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May 23, 2024 | read

164. Post-Year-End Tax Planning Tips for Investors and Business Owners

Thomas Castelli

In this episode, Brandon and Thomas talk about post-year-end tax planning.

This episode is sponsored by Landlord Studio and Tax Smart Investors.


Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast.

Brandon Hall 0:05
Your source for all things real estate, accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:30
Hi, everyone. Thanks for tuning in to this episode of The Real Estate CPA Podcast. Today, your host Brandon Hall and Thomas Castelli here to talk about post year end tax planning. We did an episode before the year end about what you can do prior to your end to minimize your 2021 tax liability. But now we’re in 2022, there are still some things left you can do to minimize your taxes. And that’s exactly what we’re going to talk about in today’s episode. We all know minimizing taxes is essential to growing your portfolio However, another important aspect of growing your portfolio is making sure you have the right accounting system in place. And while there are plenty of general business accounting software options out there, they’re not designed for landlords managing rental properties and can feel clunky and overly complex. Landlord studio on the other hand, is designed specifically for Do It Yourself landlords, they offer a full suite of tools designed to help landlords save time with their income and expense tracking, as well as property management tasks like rent collection, rental listings, lease management and tenant screening. One thing I found particularly impressive was its ability to connect bank accounts to view and reconcile transactions from inside the software. And by using landlords studios mobile app, you can digitize your receipts and the software automatically lifts and imports the receipts details. Landlords studio is also a great way to stay tax compliant, particularly as they offer a number of different financial reports including Schedule II, where rental properties reported on your form 1040, you can learn more about landlord studio by heading to WW dot landlord studio.com/cpa. Again, that’s landlord studio.com/cpa. We’ll drop that link in the show notes below. But for now, we’ll jump right into today’s episode. Alright, so the first post, the year end tax planning tip we’re gonna talk about is the boring stuff, right, and that’s going to be maxing out your IRAs. So you can max out a traditional IRA up until the tax filing deadline, which is April 15 2022. So if you’ve not made a contribution to your IRA, it’s still very possible to do and if you are in the threshold where you can have a deductible contribution, you could still get that deductible contribution after a year. And

Brandon Hall 2:34
what about like backdoor Roth IRA conversions?

Thomas Castelli 2:36
Yeah, so you can do a backdoor Roth IRA conversion at any time. So if you really wanted to right now, what you could do, as you could go ahead and make a contribution of $6,000. That’s the yearly limit into your account for the 2021 tax year. And then he immediately literally immediately just do a conversion to a Roth IRA. So you can put the money into the traditional and then do the conversion to the Roth IRA right away. I mean, he also put $12,000 in for 2021 and 2022, at the same time, do the Roth conversion. And now you can invest in the Roth and not have to worry about leaving it in the traditional IRA, putting it into a bunch of investments that may or may not accrue gains over the course of this year, and then later on do the conversion analysis, then you have a taxable event, because the earnings portion of the conversion will be subject to

Brandon Hall 3:29
tax in why would I want to do a backdoor conversion. So you

Thomas Castelli 3:33
might want to do a backdoor Roth IRA, because basically what ends up happening is you’re gonna put money into investments over the course of the next 1015 2030 years, however long your investment horizon is, and this money is going to hopefully grow substantially over that period of time, and then we take that money out, you’re not gonna have to pay tax on it. Whereas if you did put into a traditional IRA, when you take that money out, you’re going to have to be taxed on it. And that’s taxed at the ordinary income tax rate is not taxed at the capital gains tax rate. So you’re going to be whatever the ordinary income rate is, when you’re in retirement is going to be the rate that you’re paying on the distributions from the traditional IRA. Whereas with the Roth, again, you’re not paying any tax when it comes out. So the idea with the Roth, the backdoor Roth is, if you’re over the phase out limits for the Roth IRA, you put the money in traditional IRA, and then you immediately do a conversion into the Roth and invest through the Roth. So you don’t have to worry about any tax issues on the earnings portion from the traditional IRA.

Brandon Hall 4:34
Yeah. So you do take a tax hit on the monies that you’re ultimately converting into a Roth. But the idea is that if you’re growing this principle for 30 years, and then you can take out all of that growth tax free, then it’s beneficial. And that’s true even if you are in the highest tax bracket. At least that’s the theory. I don’t have any hard data points that I can point to right this second that shows whether or not it’s beneficial for you listener but there is some risk, right? There’s two things you gotta watch out. For one, the IRS is aware of these transactions. And they could invoke the step transaction doctrine, which basically says that you took a series of steps to avoid taxes. But in reality you put after tax money into a Roth IRA, and you are over the phase out limits. So we’re going to disallow all the steps in between and make you take the money out of the Roth IRA, they could, in theory, do that in theory. But the other thing you got to watch out for is the Biden tax plan. Now, it’s still in proposal mode. As of this recording, mentioned, Senator Manchin is not seemingly not negotiating with the White House or any anybody on the Democratic Party, and things have seemingly fallen apart. But assuming that they pick the pieces back up and pass this bill, you will no longer be able to do a backdoor conversion, and they say the date is December 31 2021. So after that date, you’re no longer able to do a backdoor conversion. So if you’re thinking about doing a backdoor conversion, right now, my suggestion is to wait until we know if this bill back better plan, this tax plan is going to pass or not, because they might update that date, they might not update the date, December 31. And I don’t know how it works. Like I didn’t read that particular section, I just I just read the summary of that section. So I don’t know, procedurally, if you are allowed to do a backdoor Roth conversion for the 2021, tax year in 2022. Or if you’re just simply not allowed to engage in any sort of backdoor Roth conversion after December 31 2021. So just be aware of the build back better plan, it’s got a potential blocker there for you. So if you go and engage in a Roth transaction today, or Roth conversion today, you may just set yourself up to fail. And you might not know that for, you know, a couple months, just depends on how quickly we either get to resolution on the build back better plan or just completely falls apart. And we have confirmation that it’s actually falling apart in mansion, it’s just not going to move on anything.

Thomas Castelli 7:06
Right. Right. Right. It’s, there’s a lot up in the air with that, unfortunately. So definitely, you know, definitely keep that I think somewhere in there and said that they were going to disallow it on this allow the Roth conversion on those with like AGI is above $400,000. I think there was like a number in there. So you might be saved. You have to double check that. But yeah, I mean that the bottom line is these things are still you could still make contributions to a Roth, or a traditional IRA pending that your income and phase out limits until April 15 2022 for the 2021 tax year. So that’s something that’s still available to you. And if you can make deductible contributions to traditional IRA, we’re not going to go through all the rules here today, if it’s in terms of phase outs and stuff, because it gets complicated, but you can still make those contributions up until that point.

Brandon Hall 7:55
Yeah, yeah. So maybe you just wait, right? Maybe that’s the recommendation is just wait until maybe early April. I don’t like pushing things to, you know, April 14, April 15. So don’t wait that long. But maybe first week of April, you know, if you want to do a backdoor Roth conversion, just wait until first week of April. I believe you can’t even extend your returns and go all the way to the extended deadline.

Thomas Castelli 8:16
Not with the contributions of the country’s dads dads that stuck at the April 15 deadline regardless of whether you extend or not.
Brandon Hall 8:25
Yeah, okay. It’s funny, man. I know I know section 469 inside now but it’s these little it’s almost like what I consider like the basic stuff that I forget the nuances so glad to have you on the call. Why only

Thomas Castelli 8:37
wish I knew this. I’m just drilling questions every day for the CFP and literally had just finished the the retirement account section. So So yeah,

Brandon Hall 8:45
Tom studying for the CFP, everybody. I don’t know if we announced that yet. But studying for the CFP, that certified financial planner, our goal is to open up a wealth management practice here at the Real Estate CPA. So we can help all of our clients with investment decisions, and both on the real estate side and on the equity side. So we’re really excited about that.


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Thomas Castelli 9:02
Right? Right, that’s going to be super exciting, we’re able to launch that. But just to keep it go back on track here for what you can do post your end for tax planning. You can also if you had opened up an HSA or already had an HSA account open prior to the end of 2021. You also have until April 15 to max out your contributions to your HSA. And those HSA contributions are tax deductible. And there are no income limits. It doesn’t matter if you make $500,000 Or you make $100,000 you make $2 million in contributions to HSAs remain tax deductible. So if you have one of those accounts, and you have not maxed it out yet, there’s still there’s still time to max out your HSA.

Brandon Hall 9:44
So I’ve got a practical question for you. And this this kind of ties into taxes and hopefully this will bring value to all of our listeners. So we just renewed all of our health plans at the firm here and you know, we provide health care for health plans, we cover the cost premiums for our employees or we’re really excited about this year because now we’re covering 100% of premiums for our employees, as long as you’re on that, that high deductible plan and we basically apply that premium to everything else. Anyway, that’s beside the point. But so I’m looking at the three health plans we have right in the for me, because I have a family have a spouse and two kids. You know, the premium goes from $430 a month to like $1,200 a month, which is ridiculous on the I guess that’s premium costs are different conversation $1,200 a month for the high deductible health plan. But then the super low Deductible Health Plans or our third health plan but like the the the Cadillac health plan, I don’t wanna say Cadillac, Ferrari Rolls Royce, let’s do that Bentley, Bentley helped me or Bentley health plan is, or McLaren maybe what’s like a super, extremely super lycra? I don’t know Anyway, well, we’ll go move the McLaren health plan as a $1,500 a month premium. Okay, so I was sitting here and actually did this myself, but I should have asked you. So now I’m going to just ask you if I did the right thing, and we’re going to do this live. And you could tell me if I did or not in front of our what do we have 70,000 listeners a month, I chose the the big plan instead of the high deductible plan. So I’m paying an extra $300 a month for the McLaren plan, which has a much lower deductible $3,000 deductible versus the high deductible like 9000 or whatever deductible was, but I can’t contribute to the HSA. So I’m paying $3,600 more in premiums, right for a lower deductible plan 100% coinsurance after the deductibles hit. But our high deductible plan is the same thing once you hit the deductible, the 9k deductible 100% coinsurance, but I’m giving up that HSA contribution and the tax deductions associated with it. How do you analyze something like that? Because I was I was like, 3600 extra dollars? I’ll just go with that. But then I was like sitting there thinking like, Yeah, but if I could sock away money, because how much how much can you put into an HSA for a married couple? For it for a married

Thomas Castelli 12:03
couple? I’m pretty sure it’s $7,300 for family, so $7,000 per year?

Brandon Hall 12:10
It’s just a single, that’s not double. That’s not a single singles? 36/5 Okay, so 7000 something times 37%? What is that? Like? 714 21 $2,800 $2,700?

Thomas Castelli 12:23
Yes, see,

Brandon Hall 12:24
that’s less than that.

Thomas Castelli 12:26
We’re looking at 20 Twice. 2700 2700

Brandon Hall 12:29
Okay, man, I can’t do math today. Not enough coffee. So $2,700 in tax savings. If I socked away, if I maxed out the HSA, the earnings can then grow tax free, then I can use that I can use those earnings to pay for, you know, health care stuff. Did I do the right thing? Did I do the right thing by paying an extra $3,600 a year in premiums and foregoing this HSA contribution?

Thomas Castelli 12:51
Yeah, you know, that’s a good question. You know, I have to put everything probably down on an Excel spreadsheet and look at, you know, look at the numbers. But I think if you have a family, right, and you have two kids, two young kids, you’re probably going to have more out of pocket expenses, you’re gonna have more, you’re gonna have more healthcare related expenses throughout the year. So having that lower deductible probably makes more sense. Because if you go, you know, once you hit that deductible, you’re not paying out of pocket anymore, right. So probably, if you have a kid, you probably you give me you have to look at what your healthcare costs are going to be for the year and say, and do an analysis to determine what would make the most sense. But with two young kids out, imagine you’re going to hit the ball, and then whatever is beyond that, you’re not going to have to pay, and you’re going to be in a better position in the long run, in terms of reducing healthcare costs today.

Brandon Hall 13:38
So if the HSA plan was a, I think it was a $9,000 for a single person, and it was 18k per family. So maybe that was the big difference. And then the McLaren plan was 3k deductible 6k family. But I don’t even know how that stuff works, man. Because like each month, my spouse and myself both have our own deductibles. I don’t know, super confusing, but I guess the way that I was thinking about it, if I was single, the way that I’d be thinking about it was if I added an extra $3,600 in premiums to reduce my risk, my health care risk. What’s the spread on the deductible on the HSA plan versus the deductible on the McLaren plan? The spreads 6k. So if I pay more in premiums, then I reduce my risk of having to pay 6k out of pocket. But at the same time, I can even hedge that further by contributing to an HSA. ATM is so confusing.

Thomas Castelli 14:28
Yeah, there’s a lot of analisar CPAs. There’s a lot of analysis that has to go into it for making, you know, a decision for each and every person depending on what you know what their health care costs are going to be for the year and stuff like that. But I can say the reason why I won’t I ended up with health care plans because I’m single and knock on wood. I’m pretty healthy. So I’ve virtually no health care costs that come out of pocket each year. And with that said, it just makes more sense to be on a hierarchical health care plan and just put money into an HSA because I have no costs Having said that, if I had kids, I know that I would have health care costs that I would have to pay. And I would have to do an analysis to determine Okay, well, here’s the amount I expect probably pay out of pocket for health care costs between deductibles and all that, versus how much would I be able to save with the HSA? And that’s the entire analysis to figure that out?

Brandon Hall 15:22
No, dude, I just tell my kids to sweat it out. Yeah. And then three months in two months, three months and two years old, but sweat it out, you’ll be fine. Yeah, Daddy’s not spending money.

Thomas Castelli 15:35
Daddy chose the higher double health care plan that year. And we’re not we’re not going to the doctor. Okay. That’s how you sit tight.

Brandon Hall 15:44
Alright, so, so you can retro actively contribute to an HSA?

Thomas Castelli 15:48
Yeah, so you could do it after a year ends. So you can do it up until April 15, for 2021.

Brandon Hall 15:54
So here’s a cool tax strategy for everybody to, to remember, let’s say that you didn’t contribute to your HSA last year, you didn’t make any contributions, okay. And because you didn’t make any contributions, you know, you might be thinking all why, you know, I paid for all these health care costs. Well, because I didn’t make any contributions, I can’t deduct anything. And that’s not true, you can retro actively make that contribution. So you can recapture that spend, and there’s a whole, you know, you can contribute then immediately distributed back to yourself, which is also beautiful, because you can reimburse yourself for health care costs. Eight out of pocket from an HSA, right. So if you didn’t use the HSA, you can put money into and then immediately take it back out. Don’t do it without talking to a CPA first, but really neat tax strategy. We actually used to deploy that all the time with our clients. I don’t know if we still still do on the planning. But

Thomas Castelli 16:45
yeah, I mean, I think I think we do in certain situations, when it comes to more of like that type of like retirement esque planning. But a lot of our planning these days has to do a lot about folks. And I’ve had to reduce taxes with with real estate specifically. But if that’s something somebody wants to talk about, we’re more than happy to bring that to the table. But one of the HSA strategies a lot of people use AWS throws in there is what they do is they max out their ancient sage every year, they go ahead and they invest their HSAs. And then they save their receipts for their medical expenses, and they just accumulate their receipts. And hopefully, they store them somewhere safe. And then they’re gonna, the plan is to let their money grow in the HSA. And then at some point later on down the line, they’re gonna go ahead and reimburse themselves for all their medical expenses, because there is no deadline at this moment of when you have to reimburse yourself. So, you know, I could incur an expense and medical expense in 2021, or 2022, and wait until 2044, to go ahead and reimburse myself for those expenses. And that would leave the principle intact within the HSA account to continue to grow through whatever investment vehicle you choose. And then later on, take it out. So that is an option. People do do that. Or to Brandon’s point, some people will make the contribution after a year and then reimburse themselves for expenses. They incurred the prior year after year. And so there’s there’s a lot of flexibility in how you use that plan. But for right now, just know that you could still go ahead and make a contribution if you haven’t already. You just

Brandon Hall 18:15
said do do that. Do you do that? You said do you do on the podcast. Once you once you hear it, you can never own hear it right. So I do this all the time. And my wife calls me out on it. Because I’ll be I’ll be like, yeah, people do do that all the time. Julie go, they do do and now that I hear that I’m like, I can’t hear it. You know, we don’t cut this part. Is this this is uh, yeah. Anyway, good stuff. What else you got for

Thomas Castelli 18:38
us? All right. All right. So we get this question a lot from clients all the time. And that’s, you know, can you do a cost segregation study after your end? Or do you have to do it prior to the year coming to a close? And the answer that question is, if you have purchased the property, let’s say for example, in 2021, he placed that property in service, which is typically mean, it’s listed and rent ready, if not already rented, and then that property is going to be reported on your 2021 tax return as a rental property on Schedule E, or the ADA 25 year partnership or S corp, etc, etc. We’re not gonna go into all those details. But the cost segregation study does not have to be performed in 2021. They can be performed in 2022, as long as it’s ready to be reported on your 2021 tax returns by the tax filing deadlines, including extension. So that’s going to be by April 15th. If you’re an individual and you don’t extend your return, or it’ll be by October 15, if you’re an individual and do extend your return or by March 15. If you don’t extend and you’re an entity such as a partnership or until September 15 If you are an entity do extend so you have until the deadline again including extensions to have the cost segregation study performed and reported on your tax return you do not have to do it in 2021. The key is the property just needs to be placed in service In 2021,

Brandon Hall 20:01
why do they have such a big level? Why is this even a thing? We will have people come to us and say, Why do I need to do this before the end of the year? Why do I need to do a Cossack study before the end of the year? Why? What’s prompting them to do that?

Thomas Castelli 20:15
What’s probably meant to ask why do I need to do one before the end of the year? Yeah, I think it’s just and people, you know, see 1230 ones a cliff, and that the study, for some reason needs to be completed before the end of the year in order to report it on your 2021 tax return. Sometimes it is the year end planning rush, I suppose. But I don’t know why, where that question comes from other than just the 1231 Cliff. And most people, you know, might not know that. This is something that can actually be done after the fact. Yeah, I

Brandon Hall 20:46
think there’s, there’s another factor as well, which is the cost segregation, companies pushing people to write to do a cost segregation study before the end of the year. And the reason that they’re doing that is they’re just trying to hit year end sales numbers, right? I mean, all of our companies, our company included, we have a 1231 cut off. And if we want our revenue and profitability to look really good, so that we can, you know, pay our partners out pay big bonuses to our staff, we have to try to do a push at the end of the year, well, cost companies are doing that. So just be aware of that, that it’s not it’s not malicious, it’s not a bad thing. It’s just that you don’t have to do a cost segregation study, within the same year that you acquire the property, you can do it, like Tom said, all the way up until you file your tax return on October 15. Or September 15. If we’re talking about a company that has a an extended deadline of September 15.

Thomas Castelli 21:39
Right, yeah, I didn’t even I didn’t even think about that. But yeah, I mean, Cost Segregation studies, like every other companies company here on the cash basis they want to try to get is they want to try to get as much revenue as they can before the end of the year. And their sales reps probably want to make their numbers too. So they want to get everything and so

Brandon Hall 21:55
they’re trying to get big commission checks for Christmas and stuff like that, right? Yeah.

Thomas Castelli 21:59
And they’re not necessarily doing you a disservice, like you said, if you do a four year and that’s fine. But if you do a year up there, that’s fine, too. In fact, you could usually you can even do it several years after the fact. But it does come with a lot. It does come with more reporting complexities and does usually increase your tax filing costs if you wait too long. So the bottom line is you want to usually get it done for the year and reported for the year you acquired property in place in the service. So that would be 2021. You don’t have to do it in 2021. But you want to usually haven’t done for that first year, we originally placed that property in service to keep everything as streamlined as possible. Alright, so we have another one here. And that’s going to be a making retro active S corp election. This is usually something that small business owners, if you’re a consultant, maybe you’re a real estate agent, property manager, basically any type of business where you’re generating revenue and your small business, and the S corporation may make sense for you to help you minimize your exposure to the self employment taxes, which is currently 15.3%. On the first employee was $141,000 or so income between 21. So you can make a retroactive S corporation after your end is one another tax planning tool you can use.


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Brandon Hall 23:14
Yeah, so let’s talk about why you would want to do that, right. And who can actually do that, first, you have to have an LLC, or a C Corp set up. So you got to have an LLC or a C Corp set up. You can’t, you can’t retroactively tax your sole proprietorship, as an S corp, right? It’s a tax election on an entity that already exists. That’s the key. So if you are you’ve been running everything out of your own name, you don’t have an LLC or a C Corp or whatever set up, then this is not going to apply to you. It could apply to you this year, though. So pay attention. Now, when do you want to do this really, you only want to run an S corp if you have earnings from self employment. And the reason for that is that your earnings are subject to a 15.3% self employment tax. When you’re a W two employee you pay 7.65% Your employer pays the other 7.65% That’s what’s always funny about like how, you know these rich people never pay taxes, but in reality there are companies pay millions and millions and millions of millions of dollars in Social Security, Medicare taxes every day, but nobody talks about that because that’s this the hidden tax that nobody talks about. Even Even people that you know, prepare their own taxes like Oh, my effective tax rate is so low. I’m immediate, like Yeah, but would you pay in Social Security Medicare taxes, because everybody forgets about this extra 7.65% tax that they’re paying on their wages every single month. So you pay 7.65% Your employer pays 7.65%. When you’re self employed, for purposes of the Internal Revenue Code, you are treated as an employee and the employer so you get the lovely benefit of paying both halves for yourself. So you pay 7.65 as the employee and another 7.65% as the employer total 15.3% tax that’s called self employment tax. So if you’re holding Saylor, if you’re a real estate agent, if you are a flipper of builder, even arguably a capital raiser, you could be in a self employment situation where you are having to pay a 15.3% tax on your earnings. And you would want to route those earnings through an S corp. So that you can reduce your exposure to that 15.3% tax, you’re not gonna be able to eliminate it. If you are eliminating that 15.3% tax, congratulations, you will most likely be getting an audit letter within the next three years. They are ramping up audits on S corporations, it’s an audit priority, they’re hiring more people, more revenue agents to come in and audit S corporations, make sure you’re paying yourself a reasonable salary, we have done a ton of content unreasonable salaries in the past. So feel free to go and try to find our podcast, check out our YouTube channel. If you need help, we have a whole system that we’ve developed to help people with it. So you can check us out of the real estate cpa.com. But reasonable salary, you got to pay yourself a reasonable salary. And whatever you pay yourself is subject to that 15.3% tax, but the extra avoids it. So if I’ve got $100,000 of net income from flipping real estate or flipping homes, and I’m running out on a schedule C sole prop or even a single member LLC, I’m going to pay $15,300 in self employment taxes, and then I’m going to pay my marginal tax rate on the $100,000. And then I’m going to pay my state tax rate on the $100,000. So I’m easily in, you know, the 50% or so tax bracket or 50% tax rate. That’s probably not true my effective tax rate, every dollar that I that I earn, I’m probably more like 30 or so percent. But I’m a lot higher as a self employed business owner on every dollar of earnings. But my effective tax rates can be a lot higher than a W two employee because I have this self employment tax burden. So if I shift that 100k into an S corp, maybe I’ve determined that my reasonable salary is $50,000. So I pay myself a $50,000 W two wage, you have to run payroll, you have to do this all legitimately, you can’t just do it haphazardly, so I’m gonna be legit, pay myself 50 kW to wage that is subject to 15.3% tax, that’s self employment tax, the additional $50,000 Because remember, I earned 100k Total 50,000 is being paid out as a W two, the remaining 50k just sits in my S corp checking account, I can distribute that out to myself, it’s considered a cash dividend. And it avoids that 15.3% self employment tax in this example, when I was running everything on a schedule C, my $100,000 was subject to a $15,300 self employment tax. When I moved it into an S corporation paid myself 50k of w two wages, the remaining 50k is taken out of profit. My self employment tax is $7,650. I’ve cut it in half, I’ve saved this example. I’ve saved $7,600 By moving it to an S corporation. But you have to have an LLC set up. If you don’t have an LLC set up and you want to do this this year, go set up an LLC today, go do it right now. It does not take long, you do need to make sure that you do it correctly from a legal protection standpoint, you know, but you can go to the Secretary of State website instead of an LLC in a matter of maybe 30 minutes tops. So go you can go do that today. But today will be your start date that you can retroactively tax an S corp on right. So you can only go back as far as that start date of LLC, and up to three years in 75 days things what you can use.

Thomas Castelli 28:29
Yeah, and something I want to throw in there. We’ve gotten some confusion out there recently with some with some folks being in the tax smart investor community or some central clients we’re working with, I forgot exactly where it came from. But here’s how this works. Right. So for 2021 If you wanted to execute this for 2021, he would have had an have an LLC set up in 2021 and received the revenue in the name of that LLC. So say you had a single member LLC, and you received all your income to the single member LLC, then you will be able to make that retroactive S corporation on this single member LLC. Like Brennan said before if you’re sole proprietor and say let’s say I’m a sole proprietor, my name is Thomas Castelli and I receive all my money in my personal name, I cannot go back and retroactively do that. So the brand’s point, if you want to execute this strategy in 2022 posts you’re gonna want to do is set up an LLC, and start receiving the revenue in the name of the LLC. Now, you can make that corporation right away. Or you can wait until after the year or if you wait closer you get to your end or even after your end to make the S corp election for 2022. But the key is the LLC has to be there and you have to receive the money in the name of the LLC.

Brandon Hall 29:40
In to actually add on that real quick. You know, sometimes we get we get people that hear about the strategy and it’s like November and they’re like, Okay, well, I’ll just go set up an LLC real quick. Right? Well, that’s great, but you can only retroactively tax the S corp to the date that you started the LLC and that you started running income through the LLC. So if you set up an S corp on November 1 then all of the income that you’ve earned prior to November 1 is not eligible to be routed through the LLC, the S corp strategy, right? So it’s only November and December. So it’s, it’s not gonna be beneficial unless you have the LLC set up in the beginning of the year at the beginning of the year. So you really need it, this is appealing to you right now, and you don’t have an LLC set up, you need to go do that now. And again, make sure that you you handle the legal stuff, too. You really need an operating agreement to lock your LLC down and protect it from creditors. So make sure that you you do double check on that side, too. We’re just telling you the tax piece, there are a couple caveats that I want to highlight. Anytime that you retroactively tax something as an S corp, you have to run payroll. And anytime you retro actively run payroll, you’re going to be subject to potential penalties for late payroll runs, right if I tax my my LLC as an S corp today, well, now it’s January 2022, I’m going to retro actively tax my S corp, you know, for all of 2021, I’m going to treat it like an S corp. And now I’m going to run this retroactive big one time payroll to reclassify all of my 2021 distributions to myself as wages or a portion of them as wages. But now what I’m doing is I’m just submitting late payroll, okay. And that’s going to subject me to penalties, it’s going to subject me to IRS letters and state letters. So I’m just gonna be prepared for that. The penalties are not large first time, typically the first time you can get you can work with the states, especially to get them abated. But you’re gonna have you’re gonna have an additional administrative headaches is my point, it’s going to take some time for you, you’re also going to have to set up payroll, typically, you can use like a software, we always recommend using gussto G us to, I think it costs like four or 500 bucks a year, you’re also going to have to pay for an S corporation tax return form 1120 dash s, and that’s gonna cost you probably 15 $1,800 a pop, even on the simplest businesses, so you got to factor in the costs, okay. So there’s costs involved. If you budget 21 to $2,200 a year, you’re probably safe. So you want to make sure that your tax savings exceed that, which is why you hear CPA say, Hey, you really need to be netting like 60 $70,000 in your business before running this S corporation makes sense. So just just factor in the cost factor in the additional administrative time, especially the first year you’re going to get letters, people hate getting letters, just be aware that that’s going to happen. And then make sure that you have a conversation with your CPA about the qualified business income deduction. We’re not going to go into that right now. But an S corp impacts the amount of that Cubii deduction that you can claim on your taxes. So please, please make sure that you touch base your CPA before you make an S corp election.

Thomas Castelli 32:44
Right 100%. And one last thing I want to set as corporations before we move on, is that the s you can use, we did a lot of talking here on this podcast. But we’re setting up an LLC, and taxing it and retro actively having a taxed as an S corp. That’s perfectly legitimate way to go about using an S corp. But you can also just use a plain S corp if you wanted to. Now you can’t you wouldn’t be making a retroactive election or anything like that on an S corp. But using an S corp itself would be effectively the same thing from the tax side. So just want to make that clear, you can use an S corp or even have an LLC in tax the LLC is S Corp. But anyway, moving on to one last thing we want to mention here for post year end tax planning. And that is gathering your time logs for the real estate professional status or short term rentals. If you’re trying to prove that you materially participated in your short term rental activity, you want to make sure that you have those timelines set and ready to go. Now, if you haven’t already did that last year, because the longer and longer you get away from the prior year, the more and more time passes, the harder and harder it’s going to be for you to accurately create a timeline that reflects what you did the prior year. Like I always say I’ve mentioned this other podcast. You know, as a CPA, I’m used to tracking time, and you’re trying to track time from last week is a challenge. You know, if you didn’t write everything down and you didn’t take good notes and everything where you have a very good calendar system set up to go back and and look at what you did. So I can only imagine for for people who aren’t used to track their time on a regular basis. How how hard that might be to try to go and do it accurately remember, the IRS and the task force? They’re going to be looking at your log, and they’re going to see is this credible? And is this a reasonable log, and they know that people will go and retro actively create it. And if they sniff out that it was retro actively created and it doesn’t look credible, they can throw out your entire position. So the bottom line is if you haven’t already completed your time logs for 2021. If you’re looking to make a real estate professional election, or you’re looking to materially participate in your short term rentals to make the losses non passive, then you’re going to want to make sure those logs are Clean and buttoned up, probably very soon yaghi I want to wait much longer than January to get it done if you haven’t already. So we just launched the 2022 tax Mark boot camp with nearly 200 students. And we had a lot of people asking, you know, if they could still register and unfortunately registration for the January 2022, boot camp is closed, and we’ll be doing another one at some point later on this year. The date is to be determined, and you know what, you really don’t have to wait and to get taxed more, you can actually still get taxed more today by signing up for the tax ready foundation course that Brandon created. And you can find that by going to courses dot the real estate CPA calm and you can use promotional code R E CPSS, capital RD CPA to get $100 off that course. Just like the bootcamp, it covers the real estate professional status, short term rentals, repairs and improvements. And also goes much further than that and covers things like entity structuring Cost Segregation studies, paying your children and a lot more. The tax basics are all in there. So you don’t need to wait for the next tax smart bootcamp to become tax smart. You can go ahead and register and enroll in the course which is open all the time. And you can do that by going to courses dot the real estate CPA calm and use promo code R E CPA for $100 off. We’ll see you in the course but until then, happy investing.

Brandon Hall 36:21
Thanks for listening to today’s show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client’s navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.


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