How To Reduce W-2 Taxes By Owning Rental Property

Today’s Tax Tuesday episode answers several listener questions on HSAs, S-Corps vs. LLCs, and reducing your taxes with rental properties. Eliot Thomas hosts, along with Jeff Webb, CFO of Anderson Business Advisors.  Online we have Dana, Dutch, Piao, and Troy - all kinds of resources there to help answer some of your questions.

In this episode, you’ll hear our advice on the tax benefits gained from being an LLC, S-Corp or C-Corp, and we’ll answer a couple questions concerning HSAs - their contribution limits and investing with that HSA money. There are also some questions answered about home offices, ITIN numbers, bitcoin and of course a little bit about short and long-term rental properties and their tax implications. Submit your tax question to taxtuesday@andersonadvisors.

Highlights/Topics:

• "Can you please explain the difference between an LLC, a C-corp, and an S-corp? Can an LLC also be a C- or an S-corp? I understand that C-corps and S-corps are tax elections, but are they also a type of entity?" –LLC is a legal entity, it is not a tax entity. If you want anything else like an S-corporation or C-corporation, you actually have to tell the IRS that, make an election.
• "Are the limits for contributions a monthly or annual amount? On irs.gov, the limit as listed is $3200 for single and $7200 for family." - the contribution limits are annual amounts.
• "My accountant thinks I should switch from an S-corp to a Schedule C," that's a sole proprietorship on the 1040, "because my profits are below $80,000–$90,000, and the S-corp is expensive, and I'm just one person, so I do not want to grow any bigger, and I'm happy with the sales. My question is, what is best for me, not the company? What happens if I switch? What is better for retirement and social security as I am 56 years old?" - You are going to pay for a tax return to the S-corporation that you wouldn't have to pay for extra on Schedule C. There's some work to do to put that Schedule C together. Your 1040 may get a little more expensive. If you have a health insurance plan for yourself that you're paying for, that should be paid for by the S-corporation. It will save you a good deal of money.
• "Can you convert a personal vehicle into a business vehicle if you only use it for business? What if you only own one vehicle? Can you deduct mileage, gas, or anything else?" - You can do that, but you have to actually contribute the vehicle to the business. Because what we don't want is any personal use of this vehicle. The solution is to track your mileage. If you are one who drives a lot, the more you drive, the more mileage, the better this comes out - keeping it in your name as a personal vehicle.
• "Can I reduce my W-2 taxes for my job by owning rental property?" – If you are materially participating in your short-term rental—it's not really a rental to trade or business—yes, the losses from that could reduce your W-2 income. It's plausible, but you're going to have to be within these parameters, short-term rental, or long-term rental and meet the criteria for it.
• "I have a C-corp staffing business. Since Covid, I've been using my home office. The home is in mine and my son's name. How can I count for the space used as an office for a tax deduction?
• “What is your advice for a small business owner on employing people who only have their ITIN number pending the social security number?" -Basically, you're not allowed to have people with an ITIN as employees. They have to have a social security number and be registered in the US to be here.
• "Can you discuss the step-by-step process of completing a 1031 exchange? - The forward 1031 makes more sense, because keep in mind, you cannot touch the cash. You also need a Qualified Intermediary. Determine if you want to do a forward 1031, a regular 1031, or do you want to do a reverse?
• "I have a question regarding investing with my HSA. Does an HSA function like a Roth IRA in terms of paying UBITs (unrelated business income tax)? In other words, if I invest my HSA in crowdfunding or syndication, for example, will I have to pay UBIT?" - You need to be very careful with the investments that you're going into. To your question, yes, it's subject to your HSA, it's subject to UBIT. If you invest in a real estate syndication, those typically run for four to five years. That money's going to be locked up in a hard asset that you can't get to.
• "Can I write off a loss selling my bitcoin with a $10,000 loss? I bought it at $26,000 and bought it right back at $16,000." - It's not allowed for you to recognize a loss on that. You’ve got to wait 30 days.
• "My understanding from a tax perspective, an LLC taxed as a C-corp and a traditional C-corp receive the same benefits such as medical reimbursement, administrative office, retirement plan, et cetera. (1) Can you explain the positions of the LLC taxed as a C-corp? Do I still need a president, vice-president, treasurer, secretary, or just member managed? - Those positions are usually required by state law. It has nothing to do with how they're taxed. It has to do with how they're formed. (2) Why would anybody form an LLC taxed as a C-corp over a regular C-corp? If there is no plan to take it public, why choose one over the other? Cost to maintain, paperwork required, et cetera?" - Yeah, easier form, less criteria behind it, a C-corp is required to have certain meetings, et cetera. You don't necessarily have that with the LLC.
• "Is it best to start an Airbnb business now or wait until the beginning of the next year for tax purposes? What do you think the best options are?" – You don't need to do cost segregation. It's not going to help you, unless you're renting this property out for a lot of money, like it's a beachfront property and a primary or something like that, and you're getting $10,000 a week for it. I would conserve it or save that cost seg for potentially 2023.
• Check out our events coming up later this month.

Resources:

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