Small Business Structure - Choosing The Right Structure For Tax Reduction

Welcome to another episode of the Tax Tuesday show. Host Toby Mathis, Esq., joins our regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to help answer your questions. We send a big thank you to all our people online answering your questions today - Troy, Tanya, Sergey, Ross, Kurt, Kenny, Jared, Dutch, Dana, Patty, and Matthew are all on.

On today’s episode, Eliot and Toby answer listener questions including a very detailed question on inheriting rental properties, a question on crypto-currency and taxes, one on hiring and paying your children, and we answer the title question on structuring small businesses using an S-Corp.

If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

• "What is an installment sale on real estate? How do you utilize it within the tax code?" - An installment sale simply means that you're getting payment over more than one year. It could be for two years, it could be for 20.
• "What happens to accumulated depreciation on rental property when the owner passes away? Does the person inheriting the property need to account for depreciation recapture from the deceased owner when you later decide to sell that property? If the person inheriting the property gets a step-up in basis, does that new basis now become the basis to calculate depreciation on if you keep the property? Can the person inheriting the rental property also have a new cost segregation done? And would that be affected by any cost segregation done previously? Any other tax considerations to be aware of when inheriting rental property?" — It goes away.  Don’t gift it to your kids before you die! Your new value “step up in basis” is what you calculate from.  New cost-seg, yes, nothing relates to the old cost seg.
• "I received a 1099 INT from a bankrupt crypto company I invested with called Celsius." The money on the 1099 never touched my bank account as it is currently locked in a crypto wallet on their website for the last eight months. It was interest from USDC coins I staked, but I left it all in the wallet to reinvest. Am I supposed to pay taxes on this money that I never received, or can I leave it be and ignore it until the bankruptcy is resolved?" – you need to report it and you need to pay tax on it.
• "How does the tax law treat the hiring of children by an LLC? At what age can they be hired? Which circulars discuss this?" - when they're under 18, no Social Security, no Medicare taxes on those, but they must be paid by an LLC that's owned by mom and dad if it's a disregarded LLC or a partnership, and they have to be paid as W-2 employees.
• "I'm using the home office and depreciating part of the house. How will it look on the taxes that the year I sell it?" – I like using the administrative office in the home and having an S-corp, a C-corp, or an LLC taxed as an S-corp or a C-corp, reimbursing me for the value of my space because then I don't have depreciation recapture.
• "Are there any tax deductions for real estate held in a self-directed IRA?” When you see SDIRA, that just stands for self-directed IRA. - you're going to lose out on those big things like depreciation, et cetera, so no tax benefit.
• “I was hit hard with UBIT inside my Roth, where I owed $200,000 on a $400,000 gain. The company is no longer in business, trying to scratch back any part of the UBIT. Is it possible that it happened?”-- It was leveraged. Valerie, this is unrelated debt financed income. Yes, there is something you can do.
• "Can you explain S-corp taxes with shared distribution? When it's time to file taxes, do we pay taxes on all shared distributions?" Do you have to pay taxes on everything you receive or just the profits, et cetera? - An S-corp has two primary ways of getting paid as an owner, shareholder. One would be W-2 wages and the other is all the other income.
• "I started in LLC, C-corp with Anderson advisors on October 22 for real estate. I have paid $20,000-plus in networks, education, probably getting training. I did not do any deals and 2022 for my new real estate business. Can I still write all that off for the business? I have used my personal credit card to make purchases for the new REI business, real estate business. Since I do not have a business credit card, did I break the corporate veil?" – Yes, you can deduct those expenses. They are going to go on your C-corporation. If they were incurred prior to the date of incorporation, there'll be what we call startup costs.
• What org structure for small business is audited the least and provides the lowest tax liability?" – That's going to be your S-corporation, typically. It's going to give you a lot of deductions and reimbursements that you can take advantage of.
• "How do I best utilize my C-corp status for tax savings and investing in real estate? We have my 1099 paycheck going to our C-corp bank account and then pay out about half of it to our personal bank account as a paycheck. How do I utilize the other half that's sitting in the C-corp accounts, such as to buy new short-term rental or long-term rental investment property?" - the C-corporation, before you do the loan, you can take a lot of reimbursements—accountable plan reimbursements, corporate meetings for 280A, medical reimbursements. That all gets some money out to you tax-free deduction to your C-corporation. Get these first, then take a loan.
• Rapid-fire chat questions answered at the end of the show

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