E24: Maximizing Tax Savings with Proper Business Structures and Tax Planning

Looking to optimize your tax strategy as a business owner or real estate investor? In this episode, Eric Scoville is joined again by Brandon Hall of Hall CPA and Tax Smart Insiders to discuss tax planning strategies for business owners and real estate investors. Brandon shares insights on classifying income as active or passive, proper business structures, and what to expect from a tax audit.

Here are some topics from today’s discussion:

• How to prepare a tax return
• Common mistakes DIY taxpayers make
• LLC, S-Corp, and C-Corp structures and when each makes sense
• Brandon’s approach to tax planning
• Passive income vs. active income from a taxation standpoint
• The penalties for getting audited

 

Episode Highlights:

[04:24] How to Prepare a Tax Return

Preparing your tax return can be manageable if you have a simple tax situation, such as a W-2 job with some itemized deductions like mortgage interest, property taxes, and charitable contributions. TurboTax can be a useful tool for self-preparation in these cases. However, it's crucial to recognize the limitations when your tax situation becomes more complex, such as starting a Schedule C business or investing in real estate. Adding a business or rental property to your return significantly increases the complexity. The IRS provides publications that offer instructions on preparing these additional forms, such as Schedule E and Schedule C. These publications also estimate the average time it takes a non-professional tax filer to complete these forms, often around 50 hours. This emphasizes the importance of seeking professional assistance when your tax situation becomes more intricate, ensuring accuracy, minimizing audit risks, and optimizing your tax strategy.

[05:59] Common Mistakes DIY Taxpayers Make

One common mistake that many DIY taxpayers make, particularly regarding real estate, is claiming deductions they are not eligible for or trying to offset their W-2 income with losses from depreciation, even if they are not real estate professionals or their property is not a short-term rental. Even well-informed DIY taxpayers who invest significant time in understanding the tax code may overlook more advanced concepts, such as partial asset dispositions and specific regulations like the 2013 tangible property regulations. These intricacies require a higher level of expertise to navigate accurately. Brandon believes tax preparation is one of the hardest businesses to run. He also advises against doing it yourself because you could be costing you more money and/or time than if you had just gotten yourself an expert.

[08:54] The Different Structures

• LLC - A limited liability company provides legal protection but is taxed as a sole proprietorship (Schedule C) or partnership by default.
• S-Corp - An S-corporation election allows business income and losses to pass through to owner's personal tax return. This structure can help reduce self-employment taxes.
• C-Corp - A C-corporation is a separate legal entity from its owners that pays corporate income tax on profits before distributing to shareholders. Profits are then taxed again on the owner's personal tax return.

 

[28:09] The Benefits of Passive Business Investments

Investing in passive businesses can offer significant advantages. For instance, if one invests in a hair salon without actively participating in its operations or management, the income received from the investment becomes passive income. This means that the individual can leverage this passive income to offset any tax losses generated from other passive ventures, such as rental properties. In this way, passive business investments provide a valuable opportunity for diversification and strategic tax planning. It's important to note that the concept of passive businesses extends beyond rental properties, enabling individuals to offset income and losses between different passive ventures.

Resources Mentioned:

 

Hall CPA

Tax Smart Insiders: www.taxsmartinvestors.com/free-trial