Tax Deductions: Are the Expenses for LLC Preparations Deductible?

It’s Tax Tuesday again, and Toby Mathis, Esq., hosts, with special guest Eliot Thomas from Anderson Advisors, and they are here to help answer your questions.

On today’s episode, Eliot and Toby answer listener questions including what can be written off as far as expenses for the preparation costs of setting up an LLC, several questions (as usual) around short- and long-term rentals, real estate investments, passive vs. active income connected to your properties, and quite a bit of information about cost segregation – who to work with, what you can deduct, the timelines, etc.

If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

• "If I put a short-term rental in operation in October or November, does the bonus depreciation get prorated accordingly?" We're looking at whether or not we prorate from October November for the rest of the year, or how do we handle that? – It doesn't matter whether you bought it in January or December, you put it into service before the end of the year, not prorated.
• "Useful strategies for pulling money out of a small business tax-free, not being double taxed?" - The only time you ever worry about a double tax is when you have a C-corp because they're taxed at the corporate level.
• "Mileage deduction in a partnership, does this go on a Schedule C?" - No, it doesn't.
• Number four, "Is the expense related to the preparation of your LLC tax deductible such as travel costs to go see a property, et cetera?" – The expense relating to the preparation of your LLC is absolutely deductible. It's going to be an organization expense up to $5000 for the year, and that includes the state fees, the registered agent fees, accounting fees, attorney's fees.
• "Please talk about the $25,000 deduction for real estate investing. Where does it apply and where doesn't it? I have only one rental single-family home at this time." - When you have passive losses, normally, they only offset passive income. One of the exceptions is this $25,000 active participation.
• "How should I set up my taxes on my properties?” – We're looking at an LLC (Limited Liability Company), probably one that's what we call disregarded. Disregarded means it just doesn't file a tax return.
• “I have two rental properties in California I've been managing full-time since 2021. I have been working more than 700 hours per year. Do I qualify for real estate professional status? If so, what is the process at the time of filing the 2022 taxes?" – It's 26 USC 469(c)(7). You can go straight to it. You need to aggregate those two properties as one activity. Otherwise, you have to meet that test for each property.
• "What is cost segregation?" - Cost segregation is a fancy way of saying you're breaking a piece of property that's real estate into its pieces, as opposed to just treating it as one uniform structure. (Picket fence, sidewalk, driveway pavers, new carpet, new appliances, etc.)...you need to do what's called a cost segregation test or report, which is what cost segregation refers to, which means having an accountant pop out to the house, and break these down into their pieces.
• "Is it more beneficial as an LLC owner to pay myself as a W-2 or 1099 employee?" - There's no such thing as a 1099 employee, The correct term is a W-2 employee or a 1099 independent contractor. I would say it depends on how that LLC is taxed. If you are an LLC that's disregarded and your sole proprietorship, you cannot pay yourself a salary.
• "What are some creative ways to save money on the gains from real estate investing?" - Here are some cool ones - (1) The low-lying fruit, 1031 Exchange and you defer the gain. (2) You can also still do this thing called a qualified opportunity zone.
• Lastly, "Hi. How are crypto gains taxed? When? At the time of selling the crypto to convert back to cash? I have been doing short-term trading with my own account. Please advise the best strategies to minimize taxes. My hubby is W-2 and I'm a real estate professional with three rentals. Thank you." – Once you own the crypto, it's when you sell it or when you convert it, or trade it for something else of value. Protect it with a partnership LLC, or put it in a Roth, or deferred retirement account.
• Rapid-fire chat questions answered at the end of the show

Resources:

Cost Seg Authority Website

https://costsegauthority.com/

Email us at Tax Tuesday

taxtuesday@andersonadvisors.com

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