This last weekend I went down to Chicago (Downers Grove) for a real estate intensive training class. The class was taught by none other than Mark Kohler! He is a CPA and tax attorney who focuses on helping individuals and small businesses build and protect wealth through wealth management strategies – See more at: http://markjkohler.com.
It was a wonderful day of learning and networking with fellow real estate investors. I carpooled down with 3 other local Wisconsin entrepreneurs, myself and my wonderful wife who is a realtor. The office where this event was held is run by a real estate investing group that hosts monthly and weekly meetings. Every 1st Saturday of the month there is a marketing training, every 3rd Saturday there is a real estate intensive, and then there are weekly study groups every Thursday. All these events are also live broadcast so people around the country can participate if they aren’t located near Chicago. Usually they cater in a lunch, but this week there was no catering because they needed to use the space usually dedicated for this as overflow seating. There were upwards of 800 people in attendance.
So what I’d like to do with this post is give you a few of the golden nuggets that I gleaned from the presentation.
Have a small business!!
You must have a small business if you want to tap in to the majority of write-offs for tax purposes. It doesn’t really matter what type of small business you want to operate, but ideally it should be something that you are passionate about. Do you like fishing? Setup a business selling fishing gear, teaching people how to fish, have a fishing podcast etc. What about clothing? You can buy used clothes at Goodwill and resell them online for a profit. Photography is another passion a lot of people have. The possibilities are endless. Real estate happens to be a very profitable business as well. You can buy and hold rental properties, wholesale deals, fix n flip houses…there are all sorts of way to make money.
The main point here is to start a small business so that you can write off every day things that you would have bought anyways. This way you reduce the amount of taxes paid by having larger deductions.
Short Term Income vs. Long Term Income
Mark pointed out the difference between short term income and long term. Short term income is income from sources such as: sales of services, sales of products, commissions, doing wholesaling, a fix n flip deal, 1099 jobs, consulting…anything that requires you to actively work. Long term income is income from sources such as: rent, royalties, interest, dividends, capital gains, lease options…these are passive income streams where the money just comes in.
Typically income that is short term you will want to run through an S-Corp so that you don’t pay self employment tax, corp tax etc. You will take K-1 dividends for roughly 66% of the income, while the rest will be taxed through a W-2. So while you can’t completely avoid paying taxes, you will be taxed at a lower rate. The long term passive income will be held in LLCs, so that there is liability protection. An LLC doesn’t give you any better tax deductions than a sole prop does, so you will still run your passive income through your S-Corp, just like the rest of your short term income.
When you are just starting out, creating an S-corp isn’t necessary, but by the time you are netting $40k annually, it would be worth it to create an S-Corp. If you’re not sure if you’ll net that much income in the year, you can start out by creating an LLC, and then converting to an S-Corp later. An LLC can be backdated to allow you to write off everything throughout the year, but an S-Corp cannot. So setting up your LLC sooner rather than later is a good idea.
Maintaining the Corporate Veil
The main reason for setting up an LLC is for protection. The name “Limited Liability Company” means that it provides its owners liability protection against company actions and debt. Just because you setup an LLC however doesn’t mean you are bulletproof. Here are 6 things to do to maintain your corporate veil:
- setup the documents properly
- do your annual maintenance (have a meeting with your board of directors once a year, takes notes, send them to an attorney)
- title to property is in name of the LLC
- all contracts in the name of the entity
- use the company name on everything
- don’t commingle banking, keep the money separate
There are many categories of write-offs, but I’m only going to focus on two for this article. Travel and Dining.
Travel – 100% Write Off!!
Rental car and it’s gas
Entertainment and dining while traveling are separate, but the above examples can be written off 100% while you are traveling. The above list is not exhaustive, but you get the idea. Timing is also important. Let’s say you fly in on Wednesday, have a business meeting on Thursday and Friday, and then another on Monday. You fly out on Tuesday. You can write off the entire time including Saturday and Sunday.
Here are 5 ways to write off travel:
- rentals, buy where you travel, visit is written off
- corporate meeting
- meet with a client
- meet with a vendor
If you’re going on a business trip to shop for a rental, the trip can only be written off if it results in buying a rental unit.
There are 3 categories to dining:
- Dining with others, out to eat – 50%
- Dining by yourself – 50%
- As long as you’re traveling outside of your normal commute
- Groups and office – 100%
- Company fridge
- Donuts, bagels in the office
- Staff meetings on premises
- Something in the house if it’s with non-owners for a business meeting
- At a fix n flip
Well that was a short synopsis of what Mark Kohler covered this last Saturday. It was sure a good day of loads of information. If you’re interested in more of this, I’d be happy to share some more resources with you. Feel free to contact me.