Q: Hi! Tom, My coach told me to set up a entity by end of this year so I can write off my Rich Dad real estate education cost as expense. I have not have any income from real estate yet, and I currently receive tax credit because we don't have enough income for a family of 4. And I paid $15300 school tuition and $30000 for rich Dad including your course in the year of 2010. Do you think it is suitable for me to set up entity by end of this year?

A: Whether you have an entity set up is not relevant. The relevant question is whether you started business this year. If you have not started business, then you don’t get to deduction your education. This could be a good thing for you, since you don’t have any income. So, you can deduct some or all of the education expense when you start your business and the rest will be amortized (deducted) over 15 years. This is assuming your education is directly related to your business and you meet the other tests for deducting education expenses.

I would strongly suggest you sit down with a qualified CPA to review this. You have spent a lot of money on education and you want to make sure you get the best tax benefit available to you. Don’t skimp on professional advice. Get the best possible and it will always pay for itself.

If you would like assistance finding a qualified CPA, please contact our office at 866.467.5809.

Warmest regards,

Tom

Cheri asks the following regarding her S corp

Q: After years of working for an S-corp I am just now learning that a 2% or more shareholder can't take part in pretax deductions? True? We have a Flex, simple Ira, and a POP plan for health, dental, childcare and other Aflac pretax benefits. If such an individual has in fact participated over the years in such plans how do you determine what is the shareholder's worst potential tax/penalty consequences and how do you right this wrong?

A: Some pre-tax deductions are not available to a self-employed individual. A 2% or more shareholder is considered to be self-employed. You can participate in a Simple IRA, though there are some limitations. Medical benefits and other fringe benefits are not allowed to a self-employed individual.

I suggest you meet with your accountant to determine the penalties that might apply and how to avoid them. Feel free to call our office at 866.467.5809 if you would like to consult with one of our professional tax advisors (all of whom are CPA’s).

Warmest regards,

Tom

One of the most common questions I get from real estate investors is whether they can qualify for real estate professional status under the tax law. By doing so, all of their real estate investment losses can be deducted currently. Rosemarie is the most recent student to ask this question:

Q: How do I qualify as a real estate professional? My husband works for an employer and I am taking on the real estate investing with his help. I do not earn an income from any source. Our concern is that his income is relatively high now and we are going to lose the business and personal deductions because we started mid-year and are building the foundation to the business.

A: Real estate professional status is a fairly straightforward test. First, you must spend more than 750 hours during the year involved in real estate. Second, you must spend more time in your real estate business than all of your other businesses combined. The good news for you, Rosemarie, is that if you qualify, then your husband doesn’t need to qualify.

The other good news is that even if you don’t qualify, you don’t really “lose” your deductions. They simply get postponed until you have passive income, either from real estate or some other passive business activity. It would be a good idea for you to sit down with a qualified real estate tax specialist to go through the passive activity and real estate professional rules. We are happy to help you find someone if you don’t already have a good CPA to go to. Just contact us at cs@provisionwealth.com

Warmest regards,

Tom

We have several Canadian students and clients, primarily because they are investing in U.S. real estate and/or businesses. Our expertise is on the U.S. side. So we always suggest that our Canadian clients find a good Chartered Accountant (CA) in Canada as well. John asks the question about the difference between a living trust in the U.S. and a living trust in Canada.

A: I don’t know. I suggest you meet with either a CA or attorney in Canada to discuss. We do have an international tax expert on staff, though this is more of a legal question than a tax question so I would defer to a Canadian attorney for this answer. Please feel free to call our office at 480.467.4400 if you would like a referral for a Canadian CA or attorney.

Warmest regards,

Tom

I’m a little late answering this question, though it is a moot point, since you can never shift income by lending money from your S corp to yourself. Income shifting is a bit dicey in any case. You have to have a legitimate purpose for shifting the income. C corps are probably the best way to shift income providing you can come up with a real business purpose for doing so.

I suggest you sit down with a Tax Strategist so you can permanently reduce your taxes instead of playing games each year through income shifting.

Warmest regards,

Tom

Interesting question that came in from Perrilee:

Q: Is there a tax advantage to opening a business bank account over a personal account? I keep hearing to open a business account, WHY? Thanks Tom

A: You only need a business bank account if you have a business. Any business entity MUST have its own bank account. All income earned by that entity should be deposited to the entity’s bank account and all expenses of the business should be paid out of the entity’s bank account. If you have a sole proprietorship (no entity), then you still should have a bank account set up solely for the business. This makes things much easier for the tax return and also for an IRS audit to prove that you really have a business.

Of course, the real question is whether you should have a business. The answer is “YES!” Businesses get lots of tax benefits and can provide tremendous cash flow. If you want to learn how to run a business and how to become an entrepreneur, look for the new Global Entrepreneurs Organization (GEO) coming out of Rich Dad later this spring. I am heading up this new initiative and is will be outstanding. Finally, hands-on training for entrepreneurs. And, you can make money while you train.

Warmest regards,

Tom

Sudhir wants to know more about the GEO program I am working on with Rich Dad. GEO will be a hands-on training for anyone who wants to learn how to be a successful entrepreneur. It is a 3-year program. The first year, you will focus on how to market and sell services in an established business. The second year, you will learn how to expand a business to multiple locations and learn how to use and develop systems to make the operation of multiple locations simple. The third year, you will learn how to raise capital and invest your business profits.

GEO will not be for everyone. It is only for those who are serious about becoming entrepreneurs. You will do actual marketing and actual selling of real services and will earn a sales commission for everything you sell. One of the things I like most about GEO is that it gives you the opportunity to succeed and to fail in a closed environment. You will not have to worry about branding, one of the most difficult aspects of starting your own business, as you will be marketing and selling an established brand. You will learn everything you need to know to become a successful entrepreneur and will be given access to people and training that will be available only to a few select individuals.

I wish GEO had been available to me before I started by CPA firm. I would have saved thousands of hours, hundreds of thousands of dollars, and an immense amount of stress.

Warmest regards,

Tom

A lot of you are Rich Dad fans and have hear Robert Kiyosaki or Garrett Sutton (Rich Dad legal advisor) suggest you set up an LLC or limited partnership for your real estate investments. One of our students, Karie, also a Rich Dad fan, asks the following great question about what to do next:

Q: I am a new investor, setup an LLC like Robert suggested and now don't know where to start. All our money is in our names not sure how to roll it over to the company. We purchased our first home in September, rehabbed it and have renters in the home with a cashflow of about $250. All money that was out of pocket came from our current account. I was looking into getting Quickbooks which I feel will benefit us. I have been keeping all receipts for our expenses and now we have revenue. How do we get started to make sure our first year taxes go smoothly.

A: First, you need to set up a bank account within your LLC. All income and expenses related to your rental property should go through this account. Next, set up Quickbooks, just as you were thinking. Then, I suggest our Basics of Bookkeeping and Basics of Quickbooks courses to get you headed in the right direction. We also have a great course called Year Round Tax Planning that we created just for the new investor. You can find all of these courses on line at www.provisionwealth.com/products.

Warmest regards,

Tom

Sudhir has a great question regarding estate planning and tax strategy:

Q: I am enrolled under Tax strategies with ProVision and working with Rob. Do you guys take estate planning into consideration when suggesting these strategies or that's a separate game plan. As I understand estate planning should be integral part of the whole tax planning. Please comment and advice. thanks

A: We always take estate planning into account when doing an income tax strategy for a client. Frequently, we don’t have time during our normal 1-3 months of tax coaching to handle all of the estate planning. In this case, clients will normally extend their coaching for a month or two to take care of the estate planning. With the estate tax back on the books, estate planning is more important than ever.

Warmest regards,

Tom

Sudhir asks the following question about LLC’s:

Q: I am starting a new entity with a non-related business partner to buy and hold rental real estate. Should this new entitiy (LLC as partnership) should be member managed or manager managed? I do have about 10 rental real estate portfolio outside of this partnership under different LLC's and i am in the process of forming a holding company and working with Rob as Tax strategy client. This partnership LLC is to be set up soon as we have closing date for our first property soon. thank you

A: Rob has probably already answered this question for Sudhir. Still, this is a common question and I am happy to respond to it here on my blog. I am a big fan of manager-managed LLC’s. This designation gives you more control over who can handle LLC affairs. It could be one or more of the members. Or, it could be that you hire an outside manager. My attorney friends also tell me that there is some asset protection benefit to a manager-managed LLC, though I suggest you ask them to be sure. For more on asset protection, join Garrett Sutton (Rich Dad legal advisor) and me at our Tax and Asset Protection course. We hold this course every month in a different location. Go to www.RichDadEducation.com for more information.

Warmest regards,

Tom

California has a nasty tax on LLC’s of $800 per year plus a fee if the LLC’s income exceeds $250,000. Bryan wants to know if Louisiana has similar taxes and fees on LLC’s.

A: Louisiana does not appear to have any special taxes on LLC’s, but rather treats them the same as they are treated for Federal tax purposes. So, if you elect S status for Federal purposes, you should be treated as an S corporation for Louisiana state purposes as well. It doesn’t appear that Louisiana charges LLC’s any special fees or other taxes.

Warmest regards,

Tom

This question come from Joe, one of our ProVision clients:

Q: I recently went over my tax strategy with Cindi and we concluded that my best option is to set up my trading account within an LLC for asset protection since I would not qualify as a trader at this point. I do plan to quit my job and become a full time trader at some point. Should I start to build business credit now for future purposes?

A: You can never start too early building business credit. Since debt and taxes are what make you wealthy, gaining access to more debt is essential to building your wealth. It’s great that you already are setting up an LLC and yes, you can start building business credit immediately. If you need help, I suggest Garrett Sutton’s training course on building business credit. You can find it at www.sutlaw.com.

Warmest regards,

Tom

One of our most active students, Perrilee, asks the following question:

Q: Tom, When I charge business expenses when do I get to claim them on my taxes, date of purchase or date of paying them on the credit cards. Payments on credit cards can go over the end of the year or even 2 years. Thanks Perrilee

A: This is a great question. You get them as of the date of the charge. So, even if you don’t pay them off until the next year, you get them in the year you made the purchase. This is an exception to the general rule that you don’t get to take an expense until you pay for it. The reason is that you have borrowed from one party (the credit card company) and paid the vendor (the company you bought it from). If you had purchased the item from the vendor on an account with the vendor, then you would not receive the deduction until you paid the vendor (unless you are on the accrual base of accounting).

Warmest regards,

Tom

This is a very common question, the answer to which can make a big difference in your tax liability and your cost of doing business, as well as your asset protection. Our student, Mindy, asks it this way:

Q: Hi there, We are just starting out...we live in California but own property in Nevada. We want to invest in and eventually hold real estate. What would be the best place state to start our business... and S corp or LLC state? Thank you.

A: You should definitely form your LLC in Nevada for your real estate that you own in Nevada. I would also suggest you form your LLC for your business in Wyoming or Nevada if you are ever planning to leave California. This way, you can take your entity with you when you leave California and stop paying California’s $800 minimum tax.

You should speak to my friend and fellow Rich Dad Advisor, Garrett Sutton, about whether to form an S corp for your business or an LLC taxed as an S Corp while you are doing business in California. Garrett is an asset protection attorney and can best advise your regarding the challenges of LLC’s in California. You can contact him at www.sutlaw.com.

Warmest regards,

Tom

Lot’s of people get into business with family members. Joe, one of our students, is among them. His question is about the right entity to use when you do this.

Q: I have a family member that is running a repair service business, I was thinking of approaching him to buy in to the business. Im sure he is not set up within an entity. I would like to help set up a good foundation with an entity to help reduce taxes but Im not sure on how I would be paid since I would not be doing much of the work within the business. What entity would be best for this situation? How would we pay ourselves individually within the business?

A: Treat a family business just like you would any other business. Set up an entity that will protect you from your partners, from the IRS and from potential lawsuits. In most states, the best entity for this is an LLC. Here is what you do:

Form an LLC with your partner (family member). Then, form a second LLC that only you (or you and your spouse) own. This LLC will own your interest in the LLC you have with your partner. The first LLC should be taxed as a partnership. The second LLC should be taxed as an S corporation. Your S corporation will receive distributions from the partnership. That’s how you get your share of the profits from the business.

We go through this structure in great detail in our course, “Building Your Perfect Foundation” in our School of Wealth Strategy. You should also take a look at our course, “Making the Most of Your S Corporation” for how to deal with your S corporation. You can find them both at www.provisionwealth.com/products.

The S corporation will significantly reduce your taxes. One other way you can do this is to simply be a limited partner. If you don’t want any say in the business and just want to invest, you could form a limited partnership, where your family member is the general partner and you are the limited partner. In this case, you would not need a separate S corporation. However, remember that you cannot have any control over the business if you are a limited partner and the minute you do (such as have check writing privileges) then you automatically become a general partner, subject to much higher taxes and losing your asset protection from being a limited partner.

This is why getting fully educated about taxes is so important. Taxes are totally dependent on your facts and circumstances.

Warmest regards,

Tom

For some reason, new investors seem to be concerned about opening a separate bank account for each of their entities. Remember that each entity is a separate business. So, to get the benefits of asset and tax protection through your entities, you must have a separate bank account for each entity. Here is a question about this from one of our students:

Q: Tom, What are the advantages of having a business banking account for my real estate investments? What I have done is have a separate personal account for each LLC, keeping the bookkeeping simple and each bank statement only for that lLLC. Is there a benefit to business over personal account? Thanks, Perrilee

A: You don’t have to have a separate bank account for each of your real estate investments. You just have to have a separate bank account for each entity, e.g., each LLC. You can keep the bookkeeping simple by using a holding company structure like the one we talk about in our course, Building Your Perfect Foundation. A separate bank account for each entity tells the courts and the IRS that you are willing to treat each LLC as a separate and distinct entity and follow appropriate business practices for those entities. Without the separate bank accounts, both the IRS and the Courts and claim that you really don’t have separate entities and in fact all of your investments should be treated as being owned by you individually. It’s as if you never formed the entities in the first place.

Warmest regards,

Tom

One of the most common questions I get is about which entity to use for an investment or a business. The best answer to this question is to sit down with your tax advisor and develop a comprehensive, long-term tax and asset protection strategy. This will allow you to maximize your tax savings while protecting yourself against lawsuits. For more information about ProVision Tax Strategies, visit our website at www.provisionwealth.com or call us at 866.467.5809.

One of our students asks the specific question about his investment entity as follows:

Q: I’ve just signed up with the Rich Dad Poor Dad co and looking forward to moving on my training. I am also interested in getting the proper corporation set up as well. I know some prefer LLC’s while others like Sub S. Can you direct me toward the proper direction I should go in setting up a corp. for a real estate investment company? KC

A: Which entity to set up depends on the facts of your situation. If I were your tax advisor, I would want to know what state you are in, how long you plan on holding your properties, what type of property you plan on acquiring and how much property you plan on acquiring. We discuss entities in our Rich Dad training course, Tax and Asset Protection. Be sure to sign up for this class and join us soon.

Warmest regards,

Tom

Darcy and Scot ask a question about one of the newer tax credits. The Making Work Pay credit is simply a giveaway to anyone with a job who pays taxes. The goal was to stimulate the economy. You really don’t have to do anything to get the credit except have a job and pay taxes. So it’s not really intended to encourage a certain behavior since most people want to have a job and they don’t need a tax credit to encourage them to get one. Perhaps there are people who are too lazy to get a job and Congress thought that a tax credit would get them into a job. Seems silly to me.

Your tax return preparer should automatically claim this credit when they prepare your tax return. The amount of the credit is $800 on a joint return if you earn at least $13,000. This is a refundable credit, so you get it even if you don’t have a tax liability. Like I said, it’s a giveaway. Enjoy!

Warmest regards,

Tom

As many of you know, I am not a big fan of 401(k)’s and IRA’s. Still, there is an IRA that can work well for many people, depending on your wealth strategy. This is a ROTH IRA. Unlike ordinary IRA’s, ROTH IRA’s don’t simply postpone the tax on your investment earnings to a later year – they permanently eliminate taxes on these earnings. This is the answer to the question posed by our student, Perrilee.

Q: I have again a question about Roth. I have a self directed Roth which I have invested and the roth has gained value. When do I pay the taxes on the gains? I am still confused on the taxes. Perrilee

A: You never pay taxes on a ROTH. This is the magic of ROTH IRA’s. There are some exceptions to this rule. First, any “Earned” income in a ROTH is taxed to the IRA. So, if your Roth owns and LLC and you run a business through that LLC, the IRA will be taxed on the income from the LLC (lot’s of other challenges with a business in a ROTH as well – just don’t do it). Also, most “Leveraged” income in a ROTH is taxed to the IRA, so if you borrow on margin to do your stock trading in a ROTH, the IRA will be taxed on the portion of the earnings generated by the amount you have on margin.

Best uses of a ROTH IRA are stock and option trading, precious metal investing (though not collectibles) and lending (interest income, such as hard money loans or tax liens).

There are some sophisticated tax planning strategies we can also do with a ROTH. You have to be very careful to follow all of the rules on these strategies. When you do, they can be worth thousands or even millions of dollars in permanent tax savings. Call my ProVision office at 866.467.5809 if you want to learn more about these strategies.

Warmest regards,

Tom