Using Your S Corp: Section 179 Deductions

If the title of this article is already making you yawn, I promise—this will be more exciting than you think. Why’s that? Because this article is all about SAVING YOU MONEY BY LOWERING YOUR TAXES.

Save Money? Lower Taxes? Tell Me More!

Now that I have your attention, let’s dive in. Using a Section 179 tax deduction with your S Corp allows you to deduct the full purchase amount of business equipment from your personal taxable income.

When a Section 179 deduction is personally allocated to you from an S Corp or partnership, the income and expense are “passed through” to you, and you claim it on your individual tax return. This means any income you earn from your S Corporation will be reduced by your Section 179 deductions, and you’ll only have to pay taxes on the reduced amount. 

Let’s look at an example to see how this would play out in real life:

Tom is a real estate investor who started an S Corp to hold his investments. He earned $100K in 2020 through the S Corp. Since an S Corp is a pass-through entity, Tom would typically have to pay personal income taxes on the $100K the S Corp made. However, if Tom has $20K of Section 179 deductible expenses, he’d only have to pay personal income taxes for $80K. 

Pretty spiffy, right?

s corp section 179How Section 179 Works

Section 179 gets its name because the rule is found in section 179 of the Internal Revenue Code. Essentially, this rule allows you to write off the full cost of eligible Section 179 property in the year it is purchased and put into use instead of deducting the depreciation over time.

This means you cannot take a 179 deduction on property purchased in a previous year, even if this is the first year you used the property for business purposes. For example, if you bought a vehicle for personal use in 2019, then converted it to a company car 2020, you cannot use a Section 179 deduction.

What You Can and Can’t Deduct

Property eligible for the Section 179 deduction is usually tangible personal property (usually equipment or office furniture) purchased for use in your business. 

Some common examples of Section 179 qualifying property include:

However, certain types of depreciable property are NOT eligible for a Section 179 expense deduction. Ineligible property includes:

Additionally, if you use property for both personal and business purposes, you can only use a Section 179 deduction if the asset is used at least 51 percent of the time for business. 

Section 179 Deduction Limitations

The total amount of purchases you can write off changes every time Congress updates IRC section 179 of the tax code. As of 2020, the maximum Section 179 expense deduction is $1.04M. 

In addition, this limit will be reduced by the amount by which the cost of Section 179 eligible property placed in service during the tax year exceeds $2.59M. This means if your business purchases and puts into use $2.6M, you’ll only be able to deduct $1.03M of these expenses using Section 179. The $10K overage on the $2.59M limit will reduce the $1.04M limit by $10K.

As a small business, I know you probably won’t come anywhere close to this amount of Section 179 expenses. But it’s always a good idea to know the rules, just in case.

Business Vehicle Deductions

People used to refer to Section 179 as the “Hummer Deduction” or the “SUV Tax Loophole” because many businesses took advantage of these deductions to write off the full purchase price of expensive vehicles. In response, the IRS severely reduced allowable write-offs for business vehicles. As of 2020, the maximum section 179 expense deduction for sport utility vehicles is $25,900.

Bonus Depreciation

If you can't write off an asset immediately, you have to depreciate it. You deduct a percentage of the value each year until you've written off the entire cost. 

It's also possible that you can take off extra for expenses that exceed the Section 179 limit, the first year as "bonus depreciation." Through 2022, the amount of bonus depreciation you can claim is 100%. 

Starting in 2023, bonus depreciation rates decrease to:

When you use Section 179 deductions with your S Corp, you can save a ton of money in taxes. Make sure you keep track of everything you buy for your business and GET THOSE DEDUCTIONS!

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Getting The Most Out of Employee Business Deductions.

Self Employment Tax & The Independent Contractor

Paying taxes as an independent contractor can be a pain. The purpose of this article is to make it easier for self-employed individuals (such as real estate agents, brokers, and investors) to understand, calculate and plan for paying Uncle Sam the self-employment tax he is owed.

What Is An Independent Contractor?

An independent contractor is essentially a nonemployee, meaning a person or business entity that provides products or services to other businesses and is in business for themselves. This is in contrast to an employee, who works for an employer and is paid a certain wage or a salary.

Sounds pretty obvious, right?

According to the National Association of Realtors, there are about 2 million independent real estate agents and brokers in the United States. Each one of these individuals is a self-employed business owner, considered an independent contractor.

The Internal Revenue Service (IRS) has declared that real estate agents are "statutory nonemployees" for tax purposes. As such, they are considered self-employed and subject to self-employment tax, just like any other independent contractor.

What Is Self-Employment Tax?

Self-employment tax consists of Social Security and Medicare taxes for self-employed individuals. It is equivalent to the Social Security and Medicare taxes that employers are required to withhold from their employees’ paychecks.

Think of it this way: If you were working for an employer, you would have a certain amount of money withheld from your paychecks for Social Security and Medicare taxes. What you may not know is that your employer would also have to pay that same amount on the wages you receive.

Those required to pay self-employment tax include:

Independent contractors are responsible for paying both the employee's and the employer's portions of self-employment tax on their earnings. Also, rather than having the tax withheld from multiple paychecks throughout the year, independent contractors must pay self-employment tax as a lump sum, along with their income tax return in the spring, or by making estimated quarterly tax payments throughout the year.

Self-Employment Tax & Real Estate Investors

Investing in real estate is one of the best ways to create wealth and enhance your cash flow. For passive income investors, your rental income is not subject to self-employment tax. However, if you do several real estate transactions in a year, the IRS might consider you to be doing active business or trade rather than simply enjoying passive income from your real estate investments.

While the IRS treats everything on a case-to-case basis, if you earn more than half of your total income through real estate investments, the IRS may consider your earnings to be a source of earned income rather than passive income. Earned income is subject to self-employment tax and higher income taxes.

How you legally structure your investment activities can also affect how your investment income will be taxed. For example, investing in real estate as a C corporation, and paying yourself a management fee or salary can also trigger self-employment tax and higher income taxes.

How To Calculate Self-Employment Tax?

You calculate self-employment tax on Schedule SE (Form 1040). To do so, you must take 92.35% of your total net earnings (gross earnings minus any deductions) and multiply that figure by the current self-employment tax rate.

Currently, the self-employment tax rate is 15.3%, which is a combination of 12.4% Social Security tax plus the 2.9% Medicare tax. Therefore, the formula for self-employment tax is as follows:

SE Tax = (net earnings) x (92. 35%) x (15.3%)

For example, if you earn $10,000 in self-employment income in 2020, you will pay approximately $1,412 in self-employment tax ($10,000 x 0.9235 x 0.153 = $1,412.955). Likewise, if you earned $50,000, you would pay $7,064.775 in self-employment tax ($50,000 x 0.9235 x 0.153 = $7,064.775).

How Do I Pay Less Self-Employment Tax?

Self-employment tax can be a hefty price to pay for doing business as an independent contractor. The only way to reduce your self-employment tax is to reduce your self-employed income.

Shockingly, the IRS allows independent contractors to deduct a wide range of valid business expenses on Schedule C (Form 1040). Knowing what these deductions are and keeping good receipts and records can save you thousands of dollars.

Common expenses that can be deducted on Schedule C include:

Other expenses that individuals often forget to deduct on Schedule C are:

Your self-employed income and expenses are reported on Schedule C. The result of that form is the total self-employed income that gets transferred to the Taxable Income line on your 1040.

Why Become An S Corporation?

If you are an active real estate flipper or wholesaler, you are more than likely subject to self-employment tax. But you can save thousands in taxes by electing to be taxed as an S Corporation.

S Corporations (and LLCs that have elected S Corporation tax treatment) can be structured to minimize or avoid self-employment tax entirely. Also, as an S Corporation, you will not be obliged to pay federal income tax or corporate taxes.

For instance, you can structure your S Corp so that you only pay self-employment tax on a fair salary that you pay yourself, rather than on your corporation’s net earnings. Moreover, any distribution you pay yourself from the S Corporation will be completely exempt from self-employment tax.

Budgeting For Self-Employment Tax

As a rule, whenever you have income from sources other than a salary or wages, and you expect to owe $1000 or more when you file your tax return, you need to make estimated quarterly tax payments to the IRS to avoid penalties, interests, and a sizable tax bill at the end of the year. While it is best to consult with a tax professional to determine your quarterly tax payments, there are steps you can take to budget for your self-employment tax obligation:

Set Money Aside

After accounting for self-employment tax, set aside at least one-third or even as much as 45% of all your earnings in a dedicated savings account. This will help ensure that you have enough to make estimated tax payments each quarter.

Track Your Expenses

Remember, self-employment tax is paid on your net earnings, meaning the amount you have left over after you have accounted for all your expenses. So, be sure to keep accurate records of all your expenses to ensure that you are not paying more taxes than necessary.

Pay On-time

If you must submit estimated tax payments each quarter, make sure that you submit them on time to avoid penalties.

Consult With A Qualified Tax Professional

A qualified tax professional can help you determine what your self-employment tax liability will be and ensure that you pay your taxes on time. With the right preparation and advice, you will not be caught off guard when tax season rolls around.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

What’s The Difference Between An S Corporation & A C Corporation?

If you’re trying to set up a business to hold your real estate investments, all the jargon and legal mumbo jumbo can be confusing. For instance, the internet is probably telling you to decide if you want your business to be an “S” corporation” or a “C” corporation,” but you don’t even know the difference between an S Corp and a C Corp. So how are you supposed to decide?

Don’t worry—I’ve got your back. Think of this article as your starter guide to deciding how your business should be structured and taxed.

Before you can choose between an S Corp and a C Corp, you need to understand the basics of how businesses are classified. 

There are two different levels of classification:

First, you’ll need to choose the type of legal structure you want your business to have (corporation vs. LLC), and then you’ll select how you want to be taxed (S Corp vs. C Corp).

difference between s corp and c corp girl walking down pathFirst Level of Business Classification — Legal Structure

State laws will control the process of forming a corporation or LLC. When you start a business, you’ll need to decide if you want to be a corporation or an LLC, which controls your business’s legal structure and has nothing to do with how it will be taxed.

Corporation

A corporation is a business entity that is legally considered to be entirely separate from its owners. Real estate corporations can be held liable for corporate actions and earn profits that are considered the business’s income and not the owners. 

Generally, corporations are:

Limited Liability Company

Like corporations, a Limited Liability Company (LLC) is also a separate legal entity from its owners. However, real estate LLCs provide more flexibility in management options and fewer record-keeping requirements.

LLCs are:

Side note: If you’re starting your business to hold multiple real estate investments, you may want to consider forming a series LLC, which allows you to hold your investments in separate “series” within the same LLC for maximum asset protection and convenience.

Should Your Business Be An LLC Or A Corporation? 

Whether an LLC or corporation is a better structure for your business depends on various factors, including your goals for your business and your desired management structure. You should consult with an experienced business attorney when deciding which type of entity is best suited to your ambitions.

Second Level of Business Classification — Tax Status

Once you’ve decided on a legal structure for your business, you’ll also have to choose how you want to be taxed: S corp or C Corp? Both corporations and LLCs have the opportunity to choose between the two tax statuses.

C Corporation

The IRS acknowledges C Corps as distinct taxpaying entities. This means that if you go with a C Corp, your business’ profits will be taxed like "personal income" of the corporation. You’ll have to file a tax return for the company each year. Any portion of the profits distributed to the owners will be taxed again as their personal income.

S Corporation

S Corps are what is known as “pass-through” entities. This means that S Corps themselves don’t pay taxes. Instead, the company’s profits (or losses) are passed through to its owners for tax purposes. 

Each owner will include their portion of the company's profits and losses on their personal tax returns and pay taxes based on their individual tax bracket. Additionally, S Corp distributions are not subject to Social Security taxes as long as you’re paying yourself a reasonable salary. Because of the advantages offered by S Corp taxes, many real estate investors elect this tax status for their businesses.

Default Tax Statuses

The IRS will assign a default tax status to your corporation or LLC if you don’t tell them that you want them to do something different. What your default tax status is depends on the type of entity you formed and how many owners there are. 

Default Tax Status For Corporations

When you form a corporation, the IRS will automatically consider you to be a C Corp.

Default Tax Status For LLCs 

When it comes to taxes, there’s no such thing as an LLC. By default, single-member LLCs will be treated as sole proprietorships, and LLCs with two members or more will be treated as partnerships. The LLC will be viewed as a "disregarded entity" and will not be taxed.

How To Change Your Default Tax Status

If you form a corporation and decide you’d prefer to be taxed as an S Corp than a C Corp, you can file Form 2553 with the IRS to change your corporation’s tax status. Similarly, LLCs can file Form 8832 and choose to be taxed like an S Corp or C Corp.

S Corp Versus C Corp

So, you can elect to be taxed as either an S or C corporation. Why would you choose one over the other? 

In short: If you are going to bleed your company dry, an S Corp may be better. If you are building a business and need to leave funds with the company to grow the business, a C Corp may be better. However, you should always talk to your tax advisor and your attorney to figure out which is best for your particular circumstances and goals..

When An S Corporation Is Better

An S corporation works really well when you’re taking all the money out because there’s only one tax level—at the shareholder level. That means the owner is the only one that’s taxed—the company is not taxed. This is the best option if you’re going to take all the money out of the business. 

When A C Corporation Is Better

There are also many advantages to going the C corp route, including a 21% corporate tax rate. In a state like Texas or Wyoming or Nevada (where there aren’t corporate taxes), you’re getting a 21% flat rate on all the money you leave in the company. The more you can keep in a C corp, the better off you will be because of the 21% tax rate.

In a C Corp, the corporation is taxed, and then, when money is distributed, it’s taxed again at the shareholder level. If you’re taking money out of the company, it probably should be as salary, because otherwise, you’re going to be double taxed.

What’s Next?

After you decide how to tax your business (S Corporation or a C Corporation), you need to pay yourself a reasonable salary. You’re going to want a bookkeeper. 

You’re an independent contractor employed by your business now, but you’ll have to correctly handle the withholdings. This includes filing the payroll tax reports. An experienced lawyer can help you get through this process and make sure you set everything up properly. 

 

Interested in learning more? Check out our articles Using Your S Corp: Payroll Taxes and Using Your C Corporation’s Tax Brackets To Reduce Your Tax Burden.

How You Can Bypass The 20% Withholding Tax On 401(K) Distributions Using Your IRA

You have to think of the IRS like they’re pirates out to steal your money. They want to get into your home. They want to carry off your daughter. They are the barbarians at the gate.

Our clients are wealthy investors who will pay their fair share when and where they are obligated.

But there are ethical and legal means to keeping more of their money, and it's our job to help them find those means.

Here’s one way to keep the government’s greasy fingers off of your retirement savings by bypassing the withholding tax on 401(k) distributions. 

Tax Advantage of Retirement Tax Savings

Your 401k is subject to a 20% withholding tax when you cash in. IRA distributions, however, aren’t subject to taxation at the time of distribution.

That means you have a head start against the pirates.

This is the easiest switch in the world. Dump your 401(k) into an IRA. To get started, check out our article, IRA Rollovers: Yes, Rolling Over Your 401(k) Into An IRA Is Smart!

Everything in your 401(k) is going to take this hit. But your IRA is all yours.

Now, this isn’t a complete get-out-of-jail free card. The real world isn’t Monopoly and you’re going to look like an idiot if you start wearing a monocle.

The tax owed on the distribution of an IRA or 401(k) is identical. You will still receive a 1099-R.

The difference is when you have to pay the piper. If you keep your 401(k), you pay the Man up front. 

The Difference 20 Percent Can Make

You may not think 20 percent is a big deal, but with a little creativity, 20 percent is going to add up. There’s nothing wrong with retiring on the beach. My buddy (we'll call him John) took $500,000 from his 401(k) and he went got himself a fine little spot with plenty of sun and plenty of surf.

My buddy Sam, on the other hand, talked to me first. So, when he pulled his half a million bucks out of his IRA, we figured out how to get him a beach house like John. We also figured out how to put a little boat at the end of the pier for him. Sam loves to fish, so we invested a little in a fishing business too. Sam doesn’t care if the fishing business makes any money, but he got to keep enough money to buy a boat and make it a business expense. He also got to retire with a nice expensive Dunhill cigar in his hand.

John only gets a nice smoke when Sam is feeling generous.

It’s no contest folks. IRA or give your money away.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Offshore Banking: Everything Investors Need To Know

The concept of banking has been around for about as long as civilization itself. 

In ancient Mesopotamia, temples and palaces often acted as financial institutions, lending seeds to local farmers to plant their crops. Once those crops were harvested, farmers would be required to pay back their seeds. 

Of course, banking has evolved since then. 

Today’s banks continue to provide loans to the communities they serve while giving people a safe place to keep their money. And while most people bank within their country of residence, which is known as “onshore banking,” today we want to look at the overseas alternative, offshore banking, and how investors use it to their advantage.

 

What Is Offshore Banking?

Offshore banking, like onshore banking, provides a safe place for financial customers to transact, but it offers additional benefits that traditional banking doesn’t. Many of these benefits make offshore bank accounts attractive, particularly to wealthier individuals. 

By definition, offshore banking is when a bank accepts and safeguards money from people who live in foreign countries.

When it’s explained in simple terms, offshore banking doesn’t sound so forbidding, does it? So why does the idea of opening an offshore bank account make some people feel like they’ll be joining the ranks of tax-evading criminals in Hollywood films? (We’re looking at you, Wolf of Wall Street!)

While it has gotten a bad rap, such as in the case of the Jersey accounts frozen by Lloyd’s Offshore Banking due to money laundering, the truth is that there have been many more regulations established among offshore institutions and, as a result, it has become more difficult for individuals to indulge in illicit behavior. See our article, Is It Legal to Have an Offshore Bank Account?, to learn more.

In reality, offshore bank accounts are not owned only by criminals portrayed on the silver screen, but also, and more commonly, by everyday people, from travelers to investors alike. 

Feeling better about the idea of opening an offshore account? Prior to reading the next section, take a quick moment and try to think of your priorities when it comes to offshore banking services. These might be lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

Benefits Of Offshore Banking

There are a lot of reasons why people might choose to bank offshore instead of confining themselves to domestic banking options:

 

Which Country Is The Best For Offshore Banking?

The best country for offshore banking depends on you and your needs. If you do a lot of business in Asia, Singapore might suit you best. If you’re worried about banks reporting your information, you might prefer to bank in one of the few countries which have not adopted the Common Reporting Standard (CRS), such as Georgia. 

If you want to open an account easily and with a low starting balance, Georgia also checks that box. If you’re looking mainly for asset protection, it’s what Swiss banks specialize in. 

And for the best tax rates around, you’ll find those in the Caribbean. More on that later!

There are quite a few offshore banking countries to choose from. Whether your priority when it comes to offshore banking services is lower tax rates, asset protection, higher interest rates, or just convenience to a place you frequently travel.

 

How Does Offshore Banking Work?

Offshore banking works pretty much like onshore banking, except that it is usually a bit more stringent. For example, in traditional banking you can just walk in with two forms of identification and an initial deposit, and most likely you will be approved. As you will see in the steps below, opening an offshore bank account is more of an in-depth process. 

Since we’ve already established some of the general concepts of offshore banking, as well as what your ideal institution (or institutions) would offer, let’s discuss what offshore banks are looking for when it comes to choosing their potential customers. To ensure that you are fully prepared for opening your offshore account, we’ve highlighted the main steps of the process below. 

Once you’ve completed all of the above steps and submitted any additional requested documents, the average turn-around time is five days. While each case is unique, these are the basic steps of opening an offshore bank account. 

Not too scary, right? Of course not! However, if this is your first time venturing out into offshore banking, I strongly recommend you consult with a professional organization that specializes in establishing relationships with offshore banking institutions. 

As we have established, more and more people are choosing to divide their finances among multiple institutions, particularly into offshore accounts, for a myriad of reasons. 

 

Why Is The Caribbean An Attractive Location For Offshore Banking?

What do you envision when you think of the Caribbean? Okay, I’ll give you about five more minutes to (reluctantly) put down your tropical cocktails and brush the beautiful grains of white sands off your feet.

Are you with me now? Great! Now apart from the impossibly gorgeous tourism, let’s talk about another reason why the Caribbean is so amazing. 

If you only know of, or have read about, offshore banking from the media, the Caribbean is most likely the first or second place that comes to mind. Why is the Caribbean so popular for offshore banking? Since the 90’s, it has been full of tax havens! Tax havens are these wonderful places where you incorporate your business, and, depending on the country, pay little or nothing in taxes. Additionally, many nations in the Caribbean have strict privacy laws and have refused to sign tax treaties with foreign governments. This means what happens financially in the Caribbean, stays in the Caribbean. Particularly for investors, low taxes and financial privacy are the major draws to the Caribbean. It also doesn’t hurt that it boasts some pretty breathtaking backdrops (care to take an impromptu trip to research these points in person?!) 

If you’ve made it this far into the discussion, I’m sure you can see just how straightforward offshore banking can be - just as long as you reflect upon your priorities, choose the right institution for your needs, consult a professional for legal advice, and most of all, be sure to report all of your accounts accurately because you definitely want to remain on Uncle Sam’s (or Johnny Canuck’s) good side!

 

How to Protect Yourself as a Real Estate Money Partner

One of the more elegant features of the real estate world is the way the whole ecosystem encourages symbiosis. Investors often are stronger together, especially in the face of an obstacle. For most investors, start-up capital or even cash flow to expand will become issues at some point in an REI career. Money partnership is one creative way REIs are helping each other by offering complementary skills to one another and combining forces on an investment. This is a clever way to square a capital issue or get help finding deals, depending on your role. Everybody wins when these arrangements work out. Here are some of the things you need to know to make sure yours does.

Money Partners and Credit Partnerships Explained

The money partner is the term for the person in this arrangement who has capital to spare. As for the person that has time or scouting skills or other resources, they are sometimes called the entrepreneurial partner. Other terms for these types of arrangements include credit partnership and partner funding.

Many of our investor clients are at the stage in their careers where they’re richer in capital than time. But don’t get discouraged, most beginners start out rich in resources other than cash. It may be your willingness to spend time researching, number-crunching, your day job skill set, or even your charm or tenacity--but there is certainly something about you that makes you valuable to another investor even if you’re cash-poor. Eventually, as your career progresses, your time will become “expensive” enough that you may assume the other role. Many REIs transition into mentorship.

How to Protect Yourself as a Money Partner

If you’re the “bank” in any kind of deal, you’ve got to look out for yourself. Money partnerships aren’t any different. You’re taking a risk, so of course you want to take the steps you can to mitigate that risk. Here are some of the most important tools you can use to keep yourself protected.

Option #1: Create Clear, Thorough Contracts

If you’ve got concerns about what your new partner may do if they’re not responsible in their duties. But that’s why the smart folks in our early legal system (and its predecessors) gave us contracts: to get everyone’s roles, responsibilities, and rewards in ink. Simply using basic contracts to solidify your verbal agreements can prevent nasty disputes, and even lawsuits, down the road.

If you have specific concerns, address them in the contract. Ask your attorney what some wise provisions would be given the specific fears or worst case scenarios you’re aiming to prevent. Odds are good you can rule out a lot of shenanigans by simply taking the time to create an effective contract. Anyone who wants to make money with you should be willing to sign a contract with fair, reasonable, comprehensible terms.

Option #2: Use Entities To Limit Your Personal Liability

Where a contract can’t always help you out is in the realm of lawsuits. Unfortunately, partners sometimes get bad blood. Deals sometimes don’t go as planned. Of course, most people get angry and play the blame game. Some people’s preferred venue for the blame game just happens to be the courtroom.

Don’t become a victim to your partner revealing themselves to be bitter or litigious. Protect yourself by creating an LLC and operating it in a manner to a venture-specific LLC. Use your Operating Agreement to clarify your relationship to as fine a degree as you like, and even divvy up profits and losses as you agree is fair. The great thing is you can have equal power if you like, or a money partner may want a greater share of profits. These are all the details you can get on paper when you file your LLC, but filing your LLC serves a second purpose: asset protection.

The LLC limits liability around real estate investments. Moreover, a Traditional or Series LLC separates you from the asset and its problems. You’re separate and no longer “own” it, but control it. What’s great about not owning something is it’s impossible to lose it in court. But of course, you retain legal control. Clever business structures can have many benefits on top of helping you CYA in a money partnership.

Tax Scams To Be Wary Of: The Dirty Dozen List, (1-6)

The IRS released its 2019 scam watchlist, affectionately known as the Dirty Dozen. What should you watch out for during this year’s tax season? Learn the latest below, and remember, it’s okay to be skeptical of any officer claiming to originate from the IRS.

#1: Illegal Use of Off-Shore Accounts

We’ve shared before about the legal use of off-shore banking, which is safe. Unfortunately, anyone illegally convincing you to use off-shore accounts to evade taxes is dragging you down a dark path. Should you follow, you’ll pay the price.

#2: Phishing Attacks

Phishing is better known as “that scummy move where people send convincing-looking fake emails to steal your log-ins.” For those unfamiliar with Scumbaggery, you’ll get an email that looks like it’s from, say, Your Bank. But it isn’t from Your Bank. It’s from some jerkface who wants you to believe he’s Your Bank, so you’ll unwittingly give him Your Banking credentials.

Watch emails closely. Unless you know someone personally, don’t take identities for granted online. An email from yourbank.com that’s consistent with other emails from Your Bank isn’t a phishing attack, and there’s nothing wrong with calling Your Bank (or whichever institution the caller claims to represent) to confirm.

Phishing preys on the implicit trust we have in our institutions and your laziness. Phishers hope you don’t look closely at the email. Awareness is your best defense.

#3: The Bogus Tax Return (Preparer Fraud)

You can avoid this one by simply ensuring your tax preparation professional is qualified and ethical. CPAs usually won’t pull this move, but fake pros crop up every year, sadly.

#4: Refund Scams

This type of preparer fraud involves shady characters claiming to be experts promising you absurdly high refunds. This should set off your BS detector--vet the provider or switch if this offer isn’t the first red flag.

#5: The BS Charity

We hope there’s a special place in the afterlife for people who invent fake charities. But hey, it’s their souls--just don’t donate to one or it’s your behind on the line. Uncle Sam can’t get your money back. Further, deductions toward fake charities don’t count, which leads us to...

#6: Return Padding and False Deductions

Yeah, people really try. Unethical preparers have been busted cooking books or creating a laundry list of bogus undeserved deductions to get a huge refund, usually to “earn” themselves a cut. The scam and how the preparer profits may vary. Consider this your fourth consecutive warning to be careful who you let do your taxes.

Including you. Many individual taxpayers have taken liberties with deductions, and even outright invented false deductions. There are times when ethical people are tempted to break the rules in life. But when you’re filling out a tax return isn’t one of those times. Save your rebellious side for the stage, the canvas, the negotiating table, the board room, the bedroom, or really anywhere that won’t get you into a hot mess with Uncle Sam. That’s not legal advice, by the way--that’s just good old-fashioned American common sense.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Tax Consequences For Section 280A and Airbnb Vacation Rental Assets

Do you have properties you’re using as vacation rentals, short-term, or mid-term rentals? If so, or if you are considering listing part or all of an investment property on Airbnb or any other online platform, this article is for you. Vacation rentals have become an increasingly popular way to maximize profits on investment properties. That said,  to run your vacation rental business legitimately, you need to be certain to cross your “t”s and dot your “i”s. Because this type of use is a fairly new byproduct of the gig economy, regulations and laws can change quickly. Even the insurance industry has caught up at this point. So of course the Tax Man has. The smart investor must be mindful of not only their state and local legislation, but also how these types of investment properties are taxed. Here’s our little crash course on the subject to get you started.

What Type of Airbnb Host Are You?

Of all the questions that will help determine your tax responsibilities vis a vis Airbnb profits, this is both the most qualitative yet critical. Your answer is the difference between “not a penny owed” and “Get out your checkbook.”

Depending on which of these two criteria you fall into, you may not have to report at all:

  1. Your home is only on the Airbnb platform for 14 days or fewer of the calendar year. Pocket your funds and enjoy the thrill of beating the system. No reporting necessary.
  2. Those who rent their home over 15 days out of the year--including spare rooms, part of the home, etc.--will have to report any income derived from such rental on Schedule E of their tax return.  

Section 280A is the part of the Tax Code that makes these definitions for personal and rental use and otherwise lays out the rules investors must play by. Fortunately, it isn’t all bad news though. Here’s a quick breakdown.

What is Section 280A? Does it Matter to Me?

Section 280A of the Internal Revenue Code isn’t just a novel way to kill conversation during date night--it’s the Taxman’s guidebook for how you get to use your home in the course of business. In fact, Section 280A has made a cameo right here on the RLS blog before in our breakdown of the Home Office Exemption (a worthy read if we may say so ourselves).

If you’re renting your home or any piece of it for profit for fifteen or more days annually, then Section 280A matters to you. This is the portion of the Tax Code that will dictate what must be reported, which records matter, and perhaps most importantly for lots of you, which deductions you can take on your short term rental real estate business. If you’re considering entering this market, it’s wise to become hip in the ways of managing your records and taxes. You’ll find yourself coming back to 280A in some form or fashion a few times before Tax Season is over.

Get in the Habit: Accurately Report AirBnb Income and Expenses

Regardless of how long you plan to be in the vacation rental game, one area you cannot get sloppy on is bookkeeping. Now don’t worry, there are no new fancy systems to learn here. You’re free to self-organize to your heart’s content. Here’s what the Tax Man cares about if you’re hosting over fourteen days out of the year:

Now, Airbnb might report your earnings. They have to, beyond a certain point. Airbnb users with over 200 individual transactions or earning in excess of $20,000 within a year can expect Airbnb to report these figures. This is yet another good reason to always start with the records you have on the platform itself, but keep your own for accuracy reasons. You may be one of the many users that falls somewhere in between “occasional” and “frequent.” Whatever your situation, keeping your own records guarantees you’ll have at least one full set of documentation.

What Deductions Can I Take as an Airbnb Host?

Fortunately, there are tax benefits as well as obligations that you may enjoy related to your vacation rental business. This is why documenting expenses can be so critical to maximizing your tax savings on these properties.

You probably already know there’s a bit of overhead to hosting, and in some areas, quite a lot. That’s why these types of expenses are generally deductible on your taxes:

Basically, if it’s a real and justifiable business expense, you can likely use it as a deduction too. If there’s some unique cost related to your property, make a note of that. It never hurts to ask your CPA about costs like specialty insurance or anything you explore explicitly for your short term or vacation rental business. These are all possible--not certain--deductions you can exploit. Your asset protection entity may also be of assistance in managing taxes, so be sure to let your relevant professionals know how you control the rental asset. If you live in the home, this may not apply directly, but it’s still good to know where the divisions between your personal and business-owned assets are.

How Can I Bolster My Vacation Rental Business’s Chances of Success?

Following the above advice to the letter is a great start. But on top of excellent record-keeping, there are some other pro-tips to keep in mind when you establish your Airbnb or short-term rental business. Here are a few to get you started.

Offer Excellent Service

This may seem obvious bordering on cliche, but it also happens to be the truth. If two businesses offer the same product or service for the same price, how do you decide who to go with?

Really?

Think about it for a moment.

Now think about what would make an outstanding vacation rental. Really practice empathy and put yourself in the position of your likely traveler demographic. Write down everything that comes to mind, and aspire to offer the level of customer service you’d expect in a place twice as nice as what you’re offering. Hosts who go the extra mile tend to be rewarded on the Airbnb platform with designated statuses, high booking rates, and even featured listings. Truly offering the best experience of the space you have available, whether it’s a humble lodging for a solo traveler far from home or a beach condo for a family getting away from it all, will make you stand out on the platform and with your clientele. So go the extra mile.

Expect the Unexpected & Offer Simple, Thoughtful Solutions

Airbnb has lots of great advice for hosts. You can expect to go through more things than an average household: linens, cleaning supplies, trash bags, even certain food and beverage if you offer it. Get all the free information you can, but also plan for emergencies.

Here’s a common one few will warn you about: the need for an extra mattress. A $40 Walmart mattress not only could bail a guest out of a bad situation or furniture malfunction: it also counts as an extra bed to offer future guests. Think ahead about common mishaps, and if you can’t anticipate them, at least try to be available to respond. Consider also the types of items people forget when traveling. How many times have you found yourself without a hair dryer (an actual amenity you can list on Airbnb, for the record), deoderant, feminine products, contact fluid, Advil, or some other cheap but oh-so-essential item? After all, those are things you tend to need quickly when you need them. Keeping guest bathroom drawers stocked with such basics will put anxious guests (or those who meet a traveling misfortune) at ease.

Bonus: Those loving gift baskets? You can write all their contents off later.

Have a Plan for Responsiveness

We all know nonsense just happens when you travel. Planes are late. Layovers extend. Baggage gets lost. These types of situations can leave new Airbnb travelers feeling especially nervous. But the beauty of the platform is that you become that person’s touchstone to the city. If you cannot personally manage your Airbnb offering, it really is a good idea to get some full-time assistance.

Responsiveness is actually measured by the Airbnb app. Hosts with high levels tend to perform better. If you aren’t able to manage your property alone, recruit a friend, family member, or even friendly graduate student to help. Offer them a fair price to help you out wherever you need. Maybe that’s just a modified maid service, maybe it’s help maintaining your account, or even a hybrid of the two with your own needs mixed in. Just be sure that if you do hire an individual, you are clear on their role as a contractor. It never hurts to solidify even the most informal relationships with a solid contract.

Choose the Right Professionals for Help

Knowing when you need a lawyer or CPA can be critical. The smartest investors generally have a real estate attorney involved when it comes time to buy, sell, or transfer property. Many will set up asset protection systems in advance but also use their attorney for advice on growing their business. CPAs are more essential for tax-specific questions, though you will generally find real estate attorneys are at least aware of the issues likely to affect clients.

Nonprofessionals can also be helpful to you. Form your own personal-professional network of fellow Airbnb hosts, and don’t be afraid to make a few “aspirational friends” along the way. You know, the kind you want to be like. Following in the footsteps of someone who has had success is a good way to learn the industry quicker--and see your profits faster.

Tax Responsibilities for Airbnb Hosts & Vacation Real Estate Investors

The vacation rental industry has been booming for some time now, with no signs of slowing down. In fact, it’s how some people get into real estate: by realizing the income from renting a room in one’s home is pretty nice. More investors and ordinary folks are taking advantage of platforms such as Airbnb to maximize their real estate income. If you’re one of them (or thinking about becoming a host), you should be aware of your tax obligations. Here’s the quick and dirty guide for the vacation rental investor.

14 Days: The Magic Number

One simple way to avoid extra tax expenses is to limit vacation renters to a two week stay annually. The Tax Code only kicks in the costs discussed below for visits over this time period. So if you, say, are an occasional user of Airbnb or tend to only have very rare short guests, you won’t need to report the income. But here’s the catch: you can’t deduct your business expenses on unreported income.

When Do You Have to Report Income From Airbnb?

If you meet the following conditions, you must report and pay taxes for your vacation rental business:

  1. You have guests on your property for over 14 days.
  2. You occupy the home for over 14 days of the year or 10% or more of the days you’re renting.

If you live in the home you’re renting, that means you will have to distinguish which portion of the mortgage is related to personal vs. business use. Property taxes and interest will also be recorded on Schedule E of your tax return.

You May Get a 1099 From Airbnb

Airbnb might send you a 1099-K, the type of 1099 for third party transactions. If Airbnb withholds funds for any reason, you’ll also receive notifications of withholdings at your mailing address.

Not everyone gets a 1099-K from AIrbnb. However, if you earn over $20,000 or make over 200 reservations in a single tax year, you will receive one. Airbnb will also report your earnings.

Other Tax Issues for Vacation Rental Investors to Note

Everything discussed above pertains to federal law. But Airbnb investors must also conform to state and local regulations. Airbnb and vacation rental regulations change fairly rapidly and vary dramatically from jurisdiction to jurisdiction.

The best thing an investor can do to ensure they are complying with all state and local laws is to  acontact a qualified real estate attorney. A small fee for a bit of legal advice that could keep you away from a tax dispute is totally worth it.

Capture Every Dollar Of Tax Savings In Your Real Estate Business

We make it cheaper and easier to own real estate. Work with us to make sure you get every dollar you’re entitled to.

Real Estate Investment Tax Strategy and Compliance

Get things set up right. Acquisition is often the most complicated piece. We go through your payments and closing statements to get everything in place and capture very dollar.

Accelerate deductions. It can take a long time to recover costs in real estate. We work to get your rehabs deducted up front. We work with cost segregation experts to help you save money up front.  Do more deals with more money in your pocket.

Including your overhead. We don’t forget your other costs. Office expenses, mileage, marketing, and other overheard costs are all deductible. Work with us to capture overhead expenses to your maximum benefit.

Work with confidence. Work with people who know real estate. We have experience working with real estate investors of all types, from single family landlords to commercial syndicates. We know what we are doing.

Real Estate Investment Accounting Solutions

We can handle your record keeping and reporting, giving you more time to find deals and make big money. Our cloud-based platform gives you access to reporting as you need it. Forget worrying about debits and credits.

Real Estate Investment Tax Strategy Solutions

Learn how to build a better mousetrap and get ready for a brighter future.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

How Independent Contractors Should Make Tax Payments

The Right Amount at the Right Time

Filing and paying your taxes looks a lot different as an independent contractor than it does as an employee. Let’s talk about how a contractor calculates their income and tax due, and then we’ll go over the timing of how a contractor should make tax payments.

We Get to Deduct Things?

Contractors have a much easier time deducting work-related expenses than employees do; in fact, starting in 2018, most employees can’t deduct unreimbursed work expenses at all. A contractor can deduct unreimbursed expenses directly against the related income on Schedule C, and only pays income and self-employment tax on the net income amount. Here are some expense items you can likely deduct:

Home Office Expense Tax Write Offs

Most contractors work from home. If you have a part of your house you use to conduct your work as a contractor, you can deduct a portion of the expenses of your home. You can either deduct a flat $5 per square foot (Line 30 of Schedule C), or you can deduct expenses based off the square footage of your office versus the square footage of your home (Form 8829.)  Expenses you can allocate in this manner include mortgage interest, real estate taxes, rent, insurance, utilities, repairs and maintenance, and HOA fees. You can also depreciate your home for this purpose and deduct that as a home office expense; see Part III of Form 8829.

Office Expenses Tax Write Offs

You can deduct the expenses of setting up and maintaining an office. Your computer and accessories, software, pens, paper, and other typical office expenses are deductible.

Phone and Internet Tax Write Offs

You can deduct a portion of your cell phone and internet bills for the percentage you use them for business.  Be reasonable; the IRS can require you to substantiate the percentage you have chosen.

Licenses and Education Tax Write Offs

If you have a professional license, you can deduct your annual license fees. Whether or not you have a license, you can deduct costs you spend on continuing education, books, and other materials that help you expand your skills related to your contracting job.

Travel Tax Write Offs

If you have to make unreimbursed travel, you can deduct plane tickets, hotel rooms, and 50% of the cost of your meals while you are away from home. You can also deduct driving - for 2018, it’s worth 54.5 cents a mile.

Other Tax Write Offs

The items above aren’t an exhaustive list. The legal standard for a deduction is whether or not it is an ordinary and necessary business expenses - as in, would a reasonable person consider the expense in question? If you have big items you’re not sure about, talk to a CPA and get some extra wisdom.

How Much Taxes Do Independent Contractors Pay?

Contractors pay two different types of tax as part of their annual Form 1040 filing. One is the standard income tax, the same as everyone. The net business income is added to other sources of income (W-2s, interest, dividends, rents, etc.) as part of the calculation of taxable income. The second is the self-employment tax, which is a replacement for both the employer and employee portions of the Medicare and Social Security taxes paid by employees. The self-employment tax is a flat 15.3% on net self-employed business income up to $128,400 for 2018, and 2.9% on amounts above that. This tax is added to your income tax to determine your total tax liability.

Oh, You Expect Me to Pay Now?

Since there is no withholding done when payments for services are made, a contractor has to make tax payments directly to the IRS. Generally, the IRS requires that payments be made in quarterly installments through the year, which are called estimated tax payments.  You must pay the lesser of 90% of your current year tax, or 100% of your prior year tax (110% for people with prior year adjusted gross income over $150,000) in four equal installments throughout the year to avoid the estimated tax penalty. The penalty is currently 6% (adjusted for changing ainterest rates) on the daily outstanding underpaid balance, so if you have to choose between paying the IRS or paying off credits cards or other short term debt, the IRS can usually wait.

Any amounts not paid in as estimated tax payments need to be paid by the April 15 filing deadline. Even if you get an extension, an extension of time to file is not an extension of time to pay. Amounts not by paid by April 15 will incur a penalty of 0.5% per month of the underpaid balance, plus interest, so try to pay what you owe by the deadline.

Three Ways Your Taxes Are Impacted by Student Loans

Student loans are a major stressor for most Americans, with nearly 40 million managing this type of debt. Don’t let ignorance of how student loan payments affect your taxes add to your worries. In fact, there’s some good news for anyone making these payments below, where we examine three of the ways your taxes are impacted by student loans.

Deductions Are Available for Loan Interest Payments

If you pay student loans in a tax year, the interest on your payments may qualify you for a deduction of up to $2,500.  Your Modified Adjusted Gross Income will determine how much of the deduction you may take, with individuals earning under $80,000 and couples filing jointly earning under $165,000 receiving the full amount. You may still qualify for a lesser amount if your income exceeds these limits. Those who have paid over $600 will receive Tax Form 1098-E from their loan servicer; if your burden was lower, you may have to request it to get your deduction.

Filing Status May Influence Loan Payment Amounts

Many keep student loan payments manageable by taking advantage of income-driven repayment plans, which base payment amounts on actual income earned. Unfortunately, you can’t ignore that filing jointly with your spouse would likely change your income, possibly even disqualifying you from the plan you intended to use. Consider whether you’re better off filing separately if your joint income would substantially interfere with your ability to make your student loan payments.

Loan Forgiveness Influences Your Taxes

If you are using a loan forgiveness program, the type of program may influence additional taxes owed. For instance, if you are using the Public Service Loan Forgiveness Program, you must make the 120 on-time payments in the program’s criteria, but do not generally owe taxes on the amount forgiven by the program.

The same is not true if you are, on the other hand, using an income-based repayment plan. You may meet very similar criteria, but you’re highly likely to be taxed proportionately to the amount forgiven.

Tax Professionals Can Help You Make The Best of Your Situation

When in doubt, and particularly when the IRS is involved, get a professional opinion before making any major changes to the way you pay your taxes. A qualified tax professional can also help you determine where you can be saving substantially on your taxes and even point out deductions and credits you can take advantage of. At Royal Legal Solutions, our professionals construct your strategy with tax savings in mind, and we also have relationships with CPAs to assist us with complex tax situations.

If you have questions for our tax professionals, contact us today. We are happy to answer any questions you may have about our tax services or the tax implications of our other services. For specific advice on your situation, set up your personalized consultation today.

Tax Law and Family Court: What You Need to Know About Divorce, Custody, and Your Tax Obligations

Divorce is already one of the most stressful life events that many of us will go through. There’s a reason the expression is “going through a divorce”--it is truly a process to be endured. There are many factors to consider when you find yourself separating from your partner. On top of the emotional stress involved, you will also have legal and tax concerns to worry about. One concern is the fact that family courts often make rulings that directly conflict with federal tax law.

Technically, federal tax law trumps family court rulings. But in practice, this does not stop judges from making rulings that run counter to federal tax law and can spell trouble for the taxpayer. The errors in these rulings tend to arise out of ignorance. Family court judges may be accomplished experts in the practice of family law, but that does not mean they are also experts in federal tax law. The unfortunate result is that many judges inadvertently create tax problems for the divorcing couple. Further, if your family lawyer is not familiar with your potential tax issues, he or she may not be able to advocate for you as effectively. Fortunately, you can avoid the complications we will discuss by simply being aware of them and using the appropriate kind of professional help. Read on to learn some of the most significant tax issues you are likely to face in a divorce, and more importantly, what you can do to prevent the most common tax problems associated with divorce.

Dependency Issues: Which Parent Gets to Claim the Child as a Dependent?

One of the most common issues that a divorcing couple with children may face is who gets to claim any children as dependents on their federal tax returns. The parent who uses this exemption may be eligible for up to $4,000. Family court judges often mistakenly believe that both parents may claim a dependency exemption, particularly in cases where they are sharing custody. This simply is not true, and a person who blindly follows the court’s ruling may later find they owe the Taxman, despite having done “everything right” per the ruling.

Which parent has the right to claim dependency isn’t always clear-cut. Most courts will award the exemption to the custodial parent, or the parent who is providing over half of the child’s support and care. In joint custody cases, the determination of who is providing the majority of care will be made by the family court.

However, there is an exception to this general rule. The custodial parent may choose to release the exemption to the other parent by filling out IRS Form 8332 and submitting it with his or her tax return. Since all family situations are unique, this may be appropriate in yours. But be advised that if you elect to release the dependency exemption, you will not be able to claim the Child Tax Credit of up to $1,000 either.

Child Support Issues

Child payments may not be deducted or taxed, regardless of which party is awarded child support. The legal basis for federal tax law treating child support in this manner is interesting. The short version is that Uncle Sam does not want to incentivize or promote divorce in any way, and that allowing for any kind of potential tax break surrounding child support may do exactly that.

Alimony Issues

Alimony is a type of income and is therefore considered deductible for the party making payments. The payer may deduct however much alimony the payee is claiming as income on his or her tax return.

Some divorcing couples opt to use unallocated income as an alternative to alimony. This option is considered legally distinct from either child support or alimony, and may confer some additional benefits to both parties. First, contingencies may be placed on the support payments that are directly related the the costs of childcare and the circumstances of both parents and the child. For instance, unallocated income may end if your former spouse gets married, your child reaches a certain age, or in other scenarios. There may also be tax benefits for the divorcing couple, such as the recipient of unallocated income paying in a lower tax bracket for the support received.

Property Issues

A wide variety of property issues may affect your tax situation during the divorce process. Some concerns real estate investors would be wise to  advise their tax and legal professionals about may include the following:

If you anticipate any of the above property issues, one practical step you can take to make things easier is to make a complete list of any and all assets you own.

Other Tax Considerations in a Divorce

Many of the other issues to consider when divorcing are directly affected by which parent receives the dependency exemption. Examples of these issues include:

Avoid Tax Complications With Your Divorce By Getting a Professional’s Opinion

Fortunately, the issues discussed above can be prevented with a little bit of education and the help of competent tax professionals.

If you’re an investor preparing for a divorce, feel free to contact Royal Legal Solutions with questions you have about protecting your real estate assets during the process, avoiding tax issues, or any other concerns relating to your real estate investments. Our legal professionals are familiar with the tax laws affecting real estate, and we also maintain relationships with competent CPAs who can assist our investor-clients. We can also work with your family law attorney to ensure your needs will be advocated for properly in any divorce or custody proceedings. Whether your concerns are about taxes or other issues that require a sensitivity to the needs of real estate investors, Royal Legal Solutions can help you. Stay ahead of any potential legal issues by  scheduling your personalized consultation today.

Deciding How to File Taxes Once Married: Jointly or Separately?

You know that Frank Sinatra great “Love & Taxes?” Or those many romantic films that end with the couple riding off into the sunset, only to tumble into a large country bed with their tax returns? No? Us, neither. Fortunately for us all, the song “Love and Marriage” makes no reference to taxes and this part of married life tends to remain unscripted in film and TV. All the same, determining how to file is one important change you will have to address after getting married.

When does it make sense to file separately versus jointly? What factors do you need to take into consideration when determining how to file? We have created this cheat sheet to help you answer some of these basic questions and make the best decision for you and your spouse.

When Does The IRS Treat You as Married?

In general, the IRS will treat you as married for the tax year that you got married. So for the tax year 2018, it doesn’t matter if you got married on New Year’s Day or in December. You could have been married for a single day, even. But your marital status as of December 31, 2018 will determine whether the Taxman considers you single or married for the 2018 tax year--or any other.

When Filing Jointly Makes Sense

For most couples, filing taxes jointly once married makes sense. Couples who choose to do this will complete a single return together. Further, they must be aware that their combined income will be considered as a single unit. They must decide whether to itemize their deductions or take a standard deduction on this return. Fortunately, the IRS offers couples who file jointly one of the highest possible standard tax deductions. For tax year 2018, this standard deduction is $24,000--twice that offered to those who are married but filing separately.

Couples who file jointly are also eligible for certain tax credits that those who are filing separately may not receive. Examples of these credits include the following:

When only one spouse is earning money from a job or other income source, filing jointly makes more sense. This scenario makes it easier for the spouse’s combined income to fit into a lower joint tax bracket. The couple may also take advantage of the non-earning spouse’s deduction when filing their return.

Potential Problems With Filing Jointly

Filing jointly is not without its potential drawbacks. When couples file jointly, their overall income will be higher. This can potentially push higher-earning couples into an even higher tax bracket. Usually, it should not--the tax brackets for couples who file jointly are typically lower than if those same couples were to file separately. However, if two higher-income spouses file together, they may find their combined income is high enough to create problems. Such problems can include the following:

Another matter to consider is that when you file jointly with your spouse, you are liable not just for what you report, but for what he or she reports as well. By virtue of filing together, you are now “jointly and severally liable” for the tax payment itself, any interest due, and any penalties due as well. This can remain true even if you later divorce that spouse.

When Filing Separately Make Sense

While filing jointly makes sense most of the time, there are occasions where it makes more sense to file your taxes separately. After all, each couple’s tax situation is unique. Two key examples of when it makes more sense for spouses to file separately include:

The first situation is one where separately your liability from your partner’s has clear benefits. If your partner has been overstating income or knowingly making errors with deductions, you likely don’t want to be anywhere near that situation and this would be a good reason to file separately. The last thing you want is to get dragged in on a potential audit or tax dispute that you didn’t start. It may also be a good occasion to ask your partner some other pointed questions, but filing separately is at least a start.

There are a variety of scenarios that may meet the second criteria of one spouse being eligible for a substantial deduction that would mean the couple pays less overall by filing separately. Consider the following example. John and Mary are a couple in their late 60s. John’s income far exceeds Mary’s. He has continued to work his full-time job, while Mary has reduced to part-time hours awaiting retirement. Earlier this tax year, Mary had a major surgery earlier this year which cost approximately 20% of her personal adjusted gross income (AGI). Because of this fact, Mary could deduct the cost of her medical expenses if she and John opt of MFS status. If the two filed jointly, John’s income is so much larger that the medical expense would no longer meet the criteria for deduction: that it be larger than 10% of the AGI for the couple (if filing together) or Mary (if filing separately).

There are non-financial reasons why a couple may opt to file separately, as well. For instance, if one spouse is unable or unwilling to sign a return, or the couple is separated pending a divorce, filing separately may have some practical advantages.

Potential Problems With Married Filing Separately (MFS)

It is important to note that Married Filing Separately (MFS) is a different status altogether than filing as a single person. Partners who file separately must be aware of some limitations as well as potential drawbacks to filing in this manner.

First, spouses who are filing separately must either both take the general deduction of up to $12,000 (for tax year 2018) or both must itemize. One thing that is not permitted is for each spouse to do as he or she pleases--one cannot take the general deduction while the other itemizes. This “rule” is to prevent couples from making any substantial tax gains from simply filing separately. Similarly, the Internal Revenue Code also provides that taxpayers cannot “get around” the issues created by a higher income from filing jointly by filing separately.

Similarly, the couple who files separately waives their right to many of the deductions that couples who file jointly may take advantage of. For instance, couples who file separately must decide which spouse may lose the ability to deduct student loan interest altogether while capital loss deductions are limited to $ as opposed to the $13,000 couples filing jointly may deduct. The many kinds of tax credits listed above that are available for couples filing jointly would not be available to those filing separately. Social Security benefits are also affected. Couples who file jointly enjoy the fact that they are not taxed on their Social Security benefits until half of all benefits and other income received equals $32,000 or below. Every cent of Social Security income is taxed on a MFS return, however.

How Do I Know If Filing Separately or Jointly Is Best For My Situation?

There are two key things you can do when determining how to file your tax return. The first suggestion may sound like a bit of a headache, but it happens to be the only conclusive way you will know for sure whether your joint or separate return will in fact be cheaper. Prepare the return both ways, maximizing the benefits of each, then simply compare the costs. The other thing you can do, especially if going through the process of preparing your returns both ways is too time-consuming or demanding for your tastes, is get the opinion of a seasoned professional. A good tax professional can gather some basic information about both spouses and their incomes and generally tell which method will be best. He or she may also take the step of fully preparing both returns if the call is a close one.

Don’t Make Tax Decisions Alone: Get Help From Qualified Tax Professionals

As with all tax matters, it is wise to get the opinion of both an attorneys and  a CPA familiar with your situation before making major decisions. If you have read all of this information and still are uncertain about the best way to file, or simply want to learn more about what your options are for minimizing your tax liabilities, feel free to contact the experts at Royal Legal Solutions today. We are all too happy to see where we can help you keep more of your hard-earned capital in your pocket by developing strategies that take the full scope of your tax situation into account.

Royal Legal Solutions has attorneys who are familiar with tax law on staff, and we also maintain professional relationships with CPAs who are sensitive to the needs of the real estate investor. schedule your consultation today.

Scam Alert: How to Know if IRS Demands for Taxes Owed Are Legitimate Or Scams

Imagine you’re sitting in your office or at home going about your daily business, and you get a phone call. The caller informs you that you owe the IRS money. They go on to explain that your tax payment for the year before was never received at all and that you must pay up now or face serious consequences. You might be threatened with a wage garnishment or even jail.

Unfortunately, this is a real scenario that unscrupulous scammers use to trick honest taxpayers into paying money they never owed in the first place.  As you may have already guessed, the caller isn’t really from the IRS. They’re just a petty thief attempting a cheap, but an all-too-common con.

Ending up in a tax dispute is incredibly stressful. Of course, this is the fear that these opportunistic scammers will prey upon to fraudulently get their hands on your hard-earned money. Learn more about what these scams look like, alarm bells to watch out for, and most importantly, how to protect yourself from becoming a victim.

Four Warning Signs and Ways to Determine if IRS Scam Threats Are Real

First of all, don’t panic if you receive a call or email purporting to be from the IRS. Even if the threat is real, panic is not a strategy. Instead, follow these four tips to protect yourself from thieves posing as IRS personnel.

Verify The Source of The Communication

Make a note of the number that called you. A simple Google search can reveal if the number is in any way related to the IRS. If you received an email, look at the full address. If it does not end in “irs.gov” or at the very least, “.gov,” odds are good you are communicating with a scammer rather than a real representative of the IRS.

No matter what the caller says, you can simply hang up while you verify the origins of the call. You cannot be “punished” or forced to pay more money for hanging up on the caller, even if they really are with the Taxman.

Don’t Give in to Immediate Demands For Cash

While scammers will insist that you must pay past-due taxes immediately, our friends over at the real IRS will not. In a real tax dispute, you will receive a written demand for taxes owed in the mail.

Also, be aware that a real demand from the IRS will inform you of your rights in a tax dispute. Legitimate claims will always notify you of your right to appeal the amount in dispute. Even if you were found liable for taxes owed by the IRS, you would have options available to you such as payment plans.

Pay Attention to Payment Method Requests

Since the caller is demanding money, they will typically specify how it is to be paid. These requests can be clues that you are dealing with a charlatan.

One major warning sign is demand for payment in a particular format, such as with Western Union, money order, prepaid card, or even PayPal. Note that the real IRS will not even accept some of these forms of payment, nor would you be obligated to pay a large sum of money immediately over the phone or via an insecure email. Scammers will also play up the “urgency” of the situation in an effort to get you to reach for your wallet.

Demands for credit card payment are a dead give-away that the call is not related to a real tax dispute. Personnel from the IRS will never ask a taxpayer to give their debit or credit card information out over the phone. Even if you later find you do truly owe the IRS, there are plenty of other reasons to never pay your taxes with a credit card.

Watch Out For Outrageous Threats

Sometimes scammers will threaten to call the police or otherwise send law enforcement after you if you resist demands for payment. This is just another way to instill fear, cloud your judgment, and prevent you from assessing the situation rationally.

You cannot be arrested by state or local authorities for failure to pay taxes. Simply failing to file a  return or owing money to the IRS is not a crime, and therefore not a jailable offense. In theory, a person may be jailed for cheating on their taxes, but the IRS would have to prove that he or she did so deliberately. The burden of proof on the Government’s end is high, so even people who cheat on their taxes rarely end up seeing the inside of an 8x10 cell. Individuals who fail to pay the appropriate amount of taxes may be audited, have their wages garnished, or be subjected to a payment plan--but they will not be arrested.

What Can You Do About IRS Scams?

Even if you follow all of the above tips and find out that you really do owe money to the IRS, you still should not panic. There are several tools for fighting back if you end up in a legitimate tax dispute and even more for arranging payments.

If you do receive a call from a bogus tax collector, you can take action to help put the scammer out of business and spare future taxpayers from the types of calls or harassment you may have received.

First, you should consider reporting the scam attempt to the Treasury Inspector General for Tax Administration (TIGTA) online or by calling  1-800-366-4484. You may also file a complaint with the Federal Trade Commission. Mention in the complaint that you were contacted as part of an IRS Telephone Scam and include the details of the incident: dates, times, and any information that could help identify the scammer. Both of these authorities have the resources to notify the public about the details of these scams and pass on the information you have to the appropriate law enforcement agencies.

Bottom Line: Understand What IRS Scams Look Like to Avoid Becoming a Theft Victim

Now that you know these scams exist, you won’t become the next victim. That said, if you do have real concerns about paying your taxes, the best time to address them is before you file at all. Professionals like the experts at Royal Legal Solutions can help you with a variety of tax concerns. We routinely help investors set up structures that minimize their tax liabilities and work with CPAs who can assist you with other tax matters. Take our tax quiz and schedule a consultation to be proactive about your concerns and learn more about the services we can provide to help keep you on Uncle Sam’s good side.

How You Can Save Thousands in Taxes with an S-Corp

If you are an active real estate flipper or wholesaler, you are more than likely subject to the self-employment tax (15.3%). Read on to discover how you can save thousands on your tax bill by electing to be taxed as an S Corp.

A flipping or wholesaling business is not considered to be a passive activity like rental real estate. Instead, it is considered an active business. And because flipping and wholesaling are active businesses, you are subject to the full 15.3% self-employment tax which can lead up to an $18,130.50 $21,068.10 (updated for 2020) tax on your earnings, ouch!

You can definitely find a better use for that money, right?

How Can Being Taxed as an S-Corp Help?

Creating an S-Corp, or an LLC taxed as an S-Corp allows you to hire yourself as a W-2 employee and split your earnings between salary and distributions.

In this strategy, you only pay the 15.3% SE tax on the part of your income considered salary, and not on the distributions.

It is important to note that the wage or salary you pay yourself must be reasonable, otherwise the IRS might charge you back taxes and penalties (i.e. your wages can’t be $1 and dividends $99,999).

Example

You are a real estate flipper with earnings of $167,830 for the 2018 tax year. If you are simply a sole proprietor (or partner), then all of your flipping income is considered active, and up to $118,500 would be subject to the 15.3% SE tax – totaling $18,130.50.

However, if you set up an LLC and elect to be taxed as an S-Corp, you can split the earnings between salary and distributions. With the help of a CPA, you determine $65,000 to be a reasonable salary. This means you will only pay the SE tax on $65,000, saving $8,361.

Potential Pitfalls of this Tax Strategy

Of course, Uncle Sam wants his money, so it’s never that easy.

Service companies are more likely to be scrutinized by the IRS when using this strategy because most of their earnings come from personal efforts, and not from that of other employees. That is why it is imperative to work with a CPA to research and document the reasons behind the reasonable salary you decide to pay yourself.

Also, the IRS requires companies with W-2 employees to pay a Federal Unemployment Tax (FUTA) of 6.20% on the first $7,000 of income for each employee. In some states, you could also be subject to the State Unemployment Tax (SUTA). Once you implement this strategy, you will be considered a W-2 employee and will have to pay this tax.

There are also costs involved in creating the entity and filing a separate tax return if you’re not already a partnership. And for S Corps, there are some administrative requirements such as setting up a board of directors and holding meetings.

The Bottom Line with S-Corp Taxes

Creating an entity and having it taxed as an S Corp has its advantages and can potentially lower your tax liability, but may not be for everyone.

There are costs involved with setting up and maintaining the entity, which will have to be weighed against the actual tax savings you will receive. In many cases, this strategy will make sense for higher-income earners (people earning at least $50,000 from their business).

You will want to discuss the advantages and disadvantages of this strategy with your CPA to find out if this makes sense for you based on your personal circumstances. There are always unique circumstances, such as a husband-and-wife business (sole proprietor or partnership).

You may also be interested in our article, "How To Take Money Out Of Your S Corp."

About the author: Thomas Castelli, CPA is a Tax Strategist and real estate investor, who helps other real estate investors keep more of their hard-earned dollars in their pockets and out of the government's. You can find more articles from Thomas by visiting The Real Estate CPA’s website.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

When to File Taxes Separately if a Married Real Estate Investor

Many married couples elect to file their taxes jointly because it is genuinely cheaper. Well, most of the time. If you're a real estate investor, you likely already know that the typical rules don't always apply to you. Filing jointly may end up costing you more depending on your situation and a variety of other factors. Let's look at three common situations where filing separately is typically cheaper for married real estate investors.

When Both Spouses Have High Incomes

Being a high earner is something most investors aspire to. But there are some drawbacks to both spouses being professionally successful. If you and your spouse are earning $309,900 or more annually, filing jointly could disqualify you from certain deductions that would otherwise save you money. This income level is not unusual if both spouses are real estate investors.
In these cases, it's best to work together by filing apart. You will each be eligible for more deductions by filing separately. You will still need to work as a team to ensure you aren't both itemizing the same deductions. But ultimately, taking the time to review your separate filings will preserve your collective wealth.

When Your Spouse Already Owes The IRS

If your spouse owes the IRS, filing together could cost you your refund. If you file jointly, the IRS will seize your refund to satisfy your spouse's debt. If you're relying on that refund for something essential like making a real estate investment, it is best to file separately until your spouse's tax issues are resolved.

When You're Getting a Divorce

If you are in the process of getting divorce or have a reason to suspect your spouse is dishonest when it comes to taxes, filing separately isn't cruel. It's the smart move. Even though you may want be to trust your spouse, if there is any love lost or trouble in paradise, filing separately will protect you. Liability attaches once you both sign and file the return. Essentially, you're treated as a unit for tax purposes. Divorcing partners have been known to shuffle around debt or attempt to hide assets. If you are experiencing any of these problems, filing on your own is actually a form of asset protection.

When in Doubt, Contact a Professional

If any of this information or the filing process is confusing, know that there are professionals here to help you save on your taxes, our tax attorneys Royal Legal Solutions can assist you with making the judgment call about filing jointly or separately. We work exclusively with real estate investors and know these issues well, and have assisted many married professionals in the past. When you work with us, you also have access to the CPAs we have personally vetted. Get professional help to avoid giving your hard-earned money to Uncle Sam.

Charitable Gift Options Using a Self-Directed 401(k)

Charitable contributions are a popular strategy among the wealthy for lowering tax payments. But this method isn't exclusively for the Michael Dells and Kim Kardashians of the world. Investors from all income levels, including you, can use it too.

But even savvy investors don't always know that charitable gifts can be made from retirement accounts. So whether you simply want to donate money from your 401(k) to a cause close to your heart, save on your taxes, or both, this article is for you. Read on to learn more about your options for giving charitable gifts with your Self-Directed 401(k).

Why You Should Consider Giving Your Retirement Funds to Charity

The funds in IRAs and 401ks are among the most heavily taxed that the average investor will hold, and redirecting them towards charity can make a meaningful difference. Charitable donations help you save money by reducing your taxable income. This is why many highly wealthy individuals give in large quantities. Sure, many of them are philanthropic at heart, but there is also a distinct tax advantage to donating. The higher your taxable income, the greater your tax responsibilities when Uncle Sam comes around to collect his bills.

Giving to charity also qualifies you to receive a Charitable Gift Tax Credit. Literally anyone can take advantage of this. Generally, the credit is computed by taking the market value of an item or actual amount of cash donated, then subtracting the percentage of your tax bracket.

Strategic donations can lead to thousands returning to your pocket. Of course, there are limits: you cannot donate more than half of your income in a given year. Similarly, for these benefits to apply, you must itemize each donation.

What Options You Have For Giving to Charity

You're likely already familiar with some types of donations. Others are less obvious. Here are some, but not all, of the many methods you can use to your taxable income to a charitable cause:

Which Options Are The Most Beneficial?

While any of these options is certainly beneficial and altruistic to the receiving organization, smart investors may be wondering which will benefit their own bottom lines. You may be surprised to learn that retirement and life insurance donations are among both your strongest and lesser-known gift choices.

Many potential donors do not know much about life insurance or retirement plan asset gifts simply because charities are less likely to request them. Many nonprofit organizations have a need for immediate cash that is simply not addressed with these types of donations. They are nonetheless useful for the charities--and you.

Ways to Give To Charity From Your 401(k)

Below, we'll describe the two simplest options for donating to causes you care about with your 401(k) funds.

Option 1: Donate Directly From the Plan

You can liquidate an asset (or several) held by your plan, then directly donate the funds to the nonprofit group or cause of your choosing.

Option 2: Name a Charity as a Beneficiary of Your Plan

Naming the charity of your choosing as a beneficiary works the same way as designating any other beneficiary. However, this option has the added advantage of allowing plan funds to pass through to the charitable organization completely tax-free. If you have tax-deferred funds, this is actually the smarter expense than passing those same funds on to your heirs.

Your heirs would have to pay the taxes, but the charity does not. Though this may not directly benefit you as much, it is certainly the most efficient use of money that would otherwise be gifted to the U.S. Government. That you can control the funds by selecting any qualifying charity means you have the luxury of supporting a cause you truly believe in.

Section 280A: Home Office Deduction Rules

Many people who have office jobs envy those who can work from home. If you're a small business owner, freelancer, or kick-ass entrepreneur who uses a home office, you probably know that the truth is a little bit more complex. Sure, you can sometimes get away with working in your pajamas, but working from home also takes a lot of discipline and incurs many costs. Fortunately, there is an entire section of the Tax Code that allows for home office deductions that can add up to significant savings. Meet Section 280A, the birthplace of those sweet, sweet write-offs. Read on to learn how to make the most of your Home Office Deductions while staying compliant with the IRS's rules.

Rule #1: You Must Have an Actual Home Office

You can take advantage of the benefits of Section 280A if you have a dedicated office space in your home. Uncle Sam calls this the "regular and exclusive use" requirement. Now, Uncle Sam is reasonable about this. Your entire home does not have to be business-only, but you must have a space in it that is solely for business purposes.
In theory, you could convert your neglected TV room or basement for this, but you have to use it only to manage your business. We have many real estate investor clients who do exactly this and are still acting within the lines of the law. This rule is designed to keep unscrupulous taxpayers from writing off personal expenses as business expense. Of course, we know you wouldn't do that. Just be sure you can prove your case if anyone looks into the use of your home office space.

Rule #2: Your Home Office Must Be Your Business's Base of Operations

The IRS calls this rule the "principle business location" requirement. In plain English, this means your home office must be where the majority of your business is conducted. Let's say you are running a real estate business from a home office. If you are using it for most of your business activities (phone calls, meetings, computer-based work), you can still use another location for other purposes. But only to a point. Having a separate office for meeting high-profile clients or completing shipping duties, for instance, would still qualify you for Home Office Deductions.
One caveat of this rule to understand is that the IRS takes the literal amount of space in your home devoted to business only into consideration. The more physical space in your home that you devote to your business, the better.

Get Professional Help With Your Home Office Deductions

Most people with reasonably stable mental health don't enjoy spending their free time deciphering the tax Code. While this article has explained the basics, these issues are complex. Fortunately, you don't have to slave over the time-consuming process of understanding every detail of Section 280A. That's why the smart move is to get advice from the tax professionals at Royal Legal Solutions. Our tax attorneys already know the Internal Revenue Code inside and out. After all, many of our clients are take-charge entrepreneurs who work from home. In fact, so many of our investors are self-employed individuals that we also offer retirement planning advice for self-employed individuals. Don't torture yourself too much trying to understand the regulations: get professional help today.
 

Double Your Real Estate Investment Return With a Tax-Efficient 401(k) Strategy

Did you know that you can use a self-directed IRA for your real estate investment? I’ve talked about this before and you can read more from our article about self-directed IRA investments.  There's no doubt that self-directed IRAs are powerful investment vehicles, but they aren't silver bullets for all investors.

That said, they do come in handy for Roth funds or when you’re planning to buy and hold onto one property for a long time. But the current IRS trends have many investors eyeballing different types of accounts.

So, what is an alternative I recommend?  I’m a big fan of the Qualified Retirement Plan (Solo 401(k) or Profit Sharing Plan) because it comes with the same benefits as a self-directed IRA and some more. Today, I’ll go over a strategy you can use to partner with your QRP to buy investment property.

House Flipping With a Solo 401(k): An Example

Fred Stark is a real estate investor who has spotted a hot property going for $200,000. He has a QRP with about $150,000 and $100,000 in the bank. Fred can easily buy the property in his own name or opt to partner with his QRP for the transaction.

How Do Investors Partner With a Retirement Plan?

To partner with his QRP, Fred is required to form an LLC. He then divides the ownership of the property in proportion to each member’s (Fred and the QRP) contribution. For example, if Fred puts in $70,000 and the QRP contributes $130,000, then ownership will be split in a 35% to 65% ratio between Fred and his QRP respectively.

How Profits Are Treated

Profits from an investment are usually distributed based on the percentage of ownership. This means that if the investment property Fred is buying generates an income of $30,000, he will receive $10,500 while $19,500 goes to his QRP. Consequently, John will have a taxable income of only $10,500. The $19,500 received via the QRP will not be taxable.

How Depreciation is Treated

Real estate depreciates over a period of between 27.5 years to 39 years. Fred can use the depreciation of the property to offset the income gains. So in fact, he can use this “paper loss” to his advantage.

What Impact Does Depreciation Have on Taxable Income?

Let’s have one more look at Fred’s $200,000 house. $175,000 is allocated to structures subject to depreciation while $25,000 is allocated to land. This means that the property will have a depreciation of $6,400 every year. Then his share of depreciation given that he owns 35% of the property is $2,240. This reduces his income to $4,760 from $7000. His QRP gets allocated $4,160. But since the QRP income is non-taxable, there is no benefit accruing from this depreciation.

But, wait: can he allocate the whole chunk of depreciation to his portion of income?

Yes. And this is where the magic happens. By using an LLC, Fred can allocate all the losses to himself, reaping the full benefit. Now his taxable income is only $600. Now his taxes are only $180 bringing his net income to a whopping $19,820 from the initial $20,000.

Set Up Your Solo 401(k) Today

If that’s not exciting, I don’t know what is.

The Solo 401(k) is a QRP that has amazing income and tax benefits that you should take advantage of. But you should proceed with caution. You may want to read our article on using a 401(k )to buy a house first. This is not a collaboration you should set up on your own.  Use a professional who has the qualifications and experience to execute it the right way.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Top 3 Types of Tax Professionals Real Estate Investors Should Be Aware Of

When dealing with life's only two certainties, it's hard to tell which is more painful: death or taxes. Death is painful no matter what. But fortunately, there are ways to actually minimize the misery involved with dealing with Uncle Sam. As a real estate investor, you already know how important it is to maintain adequate tax records.

Fortunately, you do not have to go it alone with only Quickbooks and TurboTax by your side. There are professionals who deal with this all day long that you can outsource your tax issues to while you focus on your investments. Here are the top three tax professionals you should know about, and what they can do to ease your pain come Tax Season.

1. Certified Public Accountant (CPA)

Accountants are a special breed of people. They commit their working lives to running numbers, and a good CPA will know the Tax Code inside and out. Accountants must be accredited by the state, take continuing education courses annually, and pass a difficult exam to verify their credentials. While many CPAs are knowledgeable about taxes because of their education, smart investors pick an accountant who specializes in tax issues. You want someone who deals with Uncle Sam and his rules on a daily basis to worry about your books so you don't have to. Our firm partners with such CPAs for this exact purpose.

2. Enrolled Agent

An Enrolled Agent (EA) is a professional who must pass a rigorous exam exclusively about IRS regulations and tax matters. Once they have passed this notoriously exam, they hold the distinction of being licensed to practice in every state in the Union. These professionals are also the only people who can represent you in IRS hearings without any type of limitations.

3. Attorney

We promise this isn't just our bias because we are attorneys ourselves. Here's a fact you may not know about being a practicing attorney: becoming an attorney is hard. We must not only attend law school, pass the State Bar, but also participate in continuing education so that we are up to date on state and federal laws. This includes tax matters.

The value of an attorney is in their knowledge and ability to advocate for you. In fact, any attorney can represent you for tax purposes. That said, you are best off selecting an attorney who specializes or has experience in tax law. Our tax professionals at Royal Legal Solutions are licensed attorneys who routinely assist investors like you with filing appropriately, understanding your tax obligations, and ensuring compliance with IRS regulations. Regardless of who you pick, a good lawyer is worth their weight in platinum. We can save your backside in a dispute with the IRS, but more importantly, we can prevent this situation from happening in the first place.

Bottom Line: The Pros Make Your Life Easier

You may use any of these professionals to assist you in preparing your taxes, if only to relieve the stress involved. Do your research on any person you add to your real estate dream team to verify their qualifications. This little bit of proactivity will ensure you are better protected as a real estate investor.

Keep more of your money with a Royal Tax Review

Find out about the tax savings strategies that you can implement as a real estate investor or entrepreneur by taking our Tax Discovery quiz. We'll use this information to prepare to have a productive conversation. At the end of the quiz, you'll have an opportunity to schedule your consultation.    TAKE THE TAX DISCOVERY QUIZ

Is a Land Trust a Disregarded Entity?

A land trust can provide anonymity and asset protection, but how are they treated for tax purposes?

It will depend on the type of trust you decide to form. Land trusts can be “simple, complex, or grantor trust[s] depending on the terms of the trust instrument.”

In this article we will explain the "disregarded entity," tell you what type of land trust is a disregarded entity, and explain other ways land trusts can be taxed.

What is a Disregarded Entity?

Before we jump right into what types of trusts are disregarded for tax purposes, let’s recap what disregarded entities are.

Disregarded Entities are “pass-through entities” that do not pay tax at the entity level, and do not file a tax return. Instead, you report the entity’s income and deductions are reported directly on your tax return (or whoever owns the trust).

This is good news is you don’t need to file an additional tax return for the trust, which of course would cost more money.

What Type of Land Trusts are Disregarded Entities?

For the most part, land trusts are structured as grantor trusts (also called revocable trusts), which are disregarded.

That is because you, the grantor of the trust, remain in control of the trust and its assets. You’re considered the owner of the trust for tax purposes.

This differs from an irrevocable land trust, where you give up all ownership rights of the trust and its assets. In this case the trust would be considered its own entity, and need its own tax return.

Series LLCs, Land Trusts, and Taxes

If your land trust is incorporated using a series LLC, its tax treatment will be determined by the tax treatment of the LLC.

Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.

Can Each Series in a Series LLC be Taxed Differently?

A series LLC is a limited liability company that allows you to create multiple entities under one “master LLC”. Each new entity is called a “child series” and can have separate membership interests, assets, operations – and treatment for tax purposes.

Series LLCs are popular among real estate investors because it’s easy to add additional series and they provide excellent asset protection. They also provide flexibility in tax treatment, as you will see

Protection For Real Estate Investors

One of the primary benefits of using a series LLC is you only have the file the articles of organization one time. To add another series all you need is an operating agreement.

This cuts down on the state fees required to open and maintain separate LLCs and reduces the administrative burden of managing multiple LLCs.

For these reasons, series LLCs are popular among real estate investors and business owners who own multiple properties with different partners and structures.

Series LLC Tax Treatment: One Example

You are a real estate investor and professional property manager. And often purchase over 10 properties a year with multiple different partners.

You open up a series LLC and use one as a property management company that is taxed as an S-Corp. Whenever you purchase a property with a partner, you create another series owned by you and that partner, and it’s taxed as a partnership. When you purchase a property yourself you simply have it taxed as a disregarded entity.

Using the series LLC helps you reduce the filing and administrative fees associated with opening and maintaining a new LLC each time you by a new rental property.

Tax Risks of Series LLCs For Real Estate Investors

There is some uncertainty around the federal tax treatment of series LLCs as there are no laws or official guidance provided by the IRS.

But unofficial guidance from the IRS and a Tax Court decision are available. And they indicate that, at least in certain situations, treating each “child series” as a separate entity with different tax elections is appropriate

The Bottom Line

Generally, LLC’s are not used primarily for their tax benefits, but rather their liability protection.
However, due to the ease of adding additional series, liability protection, and flexibility in the tax treatment of each individual series - series LLCs make sense for real estate investors who operate businesses and purchase real estate with different partners under multiple structures.
And since there is no official laws or guidance from the IRS, it is important to work with a qualified CPA and attorney to ensure you’re following all the rules and regulations to maintain the liability protection of each series.

Author: Thomas Castelli, CPA is a Tax Strategist and member of The Real Estate CPA, an accounting firm that helps real estate investors keep more of their hard-earned dollars in their pockets, and out of the government’s, by using creative tax strategies and planning.