Al Aiello Article-of-The-Month
September 2011: What A Qualified Bookkeeper Can Do To Save You Time And Money!
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What A Qualified Bookkeeper Can Do To Save You Time And Money!______________________________________________________________________
Al Aiello, CPA, MS Taxation, Business Owner
A number of my students use a good bookkeeper who can do the following well and at much lower fees than a CPA:
__Use Quicken or even better QuickBooks to summarize your receipts, deposits and expenses from your checkbook and bank statements.
__Set up rental property expense categories according to the deduction line items on the IRS rental property schedules such as Schedule E, or on the highly preferred lesser audited partnership form 1065 (along with backup form 8825).
__Assist you with recordkeeping & management systems that pertain to real estate. There are a number of excellent recordkeeping programs that are specifically targeted for real estate recordkeeping and save a lot of time and accounting fees. Once set up these programs are fairly easy to use for you or your bookkeeper. See next for recommendations.
__Assist you with property management. A good bookkeeper could also be a competent clerical assistant who could help with property management functions such as taking tenant applications, typing leases, work orders and other internal management documents. But it is imperative that they abide by federal & state rules of fair housing which you should inform them including having a management systems manual. There are excellent property management programs out there. For the best - Jeffrey Taylor, www.Mrlandlord.com. Also - Mike Butler www.mikebutler.com.
__Prepare and send 1099’s to independent contractors. There are excellent computer programs that can the bookkeeper can use to do this.
__Assist you with tax preparation using a tax preparation computer program. A lot of the work done by CPA’s is “line-by-line form filing”, but they charge higher “CPA” prices. There are easy-to-use tax-preparation computer programs (such as TurboTax or TaxCut) where your bookkeeper can assist you in the preparation of your taxes. Besides, 1040’s there are tax-preparation computer programs for partnerships and corporations. These programs get better all of the time.
TIP 1: Before having a bookkeeper assist you with tax return preparation, you could first engage a competent CPA to do a one-time set up and preparation of your tax return in accordance with the Renaissance Goldmine strategies. Once set up, it will be much easier for the completion of your tax returns for later years. You then have could have the CPA review the returns every three years. If changes need to made, returns could be amended back 3 years for refunds.
TIP 2: There are also very competent bookkeepers who can do your entire tax return for you, do a great job and save you a bundle of fees. Just make certain they do it in accordance with the Renaissance Goldmine strategies (www.GoldmineSavesTaxes.com) .
What a Bookkeeper Should Not Do For You -- Internal Accounting Controls: In NO way a bookkeeper should handle cash or checks (money). This includes making up of deposit slips, taking deposits to the back, handling cash, signing checks…NO signature stamps!
The above are excerpts from the special report, “80-15-5” - How To Determine The Competence Or Incompetence Of A Tax Advisor, Including Your Own. For more info go to www.AlAiello.com click to “MONEY-SAVING Reports”, scroll down to the 1st report.
Rental Property Owners - Fully Deduct 100% Of The Cost Of Capital Assets With Bonus Depreciation!______________________________________________________________________
Al Aiello, CPA, MS Taxation, Business Owner
Instead of depreciating certain qualifying assets over a number of years, with “100% Bonus Depreciation” you can write them off all in one year. Such qualifying assets are new equipment, new 5-year personal property in real estate, new 15-year land improvements in real estate. So if you buy new appliances, kitchen cabinets, carpets, lighting fixtures, storage units for your rental properties, you can fully deduct their cost all in one year, instead of over 5 years (which is good but not as good as no years). The same for 15-year land improvements such as a new parking lot, new pavements, new driveways, new lawns & landscaping…all deducted in one year, instead of over 15 years, regardless of their cost. If you purchased an entire new property, all of the allocated 5-year personal property and 15-year land improvements can be fully deducted in the first year.
Unlike Section 179 first year expensing, there are no deduction limits with 100% bonus depreciation, except that the assets must be new (never used before). Plus there is no IRS controversy if the new asset is capital or a repair. It’s totally legally 100% deductible! But do it now, as this bonanza is due to expire December 31, 2011.
TIP: To maximize the 5-year personal property and 15-year land improvements deductions, do the componentizing (cost segregation) system for rental properties covered in The Renaissance Goldmine.
Al Aiello is the author of The Renaissance Goldmine of Goldmine of Brilliant Tax Strategies Real Estate Investor’s, A Tax Reduction Software System. For more info go to www.GoldmineSavesTaxes.com.
Will Wholesaling Make You a Dealer?______________________________________________________________________
Al Aiello, CPA, MS Taxation, Business Owner
What Is “Wholesaling”? Wholesaling is quickly
selling a property “as is” with little or no fix-up. Many times the
entrepreneur never goes to settlement and will just assign (or “flip”) the
agreement of sale to their buyer for a quick profit. Wholesaling can be a
lucrative cash-profit business, with some really great people teaching it
out there, such as Than Merrill.
But Will It Make You A “dealer”? That all depends, but first some background. The IRS and even more so, unknowledgeable CPA’s, will allege you are a dealer when you get into real estate “selling” activities such as wholesale flips, rehab flips, lease-options, sub divisions, condo conversions or just selling investment property.
Being tagged as a dealer could be a financial disaster. Reason: unlike an “investor”, you are subject to the highest ordinary income tax rates, plus Social Security taxes, other employment taxes and possibly alternative minimum taxes. Thus, 50%, 60% or more of your hard earned profits could be drained by all kinds of taxes. Moreover, dealer profits (whether by cash or paper) are immediately taxed in full and cannot be tax-deferred in any way including not being able to use a 1031 exchange, seller financing/installment sale reporting, a self-directed IRA, certain trusts or any other tax deferral strategy. Being tagged as a dealer could wipe you out! It’s like being condemned to hell!! On the other hand, if you demonstrate status as an “investor” you can be “saved” and avoid these expensive pitfalls of being a dealer.
First Off, Just Because You Start To Flip Properties Does Not Mean You Are A Dealer. Based on numerous tax courts cases (including a Supreme Court Case); actual IRS audits; and my extensive research; with planning, even a very large number of flips (in one year) could avoid costly dealer status.
There Are Avoidance Strategies. Altogether, there are over 30 strategies to avoid the costly consequences of a dealer. My experience indicates that one of the best strategies is investment intent. That is, demonstrate that the primary purpose of the quick sale profits is for investment purposes and not sales speculation. For example, the primary purpose (or purposes) of the quick sale profits can be for a number of “investment necessities”, such as down payment funds to acquire long-term investment keepers, or working capital for property investment operations including preventive maintenance.
Result… Non-Dealer Investment Transactions. With this premise, tax follows economics as opposed to sales speculation with tax avoidance motivation. That is economics first! Therefore, as employed here, these flips are non-dealer, investment transactions with solid economic foundation. This is a very powerful defense against any IRS attacks. Consequently, there are numerous cases and scenarios, some of which I have had first hand experience with, where even a huge number of sales in one year did not cause dealer status.
Plus, There Has Never Been An Issue Of Civil Or Criminal Fraud With The Issue Of Investor Versus Dealer. Entrepreneurs have literally sold hundreds of units in a short time; claimed not to be a dealer without issues of fraud and, with the right planning and documentation, even won their case. Reason: The issue is a very arbitrary question of fact and not of law. Accordingly, asserting any type of fraud (where the burden of proof shifts to the IRS) is very difficult and almost impossible. Therefore, real estate entrepreneurs have everything to gain and little (if any) to lose. They should do so by planning in advance with dealer-avoidance strategies (especially investment intent); avoid inept advisors; and GO for it!
Overlooked Deductions For Business Owners
Al Aiello, CPA, MS Taxation, Business Owner
There are many overlooked deductions for self-employed entrepreneurs, home-based businesses, independent contractors and other small business owners. Here are a few my favorite ones:
__Deductible Salaries To Family Members. Are you paying non-deductible allowances to your children, grandchildren or other young family members? Hire them part time in your business and convert a non-deductible allowance into a deductible salary, such as $5,000 a year (which you can pay in the 4th calendar quarter to reduce payroll filings). In a 30% business bracket you save $1,500 (every year) and the child does not pay income taxes, because $5,000 is under the present taxable income threshold. Even children as young as 6 or 7 years old can do filing, copying, cleaning, even work the computer and internet. (Several tax court cases support this). Even babies where you use their cute photos in your marketing, such as on your web site. Under the photo you can have something like this – My Mommy and Daddy Have The Best (whatever your business is), So Please Contact Them. You can also contribute for them up to $5,000 a year to a Roth IRA which can grow exponentially to significant tax-free amounts with very early compounding. This is a nice nest egg for the child. .
TIP: You have until the following April 15th to make IRA and Roth IRA contributions for the prior year. For example for 2011, you have until April 15th, 2012 to make the contribution for 2011. But for reasons of early compounding… the earlier, the better.
__Deductible Fringe Benefits To Family Members. Once family members are on salary they can be provided with certain deductible fringe benefits, such as educational assistance and especially health benefits including a Medical Reimbursement Plans under Section 105(B). The big tax advantage of fringe benefits is that your business can fully deduct them as a business expense, yet the family employee does not pay taxes on them – double taxation the right way > your way!
__Full First Year Expensing of Capital Assets. With Section 179 first-year expensing, you can receive an upfront write-off of up to $500,000 (such amount subject to change). Use Section 179 to fully write-off business assets that are generally depreciable over 5 or 7 years. Examples - business equipment, computers, printers, scanners, copiers, faxes, office furniture, fixtures, etc. You write-off the entire cost (up to the limit), even if you do not pay for the assets, but financed them with your credit card or a lease-purchase arrangement. For example, assume you are in a 40% business tax bracket and you buy $10,000 of business equipment, you immediately pocket $4,000 in taxes!
CPA ALERT: Many CPA’s will say this is an aggressive deduction. It is not! Reason: It is a statutory legal deduction per Internal Revenue Code Section 179. So if you need deductions (using IRS form 4562), take it and save $1,000’s!
__Deductions WithinYour Home-Office. Under Section 280A, home-office deductions include claiming a business percentage of your home's operating expenses such as: Repairs, maintenance, utilities, homeowners insurance, trash\garbage removal, association dues, and any other expenses to operate, clean, maintain, manage and repair the home. Also included is the business percentage of real estate taxes, mortgage interest, casualty losses and depreciation on the home
Whether you are entitled to Section 280A home-office deductions or not, you are still entitled to deductions related to or within your home-office. Reason: These within-the-home-office deductions come under different tax law provisions. They include the following:
- First-year expensing of business assets (see last deduction)
- Depreciation of personal-use assets converted to business assets
- Office supplies & stationery
- Office accessories such as light bulbs, extension cords, etc.
- Office cleaning & maintenance directly for the office
Over the year, these deductions can add up.
Asset Protection Vs. Total Wealth Protection – Knowing The Difference Will Save You Thousands!______________________________________________________________________
Al Aiello, CPA, MS Taxation, Business Owner
Asset protection is a very popular subject, especially among real estate investors, as it should be with astronomical increases in the number of lawyers and lawsuits.
However, here is a quote from one of my expert legal team members about asset protection. “The promotion of asset protection went from shady to shameless. Attorneys crisscrossed the country giving seminars to the masses on family limited partnerships, offshore trusts or some incompetent structure. At the conclusion of each seminar, many attendees arose to flock to the back of the seminar room where they could not turn over checks fast enough to pay for $2000 kits giving them the blueprints for a bullet proof asset protection plan. Of course, many of the eager buyers who rushed to the back of the room first were paid shills who showed up at every seminar and whose checks would be torn up that night. The few real attendees who were caught up in the herd mentality and actually paid real money for these kits ended up with a simple Nevada partnership or corporate structure that was useless against a moderately sophisticated creditor, or a boilerplates offshore trust offering them protection so long as they were prepared to flee the country to avoid being jailed for contempt of court. The only things many of these kits accomplished was to generate millions of dollars in needless tax liabilities, when their do-it-yourself purchasers undertook complex business and estate planning maneuvers without understanding the tax ramifications.”
WOW! But unfortunately it’s true. On the other hand, there are on the real estate speaking circuit reputable national speakers (attorneys) who have brilliant legal minds doing informative presentations on legal asset protection.
I will not list who they are, but if I did you would most likely know of them. My commentary about them is constructive.
I, along with my legal & tax team, have thoroughly reviewed and analyzed the structures that these attorneys teach with their opinion as to why theirs is the most effective way.
The determination of our objective review and analysis is as follows:
1. The selection of an entity or other asset protection vehicle should be based on objective factual data and not subjective opinion - where you evaluate the three sides to a structure:
1. LEGAL Side – Based mainly on state law.
2. TAX Side – Based on current tax law provisions.
3. IRS Side – Based on current IRS audit statistics (and insider info) as to which structures are audited or scrutinized the most, or the least.
You should obviously select the structure that fairs best on all three sides for your particular situation.
2. Such asset protection is mostly taught as if it were inside a vacuum with a primary focus on the one Legal side with little (or more often) no consideration to the Tax and IRS sides, which can have a very significant adverse impact on the financial health of you and your family.
3. Therefore what is not being taught is – Total Wealth Protection – which includes asset protection, but is much more comprehensive and includes the following:
✓ Lawsuit Protection
✓ Financial Privacy
✓ Entity Structuring
✓ IRS Audit-Proofing
✓ Income Tax-Reduction
✓ Estate Tax-Reduction
✓ Estate and Legacy Planning
✓ Investment Planning
✓ Marital Planning
✓ Insurance Planning
✓ Avoiding Incompetent Advisors.
When approached this way it becomes an incredibly powerful approach to protecting you and your family. A discussion of every one of these topics of Total Wealth Protection is a boot camp unto itself, well beyond our scope here. So let’s address a couple of them, next.
4. A particular asset protection vehicle or strategy may have a favorable legal consequence, but at the same time have expensive tax liability consequences or could expose you to a costly, aggravating, time consuming audit.
5. Accordingly and as an example, what is not taught by most of these asset protection guru’s is the art & science of IRS Audit-Proofing which includes proven techniques to reduce or even eliminate an expensive annoying audit. In fact, IRS Audit-Proofing may be the most important aspect of Total Wealth Protection and could be listed as number 1 above. Reason: There is no more powerful creditor-predator than the IRS!They can lien your properties (including your home), they can levy your bank accounts and they NEVER go away!! Compare that to a supplier or contactor suing you, or a hospital for past due medical bills you cannot pay. Yes, you still want to protect yourself here, but these types of creditors have nowhere near the collection power of the omnipotent IRS. Even a lender with a secured mortgage or deed of trust certainly has recourse, but still not like the IRS. Most attorney asset protection guru’s, have no IRS audit experience whatsoever and have never been inside an IRS examination office. Even some lack litigation experience with legal matters apart from tax and IRS issues.
As an Educator, my approach is to have as a team, experts on all phases of wealth protection – Asset Protection, Entity Structuring, Tax-Reduction, IRS Audit-Protection, Self-Directed IRA-LLC’s, 1031 Exchanges, Financial Planning, Estate Planning …along with avoiding incompetent advisors = Total Wealth Protection for the multi-faceted shielding of all of your family financial resources.
AL AIELLO RESOURCES FOR MORE INFO
The LLC Master Machine- How to Set up and Operate Your Real Estate LLC for Maximum Legal Protection, Tax Savings and IRS Audit Proofing - Save $1,000’s – WITHOUT Expensive Lawyers. For both new and existing LLC’s. Includes a Q&A helpline for LLC legal questions. For more info go to www.LLCProtectYou.com
The Renaissance Goldmine of Brilliant Tax Strategies For Real Estate Investors- Easy-To-Use Software Program That Will Dramatically Increase Your Cash Flow With The Absolute Best Tax-saving Secrets in The Country, Specifically for Real Estate Investors. Includes a Q&A helpline for real estate tax questions. For more info go to www.GoldmineSavesTaxes.com
The Ultimate Tax Bible for Self-Employed Entrepreneurs- The Consummate Tax-Reduction System for Small Businesses, Home-Based, Independent Contractors and Other Business Entrepreneurs. Includes Superb Strategies (different than the Goldmine above) That Will Legally Save You Hundreds…Even Thousands of Dollars More In Taxes! Includes a Q&A helpline for business tax questions. For more info go to www.AlAiello.com and click to “Tax Savings Business Owners”
Equity Stripping Excel–How To Use Only Two LLC’s to Protect Any Number Of Properties In Any Number Of States. Save Thousands in State Franchise, Legal And Accounting Fees With This Simple, Ingenious, Proven Asset Protection Strategy. Includes a Q&A helpline for asset protection questions. For more info, email us at email@example.com
PHONE CONSULTATIONS: When available, Al will do expert phone consulting. Fee for Students $150 per half-hour; for non-students $250 per half-hour. To set up an appointment email Janine Pratt… firstname.lastname@example.org THANK YOU
Real Estate Investors...
How to Protect Your Wealth from
Being Drained by Taxes!
Al Aiello, CPA, MS Taxation, Business Owner
Here is a quick overview...
AVOID IRS, LIKE THE BUBONIC PLAGUE! There are over 30 ways to reduce your chances of audit. One great way is staying off heavily audited schedules such as Schedule’s C or E and file as a partnership, form 1065, which is much less audited. Also refer to my Special Report, Powerful Insider Secrets To Avoid IRS Audits. Go to www.AlAiello.com, scroll down to “MONEY-SAVING Reports”, down to the 5th report.
AVOID INEPT CPA’S, LIKE THE CURSE OF HELL! Bad tax advisors cause more investors to pay more taxes than the IRS can ever dream of. Ask your follow investors for some good prospective CPA’s who specialize in real estate. Get references and carefully screen them out. NO CPA? Like a bad tenant...having NO CPA is a heavenly dream next to having a bad one. Many of my students do not have a CPA or use one on a very limited basis. Instead they use a good home study course on real estate tax reduction along with tax preparation software (such as TurboTax). and perhaps with a good bookkeeper. They rave about how they legally save more money than they did previously with a CPA, but without the high fees. Now this is not for everyone. But if you do use a CPA, make sure that you have at least a general understanding of real estate tax law and that the CPA is working for you; because no one cares more about your money than YOU! Also refer to my Special Report, “80-15-5” - How To Determine The Competence Or Incompetence Of A Tax Advisor, Including Your Own. Go to www.AlAiello.com, scroll down to “MONEY-SAVING Reports”, down to the 1st report.
SELECT THE RIGHT ENTITY. Start off with the right form of ownership entity that protects you the best, saves you the most taxes and audit-proofs you against the IRS. Generally, for real estate that entity will be an LLC-Partnership. This is one entity – a limited liability company (LLC), that you elect to be taxed as a partnership. (See prior January 2010 article - Real Estate Investors…Can An LLC Create And Support Tax Deductions?)
CREATE VALUABLE “PAPER” DEDUCTIONS. That is “paper” deductions that do not require you to expend cash for, yet creates cash flow in your pocket via tax savings. This paper deduction is - Depreciation. A very profitable depreciation system is componentizing (also called Cost Segregation Analysis). Componentizing is something that I have been using for over 25 years to dramatically increase my cash flow (and wealth) via tax savings from much larger non-cash depreciation deductions. And so have my students. With componentizing, you break out components, from the property cost, that allow you to use shorter recovery periods with the result of much larger deductions and savings. For example there are many items that can qualify for personal property and be rapidly written off over 5 years (double-accelerated) instead of slower building depreciation of 27-1/2 or 39 years straight-line (or 6 times faster than the building). There are land components that too can be rapidly written off over 15 years (accelerated) instead of 27-1/2 or 39 years straight-line (or 2 to 3 times faster than the building). Furthermore, you can fully deduct the remaining basis of property components that are replaced (gutted out).
AVOID PASSIVE LOSS LIMITATIONS - FULL DEDUCTIONS. Except for $25,000 of losses, rental property tax losses are subject to passive loss limitations which means real estate investors can not deduct rental property losses against other ordinary income such as W-2 income, business income, flip profits, IRA distributions, etc. If the investor’s adjusted gross income (AGI) is above $150,000 they will not even be allowed the $25,000 annual “active” exception for deducting such losses. The losses are “suspended” and must be carried forward until the property is sold. To avoid being subject to these limitations there are several steps to take. One important one is that the investor must document that they incur enough hours in the real estate business at a minimum of 751 hours a year.
TOTALLY AVOID THE TAX DRAIN OF BEING A “DEALER”. If you are quickly selling properties the IRS or even more so, unknowledgeable CPA’s will try to tag you as a dealer. Altogether, there are over 30 strategies to avoid the costly consequences of a dealer. My experience indicates that one of the best ones is to demonstrate that the primary purpose of the resale profits is for investment purposes and not sales speculation. For example, the primary purpose (or purposes) of the profits can be for a number of “investment necessities”, such as down payment funds to acquire long-term investment keepers, or working capital for property investment operations including preventive maintenance. Accordingly, as employed here, these flips are non-dealer, investment transactions with solid economic foundation. This is a very powerful defense against any IRS attacks. Consequently, there are numerous cases and scenarios, some of which I have had firsthand experience with, where even a huge number of sales in one year did not cause costly dealer status.
SELL PROPERTIES TAX-FREE – YOU KEEP ALL THE PROFITS. One of the best strategies to avoid all tax liabilities on the sale of investment property is a 1031 exchange. Briefly stated, a Section 1031 exchange (or rollover) is a legal tax provision that allows you to defer taxes on the sale of your investment property by acquiring another investment property within certain IRS requirements. Understand, 1031’s do not just defer taxes, but by having the interest-free and payment-free use of the tax savings, you have more buying power for the replacement property. For example, if you save $20,000 in taxes by doing a 1031, as a 10% down payment, $20,000 empowers you to buy another $200,000 worth of real estate. (Assuming a 10% annual return, you reap $20,000 more income every year, in 5 years, that’s $100,000!). In fact, many times, the 1031 savings, combined with leverage, is the difference that makes the difference in doing the deal. My students like to use the higher untaxed equity from a 1031 exchange to roll over into property they intend to keep so they can reap the cash flow, equity buildup and tax deductions (esp. depreciation) you get with keepers.
Tax Strategies Real Estate Investor’s, A Tax Reduction Software System
by Al Aiello. For more info go to www.GoldmineSavesTaxes.com.
Get Smart! Let The Government Pay You $$$ For Keeping Good Records!
“POOR RECORDKEEPING IS A MAJOR CAUSE OF SMALL BUSINESS FAILURE”... The U.S. Small Business Administration (SBA)
All successful people keep good records so they can control, improve and develop their business. When it comes to taxes, poor recordkeeping also means lost deductions, more taxes, more IRS problems and more costs to you. Let the government pay you for good records!
For example, you are in a 40% tax bracket. Because of your good business organization you come up with another $2,000 of deductions. In the 40% bracket these deductions equate to $800 in tax savings or a government pay check as a reward for your entrepreneurial organization. If the recordkeeping during the year took you an unlikely 2 hours*, you would have been paid a nice $400 an hour from the government. (*With the following shortcuts it will even be a lot less). Recordkeeping also keeps you out of trouble with the IRS, as it documents your business expenses. An ounce of recordkeeping is worth a pound of argument!
HERE ARE SOME PROVEN SHORTCUTS WHICH CAN SUBSTANTIALLY REDUCE RECORDKEEPING TIME:
USE THE "DOWN-TIME APPROACH" -- This reaps valuable deductions you would otherwise miss. You record out-of-pocket cash expenses during the “down-time”, such as -- waiting at a drive-in bank, waiting at a gas station, waiting in a traffic jam, waiting for a client or waiting for whatever. For those of us who live in cold winter climates, a good time to catch up with some valuable recordkeeping is in January when you are stuck at home in a winter storm.
KEEP AN ENVELOPE IN YOUR CAR -- Each day as you start your car, let the engine warm up a bit so you can make your entries, including your odometer reading and places you intend to go. Use the envelope to hold the receipts you acquire during the day. Start a new envelope every month. On each envelope, write the month and year. You can do this with a Palm Pilot or similar type device.
FOR BUSINESS AUTO TRAVEL, INSTEAD OF 12 MONTHS, USE A 3-MONTH "SAMPLING" -- You are allowed to use a 3-month “sample” period to compute your business mileage for the year, provided it is representative of the full tax year. For only 3 months of the year, log in your dairy each of your business trips with mileage. You should select the 3 months where you are the busiest so you can get a high representative business-use of your auto. Once you set it up, it’s easy and a real time-saver!
DON’T YOU DO THE RECORDKEEPING... USE OTHER PEOPLES TIME & TALENT ("OPT&T") -- Don’t get bogged down in unproductive detail. It will soak up valuable time that you could be using to earn more income. Instead, leverage your time by employing a personal assistant (who could be your children or spouse*) to take care of recordkeeping and other clerical duties. [*Note: You can also receive additional income tax benefits by employing family members in your business.]
USE CREDIT CARDS -- By using credit cards you have the necessary receipts and canceled checks. Use the credit card companies that send annual tax summaries which have your tax-related expenses already totaled and classified for the year.
USE COMPUTER TECHOLIGY – Such as Quicken or even better, QuickBooks and other application out there. There is also TurboTax or TaxCut for tax preparation recordkeeping.
DO RECORDKEEPING FREQUENTLY! -- Preferably daily. At the very least, do it every month instead of waiting until the end of the year when everything piles up, when it then takes 5 times as long!
One thing is for sure, never wait until you are audited, unless you like horror stories!
Real Estate Investors…Can An LLC Create And Support Tax Deductions?______________________________________________________________________
Al Aiello, CPA, MS Taxation, RE Investor
Yes! But first, if you have not done so, set up a limited liability company (LLC). Then elect the LLC to be taxed as a partnership (with at least two members) so you have an LLC-Partnership which is both a legal and tax entity (with a low IRS audit profile) and the best entity for real estate. If you operate as one person, another member (to create the partnership) can be your spouse, other family member or even another entity you own such as a C-corporation. These can be minority low-percentage members so you can still have total control.
Now to the topic at hand. Properly structured, with the appropriate documents, an LLC can support expenses as tax deductions, many of which are IRS hot spots (discussed shortly) and typically would be more aggressive if taken as a non-entity sole proprietor (which is also very prone to IRS audits).
What to do: Use a properly worded comprehensive LLC Operating Agreement (OA). There are several important LLC legal documents. But the OA is the most important one. It is the nuclear, governing instrument…mandating LLC business operations. Simply put, it is the heart of the LLC. It also is a private document, not exposed to the public such as the articles of organization. The OA used, should be a “Real Estate OA”, specifically designed for real estate investment operations.
A properly worded OA will contain legal provisions that document the LLC is a separate entity where the LLC affairs are separate from the affairs of the members. These legal provisions (along with entity formalities) will give its members limited liability protection, therefore making it difficult for a court to pierce the LLC entity veil (which would expose member personal assets to attachment). This is because the LLC would be separate and distinct from its members. Standard boiler-plate OA’s (which most are) do not do this, as well as below.
Tax Deduction Support: A properly worded Real Estate OA also supports the multitude of tax saving expense/deductions (and strategies) that are available for the absolute best tax shelter – real estate.
How Is This So? Because having the correct legal provisions in the OA (per the above) separates the LLC entity from its members, as a separate legal person. So given this, the statutory LLC entity (separate from its members) via this legal document (the OA), formally authorizes LLC members to incur expenses necessary to attain the specific business purpose of the LLC as provided in the OA (which purpose is: High-return, low-risk real estate investing). This is summarized below.
The LLC Entity
You as LLC Member
Gives legal authorization to incur expenses necessary to attain the LLC business purpose
With the LLC authorization, you incur the authorized deductible expenses, carrying out the LLC bus. purpose
This is powerful! You will feel much more assured and comfortable that your tax deductions are legally supported by this legal entity (LLC) via this legal document (OA).
IRS Hot Spots: This is especially so with IRS hot spots such as deductions for auto, home-office, entertainment, meals, travel to find property; especially, real estate education (seminars, home study courses, coaching programs) along with related travel to the educational event. With the proper LLC documents, you can legally and fully claim such deductions, even if you do not yet own any investment properties. This could be a very troublesome area with the IRS…but now can be resolved with a properly structured LLC entity with complete, correct documentation!
Conclusion-Summary: Such proper documentation can therefore be an effective defense against any IRS attacks; or CPA’s trying to deny you of valuable deductions. Reason: This statutory LLC entity (separate from its members) via this legal document (the OA), formally authorizes these deductible expenses necessary to attain the LLC business purpose. You end up with legal tax-saving deductions and a more successful real estate operation...The best of both worlds.
The above are excerpts from The LLC Master Machine – The complete LLC system for real estate investors (including a comprehensive 121 page RE OA) by Al Aiello and Wm. Noll, Esquire. For more info go to www.LLCProtectYou.Com.
Year-End Tax-Saving Tips You Can Use Right Before December 31, 2010 to Save a Bundle of Taxes In 2010______________________________________________________________________
Al Aiello, CPA, MS Taxation, RE Investor
There are over 30 planning ideas you can do to reduce your taxes at the end of the year, even as late as December 31st. Here are 5 of them.
1. Settle on a rental property by 12/31. Buying real estate anytime during the year will yield valuable deductions. Before year-end you can incur rental property expenses such as repairs, utilities, insurance, condo fees and other operating expenses. You will also be entitled to some depreciation deductions. On the building portion, you will be limited because for partial years the amount of the depreciation is prorated according to the number of months placed in service. Therefore, if you settled in December, you would only be entitled to claim one month of depreciation. However, for the 5-year personal property and 15-year land improvements, the first year is an automatic 6 months of depreciation, regardless of when the property is placed in service. You can also elect the accelerated method for personal property and land improvements. Here is one that is little-known -- existing property components in the property that you replace, “gut out”, (such as plumbing, electrical or the heater) can give your huge non-cash deductions as they can so be fully written off for the current year.
2. Use First-Year Expensing for immediate write-offs of business assets -- even in December! With Section 179 first-year expensing, you can receive an upfront write-off of up to $500,000 (such amount subject to change) . Use Section 179 to fully write-off business assets such as computers, printers, scanners copiers, faxes, office furniture, fixtures, etc. (Even certain personal property in a rental property). You still get the full deduction even if the business asset (computer, fax, etc.) is placed in service on the last day of the year up until 12 midnight, December 31. You do not have to pro-rate the Section 179 limit. You write-off the entire cost (up to the limit), even if you do not pay for the assets, but financed them with your credit card or a lease-purchase arrangement. For example, assume you are in a 40% bracket. Just before year-end, you buy $10,000 of business equipment. You immediately save $4,000 in taxes!
3. Deduct payments to yourself through retirement plans -- Because of early tax-free compounding on the earnings, you should make maximum tax-deductible contributions to retirement plans as soon as possible during the year. If you have not done so, you could open up a self-employment retirement plan such as a qualified plan (formerly called a Keogh plan). Depending on the type, these plans can allow you to make substantial tax-deductible contributions. You can also borrow from these plans (within certain limitations).
Qualified plans must be opened before December 31 of the current year to secure deductions for that year. Once you do this, you can significantly extend the period for securing deductions for tax year 2010, up to September 15 or October 15, 2011. So contributions do not have to be made many months after. Moreover, certain qualified plans are discretionary in that you do not have to make contributions, but the option is there for you to do so.
4. Give & deduct business gifts -- Holiday time is a good time to start giving tenants, clients, referrals, and associates gifts of liquor, candies, potpourri, etc. The amount of the gift deduction is limited to $25 per person. Greeting cards are deductible with your business name on the card and mailed to tenants, clients, prospects, etc. The cost includes cards, postage and handling.
5. While you are out Christmas shopping stop off at the book store. Buy real estate and other business related books. You may also want to buy Christmas gifts for your good tenants or clients (get rid of the bad ones!). Put them on your credit card, deduct them in December and pay for them next year.
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