Archive for August 2019

Your New Mission: Plan For the Future

Image via Pixaby

 

If there is one thing I don’t understand it is the military and the unique financial challenges facing active military personnel and veterans. Lucille Rosetti has provided another post helping fill the gaps in my experience.  She has provided several valuable resource links helping veterans plan their future. She is part of the Wealth Legacy Institute, has graced the digital pages of this blog before and elsewhere on the web. Enjoy

 

 

Your New Mission: Plan For the Future

by: Lucille Rosetti

 

As a U.S. veteran you have served your country, but now more than ever it’s time to serve yourself and your family. As you get older this means making a plan to ensure your finances are in order. Avoiding this can harm you financially and could leave your family struggling later down the road. Here are some practical tips to help you complete your most important mission yet: taking care of yourself after you retire. 

 

Utilize VA Loans to Refinance or Buy

 

Even if you don’t have perfect credit you still have to have a place to live. As a veteran, you may be eligible for a lower-interest VA loan, which can save you a significant chunk of money each month. If you qualify, a VA purchase loan doesn’t require a down payment or private mortgage insurance like a conventional or FHA loan. Refinancing can also help you save money by lowering your interest rate if you already own your property. Keep in mind, however, that the property appraisal must be higher than the selling price.

 

Discuss Your End-of-Life Wishes

 

Thinking about your own death isn’t pleasant, but making plans in advance is important. If you haven’t already, one of the first things you should do is have a conversation with your family about your final wishes. Do you want to be buried or cremated? Do you want a formal funeral service or a casual end-of-life celebration? While it will ultimately bring everyone peace of mind and allow you to begin making financial plans for final arrangements, know that it will still be a difficult conversation for you and your loved ones. Approach the subject with sensitivity, and be ready to have multiple discussions with anyone who can only talk about a few details at a time.

 

Supplement Your VA Burial Benefits

 

In order to offer some support to your loved ones during what will already be a traumatic time, you also need to make a plan about how to pay for your final arrangements. Military.com explains that the VA offers a small stipend to help your family pay for your funeral. At most, this is $2,000, a sum that only applies if your death was directly related to service. A funeral can easily cost $8,000 or more. Consider supplementing your VA burial benefits with a funeral insurance policy, which can also provide your family with a small injection of cash to help cover outstanding debts. Before you decide how much coverage you need you’ll need to know the kinds of arrangements you would like and how much money should be left over for other needs.

 

You Can Still Save Money

 

When you enrolled in the Armed Forces you likely had the opportunity to open a Thrift Savings Plan. Even if you had matching contributions this might not be enough. This is especially true if you had to make withdrawals to cover your living expenses as you transitioned from military to civilian life. If you are still working you have the option to add funds to an IRA up until you are 70. There are special rules, however, and if your only income is from an annuity, pension, or disability, you won’t be allowed to contribute to an IRA. There is nothing stopping you from putting money into a high-yield savings account or, under the guidance of a respected financial advisor, a low-risk investment vehicle

 

VA Medical Benefits Offer Broader Coverage Than Medicare

 

You’ll become eligible for Medicare when you turn 65, but it may not be enough. If you have significant health problems or are considered low-income VA medical benefits may be a better option. This coverage, which is explicitly set aside for veterans goes beyond Medicare benefits by providing dental care and long-term residential nursing home care. You may be eligible for lower co-payments and deductibles. Reach out to the VA by calling 877-222-8387 and ask for VA Form 10-10EZ. This is the Application for Health Benefits and is the first step in understanding what you may qualify for. You can also apply online at VA.gov. 

 

Although you’re no longer on active duty, it’s still your duty to take care of yourself and to protect your family’s financial future. You can do this by paying close attention to your benefits. Some, such as a VA loan, can help you save money. Others, like VA funeral reimbursement, aren’t enough to cover your needs. Knowing what you have and what you don’t is the best way to make a plan that will allow you to defeat the enemy of time and live out your golden years without the weight of financial woes.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

The Fleecing of the FIRE Community

The con artists have a new target loaded with cash: the FIRE community. They are walking in, head held high, when they make their offers. It might look like the investment of a lifetime. Here is how to protect yourself. #protection #risk #investments #scams #fraud #FIRE #financialindependence #independence #retireearly #retirementThey call us snowbirds.

Every year as the the temperatures turn south, so does the traffic from the northern climes, bleeding into the sunny south on the latticework veins of varicose highways. 

Mrs. Accountant and I have enjoyed warmer weather in January with a trip to the land where summer never ends for many years now. Some years we miss, but most years we take a pre-tax season gander south before the pace of a busy tax season sets in.

For several years we made the trip south dual purpose, mixing business with pleasure. The last time we did this we were walking the streets of Gainesville, Florida waiting for one of the various FIRE (financial independence/retire early) camps to begin. 

The camp was outside town a few miles. These gatherings generally are a reasonable mix of fellowship and education. But this one was going to have a surprise.

One of the presentations had a slick offering of real estate. A small community was planned with narrow street for bikes only. Each house was small so everyone was forced to spend more time outdoors. Home was for sleeping and not much else.

A large centrally located community building had a community kitchen. Each night members of this community would dine together. Families would take turns preparing meals for the entire group.

I turned to Mrs. Accountant and she knew what I was thinking instantly. This project didn’t have a snowball’s chance in Hades.

It was a nice presentation, but what part about the “I” in FIRE don’t you understand? These people value independence highly and this was the exact opposite of “more” freedom. These people would never think of buying a non-conforming home with massive community rules and a requirement to feed the town periodically.

Then I turned to view the reaction of the room. After I winched my jaw back into place I understood what had just happened. 

The FIRE community had reached a critical mass and was prime for a fleecing.

 

Baa, said the Sheep

A few weeks back I published a critical review of the FIRE community. As expected, many readers agreed with my assessment, while a few disagreed. The disagree camp didn’t have a lot to stand on because their argument (in one comment) boiled down to ‘I was wrong because I made a spelling error.’ Of course, those who follow on social media knew I hid Easter Eggs in the post, noting there were several layers to unravel. (I needed certain letters!)

Ya also know ya hit the nail square when the arguments take those kinds of turns.

However, I was wrong on at least one account. My allegory of these communities as ‘communistic bike towns’ were off base and it wasn’t the message I wanted to convey. My connection to mid-19th century Russia was a stretch for sure.

But I wanted people to think about what they were doing! I saw a slick developer looking to pluck a relatively naive groups of potential investors.

Non-conforming homes will have a harder time holding value, especially in weak markets. The number of people willing to live in these communities also reduces the number of potential buyers.

And what about conflict resolution?

Well, they had an answer for that. The problem again is that this group of people looking for more ‘independence’ would lose a large part of that independence with a serious amount of their time and assets if they invested. 

The old adage: Good fences make good neighbors, was forgotten by this crowd.

 

Two Problems FIRE Must Address

I saw a seasoned developer carefully carve the group.

The willingness of so many to embrace this concept without serious thought made me nervous. The only relevance we got from the developer was, “They are doing it in Europe with great success.” And since we are in Florida, I have some land I’d like to sell you, too.

One thing was clear. The FIRE community, the FIRE movement, has reached critical mass. There are enough people with cash available to fleece. The old Microsoft Support Scam and IRS Scam are peanuts to what can be pried from the fingers of this group.

Many who follow FIRE bloggers are quick to crack their wallets when a leading blogger thinks an investment is a good idea. This is a terrible idea! You understand many of these bloggers have something in it for them and even if they don’t there is no guarantee they know what they are doing. They might be retired, but they still line their pockets with blog revenue. 

And I’m no exception! Everything I say or do should be questioned! I throw out ideas and tax strategies non-stop. My record of wealth creation is solid, no doubt, but I have no lock on smart investing. Remember, good ‘ol Warren Buffett is taking a shellacking on his Kraft-Heinz investment and he is probably the best investor of all time. The lesson: do your own research.

If the FIRE community is ever to survive it must address two serious issues. 

Scams are hitting the FIRE community at a torrid pace. FIRE is now a large enough movement that scammers are focusing on the group and their large pile of savings and investments. #savings #investments #scammers #risk #FIRE #FIREcommunity #FIREmovementFirst, many in the FIRE community are relatively new to the movement. They had their come to Jesus moment, crucifying debt and massively funding their retirement accounts. Then they start building their non-qualified accounts. And don’t think the shysters of the world haven’t taken notice.

The acolytes are fresh from foolish financial decisions and with a small amount of knowledge built serious wealth. Most are not millionaires, but sitting around with $300,000 incubating inside an index funds is a ready source of cash if you can offer the right deals these suckers, ah, fine young people take a fancy to. 

The second problem is the neophytes now as a group command a serious amount of money. The old ‘invest in an index fund and forget it’ advice isn’t going to cut it.

FIRE members love buying real estate. Several bloggers act like it is all easy money. Well, it isn’t.

I have well over $40 million in real estate transactions in my own account. This is more than some real estate sales professionals ever sell. My stories include the good, some really bad and the down-right ugly. I live this stuff.

Real financial education is lacking. I know this because I get more consulting requests than I can handle. Maybe 10% get a hearing and I charge $350 an hour. People in the FIRE community are digging some deep financial holes and some are creating massive tax and legal problems for themselves. 

 

What YOU Must Do

Neither you nor I can fix all the problems in the FIRE community. I can preach from my small perch of this blog, but in the end it is up to you.

The FIRE movement is such a desperately needed movement. People are so lacking in basic financial knowledge. 

The illusion of saving half your income in index funds salves all financial woes is misleading. 

The seasoned hucksters have noticed our quaint little group. They know exactly what to say to get your money. They will not peal a couple hundred dollars from your stack; they want six figures!

Scams are tricking even experienced investors. Take these steps to avoid being scammed. #scam #experience #investing #thewealthyaccountant #assetprotectionSince you managed to acquire a respectable nest egg you think you are an experienced investor. It is doubtful you are!

What you MUST do is step back from any new investment. If the deal needs immediate action you MUST take a pass. Don’t worry. Another deal will always come along. The hurry-up deals are all too often scams anyway.

Buying into an unconventional investment, which these bike communities are, should never happen unless you are very experienced financially and have the ability the lose 100% of your money without changing your lifestyle one iota.

I’ve been publishing more on investing lately. (It is outside tax season so I wanted to write about something else for a bit. More tax posts are coming soon.) The reason for this is the number of readers crying out for help.

You have no idea of some of the people on my desk I’m helping. These are serious issues; small fortunes completely destroyed unless I can find a way to preserve their wealth. I don’t always win.

To keep this short I will close with one last suggestion. If you can’t read and interpret financial statements like a seasoned accountant you have no business being in any kind of exotic investment, real estate included. Stick to index funds and money market accounts.

You might not shoot the moon, but you will not suffer a catastrophic loss sending you back to square one, as a neophyte in the FIRE community once again.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

How to Analyse a Stock

What if you could buy Juul for a fraction of its value before it goes public? You can with this one simple trick. #Juul #Altria #stosks #investing #stockinvesting #indexfundsThere is a hunger for more information on my thought process when considering an investment in an individual stock. Index funds are still the best choice for most people as they are low-cost and are easy to set up and automate. Yet, the questions still come in.

Investing some of your liquid cash into a promising business is not only exciting, but offers the opportunity for outsized gains. Catching Microsoft or Amazon before they started their assent to the moon would increase the returns of any portfolio. Buying a good business increases the chances your returns will be higher than mere index funds.

Recently I published a review of the financial statements of Altria (MO) and why this might be a good company to invest in. However, I go much deeper than just the financials before plopping down my hard cash. Management needs to be assessed; how the company treats shareholders is important; is there a competitive advantage? 

It is still possible today to find stocks trading at incredible values. Apple (AAPL) has loads of cash. A large portion of AAPL’s stock price is the cash they hold. The enterprise value reflected in the stock is compelling even as the price has climbed and U.S./China trade issues abound.

MO will be our guinea pig again today as I lay out my investment thought process. The reason for this is I own MO and have recently added to my position so my reasoning is fresh. I recommend you read the first post linked two paragraphs above first. You can get a clear idea of why MO is worth considering from the financial statements before continuing. It is a good idea to bookmark these two posts so you can review the process before buying your next stock.

But there is so much more. Like AAPL, MO has hidden bonuses for owners of the company and risks to consider.

 

Money in the Drawer

Back in the 1980s when Peter Lynch was the name you listened to when it came to expert stock advice a unique situation existed.

Savings & Loans were going public at a torrid pace. Once it was discovered how much money could be made, every S&L couldn’t covert to a bank and issue public shares fast enough. Lynch made a killing for the fund (Magellan) he managed at Fidelity.

The biggest problem was getting enough shares. Non-customers of the S&L were frequently locked out of the offering. Even depositors of the S&L could only buy a limited number of shares.

Most S&Ls were small. But there were thousands of them! 

Shares usually went public at $10 or thereabouts and almost always saw a sharp increase the first day of trading. Gains of 60% and more in the first month of trading were not unheard of. 

Lynch clued this accountant into the secret early on. Since the S&Ls had no current shareholders technically all the money from the Initial Public Offering (IPO) went back into the bank to grow the business or pay out dividends, usually both.

Lynch said it was like buying a company and finding your payment in the desk drawer after the purchase. Whatever the bank was worth before was now worth the same, plus all the new monies. 

I like finding money in the desk drawer! 

 

More than Cash

The S&L days are history now. Without mentioning names, a certain accountant opened accounts in every S&L he could find in NE Wisconsin. 

Interest rates were higher then so tying up money still enjoyed a return. Usually a $1,000 or so in a savings account of some sort qualified you for the maximum allotment. 

When the announcement was made I would sign up for the maximum amount of shares and wait for the day it began trading (usually six months or so at most). 

I didn’t sell as soon as the bell rang. All that new money meant the bank was worth around double the IPO price and if management invested wisely returns could be even larger. Most $10 S&P IPOs traded in the mid-20s a year or so out. I sold when full value reached or close to it. 

Selling wasn’t the first priority. Sometimes rumors of banks looking to consolidate the industry added to profits. (Remember, the prior S&Ls had a lot of cash on the books, making them prime takeover candidates.) I sold many, but also kept a select few. Some didn’t pan out the way I wanted so I sold (usually at only a 100% profit). 

These new banks that did get bought out could generate over a 500% return for the original investors in a few short years.

One important point to clarify. I never bought more shares of these prior S&Ls after they started trading. What I was allotted of the IPO is what I got. Any additional shares purchased would not be cash in the drawer. With so many banking institutions it was obvious this was a smash and grab. 

 

MO Money

The #1 Stock to consider for safety in a bear market and massive profits in a bull market. This could be the best performing stock of the next 10 years! #stock #investing #cash #bullmarket #bearmarket #bull #bear #market #stockmarket #1What does the demutualization of savings & loans have to do with Altria (our stock in the spotlight) or any other stock investment?

While it is true the massive profits from S&Ls is over, plenty of lessons can be learned. IPOs are a risky venture and not for most investors. (I don’t recommend IPOs because the good ones are bought out by the large funds and the poor ones you don’t want.)

Many companies have hidden treasures buried in their financials. Reading the balance sheet will not reveal these gems. For that you need to read company SEC filings like the 10-K (annual report) and 10-Q (quarterly report). 

 

Risks

MO is in the tobacco business even as they work hard to transform into a smoke-free company.

Transformation usually has some pain. Couple that with a large number of funds and investors refusing to invest in tobacco for ethical reasons and you have a unique environment. 

Tobacco use is down. A lot! Cigarette volumes are dropping around 5% a year now as vaping is gaining ground. This cash-cow of the industry is facing serious threats. 

Constantly raising prices dulls the pain, but eventually a limit will be reached where the negative elasticity from price increases turns positive*. Cigarette usage peaked in 1952 and has declined slowly since, only to accelerate with other alternatives.

No matter how positive a picture I paint the remainder of this post on MO does not subtract from the issues facing MO as tobacco use decreases.

Every investment, even those juicy S&L demutualizations, had risks. 

 

Know What You Own

Some businesses have loads of cash sitting around, like AAPL. AAPL has something like $47 per share in cash in its accounts. AAPL closed the day I’m writing this at $200.48 per share. That means about 23% of your investment in AAPL is buying the cash in the checkbook. Looked at another way, the $200 price minus the $47 cash per share means investors are valuing AAPL’s enterprise at about $153 per share currently. 

Unlike AAPL, MO doesn’t carry large amounts of cash per share on the books. Compared to normal operating expenses, MO generally uses most of its cash in operations and returns the rest to shareholders in the form of a dividend and share buybacks fairly quickly.

However, Altria has some very interesting assets under the hood. MO owns 10.1% of Anheuser-Busch Inbev NV (BUD). BUD is one of the largest brewers in the world with over 400 beer brands. 

BUD closed with a market cap today (August 12, 2019) of $163 billion. MO, for comparison has a market cap of $85.9 billion at today’s close. In other words, MO owns $16.463 billion of BUD, or just over 19% of the price MO is trading for at today’s close. 

Put another way, almost $9 of each share of MO is really BUD! (MO has just under 1.9 billion shares outstanding.)

With MO closing today at 45.98 and BUD nearly $9 of that price means everything else MO owns and does is valued by traders (hard to call them investors) at ~ $37 per share.

 

Holy Smoke!

The cigarette business still brings in the bulk of profits used to pay those juicy dividends. This year marks 50 straight years of dividend increases.

Investments like BUD pay a dividend to MO each year so MO has cash flow while BUD grows its business. 

Not all of MO’s investments pay dividends. . . yet. Late last year MO opened the checkbook (added debt) to buy 35% of Juul (vaping) for $12.8 billion and another $1.8 billion for 45% of Cronos Group (CRON) (weed). MO also purchased 80% of on! (oral nicotine)for $372 million in early June this year.

on! is a small investment and not large enough for this discussion. 

CRON is a very long-term play in the expanding marijuana market. I don’t expect CRON to make an equity contribution to MO for at least 5 years, probably longer.

To keep this simple let’s assume on!, CRON and other minor investments held by MO are worth zero. They do have value since MO could always sell the CRON shares they hold. $1.8 billion of a $85.9 billion market cap is only 2% of the stock price, or less than a dollar per share.

 

Growth Engine

If you can swallow your ethics and see your way to ownership of some MO it might be worth your time. While other cigarette companies are facing the same sales declines, only MO has a real plan to live, even thrive, another day. 

Find hidden assets owned bu public companies. Find the secret stash some companies hide from investors. Unlock the wealth. #unlock #wealth #stocks #secret #hidden #income #investmentsMO has always made investments in its future. The company also thinks long and hard about their shareholders. (Maybe because nobody else will be their friend.) Dividends at the company have always been rich. Spin-offs in the past (Kraft and Phillip Morris International come to mind) have also unlocked shareholder value.

All that aside, I think Juul has the possibility to be the best investment MO has ever made. At the beginning of this year Juul was expected to generate $3.4 billion in sales. On the latest earnings conference call, Chairman and CEO, Howard A. Willard III, said Juul sales grew 194% in the first half of 2019! And this is a slow down?

By this accountant’s calculations, the current growth rate pegs Juul for $3.8 billion in sales for 2019. To top it off, Juul is expected to make an equity contribution (sorta like a dividend) to MO later this year! Willard said it would be an immaterial amount, but an equity payment to MO only a year after purchase! Material equity contributions might be sooner than anticipated.

Juul has plenty of issues domestically. Regardless the outcome in the U.S., Juul is set to have a massive international business as well. There are certain to be setbacks, but Juul is set to be a massive player in the nicotine market. And MO is the perfect partner with experience handling these issues.

Juul sales growth rates must come down in a few years.  At these growth rates Juul would have over $100 billion in sales in 5 years. MO had just under $20 billion in sales last year. 

Juul cannibalizes MO’s cigarette business while doing the same to every competitor domestically and increasingly internationally.

I do not believe MO’s investment in Juul is worth only $12.8 billion. I think it is more. Someday MO may absorb all of Juul or spin it off. I don’t know the future. Regardless, MO will see the value of Juul climb a lot higher in an unnamed accountant’s opinion. 

It is not inconceivable for MO’s ownership in Juul to be worth more than the rest of the company combined. Juul has the promise of a fat dividend stream in the near future.

Within a few years MO will be growing faster than they have in memory as BUD, CRON, on!, Juul and other investments add to profits. Dividends are currently safe and still growing. It is easy to see where future dividends will come from.

 

Final Sales Pitch

MO is a steal because too many don’t consider investing in tobacco. That is a shame. Reasonable values are hard to come by at current market prices. I invest to make a profit and expect you do as well. Therefore MO should be a consideration. 

Altria is changing. Once a cigarette company, is now transforming into a better company. Vaping isn’t a perfect solution, but it is better than smoking. Beer isn’t good for you and I doubt weed is either. Good for you or not, people keep buying things they want and they want nicotine.

MO has a solid management team willing to work for the shareholders. That is hard to find these days. MO buys back stock, but gives the bulk of profits to owners in cash (dividends). While MO has risks there is a lot to like about this company. It’s a business I want to own and do.

MO also has a serious competitive advantage. Regulations and limited advertising opportunities keep upstarts at bay. MO’s commanding lead allows them to control the market. Juul has a similar lead in vaping. Now you know why MO bought 35% of Juul. The closest competitor will be a very distant second. 

Warren Buffett once said about tobacco companies: the product costs a penny to make and is addictive. What’s not to like? 

I think Buffett never bought MO because he wants to keep a clean reputation. Coca-Cola was as far as he could go with an addictive product.

And remember this: People risked (and in some states still risk) going to prison for a decade or longer to smoke weed, a non-addictive drug according to many. 

Nicotine is addictive. What are the odds people will stop using it?

Exactly.

The market is open tomorrow. All those who don’t like tobacco are selling. You might want to pick some of that up while you can at a reasonable price.

Oh, and the dividend is slated for an increase in two weeks. Nothing like getting a raise the first month on the job.

 

* Price changes have an element of elasticity. If sales drop 10% when prices are increased 10% we say it is elastic. If sales drop only 2% when prices climb 10% we say it has negative elasticity. When the opposite happens (10% price increase causes sales to decline 12%) it has positive elasticity. Economics students will note price elasticity of demand is always negative because the demand curve slop is leftward. A better way to say this is tobacco price are currently inelastic (sales drop less than the price increase). However, a  point will come when they are elastic (sales drop faster than price increases). You can read more here if you want a technical review of price elasticity

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

Commingling is Killing Your Wealth

Commingling of funds (mixing business and personal funds) is one of the riskiest things you can do, causing serious legal and tax problems. 

The issue is less acute from a legal standpoint if you are a non-LLC sole proprietor. There are still plenty of tax issues, however.

LLCs and corporations are at extraordinary risk when funds are commingled. Treating your business as a personal fiefdom instead of a separate entity—which it is—can cause serious legal and tax issues down the road. We will deal with both issues in this post.

 

Legal Issues When Commingling

The real reason you should incorporate or organize an LLC is for legal purposes. Taxes come along for the ride. 

The tax code treats certain incorporated businesses punitively: notably attorneys, accountants and doctors. When people in these professions want the liability protection of a corporation they are considered a personal service corporation (PSC). 

Commingling money can cost you big in taxes. The best tax professionals refuse to work with clients who commingle. Don't overpay your taxes. Never commingle! #commingling #comingling #taxes #taxplanning #IRS #sidehustle #smallbusiness #businessA PSC is not entitled to the graduated tax rates of regular corporations and therefore pay tax at the top corporate rate on all profits. New tax laws lessen the tax issues a bit now that the top corporate tax rate is a flat 21%, but other issues still abound. 

For these reasons we saw large partnerships form for doctors, attorneys and accountants. (Making partner is something every CPA and attorney aspired to.) 

The problem with large partnerships is that legal liability can be massive in these professions. The tax hit was so large that insurance was a cheaper route than the higher taxes of a corporation, However, it was a serious disadvantage.

And with attorneys taking the hit it was only a matter of time before a solution was devised. (The first LLC was allowed in 1977 in Wyoming when the state passed legislation allowing limited liability companies.) The limited liability corporation (or partnership) was created. 

The good news is that LLCs are superior to corporations in many respects. Organizing as an LLC and then electing to be treated as a regular or S corporation is quite common. 

Before I outline how dangerous commingling of business and personal funds are, let me first outline the legal difference between an LLC and corporation.

Legal Difference Between an LLC and Corporation

LLCs and corporations are organized at the state level so the rules can vary between state. I practice as a tax professional (enrolled agent) so what I am about to share is how I understand the difference between LLCs and corporations as told to me by attorneys. Always consult a competent legal professional prior to organizing a legal entity (LLC or corporation).

This is the one difference, of many, between the LLC and corporation I consider the most important. It is best illustrated by using two almost identical firms facing a legal challenge.

Example

Two groups of twenty doctors join together to start a practice. The first group of doctors organizes as a corporation. It does not matter if they are a regular or S corporation as those are tax designations and we are only considering legal protection in this example. The second groups of doctors organizes as an LLC. They can elect to be treated as an S corporation, but they are still legally an LLC.

A doctor from each practice face a lawsuit. In the corporation practice all doctors are liable for the acts of each other doctor (all-acts). The doctor sued in the LLC is the only doctor liable; the other doctors are not liable for the acts of other doctors in the LLC (own-acts).

 

This is a huge advantage to businesses with multiple owners. Not only is there a legal wall between your business and personal wealth; there is a wall between you and the other LLC members and their actions!

Serve yourself a big, juicy tax cut by never commingling. Lower your taxes and reach financial independence sooner by following this one simple rule. #taxcut #commingling #financial #financialindependence #retirement #business #smallbusinessEach state has their own laws governing how this will work in their state. The state you organize in is the state laws you follow. (You can organize an entity in any state even if you don’t do business there.) 

Limited liability, whether from an LLC or corporation, can be pierced. You may have heard the term “piercing the corporate veil”. What that means is certain actions can cause your personal belongings and wealth to be at risk even though you have the protective entity structure.

 

I don’t know if I can shout this loud enough. If you commingle personal and business funds you almost certainly lose all the asset legal protections provided by the LLC or corporation!

 

So, when you commingle you lose the single greatest advantage to having the entity structure.

Here are two simple rules to consider when contemplating commingling:

Rule 1. Commingling invalidates your LLC and all your personal assets are at risk: lake house, mountain retreat, boat, kids college fund etc are at risk in a lawsuit or asset seizure. 

Rule 2. No commingling. If confused, see rule 1.

But it gets worse!

 

Tax Issues When Commingling

Losing all your legal protection is a disaster, but then you face tax issues.

Commingling is the bane of every tax professional. Poor recordkeeping is time consuming to fix when time is at a premium during tax season. Bad records are so common virtually all accountants charge more to deal with poor, incomplete or missing records when preparing a tax return.

An informal survey on social media shows many tax professionals refuse to take clients with poor records and even break the engagement if poor records are turned in more than a few years. (It’s low margin work with lots of stress when time is in short supply. Top level tax professionals don’t have time for this foolishness.) The author has disengaged many clients over the years due to commingling.

Cathy Bryant, a former IRS revenue agent told me, “The fastest way to get into tax and money problems is to commingle funds.”

What does Bryant mean by this? Well, when you commingle funds you really have no idea what your real income and expenses are. The mixing of business and personal funds means the IRS can run over you, causing you to pay more taxes, and you have no recourse because you have no idea what your numbers really are. 

If you are a corporation or partnership (or LLC treated as such) you have the added issue of basis. There is no room in this post for a detailed review of basis, but know this: If you don’t know your basis there can be some very nasty tax surprises in your future.

Also, the IRS can revoke your S election if you commingle funds because you are not treating the S corporation like a separate entity. This means you could face serious additional taxes in an audit without recourse. Re-read this paragraph again S corp owners until this sinks in. If the IRS discovers commingling in an audit it could bankrupt you!

 

Avoiding Commingling

I hope I put the fear of God in you with the warnings above. Every tax professional should keep this post and show it to clients who commingle or are contemplating it. Remind the client the next step is ending the engagement. (Most tax professionals require an engagement letter be signed prior to working on an account. The engagement letter outlines the services provided and fees.)

Your legal protection is gone when you commingle. 

The IRS has you when you commingle. The IRS auditor will assess more tax and get away with it due to your poor records and commingling of personal and business funds. Revocation of your S election will be a financial disaster.

Avoiding commingling is actually very easy. If you don’t want to handle the bookkeeping yourself, hire it out. It is cheaper than overpaying your taxes and losing legal protections

Here are the rules you should follow when you have a business, no matter how small. Even a side hustle treated as a sole proprietorship should follow these rules.

 

Rule 1: Use separate bank accounts and records. The easiest way to keep personal and business monies separate is to have separate bank accounts for business use only and records dedicated to the business. Use any bookkeeping software you want, even an Excel file works.

When the business needs money you can invest money into your company by moving money from your personal account to the business account. This will show on your Balance Sheet equity accounts as a contribution or investment. It will add to equity basis for tax purposes; a good thing, especially for S corporations.

Once your business is profitable you can distribute money to the owner: you. Record the transaction as a distribution. You may also have a wage from your business if you are an S corporation. The distribution is the profits paid you (think of it as a dividend on your invested capital) after your wage is paid.

 

Rule 2: Treat the business like the separate entity it is. If you were the CEO of Apple you would not mix your personal funds with the corporations. I know, I know! You are not Apple. But you should still treat the business, even if 100% owned by you, as a separate entity (which it is).

There is no problem with you investing in your business or distributing excess funds. To do this you just transfer money into or out of the business account. The transaction is recorded on the books of the business accordingly.

Never deposit a business check to your personal account! The business should never pay your personal bills, either! (Transfer the money from the business to your personal account if you need business funds for personal expenses. This will leave a clean paper trail sure to please your tax professional and thwart a zealous IRS auditor.)

 

Rule 3: Consider a loan to/from shareholder account.  You can also lend money to and from your business.

When you have a small business it is hard to always separate all expenses. For example: you might have one mobile phone for business and personal. Having two phone would not make sense for such a small business. Since the phone is in your name you can pay the bill and have your business reimburse you for the business portion, currently a 60% safe harbor.

The same applies to mileage, meals or any other hard to separate business expenses. Your business can reimburse you for personal payment of business expenses. This is called an accountable plan and acceptable to the IRS (and distinguished tax professionals everywhere).  

Don't let the IRS tax your credit card rewards. If you commingle business or side hustle money with personal funds the IRS can tax some or all of your credit card rewards. #creditcardrewards #rewards #creditcard #taxes #IRS #comminglingI understand many small businesses frequently transact funds with an owner. Rather than record each of these transfers in an equity account, consider using a loan to or from shareholder account. If you take many distributions during the year treat it as a loan to shareholder. On the last day of the year convert the loan to a distribution. It is cleaner than running numerous transactions through equity accounts.

Credit card rewards also cause many business owners to commingle funds. I understand you want the most cash back so you want to run personal and business on one card. 

This isn’t a problem as long as it is one card and not credit card churning. If you want to churn, don’t involve the business; it becomes a mess really fast with the legal and tax consequences listed above.

However, you can have one credit card for business and personal. Reconcile the business portion of expenses on the card. If you pay with a business check make sure you list the personal spending as a loan to shareholder. If you pay the credit card bill with a personal check either get a reimbursement from the business or record as a loan from shareholder.

 

Commingling is the bane of the accounting, bookkeeping and tax preparation businesses of the world. Keep business accounts and spending separate. 

Good tax professionals will either charge for fixing your books during tax season and are likely to disengage. Then you are left with a second tier professional, if you can even find one willing to deal with such a mess.

In a tax audit you don’t want a revenue agent to see you commingled funds. They will have a field day with you if you have. 

Most of all, you want clean books so you know where your business stands financially and can make better business decisions. 

And if your tax professional asked you to read this it means you either comply or are gone. Life is too short and tax professionals are under a lot of stress. Help them help you pay less tax. Never commingle funds.

Ever!

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.