one of the things that you need to do is to pay yourself a wage. Right. And that's how you can control how much you'd pay to yourself. That, that 15. 3 percent doesn't necessarily go away. It kind of, it kind of asserts itself in a new way. Instead of it being on all profits.

It's only on what you declare to pay yourself. 

Melissa Broughton: So you say one of the things you need to do. I look at that as one of the things you get to do because I think for a small business owner to be able to be on payroll and to pay into payroll taxes and things along those lines, I know it makes people grumble, [00:07:00] but I think it's, there's all kinds of benefits to doing that as opposed to taking draws, which is what you're doing when you're Uh, Schedule C filer.

Eric Broughton: When moving from Schedule C to S Corp, you not only get to set yourself up as being a W 2 employee of your own company, which comes with a wide variety of tax strategies that open up, but it also puts you in the same realm as everybody else that has a W 2. So, you know, you're looked at, and I hate to say this, but banks look at you more favorably because you're not a sole proprietor, you're a W 2 employee.

And of course, inevitably they're going to learn that you also own the company. So then they're going to take that as a factor into effect. But if you've been in business for five years and you've been paying yourself as a W 2 employee and giving yourself raises, you know, over the past five years, just like you would with any other employee.

You know financial institutions will look at you more favorably 

Melissa Broughton: absolutely because they 

Eric Broughton: see you as a solid earner. They see you as someone who is, [00:08:00] is running their own company. You're making money, you're paying your debts and you want to expand or you want to do something else with money. They're going to loan you.

They, they're going to see, they're going to view you as being a more successful option than just someone who's a W 2 employee. 

Melissa Broughton: Well, it's kind of like a double gold star, right? I just got really excited about this because we've seen it for ourselves, but we've also seen it for clients of ours that are S corps, where they go to get funding, they operate as an S corp, and they're on payroll.

They've been giving themselves. Reasonable wages over the last few years as the same that they would for an employee. And the institution that they're going to for a loan says, you know, okay, you, you meet the wage requirements for whatever this loan is that you're looking for. And it, it also shows kind of an extra bonus that you have a company that's in good standing.

So, and we're, we're not going to get into financing or anything like that here. But it's kind of like a double bonus there. So there's lots [00:09:00] of benefits to it. One of the things I do want to touch on before we get into the strategies is that it takes time to establish an S corp. It's not an instantaneous.

You let's say call us because you, I think, wow, this sounds like something that I absolutely need to do. I want to elect my company or however I'm going to say that I want to, I want to become an S Corp. They reach out to us. It's not instantaneous. It's not just to fill out a form and the next day it happens.

What's the timeframe and what's kind of the. I don't know, the interesting thing that happens during the year where you've been a Schedule C filer at the beginning of the year and an S Corp maybe towards the end of the year because you did a mid year election. 

Eric Broughton: Yeah, if you make the change up from being a sole proprietor to being an S Corp owner in the middle of the year, your cut point is going to be the first day of the month that you became a corporation.

That's kind of the cutoff point, and that's actually the cutoff point for all of your [00:10:00] financials from being a sole proprietor to being an s-corp is the first day of the month that you became a corporation. And that's kind of how I, I, I view it for my clients. I say, okay, the first day of, you know, your, you were incorporated May 7th, your first day is May 1st, and everything from May 1st going forward is S corp.

Everything from April 31st going back is under Schedule C. And, you know, you have to start doing the separation of, and somewhat of a popular term, but just separation of church and state between your S Corp and your sole proprietorship. Right. And the, like, the biggest thing is, is you, you set up the corporation and you open up new accounts.

with the new EIN number versus your social security number that you were using beforehand, or if your schedule C had an EIN number, you're going to want to close out those old accounts and open up new accounts. Why? Because you became a new business entity. You want to start off with books that are fresh from that [00:11:00] day going forward with nothing from the past.

Melissa Broughton: So, I see that we could really go down a whole rabbit hole on setting up an S Corp and things to do when you're setting up an S Corp and things to expect, and I don't want to take us too far down that rabbit hole, but, but, 

Eric Broughton: I mean, it could change to be S Corp strategy usage to S Corp and how to actually start it off.

That's a whole new episode. Right. 

Melissa Broughton: S Corp compliance is a whole new episode. Getting off on the right foot. So, we're not going to go too far. To that today, but I promise we will do that in a future episode. So let's dive into some strategies for an S corp. So if you're, you know, if you're, if you're at the, I'm going to say, I'm going to say if you're at the level of you're making a profit of 60, 000 or more, and I know you balk at me about that amount, but if you're making 60, 000 or more in profit and you anticipate that your business is going to be doing that well or better.

In the following year, I think it makes sense to at least start [00:12:00] investigating into becoming an S corp. And that's my last point on becoming an S corp. So let's talk about strategy one. You're an S corp. You're a business owner. That's, you know, established yourself as an S corp. You've, you've done the transition, you've done all that stuff.

So strategy one is, is actually interesting, and I think we need to go back to, let's talk about that an S Corp is a pass through corporation, and let's talk about what that means, because strategy one goes straight into that. 

Eric Broughton: So a pass through entity, no matter what its type, means that if files Its own tax return, but it doesn't pay its own taxes.

It generates what's known as a K one and that K one will go to shareholders of said partnership or S corporation. And that K one is based upon your percentage of ownership. So if you own 50%, 50% of the profit or 50% of the losses get reported on a K one, that then you add onto your tax filing. [00:13:00] And it can either add to your, your AGI, or if you have shareholder basis that's high enough to afford it, the losses can then also be written off against your AGI.

So it's a really a wheeler woe situation in regards to how K 1s function. 

Melissa Broughton: Well, I think that it means that you actually have to take an active role in your finances, right? You can't just kind of bury your head in the sand and wait until the end of the year and just say, well, I became an S corp and all of these wonderful things should be, you know, happening that IRS and Ed McMahon are going to show up at my door with balloons and say, you've won.

It doesn't work like that. No, so 

Eric Broughton: the first strategy is, you know, setting yourself up and paying yourself a good wage. 

Melissa Broughton: Your goal with the S Corp is to get it as close to zero as in no necessarily profit, but not necessarily a huge loss at the end of the year. 

Eric Broughton: [00:14:00] Yeah, that means you managed everything going in and out to, to a good degree.

It's tough because sometimes you think to yourself, you know, it's November and you've got your numbers all kind of locked in. And then all of a sudden you have like three unexpected contracts come in and pay you 50 percent value in December. It's not like you're going to tell no to your clients. No, you can't pay me yet.

Melissa Broughton: Right. 

Eric Broughton: Or at least you don't want to tell your clients, no, you can't pay me yet because it messes up my tax strategy for the year. So I mean, you plan for the best eventualities and you try to narrow it down as much as possible, but it's kind of more important to have the baseline stuff into place than to worry about whether or not the, at the end of the year, the company is going to show on its books, it's a profitable or it has a loss.

Melissa Broughton: So that leads us right into strategy one. It is one of the items that is a requirement if you become an S Corp. As an owner of the S Corp, you have to pay yourself a [00:15:00] reasonable salary. And the IRS's guidance on that is just as vague as what I just said. You have to pay yourself a reasonable salary and you, you don't want that to change.

We don't want that to change. There are people that say that they wish that there was some guidance on that. And I'm going to say. 

Eric Broughton: There are some companies that have tried to establish a market base for what is reasonable salary. And it, it, it really just depends upon who you interact with. Because reasonable salary for a first year corporation is vastly different than a reasonable salary offered by a corporation that's been in business for 5, 10, or 20 years.

Melissa Broughton: Right, because you don't want to, you know, throw the baby out with the bathwater. You don't want to overspend to where you've Robbed your business because you're stuck on this life to pay myself what I would be making if I was Working think about it 

Eric Broughton: this way those all those early on tech companies in early 2000s.

They didn't pay these exorbitant wages They actually paid somewhat [00:16:00] lowball wages, but they offered a lot on the back end, right? Right. So then the corporation could be doing that. It could be offering things on the back end. That's definitely a discussion to be had, but for a reasonable salary, you know, if you kind of look at it, what is reasonable?

Reasonable in California is gonna be vastly different than what's reasonable in Montana. 

Melissa Broughton: Sure. So 

Eric Broughton: you really kind of have to take it into account that if this is a position that could be done by someone remotely, Then maybe you should be looking at hiring someone, with big quotations, at a reasonable salary in Montana.

And then that's kind of the kickoff wage point, is that you're then paying yourself that, and if necessary, then taking draws from the company. I 

Melissa Broughton: mean, we've certainly found, because all of our bookkeepers are remote, we've certainly found that there are certain states that are far more advantageous than California to hire people.

Not that we're against hiring people from the state of [00:17:00] California, but state of California, you know, wages that are being demanded are maybe 10 to 15 an hour more then other states. Well, in 

Eric Broughton: other states don't necessarily have all of the additional legislative. Um, and then we have extras 

Melissa Broughton: that 

Eric Broughton: come into play.

No need to go dig it down in a hole like that, because the strategy is just setting yourself up at a reasonable wage. If your reasonable wage that you're setting yourself up on is to start off with, remember in the following year, you can increase it and things of that nature. And because you are also the owner of the business, you can take distributions from the company as well.

Melissa Broughton: can afford them, right? So you're paying attention to your financials. You see that your company can afford to pay you out a distribution. You can, you can absolutely still do that. You can also, and this will lead us directly into, there's been such a lead up to this strategy. One, you can also adjust your salary throughout the year.

So, you know, let's say you're [00:18:00] that real estate professional. I know that, that I talk about them a lot. I love working with that demographic. Let's say you're a real estate professional. Let's say, you know, you're, you're six months through the year. You've got yourself on a salary, you're paying yourself that salary, and maybe you have a month that just doesn't quite go as expected.

You can absolutely make the adjustment to reduce that salary. So. Strategy number one is actually reduce an S corporation owner wages. So let's talk about that for a second. 

Eric Broughton: Yeah, so when you do a sole proprietor, any money left over is considered to be your wages. So you're taxed on it at 15. 3%. You're going to change it from being all of your profits left over to setting yourself up as a, in a reasonable salary.

That only that portion then gets taxed at 15. 3%. 

Melissa Broughton: So, specifically an S corporation and talking about cutting payroll taxes, do you think that's beneficial? [00:19:00] 

Eric Broughton: It is beneficial because you're moving away from paying the entirety of all of your profits at 15. 3 percent as a sole proprietor, to then being an S corp owner and paying only a portion of that in, in payroll taxes.

And then everything that you're paying also becomes a business related deduction. 

Melissa Broughton: So I'm going to say right here that my partner did not necessarily get as excited about Strategy One as I thought he would be. So we'll just move on to Strategy Two. So Strategy Two is the ability to deduct S Corporation owner health insurance premiums.

Eric Broughton: Okay, so that is where you are the owner of the S Corporation and you're also an employee of the S Corporation. You have to get insurance and the specific thing about the insurance and it's really kind of. Kind of a twist and turny path is that you have to get insurance like in the state of California You got to have health insurance.

Let's just let's say that so you're on [00:20:00] w 2 and you're getting health insurance for yourself and The premiums are then being paid by the company. Okay, that doesn't get listed as a standard w 2 deduction It gets listed differently. So the company gets to write it off, but not as healthcare. They have to write it off as wage compensation.

Melissa Broughton: Got it. 

Eric Broughton: So then that wage gets added on to your gross wages for the year. It doesn't increase what you owe for federal tax or anything else like that. Why? Because once the W 2 gets reported on your personal taxes, you then do self employed health insurance deduction. So it's really a roundabout way to do it, but, or having is, it's really a roundabout way that they've forced us to do it.

But, uh, By doing it that way, you ensure that you're in compliance, not only with having health insurance, but having the company be able to write it off, and then you get to deduct its value on your taxes. 

Melissa Broughton: And so this is where I should pause and say this is our [00:21:00] disclaimer of this episode is for entertainment purposes only, not to say that these aren't real and legitimate strategies.

But there are intricacies with different strategies that it is absolutely not something that you should be trying to do on your own or without the guidance of a tax professional. 

Eric Broughton: Which takes us into strategy three, which is employing your child. 

Melissa Broughton: Ooh, as a tax professional. 

Eric Broughton: You can employ your child. If you have a business, you can employ your child.

You can go up to this year's level of, of single. deduction, 

Melissa Broughton: which is just under 

Eric Broughton: just under it's right around the 14, 000 mark right now. And that means you could pay your child up to 14, 000. You generate a W 2 for them and all that fun stuff, but you don't have to pay federal taxes. Now you have to do the social security and all that fun stuff on the back end through your corporation, but you don't have to pay anything on the federal side.

And the fact that they're now also a W 2 employee. [00:22:00] gives them the benefits of certain tax strategies, but also of certain investment strategies such as your children now can have a Roth IRA. 

Melissa Broughton: Well, it's an excellent way to save for college or to help them to save for their first home or their first business, right?

Eric Broughton: Right. They could follow in your footsteps and start up their own business. And they've got plenty of seed money that you've been setting aside since they were three years old, right? Right. So 15 years in a Roth IRA is nothing, nothing, nothing to sneeze at, especially if you're putting in a couple of thousand dollars every year, which let's be honest as a business owner, that that should be something that is relatively easy to accomplish, especially if you're paying them.

You know, 14 up to $14,000 out of the company, off the company books. Anyways, you should be able to take a portion of that and put it into a Roth ira, 

Melissa Broughton: right? So it's a nice hunk that you can take off of that profitability of your s corp of, we're gonna call it right around $14,000. You can automatically pay that to [00:23:00] your child for doing legitimate work for your business and.

It comes right off the bottom line as a deduction because it's a, it's a payroll expense, right? 

Eric Broughton: Yes. Yes. So, exactly what you said. Love it. I 

Melissa Broughton: love it when I hit it on the head. Yay! Exactly what I said. Perfect. So, number four. You don't like, I actually was excited about it when I went to a class on it, but after you and I talked about it, I understand why it's not something we necessarily advise, but it is something that's getting some momentum, we'll say.

And I think we should talk about, you know, the good, the bad and the ugly. 

Eric Broughton: So strategy number four, sell your home to your S Corp before converting it to a rental property. I am not necessarily opposed to this because what it can do Wait, you're not 

Melissa Broughton: opposed to it? 

Eric Broughton: I have reservations in regards to one aspect, but it's, it's specifically talking about, you're not putting your [00:24:00] home in the S Corp.

You're putting a home that you're going to turn into a rental. 

Melissa Broughton: Okay. So you're taking an asset. 

Eric Broughton: You're taking an asset, not your, not your primary residence, but you're taking an asset. And that's, that's, that's a different conversation. I've had some conversations where people are saying, well, I'm just going to put my home into the S corporation.

I'm like, Oh no, no, no, no, no, no, no, no, no, no, you don't, you don't do that to your primary residence. 

Melissa Broughton: Well, it's not a just, right? It's, you're not just going to do it because there's definitely steps that they're taking. You need to follow. And I think that's why you had reservations about it. So talk about that process and what that would look like to sell your rental property to the S Corp.

Eric Broughton: So you have a property it's in your, it's in your possession. It's either considered a primary or a secondary residence, and you're going to convert it into a rental. Fantastic. Then what you do is you sell. the property to the S Corp and you take advantage of the home sale exclusion. 

Melissa Broughton: Okay. So do you sell it for fair market value?

Eric Broughton: Sure. You sell it [00:25:00] for fair market value. You sell it for appraised value. You just as if you just sold the home outright and you got rid of it. End result of where it goes to, it doesn't matter in this part of the equation. You set it up so that you take advantage of the 250, 000 or 500, 000 automatic deduction against the profits of the sale of the property.

And 

Melissa Broughton: that's all about capital gains. That's 

Eric Broughton: all about capital gains. So let's say that after you add it up, what you've purchased, what you purchased it for plus whatever you've spent in maintaining it over the past 10 years means that you've got a profitability of say, 250, 000. We're 

Melissa Broughton: going to make it real simple.

Who knows what this house cost us. Right. 

Eric Broughton: Doesn't matter. It doesn't matter. Your net profit is 250, 000. 

Melissa Broughton: Now, does your business then have to have Hold on. We're not there yet. We're not there yet. 

Eric Broughton: Not to the business yet. Nope. You still personally own it. 

Melissa Broughton: Okay. 

Eric Broughton: You're selling it to someone else. 

Melissa Broughton: Okay. 

Eric Broughton: You have 250, 000 in profit, but because it was one of your homes, you get a 250, 000 exclusion against [00:26:00] that profits.

Melissa Broughton: Okay. 

Eric Broughton: So then that goes away. So now you have no tax liability for selling the home to someone else. Now, let's talk about the S Corp buying it. The S Corp buys it at the appraised rate that you're giving to it, that you're selling it to. But what if no money actually exchanged hands? You then have 

Melissa Broughton: What?

Eric Broughton: You have basis 

Melissa Broughton: Okay. 

Eric Broughton: That now within the corporation from the sale of that property. 

Melissa Broughton: Okay. 

Eric Broughton: That then you can then take against. 

Melissa Broughton: I literally have so many questions. And I feel like this one could be a whole episode. I also feel like this one. I don't want to dig too far into it. No, I know you don't. I also feel like this would be a good one for you to whiteboard.

For people to kind of see it visually. Cause I get it. But I can feel the questions, 

Eric Broughton: right? So we're just going to go with that. If people have questions, they can reach out to us at busybeadvisors. com. I can help work with them on it. If this is a scenario that they're actually living in, right. Not necessarily as a fun exercise.

So then you sell [00:27:00] the property over, you don't actually exchange money out of the S corporation to you. You take it in the form of a shareholder basis. 

Melissa Broughton: Okay. 

Eric Broughton: So now the company has a rental property that they start renting out. That they don't. Because they technically have a loan on and they owe the owner for putting this asset into the company.

Got it. And the owner can then take this value of asset out without tax liability anytime down the road. That's fun stuff. And then the company starts treating that rental property as a money making asset. All told, all of these strategies in regards to For the 

Melissa Broughton: company, it becomes a money making asset for the company.

For the 

Eric Broughton: company. and the end result or the end benefactor of what the company's profitability is. you. So ultimately it's making money for you, 

Melissa Broughton: right? So there's a few different scenarios where this could work. I think one of the scenarios is the no cash changing hands, but I think another scenario, or at least how I had envisioned it 

Eric Broughton: burying [00:28:00] 250, if you're married.

In second resident home sale exclusion options. 

Melissa Broughton: So for the, and this is kind of my last question on this one for the selling your rental property to your S Corp. Can you just pick any price or does it have to be fair market value? You 

Eric Broughton: do an appraised value. 

Melissa Broughton: Can it be? So let's say your S Corp has an additional.

200, 000 that it needs to get rid of to not have to pay taxes on that 200, 000. And you have a rental property that's fair market value is 300, 000. Could you sell it? To the S Corp for 200, 000 or would that cause questions and eyebrows to be raised? 

Eric Broughton: That's situational. Okay, I Mean you're right in the ballpark, but I don't want to give a flat out yes, 

Melissa Broughton: okay So but well in truth none of these are flat out yeses or no there's so many different variations, and so that's That's definitely where you should.

Well, and 

Eric Broughton: it's not like they wrote the tax code [00:29:00] so that it was easily understandable by everybody. On 

Melissa Broughton: purpose. Okay. So number five, reimbursement of home office expenses. And we get the home office expense question a lot when we have people that just, we tell everybody if you have questions, email us and they do.

Eric Broughton: Like the home office expense exists out there in, in more than one format. The primary format that everybody knows about or everybody's heard about is the home office expense that you can write off as a sole proprietor of a business, which dollar for dollar is not the best write off anyways. I'm not a big fan of that write off only because it's such low value.

Compared to actually what it means to have a home office, you have a business office, a physical address for the business, that's your brick and mortar location. And then you have a home office address. Having that home office is really important because you need that for your business to continue functioning, functioning, you know, throughout everything.

The better route is if you're an [00:30:00] S Corp and you have an employee. 

Melissa Broughton: The better route is always if you're an S Corp. 

Eric Broughton: You're an S Corp. 

Melissa Broughton: Yes. 

Eric Broughton: You're an employee of your S Corp. 

Melissa Broughton: Yes. 

Eric Broughton: You as the board member, well, the collectively the board, make a decision that you're going to do a compensation package for all employees.

And part of that compensation package is a home office reimbursement. Home offices, especially for, for like big corporations when, during COVID, when they had people working from home. They weren't paying you for the use of your space, they weren't giving you money for your increased power bill, increased gas bill.

Why? Because they were seeing it as you were being, you were doing all right, because you didn't have to commute. You weren't spending much as on gas. Yeah, there was all kinds of, there were all kinds of justifications for it. But home office reimbursement from a corporation to an employee can, is, is something that really can be set by [00:31:00] either.

A number willy nilly, which I never recommend. 

Melissa Broughton: We don't like the willy nills. 

Eric Broughton: Or having it based in like a fair market appraisal or evaluation of your home office space versus something that if the company wouldn't rent it on their own. 

Melissa Broughton: So we've talked about the Augusta rule. We've talked about comparing fair market value in so many different scenarios.

How, how, what, like what radius are we talking about with fair market value? Two miles, three miles, five miles. 

Eric Broughton: Your zip code and one away. Okay. So if you wanted to look at it, you could say your zip code and one zip code step around you in a radius circle. Why? Because that's the average commuter distance for most people.

Melissa Broughton: Sure. 

Eric Broughton: You, you commute anywhere from 3 to 25 miles one way. And as long as you still kind of stay in that radius, you could, you could find fair market value for a furnished office space in a good neighborhood near [00:32:00] you or around you or in your neighborhood. And you get three of those, you average it out.

And then that becomes your baseline for establishing why you're paying yourself this amount of money. 

Melissa Broughton: And we'll, we'll get together after the show and we'll write up some show notes on the reasonable or I should say fair market value of, of rental properties in the area and kind of what radius to search for and what questions to ask because there's, You know, there's, there's other things to be considered if you are going to rent a space and it's, you know, within two miles from your home office, you're looking at that space for a comparison, but that space doesn't include utilities.

That's where those kind of those other things that you should be able to write off. 

Eric Broughton: So a lot of furnished office spaces don't include internet 

Melissa Broughton: or telephone 

Eric Broughton: or telephone. So those are two expenses that you will want to break out and pay either through reimbursement or direct payment from the [00:33:00] company.

So just have those in mind. for that in particular. 

Melissa Broughton: Okay, strategy number six, rent your home to your S corporation. 

Eric Broughton: That is just another name for Augusta. 

Melissa Broughton: Right, it is. Right. It is. It's the 14 day rental rule. It's the 14 day rental rule. Which is, which is something that I get all kinds of excited about.

We've got a free webinar that's out. On the Augusta rule, specifically, if you're, 

Eric Broughton: we've talked about it multiple times on previous broadcasts. 

Melissa Broughton: I'm pitching my free webinar that I put together. It's very entertaining. No, it's actually really interesting because we get a lot of questions about the Augusta rule, the 14 day rental rule in which you can rent your personal residence to your business meetings 

Eric Broughton: or functions and events, 

Melissa Broughton: right functions and events.

And it's definitely one of those things that. It takes a little bit of explaining to wrap your brain around, and rather than kind of repeating it over and over again, we put together a webinar on it. So, if you're interested [00:34:00] in gaining access to the webinar, we'll make sure that we have a link in the show notes.

We're not even going to touch on the webinar. Strategy six then. 

Eric Broughton: Yeah, because it's we've already talked about it. We've talked about 

Melissa Broughton: it 

Eric Broughton: And there's lots of resources that we have out there in regards to it So we're going to move to strategy number seven 

Melissa Broughton: and that's reimbursement of depreciation expenses 

Eric Broughton: this is If you use your home, or you use your vehicle, but the vehicle or the home is not owned by the corporation, this is where this particular one gets very sticky.

Melissa Broughton: Okay. 

Eric Broughton: Because you have to be careful who owns the asset. 

Melissa Broughton: Right. 

Eric Broughton: Right, that has to be delineated like flat out. There can be no ifs, ands, or buts that either you own the vehicle or the company does. 

Melissa Broughton: So, tell me a scenario where it works. 

Eric Broughton: A scenario where it works is where the company can reimburse you for depreciation of an asset that's not being [00:35:00] reimbursed to you in another way.

Melissa Broughton: Okay, so is this of benefit because you get to take your depreciation? 

Eric Broughton: Well, it's anything that falls under section 179. That could be, that could be a personal piece of property. That could be a personal equipment such as a vehicle or a tractor or something else that's being used for company purposes, but you still own it.

Melissa Broughton: Okay. How is it a benefit? I know that that sounds like a silly thing because I'm the one who put the list together, but I think there's a lot of people that might be in their cars scratching their heads at this point. 

Eric Broughton: So when you take mileage, for instance, if you take mileage reimbursement for a vehicle, if you're an employee of a company, part of that mileage reimbursement that the IRS sets aside is that a portion of that is to cover your depreciation.

Melissa Broughton: Okay. 

Eric Broughton: So. Vehicles kind of already have that built into it where a company can pay you reimburse you for the depreciation of an asset Because it's considered that a piece of [00:36:00] property or a piece of equipment only has a certain amount of life to it. 

Melissa Broughton: Okay. 

Eric Broughton: And so that becomes more of a situational. So Strategy 7 is really something that comes into play if it's situational.

Melissa Broughton: Well, it's situational. In the fact that it really only applies to someone who owns an S corp and has an asset that is depreciated that the business uses, but the business doesn't own they personally still own. So that's going to be a very specific. 

Eric Broughton: Yeah, it is specific because strategy number eight, which I'm going to.

Push us towards actually talks about vehicle expense and reimbursements. And so seven is kind of a catch all for everything. That's not a vehicle, right? So it may not even apply to you. And in a lot of situations, it's not going to, 

Melissa Broughton: I can't think of any of our clients that it would apply. I 

Eric Broughton: do. I have a client that he does gravings and, and carvings and things of that nature.

And he's got a [00:37:00] laser carver and he owns it. But the company does not. 

Melissa Broughton: Interesting. Yeah, 

Eric Broughton: he, because he owned it out right beforehand and is in his company, doesn't need to own it. And he's, he's somewhat resisted. And I said, well, at least have the company reimburse you for the wear and tear on it. If you're not going to have them rent it from you directly, then, you know, how about wear and tear and, and, and maintenance and stuff like that.

So we, we, we negotiated on his home property, how to work it out. But. Strategy eight, reimbursement of vehicle expenses that comes in. It's like, if you've got a heavy vehicle that the company owns, that's not going to be a way for you to, that's not a strategy for you to take advantage of something because the vehicle's already in the company, right?

So all the wear and tear, the maintenance, mileage, asset depreciation, everything is going towards the company already. This is talking about a vehicle that you. own that you use [00:38:00] for company purposes but is not owned by the company. So the company then reimburses you for the qualifying factors of, of reimbursing you for mileage and stuff like that.

So on this personal vehicle, you would track your mileage, but then also have the company cover the costs of the vehicle. And then at the end of the year, you would just take the greater of the two write offs. You don't take both of them, but you take the greater of the two. 

Melissa Broughton: Right. 

Eric Broughton: And mileage, traditionally.

comes out to be higher. Now, in California, especially with increased gas prices and things of that nature, increased registration, gas prices, costs of maintenance and stuff like that, that really throws off. what the value is comparative. So in some instances, like a company in California could have a couple of, of situations where that reimbursement actually is, is not as good as the actual expenses are.

Melissa Broughton: Well, I think this kind of leads us back to [00:39:00] the, if you've elected to become an S corp, you've, you've gone, you've moved away from, um, From the point where you should be doing your taxes on your own. I mean, the software programs that are out there, although they may be good for preparing and I say good with kind of a furrowed brow because there's limitations that are placed on those software programs to kind of keep you from getting into too much trouble.

It might work if you're, you know, you work for a job and you're a W2 earner might even work if you're a sole proprietor and you're, Acting as a Schedule C business owner, but they're definitely not going to work with depreciation schedules or anything along those lines. And I will say that depreciation is definitely something that can get you in a bit of trouble if you don't kind of handle it.

Eric Broughton: do it correctly, they'll, what they'll do is they'll just have you refile with the adjusted depreciation, which is always going to be a penalty in your in Of course. They disallow 

Melissa Broughton: the [00:40:00] depreciation, which is terrible. So, so Do things right, take the time to find a tax professional, maybe it's the team at Busy Bee Advisors, that you feel like you can communicate with, that you enjoy working with, and you've made the, the jump, you're, you're running a successful business.

Treat your financials for that business with the respect that they deserve. That's my little soapbox. 

Eric Broughton: You always hear about people that have companies and stuff like that say oh, no worries I'm gonna put it on the company credit card. 

Melissa Broughton: Yeah, 

Eric Broughton: I'm gonna I'm gonna buy my ticket to Aruba on the company credit card This 

Melissa Broughton: leads us right into nine, which is reimbursement of travel expenses 

Eric Broughton: So in that particular one if you bear this in mind, I'm saying this very deliberately If you are a company owner, sometimes it is best to buy your own stuff.

And here's why. You [00:41:00] go on a trip and you haven't quite figured out how to incorporate business to it. Okay. Buy it on your personal credit card. Continue to work on it. Let's say that you're there on the trip and you figured out, Oh, geez Louise, this is how I can turn this into a business trip. Or you figured it out the week before or something like that.

I know how to make this a business trip. Fantastic. Fantastic. Fantastic. Continue to pay for everything on your own personal cards. And then, once you get back home, submit to your own company a reimbursement request for the travel expenses. 

Melissa Broughton: Okay. 

Eric Broughton: And that is one route to get travel expenses reimbursed back to you as an individual from the company.

And then if it's something that you know already about, then have the company pay for everything in advance. And sometimes it's better to have the company reimburse you. Because when companies reimburse for something, they generally just need a receipt. 

Melissa Broughton: Correct. 

Eric Broughton: Right? When companies pay for stuff, sometimes they need receipts.

[00:42:00] Sometimes they need follow up emails. Sometimes they need the documentation requirements for companies paying for things directly. Sometime is greater than them just reimbursing an employee for that same, same expense. Right. So that is definitely something where you want to have a conversation with your tax professional on is should I be having the company reimburse me on this particular thing, or should I have the company pay for it, you say, Oh, well, we have a company, we have a company policy that cell phones are reimbursed.

Melissa Broughton: And that's the explanation that's needed. 

Eric Broughton: And then they go, Oh, okay. And then move on. Because they're just making sure that the numbers are accurately being reflected. They're not there to do an audit. They're just there to make sure that the numbers that you're reporting to them are accurate. That's it.

Melissa Broughton: Right. Because they're doing their due diligence. And 

Eric Broughton: so in strategy 10. 

Melissa Broughton: Oh, we're going to get to 10. 

Eric Broughton: When your corporation provides an employee with a smartphone or similar telecommunications equipment. primarily [00:43:00] for non compensation business reasons. It is considered a work condition fringe benefit that is excludable from income.

That is fancy talk for cell phones can be reimbursed. They can be reimbursed not only for the fact that you went and purchased your cell phone, see strategy seven, but also for strategy 10 of the actual expenditures from the cell phone. Now the company can go one of two routes. They can, you can, you can have the company then reimburse you for your cell phone bill because you paid it on a monthly basis.

And there's strategies to enact in regards to that. That could be more beneficial. Or the, the, the company can then pay you kind of a flat rate back for your cell phone. 

Melissa Broughton: And I think this goes along to kind of the overlying theme that I'm hearing and that I, you know, I know it's the overlying theme of there's not necessarily anything that we're talking about that's this [00:44:00] brand new, never heard of it thing.

In fact, the Augusta rule is probably the only one where I come across people who have never heard of it. And it really takes a little bit of explaining to, for somebody to wrap their head around it. If they're hearing about it for the first time, but it's about doing what you're already doing. So traveling or having a cell phone and just treating it.

Just a little different. 

Eric Broughton: Yeah. So there can be bit general, generally speaking, there are a fair number of things that are referred to as fringe benefit deduction. And cell phone in particular is one to kind of go into one that I've seen used in the past is like California for fast pass in the Bay area.

If your business has you commuting in and out of an area where you need to pay tolls and things of that nature, and instead of paying individually, you get The FastPass, which is a monthly pay system, same thing as your cell phone. You may use it to call your loved one, [00:45:00] but majority of it, you're using it for business related purposes.

How I tell my clients to look at these kinds of situations is this, can your business function without Y? The, or the X. Right. Can your business function without you having a cell phone? No. Can you survive without having a cell phone? Yeah. People do it all the time. They go camping. They go out on the boat.

They turn their phones off. They're on an airplane. They turn their phones off. They leave their phone at home. Whatever, whatnot. You don't need a phone to personally survive. 

Melissa Broughton: But your business does. But 

Eric Broughton: your business needs you to have a phone to survive. And that's where the difference comes into play.

Same thing when, if you start looking at other fringe benefits. Is this benefit? Needed for the company to survive fast pass. Yes, because you're commuting like four times a week Well, just because you personally went and commuted once or twice or three times that month and that doesn't matter It's still covered by the company.

You [00:46:00] don't have to break that stuff down. So think about it from that viewpoint It can the company survive without it? Yes or no that declares on whether or not that is a a fringe benefit deduction or not. 

Melissa Broughton: Okay. 

Eric Broughton: Versus a compensation. 

Melissa Broughton: So we've gone over some really awesome tax strategies. I think that the takeaway point is absolutely none of the strategies that we use or recommend to our clients are a one size fits all situation.

If you're hitting profitability level of, you know, 60, 000 or more in your, in your business, I strongly urge you to consider, Becoming an S Corp and we'd love to be of service. If you have any questions or would like to reach out to Eric or myself, feel free to email us at info@busybeadvisors.com or visit our website Busy be advisors.com.

So. Second book or not our second book, but my [00:47:00] second book just just dropped. We got the box from the publisher. We, we did an unboxing. It was very exciting. So the four hour bookkeeper is available for pre order on amazon. com. Or PDF version of it or an ebook version of it is available for purchase at ineedbookkeeping.

com. 

Eric Broughton: That's fantastic news. I'm very excited that the culmination of all of your work is now bearing fruit in the form of you being able to share your knowledge in part with people that you may not be able to get in touch with on an individual basis. They could actually read this book and they can gain some.

They can gain some insight into how to go about doing their books because a lot of people think they have an idea of how to do their books and then they start working on it and then they get bogged down in the minutiae of bookkeeping or the potential minutiae of bookkeeping and you really have a [00:48:00] great way of looking at it and bringing them back to a global view of rather than a detailed map view of their finances and keep pulling them back to focus on the global view of their company finances, which means that they don't necessarily have to spend so long in the weeds and they can spend four hours.

Um, working on their books for their small business for their home based business and stuff like that. And I think that's fantastic. 

Melissa Broughton: Right. And that was, that was the objective. So we'll probably dive into a little bit more on the 4 Hour Bookkeeper in another episode. But until then, thanks for listening.

Thanks for listening to The Real Buzz taking the sting out of taxes. 

Eric Broughton: If you like what you heard, 

Melissa Broughton: please subscribe. 

Eric Broughton: Please post a positive review 

Melissa Broughton: and share with a fellow business owner or friend. 

Eric Broughton: If you're serious about reducing your tax liability, 

Melissa Broughton: reach out to us at busy [00:49:00] be advisors dot com. 

Eric Broughton: And follow us on Facebook 

Melissa Broughton: and LinkedIn at Busy Bee Advisors.

Eric Broughton: Thank you. The

Melissa Broughton: purpose of this episode is for entertainment purposes. You understand, of course, that everyone's tax situation is completely different and that one tax strategy or suggestion cannot be applied in all cases and that there very well may be variations. Thanks for listening.