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

Thanks to everyone who was on our School of Tax Strategy coaching call last night. We had numerous great questions and a great discussion. I promised to blog about one of the questions to give some clarification.

Q. I know that I have a choice for basing my estimated payments either on last year's tax or this year's tax. Can I change my decision in the middle of the year? In other words, if I base my first two estimated payments on the current year's tax liability, can I then switch to using last year's tax liability for the remaining payments and still avoid any penalty?

A. Effectively, you can change, as the required annual payment is the lesser of last year's tax or 90% of the current year's tax liability. But beware of the exceptions to the option for using last year's tax. If your adjusted gross income is above $150,000, you have to pay 110% of prior year to meet that exception.

Warmest regards,

Tom

Here is a recent question from Michael about the deductibility of educational seminars.

Q: I am having an IRS audit and they are trying to not allow my deduction for taking a personal development seminar. Tony Robbins like seminar. I am in networkmarketing? and I thought that those were deductable. I cannot find any case law? can you help?

A: First and foremost, I always suggest to people that they hire a qualified CPA to handle any IRS audit. It's cheaper than handling it yourself as you will always end up paying less tax if a good CPA is in charge of the audit. Also, it seriously reduces the emotional strain of the audit because you don't have to deal with the IRS. That said, let me answer the specific question.

Section 212 and Section 274(h)(7) of the Internal Revenue Code specifically disallows deductions for seminars taken for investment purposes (i.e., production of income). These are probably the rules being cited by the IRS auditor as why your seminar is not deductible.

However, Section 162 allows a deduction for all "ordinary and necessary" expenses carried on in a trade or business. Michael's challenge is proving to the auditor that the Tony Robbins course specifically relates to his business. Again, this is where an experienced CPA would be useful in conducting the negotiation and proving the relevance of the course to the business.

For more about how you could take advantage of the expert negotiation team at ProVision, please visit our website at http://www.provisionwealth.com or just pick up the phone and call us toll free at 1-866-467-5809.

Warmest regards,

Tom

Debbie from our School of Wealth Strategy asks the following question:

Q: My life partner and I purchased two single family homes this year as rental properties and see advice as to what entity should be established to take full tax advantage/asset protection. One of these properties is in the Go Zone and we seek advice as to allowable depreciation on this property.

A: Seems like a simple question, doesn't it? As simple as it seems, we actually have multiple questions and sub-questions. Let me address them one at a time. The first question is which entity is best for tax purposes. This, of course, depends on your ultimate strategy and where you live and where you invest. In most states, we recommend forming an LLC that is taxed as a partnership. Especially because you are not married, we suggest you have an attorney draft an operating agreement for the LLC. We also suggest you get with your Tax Strategist make the most of the tax benefits of the LLC. If you don't already have a good Tax Strategist, please call our office at 866.467.5809 and we will be happy to get you lined up with a qualified Tax Strategist.

The second question is closely related to the first and this is the asset protection question. Again, in most states we would recommend an LLC, but ALWAYS recommend you speak to a qualified asset protection attorney. If you don't know one, call us at we will recommend one that will meet your requirements.

The third question is about the depreciation. And this has a couple of sub-questions. If you qualify for the GoZone depreciation, you can take 50% of the cost of the property, not including land, plus ordinary depreciation on the remaining 50%. But even if you qualify for the GoZone depreciation, you may be limited as to how much you can take this year, depending on whether you are passive or active in the real estate, your adjusted gross income, and whether you qualify as a real estate professional. For answers to all of these sub-questions, I recommend you go to our website at http://www.provisionwealth.com/products and subscribe to our School of Tax Strategy where you will get a new course on a specific tax strategy each month, including a course on making the most of your real estate tax benefits and one on depreciation.

It sounds like what you really need is a good Tax Strategy. For this, I strongly recommend you speak to my assistant, Beth Rojas, at 866.467.5809 and set up an appointment with one of our Tax Strategies to determine the best approach for you.

Warmest regards,

Tom

We are always asking for questions from our School of Tax Strategy students. Recently, we were asked the following question:

Q: "Hi Tom, If a person has a 401k still with a prior employer's plan, is it best to move that money into an IRA or something else? Anything that that person needs to keep in mind to ensure it's not a taxable event? Thank you!"

A: Here are a couple of quick tips to make this easy for you.

1. Ask yourself if you are happy with the amount of money the investment is earning in your 401(k). If the answer is yes, leave it there. If the answer is no, move it into a self-directed IRA.

2. To make sure the rollover from the 401(k) to the IRA is not taxable, do a "trustee to trustee" transfer. This means that you tell your former employer to directly transfer the investments in the 401(k) to your IRA.

3. If your former employer makes a mistake and writes you a check instead, it's okay. Just be sure to put the entire amount back into your self-directed IRA within 60 days.

Caution: If your former employer withheld taxes when they wrote you the check from your 401(k), you have to write your own check in the amount of the taxes to your IRA. The withholding is treated as a distribution to you, so you have to put that amount back into your IRA as well. You will get back from the IRS when you file your tax return.

Set up your self-directed IRA with a good trustee. We recommend both Sterling Trust in Texas and Entrust (offices around the country). For more information, visit Wealth Strategy U. It's FREE at http://www.provisionwealth.com/wealthstrategyu

Warmest regards,

Tom

My friend, Maria, asks the following questions:

Hi Tom, we are exploring 1031''s. How long should our current primary residence be a rental property before it can qualify for an exchange? Is it possible to leverage the equity in this property to a property with more cash flow without a cash outlay? If so, how?

A: Let's start with the second question. Suppose you had a building that was worth $2,000,000 and your loan was $1,200,000. What are the restrictions on what you can buy in a 1031 (i.e., like-kind) exchange. The general rule is that when you sell a property, you recognize taxable gain for the difference between the sales price and your adjusted (i.e., net of depreciation) cost. Under IRC Section 1031, if you follow the rules, you can defer any gain if you exchange your property for another "like kind" property.

The rules for Section 1031 are complex and detailed. But there are a couple of simple rules of thumb you can rely on to answer some of the general questions before going to your CPA for more detailed answers. First, so long as the new property costs more than the property you sell, you should not have to recognize gain (again, as long as you follow all of the other rules). So, in the example, so long as the new property costs at least $2,000,000, you should not have to recognize gain on the sale of the old property.

Your old property has a loan equal to 60% of the value of the property. Let's say that you find a bank that is willing to loan 80% of the value of the new property. That means that with your $800,000 of equity in the old property, you should be able to purchase a new property costing 5 times this amount or $4,000,000. There is no maximum value of the new property from a tax standpoint. The only real restriction is the bank's lending requirements.

Now let's look at question number 2. Suppose you turn your personal residence into a rental property. How long do you have to rent it out before you can do a 1031 exchange? The IRS guidelines say that you need to hold the property as a rental property for one year and a day. If you do that, they will not challenge you. Even if you hold it as a rental property for less than a year and a day, however, you may be able to do a 1031 exchange. See your CPA for the detailed rules about this and the related risks. If your CPA does not specialize in real estate, call the ProVision office at 866.467.5809 and schedule an appointment to speak to one of our real estate tax experts (all of whom own investment real estate).

One other question that comes to my mind is how you changed the property from a personal residence to a rental property? Did you know that you could have excluded as much as $500,000 of gain permanently if this was done the way we would recommend at ProVision? This could have eliminated entirely the need for a 1031 exchange and created a permanent tax benefit. For more on this and other tax saving strategies, call us or enroll in our School of Tax Strategy at http://www.provisionwealth.com/products.

Warmest regards,

Tom

I am so glad to be getting questions from my new friends in Australia. Let's start with a question from Maya.

Q: How different is your U.S taxation system to Australias,and will these differences be taken into account during the coaching programme when it commences? Eg How does your IRA differ to our Australian Superannuation?

A: Australia and most other countries, including the U.S., have net income tax systems. This means that you are taxed on your income, less any income that is specifically nontaxable (excluded) and less deductions. While the exclusions and deductions will be different from country to country, many of the basic principals remain the same. These are the principals we talk about in our bonus course on tax planning that comes with our course on Wealth Strategy.

For example, in the U.S., we have individual retirement accounts (IRAs), profit sharing plans, SEP's and pension plans. All of these are ways to defer income from today until some later year. In Australia, you have your Super and in Canada they have their RSSSP. All of these plans effectively function the same, in that the government controls how much and who can contribute to the plan, how the plan can invest its assets, when you can take money out of the plan and how the money you take out is taxed.

As we discuss in our bonus course on tax planning, most individuals rely heavily on these plans for retirement planning and tax planning. At ProVision, we believe there is a better way. That way is to create a Tax Strategy that produces permanent tax savings. Again, all countries have tax credits, income exclusions and deductions. While they may be different from country to country, the principals are the same in all countries. These are the principals we discuss in our bonus session on tax planning.

Of course, we recommend you find an experienced, creative tax strategist local to your country to be on your wealth team. Our course on Building Your Wealth Team that comes as part of our School of Wealth Strategy (http://www.provisionwealth.com/products and that was included in the course you purchased at the Chris Howard seminar teaches you how to find the right people for your team. When it comes to a tax professional, however, one thing you need to be sure of is that your tax strategist looks at taxes from a big picture, strategic point of view and focues on permanent, rather than temporary tax savings.

The value of such a tax professional in incalculable. You can save thousands of dollars in taxes that you will never have to repay that can be used to create millions of dollars in wealth and passive income.

I look forward to having you on our monthly coaching calls. Please be sure to ask lots of questions during those calls as well. I'm sure you are not the only person with your specific questions, so your questions help everyone.

Warmest regards,

Tom

I blew it and I'm sorry. My resolution was to blog every week day and I missed yesterday. But here's the thing about resolutions. The tendency is to drop them if we goof. Instead, I prefer to admit I made a mistake and keep going. So, I'm going to keep blogging every day even though I'm already not perfect this year.

Today's question comes from one of our School of Wealth Strategy members. Jerry has a tax question. This is totally appropriate since taxes have such a huge impact on wealth building.

Q: Do the S-Corp minutes need to declare a per-share dividend in order to take quarterly distributions? If so, do I need to hold quarterly meetings to declare them or can I make a blanket declaration for the year? Thanks for your help and the great courses and workbooks. I’ve learned a lot and am applying it as I go.

A: You do need to declare quarterly distributions in an S corporation. The key is to act as if you are a regular corporation, like IBM. Each quarter you hold a meeting to declare the dividend and then you pay the dividend. Of course, you may want to hold your meeting with your spouse at a nice restaurant and make the meal deductible. But you do need to maintain minutes of your meeting and keep them in your corporate book. For more about how to handle S corporations, meals & entertainment and corporate formalities, I suggest you subscribe to our School of Tax Strategy (http://www.provisionwealth.com/products)where, just like the School of Wealth Strategy, each month you will receive a new course on a different tax strategy topic. All three of these topics are complex enough that we have created a separate course for each of them.

Thanks for being patient with my goof yesterday. Keep reading and feel free to send the link to my blog to your friends.

Warmest regards,

Tom

I know it's late, but I promised Jerry in our School of Tax Strategy call last night that I would answer his question today regarding the election to deduct/amortize start up costs. His question was whether you can make the election on an amended return. The answer? It depends.

Like most tax questions, the answer depends on the facts of the situation. In this case, it depends on when you amend your return. If you amend your return prior to the original due date, plus extensions, you can file an amended return (or a substitute return) and make the election. Otherwise, you are out of luck because you have to make the election by the extended due date of the original return.

However, all may not be lost. As I suggested last night to Jerry, just because you didn't make the election doesn't mean there might not be another way to get the deduction. In Jerry's case, those of you on the call will remember that we decided we could make the argument that the costs in question might really be costs of a continuing business, rather than of a new business. If the expenses are attributable to an existing business, they are deductible under the regular tax rules for business expenses and no election is necessary.

The moral of this story is twofold. First, get good tax help as early as possible from a qualified tax strategist. Go to http://www.ProVisionWealth.com for more information about how ProVision can provide the strategies you need to permanently reduce your taxes. Second, even if you make a mistake, sometimes, with good advice, you can correct it just by taking look at it another way.

As always, let me know how ProVision can help. It's our mission to show you how to take back the taxes that you are overpaying.

Warmest regards,

Tom

Debbie from our School of Wealth Strategy asks the following question:

Q: Tom, what do you mean when you say we should build a business around our investing?

A: This is the question of all questions and gets to the core of ProVision and what we are all about. Let's start with a little background.

Historically, all great fortunes have been built in business. Whether it was Andrew Carnegie, John D. Rockefeller, Bill Gates or Warren Buffett, all great fortunes have business as their foundation. You really don't hear about great fortunes being made by investors. Ever wonder why? It's because business done right provides the most leverage, greatest velocity, and least amount of risk of any money-making activity.

I come from a long line of entrepreneurs. My father owned a printing company, his father owned an insurance agency. I learned early on in my life what it was like to run a business. But my father, while a great printer and a wonderful person, was not a great businessman. So I have spent my life learning what makes the difference between a great business and an average business. Why do some businesses grow and grow while others seem to hit a ceiling past which they can't grow?

The answer to this question lies in the foundation of the business. Small businesses stay small when the owner spends his or her time running the business. Effectively, these people own their job. They have no time to work on the business because they are always working in the business. The key is how to get the owner out of the business operations and focused on the business growth. The answer is for the business to create a strategy and a set of systems that implement that strategy. Then, and only then, will the business owner have time to grow the business. When the strategy and systems are in place, the owner only has to manage the systems, not the people. The owner isn't doing the work, the employees and other team members are doing the work.

In case you think this is a fantasy, let me explain that I have done this with my accounting firm. My partner, Ann, is a systems genius. My expertise is in strategy. So once I created the strategy for the firm, Ann created the systems. The result is that Ann doesn't spend any time at all on the accounting firm and I spend about 3 hours a week. If it can be done with a professional services firm, it can be done with any business.

So, back to Debbie's question. What does this have to do with investing? I have discovered that the business principles of strategy and systems can be applied to investing. Investors who create a business of investing, by developing a strategy and implementing systems, can enjoy the same results enjoyed by a successful business owner, i.e., higher profits, more growth, less time spent on investing, total control over their investing and less risk.

These are the principles I teach on T. Harv Eker's stage, Chris Howard's stage and Robert Kiyosaki's stage. These are the principles I have followed to create an accounting firm where I only spend 3 hours a week managing the firm. And these are the principles I follow in my real estate investing.

The good news is that Ann and I have decided to share all of our strategies and systems with you. And we have made it as inexpensive as possible. How? Through our School of Wealth Strategy and our School of Tax Strategy; two inexpensive subscriptions that each include hours of training materials and a monthly coaching call with me. To sign up, simply go to http://www.provisionwealth.com/products. It's fast and it's easy.

We want to share more of our strategies and systems, so we are continually adding more sessions to our Schools. The response from our current members has been fantastic.

Thanks to Debbie for asking this question.

Warmest regards,

Tom

One of my fellow adjunct professors asks the following question as a follow up to my recent email:

Q: "Excellent article! I admit, however, I was hoping to see whether in your opinion an adjunct professor is able to deduct his/her mileage traveling to school.
Samantha

A: Well, Samantha, like most tax questions, the answer is that this depends on your facts and circumstances. The general rule is that if you are an employee, then your travel to and from your work location is considered commuting and is not deductible. However, that doesn't mean we couldn't change your facts to make it deductible.

Let's say, for example, that you don't have an office at the university. But you do have an office at home that meets all of the tests for home office. And you work in your home office each day you teach preparing your lesson prior to traveling to school. Then, I think you have a good argument that your commute is to your office and school is the second location of the day.

Remember, that the travel still is treated as unreimbursed business expense and will only be deductible on Schedule A if you meet the 2% floor for total miscellaneous itemized deductions.

For more about how to maximize your auto expense deduction and how to make sure your home office is allowable, join us in our School of Tax Strategy where we have courses specifically on these two subjects. Go to http://www.provisionwealth.com/products.

Warmest regards,

Tom

Many clients of ProVision and our School of Tax Strategy have chosen as their preferred growth asset category stock and option trading. When done properly and with the right set of systems, this category and be very lucrative. We have clients who are doing as well as 7-10% per month on their trading activity. Of course, there are many people who lose money because they don't have the training or don't strictly follow their criteria.

In either case, the question comes up as to how to treat the expenses of trading and how to treat the gains and losses from trading.

The IRS has consistently asserted (and won) the argument that gains and losses on strock trading by a noncorporate taxpayer are capital gains and losses. This is true whether the taxpayer is considered an investor or a trader. The effect of this is that losses can only be used to offset capital gains except for $3,000 per year that can offset other income.

But what about the other expenses of trading? Whether they are deductible or whether they are also capital losses depends on whether the taxpayer is considered a trader or investor. If the taxpayer is an investor, the expenses are simply additional costs of the stock and will be capital losses. If the taxpayer is an investor, the expenses will be deductible as incurred in the production of income.

There are three tests the IRS and courts use to determine trading status:

1. The taxpayer's investment intent
2. The nature of the taxpayer's income to be derived from the securities (interest and dividends for an investor versus gains for a trader) and
3. The frequency, extent and regularity of the taxpayer's trading activities

In general, it takes a lot of trading activity (multiple trades each day) to show that you are a trader. Because the test is based solely on your specific facts and circumstances, I recommend that you sit down with your Tax Coach to figure out whether you are a trader or investor and how you should carry on your trading activities (i.e., individually or through a corporation). Call us at 866.467.5809 to set up your appointment to speak to one of our experienced Tax Coaches or join our School of Tax Strategy at http://www.provisionwealth.com/products.

Best of luck in your trading activities. Remember to stay focused and stick to your criteria.

Warmest regards,

Tom

Last night, I had the great privilege of being a guest on Kim Kiyosaki's webinar that she does each quarter for PBS. The topic centered around our current economy and whether this is an adversity or an opportunity. Kim asked me a very important question:

Q: What are you recommending to clients in this current economy about how to deal with financial challenges?

A: Education, education, education. I explained that as our knowledge about finance and investing increases, two things happen. First, our risk goes down. The more we know about any investment, the lower the risk because we know how to invest. Second, investment returns go up. We are able to take advantage of better investments when we know how to deal with them and how to find them.

I went on to say that after knowledge, the next key is FOCUS. It's critical that you focus on a single type of investing activity. I was very clear that the idea of multiple streams of income from multiple types of investing as recommended by several of the "gurus" is garbage. It simply doesn't work. In fact, it cannot possibly work. How can you possibly master multiple investment strategies?

We teach our clients how to determine the right investment category for them and how to create a strategy that will be successful for them in our School of Wealth Strategy. If you haven't had a chance to review this wonderful educational product, please go to http://www.provisionwealth.com/products and check it out.

In reality, the only way to solve your current economic situation is to get educated in a new way to look at wealth. The old ways simply don't work anymore. Come visit us and let me know what you think.

Warmest regards,

Tom

We all know that a home business is one of the best ways to reduce taxes. The Internal Revenue Code is full of tax deductions, exclusions and credits for businesses. Of course, because of all of these benefits, the IRS is always on the lookout for abuse. One of the abuses they look for is hobbies that people "mistakently" report as businesses.

Q: When is a business a business and not a hobby?

A: The IRS recently provided additional guidance on this, citing several factors that make a business a business and not a hobby:

1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Does the taxpayer depend on income from the activity?
3. If there are losses, are they due to circumstances beyond the taxpayer's control or did they occur in the start-up phase of the business?
4. Has the taxpayer changed methods of operation to improve profitability?
5. Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
6. Has the taxpayer made a profit in similar activities in the past?
7. Does the activity make a profit in some years?
8. Can the taxpayer expect to make a profit in the future from the apprication of asets used in the activity?

An activity is presumed to be for profit (and not a hobby) if it makes a profit in 3 out of the last 5 years. This may become a problem for many businesses in the current depression (yes, I said depression, not recession). So keep these other factors in mind. The more you meet, the more likely your losses will be allowed. Of course, if you have a profit, you don't really need to worry. So, the ultimate solution is to develop the Strategies and Systems you need, such as those we teach at http://www.provisionwealth.com/wealthstrategyu in order to make outstanding profits.

Remember that with the right Systems and Strategies, "Your Financial Freedom is Closer Than You Think."

Warmest regards,

Tom

The IRS states that commuting to and from work is not deductible. So how do we make it deductible and stay within the IRS rules? That's the question Michael from Kentucky asks:

Q: I am a 1099 sub-contractor doing database consulting for a local spirits company. I have an LLC for my Computer Consulting business based in Shepherdsville, KY. I drive 30 miles one-way to the client in Louisville, KY four days a week. Are these miles deductible and if so, under which IRS tax code? P.S. Thanks for the great information at Rich Dad Annual Forum! It was great meeting you!

A: The way to increase deductions is to Learn the Rules. The question here is what's commuting? According to the IRS, commuting is traveling from your home to your first place of business for the day and then returning home from your last place of business for the day. In Michael's case, this means that if he travels directly to Louisville from home and then back, his entire trip is commuting and is nondeductible.

Instead of going directly to the client, what if Michael goes to his office in Shepherdsville, does some work, then goes on to the client in Louisville, returns to his office in Shepherdsville, and then returns home from there. This makes his trip to Louisville deductible. Only his trip to his Shepherdsville office is commuting.

What if his office in Shepherdsville is in his home? Then, his walk from his bedroom to his office is commuting and his trip from his office to Louisville is deductible. When he returns to his home office to do some work at the end of the day, his trip there from Louisville is also deductible. Of course, the real effect of this planning strategy is to make his entire trip to and from Louisville deductible. See what happens when you Learn the Rules?!!

For more on setting up your home office, see our home study product, Getting the Most of Your Home Office Deduction at http://www.wealthstrategyuproducts.com or even better, join our School of Tax Strategy at http://www.provisionwealth.com/products.

Remember that the more expenses you make deductible, the lower your tax and the faster you reach your financial freedom.

Warmest regards,

Tom

Weekend before last I was at the Marshall Sylver event, Financial Prosperity. It was a terrific seminar. The next one is in Orlando later this year and I encourage everyone to attend. I attended both as a participant and as a speaker.

One of the exercises Marshall had us do was to put together a business plan for an entirely new business. He put us into groups of 7 and we were to come up with a business that none of us had done before or were planning on doing. Our group decided to plan a business selling the latest solar panels.

Of course, my task was to come up with the tax benefits of solar panels. Fortunately, a client of mine, Jack McGill, recently had explained some of the tax benefits and they are extraordinary.

First, there is a federal tax credit equal to 30% of the cost of the solar panels for any homeowner who buys and installs the panels on their home. Many states also give tax credits (Arizona's is $1,000) and many utilities are offering rebates.

One other benefit is that if you put a bigger unit than is necessary to power your house, you can sell your excess energy back to the utility company. Our group estimated that with the new technology, a homeowner could easily recoup their investment in less than 5 years. After that, their energy is essentially free and they can still sell excess to the utility.

Sounds like a great opportunity for anyone interested in going green with their home energy consumption. The only challenge I found in my research is that you don't get the federal credit if the unit is used to heat your swimming pool. I'll have to figure out a way around that when I install the panels in my new home in Park City, since I will definitely be heating a pool.

For more information about tax saving strategies, join us in our School of Tax Strategy at http://www.provisionwealth.com/products. Go green and get those tax credits.

And remember that your financial freedom is closer than you think!

Tom

Anya from our School of Tax Strategy asks the following question:

Q: Hi Tom, I have a question regarding my start-up costs. I purchased some training materials on CDs for QuickBooks as well as the QuickBooks software itself in Septemebr of 2008. I was still working for my employer at that time. I quit my job in November and earned my first check as a self-employed person in December of 2008. I did not start actively looking for new clients until March 2009. Can I deduct the sofware and the training CDs as Section 179 deduction on my 2008 taxes?

A: The answer to this question is, of course, dependent on some additional facts. So let me give you the basic rules and then you can decide how they work for you. You are correct that the software and education are start up costs. Up to $5,000 of start up costs can be deducted in the year you start business if you have total start up costs of less than $50,000 and you make the proper election on your tax return for the year you begin business. (Elections are one of the reasons that using a qualified tax preparer is essential when you have your own business or investments.)

Since you received income for your new business in 2008, it's pretty safe to assume that your business started in 2008. So it looks like you probably can deduct the software and educational materials as start up costs. You will also need to treat these expenditures as Section 179 expenditures and make the election to expense them.

For more on start up costs, including how to make the election, go to http://www.wealthstrategyuproducts.com and order our course on Start Up Expenditures.

Warmest regards,

Tom

I recently did a tax evaluation for Joe, one of our students in our School of Tax Strategy. He has a follow up question to our discussion:

Q: Hi Tom I had a follow up question re our tax review. I took a 3 day rich dad stock trading class in Nov 08 ~$500 I also signed yup for stock trading advanced course work $24k. I don't have an entities set up for trading or real estate yet - we just file a personal IRS 1040 for 2007 tax yr Could we claim this education as a business expense? thanks lots, Joe

A: This is a common question from seminar participants. In recent years, the IRS has been challenging the deductibility of a lot of seminar expenses. The reason is that education, unless it's to improve job performance, is not deductible? Why? Because it is not for producing income.

There is a way, however, to make seminar expenses deductible. How? Simply show that you are using the seminar to POTENTIALLY produce income. In other words, start a business. Take that great information you learned at all of those seminars and put it into practice. Actually start that business. Then, the education expenses can be treated as Start Up costs. For more on Start Up costs and how to deduct them, try our course on Start Up expenses at http://wealthstrategyuproducts.com. If you want to learn how to start that business, join our School of Wealth Strategy at http://provisionwealth.com/products. At ProVision, we want you to succeed in your tax reduction AND in your business and wealth strategies.

Remember that when you reduce your taxes and build the foundation for a strong business, your financial freedom is closer than you think.

Warmest regards,

Tom

One of the most frequently asked questions I get, either at a seminar or through email, is about what type of entity should be used for a start up business. I'm glad people are thinking about this, because the types of entities you use are at the core of a successful tax strategy. Yesterday, I received a question in this regard from Charlie, one of our School of Tax Strategy members.

Q: Hi Tom, It's Charlie again. I just thought of another question. My fiance Tiffany and I started selling on eBay. So far we have sold 27 random items around the house. The profit margin is a joke, no more than $100. Anyhow, we are going to be transitioning to drop shipping through eBay. Which means, selling warehouse items through an outside source, and they take care of shipping and handling. All we do is find the items we want to sell and advertise them. We want to go full scale on that, and generate thousands per month. My question is, when should we set up an entity, if we should at all? and whether or not setting up an entity would be the best tax strategy for us. Are we behind on doing that? What are the action steps around that? Tiffany and I are brand spankin new to business, so please guide us in what would be the most tax and cost effective way of running our eBay selling business.

A: It's never too early to set up an entity for your business, so get started right away. The choice of entity depends of several things. For example, what state or states you will be operating in? How big to you plan on growing your business? How fast do you expect your business to grow?

The best answer to entity choice is always to determine your entity within a comprehensive Tax Strategy. Your Tax Strategy should include not only your choice of entity, but how you plan to operate the entity, your goals for the business and even your exit strategy. A simple way to begin is to form an LLC, or limited liability company. In most states, this is a good entity to form. The best thing about an LLC, outside of it's asset protection characteristics, is its flexibility from a tax standpoint. An LLC can be taxed as a sole proprietorship, a partnership (if two or more members), a C corporation or an S corporation.

Until you actually do your tax strategy, just set up the LLC along with a bank account and bookkeeping (we recommend Quickbooks Pro for start up companies). When you meet with your CPA to do your tax strategy, you can make changes to how the LLC is taxed, if necessary.

Remember that a good tax strategy is the first step to increasing your cash flow by lowering your taxes. And it takes good cash flow to develop lasting wealth. With lower taxes, strong cash flow, and wealth, your financial freedom is closer than you think.

Tom

Our School of Tax Strategy member, Debbie, has an overload of real estate papers and she would like to know what exact documents she will need to keep on hand and which ones she could discard or scan and save to a disc.

For tax purposes, the IRS allows records to be kept electronically, so there is no real reason to keep hard copies. There may be other laws that require you to keep hard copies of certain materials.

I suggest you keep a hard copy of your settlement statements, your mortgage note, and your deeds. And I suggest you keep them in a fireproof safe. These are the three documents on any real estate transaction that you are likely to need and to easily retrieve.

Warmest regards,

Tom

This question came in from Chris in Hawaii:

Q: Aloha Tom: How many years should to save my tax records/receipts?

A: We recommend you keep them for 7 years. The reason for this is that the IRS has 3 years to audit you under normal circumstances and 6 years under extenuating circumstances. It's save to shred them after 7 years. Better is to maintain them in digital format. We do that for al of our clients and we can keep them as long as you want.

Here is a question from my good friend, Melissa, that I am sure is on the mind of many people these days. Many of you are unloading properties that are "under water" (the mortgage is higher than the value of the property) via a short sale. In a short sale, the buyer purchases the property and shorts the mortgage lender. In other words, the mortgage lender agrees to take less than the face amount of the mortgage in order to get rid of the property. There can be serious tax consequences to the seller on this transaction.

Q: If I have to do a short sale on a property, I get a 1099 from the government, which is considered forgiveness of debt. That’s taxable, but there are some ways with Obama’s recovery plans that stay that, right?

A: Actually, you will receive a 1099 from the lender. And yes, it's considered forgiveness of indebtedness. And generally, forgiveness of indebtedness is taxable income. There are some possible ways out of this.

First, if you are insolvent, you don't have to recognize the income to the extent of your insolvency. Insolvent means you have liabilities (outside of those in the short sale) that are higher than the value of all of your assets. For example, if you have debt of $600,000 and the value of all of your assets is $500,000, then you are insolvent to the extent of $100,000 and you do not have to recognize the first $100,000 of debt forgiveness income.

Second, if you are bankrupt, then you don't have to recognize the income. Both of these first two exceptions to taxation have been part of the law for many, many years.

Third, President Bush (not Obama), added a provision that allows you to avoid taxability if the short sale is on your primary residence.

There is one provision for investors to avoid income. If the discharge is of considered to be qualified real property business indebtedness, then the income may be excluded. The one other advantage an investor can get is if the loan is nonrecourse (no personal liability). In that case, the forgiveness is treated as a sale of the property and you get to recognize capital gain instead of ordinary income.

If you are in this situation, I strongly recommend you sit down with your tax coach and go over the numbers to determine whether you are insolvent and what the precise income tax consequences of the short sale will be to you.

The tax liability can be huge in a short sale, so be sure to get all of your facts straight and understand the rules before you go through with the short sale. When you do this, you can make a better decision and know the consequences of the sale before it happens.

Warmest regards,

Tom

This question comes from Sue and is a question I hear a lot.

Q: I will be receiving an inheritance from my mother, some time this year or maybe next year. I don't really know the amount but probably aroud 100,000. My mom died in Vermont and I live in California. Will I end up paying CA taxes on the amount? if so are other states better? Her estate at death was probably around 1,000,000 but my really dysfunctional sister is the excecutor, so I don't know. Thank you. Sue D.

A: Good news, Sue. There is no income tax on an inheritance. And based on the size of your mother's estate, there shouldn't be any estate tax either. So the $100,000 (when you get it) will be free and clear from the IRS or the State.

Warmest regards,

Tom

In case you weren't on our School of Tax Strategy call last night, here is the answer I gave to Roy's question below.

Q: We are in the process of setting up our entities. We are setting up 3 LLC's. One will be taxed as an S corp and the others to be determined. My wife is the sole managing member of all three LLC's. Would it be smarter to have an LLC be the managing member rather than my wife? What would the tax consequences be either way?

A: First of all, good for you for setting up your LLC's even when you are not sure how they should be taxed. You can always make that change later. As for the manager, this is quite a good question. It really depends on whether the manager will be taking a fee from the entity. Since you presumeably are the sole owners of the LLC, so long as you don't have a charging order against you, it really shouldn't matter. There's no real reason for you to take a management fee.

Suppose, however, that you are sued and a charging order against one or all of the LLC's ensues. In that case, you may want a way to get money out of the LLC other than through a distribution. The likely candidate is a management fee to the manager (especially if you are accruing it as you go so it builds up over time). When that management fee is paid, if it's to your wife, then she will treat it as self-employment income and pay SE tax on the full amount. In addition, she may have a garnishment against her income as a result of the same lawsuit that resulted in the charging order.

An alternative would be to have an LLC taxed as a corporation ("C" or "S" depending on your tax strategy) as the manager. The result of this should be to avoid the garnishment and the self-employment taxes.

The downside to this strategy is additional complication whenever the manager has to sign anything on behalf of the LLC. The signatures get a little combersome. You could have both your wife and an LLC as managers and have your wife as manager sign documents.

You can see that frequently there is a choice between tax savings and simplicity. Most people will opt for the simplicity since the likelihood of the charging order is pretty slim for most situations.

This is why a personalized tax strategy is so important. You have to look at your preferences, your business, your investments, even your age, your family situation and your health. For more information about tax strategies, visit our free website at http://www.ProVisionWealth.com or call us at 866.467.5809.

Remember that tax strategies and asset protection strategies are all about freedom. And isn't that what we are celebrating this weekend? Are you free from worries about lawsuits? Are you free from overtaxation? If not, join our movement for tax and financial freedom. Because when you learn the rules, your financial freedom is closer than you think.

Warmest regards,

Tom

Home office deductions are one of the most misunderstood deductions. Many accountants still feel that taking a home office deduction is a big red flag to the IRS, that you cannot have both a home office and another office, and that there isn't a great benefit to the home office deduction since you get the real estate tax and home mortgage interest deduction on Schedule A even without a home office deduction. These ideas are all false.

Home office deductions are great. They are specifically allowed in the Internal Revenue Code and can provide significant benefits to the business owner. They can be confusing. One of our clients, Melissa, asks the following question about Home Office deductions:

Q: I’ve had to cover some business expenses on personal credit cards other than my appointed business credit card, and I’m doing routine expense reimbursements in order to properly care and feed my LLC. So ? – You and I talked about my carrying 20 percent of home/office expenses for my home office deduction. Do I ALSO reimburse myself for the 20 percent of those expenses? Or are they ONLY designated for the deduction come tax time?

A: Let me make sure I understand the question and perhaps there are two questions here. The first is related to reimbursement by the business for personal funds used to pay for business expenses. Any time you use personal funds for your business, this should be treated as a loan to your business. I recommend you have a line of credit between you and the business that includes regular interest payments and eventual principal payments.

The second is whether you reimburse yourself for home office expenses. My recommendation is that you do reimburse for home office expenses. If your LLC is a single member LLC and you are reporting the income on Schedule C of your personal return, there really is no need to reimburse yourself. You can take care of this all at tax time.

If you are treating your LLC either as a partnership (filing a Form 1065 partnership return) or as an S corporation (filing form 1120S), then I suggest you reimburse yourself for the home office expenses. In fact, the IRS say you MUST reimburse yourself if your company is an S corporation. If you company is a partnership, it depends on the partnership/operating agreement. To be safe, I suggest even in a partnership that you reimburse yourself before the end of the year.

Thanks for this question, Melissa. A lot of people get this rule wrong only to find their home office expenses nondeductible at tax time. For more about how to best handle your home office deductions, see our course on Home Office Deductions at http://www.wealthstrategyuproducts.com/Tax.html

Warmest regards,

Tom

Last night I finished completing our teleseminar series, "5 Secrets to Massive Tax Savings." This series focused on the structure and general principals of tax law. It was applicable to any person living in any developed country. Why? Because the principals of tax law cross boundaries and are adopted by all nations.

Our final discussion last night centered on how to avoid an IRS or other tax audit. We discussed the impact your tax return preparer can have on the likelihood of an audit as well as some other things you can do to reduce the chances of an audit. Of course, we also discussed how to handle an audit.

Just prior to the seminar, one of our participants, Roy, sent in the following question:

Q: I have paid the AMT for the last 7 years. Does this affect the likelihood of an IRS audit?

A: The fact of paying AMT does not, in itself, increase the chances of an audit. However, what put you in the AMT may. For example, if you are in the AMT because you have large miscellaneous itemized deductions, I think it's fair to say you have a better chance of being audited than someone without the large miscellaneous itemized deductions. On the other hand, if you are in the AMT because you live in California and pay outrageous income taxes that are not deductible for AMT purposes, you don't have any greater chance of being audited than anyone else.

What I can tell you is that there are many ways to reduce or completely eliminate the Alternative Minimum Tax. We are developing a course right now to address these issues. Look for it soon at http://www.wealthstrategyuproducts.com/tax.html.

Warmest regards,

Tom

Kevin, one of our School of Tax Strategy members, asks the following question:

Q: We have a real estate business with an associated Tax ID # for the LLC. We are also starting an E-Commerce business. Can we use the same Tax ID # for both?

A: The short answer and the answer you would receive from most tax advisors is "yes." Of course, you can use the same EIN if you put both the real estate business and the E-commerce business in the same LLC. The EIN is for the LLC, not for the specific business.

The challenge with this question, though, is that it's the wrong question. Just like my pickle story (I'll put this in my blog tomorrow), the key to a good advisor is not giving correct answers - it's asking the right questions. So what is the right question for Kevin? Here you go:

Q: Should I put my real estate business and my E-Commerce business into the same LLC?

A: Absolutely not! I can think of at least two reasons not to do this. The first is asset protection. Do you want to put your real estate business at risk for potential liability from your E-commerce business or put your E-commerce business at risk for potential liability from your real estate business? Of course not.

The second reason is a tax reason and requires an additional question. What is your real estate business? Is it real estate investment (i.e., buy, rent and hold)? Or, is it real estate development (buy, improve and sell)? If the former, you don't want to mix it with your E-Commerce business because you will eventually want your E-commerce business owned in an S corporation while you will want your real estate owned in an LLC taxed either as a partnership or as a sole proprietorship. See our courses on Building Your Perfect Foundation and Getting the Most out of Your Real Estate at http://www.provisionwealth.com/products.

If your real estate is development, you have opportunities for some of the income to be capital gain taxed at better rates and will want to have a complete tax strategy set up for this. Actually, no matter what your real estate business is, you need a tax strategy. A tax strategy will answer all of these questions and we will ask you many more that will need answering. Please join us on our School of Tax Strategy call tonight and we can discuss the components of a good tax strategy. We will also be discussing the Alternative Minimum Tax and how to avoid or reduce it as part of your tax strategy.

If you are not yet a member of the School of Tax Strategy, go to http://www.provisionwealth.com/products and join today.

Remember that the quickest way to increase your cash flow, build your wealth and reach your dreams is to reduce your taxes. This is why "your financial freedom is closer than you think."

Warmest regards,

Tom

Here is a comment that came in a while back from Brian, one of our School of Tax Strategy students:

"I need to start my legitimate business to be able to write off my leisure (golf, travel). I now am better educated than my tax preparer....scary."

This is something Brian learned by participating in School of Tax Strategy (http://www.provisionwealth.com/products).Brian learned well. The Internal Revenue Code provides hundreds of tax benefits for business owners.

The comment that Brian now knows more than his tax preparer is not uncommon from our students. This comment signifies that Brian has outgrown his accountant and it's time for a new one. That's a good thing. More knowledge brings more success. Now, Brian has sufficient knowledge to work with a sophisticated tax advisor, such as one of my partners at ProVision.

You see, with knowledge comes opportunity. Now Brian can look at developing a strong tax strategy that will yield permanent tax savings for the rest of his life. Congratualtions, Brian!!!

If you think you may have outgrown your tax preparer, give us at call at 866.467.5809. When you permanently reduce your taxes, your dream gets that much closer. That's why at ProVision we say, "Your financial freedom is closer than you think."

Warmest regards,

Tom

My friend, Billie, has a situation she would like some help with. Here is her question:

Q: Tom, I am permanently disabled from employment for the last 20 years. I am also a new coaching participant in Rich Dad's Real Estate Investor program. I understand that rental income and capital gains are not earned income. My former assets were liquidated over the past few years to fund a life/death legal and medical situation for my young daughter. I am seeking the parameters of types of deals and entities that I may engage in without needing to claim earned income. Any earned income claims will jeopardize my disability income. Because I had to liquidate my previous holdings, I need to construct a plan that will help me generate some cash flow to have some amounts to begin investing again. The types of deals that involve putting deals together for other people seem to be "earned income" activities. Do you have any suggestions about how to proceed in my planning process? As I understand my position, I must either choose only deals that will be "investment income" or find a way to create an entity or structure that will protect me from challenges to disability. The injuries were from a closed head injury, requiring relearning walking, talking, and constantly making compensations for residual cognitive and physical challenges which make regular "E" sector work non-viable for me. Thanks for your thoughts, Billie .

A: There are lots of ways you can create income without it being "earned income" that makes you lose your disability benefits. First of all, any investment you make into a business where you do not participate in the management and/or operations of the activity is a passive activity. Passive income is not earned income. For example, if you were to invest in a real estate development and your only role was to invest cash into the deal, your income from the deal would be passive and not earned income so long as the investment is through a limited liability company or a limited partnership or an S corporation or C corporation.

Really, the only investment that would produce earned income is one where you devote a considerable amount of time (typically 500 hours per year or more) and you are a general partner AND it's not real estate rental. If you are devoting time to this, it becomes a little more complex and we probably need to talk about it 1-1.

Please call our office at 866.467.5809 if you have additional questions or you want to devote your time and efforts to an investment and still received "unearned" income. There is always a solution to any tax issue.

Warmest regards,

Tom

Frequently, we recommend to our clients that they set up a limited liability holding company structure for their real estate. The holding company owns 100% of other LLC's that own title to the actual real estate. The holding company is the only company that has to file a tax return (and then, only if there are two or more members of the holding company). So, Corey, one of our School of Tax Strategy members, asks the following question about how to handle the accounting for these LLC's.

Q: Tom, I have an Asset Management Limited Partnership that owns an LLC (the LLC will hold real estate). Because the LLC has a sole owner(AMLP) it is my understanding that it is a disregarded entity and is covered under the AMLP tax return. My question is how do I set this up in Quickbooks so the LLC information flows through to the AMLP while still having the LLC information available separately. Thanks, Corey

A: In this case, Corey is using a limited partnership instead of an LLC for the holding company. Nothing wrong with that. The same principles will apply.

Corey is correct that the LLC is a disregarded entity for tax purposes and only the limited partnership will have to file a tax return.

The way to set up Quickbooks in this situation (i.e., the real estate holding company situation) is to set up the LLC as a class in Quickbooks. Each property owned by the LLC can be a class or you can set up a class for the LLC and sub-classes for each property owned by the LLC. When you want a report about the activity for either the LLC or the property, you simply generate a report by class. This way you can separate the income by property and you can also (if you use subclasses) separate the income by LLC.

Let me know if any of you have other questions about Quickbooks or accounting for your real estate.

Warmest regards,

Tom

This question comes from Kaye:

Q: How do I use Quickbooks to keep track of Tax Lien investing?

A: I will give you both the simple answer and then the more complete answer. The simple answer is that you record your investment as a long-term asset. I would name each tax lien investment separately in your chart of accounts so you can track it. The interest you receive should be recorded simply as interest income.

There will come a time, of course, when the tax lien is either repaid or you take the property. If the tax lien is repaid, you simply record the cash you receive and reduce the investment account. If you take the property, you need to record all of the costs of taking the property, including the amount you paid for the tax lien, as the cost of the property. This is now a new asset on your balance sheet.

Pretty simple, actually. Just remember that a tax lien is really a note receivable from the property owner (or the governement, depending on your state). And when you take the property, you really are foreclosing on the property and essentially buying the property at that time.

For more on tax liens, go to Chapter 21 in the Kiyosaki book, The Real Book of Real Estate.

Warmest regards,

Tom

Corey asks the following question:

Q: Tom, We have a Vacation home that we would like to put into an LLC for asset Protection. The LLC is owned by the AMLP. What are the options for doing this. I realize that we will not be able to deduct the Mortgage interest on our personal return after we do this. Do we need to rent the Vacation home from the LLC for our personal use(it is all personal usage no rentals for this home) in order to maintain the corporate legalities for asset protection? If we did rent it to ourselves would it have to be a net zero lease for taxes? Just looking for the best way to handle this with respect to taxes and asset protection combined. Thanks again! Corey

A: Corey, putting your vacation home into an LLC will not affect your mortgage interest deduction. Especialy if it is still owned by you and your spouse. In fact, you won't even have to file a separate tax return for the LLC as it can be considered a disregarded entity for tax purposes.

I don't recommend you rent it to yourself. You actually can lose tax benefits by doing so. There are several other tax benefits you can achieve with a vacation home, especially if you rent it out or if you have a business that you can rent it to.

Warmest regards,

Tom

Terry asks some excellent questions regarding an IRS audit and how to prepare:

Not that any one wants to go through an IRS audit, but I wonder if you could do 3 lists for all of us.

Q: What steps do we need to take to reduce a chance of an audit?
A: The most important thing you can do to reduce the change of an audit is to hire a really good tax preparer. This makes a huge difference on your chances of an audit. There are many options of how to report income and expenses A good tax preparer will look for ways to minimize your risk of audit.

The second thing you can do is build the right entity structure as part of your tax strategy. Some entities have a much greater likelihood of audit than others. A good tax strategist who also can prepare your tax returns can reduce your chances of an audit by as much as 90%.

Q: What forms and records do we need to have on hand so that the IRS auditor will not go on a fishing expedition through our records?
A: Good documentation is essential. The two most important records are a proper set of books through Quickbooks or some other complete software package and a completed corporate book for each of your entities.

Q: At an audit who should be there with us?
A: I strongly recommend that you have your CPA go to the audit without you. There is no reason for you to be there. Your CPA should be experienced in handling audits and auditors. And if the auditor asks your CPA a question, he/she can always say, "I don't know." You can't say that. This gives the CPA and you time to prepare an appropriate response to the auditor. This will help keep the auditor from going on the fishing expedition you were talking about earlier.

At ProVision, we take care of all of these aspects of an IRS audit for our clients. We have courses on bookkeeping and documentation (corporate formalities) at http://www.wealthstrategyuproducts.com and we routinely create tax strategies for our tax clients. For more information, contact us at cs@provisionwealth.com or call us at 866.467.5809.

Ada asks the following question about the tax effects of loans between an owner and their business:

Q: Could you tell me is a loan payback payment a deduction for a C-Corp so it will be excluded from the total income?

A: No, a loan repayment from a corporation to a shareholder is not a deduction. The reason is that when you loaned the money to the corporation, the corporation did not have to pay tax on it. So, when it is repaid, there is no deduction. The good news is that it is not income to you either.

Warmest regards,

Tom

Last week in our School of Tax Strategy call on Business Start Up expenses, we got to talking about education expenses. The IRS appears to be challenging a lot of education expenses, particularly those relating to public seminars on real estate and other investments. So, I promised I would give my opinion as to how to get the best tax benefits from your seminar education expenses.

Most people know about the Lifetime Learning and Hope Credits and other benefits for higher education though an accredited school. I'm not going to discuss those here. Rather, I'll focus solely on seminar expenses relating to some type of business or investing.

The general rule is that continuing education is not deductible if it qualifies you for a new profession. The genesis of this rule is in people going back to school for a law degree or some other professional designation. Congress decided that becoming qualified for a new profession should not be deductible.

So what about seminars for real estate and other businesses? If you are taking a class to become a real estate agent, that is clearly not deductible as it qualifies you for a new profession. On the other hand, if you are thinking about starting a new business, say real estate, then the seminars should qualify as investigative or other start up costs for the new business. These are generally amortized over 180 months once the business starts in earnest.

Let me give you an example. Suppose you spent $40,000 on educational courses and another $14,000 with attorneys and accountants and others to get the business set up. Once you begin business, you can start taking a deduction of $300/month for the next 180 months (15 years). ($54,000/180 = $300).

If your total start up costs are less than $50,000, then you can take a $5,000 deduction in the first year you do business and then amortize the remaining amount over 180 months.

The key here is to be able to show that the courses don't qualify you for a new profession, but rather are part of your investigative costs for your new business. I highly recommend you sit down with a qualified CPA who specializes in real estate to document your seminar expenses properly. Also, your CPA should know how to make the proper start up cost elections and how to properly report your expenses on your tax return. If you would like a recommendation for a qualified CPA, please feel free to call us at 866.467.5809 and ask for Wendy.

Warmest regards,

Tom

This is the question on a lot of high-income earners minds this year. Because this is the year that you can convert your regular IRA to a Roth IRA regardless of your income. And there is no penalty for converting. You just have to pay the tax as if you had taken a normal distribution of the IRA (no early distribution penalty tax).

Corey, one of our School of Tax Strategy students, has been very patiently waiting for an answer to the following questions about Roth IRA conversions:

Q: We have traditional IRA's(after tax contributions) that we are planning on converting to Roth IRA's this year. My Wife has a current Simple IRA from her work. Does she need to include the amount of the Simple IRA in the "total of all IRA's" for the pro-rata basis to figure the taxable amount of the conversion. Thanks

A: You only have to include the IRA's that you are converting. If you have a Simple IRA at work, you will have to ask your employer if there is a way to convert this to a Roth separately.

Q: For high income earners, I wanted to know if you thought it better to used saved money to contribute to a traditional IRA (with thoughts of conversion to a Roth IRA in 2010 and beyond) or to use the money for a down payment on real estate to use as a rental. Thank you. Corey

A: The answer to this question really depends on your wealth strategy. Everyone needs to create their own personal wealth strategy. This strategy should focus on a particular type of investing so you can become an expert in that type of investing. You could be focusing on real estate, paper assets (e.g., the stock market), commodities or business. Your focus will determine the answer to this question.

If you decide to invest in real estate, then definitely stay out of the IRA, Roth or otherwise, as it will diminish your ability to leverage your real estate and you will lose all of the tax benefits that real estate has to offer.

If you decide to invest in business, then stay out of the IRA since business income is taxed to IRA's just as if you had earned it outside of the IRA.

If you decide to invest in paper assets, using a Roth IRA can be very beneficial, as the income and gain will never be taxed.

Commodities, such as oil and gas and gold and silver, can be good or bad in an IRA. Oil and gas has tremendous tax benefits right now, so I would not use an IRA for this investment. But a Roth IRA can be a great place to invest in gold and silver, since you will never be taxed on the gains.

So start by determining your wealth strategy. If you would like help with this, please contact our office at 866.467.5809 and ask for Wendy, or email us at cs@provisionwealth.com.

Warmest regards,

Tom

We had a great discussion last night about how to pay for your child's education and take all of the tax benefits available to you. We discussed the Hope Credit, the Lifetime Learning Credit, the American Opportunity Tax Credit, the education expense deduction, student interest deduction, Coverdell IRA and a host of other more creative methods to pay for your child's education with tax-free dollars.

During our discussion, a question came up that I was unable to answer. So, this morning I researched it and came up with a really interesting answer that could benefit a lot of people.

Q: Am I allowed to take both the tuition and fee deduction and the student loan interest deduction?

A: Yes. You are allowed to take up to $4,000 of qualified expenses for higher education and up to $2,500 of loan interest as deductions on the front page of your tax return. Where this is deducted, as we discussed last night, is really important. Because these are adjustments to gross income on page 1 of your 1040, they will decrease your AGI (adjusted gross income) and could allow you to take other tax benefits such as the deduction for rental real estate losses.

For more information on the best and most creative ways to pay for your or your child's education, go to the School of Tax Strategy page on our website at http://www.provisionwealth.com/products.

Warmest regards,

Tom

An IRS audit may be the single biggest fear of any American taxpayer. The truth is, they can be pretty easy to handle. It’s just a matter of being prepared. Our friend, Terry, asks the following questions about preparing for an IRS audit.

Q: I have 2 question involving and IRS audit: 1. What documents, and forms should I have ready to go prior to the audit? 2. Who should I take to the Audit with me, Tax Attorney, Tax Preparer, both or some one else entirely. I am not in the process of getting audited but should it happen I would want to be fore armed. I remember you said the less work they auditor has to do the easier on you they are.

A: The two most important documents you should have ready for an IRS audit are a really good, clean and accurate set of bookkeeping records and a complete corporate book. For more about preparing for an IRS audit, go to www.provisionwealth.com/products and click on our Tax Strategy Prodcuts box. Then, go to our product called, “Managing Your Corporate Formalities” and our other product called, “Preparing for an Audit.”

As for who to take with you to the audit. NOBODY. Not even yourself. You should never go to an audit. Instead, send your tax advisor. Let him handle your audit for you. It will reduce your stress and he should be able to get a much better result than you do. For many of ProVision’s clients, we even offer an Audit Defense Plan so you don’t have to pay us for handling the audit. We only do this for clients for whom we prepared the tax return. For more information about our Audit Defense Plan, call us toll free at 866.467.5809.

Warmest regards,

Tom

Pete asks the following question about his car:

Q: If I take a company owned and fully depreciated car and give it to myself personally are there tax consequences when I sell it?

A: Yes, most definitely. When you sell the car, you will have to recognize ordinary income for the full sales price of the car. The concept here is basis. You get basis in an asset when you buy it or add to it. In the case of a car, your basis typically is the full price you paid for it, including sales tax unless you took the sales tax as a separate deduction.

As you depreciate the car, the depreciation reduces your basis. So, if you fully depreciate the car, your basis is zero.

When you sell an asset, gain or loss is determined by the difference between your selling price and your basis. Since your basis is zero, the entire selling price is gain. You don't get to take capital gain on the sale because of the depreciation. This is called "recapture." Any portion of the sale that relates to the depreciation you took before is recaptured as ordinary income and taxed at your ordinary income rates.

For more about how to treat your car and other vehicles, see our course called "Maximizing Deductions of Your Dream Vehicle." You can find it along with our other tax strategy courses at http://www.wealthstrategyuproducts.com/Tax.html.

Warmest regards,

Tom

Helena asks a really good question. What states are good for LLC's? Her state is Georgia and she wants to know if it's a high tax state and good for using LLC's.

The answer to this question has two parts. The first is how states tax LLC's, or limited liability companies. The second relates to asset protection.

Most states recognize Federal law for LLC's, i.e., they tax the LLC just like the IRS will tax the LLC. Taxation of LLC's primarily depends on how you want the LLC to be taxed, i.e., do you want it to be taxed as a sole proprietorship, a partnership, an S corporation or a C corporation. For investment real estate activities, the general rule is to tax your LLC as a partnership or sole proprietorship. This rule could get more complicated if Congress passes its health care bill that adds rental income to the list of income that is subject to the 2.9% Medicare tax.

Some states have a separate tax on LLC's. Texas, California and Tennessee, among others, have a separate LLC tax and require a separate tax report for LLC's. Georgia does not have this tax or any tax on an LLC unless it is treated as a corporation for Federal income tax purposes.

For the second part of this question, which states are best for asset protection, I will defer to my friend and colleague and fellow Rich Dad Advisor, Garrett Sutton. You can reach Garrett at http://www.sutlaw.com.

Warmest regards,

Tom

Nancy asks the following question about using IRA funds for real estate investing:

Q: I am interested in purchasing and holding small rental homes for rental income to increase cash flow in retirement. What are the advantages and disadvantages of owning these properties within a self directed IRA?

A: The only advantage to buying investment real estate in your IRA is that you defer the tax on your IRA until you retire. Now for the downsides to doing this.

1. You don’t get any of the tax benefits of real estate. This includes the benefits of depreciation and using your real estate losses to offset taxable income from other sources.
2. You substantially reduce your leverage. Banks don’t like to lend to IRA’s because you cannot guarantee the loan. Your interest rate will be higher and your loan to value will be lower.

For more one investing in real estate through your IRA, go to www.ProVisionWealth.com/products and click on School of Tax Strategy and get our course on investing in real estate through your IRA.

Warmest regards,

Tom

Vita asks a question that every stock trader should ask:

Q: What is the best entity to use for stock trading?

A: Like most questions, the initial answer is, "it depends." It really depends on how much stock trading you are going to do and what your goals are for your trading activity. Let me give you a few ideas that you can go over with your Tax Coach.

1. If you are trading casually, your gains and losses will be treated as capital gains and losses. This means that the losses can only be used to offset your gains (not other income) and your related expenses will be treated as investment expenses. In this case, a limited partnership or limited liability company (LLC) works great.

2. If you are trading professionally, you can elect to treat your gains and losses and being part of a business. Then you get to use your trading expenses to offset any income. These are the trading rules and you really need to sit down with your Tax Coach to determine whether you are a trader and whether you should make the mark to market election.

3. If you are a trader, the entity you use will depend on the rest of your situation and tax strategy. Again, your Tax Coach should be working with you to develop a comprehensive strategy.

If you don't have a Tax Coach who understands the trading rules, please feel free to call our office at 866.467.5809 or email us at cs@provisionwealth.com for a recommendation.

Warmest regards,

Tom

One of the great tax benefits available to investors is the depreciation deduction. What makes it so great is that you don't have to spend any cash to get the deduction. You simply get a deduction for a portion of the cost of the property each year, regardless of whether you bought the property for cash or used someone else's money to buy the property.

One of our School of Tax Strategy students, Elaine, wants to know about the depreciation on mobile homes. Specifically, she asks:

Q: I have a mobile home on property and I own. I have it rented. Is the mobile home depreciated the same as a regular home over 27.5 years?

A: I went out and did some research on this and struggled to come up with the answer. Fortunately, I have a great team member, our managing partner, Rob Deines. Rob not only came up with the answer; he came up with more. Here you go.

The general rule is that mobile homes are treated as regular homes and depreciated over 27.5 years. If the home is truly mobile, however, such as an RV, there is an argument to depreciate it over as few as 5 years.

Thanks to Rob for finding this. And thanks to Elaine for asking the question.

Warmest regards,

Tom

Robert Kiyosaki and I along with the rest of the Rich Dad Advisors enjoyed a terrific seminar yesterday in Dallas, Texas. We had over 1,200 attendees in person and 3,800 in 90 countries via on-line streaming. I met many wonderful people who are intent on improving their financial situation and taking back control of their wealth.

One of them, Mark, asked me the following question that I promised I would answer here on my blog:

Q: If I trade credit spreads with a Roth IRA, and I am not yet 591/2 and the account is less than 5 years old and I withdraw from the account, I pay a 10% penalty. Is there any other tax or fee? If not, wouldn't that be less than any other taxes?

A: Yes, it would be less than any other taxes if that were the case. For that reason, the IRS and Congress have made it clear that if you withdraw from your Roth IRA within 5 years of when you first form a Roth IRA, you will pay both regular tax and a 10% penalty when you make the withdrawal. This is even true if you are over 591/2 years old. So, don't do a Roth if you need the money within the next 5 years.

Thanks for all of the great questions at the KRLD event in Dallas. I hope to see many of you at the Gold vs. US Dollar event in Scottsdale this next weekend. It will be a life-changing event that will give you more power and control over your future than anything else you could be doing this weekend. So what are you waiting for? Sign up at http://www.provisionwealth.com.

Warmest regards,

Tom

Susie, one of our School of Tax Strategy members, asks the following question:

Q: I have started a Real Estate Investment business in the state of Texas. Myself and my husband are the only two members. I am completing the SS-4 (Application for Employer Identification Number)I have set up an LLC, but am unsure of what I should put for type of entity. For the best tax advantages, should we be a Partnership or a Corporation. If a Corporation, what form number needs to be filed. Thank you very much Tom. And, by the way, I am enjoying your program and look forward to getting through all of it.

A: The answer to your question depends on the type of real estate investing you are doing. If you are fixing and flipping, for example, you should use a different entity than if you are buying and holding property for rent.

Let's look at the buy and hold question, since that is the one we can answer here. If you are fixing and flipping, please call my office at 866.467.5809 and ask for a tax evaluation. Fixing and flipping is a business and requires additional information from you before we can give you an acurate answer.

Typically, not always, the best entity for rental property in Texas is a limited liability company that is either taxed as a sole proprietorship (if there is only one owner) or a partnership (if there are two or more owners). The reason for this is that it's much easier to get money in and out of a sole proprietorship or partnership than a corporation AND there are some serious negative tax benefits to owning real estate in a corporation. That said, remember that in 2012 we get a new Medicare tax on net rental income. This tax will apply to you if you have net income from your rental real estate (which you should not with a good tax and wealth strategy) and your total net income as a couple is over $250,000. The tax rate currently is 3.8%.

The best answer to all entity structure questions is a comprehensive tax strategy. Please contact us at 866.467.5809 or cs@provisionwealth.com to learn more about getting a personalized tax strategy for your business and investing activities.

Warmest regards,

Tom

One of our School of Tax Strategy members, Nancy, asks the following question:

Q: As a Realtor who has one independent contractor and one part time employee working for me, what are the differences between forming an LLC and a Sub Cap S?

A: The general rule is that LLC's are great for businesses. LLC's can be taxed any way you want them to be taxed. They can be taxed as sole proprietorships, partnerships, S corporations and C corporations. You simply make an election. S corporations are good for a primary business because they are easy to operate and, done right, can reduce your self-employment (FICA and Medicare) taxes. So, I like to see LLC's that elect S corporation status most of the time.

There are times when you won't want to be an S corporation, such as when you are just starting up and have losses or when you need some flexibility with other owners. We have a great course on when and how to use S corporations at http://www.provisionwealth.com/products.

By the way, we have a School of Tax Strategy call tonight. Be sure to join in if you are a member. If you are not yet a member, call my assistant, Jessie, at 866.467.5809 and she can get you signed up.

Warmest regards,

Tom

One of my new favorite clients, Linda, asks the following question:

Q: Hi Tom, When investing w/Reef Gas & Oil outside an IRA as a general partner is additional asset protection necessary? (LLC) Can the tax benefits still be realized?

A: In order to receive the tax benefits in the first two years of investment in an oil and gas development program such as that offered by Reef, you must invest individually and not through an LLC or other entity. The developer, such as Reef, should carry sufficient liability insurance to cover any liabilities that occur. Of course, we have seen what is happening in the Gulf with BP and no amount of insurance can cover that type of catastrophe.

So, you are left with the decision to be someone exposed to a huge catastrophe that is unlikely to occur (BP is really the first of its kind) and get the up-front tax deduction or invest through an LLC and have the losses treated as passive losses that can only be used against passive income.

Thanks, Linda, for the excellent question. Since the Rich Dad Gold vs. Dollar seminar, this has been a popular topic. I am a big fan of oil and gas investing and have been doing this myself for many many years. Be sure to do your due diligence and remember that you really can lose all of your investment when you invest in oil and gas - even a development program where the reserves are proven.

Warmest regards,

Tom

Recently, I had the opportunity to travel through Europe with Robert and Kim Kiyosaki and Ken McElroy. What a wonderful experience. We met great people who are dedicated to improving their lives instead of following the blind (see "mutual funds"). One of our stops was in Stuttgart, Germany.

While in Stuttgart, not only did I get to tour the Porsche factory, I also met with a terrific German tax advisor from Nuremberg. He came to Stuttgart on his own time and nickel (euro) to meet with me and tell me a little about the German tax laws so I could be prepared for the seminar we were doing that evening.

I learned that the German tax laws are full of great incentives for real estate investors and business owners. Just like the U.S. and other countries' tax laws. How great is that?!!

One of our School of Tax Strategy students is doing some investing in Germany and would like the referral for my new friend from Nuremberg. If you would please call my office and ask for my assistant, Jessie, she would be happy to share that with you.

If any of the rest of you do business in countries outside the U.S. and work with a terrific tax advisor in that country, please let me know. I am searching for the best tax advisors in each country so we can refer our clients in those countries to a great tax advisor.

Thanks.

Tom

This question comes from Vita:

Q: What are the advantages of foreign-filing your Nevada LLC to do business in another state vs. just forming an LLC in that state to begin with?

A: This is an excellent question. I hear all the time from people who have heard attorneys tell them they should always form in the state in which they are doing business or other attorneys who say to always form outside of the state in which they are doing business. The reality is that both of these answers can be correct, depending on your facts and circumstances and on in which state you are doing business.

My general rule is that if you are doing business in your home state and you plan on residing there for the foreseeable future, you probably should simply form in that state. The reason? You are going to be sued in that state anyway, regardless of where you are formed.

On the other hand, if you plan on leaving the state sometime soon, then it’s generally a good idea to form in a good, non-tax state that is outside of your state, such as Wyoming or Nevada. In addition, there are certain states that have bad LLC laws, such as Florida, California and Colorado due to recent court cases that give uncertainty as to the asset protection afforded to LLC’s in these states.

Most importantly, talk to your tax advisor AND your attorney. I’m not qualified to give legal advice. These are simply my rules of thumb as a tax advisor. My friend, Garrett Sutton, is an attorney who generally prefers his clients to form in Nevada or Wyoming. You can contact him at www.sutlaw.com.

For more information about the basics of asset protection, go to our course on asset protection at www.provisionwealth.com/products.

Warmest regards,

Tom

A lot of people are finding it lucrative right now to get into the business of buying real estate at very cheap prices and either flipping it immediately (wholesaling) or fixing a flipping. One of our students, Speed, as the following question that is fairly common among flippers:

Q: My brother and I set up an LLC to buy bulk REOs and resell them with 15yr land contracts to the new homeowner. We want to keep some of the contracts for cash flow and purchasing more REOs and we want to sell the remaining contracts to create more cash for more REOs. Can you help me understand how these are taxed within our business both the ones we keep and the ones we sell off at a discount? Anything else we should know tax wise in setting up our business and trying to scale it? Thanks.

A: Flipping is a business, so you need to treat it like any other business from a tax standpoint. This means that income will be subject to Self-employment tax if it comes through a general partnership (or LLC taxed as a general partnership) or through a sole proprietorship (or LLC taxed as a sole proprietorship). In your case, you probably want to form an LLC taxed as an S corporation.

However, before setting up your LLC, be sure to meet with your tax advisor to create a comprehensive, permanent tax strategy. While S corps can be great, they can also be very harmful. For example, in your case, if you decide to hold and rent some of the prime properties, you can get in trouble with an S corp.

For more on S corps and how to use them, see our course on Getting the Most out of Your S Corporation at http://www.provisionwealth.com/products. For more on how to formulate a tax strategy, call our office at 866.467.5809.

Warmest regards,

Tom

P.S. - Regarding your final question - number one answer is to form a team including a great team of advisors, such as a tax strategist, wealth strategist, attorney and banker.

It's been awhile since I've written in this blog. Sorry about that. I vow to do better for the rest of the year. Here is a great question from Bryan that is critical to anyone who is investing in real estate or otherwise doing business in real estate.

Q: Can you explain the difference between a real estate dealer and a real estate investor as per the IRS's perspectives? I've heard that you have to be careful in how you set up your companies and purchase real estate properties because you might lose some tax treatment, etc. Please advise. Thanks!

A: You are correct that this is a most important issue. There are two consequences to being considered a dealer of real estate. First, the gain on the sale of the real estate is taxed as ordinary income, not as capital gain. This is important even if you hold the property less than a year, as short term capital gains can be offset by capital losses from stock and other investments whereas ordinary income cannot.

Second, a dealer's income is subject to Self-employment tax. This is an additional 15.3% tax ON TOP OF your income tax.

The IRS looks at your intent to determine whether you are a dealer or an investor. If you INTEND to hold the property for a long time, you are an investor, whether or not you actually hold the property for a long time. For example, suppose you purchase a property and fix it up with the intent of leasing it. While you are fixing it up, a neighbor drops by, sees what a great job you are doing, and offers to buy the house. Your intent was to hold the property for a long time, so the IRS will allow you to treat the gain as capital gain.

The key is to do those things that show intent to be an investor. Here are some things that would show that intent:

1. You have a history of buying and holding properties for a long time
2. You don't do anything to market the property for at least a year
3. You rent the property out and hold it as a rental
4. You don't sell properties very often (similar, though slightly different than #1 above)

The people who get in trouble here are the flippers. They fix up a property and promptly begin marketing it for sale. They are dealers according to the courts and the IRS. It doesn't even matter how many they fix and flip during the year. Because their intent was to flip the property, they are dealers and have ordinary income.

If you are a flipper, there are still ways to reduce or eliminate your Self-employment tax and lower your income tax. Contact us at cs@provisionwealth.com to learn more.

Warmest regards,

Tom

Here is an interesting question from one of our students. I'll do my best to answer it with the information I have. That said, it's always best in a complicated situation like this to sit down directly with a tax advisor and go over the complete set of facts and circumstances with your advisor so you can get a more complete and comprehensive answer.

Q: Hello Tom, I am in the process of closing a rather large deal, and my commission with be 6-8 figures maybe more. I do have 2 LLC’s and was wondering how much of a Red Flag would be raised to Home Land security if I first had it brought directly into my business account here in the US? Secondly since it is and LLC “C” corp. what will be my tax ramifications if I did this all at once? All monies were legally earned, and not earned through drug sale, money laundering or anything what so ever that is illegal.

A: First, I'm glad to hear you aren't doing anything illegal. You can always receive income into a U.S. company from whatever source without raising any flags so long as it is not cash you are depositing and you report everything properly to the IRS on your tax returns.

Your tax effect will be a very large tax at the C corp level and then a second tax when you take it out as a dividend. This is why I don't like C corp's as the entity to use for a primary business. I much prefer to see your primary business taxed as either a partnership or an S corporation so you don't have a double tax issue.

For more on this, go to http://www.provisionwealth.com/products and click on the school of tax strategy. Go into the product, "Making the Most of My C Corp." Then, call our office at 866,467.5809 to make an appointment with one of my partners who can help you determine the absolute best way to handle this transaction.

Warmest regards,

Tom

Craig has an interesting situation where his employer has offered to pay for his housing. Oh that we all had this challenge, eh? (I'm learning to be Canadian. I told my Canadian friends when I was in Edmonton last weekend that I would learn how to say "eh". They told me it would be okay if I learned this, so I'm practicing.)

Here is Craig's question:

Q: Hi Tom I currently employed and I received a W-2 and I have another business and received a 1099. I am looking to buy a house. My employer has offered to pay for my mortgage as part of my employment benefits. Could this interfere with my personal tax, could I roll my business and employment into the same business structure because I am a horse trainer, and my business and employment are the same? Thanks Craig

A: Unless your housing and where your house is located is a condition of your employment, you will be reporting income for the amount of the mortgage payments made by your employer. No big deal, really. Perhaps instead they should simply increase your salary by the amount of the mortgage payment.

The only way you could roll your employment into your business is if you were not a W-2 employee and instead receive a 1099 for the entire amount of compensation. Then, you could do it.

You are in a situtation that calls for a comprehensive tax strategy. Please sit down with a tax advisor to review your situation. If you would like our help, please call 866.467.5809 and ask for Gennifer.

Thanks.

Tom

A lot of people are getting into partnership these days to do fix and flip or other real estate projects. Typically, one will provide the funds and the other will provide the time. I like this type of arrangement, since it maximizes the resources of both parties. The key here, is that there is a partnership, regardless of what else you may want to call it. You may call it a loan or you may call it a joint venture. From a tax standpoint, it's still a partnership and should be treated that way. Here is a specific question from one of our School of Tax Strategy members, Bojan.

Q: have a partner that is buying property, it will be on his name and he will pay for it. Together we will do rehab and split cost of rehab, profit from sale of property we will share. How he should pay me my portion of profit and is he will be responsible for taxes from full profit and can we split that expence and how. Thank you

A: You have a partnership. And probably a general partnership at that. You should create a set of accounting records for the partnership, do a tax return for the partnership and set up an entity for the partnership. Garrett Sutton and I teach a course on this for Rich Dad Education. You may want to sign up for it. Garrett is an attorney and teaches the asset protection part of the course while I teach the tax side.

Warmest regards,

Tom

One of the hottest topics this year is Roth IRA's. The reason, of course, is that this is the year when anybody, regardless of income, can roll over their regular IRA into a Roth IRA. Recently, I received the following question from one of our School of Tax Strategy students:

Q: Tom, I have some Roth Questions. I am under the understanding that there are several different types of ROTH accounts. I want to open an account for my son who is 11, but I want the account to be able to be used for investing in realestate, tax liens, businesses and what ever else comes up, without having to pay taxes on the monies taken out at retirement. How do I know if it is the correct type. Also, I have heard that there are education accounts that can be used for investing and are good tax for not having to pay taxes for education upon taking out the money for education. Thanks, Perrilee

A: There is only one type of Roth IRA account. Just be sure it is held by a custodian who allows you to make decisions on a regular basis. Some people call this a self-directed IRA, though it's still just a normal Roth IRA.

Think twice about what you are going to invest in through your son's Roth IRA. My advice is never to have a tax shelter within a tax shelter. For this reason, I don't like to see investments in rental real estate made in a Roth IRA. Start by determining your wealth strategy. Until you know what your strategy is for building wealth, it doesn't make sense to start investing. For more info on building a wealth strategy, go to our School of Wealth Strategy at http://www.provisionwealth.com/products.

As for the educational IRA's, I don't like them. Too many restrictions. Stick with the Roth IRA or other investment options that you decide upon with your Wealth Strategist.

Warmest regards,

Tom

One of our students, Joe, asks the following questions:

Tom, I have two questions: 1) Currently I have four rental units and waiting to close on the fifth, all of these properties are under one LLC. Value of all units is just above $500K with three properties owned free and clear est. $367,000. Would you recommend that I form another LLC for future properties to help protecting these assets from a lawsuit? What other ways would you recommend I protect myself from a lawsuit and increase my wealth? 2) At what point does your LLC have its own credit or are you as the owner always liable for the credit decisions personally? 3) Do you work with new clients? Thank you! Joe

A: First, you definitely have some exposure. Remember that every tenant is a potential plaintiff. So, with four rental units in a single LLC, you have four potential plaintiffs, any one of whom could sue you and claim against your $367,000 of equity. I would definitely consider additional LLC's to protect your assets. You can use a holding company to avoid additional tax returns and bookkeeping.

There are ways to generate business credit within your LLC's. First, you need a D&B number (Dunn & Bradstreet) for your LLC. Next, you need to borrow within your LLC. You can purchase a car, set up vendor accounts at your Home Depot and other stores where you go to fix up your properties, etc. Garrett Sutton, at http://www.sutlaw.com has a nice home study course on building business credit. FYI, Garrett and I teach a tax and asset protection class for Rich Dad Education if you want to learn more about asset protection.

Yes, of course, we work with new clients. Please contact Gennifer at 866.467.5809 and she will take care of you or send us an email at cs@provisionwealth.com.

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

The greatest tax benefit from real estate ownership is that you get to take a deduction for something that doesn’t cost you anything. That deduction is called depreciation. Even though you expect your property to increase in value, you still get a deduction as if it were decreasing in value. Typically for a residential rental property, that deduction is about 3.6% of the cost of the building. However, you can increase the percentage by doing a cost segregation. A cost segregation is a study performed by a CPA or engineer on the building to determine how much of the building and land is something other than just a building, such as content and land improvements. Here is a question about cost segregations from one of our students.

Q: I am in the process of purchasing a MHP that has mostly owned mobile homes and some lots that are rented out. My question is, if we specify in the purchase contract how much of the purchase price is for land, how much of the purchase price is for personal property (homes), how much of the purchase price is for Goodwill and how much of the purchase price is for land improvements within reason can we use those numbers for our depreciation calculations with the IRS? This would eliminate the need for a Cost Segregation Study and give us some flexibility to maneuver the dollars allocated to each type of depreciation. The Seller of this property has no issue with allocating the dollars as we see fit. This property is in the State of Oklahoma if that makes any difference.

A: The short answer is that you still need a cost segregation to maximize your depreciation deductions. Mobile homes are not personal property. They are considered real property and are depreciated as buildings over 27.5 years. So, to maximize your depreciation you still need to do the study.

However, separating the land and buildings in your purchase contract is still a good idea as it helps to establish what is land (nondepreciable) and what is depreciable property. For more on depreciation, see our guide, “The Magic of Depreciation” at www.provisionwealth.com/products.

Warmest regards,

Tom

I'm a little behind on my blog, so I'm going to answer all of Durga's questions at once. I hope you are reading this, Durga.

Q1: If I borrow from 401k to purchase my first home, would I owe tax to IRS when I sell the property with capital gain?

A1: There is no tax due from borrowing, whether from your 401(k) or from a bank. Plus, when you sell your primary residence, there is no tax so long as the gain is less than $250,000 if you are single, or $500,000 if you are married.

Q2: If I borrow from my 401k and buy a property for rental income, the income is taxed at favorable rate not ordinary rate? I do lose the tax benefits due to depreciation, don't I? How is the capital gain taxed if I plan to sell the property or do 1031 exchange? What is the plan of action needed in place if I plan to borrow from 401k to purchase my 1st investment property? I currenlty own one house. What are the disadvantages? Would you advise to go with the plan?

A2: As I mentioned in A1 above, there is no tax on borrowing from a 401(k). Since you are buying the property outside of the 401(k), you receive all of the tax benefits of ownership, including depreciation and the possibility of doing a 1031 exchange. I like this strategy for using funds from a 401(k) so long as you have the education necessary to make a good property investment.

What I don't like is buying rental real estate inside of an IRA. You are likely to lose leverage and some of your income from the real estate may actually be taxed to the IRA (due to using leverage inside of an IRA). In addition, you lose all of the tax benefits of owning real estate and when you withdraw the earnings, they are subject to ordinary income tax rates and a 1031 exchange doesn't do you any good.

Q3: How soon can one close any kind of entity if needed? Is there a time limitespecially if you are in CA that has minimum tax for LLC? Can you convert from one entity to another easily? If yes, how many times?

A3: You can close down an entity pretty much at any time. There may be tax consequences to doing so, so be sure to meet with your tax advisor ahead of time to discuss your strategy for closing down the entity. In California, I suggest you form your entity in Wyoming and register it to do business in California if you are planning to move to another state so you can take your entity with you and not have to continue paying the $800 minimum tax.

Converting from one entity to another is possible in most states. For example, most states now allow you to convert from a corporation to a limited liability company (LLC) by filing a simple form. Remember that you also have to make the proper tax elections, so be sure to work with your tax advisor on this.

Warmest regards,

Tom

Janine asks a question that I get a lot from serious real estate investors.

Q: I have invested a lot in RD Education, and start up costs for my new Real Estate/Property Investor business. I think that I heard that I must have a rental property to get beyond "Start up" and be able to qualify for any tax exemptions for my business. -What if I have a Joint Venture Agreement and I am actively making Hard Money Loans, or if I buy and sell at least one investment property? Does either of those things qualify me as a real Property Investor who can have these start up costs as well as expensed incured? Thanks Janine

A: Start up expenses do not begin to be deductible until you start business. The question of when you start your business is the subject of many court cases. In the rental real estate business, the general concensus of the courts is that you have not started your business until you have a piece of rental real estate held out for rent. It doesn't have to be rented, but it must be ready to be rented and it must be marketed to be rented.

Think about a regular retail business. When would you say they had begun business? Not until they open their doors, right? The same is true under the tax laws.

As for hard money lending, you would really have to show a lot of loans to prove that this is a "business" and not simply an investment. For fix and flips, the same is true. Just flipping one property may not put you into the business of flipping properties. The question here will come down to your intent. Is it your intent to flip many properties or just the one?

Unfortunately, the IRS has the advantage of 20/20 hindsight. They can see your intent by looking at what you actually did. So, you might say now that you intent to build a fix and flip business. However, what if you only do the one property? Then the IRS is likely to say you were not in business.

As always, I suggest you sit down with you tax advisor and come up with a complete, long-term tax strategy. You will be far better off using a professional to help you get the most tax savings over the long term.

Warmest regards,

Tom

Vita asks the following question about rolling over her 401(k) into a self-directed IRA:

Q: Since I already have a 401k plan, and the traditional IRA account is still open with my custodian, if I intend to take a distribution from a 401k plan for the purposes of redirecting it into a retirement account, do I avoid taxation if I would get a form 5498? OR - is it the case that when I take a distribution from 401k, since is pre-tax funds, I will have to first pay the tax on the distribution made and then I can channel it into a traditional IRA (and from there, to the ROTH IRA)? What is the tax rate when taking a distribution from a 401k? Thanks,

A: If you never touch the money, that is, you direct your 401(k) administrator to directly transfer your 401(k) into your traditional IRA, there will be no tax on the transfer. This is fairly simple to do and your tax preparer should be aware how to report this on your tax return.

Warmest regards,

Tom

Nick asks the following question about his flipping/wholesale business:

Q: Hi Tom, I am a student of the Rich Dad Education Advanced Training program. I am currently interviewing attorney's and CPA's specializing in real estate to add to my Power Team but wanted to get your opinion regarding a entity question. I will be doing business in NY and will be the sole owner of my company. My initial plan is to wholesale/retail (a.k.a. buy/sell without fixing) single family residences/condo/coop properties. In the future, I will also concentrate on rental properties (a.k.a. buy/hold). However, my initial question relates to my real estate business as a “dealer”. I'd also like to take advantage of the tax benefits and deductions such as home/office, automobile, cell phone, etc. provided to business owners. What type of entity should I form for this type of (buy/sell) exit strategy? Thanks in advance!

A: I see three questions here. First, when are you a dealer and what are the tax consequences? Second, what entity should you use? Third, what should be the qualifications of your tax advisor?

A1: Because you are flipping, you are probably a dealer. The issue here is your intent. It your intent to buy and hold for appreciation or to flip the deal? Seems like you are going to flip the deal. Therefore, you are a dealer and your income is ordinary income that, without the right entity structure, is subject to self-employment tax as well as income tax.

A2: The right entity is probably an LLC (limited liability company) taxed as an S corporation. When to make the election to tax your LLC as an S corporation is a matter for you to discuss with your tax advisor.

A3: If you want a tax advisor who a) understands real estate; b) will educate you about what you need to know to maximize your deductions and minimize your taxes; c) understands the value of a tax strategy and will work with you to develop a long-term, flexible tax strategy that is specific to your needs; and d) can prepare your tax returns in such a way as to minimize your taxes and reduce the chances of an audit, then your best choice would by my firm, ProVision. You can contact us at cs@provisionwealth.com or call us at 866.467.5809.

Warmest regards,

Tom

Joe is a real estate agent and wants to know what entity he should set up for his business. Because his income will be earned income, Joe should set up an entity that will help minimize self-employment taxes. The most likely choice for this is an S corporation. With proper planning and a good tax strategy, you can seriously reduce your self-employment tax by using an S corporation. Typically, depending on the state, I recommend an LLC (limited liability company) that has elected to be taxed as an S corporation.

For more on how to use S corporations, visit our website at http://www.provisionwealth.com/products and pick up our course on maximizing the tax benefits of an S corporation.

Warmest regards,

Tom

It's not often that I get a question about gifting and gift tax. Marti, one of our students, asks the following question about a gift to her son:

Q: Hey, Tom, I'm appreciating the audio CDs This question is about gifts. Our adult son, a school teacher, wanted to have his own home. After a long story... he found building site, and a builder who would let him help with the job to save money (and increase pride). I sold the company stock I had accumulated over the years in my (former) job. This was 2009. The stock sale proceeds (after the "crash") just barely covered the land purchase at $78,000. These proceeds approximately doubled our (the parents of said son)taxable income in 2009, so I had to scramble to pay off the IRS. H&R Block prepared my return for 2009. I asked them if there weren't some law about being able to give your offspring around $12,ooo from each parent, per year, without tax consequences to someone (either the recipient or the gift-givers). They said "no", and I haven't been able to find anything about it in the 2010 IRS booklet used to guide return preparation. Currently, our return is almost finished being prepared by our usual person, who is an Enrolled Agent. He doesn't know anything about gifts and taxes, either. I know you can clarify this for me, Tom. and thanks so much.

A: I suspect your confusion stems from the difference between income tax and gift tax. You can give anyone (your son or anyone else) an annual gift of up to $13,000 without any gift tax. Gift tax is a tax on the transfer of property from one person to another. It does not directly affect your income tax. You should have filed a gift tax return (form 709) for 2009. You probably would not have incurred a gift tax, due to the lifetime exclusion of $1 million that was in effect in 2009.

I suggest you upgrade your tax advisors to a qualified CPA at least. H&R Block is fine for people who don't do investing or have a business. Same with an enrolled agent. However, for more complex situations, always use a CPA. If you would like more information about our CPAs and our tax advisory services, please contact us at 866.467.5809.

Warmest regards,

Tom

At ProVision, we love to help new investors and business owners get started and on their way to financial freedom. One of the most common issues that I'm asked is what to do tax-wise during the first year of business. Kari asked it this way:

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 are right to get Quickbooks (version Quickbooks Pro is best) and get your accounting set up properly. We have two really good courses on bookkeeping and Quickbooks that you can find on our website at http://www.provisionwealth.com/products. You have a couple of choices about how you record your contributions to your LLC. You can record it as owners equity (capital) or you can record it as a loan. There can be some asset protection benefits to recording it as a loan. Be sure that you are set up with your tax preparer to pay quarterly estimated tax payments. Also, be sure you have made the proper tax elections for your entity.

I strongly recommend that all new investors work with a tax advisor to create a long-term, flexible tax strategy. In less than a month, you can learn everything you need to know about operating your first year in such a way that it's easy for you and reduces your taxes and also protects your assets. Feel free to call us at 866.467.5809 if you would like to know more about tax and asset protection strategies.

Warmest regards,

Tom

One of the most frequent questions I am asked is how to invest in real estate through an IRA. Here is the most recent of those questions, coming from John.

Q: We are trying to use our IRA $ to invest in realestate. We have converted the IRA into a self directed IRA. Our bank will not help us with any paper work associated with real estate transactions. Our next move is to move the $ to Pensco trust company, they said that they could do the paper work, any suggestions ? P.S. we already used 5 thousand $ without propper paper work to buy a house on 3/18/2011 can you help? thanks.

A: I have never found a bank that really allows for self direction in an IRA, despite what they may call it. Penso, Entrust, Sterling Trust and others do allow this. I suggest you move quickly into one of these IRA Trustees to clean up the paperwork from the first transaction and handle new transactions.

That said, allow me to share a few thoughts about investing in real estate through an IRA. Remember that an IRA is a tax shelter that defers your taxes to a later year. Investment (buy, hold and rent) real estate is also a tax shelter. So, by purchasing real estate in your IRA, you are buying a tax shelter within a tax shelter. This effectively cancels out all of the benefits of the real estate tax shelter, which are far greater than the benefits of the IRA.

If you are buying properties to improve and flip, then DO NOT use an IRA for this. You will almost for sure end up with a Prohibited Transaction, which will result in penalties, tax and interest on your IRA.

My best solution is to look at whether it makes sense to distribute the IRA money, pay the ta and penalty, and invest in the real estate outside of the IRA. An example of this can be found in our course, Managing Your IRA, at http://www.provisionwealth.com/products.

Warmest regards,

Tom

In our March teleconference, I suggested a new strategy for protecting real estate from lawsuits. Kent would like some clarification on this strategy.

Q: Dear ProVision: I have a question from your teleconference in March. You spoke of "scaring away" by using an equity line on a property which was good, but even better was to place a lien on your own property. Could you please clarify? I have listened to it several times and I am unclear on this concept and it's exact purpose and when it should or could be used. Also, from the same March teleconference: can you use your own IRA as a hard money lender to your RE business? Thank you Kent

A: The most common way someone buys real estate is to put a downpayment (typically 20-30%) on the property and borrow the remainder from the bank. Even if you put your real estate into an LLC, this still leaves your downpayment at risk in a lawsuit. My newest idea on this is to borrow the downpayment from an entity that you own. Once you purchase the property, be sure to record the loan as a second mortgage on the property with the appropriate lien documentation in place.

In doing it this way, now the LLC that owns the property has no equity in the property (except for possible growth in value, of course) and your downpayment is protected from creditors, both those on the outside of the LLC and even from your renters. Garrett Sutton, the attorney who teaches the Rich Dad Education Tax and Asset Protection course with me, calls these attacks 1 and 2. This is one of the few ways to protect you from both attacks in a single transaction. Pretty simple, actually.

Warmest regards,

Tom

The term "basis" is a very important term in the tax law. Basis determines the amount you can depreciate in a building or equipment. Basis determines how much gain or loss you recognize when you sell a property. Basis also determines how much loss you can use in a partnership or an S corporation.

Generally, basis is the amount you pay for an asset. In a partnership, your basis includes the amount you put into the partnership (contribution) plus your share of the liabilities of the partnership plus your share of income from the partnership and less any distributions you receive from the partnership and your share of partnership losses. Your basis in an S corporation is similar except you don't get basis from your share of corporate liabilities unless the liability is a loan from you to the corporation.

Luis, one of our students, asked this question. In his question, Luis referred to LLC's and S corporations. I did not address LLC's because the tax law does not address them. An LLC is taxed either as a sole proprietorship, a partnership, an S corporation or a C corporation, depending on the entity type selected by the members of the LLC. So, my answer above will work equally for LLC's taxed as partnerships and partnerships.

Of course, I have given the simplified answer to this question. You should always check with your tax advisor for the specific basis of any of your assets. In fact, your tax advisor should provide these calculations with your tax return (I know at ProVision, we always do this for our clients).

Warmest regards,

Tom

Recently, I have written much on the subject of investing in real estate through an IRA. So you know by now that I don't like this idea because you lose so much in tax benefits and leverage (debt). Here is another question from one of our students on this subject.

Q: Hi Tom; My wife and I are Rich Dad students enrolled in their coaching program. We are interested in investing in apartment buildings but have no capital to use as a down payment. We are interested in tapping into our retirement savings. I have a 401K plan with about $475,000. My wife and I have several smaller IRAs amounting to about $125,000. I know that you are not a fan of investing in real estate within a self-directed IRA because many of the advantages such as depreciation are unavailable. Are you aware of any way that I can create a self-directed IRA and then take a loan out against it so I can purchase the building(s) outside of the IRA? One of the coaches suggested that we purchase the building within the IRA, then at some time later on, purchase the apartment from our IRA through a refinance. Does this make any sense? Thank you for your many contributions toward my education! David

A: Most 401(k) plans allow you to borrow up to 50% of the balance in your 401(k). This is the best way to get money out of a retirement account into real estate. Definitely do not think that you can purchase the apartment later on from your IRA. You cannot do personal transactions with your IRA. This is called a prohibited transaction and will blow your IRA and the IRS will likely assess severe penalties at the same time.

You may be better off simply distributing out your IRA funds and paying the taxes and penalty. Sit down with your tax advisor and wealth strategist (hopefully these are the same person) and run the numbers. Frequently it makes sense to take the hit on taxes and penalties. You may find that through leverage and tax benefits, you will make back the taxes and penalties within a few years.

Warmest regards,

Tom

Jacob is wondering, now that he is investing seriously, about how to set up the right entities. Here is his question:

Q: My question is I own a rental property and Trade options. I do not have them an any type of financial entities. Is there anyone in my area which is Fresno,ca that you know of that I can sit down and talk to about setting it up?

A: Using the right entities is an essential part of building your wealth. Not only can they help reduce your taxes and protect your assets from potential lawsuits, they can be a great business tool. Remember that all serious businesses are set up in entities. Using the right entities means you are looking at your investing activity from a business perspective. And entities require that you set up a complete set of books and records. When you set up and properly use good books and records, you develop good information from which to get good reports so you can improve your investing returns.

I recently met with the Chief Revenue Officer from Zillow.com. He mentioned that one of the biggest challenges they find with investors is that investors don't have good records and complete financial information. They feel like they could do a lot more for their customers if their customers kept better records.

This is another reason why having a good CPA on your team is critical. A good CPA will help you develop good books and records and can teach you how to use these records to create reports that will improve your investment returns.

To help you set up your entities, I strongly suggest you begin by working with a tax and asset protection strategist to make sure you set up the best entities in the best way. This is our forte. So please be sure to call Siggy in our office at 866.467.5809 to find out how we can best assist you with your new entities.

Warmest regards,

Tom

We had a great call last night. Really good questions. We had a few questions sent in afterwards. One relates to a frequently asked question by Rich Dad students.

Q: My wife Becki and I have recently started and LLC real estate investment business as suggested by Rich Dad. We have invested a lot of money into the rich dad program and were under the impression that it would be tax deductible from our earned income, is any of this expense deductible from earned income, or from any other avenue such as the business.

A: Possibly. Education expenses are deductible to the extent they are to improve an existing business. Say, for example, you currently own real estate and you want to improve your real estate skills so you take Rich Dad Education classes. These expenses would be deductible.

However, if the education is for a new business, these expenses are considered "start up" expenses. They don't start being deductible until you begin the new business, which means you are open to customers (for rental real estate, it means you have your first property available for rent). We do have a course on start up expenses that you can find at http://www.provisionwealth.com/products.

Warmest regards,

Tom

This was the title of our Tax Teleconference last night in our School of Tax Strategy. There were a couple of questions that I said I would answer in my blog this morning. Here you go.

Q1: What is the standard deduction for dependent children on their own return?

A1: It's the same as for adults, though it is limited to their earned income. If no earned income, then it's $950.

Q2: Insurance companies are telling me that I can't get my rental property in Ohio insured if I live out of state. Is this true?

A2: Please contact my Allstate agent, Wayne Smith, at 480.464.8766. He can help you find the answer to this.

Warmest regards,

Tom

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

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

One of the most common questions I get is about education expenses, especially Rich Dad Education expenses. Here is a specific question from Debbie and Jerry:

Q: My name is Debbie. My husband and I have purchased the Rich Dad package in the amount of $66,000. To pay for this my husband who is 60 took the money from his retirement funds. Is there a way to off set the penalties of taking that money to pay for the $66,000?

He also wants to liquidate our entire retirement accounts; I am 54 years old and will have a higher tax problem. Do you have a way to off set that money as well and if so how?

Thank you for your assistance; we are looking forward to the next conference call at the end of the month!!

A: The good news is that your husband will not incur any penalties for taking money from his retirement account. He will just be taxed on the amount he had distributed at your regular tax rates. And, if you are already in business (including real estate rental), you may be able to deduct the full amount of your education expenses. But please sit down with your CPA and discuss this.

Don't be liquidating any of your retirement accounts until you are sure what to do with them. Creating a personal wealth strategy before you liquidate your accounts could save you thousands of dollars and put you on a much faster and safer path to permanent wealth. If you would like a referral to a good wealth strategist, contact our office at cs@provisionwealth.com.

Warmest regards,

Tom

An often overlooked tax is property tax. Most, if not all, states have them and some of them are really high. Kent and Sherry ask the following question about property taxes in California.

Q: We received a notice in the mail from a company called "Property Tax Assessor Records Corp" saying that we are over paying property taxes (personal Res) and that we should ask for an exemption of $5600.00 and after year one, that the exemption will increase to $7000.00. We live in California, Ventura County. Is this true? Should we apply? (tax Code 218)is what they use. Is it worth it?

A: I would have to spend some time looking this up. What I will say is that property taxes can frequently be lowered either through a specific exemption like the one this company is talking about or by protesting your assessed value to the county assessor. I definitely think you should look into this.

I do recommend using professionals whenever possible, especially when it comes to unique tax benefits like the one you refer to here. I don't know the company, so be sure to do your due diligence, both by checking with the Better Business Bureau and by checking into the law itself. You can do a lot of checking into this online.

Warmest regards,

Tom

Dan and Elizabeth and winning when it comes to who asks me the most questions. Come on, everyone, don't let them beat you. Get those tax and wealth questions into me. Today, they are asking about salary in an S corporation. Here they go:

Q: We recently created an LLC in Wyoming and registered it to do business in California. Would like to open a bank account, but need a tax ID number first. We are leaning toward an S-Corp designation. If this LLC is used primarily to purchase and hold real estate, will that S-Corp tax designation require an employee?

A: The answer is - probably. Someone has to do the work and that person probably is an employee. It may be one of you or it may be someone else. The one possible exception to this is if you outsource all of the work to someone else, including bookkeeping and management. In that case, you may just be issuing 1099's. The general rule, though, is that if the owners are personally involved in the S corporation business, there needs to be a reasonable salary. Otherwise, the IRS could reclassify all of your distributions as salary. In that case, you not only pay more in payroll taxes, you may be assessed penalties and interest.

Of course, your CPA can be a big help here. A good tax CPA will ask you all of the questions to determine the amount and frequency of the salary that needs to be paid and can also help you with the payroll tax reports.

Warmest regards,

Tom

Perrilee, one of our most active students in the ProVision School of Tax Strategy and a recent participant in the Rich Dad Education Tax and Asset Protection course in Seattle, asks the following question about paying her son.

Q: My 12 year old son does filing and yard maintainance for my investment business. How am I to keep track of his time and pay so I can file for him with the IRS. Both his paper work and mine. Thanks, Perrilee

A: If he has regular hours and you control his work, he is an employee and you should give him a paycheck and file quarterly payroll tax returns. So long as your business is owned solely by you and it is taxed as a sole proprietorship (which it should be), then you won't have to pay any payroll taxes other than his withholding. Children of business owners under the age of 18 are not subject to payroll taxes.

If he only works odd jobs, you are probably ok just treating him as an independent contractor and then no payroll tax returns are due and you simply have to issue a 1099-misc to him at the end of the year.

Best bet right now for doing the accounting for all of this is to use Quickbooks Pro.

Warmest regards,

Tom

As you probably realize, tax laws change constantly. Most changes come through rulings and court cases, not through Congress. In this year of budget and debt upheaval, one of our students, Charles, has the following question about upcoming changes from Congress.

Q: Have you been hearing anything about possible changes to the tax code that would change the general assumptions under which we have been approaching business--i.e., capital gains tax, depreciation, etc.?

A: No. Nothing major in the normal business and investing tax areas. There has been some additional guidance recently on reporting payments to offshore bank accounts. We have not seen any signs of serious tax legislation, though, since last December's massive changes. I'll keep everyone posted on my blog whenever I hear something coming down the pike.

Warmest regards,

Tom

One of the questions that came up in our Ask Tom Live teleconference the other day was from Marisol who just filed her Articles of Organization in California in July. She wants to know the due date for paying the $800 minimum franchise tax.

The California law states that this tax is due by the 15th day of the 4th month of the tax year. When you begin a new company, your tax year begins the day you start business. So, if you start business on July 1, 2011, your franchise tax is due on October 15th. You have plenty of time, Marisol, to get this paid.

Warmest regards,

Tom

Keith had a question that we couldn't quite get to in our last Ask Tom Live Tax Edition. Here it is.

Q: Can expenses (car, cell phone, internet, office rent, etc.) be deducted from wholesaling business LLC (taxed as S-corp)?

A: Absolutely. As long as the expenses have a business purpose, are ordinary (usual) and necessary, they can be deductible in any kind of business, including wholesaling real estate.

Warmest regards,

Tom

In our last Ask Tom Live, Tax Edition, we had quite a discussion about the benefits of cost segregation. Some of our listeners had never heard of this before. So, in response to Jeffrey's question and to be clear to many others out there, here is a brief explanation of one of the best-kept secrets of the tax law - the cost segregation.

When you purchase a rental property, remember that you are purchasing not just the building and the land. You are also purchasing all of the improvements to the land, such as the landscaping, fencing, carport, and outdoor lighting. And, you are buying the contents of the building, including the wiring, cabinetry, window coverings and floor coverings.

Depreciation is the deduction available to owners of rental property for the wear and tear on the property. Land does not get a depreciation deduction, as it does not normally wear out. Buildings get a depreciation deduction of a small amount each year, as it takes a long time for a building to wear out. For commercial property, the IRS allows a deduction of the building over 39 years, or roughly 2.5% per year. For residential property, including all apartment buildings regardless of size, the deduction is over 27.5 years, or about 3.64% per year.

Land improvements are depreciated more quickly, generally over 15 year. And building contents are depreciated over 5-7 years. So, the more of the purchase price you can reasonably allocate to the land improvements and contents, the more depreciation you will get in the early years to offset your rental income (and maybe even some of your other income).

A cost segregation is a study performed by a team of CPA's and engineers to determine how much of the purchase price of your rental property should be allocated to land, building, land improvements and contents. The IRS in their audit guide for cost segregation REQUIRES that you use a CPA and/or Engineer to do the cost segregation. Of course, you must pay this professional to do the work. My experience is that in MOST cases, the fee is far less than the tax savings.

For more information about how you can get a cost segregation done on your building, contact Siggy at the ProVision offices. Her number is 866.467.5809.

Warmest regards,

Tom

We have a lot of members of our Ask Tom Live who are just starting their business or real estate investing. One of them, Joseph, asks the following question about travel expenses.

Q: If you are in the start up phase of your business can you deduct travel expenses in the current year?

A: Not until you actually start your business. If you are starting a rental real estate business, you have started when you have your first property available for rent. All of your expenses, including travel, prior to actually starting are classified as start up expenses. Once you have actually started you business, you can deduct a portion of the expenses in the year you start business and then the rest is deducted over 180 months.

For more on Start Up expenses, feel free to check out our course at http://www.wealthstrategyuproducts.com.

Warmest regards,

Tom

The most important aspect of a good tax and asset protection strategy is the entity you use for your various investments and businesses. Different investments and different businesses (and even different states) call for different entities. William, at the end of our last Ask Tom Live, tax edition, asks the following question.

Q: do i understand that you are saying that rental property should be in an LLC?

A: As a general rule, yes, LLC's work well for rental properties. In most states, they provide excellent asset protection and for tax purposes they are "flow-through" entities, meaning that the income is taxed to the owners, not to the entity. Some states have a separate tax or fee on LLC's, such as California, so it's not always the best entity. My recommendation always is to work with an experienced tax advisor to determine your tax and asset protection strategy as soon as possible.

Warmest regards,

Tom

Medical expenses are a bigger and bigger cost each year. So wouldn't it be nice if there were tax deductible? Most people understand that there is a huge floor for deducting medical expenses on your personal tax return, meaning that you have to have a lot of medical expenses before any of them are deductible. One of the best solutions to this is a medical expense reimbursement plan ("MERP") in a family business.

Under a MERP, employee medical expenses that are reimbursed by the business are deductible to the business and are NOT taxable to the employee. Most employers hesitate to use a MERP as the cost can be prohibitive. However, in those cases where all, or most of the employees are family members, a MERP can make a lot of sense.

The case law and statutes are clear that medical expenses paid for employees who are not owners are deductible in any type of entity. Medical expenses paid on behalf of owners are only deductible to C corporations. This is what gave rise to Kirby's question below:

Q: We have a family LLC. The members are my wife and our 8 adult children. I would like to know whether I would be able to setup a rather creative health benefit for my family in the LLC. (Each of them is a member with 5% or more ownership) I understand that if I provide health benefits in a regular LLC they will be taxed on this benefit as additional
income. Is this true even if the LLC chooses to be taxed as a C Corp, or would I need to create a separate C Corp in order to provide these benefits without an additional tax burden being placed on them?

The benefit I would like to create is to give full health benefits to the two children who have none and also reimburse myself and the other children for the amounts they are required to contribute to the premium of the insurance provided by their employers.

A: As long as the LLC is taxed as a C corporation, your plan should work. An LLC taxed as a C corporation is a C corporation for all tax purposes, including the medical expense reimbursement plan rules. You simply need to make sure you have a qualified MERP and that each of the children you want to be covered (since they are all adults) are legitimate employees of the company (they actually do work for the company).

Warmest regards,

Tom

Keith wants to know if general business expenses, such as auto expense, cell phone and internet can be deducted in a real estate wholesaling business.

The rule for business expenses is that they must have a business purpose, be ordinary and be necessary. So first the expenses have to be incurred in the wholesaling business. Interestingly, the IRS recently gave in on cell phones and if they are provided for the convenience of the employer, the employee no longer has to track his usage.

Auto expense, of course, always is a percentage based on what portion of the mileage is for business and what portion is for the wholesale business.

Ordinary means that the expense is typical to your business. It would seem that Keith's examples would be typical to the wholesaling business.

Necessary means that the intent of the expense is to make more money. I would expect that Keith's expenses are being incurred with the intention of furthering his wholesaling business.

Remember that these are general answers. Each situation will be different as taxes are a function of your own facts and circumstances. So if you want to change your tax, you must change your facts. The best way to ensure you are getting all of your tax benefits is to meet with a qualified tax strategist who is a CPA and knows your business, e.g., wholesaling.

Warmest regards,

Tom

Investing in U.S. oil and gas developments is one of the few tax shelters available to employees and self[employed business owners. Currently, you can receive a tax deduction in the year you invest amounting to as much as 80% of your investment. So, if you invest $100,000 in a project, you may get a deduction of $80,000 this year. (Please speak to a qualified tax advisor before you invest as there is planning that must be done to be able to get this deduction).

Lynn would like to know if I have any good books describing Oil and Gas investments. At this time, I don't. I believe that my friends at Reef Oil and Gas are working on just such a book. I have also encouraged them to consider doing a class for Rich Dad Education on oil and gas investing. If you are interested in contacting Reef, please call our office at 866.467.5809 and we can get you over to them.

Warmest regards,

Tom

In order to begin deducting start up expenses, two events have to occur. First, the business must begin. Second, the business must elect to deduct/amortize the start up costs.

In August of 2011, the Treasury issued new regulations stating that a business is deemed to have elected to deduct and/or amortize start up costs unless is makes an election not to. This means that unless you made a statement on your tax return that you don't want to deduct/amortize start up costs, then you have elected to deduct or amortize start up costs.

This also means that if you erroneously did not deduct/amortize your start up costs in a previous year when you should have (because you started business in that previous year), then you were using an impermissable method of accounting for your start up costs. So, you should file form 3115 in the current year and you will catch up the deductions that you should have taken in the previous year. Be sure to speak with a CPA about this. Don't try to do it on your own.

Warmest regards,

Tom

Annie in our San Francisco Tax and Asset Protection class asked a very interesting question about where to deduct start up costs when you have multiple businesses. Let's say for example that you have rental property and you set up a separate management company to manage that rental property. Do you deduct your start up costs under the rental company or the management company?

Of course, these are two different businesses, so you will have different start up costs for each. How, then, do you determine which business your start up costs relate to when the costs truly relate to both. Do you allocate them between the businesses (one possiblilty) or do you put them all to one or the other of the companies?

There is no clear answer on this. You should sit down with your CPA, explain your situation clearly, and let them do some research based on your facts and circumstances.

Warmest regards,

Tom

Charles asks the following question about setting up a property management company.

Q: If one were to develop a Property Management organization (there are few choices where we are), what entity would you recommend for its organization? LLC? C or S Corp?

A: Of course, the answer to questions like this is always, "It Depends." It depends on your level of property investment, how many properties you will have, and how much income there will be from the properties.

As a general rule, though, I like to use an LLC taxed as a C corporation for management companies. There are many tax benefits, including a couple of lower tax brackets, that apply to a C corporation. Be sure to check with your CPA on this question, though, since it really does depend on your own facts and circumstances.

Warmest regards,

Tom

Jean asks the following question about setting up entities.

Q: Is sunbiz.org the best way to set up llc and trusts or is legalzoom or an accountant a better way?

A: I would suggest using an attorney to set up any entity, including an LLC or a trust. We have had the most success with Garrett Sutton's office at http://www.sutlaw.com. The reason to use an attorney is simple. First, you need a good operating agreement and most websites will just give you a generic operating agreement. Second, it's important to counsel with an attorney.

You should also include your CPA in this discussion. Remember that it is your CPA's job to do the planning for your entity structure and your attorney's job to implement that structure. So start with a Tax and Asset Protection Strategy that involves both your CPA and your Attorney. You are in business now, so don't be doing this on your own or through the internet.

Warmest regards,

Tom

This is a great question from Ron:

Q: If you have a property held in a self directed Roth IRA and you do die with a large appreciation do you avoid income taxes on this gain?

A: No. Your basis would have been stepped up at your death if you owned it outside of an IRA. Inside an IRA, it doesn't get stepped up. Just another reason not to own investment real estate inside an IRA.

Warmest regards,

Tom

Luke is just starting out. He sent the following email to us to get some direction on his entity structure.

Q: I plan on placing each property I purchase for investment purposes as it's own LLC. If I have a partner who is investing much of the initial capital, could I place the property under it's own LLC and then elect to be taxed for that specific property as a limited partnership? 2. If I could, and did this with all my properties, assuming I had a different investor partner for each, wouldn't that become outrageously expensive to file all those tax returns? I'm very new at this and just need some direction.

A: Yes, each LLC will be taxed as a partnership, so you do have a tax return for each entity. I would suggest you meet with your CPA and develop a comprehensive tax and asset protection strategy with them ASAP. There are many ways to reduce the administrative costs of owning properties, including tax returns, and your tax strategist is the best person to get you this help as the number of properties, types of properties, and number and types of partners will affect this planning.

Warmest regards,

Tom

Ralph has an interesting question about investing through an LLC.

Q: We have an LLC. Can the flow thru LLC be used like a Roth IRA, eliminating tax liability by leaving a portion of profits in the company to be reinvested repeatedly?

A: Let me answer this question in two parts. Frequently I hear speakers talk about keeping money inside a business and reinvesting it and avoiding taxes that way. Assuming we are talking about real estate investing, we want the LLC to be taxed as a partnership or sole proprietorship (depending on number of owners). The LLC does not function like an IRA. All income flows through to the owner(s) regardless of whether or when the money is distributed.

Still, if you have a good tax advisor and you are regularly investing in additional rental real estate, you should never pay tax on either the cash flow or the gain from the sale of the property. Rental real estate is a terrific tax shelter with good tax planning. So it shouldn't matter that you are taxed on the LLC's income. In fact, with good tax and wealth strategies, your real estate should produce both positive cash flow and a tax loss at the same time that can be used to offset other taxable income.

For more information, please contact Siggy in our office at 866.467.5809 and she will schedule an appointment for you with a wealth strategist.

Warmest regards,

Tom

When you are doing your bookkeeping and later when you do your tax return, how you classify your expenses can have a serious impact on whether the IRS audits your tax return. There are certain expenses that the IRS does not like so naming them such that they don’t raise a red flag is important. I’m not suggesting that you falsify your return in any way. I’m just saying that a good tax preparer knows which terms are acceptable to the IRS and which ones they don’t like. Make sure your tax return preparer is paying attention to this.

Natasha asks the following specific question about classifying expenses:

Q: Services from ProVision (tax planning coaching etc) could be included under Legal and Accounting services category, right? And asset and tax relief education?

A: Services from your CPA firm such as ProVision definitely are included in Legal and Accounting services. This is a common category and the IRS has no issues with it. The tax and asset protection class you took should be classified as continuing education, provided you have already started your business. Otherwise, it’s a start up expense.

Warmest regards,

Tom

When you are doing your bookkeeping and later when you do your tax return, how you classify your expenses can have a serious impact on whether the IRS audits your tax return.

Self directed IRAs are all the rage these days. People are tired of mutual funds and what to have more control over their investment decisions. This is great so long as you watch out for transactions that are prohibited by the IRS. If you have a prohibited transaction, your IRA will be treated as having been distributed to you in full and you will have massive penalties imposed by the IRS.

Nick asks whether the following transaction is a prohibited transaction:

Q: I've been listening to the Tax strategy CDs, and just thought of this question. Is it legit, tax wise, to loan someone money from a self directed IRA, then partner with them?

A: This would be a prohibited transaction. Any time you do a transaction in your IRA from which you personally benefit or where you render services to the IRA, you have engaged in a prohibited transaction. Stay away from this type of transaction. And don’t think that if you lend someone money from your IRA and then they lend you money from their IRA that all is well. It’s not. This is a disguised prohibited transaction and the IRS will likely catch you and penalize you for it.

Warmest regards,

Tom

Any time you do a transaction in your IRA from which you personally benefit or where you render services to the IRA, you have engaged in a prohibited transaction. Stay away from this type of transaction.

Many of our clients use Quickbooks accounting software for their investments and business. I also recommend using it for your personal bookkeeping. Mike & Della were wondering which version of Quickbooks we recommend.

I prefer that our clients use QuickbooksPro. This version allows you to do payroll and many other tasks that could be important to your tax strategy and investing. We are going to discuss how to use Quickbooks in our next AskTom LiveTax call on December 19th. Be sure to join us.

Warmest regards,

Tom