The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 61 - FOOLISH Online Tax Tips to AVOID!
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It's time to debunk some of the most misleading tax advice that could be costing you money and peace of mind. Ever heard that you need an LLC to claim tax deductions? Think again! We'll reveal why this is a myth, and show you how the tax treatment of your business expenses remains the same whether you have an LLC or not. We’ll also break down the crucial differences between sole proprietorships and LLCs, emphasizing that asset protection, not tax benefits, should guide your decision.
We’ll guide you through smarter, more sustainable ways to achieve tax deductions without making impulsive purchases like luxury cars. Learn how investing in real estate or setting up an S corporation can provide significant tax advantages. Curious about short-term rental investments or if you can claim pet expenses as tax deductions? We’ll tackle these topics too, highlighting the potential pitfalls and benefits. Tune in for practical, actionable advice that will help you avoid overgeneralized and misleading tax tips, ensuring you make well-informed decisions for your financial future.
Probably see lots of very sexy tax savings information online. I imagine you're going to hear entrepreneurs and you're going to see a lot of these influencers sharing ideas that are going to really get you excited about the tax code. And there's all these ideas swirling out there. Some of them are legitimate, some are kind of legitimate. Other ideas I see online are just plain old stupid. So I wanted to start do an episode on stupid advice and misleading advice really. So we're going to discuss some of the most misleading information I see online, and if you go online, or even if you wind up tuning into tax the algorithm, once you watch one tax video, they'll send you all these other people and there's a lot of misinformation online and, in particular, if you don't have a really skilled tax advisor, you're going to be misinformed even if you were following some of the best influencers, because even if you were to watch my short clips, a lot of them could be taken out of context and overgeneralized and they may not apply to you. What I want us to discuss today is let's talk about some of the stupidest advice that I see online from the influencers and those folks. We're going to address some of the most misleading and some of it's just dangerous. We're going to talk about what is the truth behind the matter and how you can look at these different topics. So I'm really excited to talk about this because this stuff for purists like myself, people who have spent time really just obsessing over the tax code because you know, I'm a CPA, I do taxes and I'm a little weird, let's be honest. If you like this stuff, you're a little weird, but this is the stuff we're going to talk about how you can actually make sense of this and get to the truth of the matter, how it applies to you. So let's dive into some of the most stupid advice and misleading advice that I see online and what this really means. And I'm going to start off with what I would say one of the most misleading ideas out there and I get this you know it's not really from the accounting influencers on this one the tax, the sexy tax influencers, but this is one I hear from other business owners trying to talk taxes and try to really come off and give you some ideas.
Speaker 1:And there's a legend out here that you can't have a tax deduction without an LLC. Buy an LLC, then you can have all your write-offs. They're going through the LLC. Buy your car through your LLC and now it's tax deductible. Buy your mom's birthday gift through your LLC and write it off. If it goes through an LLC, you're writing it off and that's just straight wrong.
Speaker 1:When you're starting off, unless we do corp or C corp and that's an election you would choose for your LLC the default status of the LLC is just a sole proprietor flow-through. The tax treatment of any transaction does not change whether you put it through your LLC or you put it through your own personal accounts. You don't need to wait until that LLC is set up to have tax deductions. If you have a business, if you have revenue coming in and you're working for yourself, you most likely have a business here, unless it's a hobby, and that's another conversation. But let's say we're getting started. Let's say we're starting to consult people on the side.
Speaker 1:By default, you now have a sole proprietorship and there are expenses that offset the revenues and they are tax deductible as you incur the expenses so long as you are in business. The only value the LLC has and creates when you start operating under it at first is that you have asset protection. So instead of you being personally liable for the items. It's now the LLC that could be potentially liable. And now some people will say you can pierce a corporate veil and all other opportunities. But really the only value here is asset protection. It does not change the tax treatment of the transactions coming in and out related to your business. If it comes out of your LLC and it's not business related, it doesn't magically become a business tax deduction. It doesn't change the nature and tax treatment. The IRS doesn't care which bank account it came out of when they are trying to decide whether this is a tax write-off. Now, on the other hand, I just want to note here you do not want to be paying for your personal expenses out of your LLC. It could again we risk piercing the corporate veil. You want to only have business transactions coming out of your LLC, but you can still make tax deductions of non-LLC transactions that are business-related for your prop.
Speaker 1:Next thing I want to talk about here and we did a whole episode on this on the pitfalls of short-term rental investing is I've heard some folks say if you have a high W-2, you need to invest in short-term rentals, buy a short-term rental every year. Well, yes, the short-term rental loophole can be a very powerful device. We've saved our clients tens of millions of dollars with it. Hundreds of clients Really love the strategy. However, if you are losing money on these short-term rentals or you're only doing it for the tax incentives, you may find that this could be a very huge mistake. It is a major time commitment to self-manage a short-term rental and materially participate, and you can lose a lot of money. It is very intensive and any tax savings you have if you realize that you don't want to get into short-term rentals and you just want to get rid of this hassle, you're going to pay back those taxes on the sale, unless you can do a 1031 or other capital gains planning strategies. But by the default you would have the depreciation recapture and we see a lot of folks think they want to do short-term rentals. They love the tax savings and then it all comes right back to the IRS the next year when they realize they can't handle having a job, raising family and self-managing a short-term rental. So that's why we don't want to make general statements here.
Speaker 1:Yes, the short-term rental investing loophole is wonderful. However, it is not the answer to all your problems. I'm not going to tell you. You have to invest in a short-term rental in any circumstances. Another thing I see and this is something I see overgeneralized by even some of the people that I most admire, and maybe they're overlooking this. I really don't know how this is overlooked here, though, because it's very clear as day in the tax code. They say this is another one kind of chasing back to the short-term rental loophole, and you can watch my episode that's titled what is the short-term rental loophole when I talk about it.
Speaker 1:But another really misleading idea here is as long as you put in 100 hours into your short-term rental, you can write it off against your taxes, and that's not true, because you need this material participation. The material participation has to be present in short-term rental, and the rule says you need to put in at least 100 hours, and no one else puts in more time than you. Well, guess what? When you have a short-term rental, you have cleaners going in and out of this place. Let's say you buy a $2 million luxury beach rental property whatever. We've seen clients with six-bedroom cabins. Think about the time it takes to clean that thing. It's going to be tricky to show that you putting 100 hours is going to be more than any individual cleaner. You can do it, but you're going to need a team of cleaners. And how are we going to substantiate that and prove that? The documentation that we can document and show that no one else puts in more time than us. It's very hard. So we don't want to oversimplify this. If you have a short-term rental, putting 100 hours into that short-term rental does not guarantee material participation and you being able to use those losses. We need to say that no one else put more time in it than you and that may be hard to prove.
Speaker 1:So the next thing and I'm going to talk about this is the most wacky and bizarre thing I see and maybe people post this just to get reactions and that is if you have a pet dog and you have a home office, have that dog be your guard dog for your home office. This is legitimate. Let me say this again, and I've seen folks say this online. Maybe it's just to get clicks. They say if you have a dog, train your dog to protect your home office and then you write off the expenses of the dog, and I think that this is one of the dumbest things I've seen online, because if you are an affluent entrepreneur looking to save money on the tax code? How much effort are you going to put into training your dog just to guard your home office? And what are we writing off with this dog? I mean, is that where we're going to these days in our profession, where we're putting all this effort just so we can write off the dog food and the veterinary costs? It's just the silliest thing. And also the dog has to protect the rest of your home too. So we have to allocate a portion of the dog. Hey, sorry to interrupt but real quick, if you or anyone you know is interested in using our services or joining our Email, info at markperlbergcpacom. That's info at markperlbergcpacom. All right, let's get back to the show Dog food, to the square footage percentage of your home office.
Speaker 1:Or you think you're going to train the dog to just guard the home office and nowhere else. So it's solely dedicated to guarding your home office and your fax machine. You have your dog, little pookie, little fluffies, protecting your fax machine. What's going on here? Come on. Are we running out of ideas here? Come on, guys. Why are we going to waste our energy even trying to prove this documentation here? But am I going to train my cats now to protect against my home office. Am I going to really play this game?
Speaker 1:There's just so many other opportunities for entrepreneurs to create write-offs and I think this is one of the dumbest ones I've seen. Now, you may, in certain circumstances, be able to justify it, certainly if you had a farm and the dogs are protecting the sheep. I'm from Long Island. We don't see this stuff, but maybe that's a legitimate way to write off your dog. But let's move on to some more legitimate ways to write off our dogs, and obviously we have service animals and other things like that. Here's another one.
Speaker 1:I see a lot with the flashy, sexy, entrepreneurial tax influencers is buy a Lamborghini and ride it off. Find a business cost. Now, if this is an asset that makes you money, sure, go at it if you get an ROI, but in most situations, most of you entrepreneurs do not need Lamborghinis. You're better off financing a used Hyundai Elantra so you have more money to invest into your enterprise. Buy a Jeep, buy a used pickup truck and and yes, you know, there may be circumstances where you can write off these big, sexy, flashy, shiny vehicles that cost $200,000. But what they forget to tell you in this advice and they forget to make you consider is you still have to buy the Lamborghini? Yes, you write it off, but you still have to pay $200,000 or however much it is, to buy this stupid car that you don't need. The write-offs aren't going to pay for the cost of these cars and you don't need these cars. They're useless. Not only that, we need to show that at least 50% of the time it's used in our business, because if it's, let's say, we find a way to use it in our business in year one. In year two, if we don't use it in our business and we have run out of ideas, then we have depreciation recapture and then we lose our tax deductions. So this should be pretty simple advice here and I think our audience knows better but don't buy a sexy car just to reduce your taxes. Make sure you can use and want the car and you can afford the car and it fits your lifestyle, because even if you write it off, you still got to pay for the car. So make sure you're not just doing this to reduce your taxes or get clicks on Instagram.
Speaker 1:Here's another over-generalized statement that I see, and this is regarding entity structure. Generalized statement that I see, and this is regarding entity structure. So again, listen, when we're thinking about structuring our entity, do not base it off a short clip you see on TikTok or Instagram. Entity structuring can be highly complex and personalized. So let's get into some misleading entity structuring advice I've seen online. So I've heard the generalized statement if you earn over $50,000 a year, you put your business into an S corporation. If it's under, you don't.
Speaker 1:Well, this is an extremely overgeneraleralized and very could be potentially very misleading to the audience. First, you still have to pay yourself a salary out of that S-corp and the tax savings comes when we have a difference between the fair market value of the services in the S-corp and the profit. If you were to be performing certain professional services, we may find that this S-Corporation could actually cost you more money Because you're losing what we call our QBI deduction when you have to pay yourself a salary. Now. Now you're paying more in fees to hire an accountant to file an 1120S S-Corporation tax return and we also may find because of what, what? Now this is going to be a little over some of your heads. But we also may find that the S corporation limits your ability to use your tax losses because of debt basis limitations. So if you're looking to to have debt inside of the S corporation, we may not be able to use it to create tax losses. And then, finally, if you've paid out your Social Security taxes, the benefits let's say we have a W-2 job and we have a side hustle and that W-2 job makes over $200,000 a year, we've paid for all of our Social Security. Then the S-Corporation doesn't save us that 15.3% of FICA taxes only saves us 3.8%. But we lose a 20% deduction and now we're paying more for our accounting services.
Speaker 1:So the point of the matter is on this S-Corp idea here is you need someone to look at your full financial picture, your goals and where you're headed before you can diagnose the entity structure. You cannot just watch a quick clip or educate yourself on whether or not you need an S corporation. You need someone who understands the tax code. Don't even use my advice to decide on your entity structure. The best advice I can give you is to talk to a qualified professional. This is a complex profession.
Speaker 1:Another concept here I'm learning the hard way on this one. There's a notion out here that you should all just quit your job because the tax code favors entrepreneurs. And yes, it does. But there's something to be said for being able to work 40 hours a week and to have paid vacation benefits. And when things really go wrong, you can take your resume somewhere else. And I know a lot of very wonderful, happy, fulfilled people who have lots of time with their family. Maybe more time with their family, more time to spend at the gym, less stressors employees would be far more desirable than an entrepreneur taking on as much risk and having less things guaranteed to themselves. So, yes, I can write off a lot of stuff. However, if you are a W-2 employee, the safety and the yes, you have to answer to a bus, but your ability to detach from your work on weekends and take holidays off is so much easier.
Speaker 1:And even if you have a W-2, you can still win the tax game. Even without rep status and even without short-term rentals, you're still winning the tax game. Here's why you know how much money you're gonna make every week from your job, so you can. It's gonna be easier for you to set aside money to invest. For me, I need to stockpile my cash because I don't know what's gonna happen every month.
Speaker 1:And when you're a w-2 employee, there's all other ways that you can reduce your taxes, especially as we climb into higher brackets. There's charitable deduction strategies involving leverage and valuation strategies. There's oil and gas, which we love. So even if you can't use the rental real estate, reduce your taxes, oil and gas can directly impact the taxes coming out of your W-2. You'll get some of that money back. So there's a lot of really fun and exciting things. Or you could just have a part-time hustle that gives you tax deductions. So don't quit your job just because it's sexy and it's cool to be an entrepreneur. You can still win the tax game while having a full-time job. So let's just go through these real quick. I'm going to just run through each of these and talk about how you should think of this. Summarize you do not need an LLC to take a tax deduction. You can take a tax deduction as soon as you have a business for your business.
Speaker 1:The short-term rental loophole can be very valuable, but do not decide, just because you're a W-2, that you should only be investing in short-term rentals for the tax savings. You still have tax-advantaged income with any form of real estate investing. If you put 100 hours into your short-term rental, it does not guarantee that you can use those losses to offset your W-2. We need a way to say that you put in 100 hours and no one put in any more time than you. That's going to require some additional analysis and documentation to really protect you against the IRS, but it is possible as long as we have some proactive. If you or anyone you know is interested in using our services or would like to join our team, go to info at markperlbergcpacom. Again, email info at markperlbergcpacom, conversations with our accountant and conversations with our team to make sure this is aligned properly. Don't even think about using your dog to protect your home office.
Speaker 1:There's smarter ways to get tax deduction. Guys, come on. The idea of buying a sexy, shiny, fancy car just because you can find a way to write off your taxes might be one of the dumbest financial decisions you ever make. If you're in a position to buy a fancy car, go for it. Most of you entrepreneurs out there have better things to do with your cash, like buy real estate, the S-corporation. Whether or not you need an S corporation is dependent on many factors, more than I have time to discuss in a short clip. Don't take my advice because I haven't seen your financials. The best advice you can have is to talk to a qualified professional who understands the tax law and your specific situation, where you are, what you're doing and where you're headed.
Speaker 1:And finally, you don't have to quit your job to win the tax code. There's a lot of other cool stuff out there and if you want to be a little entrepreneur, a little entrepreneurial or invest, you can still win the tax code. A little entrepreneurial or invest, you can still win the tax code. If you have some extra cash to spend or want to do other entrepreneurial things, you don't need to leave that job, especially if you like it. There's a lot of happy people out there with W-2s. They get to say hi and have lunch with all their coworkers.
Speaker 1:There's a lot of good things to be said about a good, paying, stable job. So before you look to go out on your own, just realize that there's other ways you can really build wealth and win the tax game without leaving your job. All right, I hope you guys found this valuable and if you want to learn more from us or anyone on our team and further dive into these concepts and how they apply to you, then go to wwwmarkprobertscpacom. Pretty soon, that website will be be prosperl P-R-O-S-P-E-R-L cpacom. That's where you're changing our name and I hope you guys enjoyed it and stay in touch with more content and wonderful information coming your way.