Tom's Blog

Last night we held our first coaching call with our School of Tax Strategy participants. Thanks to everyone who joined in. There were many excellent questions and terrific discussion regarding Entity Fundamentals, this month's topic.

Gerald from Phoenix followed up with a question that I want to address:

Q: Thank You for answering all the questions this evening, I have learned plenty. I have one question that came at the end of the session. can I have my limited family partnership be a member of an LLC? I just did seven of these and I'm planning to fund them early next week. advise me if I'm making a mistake.

A: Yes, your family limited partnership, or FLP, can be a member of your LLC, so long as you have not elected to tax the LLC as an S corporation. There are no real restrictions in the Internal Revenue Code for who can be a member of a partnership (remember that we discussed that an LLC with multiple members is automatically a partnership for tax purposes if we don't elect to tax it as a corporation). Similarly, there are no real restrictions on ownership of a single-member LLC (as we discussed - treated as a disregarded, or invisible, entity by the IRS) or of a regular, C corporation. Only S corporations have restrictions on ownership.

Let me also follow up a bit on the concept of "nexus." As we discussed, nexus the amount of connection you must have with a state in order for the state to have the right to tax you. If your entity was formed in a state or has commercial domicile in the state, the state automatically has jurisdiction and can require you to file an income tax return. However, as I mentioned, there have been several states over the past few years that have taken the position that if you direct meaningful economic activity (e.g., advertising) into the state, then you have sufficient connection or nexus with the state to allow them to impose an income tax.

The controversy stems from a Supreme Court case by the name of Quill v. North Dakota. In Quill, the Court ruled that at least for sales tax purposes, a company must have some physical presence in order to have nexus and be subject to the taxing jurisdiction of the state. The Court specifically mentioned that it was not deciding the question of nexus for other tax purposes (read income tax). Some state Supreme Courts have interpreted this to mean that income tax does not require physical presence. Personally, I believe this is patently incorrect and not only goes contrary to Quill, but also goes contrary to Quill's predecessor, National Bellas Hess, which was not overuled by Quill, but rather confirmed by Quill.

In the meantime, be aware that states are becoming rather aggressive. If you are doing business in multiple states, I STRONGLY recommend that you work with a multi-state tax expert to help you decide in which states you need to file.

Remember that next month we will be talking about "Building Your Perfect Foundation." In this topic, we talk more about entities and how you can use them specifically in your Tax Strategy. Don't forget to do your homework and keep those questions coming.

Warmest regards,

Tom

Scott, one of our School of Tax Strategy participants, recently asked me the following question: Tom, in your Tax Strategy CD/DVD example of real estate investments, you used sale prices of $200,000. I live in S. Calif. This wealth building example doesn't quite come close to home prices here. In fact, I can't really think of anywhere. Can you please speak to this. Thanks.

Let's begin by examining some of the principles of real estate investing. Robert Kiyosaki has pointed out to me several times in our discussions about real estate that there are four ways to make money for a real estate investor.

First, there is the appreciation from the real estate. This is more available than ever right now with the high number of foreclosures. Second are the tax benefits from real estate. For more about this, please visit our tax section of Wealth Strategy U at http://ProVisionWealth.com/wealthu. Third, there is the principal paydown on the loan. This is an area that is frequently ignored by the speculators who like to use negative amortization loans. And fourth, there is the cash flow from the real estate.

This last one is almost always ignored by the speculators who have been promoting real estate that only makes money if it goes up in value. These people are the ones currently losing their properties to foreclosure. They forgot these 4 basic Rich Dad principles for real estate investing. But, where do you find properties that positively cash flow? Essentially, this is at the heart of Scott's question. It's not a matter of finding a $200,000 property, but rather a matter of finding a property that cash flows.

There are many parts of the country where you can find a single family home that produces positive cash flow. Many areas in the midwest, the south and the rust belt have properties that positively cash flow. Recently, though, I have been buying properties in Utah. My team of real estate finders, Spectrum Investment Group at http://spectruminvestmentsolutions.com/ has been terrific at finding homes that can be purchased below value and that positively cash flow.

Check out this wonderful resource. These guys can find the properties you are looking for. They have been finding them for me for years. You can call them at 800.914.5040.

Warmest regards,

Tom

One of the questions I get a lot from seminar participants and prospective clients is when they should get their entities set up and in proper order? Should they do it prior to beginning their business/investment activities? Should they simply form a limited liability company (LLC) and then wait until they are in business for awhile before getting with a tax advisor? Or, should they operate as a sole proprietor (i.e., no entity) until they are profitable?

These are good questions not to be ignored. As you would expect, my preference is to get your entities set up properly prior to starting your business. I can think of three good reasons for this.

First, by setting up your entity foundation prior to beginning business, you can be sure that you are protecting yourself and your business right from the get go. A lot of potential liability occurs during the start up phase of a business, as many people are unfamiliar with laws and easily make mistakes.

Second, setting up your tax structure early on allows you to maximize your tax deductions. There are several elections that you have to make on your first tax return for the business. It's best if you are in the entity that is best for you when you make these elections.

Third, you have a lot of expenses during the evaluation and start up phase that you would eventually like to deduct. Setting the business entity up correctly from the start will allow you to track all of those expenses and make the necessary elections to eventually deduct them.

For certain types of entities, e.g., S corporations and LLC's taxed as corporations, the election to be treated as that type of company needs to be made early on in an entity's existence. Call this a fourth, or "bonus" reason for setting up your structure prior to beginning business.

The good news is that even for those of you who have not set up your business structure to the best benefit, you can make changes to it and obtain the tax and asset protection benefits for the future. In some cases, you can even make retroactive elections. The IRS has several published procedures for late elections that your tax coach and discuss with you.

In any case, don't wait any longer. The sooner you act and create your perfect foundation for you business and investments, the sooner you can take advantage of all of the tax benefits that are available for the prudent and informed business owner and investor.

Stay tuned for more on entity structures in upcoming blogs.

Warmest regards,

Tom

This is the time of year that we contact all of our clients and suggest that they do some year-end tax planning with us. Many of you wonder why planning at this time of year is so important. Let me give you three quick reasons.

Reason #1: AMT. More and more people are subject to the Alternative Minimum Tax. The reason this is a problem is that you lose many of your deductions if you are subject to the AMT. For example, your state income and real estate taxes are no longer deductible. Nor are your investment expenses.

The good news is that you can avoid or minimize your AMT if you do proper planning at year end. Will you be in the AMT for 2007? Then, you may want to postpone your final estimated tax payment until 2008. Same with your investment expenses. Postpone paying them.

Reason #2: Estimated Payment Penalties. If you have income outside of your regular employment, you are probably making estimated tax payments. To make sure you have made sufficient payments to avoid penalties, do a year-end tax projection now. You may be able to avoid penalties even if you are currently underpaid by a significant amount.

Reason #3: High/Low Income Year. I have run into many people this year who are either having and extraordinarily good year or a very bad year. Many people with real estate are having a bad year. What can be done at year end? Reverse Tax Planning. Rather than accelerating expenses as you usually do, you may want to push expenses to next year. Otherwise, you risk losing the deduction or taking it in a year when your tax rates are really low. If possible, you may also want to accelerate income. This way, you can avoid losing itemized deductions and personal exemptions that cannot be carried forward or back.

So take some time to meet with your Tax Coach in the next week or two while there is still time to project your income and make a permanent impact on your taxes through a little year end planning. Then, take those savings and invest them to create additional Velocity in your portfolio.

Warmest regards,

Tom

This month, our School of Tax Strategy is focused on S corporations. An S corporation can be a terrific entity for an operating business. It is a "flow-through" entity, so there is only a single tax on the income - at the shareholder level. And there can be significant payroll tax savings to using an S corporation. One of the questions I received this month about S corporations is the following:

"If my S corporation owes me money, should I take cash out as a loan repayment first and wait to take a salary & distributions until it is fully repaid?"

This question comes up in many start up companies. When you are first starting out, it is likely that you had to put in some money to pay expenses until the business became profitable. When the business starts to be profitable, you have money that you would like to take out.

At first glance, the answer to this question seems to be "Yes." After all, a loan repayment is not subject to social security taxes like salary. If the money that's available came solely from the profits of the business, you are probably safe taking it out as a loan repayment.

However, there could be an adverse tax consequence to the loan repayment. Let's say, for example, that you had losses in your first two years of operation. These losses were funded by your loans to the company. Let's say that in year 3, you obtain a bank loan. You are still operating at a loss or break even, but the bank has decided to loan money to the company and you want to take it out to pay some personal bills.

Your first inclination may be to pay back your loan to the company. The only problem is that if you do this, you will likely pay tax on the loan repayment. Why? Because in an S corporation you do not receive tax basis for loans to the company from outside parties. So, you received basis for your loan to the company. Then, you took losses on your tax return the first two years and reduced your basis in your company. At least some of that basis came from your loans to the company. Now, your loan basis is less than the face amount of your loans. As a result, when you pay back these loans, you could have capital gains from the repayment.

If this seems a little complicated and confusing, IT IS! The answer is to talk to your CPA prior to taking out the money. Have them run through the calculation to determine the best way to classify the money you take out for tax purposes. Otherwise, you could have a surprise tax bill come April 15th on the capital gains from the loan repayment.

So be sure to stay in contact with your CPA throughout the year and be sure you learn the rules for taking money out of your S corporation.

Warmest regards,

Tom

In our School of Tax Strategy call last week, I was asked the question, "What constitutes travel away from home and why is it important?"

In order for certain business travel expenses to be deductible, you must be traveling "away from home." There are actually two parts to this question. The first is, "Where is my tax home?" The second is, "What constitutes being 'away' from home?"

Your tax home is a facts and circumstances question. That is, each person's tax home will be different, not just depending on location of the person's residence, but depending on the person's circumstances. For most of us, our tax home is where we live full time. But there are many circumstances where this is not clear. For example, where is a full-time student's tax home? Is it his permanent address with his parents or his temporary address while at school nine months during the year?

Or, what happens if you don't really have a permanent residence? This was the situation in a case several years back where a traveling salesman traveled so much that the IRS and the court concluded that he did not even have a tax home.

Then, we have the question of how far do we have to travel to be "away" from our tax home? Is an hour across town sufficient? What about going 50 miles away to a neighboring town? There are many court cases discussing this question. One court suggested that a taxpayer had to go beyond the metropolitan area in which he lived in order to be "away." Another court said that the taxpayer had to go into another county.

Finally, how long do you have to be away in order to qualify as "away" for tax purposes? The courts and the IRS generally have held that if you need to stay overnight to rest because of the work and the distance, then you are "away." But, if you can reasonably go to and from the location in a single day without rest, you are not away from home.

Why is this important? If you are away from home, your meals and lodging are deductible so long as they are ordinary and necessary to your business. Meals are always deductible if you have a business purpose for the meal, specifically if you are eating with a business associate or client. But what if you are eating alone? Then, you have to be traveling away from home for the meal to be deductible. Even lodging is only deductible if you are away from home.

Since everyone's situation is different, if you have a question about whether your trip is away from home, I suggest you contact your tax coach to get help. If you don't have a tax coach or would like to find someone new, please feel free to contact us at info@provisionwealth.com or toll free at 1-866-467-5809. We serve tax clients through the U.S. and wealth and business clients throughout the world.

Warmest regards,

Tom

The other day, a client asked about how to handle receipts. And in our School of Tax Strategy group coaching call last week, we were talking about documenting meals and entertainment expenses. So, I thought now would be a perfect time to address this issue.

The IRS requires receipts to be saved for expenses in excess of $25. This can become a burden for our filing systems, particularly when it comes to little receipts for meals and miscellaneous expenses. And, these receipts tend to fade over time (especially the yellow copies of credit card receipts) so that by the time the IRS audits you, the receipt is illegible.

I think the best answer to this dilemma is to purchase one of the many scanning products that are available. You can get a scanner that is specifically for your receipts or you can use a normal scanner. The advantage of the receipt scanners is that they come with software to organize your receipts electronically. Kind of an electronic filing system. Some even maintain that they can download your receipts directly into Quickbooks.

I haven't personally used the scanning software, but I maintain all of my receipts electronically. My partner won't even let me bring any hard copy receipts to her office. She insists that they all be scanned and emailed to her. Since the IRS accepts scanned copies, there really is no reason for keeping hard copy receipts any more.

I encourage everyone to take advantage of this technology and to get your tax documentation in order. If you are a client of ours, we are very happy to accept scanned copies of any documentation you need to provide us to do your tax returns. In fact, our website is set up specifically so you can scan your documents and upload them to our secure site. For more information about this, please contact your Tax Coach or call us toll free at 1-866-467-5809.

Warmest regards,

Tom

We had a great call last night with everyone enrolled in the ProVision School of Tax Strategy. Welcome to all those who joined us from the Business Tax Strategies course. If you aren't yet a member, of the School of Tax Strategy, look for new opportunities to join us on our monthly coaching calls via our other tax strategy products at http://www.ProVisionWealth.com/products.

We had lots of good questions last night, when our topic was Getting the Most out of Your Real Estate Tax Benefits. One of the really good questions centered around mortgage debt relief and the recently enacted Mortgage Relief Act.

The question asked was what happens in the following situation under the Act:

You purchased a property for $200,000 at the beginning of 2007 with no money down. Now, you have negotiated a short sale with the bank and a buyer for $140,000. What is the tax effect?

The answer depends on whether this is your principal residence and whether the property is now worth only $140,000 or something else. The Mortgage Relief Act ONLY APPLIES TO YOUR PRIMARY RESIDENCE. So, if this is a rental property, the Act doesn't apply to you and you have to follow the normal rules. In addition, the Act only applies if you DO NOT sell the property. The intention of the Act is to allow you to keep your property, get a reduction from the bank in your loan principal so you can avoid a foreclosure, and not tax you on the debt relief. So, if you did not sell the property but just received a $60,000 reduction of your debt AND this is your primary residence, the debt relief will not be taxable to you.

However, if you sell the residence, then you effectively sold the house for $200,000. If the debt was nonrecourse, then you are treated as selling the house for the outstanding indebtedness on the property. Since you paid $200,000, there is no gain on the sale and you won't have to pay any tax. (Even if the debt were more, you might have the personal residence exclusion of up to $250,000/$500,000 available to you.)

If the debt were recourse and the value was $140,000, you would have debt relief of $60,000. If this is your primary residence, the income from discharge of indebtedness will be excluded from your income and not taxable. But, if this is a rental property, the Act DOES NOT apply to you. So, you would have debt relief of $60,000 (taxable to you) and a capital loss (or Section 1231 loss) of $60,000. This could be a DISATROUS RESULT for some people. See your tax advisor immediately if this is your situation!!!

Another question asked concerned the calculation of the home mortgage interest deduction for debt in excess of the limit. Specifically, if you have a home equity line of credit on your house that qualifies for the additional $100,000 debt/interest deduction and you pay down some of that line during the year and then raise it back up, and even exceed the $100,000 limit at times during the year, how do you calculate the interest deduction for the year?

The answer is simply to pro rate the interest deduction as it was incurred throughout the year. This is a computation that your tax preparer should be able to do for you fairly easily with the proper information.

Keep the questions coming! I'm happy to answer them here in my blog. For more on the Mortgage Relief Act and other tax issues, please go to our many articles on our website by logging onto Wealth Strategy U at http://www.ProVisionWealth.com/wealthstrategyu.

Warmest regards,

Tom

Edna from Texas asks the following question: I am a healthcare provider and if I work full time as a health care provider and work 15-20 hours a week on my real estate business would I be considered a real estate professional?

A: Perhaps. The rule is that you must spend more time on your real estate than you do in your other business/job. So, in your case, if you spend 20 hours per week in real estate, then you would have to spend less than 20 hours per week in your health care business. You should easily meet the 750 hour rule if you make the proper election to aggregate your properties (for more on this, go to http://www.ProVisionWealth.com/wealthstrategyu).

In addition, you have to make sure that at least some of your real estate activity pertains to operations (e.g., property management) and not just investing activities (e.g., bookkeeping).

Warmest regards,

Tom

I'm a little behind on answering questions for our School of Tax Strategy folks. Jeff in Boston asked the following:

When is it that we are required to issue a 1099MISC to service suppliers? When do we need to get them to fill out a W9? If the check always goes to a company name, (like ABC software or Software Technology Corp) does that by itself protect us from the need to produce a 1099 or do we need to require them to do a W-9 also? If it is to an individual and the amount is less that $600 should we send one anyway?

The rule is that 1099's have to be sent to any service provider who is not incorporated if the amount paid to that provider during the year was $600 or more. Jeff raises a dilemma that is encountered by most businesses, i.e., what if you don't know if they are incorporated? The safe answer is to issue a 1099 to all service providers you pay $600 or more during the year. Even if there is an "Inc." at the end of their name, this does not guarantee they are incorporated. I have seen this designation erroneously applied to LLC's and even to sole proprietorships. There is no reason you would need to issue a 1099 to suppliers you paid less than $600 during the year.

Warmest regards,

Tom

Corey asks the following question:

Q: Tom, I was wondering if there is a preference as far as tax strategy/legality with pulling the equity out of rental. The rental is currently a sole proprietorship and were are looking into transferring it to another entity(maybe LLC). Should you try to pull out the equity before the transfer or after?

A: As with most questions of this sort, the answer is "It Depends." In the case of a single family home rental, you probably want to pull the equity out prior to transfering it into an LLC or other entity. Banks typically do not like to lend to entities, but rather prefer to lend to individuals. So, you want the loans in place (including second mortgages) prior to contributing the property to your LLC. Be aware, though, that there are several details to attend to when transfering a property to an LLC to make sure that you keep in place the casualty insurance, the title insurance and to be sure you don't run afoul of the due on sale clause in the bank loan. Please contact your Tax Coach to go over all of these details as they apply to you. We also have this information in our ProVision educational course, "Getting the Most Tax Benefits From Real Estate," coming soon to http://www.ProVisionWealth.com/products.

Warmest regards,

Tom

Corey listened to our teleseminar with Doug Lodmell and asks the following question:

Q: Tom, Thanks for the great information on Asset protection. It seems the more I read though the more confused I become. In the Rich Dad series Garrett Sutton talks about Nevada and Wyoming LLC's and Nevada Asset Protection trusts being great for asset protection. Douglas Lodmell listed these as poor when it comes to asset protection in his teleseminar. I guess the question is who is correct or are they both correct and I am misunderstanding the presentation?

A: As Doug pointed out in his teleseminar last week, there are several levels of asset protection. Doug showed a scale of poor, good, better and best types of asset protection. I don't think there is any question that the offshore asset protection Doug advises is the ultimate in asset protection. But that doesn't mean that you don't want to do at least some of the other pieces as well. As Doug suggested, most of your investments and business interests you want to be held in an LLC. This is what Garrett is talking about. This is good asset protection and is the minimum anyone should do.

The next level beyond LLC's would be a domestic asset protection trust (DAPT). I don't believe Doug addressed these during his presentation. Here is how the DAPT works. In most states, a self-settled trust (i.e., one in which the person who puts the assets into the trust is also the beneficiary) does not protect you against lawsuits. However, a few states have enacted DAPT statutes that do protect you in a self-settled trust. Wyoming, Alaska, Nevada and Utah are a few of the states with these laws in place.

So why go to the trouble and expense of an offshore asset protection trust when you can just form a DAPT? There are two reasons I can think of. First, these trusts have not been tested in the courts. So, we don't really know what will happen when they are tested. More importantly, however, is the situation where you don't live in one of these states or your assets are located in a state other than the state in which your trust was formed. When you are sued, which state's law is going to apply? If I were a plaintiff, I would sue in the state where the property is owned if it is not a DAPT state. Will a court in a state without the DAPT statute protect you? This is a big unknown.

What we do know is that offshore APT's have been tested for over 20 years and have proven to work. Hopefully there will come a day when all of the states have DAPT statutes and we don't have to go offshore. In the meantime, though, if you want maximum asset protection, especially if you own property or live in a non-DAPT state, you should consider an offshore APT as suggested by Douglass Lodmell.

Let me know if you have any other questions about this. Hope it helps.

Warmest regards,

Tom

Corey mentioned the other day that he was confused about the different advice given by different attorneys, including Doug Lodmell and Garrett Sutton. He also told me that he was a bit confused about where to form entities, as he had heard both good and bad about Nevada LLC's.

Different opinions from different advisors is always a concern. That is precisely why, at ProVision, we recommend a solid, informed Wealth Coach (http://www.provisionwealth.com/strategic_wealth_coaching.asp) to explain the differences and how to decide which advisor to follow.

Nowhere is this more true than in the case of asset protection. I have been told by some attorneys, including Garrett, that they really like Nevada LLC's for the privacy they provide. I have had other attorneys tell me they don't like Nevada because of the cost, the current focus of the IRS on Nevada companies or because of the legal system in Nevada. I'm not saying that one is right and one is wrong. What I am saying is that each person's situation is different and you need a good wealth coach to help you identify which option is best for you and to work with the attorneys to make a good decision.

By the way, Garrett saw my blog and got back to me right away with his comment (see below under "Comments" to the previous blog entry. I understand Garrett's position. It certainly is more expensive to use an offshort APT than a domestic APT. The question is simply the level of protection you want. Some people are fine relying on their umbrella insurance policy with no LLC's at all. Others want the protection of LLC's. But some people want the most protection possible and I have not seen anything that is better than the offshore APT. And the way Doug sets these up, the APT does not go offshore until there is a triggering event. So, Garrett and Doug are both correct - it just depends on where you are and what level of asset protection you desire.

Warmest regards,

Tom

Corey asks the following question:

A partner and I have an LLC with 50% ownership each. We both plan to transfer title via a Quick Claim Deed for both of our current homes to our LLC. We then plan to move out of these homes and rent them. We will then keep the new homes that we purchased in our own personal names. Both of the homes that we plan to put into the LLC have been lived in for more than 2 years. Is the transfer of our homes into the LLC a taxable event? Also is there anything else besides the Quick Claim Deed that needs to happen in order to fully transfer the new properties into the LLC and protect us from legal liability of our new rentals?

A: Like most tax questions, this one prompts another question. How is the LLC being taxed? If you are taxing it as a partnership (my recommendation), there probably is no tax consequence to tranferring the houses into the LLC. However, you may want this to be a taxable event. If it is a taxable event, then you will receive a basis in the property (for depreciation and subsequent sale purposes) equal to the fair market value of the property at the time of the transfer. And as long as the fair market value is not more than $250,000 greater than what you paid for the house, there should be no tax on the transaction. This is a tremendous benefit, but you need to make sure you handle the transaction properly. I recommend you sit down with your tax advisor to make sure you do this right.

There is another issue regarding this transaction and that is the use of a quit claim deed. You should speak to your title company about this. They may recommend that you use a warranty deed instead so you don't lose the benefit of your title insurance. Be sure you also speak to your regular insurance agent to make sure your houses maintain the appropriate coverage for property and casualty insurance purposes.

For more about this, visit our Tax Mastery section of Wealth Strategy U at http://www.ProVisionWealth.com/wealthu.

Warmest regards,

Tom

Alfonso asks the following question:

This past year I paid to my children for helping my business. I did not have an LLC. I just operated as a sole proprietor. Are these payments deductible for me? Are they taxable to my children? If so, how?

A: I have good news for you, Alfonso. Not only do you get to deduct your payments to your children, they may not have to pay tax on them. And, you don't have to withhold any payroll taxes.

Paying children can be a great way to shelter income from tax not just for you, but for your children as well. At ProVision, this is such an important part of our clients' tax strategies, that we have developed an entire education product called, "Getting Your Children in the Game." This product is about to be released for the first time ever at http://www.provisionwealth.com/products.

Getting your children in the game can save you $5,000 - $12,000 in taxes EVERY YEAR. Don't miss out on this critical part of your tax strategy. In tomorrow's blog, I'm going to tell you how I used this strategy to get my 18-year old a house of his own.

Warmest regards,

Tom

Alonzo asks the following question: I made some business payments via wire transfers from my bank account to their bank account. Can I deduct this? I don't have a receipt for it.

In today's business world, we frequently make payments to vendors using online banking or wire transfers. Alonzo's question about documenting these transfers is critical to making sure the IRS allows a deduction for such payments. After all, documentation this the number one key to convincing the IRS to allow your deductions.

There are two simple ways to document these payments. First is good bookkeeping. If your books properly reflect the payments and properly categorize them to the right accounts, the IRS is likely to allow the deductions. Having a full set of books is a critical part of this. So, don't just use a checkbook accounting program such as Quicken. You need to use a full accounting program that has a balance sheet and income statement (i.e., dual-entry accounting) such as Quickbooks.

Second, you do need to have backup documentation. This can be in the form of an invoice from the vendor, a HUD-1 in the case of a property purchase, or a contract. You can keep these in scanned form if you do not want to maintain paper files (scanned copies are actually safer and last longer than paper copies).

Don't be afraid of using wire transfers or online banking. Just be sure to maintain proper accounting and backup documentation and you should be fine.

Thanks for the question, Alonzo. I'm sure a lot of people are wondering the same thing.

For more information on documentation, go to http://www.provisionwealth.com/wealthu.

Be financially free now!

Tom

One of our School of Tax Strategy participants recently asked me the following question: Last year, I opened a trade name for a Marketing company. After that, I was paying individuals for their services, such as delivering fliers, helping on presentations, etc. How do I deduct these payments and are their any filing requirements with the IRS in this regard?

The first question we have to answer is whether these folks are employees or independent contractors. The IRS has a list of factors that help determine this. For more information, visit ProVision's Wealth Strategy U at http://www.provisionwealth.com/wealthu.

For now, let's assume these are independent contractors. As such, you do not need to withhold any taxes or file quarterly reports. You do, however, need to file a form 1099-MISC for each of them no later than January 31st of each year if you paid them more than $600 for the year.

Since you did not have a separate entity, your Marketing company is a sole proprietorship. As such, you should deduct the expenses of the company against the income on Schedule C of your personal tax return.

Remember that to get the greatest tax benefits from your business and investments, YOU MUST LEARN THE RULES! My company, ProVision, has recently produced some marvelous education modules on a wide variety of tax planning topics. Visit http://www.provisionwealth.com/products
for more information.

Chris asks the following excellent question about the consequences of qualifying for real estate professional status:

If I elect aggregation for RE professional status for 2 rentals, what are the implications when I sell? One possible scenario in this current market would be that I incur a loss on one property (even with recapturing depreciation!) and a gain on the other, presuming I sell both in the same tax year.

A: As with most tax questions, the answer is "it depends." It depends on whether you have always qualified as a real estate professional. If so, then you simply have gain or loss in the year of sale and that gain or loss is treated as a Section 1231 gain or loss. See your tax coach for more on the consequences of Section 1231 gain or loss (generally positive).

If you have not always been a real estate professional, you may have unused passive losses relating to these properties. If you sell the properties in a fully taxable disposition (e.g., there is no gift or 1031 exchange involved), you will free up these unused passive losses to be available for use against other income (including any gain from the sale).

If you sell one, but not the other, you will not free up any passive losses. This is because you have not disposed of the entire property (which, because of your aggregation election now includes both properties). You will not free up the losses until you dispose of the other property. The result is that you could end up with these passive losses trapped and unused for years and years.

For this reason, I strongly recommend you consult with your tax coach to determine the best tax strategy even before you make the aggregation election for the first time.

For more information on how to be a real estate professional for tax purposes or the consequences of doing so, see our new ProVision education product, How to Uncover the Hidden Cash Flow from your Real Estate at http://www.provisionwealth.com/products.

Warmest regards,

Tom

Craig asks a very interesting question about his automobile expenses:

Q: Presently I am taking the standard cents per mile deduction on my vehicle under my current occupation. Due to the AMT, my accountant tells me I net back only about 2% of ALL of my expenses. How can I use my C-corp or LLC more for these expenses.

A: The issue here is that if you are an employee and you have unreimbursed expenses, such as automobile, travel, meals or other, they are only deductible as miscellaneous itemized deductions (MID) on your Schedule A. The problem with this is twofold. First, they are subject to a 2% floor, i.e., you only get to deduct MID to the extent they EXCEED 2% of your adjusted gross income (AGI). Second, they are not deductible at all for AMT purposes.

The solution is to incur these expenses as a business, not as an employee. Let's say, for example, that you are in sales. Your company allows you to either be an employee or an independent contractor. As an employee, you lose the deductions. But as an independent contractor, all of a sudden these expenses become fully deductible, not subject to either the 2% or the AMT limitations.

Of course, there are other issues with becoming an independent contractor that you need to consider, including loss of benefits and Social Security taxes.

Just paying these expenses out of an LLC or corporation will not solve the problem, so long as you remain an employee. The reason is that they expenses relate to your employment and not to your LLC or corporation. You can only deduct expenses in your LLC or corporation that belong to that entity. Paying someone else's (in this case, your) expenses is not allowed as a deduction by the IRS.

Contact your ProVision Tax Coach for tax strategies to take advantage of the independent contractor status. There are ways to minimize the Social Security taxes and even the loss of benefits.

Warmest regards,

Tom