This episode of Tax Tuesday with Anderson Advisors attorneys Eliot Thomas, Esq., and Toby Mathis, Esq., tackle pressing issues faced by business owners and real estate investors. From the implications of switching health care reimbursements from a C-corporation to an LLC, to short-term rental strategies, Eliot and Toby discuss the 100-hour participation test and how to select the right property. Other topics include the intricacies of real estate professional status, the deductibility of expenses for damaged properties, and the mechanics of Qualified Business Income (QBI) deductions. Finally, listeners learn about tax management for online businesses (at 46:17) and the potential tax liabilities of renting secondary homes through an S-corp.
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- "I currently reimburse myself for health care expenses through my C-corporation. I have another completely separate business that I run through an LLC registered in Wyoming. Are there any issues if I switch my health care reimbursement from the C-corp over to the LLC?" - It depends- who is it disregarded to? A C-corp can reimburse health expenses.
- "We want to take advantage of the short-term rental loophole strategy. If we buy a house in October and close in November, would I have enough time to reach the 100-hour test? What kind of house should we focus on?? - There are several different tests for material participation, one of them being at least 100 hours and more than anybody else. But there are 7 total tests.
- "Regarding real estate professional status, the code says you have to participate 500 hours materially or have been rep for the last five years." Actually, there are seven tests, but we'll get into that. "Does that mean if a spouse has been a rep for the past five years, he or she can be hands-off for the next three to five years and still claim rep to offset the other spouse's W-2?" - Long-term rentals are passive income normally, but REP status changes that, although it has certain requirements
- "We bought a small house. The house was in a fire and had a lot of damage. We spent a lot of money on structural engineering, services, roof, and other support of construction. This was needed for the safety of workers. They would not be able to work otherwise. My CPA told me I can't take any of those expenses as deductions because I have not rented the house yet. Please be so kind and tell me why I can't deduct structural engineering expenses of more than 12,000. My CPA told me I can only deduct utilities such as water and electricity. That's it." - The code is the code, you can’t deduct for a rental until it is in service…the write-off comes over cost seg
- "Can you go over QBI in detail? And do I deduct 20% QBI from net or gross profit? Also, do I deduct 20% first, then my expenses, or do I choose either 20% or my expenses?" - First you find your net, then there are five different qualifications
- "If I sell a house on an agreement for deed, how are the monthly payments that I receive taxed?" - If you used it as a rental, you’ll have depreciation recapture. “For deed” means you’re selling it over time.
- [46:17] "I'm considering starting an online business. I'd like to know strategies and how to manage taxes as best as possible."- Start by putting it in an LLC, tax it as S or C-Corp, be aware of state requirements…
- "Could I have my S-corp rent my secondary home when the business takes clients on retreat? While this may create an expense on the business side, does it also create a tax liability on our 1040?" - How is the second home currently being used? If it's already a rental, you may hit some limitations…
- "Does changing the floor and painting the walls count as repair, or is it a renovation?" - Painting is usually a repair, you can write that off. Flooring has other requirements.
- "Can I take a six-figure distribution from my S-corp and have it not affect my social security? If the corporation shows a profit and I'm the CFO, will this affect my social security?" You have to take a reasonable wage in order to get that credit.
Resources:
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https://www.youtube.com/@TobyMathis
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