Lyle asks the following question about money from his personal resources that he has used to fund his new business.

Q: We have used personal money to finance the LLC business, is this deductible from earned income? or how should we transfer this into the business. we hope to gain some income soon but we are still setting up, will these expenses be deductible in a latter year if they are greater than our income for this year?

A: Money you put into a business is considered either a loan to the business or a contribution to capital. Neither is deductible to you. However, if the money is used in the business for operations, the business expenses will flow through to you as a deduction if you are using a "flow through" entity such as a partnership, sole proprietorship or S corp. (BTW, any of these can be an LLC since an LLC can be taxed any way you want it to be taxed - just an election.)

The real answer to this question is a complete tax strategy. You need a plan of action to follow to make sure that you get the best tax results from your business and investing. Feel free to contact our ProVision offices at 866.467.5809 (ask for Siggy) to find out more about how to work with a professional tax advisor to set up a strong and effective tax strategy.

Here is a good question from Dan and Elizabeth.

Q: Can a hold company hold different types of businesses?

A: The simple answer is, "yes." A holding company can hold any type of business with the exception that an S corporation can only be held by individuals, certain trusts, or another S corporation (and that ownership must be 100%).

The better question is "Should a holding company hold different types of businesses? The answer to this question is - Not usually. For example, a holding company should never own both operating companies and rental real estate companies. One holding company for real estate investment and one for businesses. Multiple operating companies can certainly be held under the same holding company.

This depends also on the type of business and the risk associated with the business. The best answer of all is to meet with a qualified Tax Strategist and work through the best types of entities and holding companies for your various business and investment endeavors to create a long-term, cohesive tax and asset protection strategy.

Warmest regards,

Tom

Juanita, who lives in Florida, asks the following question about holding companies:

Q: In which state is it best to open a LLC Holding company? We live in Florida.

A: Definitely NOT Florida. Florida recently had a case where an LLC (limited liability company) with a single member was allowed by the court to be dissolved to satisfy a claim against the member of the LLC. Instead, form your LLC in a strong LLC state, such as Wyoming or Nevada, where the only remedy is the charging order. Then, you will have to qualify your subsidiaries to do business in whichever state you are doing business. According to my friend, Garrett Sutton, an attorney in Wyoming and Nevada, this should give you much better protection than simply forming in Florida.

For more on asset protection, join us at our Rich Dad Education Tax and Asset Protection class held each month. This month, we are holding two, one in Salt Lake City (this week) and one in Seattle at the end of the month. For more info, contact us at 866.467.5809.

Warmest regards,

Tom

Heather, a member of our School of Tax Strategy, asks the following question about which entity to use for real estate?

Q: We have recently formed our LLC. We plan to buy mobile homes and re-sell some and lease option others. The other part of our business is to buy- fix - sell single family homes. I'm confused on our business tax. We have no income yet and we have business expenses already. Are we sole proprietorship, partner, C or S corporation? As I read the information, each seem like they apply...Thanks.

A: An LLC can be taxed any way you choose. You have several types of business going on. Your mobile home leasing business is a real estate rental business. Your buying and re-selling of mobile homes is a dealership business. Your fix and flip is a dealer or development business. The dealer and development businesses need to be separated into a different entity than your real estate rental business. Otherwise, you will have some nasty tax consequences.

Frequently, I like to see dealer/development businesses operated out of an S corporation and rental real estate businesses operated out of a sole proprietorship or partnership. My best recommendation is that you meet with a tax strategist who specializes in real estate tax strategies. If you would like help finding such a person, please call our office at 866,467.5809 and ask for Siggy.

Warmest regards,

Tom

Su from Australia asks a very interesting question about how to deal with banks once you have done good tax planning and show very little income on your tax return. Here is her question:

Q: In June Prague event, you did a great speech on Debt and Taxes. You explained so clear about the concept of " Velocity of Money." Now, I really understand your Tax Benefits Formula: "2+2=16" concept. Thank YOU, Tom!

This brings another question: How to solve the contradiction situation by :
1. paying little to no Taxes;
2. Borrowing lots of money from Banks.

A Commercial property can finance by itself according to its own rental income and expenses.

But if buying a single family home, Banks want to have a look at the latest 2 years Tax Return. If paying little or no Tax, banks won't lend the money.

At this moment, in Australia, if you are a full time employee, you can borrow up to 95%; if you are self-employed, only can borrow 80%; if you self-employed, didn't pay much taxes during the latest 2 years, banks won't lend you money.

I'm bit confused...

A: This is a challenge, though as with most challenges, there is a solution. In the last few years, banks have become lazy and began to rely on tax returns as income statements for borrowers. In the business world, banks rely on financial statements produced by professional accountants. Because most individual borrowers don't have a professional accountant, banks have begun using tax returns as a substitute for professionally created financial statements.

Now is your turn to show the bank that you are a professional investor. Hire a good chartered accountant (CPA in the U.S.) to prepare a complete set of personal financial statements for you that you can give to the bank. Your financial statements will show that, while you have successfully reduced your taxes through depreciation and other tax benefits, your cash flow and balance sheet are strong.

Banks love to see professionally prepared financial statements and they understand them. After all, their business clients always use these and the banks require them. This is another example of how important it is to act like a real business owner when you are a real estate investor.

Warmest regards,

Tom

I received a very nice email from a student at BYU Idaho. I wanted to share this with you and my response to his question.

Dear Tom, My name is Spence. I''m a junior at BYU-Idaho and I''m smack dab in middle of my intermediate accounting courses. I''m a big fan of yours thanks to your contributions in "Unfair Advantage". Seeing how I''m just now starting to learn the tax code, could you give me any pointers on what to specifically look for so I can see the code as a "stimulus package for business owners". I love your approach and hope to see things as you see them. Thanks!

Dear Spence: Look for all of the ways the tax law encourages different types of investing. For example, check out the great depreciation benefits in real estate, or the tax credits for low income housing. Review the sections of the law that deal with oil and gas and minerals to see all of the tax benefits that investors in natural resources receive. Then, check out all of the agricultural tax benefits. Finally, look at the myriad of tax benefits for renewable energy and electric cars. These are all stimulus packages for business owners and investors.

It is so great to see a student of tax law who is getting excited about this creative area of law and looking at new ways to see the law and how it can benefit clients. You will want to check out my new book when it comes out in January of 2012 called "Tax Free Wealth." This book outlines many of the stimulus packages contained not just in the U.S. tax law, but in the tax laws of all countries.

Warmest regards,

Tom

Dan and Elizabeth are just getting into real estate and ask the following question:

Q: We are accumulating many expenses in the start-up of our investing business (as we would in the start up in any type of business). In your Audio CD on business expenses, you mention that the expenses cannot be deducted until certain requirements are met. If we purchase investment property in this year, would that qualify the expenses? Thanks!

A: The question is whether purchasing an investment property qualifies as starting a business. The answer is a little more involved than that. Not only do you have to purchase the investment property, you have to have it ready for rent and then put it on the market to rent. Only when you have a property ready and marketed for rent have you started your business. Then, you need to review our CD on Start Up Expenses to learn how to deduct all of the expenses you have incurred getting ready to start your business.

Warmest regards,

Tom

One of the goals of our students (maybe even the primary goal) is to great massive amounts of passive income. Dan and Elizabeth are starting out and have some of this income in the form of interest income from mortgage notes they are carrying. They would like to know the following:

Q: We currently have two mortgage notes that we carry and receive passive income on. This income is deposited by an escrow company into our personal account each month. Should we do anything differently with that note income for tax purposes?

A: Not really, for tax purposes. Interest income is treated the same, whether you have your notes held in a flow through entity, like an LLC taxed as a partnership, or whether you receive the interest directly. For asset protection purposes, though, you may want to consider contributing your notes to an LLC so someone who sues you personally does not get instant access to your notes.

BTW, if you want to learn more about asset protection, be sure to sign up for the Rich Dad Education class on tax and asset protection that my friend, Garrett Sutton, and I hold every month. For more information, contact our office at 866.467.5809.

Warmest regards,

Tom

It seems to be Dan and Elizabeth's week. They are wondering about setting up a holding company. Here is their question:

Q: If we establish an LLC for a holding company of other LLC's, can or does the holding company LLC have a different tax election than those of the LLC's being held?

A: For background, let's discuss the purpose of a holding company. A holding company is an entity that only owns other companies. The reason to use one is for asset protection. Also, it can help reduce the number of tax returns you have to file. I love holding companies when used properly. The key is to use one holding company for your operating companies and a different holding company for your long-term investments, such as real estate rental property.

Typically, we recommend using LLC's as holding companies. LLC's can be taxed any way we want them to - we just have to make an election with the IRS. A holding company for long-term investments usually should be taxed as a partnership or sole proprietorship. A holding company for operating businesses normally should be taxed as an S corporation.

Be sure to sit down with your CPA to discuss your entities and your entire entity structure and tax and asset protection strategy. This is not something we recommend you do on your own. Too many chances to miss some important details.

Warmest regards,

Tom

This may seem like an unlikely combination, life insurance and quit claim deeds, but both of these are questions I couldn't answer on my own during out Tuesday evening Tax Teleconference. So I submitted the questions to my friend and fellow Rich Dad Advisor, Garrett Sutton, esq. Here are the two questions along with his answers.

Q1: Is life insurance protected from creditors and other claims by function of law or do I have to do something special to protect it?

A1: According to Garrett, this varies state by state. He confirmed that one way to absolutely protect it is through an Irrevocable Life Insurance Trust (ILIT). This I had mentioned on Tuesday. An ILIT is a very nice protection as it also can protect the life insurance from estate tax.

Q2: Does it matter whether I get a Quit Claim deed on a house I purchase or should I always get a Warranty Deed.

A2: As I suspected, the Warranty deed is superior to a quit claim deed as it warrants good title to the house. Garrett was surprised that the Title Company would provide title insurance on a quit claim deed. Since the person asking the question did get title insurance, then the Warranty deed would seem to be less important. In the future, I would always recommend a Warranty (or Grant) deed. This provides you with added protection, as you not only have the right to go against your title company if there is a problem with the title, you can also go against the seller.

Great questions and thanks especially to Garrett Sutton for coming through as always. You can learn more about Garrett at http://www.sutlaw.com.

Warmest regards,

Tom

Kent is looking at buying a building that is 30 years old and wants to know about how to take the depreciation deduction on it. Here is his specific question.

Q: When calculating depreciation over 27.5 years, is that from the date of construction or purchase? For example, if I were to buy a 30 year old house, is depreciation no longer allowed?

A: Good news for you, Kent! You can take a depreciation deduction on any building regardless of the age. You start taking the deduction as soon as you place the building in service. That means that as soon as you start leasing it or using it in your business, you can start taking the depreciation deduction. And, if you do a cost segregation, you can typically get a lot more depreciation earlier. See our course on the Magic of Depreciation at http://www.provisionwealth.com./products.

Warmest regards,

Tom

I love this question that I received from JIanghua. She has this great profession where she can choose how many days to work - what great flexibility. And, she wants to be investing in real estate. The question is:

Q: I have a professional job which I can choose to work how many days a week, and I also invest in real estate. How and in what way can I set up entity (for each )to best take advantage of Tax benefit of both?

A: You would be best served by working with a Tax Strategist (CPA) to create a long-term tax strategy. You should begin by looking at the proper entity for your professional work (depends on whether you are an employee or independent contractor) and the look at the entity to use for your real estate (depends on the type of real estate you will be doing, e.g., fix and flips, buy and hold, wholesaling, lease options).

Please feel free to contact us at cs@provisionwealth.com if you would like a referral to a good tax strategist who specializes in real estate and professionals. Address your email to my assistant, Siggy.

Warmest regards,

Tom

Juanita lives in Florida and wants to do business both there and in other states. She is wondering how to set up her entity structure. Here is her specific question.

Q: We are in the process of setting up a business in realestate buying and holding to rent. We are also planning on wholesaling. We are not married. We live in Florida. We are purchasing in other states. How should we set up the company? Thanks

A: Good news for you - the fact that you are not married probably increases your asset protection, especially in Florida. Last year, a judge allowed a single-member LLC to be liquidated in order to pay debts of the member. That said, I would still rather form a holding company in Wyoming or Nevada, since they clearly have better laws. Be sure to talk to an asset protection attorney about this, like my friend and co-instructor, Garrett Sutton. You can reach him at http://www.sutlaw.com.

Be sure also to sit down with a CPA to work out your tax strategy. Remember that businesses, such as wholesaling, need to be in a separate entity structure than buy and hold real estate. For a referral to a good real estate CPA, feel free to call Siggy at my office - 866467.5809.

Warmest regards,

Tom