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It Might be Time to Give up on the S Corporation

On a sunny spring weekend in Seattle nearly five years ago I attended a conference. In the audience was Pete Adeney, aka, Mr. Money Mustache (MMM). 

MMM took to my message immediately, interrupting my presentation to inform me I was his new accountant. I took it in stride. My gift to gab exceeded my surprise.

What caught the ear of MMM was a strategy I have used for decades to save business clients money: the S corporation.

The beauty of the S corporation is that some of the profits flow through to the owner outside self employment or FICA taxes. At 15.3% for many, it is a meaningful savings.

Not everyone should use an S corporation (or LLC electing to be treated as such).  Side hustles frequently do not have enough profit to make it work. Profits under $30,000 are best left as a sole proprietorship or partnership, without consideration for legal and other matters. Between $30,000 and $50,000 it is time to start running the numbers and once profits exceed $50,000, and are likely to continue to do so, you need to get serious about an S corporation.

Many factors come into play. The previous paragraph is only a suggestion and not hard and fast tax advice. I have S corporations in my office with less than $30,000 in profits and businesses with over $50,000 in profits still waiting for the S corporation to benefit them.

That presentation in Seattle five years ago was the spur for me to start this blog and is one of my first posts. It also prompted MMM to publish on the topic as well

And now the advice is all wrong.

 

More than One Flavor of Corporation

Corporations come in two flavors: the regular, or C, corporation and the S corporation. Small businesses are familiar with the S corporation because it was designed for them. Profits flow to the owners because the S corporation rarely pays income taxes. 

Regular corporations are generally larger due to tax issues. Most stocks listed on U.S. exchanges are C corporations. 

Small business owners: deduct all your child care expenses. New tax laws have made it easier for owners to deduct personal tax-free benefits. #ICHRA #HRA #QSEHRA #Fringebenefits #employeebenefits #childcare #deductionsBoth flavors of corporation can be organized in one of two ways. The first is to organize as a corporation and the other is to organize an LLC and elect to be treated as a corporation for tax purposes. You can then elect S status, if desired.

The S corporation avoids double taxation on dividends paid out of profits. The drawback is that C corporations can provide more benefits to owners without restrictions. The dreaded “except for 2% shareholders” phrase in the tax code limits the advantages of the S corporation. In the past C corporations faced a higher income tax rate compared to tax rates for individuals. 

The Tax Cuts and Jobs Act of 2017 (TCJA) changed all that.

Regular corporations prior to the TCJA had a graduated tax rate on profits that started at 15% and climbed to 35%. C corporations now pay a flat 21% income tax rate. Individual tax rates (the rate profits from an S corporation are taxed at as they flow to the owners) top out at 37%.

Instead of profits flowing to the owners on a K-1 annually, a regular corporation pays taxes on its income and pays dividends from the remaining profits. The dividend can be qualified, but multiple additional issues abound with dividends paid from a closely held C corporation we will not be able to address in this post. (The link is to an old article from the AICPA which is still relevant today.)

C corporation dividends are NOT deductible by the corporation, but are taxable to the recipient, hence the double taxation since the corporation already paid income tax on the profits. The corporation paid income tax on the profits at 21% and the owners pay tax again at the rate for dividends (qualified or non-qualified). 

Up to this point it still looks like the S corporation is the way to go for virtually all small businesses and you would be right. However, for fringe benefit purposes, an S corporation is treated as a partnership, and a greater than 2% shareholder is treated as a partner rather than as an employee. To reiterate, this is for fringe benefit purposes only. And it makes all the difference.

 

No Simple Choices

S corporation owners still enjoys access to all the retirement plans of a regular corporation with some modifications. Health insurance premiums (IRC Secs. 105 and 106) are generally added to wages and then deducted on the personal return (Rev. Rul. 91-26). The same applies to group life insurance up to $50,000 (IRC Sec. 79) and meals and lodging for the employer’s convenience (IRC Sec. 119).

Get the most out of your tax-free fringe benefits as a small business owner. #fringebenefits #businessowner #smallbusiness #employeeawards #watch #ICHRA #QSEHRAThis is where the choice is less clear than in the past. The above fringe benefits still have value to the owner of an S corporation as long as a few hoops are jumped through. The benefits are available to C corporation owners as well, just with fewer hoops to jump through.

Numerous benefits available tax-free to employees do not apply to 2% shareholders of an S corporation. With the C corporation tax rate at a low 21% and dividends likely qualified (taxed on the personal return at the long-term capital gains (LTCG) rate), double taxes may no longer be the issue it once was. 

For some individuals, the LTCG tax rate can be 0%. This stops double taxation of dividends in its tracks. Even if dividends are taxed it is at the lower LTCG rate rather than at ordinary income rates. The top LTCG rate is currently 20%, however, there is a small (on percentage terms) additional tax on higher incomes that could push the effective LTCG rate to 23.9%.

But the benefits are the real prize. How many fringe benefits you give the owners will determine if the C corporation is better for you. Some of these benefits are massive, allowing for 5-figure deductions. Something you can’t do with an S corporation.

 

Deducting Fringe Benefits

We will touch on the most common and valuable fringe benefits you can deduct with a C corporation as an owner where it isn’t allowed as a 2% or greater shareholder in an S corporation in most cases.

 

Flexible Spending Account (FSA): This is the “use-it-or-lose-it” account you might be familiar with. Employees are allowed to withhold from their wages or salary up to $2,700 (for 2019) per year for medical expenses. If married, a spouse can do the same. 

The FSA does take planning. If the employer plan allows, up to $500 can be carried over to the next year OR up to a 2 1/2 month grace period allowed to use the money in the HSA. 

The FSA is a salary deferral; a deduction is not allowed since it is already excluded from income.

You can use FSA funds for uninsured health costs, such as: eyeglasses and exams or a gym membership or message therapy with a doctor’s prescription.

You can read more about the FSA here.

There is also a Dependent Care Flexible Spending Account (DCFSA) where employees can elect to exclude up to $5,000 from income for dependent care expenses. The employer can also provide some or all of this amount as a tax-free fringe benefit. FICA and FUTA are also avoided. 

There are several opportunities with a Dependent Care Assistance program (IRC Sec. 129) and a credit for employers covering qualified child care expenses (IRC Sec. 45F). You can read details here.

 

Deduct all your health insurance premiums and medical care costs tax-free. #healthinsurance #benefits #employee benefits #healthinsurancepremiums #medicalcosts #deductiblemedicalcosts Deductibleinsurance #HRA #QSEHRA #ICHRAHealth Reimbursement Accounts (HRA): This might be the number one reason a small business owner may choose the C over the S corporation. 

Once again we have two choices. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA). The ICHRA is available starting January 1, 2020; the QSEHRA is currently available.

The QSEHRA allows a tax-free benefit to individuals of $5,150 and $10,450 for families in 2019 for medical expenses, including insurance premiums (though the Premium Tax Credit (PTC) is reduced by the amount of the benefit, if claimed). The employer pays this benefit. The employee has nothing to report on her return with the exception of the adjustment to the PTC.

The new ICHRA has no annual cap. Yes, you can deduct a lot under the ICHRA! There are some differences, however. If you receive any benefit under an ICHRA you cannot get any Premium Tax Credit. 

It should be noted that the QSEHRA and ICHRA are for employers without group health insurance. Employees with individual insurance is allowed and what these plans are designed for.

There are several considerations with HRAs. Here is a good chart comparing the two.

 

Employer Provided Vehicle: An S corporation can provide the same benefit, but it is cleaner and easier with a C corporation. The vehicle can be used by the employee for business or personal purposes and, depending on the facts and circumstances, may be tax-free to the employee.

There are a lot of moving parts to the employer provided vehicle. Discuss this option with your tax professional to determine if it is of value for you.

 

Employee Achievement Awards (EAA) (IRC Sec. 274(j): If you have a written plan it is a qualified plan. The qualified plan can offer awards up to $1,600; $400 if not a qualified plan.

The TCJA changed the rules a bit for the EAA. Cash and equivalents are not allowed: cash, gift cards, gift coupons, gift certificates, vacations, meals, lodging, event tickets, stocks, bonds or securities. Only arrangements that confer the right to select and receive tangible personal property (a watch or plaque, for example) from a limited assortment of items preselected or preapproved by the employer are allowed. (IRC Sec. 274(j)(3). The award must not appear as disguised compensation. There are additional limitations.

 

The Best Route

There are many more fringe benefits to consider. To keep this post brief I will punt on the other tax-free fringe benefits. It is recommended you review these issues with your tax professional as there are significant opportunities to reduce taxes with these strategies.

Now you need to determine if the S corporation is best for you. It boils down to the fringe benefits. The lower flat tax rate for C corporations are a consideration and your personal tax rate on dividends from your corporation will play a role, too.

However, the biggest determinant will be tax-free fringe benefits. And when it comes to benefits the HRA will top the list. Large deductions allowed with a C corporation can remove enough income from the taxable column to create an overall tax for the C corporation lower than the S corporation. It does take planning to determine this.

The QSEHRA is a powerful tool under the TCJA personal and corporate tax rates. The new ICHRA is something you must examine. With virtually unlimited deductions for health related expenses and insurance premiums, the ICHRA will make the C corporation more valuable to small business owners than ever before.

There is no shortcut. You have to put pencil to paper or have a tax professional do it for you. It might be worth paying a seasoned tax pro to help you determine the best route. Every step inserts additional tax considerations tax professional should be familiar with that a novice may not. Investing in your business can pay hansom rewards.

 

Caveats

Tax are never easy. All the good ideas in this post still need a warning label.

If you are an LLC electing to be treated as an S corporation you can elect at any time to become a regular corporation (terminate the S election). However, you cannot elect to be an S corporation for at least five years, even if circumstances (or the tax code) change.

Also, if you are a C corporation with accumulated earnings that elects S status your tax return becomes much more complicated and probably more expensive to prepare. There are additional risks for an S corporation that spent any time as a C corporation; you should discuss these potential issues with a tax professional. The risks could subject the S corporation to additional taxes. Get all the facts before jumping.

Finally, in 2025 the tax code reverts back to 2017 rules for individuals if Congress doesn’t act. Corporate changes were permanent. One more thing to consider before you make a decision.

 

A small business should hire a competent tax professional to deal with the considerations put forth in this post. Too many variables can intercede.

This post allows you to ask good questions of your tax professional. A small investment with the taxguy should pay you back in multitudes of order compared to the fee invoiced. 

Don’t accept the S corporation as the default for small businesses anymore. The C corporation might save you more money.

Print this post out and/or send a copy to your tax professional and ask if this is something that could benefit you. Pay the nice tax professional. She will earn her keep on this one and it is well worth it to you. 

 

 

More Wealth Building Resources

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. 

Should We Soak the Rich Into Oblivion?

In 1971 the band Ten Years After released their only hit, I’d Love to Change the World. The song was a protest of the Vietnam War, but also a lament on all the ills that had befallen society. 

Many took exception to the lyrics:

Tax the rich, feed the poor

‘Til there are no rich no more?

As we head into another presidential election season here in the states we are hearing more about taxes. While rhetoric about taxing the rich more is fun, it misses the point. Tax rates don’t cause social ills.

I don’t know anyone against feeding the poor. People of faith and of high ethical and moral fiber consider it a duty to help those in need. Feeding the hungry is good policy.

But will taxing the rich into oblivion actual end hunger? History says no! 

Bernie Sanders (I promise this is not a political post) has gone on the record as saying a wealth tax should be instituted until there are no more billionaires. Now I think Bernie Sanders is a heck of a nice guy and I like him, but he is wrong on this. By a natural extension, if the very rich should be extinct, should not rich nations be similarly penalized until there are no more rich nations? We’ve tried that before. It’s called communism and it did not work!

The refrain of our song in question continues:

I’d love to change the world

But I don’t know what to do

So I leave it up to you.

I accept that challenge. 

In this article we will discuss what the correct level of tax is to maximize government revenue without harming the economy, cutting government spending and the wealth tax proposed by several presidential candidates.

 

Laffer Curve

The Laffer Curve estimating maximum government revenue at 70% , as estimated by Trabant and Uhlig in 2017.

The Laffer Curve is named after Arthur Laffer who popularized the idea that levels of taxation and government revenues are interconnected. The idea is that anytime tax rates deviate from this optimal level government revenues will be negatively affected.

The top tax bracket has been declining in the U.S. since the early 1980s based upon the promise from the Laffer curve. 

The Laffer Curve is simple to graph and explain. It makes sense. If you lower taxes the spur to economic growth can actually increase government revenue. It’s almost like people advocating tax cuts want the government to collect more taxes! 

Another easy to understand part is when taxes are at the extremes. A tax rate of 0% obviously raised no revenue for the government. The is true of a 100% tax rate. After the first year there is nothing left to tax.

In the early 1920s the top tax bracket stood at 73% in the U.S. Then Secretary of the Treasury Andrew Mellon made the argument the high tax rates were harming economic growth and that lowering tax rates could actually increase government revenue. It wasn’t call the Laffer Curve back then (Art Laffer was still in the future). But the theory was the same.

Art Laffer has been discredited recently with alarming failures of his principle. He pushed states to lower taxes under the guise it would actually increase government receipts. Instead the state governments ran massive budget deficits and had to cut critical services, gut education and layoff teachers and increase taxes.

The Tax Cuts and Jobs Act of 2017 offered the same promise. A massive tax cut was passed by Congress and signed by the president. But government receipts barely moved. As spending increased the budget deficit exploded and now hovers around $1 trillion per year while the economic expansion is now at record length. Should there be a national crisis there could be problems. Funding a recovery from a natural disaster or military event will be more difficult if even possible, not to speak of necessary government stimulus needed during an economic slowdown.

Top historical tax bracket in the U.S. Source: https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

 

The Right Level of Tax

Nobody wants to hear they need to pay higher taxes. I certainly enjoy a lower tax rate and work hard to help my clients pay the least tax possible legally. 

However, there is a problem. Lowering taxes no longer increases government revenue. Corporate tax revenue declined nearly a third  after the Tax Cuts and Jobs Act of 2017. 

I disagree with Mathias Trabandt and Harald Uhlig (see graph above). A 70% top income tax rate seems excessive to this old accountant’s eyes. 

Source: https://www.cbo.gov/about/products/budget-economic-data#2

As you can see from the above chart, personal income taxes receipts grew at about the nominal rate of GDP growth. Corporate taxes declined massively.

Some would argue corporate taxes are paid by people anyway so the lower rates helps everyone. But that begs two questions.

First, shouldn’t tax cuts increase government revenue as promised by the Laffer Curve? Individual tax collections increased about the same amount as corporate collections decreased. So the expected increase in revenue didn’t materialize and the added government spending blew a hole in the budget.

Second, if corporations are “persons” in the eyes of the law, as we are told every time a corporation want to make a political contribution, shouldn’t they be taxed as like every other person? Asking for a friend.

The truth is we have focused too much on the Laffer Curve. Most people never pay taxes at the highest rate. The level of taxes everyone else pays also plays a role. The top bracket also contains at least two lies. Taxpayers with earned income are slapped with an additional payroll tax (Social Security and Medicare tax, aka FICA or self-employment tax). Wages up to $132,900 in 2019 are hit with a 6.2% tax (double that for the self-employed) for Social Security. Medicare adds another 1.45% (double again to the self employed) on all wages and self-employment income. (Additional Medicare taxes can also apply in some instances for higher incomers.)

The point here is lower taxes will not solve the government’s budget problems. We need to cut spending if we are ever to gain sanity in Washington.

I don’t know the exact “right” level of tax. The “right” level is not always the level we should tax people at either. Milking taxpayers for maximum tax payments seems a bit obtuse to me. Less tax creates the opportunity for more wealth. That is good for any nation in the long run. In the short run, too.

 

Cutting Government Spending

Whenever I make a suggestion on government tax policy I always get a comment (many comments actually) about cutting government spending. This is where I’m glad I can sit in my easy chair and a mutter endlessly, “Lower Taxes. Lower Taxes. Lower taxes.”

Fixing government spending is easy to say and near impossible to accomplish. Social Security, Medicare, the military and interest on the debt consume virtually all federal government receipts! If we cut everything else to zero we still have a problem. 

The 2018 federal budget: outlays and revenues Source: https://www.cbo.gov/system/files/2019-06/55342-2018-budget.pdf

When the government has $1.4 trillion in discretionary spending and a $1 trillion budget deficit you need to cut more than just a bit of fat; you need a cleaver to sever arms and legs of government spending. Thank God I’m not an elected official who really has to figure this out before it is too late. 

Do we cut one of the Big 4?

We could cut Social Security and Medicare, but the government also collects a load of tax revenue from this source so this one is a non-starter unless you think we should keep collecting the tax while refusing to pay the benefits. Some fat can be trimmed here, but the pickings are slim. Not enough to make a large dent in the budget deficit.

We could default on the debt to save interest, but good luck ever borrowing money again at a reasonable rate. The next recession or military conflict we would be on our own.

And talking about the military. . .  Maybe a bit could be trimmed from national defense. There might be real savings if the military cut waste. But that is an ongoing battle that is never won. We need a strong military so meaningful cuts here will be difficult.

What remain are the discretionary items. So what do we cut here. We only need $1 trillion of reductions.

How about the TSA? Transportation? Agriculture? Maybe we can reduce infrastructure. The roads are pretty good. Right? 

If you are like me you can find waste to cut. Also like me, I bet you struggle with finding $1 trillion in cuts.

So if we are ever to balance the federal budget we are back to taxes; our favorite hated topic.

 

Wealth Tax

And this is where we came in. Bernie Sanders wants to tax the rich ’til there are no rich no more. Elizabeth Warren also advocates a wealth tax, albeit a smaller rate.

If we can’t tax income anymore then a wealth tax might be a reasonable suggestion. Sanders wants an 8% annual wealth tax. I feel the acid rising in my throat every time I hear this.

Warren has a smaller wealth tax. She also has a “Medicare for All” plan. In a few weeks I’ll be discussing a workable “Medicare for All” plan that actually cuts taxes while covering everyone if that is what people want. Stay tuned. You will like my solution to America’s health crisis. 

In either case a wealth tax is levied on the wealthy (not income, but actual wealth/net worth). I do have a problem with the wealth tax, however. 

Let’s use The Sanders plan because it illustrates the negative consequences easier. An 8% wealth tax would be paid by those with say $50 million or more in net worth. You can go to a billion net worth if you want; the problem is the same.

The assumption of a wealth tax is that rich people only do stupid or irritating stuff with their money and don’t deserve it.  I mean, thing about it. Elon Musk is building new businesses and technologies with his billions. How rude. Those created jobs are not worth it if we as a society must look at a billionaire like Musk.

Yes, I’m being facetious. That is the point. How can Musk create the technologies of tomorrow that will benefit the nation and environment, create jobs, and provide better products without the resources to do so? I don’t know if anyone has noticed, but it takes serious cash to start an electric car company, solar company and a space travel company. Without the super rich these dreams would go unfilled along with all the jobs.

I’m not saying a wealth tax is wrong or off the table. I’m saying treating a wealth tax like a punishment for being stupid enough to believe in the American Dream is really, really bad policy. 

Have you ever read the stories (or saw the documentaries) on how some of these super rich got rich? Bill Gates worked non-stop at Microsoft for decades. He licked Tang out of his hand while working. Yes, without the water! Just so he could stay at his computer a few minutes more writing code. 

Steve Jobs was tireless in his pursuit of creating excellent products. Jeff Bezos is still busting tail at Amazon changing the world. The stories go on endless. A few inherited their wealth. Most busted their tail growing a business. They gave up their life to create something magnificent. And they got really rich along the way. So what did they do? Started yet another company to provide us with still better goods and services. 

Musk built his fortune from his share of ownership in PayPal. That sale funded Tesla and all the rest. A wealth tax would take Musk and Tesla out. You can either tax the rich ’til there are no rich no more or you can have environmentally friendly products like solar power and electric cars. Not to mention the leaps made in battery storage technology. Last I checked the folks supporting the wealth tax guys are also concerned about the environment. You can’t have both. You choose.

 

Once again I thank God it isn’t my job to fix the budget mess in Washington. I do not like the idea of higher taxes. No matter what solution is used there will be many unhappy faces in the crowd. If nothing is done the problem will continue to spiral out of control until a government collapse. Then we will cut spending while taxes skyrocket; the worst of all worlds.

From a historical standpoint income taxes are low in the U.S. That doesn’t mean taxes should be meaningfully higher. In the 1990s we balanced the budget in Washington. Perhaps that was the point where we maxed out the Laffer Curve. 

Who knows for sure? It was a different world back then. The internet was in its infancy and promising the world. The dotcom bubble filled government coffers. Fears of Y2K (remember that?) spiked business spending. The stock market kept Washington flush with cash. Today is a different world.

I laid out the issue. I leave it to you, kind readers, to decide the best course. A lively debate in the comments is my dream. Politicians read this blog and if we can come up with workable solutions, maybe, just maybe, we can make a difference while keeping the American Dream alive.

 

 

 

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. 

Investing in a Retirement Account is Like Taking Out a Loan

Traditional retirement plan contributions come with a loan attached to it with a variable rate of interest, to be determined at a later date by the tax code and your income level. #interestrate #interest #loan #IRS #taxesEver since the FIRE (financial independence/early retirement) movement hit the scene I started to question conventional financial wisdom. 

Most of the advice preached was re-purposed from generations past. A penny saved is a penny earned turned into a variety of frugal anecdotes. You can’t read Proverbs (from the Bible) and not recognize the many similarities in advice. Sound money principles have ancient roots.

For a time the FIRE community welcomed me as one of their own before I stepped back a bit to cut my own path. (No sense in another voice calling out the same message.) I’m still part of the community, but gave myself permission to question the dictums of said community. The hope was to build a bridge from where we are to a higher level.

It also became clear my net worth was near the top of the demographic. This bothered me and caused me to conclude something was wrong.  How could a backwoods farm boy with nothing more than a high school education, a few college courses and a full personal library do better than virtually all within a community so dedicated to wealth?

I don’t trust luck to carry me that far. It had to be something else.

Then I started reading what was published in the tax field and felt a great disturbance in the force. While the advice was fundamentally sound, it also lacked in effectiveness if brought to task. All too often blogs were using IRS publications as their authority. (The IRS is NOT a tax authority; they are a bill collector.) If people followed this advice and the IRS ever challenged (likely with so many people tempting fate) there was a real risk of loss. (If you go to Tax Court and say you used an IRS publication as your substantial authority you lose automatically even of you a right! IRS publications have zero authority in Tax Court.)

Sometimes the math was fuzzy. A blogger might claim a certain level of frugality when it didn’t add up. Some claimed a level of wealth that also didn’t add up. Either the rules of mathematics were suspended or someone was trying to pull the wool over their reader’s eyes.

The biggest area of concern involved retirement accounts. The mantra of filling retirement accounts to the hilt for long periods of time has some obvious issues

Some retirement account problems are less apparent. Everyone keeps saying this is the best thing since sliced bread. But is it? 

So I started running some numbers and it wasn’t as clear as most are led to believe. There was something fundamentally wrong with the advice.

 

Numbers Game

The issue is with traditional retirement accounts (IRA, 401(k), 457, 403(b), Keogh, profit-sharing and cash balance plans); Roth type retirement plans don’t have this issue.

Don't lose your retirement account to hidden taxes. Current tax savings are dwarfed by future taxes on all the gains at the highest rate allowed by law. It's your money! Don't give it to the IRS. #retirement #account #hidden #taxesRoth style retirement plans don’t get an up-front deduction, but grow tax-free. Most financial blogs consider this the best animal in the yard. I agree.

A close cousin — if you qualify for it — is the health savings account where you get a deduction and tax-free growth, to be used for qualified medical expenses. The biggest drawback of the HSA is the amount you can invest annually is relatively small. 

Roth retirement plans are limited in many cases based on income on if the employer has the option in their 401(k) . The maximum Roth IRA contribution is also relatively small. (Exact limits are excluded from this post so changes in the limit don’t distract from the evergreen content.)

The mega-backdoor Roth (a favorite of the FIRE community) allows for sizable Roth contributions with one caveat: it’s probably illegal (according to the IRS). The IRS hasn’t attacked the mega-backdoor Roth because there is no current revenue to be raised by taking such action; Roth investments are not deductible.

However, once these accounts grow in size the IRS could come back and disallow the tax-free advantage, plus interest and penalties. If the IRS has a kind heart (ahem) they could forgo the excess contribution issues which would certainly mean penalties several hundred percent of the entire investment. You decide what course you wish to take. 

The safest retirement plan route means traditional retirement plan investments after you maximized your Roth contributions. Or is it?

 

Loan Document

Traditional retirement plan contributions come with a loan attached to it with a variable rate of interest, to be determined at a later date by the tax code and your income level.

All you debt-free warriors should feel a bit nervous at this point. Just as a mortgage-free home still has loan-like obligations (property taxes, insurance, maintenance), a traditional retirement account has an unannounced interest-like expense and it is a big one.

And this is what disturbed me so much that I had to publish a post on it. 

We all know that traditional retirement accounts get a tax deduction at your ordinary tax rate up to the retirement plan contribution limits. We should also know that these accounts grow tax-deferred and that all distributions are taxed at ordinary rates.

This is a real problem if your goal is to maximize your net worth. In the early years the tax benefit makes it seem like it is the best deal on the planet. But as time passes the math tells a darker tale.

Let’s start with a simple example to get a fundamental understanding of this matter:

Joe contributes $10,000 to his t401(k). This is subtracted from his income on the W-2 and never reaches his tax return. His tax bracket is 30%.

We will disregard actual tax brackets as they change over time and we are more interested in a workable formula for determining the best course currently and for future readers as well.

The good news is Joe saved $3,000 on his taxes this year. However, in 40 years, when Joe retires, he discovers his investment in a broad-based index fund performed as index funds have over long periods in the past: around 7% per year on average. Joe is a very happy man! He now has $149,744.58. 

If Joe were to take the entire amount in one year it would be a fairly large tax. However, Joe decides to take the money out over a number of years. As a result his ordinary tax rate is only 15%. (We will disregard taxes on Social Security benefits and other similar issues to make calculations easier.)

Joe now has a tax bill of $22,462. (Numbers are rounded.) That is $19,462 more in additional tax! Call the 19 grand a tax or anything else you want, but it looks like interest on the $3,000 to this accountant.

Even though Joe saw his tax rate decline by half in retirement he still saw his tax bill increase over 700%. His interest rate would be slightly less than 5.2% annualized in this situation assuming Joe never saw his account value increase after he started taking distributions, an unlikely event.

 

Early Payments

If I approached you and said I would borrow you $20,000 at 5.2% would you take it? Unless you have bad credit that is a high interest rate, especially since it in not deductible. Worse, you can’t make early payments to get out of the deal! You can’t jump ship until you are at least 59 1/2 years old. And if you are stubborn I’ll kick you overboard at 70 1/2. 

The good news is I’m a nice guy and will not do that to you. On the other hand, Congress has passed laws the IRS carries out doing just that.

And we haven’t seen the worst part yet! Retirement plan distribution included in income can cause more of your Social Security benefits to be taxed and can also increase the premium you pay for Medicare once you reach age 65.

A small tax deduction today can do real damage in the future. This is why I say I want multiple tax benefits before I get excited about a tax deduction

All this assumes your tax bracket drops when you retire. Considering the massive government fiscal deficits during a strong economy, it seems to this accountant taxes will go up in the future. And if your income remains high in retirement your tax bracket will also be higher.

Consider this: If Joe had a 30% ordinary tax rate on his retirement plan distributions his taxes would have climbed to $44,923, a full 7% annualized rate. For people with good credit this is a massive interest rate and almost nobody is thinking about this.

 

The Cold Equations

Joe’s example is unfair. First, Joe will put a lot more into his retirement plan over his lifetime, therefore, the damage will be much larger.

Second, retirement plan distributions happen over a number of years. While this might sound like a solution to the problem, it actually makes it worse as the investments continue to grow over time.

Third, smaller account balances experience the same issue only with smaller numbers and that tax rates might be lower due to the lower income level.

Fourth, early retirement does not solve the problem. Yes, you can take a limited amount of money from a traditional retirement account before age 59 1/2 without penalty under Section 72(t). This only reduces the amount of time the money has to grow; it doesn’t resolve the issue.

No matter how you cut it, traditional retirement accounts are best viewed as loans from the government, due in retirement. If you don’t pay the piper, your beneficiaries will.

 

 

Alternatives

Your experience will differ from that of others. You can use the simple example above to determine your implied interest rate assessed as tax in the future. You may discover this isn’t an issue for you. Or, you might need a moment for reflective prayer.

We saw that greed for a current tax deduction produces a 5%+ interest rate loan from the government, payable in retirement. So, what alternatives are there?

The best comparison is doing nothing at all (investing in a non-qualified account). You still invest in the same index fund. Dividends and capital gains are taxed at the lower long-term capital gains (LTCG) tax rate (15% or less for most taxpayers) instead of ordinary rates later (up to 37% federal, plus state income taxes). 

Since the money is outside a traditional retirement account you don’t have to worry about early distributions or required minimum distributions. And if you die your beneficiaries get a step-up in basis the retirement accounts don’t get. Gains on these investments are also taxed at the lower LTCG rate. 

 

Matching

I can hear the complaint already: What if my employer matches?

A valid argument. We’ll go back to Joe again and assume his employer matched his contribution 100%.

Joe invested $10,000 of his own money and his employer matched his retirement plan contribution with another $10,000. 

Joe still gets a deduction worth $3,000 for his contribution. The employer’s match is free money and not taxed until Joe takes the money out.

In total, Joe has $20,000 invested in his retirement account. His account grows to $299,489 in 40 years. The tax on this at a 15% tax rate is: $44,923. 

The initial tax benefit to Joe is $3,000, plus $10,000 from his employer, for a total of $13,000. The implied interest rate in this situation is around 3.15%.

The lesson of this part of the story is that using your employer’s retirement plan up to the match maximum is still a good idea for most. After hitting the matching maximum you might be better served putting the rest into a non-qualified account, however.

 

Smart readers will also be quick to point out the extra tax savings means you have more to invest which mitigates any of the extra taxes owed in the future. This would be true if people actually did that.

When was the last time you invested your tax savings from a traditional retirement account investment? Where did you invest it? Uh-huh. Thought so. You spend the tax savings as most do.

(If you are one of the few who actually pull the tax savings from the family budget and invest it in a non-qualified account my hat comes off to you. You still need to run the numbers to verify the best course of action.)

 

Facts and Circumstances

You can’t read tax law for more than a few minutes before running across the words “facts and circumstances”. And this situation is no different.

The IRS has hidden interest-like charges on retirement accounts. Here is how to avoid them. #avoidtaxes #taxes #retirement #IRS #interestI gave you the tools to build a working plan based on your facts and circumstances. Use a future value calculator to determine the interest rate the tax code is forcing you to pay if you use traditional retirement accounts. 

Employer matching is a real benefit that is diminished by the tax code after very long periods of time. (I would focus on the employer match closely as real value can be found there.)

After the employer match and available Roth retirement plan contributions allowed are exhausted you might find non-qualified accounts the best course of action, for you

The important thing is that you are reading this. That means you are more likely to run your numbers for the best options, for you

There are a lot of factors at play. Index funds still kick out dividends and some capital gains which are currently taxed. This slightly reduced the implied interest rate of the traditional retirement plan if you are prone to investing tax savings. It also assumes you keep your fingers off the pile until retirement. 

The one thing to remember is that deferred taxes frequently come with an implied interest rate paid as a higher future tax.

This is the kind of stuff I think about in the dark of the night. It might also be the prime reason I top the net worth list at Rockstar Finance.

 

 

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. 

Why You Should Rent to Your Business

One of the most powerful tax strategies a small business owner has is the S corporation. Under most circumstances when a small business has grown beyond $30,000 to $50,000 of annual profits it is time to consider organizing as an S corporation or LLC electing to be treated as an S corporation for tax purposes. 

The tax savings can be significant. A sole proprietorship is taxed at ordinary rates, plus self-employment tax. For 2019 the SE tax is 15.3% of the first $132,900 of partnership and/or sole proprietorship profits. (If you have wages from other sources this is included in the $132,900. Once you exceed that limit from all these sources combined the SE tax declines to 2.9%.) Partnerships pass profits to the owners where they pay the SE tax along with income tax. For partnerships, guaranteed payments to partners and profits are both subject to the SE tax. 

An S corporation does not pay income tax. Instead, all the profits are passed-through to the owners of the entity and taxed as ordinary income only; SE tax does not apply to profits passed to owners of an S corporation. Owners of an S corporation are required to be paid reasonable compensation. The remaining profits avoid payroll taxes (FICA and FUTA) and SE tax. 

Small business owners usually want some legal protections as well. The corporate or LLC structure is available to accomplish these goals. The LLC is more flexible with additional legal advantages than straight corporate entities.

Once organized, the LLC can then elect to take on the characteristics of other types of entities for tax purposes. The LLC does NOT have a tax form at the IRS. The LLC either defaults to a disregarded entity (sole proprietorship or partnership if more than one owner) or elects to be treated as a corporation. The LLC can elect S status if they inform the IRS they want to be treated as a corporation. These are two separate elections: electing to be treated as a corporation (Form 8832) and then electing to be treated as an S corporation (Form 2553).

I discussed these advantages in greater detail in the past.

 

Proper Allocation of Assets

If you had an attorney handle your LLC set-up and a qualified tax professional handle the structuring of assets inside and outside of the business you already know the S corporation rarely, if ever, has real estate inside it. 

The proper structure of a business where the owners also control the real estate is to organize the business LLC, treated as an S corporation, to hold the business only and a separate LLC, defaulting to a disregarded entity, for the real estate. The business LLC then pays rent to the LLC holding the real estate. 

Recently a reader on this blog asked why this is important:

Comment from Hobo Millionaire:

Keith, would you mind explaining the benefit of you renting to your business vs your business buying the building and paying a note over time. Is there a tax issue with the depreciation? You can depreciate/offset your taxes and the business can’t? A specific post on this setup, showing actual numbers, would be great.

We will discuss why you never want to own real estate inside an S corporation or an LLC treated as such. 

Most of the time it is a mild inconvenience only. Then there are instances where the legal and tax problems are significant and serious.

Every issue surrounding separating the business entity from the real estate holding entity are easily remedied. 

 

Legal Problems

There is no law requiring you to separate the business from the real estate. However, the LLC is a legal structure designed to protect the LLC owners. If the real estate and business are held within one LLC, the real estate is at risk if the business gets sued. Depending on the industry, this can be a serious issue or a low-risk probability.

Separating business from real estate also makes it easier to sell fractional ownership of each easier. If the real estate is held inside the business LLC it is impossible to sell the real estate (or business) without selling the same fraction of the other at the same time. 

Example: If you sell 10% of the business LLC and the real estate is held within that LLC, you have sold 10% of the business and real estate. 

Held separately you can sell all or a fraction of either the business or real estate in any fraction you want. You can also add another member (or have fewer members) to the real estate investment without also including the individual in the business side of the equation. 

Once real estate is inside an S corporation there is no easy solution to removing it. Tax issues of holding real estate with a business inside the same LLC can be significant. 

Removing real estate from an LLC is deemed a sale of the real estate for tax purposes. This means all the gains and recapture of depreciation are currently reported and taxed accordingly. Even if you are a 100% owner of the LLC and remove the real estate from the LLC to your name only (ownership really hasn’t changed, now has it?) you will be taxed on the gains! 

Therefore, if you have real estate inside an S corporation it might be better to keep it there even though it isn’t an ideal situation. You should consult a qualified attorney and/or tax professional with experience in this area of practice to avoid making a bad situation worse.

 

Serious Tax Issues

S corporations are not taxed except in a few situations. In each situation where an S corporation does pay tax the S corporation was a C corporation first for a period of time. (Electing S status at the time the corporation is organized means there was no time when the company functioned as a regular (C) corporation.) 

Holding real estate inside an S corporation with accumulated earning and profits (AE&P) from when it was a C corporation has tax consequences. 

S corporations are subject to tax on Excess Net Passive Income (ENPI) when :

  1. The S corporation’s passive investment income is more than 25% of gross receipts, and
  2. At the end of the year the S corporation has AE&P from when it was a regular corporation.

The ENPI tax rate is 35%! Lets look at an example of where an S corporation might pay the ENPI tax.

XYZ Corp elects to be an S corporation with AE&P. XYZ has $100,000 of gross receipts this year. Of the $100,000 of gross receipts, $40,000 is passive investment income (dividends, interest, rents, royalties and annuities). Directly connected expenses to the production of the passive investment income  is $10,000.

The net passive income is: $40,000 – $10,000 = $30,000

25% of gross receipts are: $100,000 x 25% = $25,000

The amount by which passive investment income exceeds 25% of gross receipts is $15,000 ($40,000 net passive income – $25,000 25% of gross receipts).

ENPI calculation: $15,000 / $40,000 x $30,000 = $11,250.

XYZ as an S corporation with AE&P pays a passive investment income tax of $3,938 ($11,250 x 35%)

 

Easy Tax Problems to Fix

The good news is that all deductions related to real estate ownership remain intact even when you separate the business entity from the real estate entity. You can still borrow against the building and deduct the interest on the real estate holding LLC tax return, as well as, depreciation and other expenses paid and related to the property. 

You can still have a triple-net lease between the real estate LLC and the business LLC. This means the business LLC can still pay and deduct insurance costs, repairs and maintenance, property taxes, utilities and so forth. Only the interest and depreciation goes with the real estate LLC. Rent is paid by the business LLC and deducted; the rent is claimed as income by the real estate LLC. 

There are times where the real estate LLC might show a large loss due to a cost segregation study or some other tax strategy. This means your business might be earning a large profit while the real estate LLC gets a special tax benefit that allows a massive deduction which causes that LLC to show a loss.

Passive activity rules tell us we are limited in some instances, especially when our income climbs above $100,000. This is easily solved with a simple election on the individual’s tax return. (The LLCs don’t make the election. It is taken on the personal tax return level.) Having a large loss on the real estate LLC if you are a high earner would be a problem if there were no outs. 

The good news, again, is you can group the activities. By grouping the real estate LLC and business LLC activities you are allowed all the deductions as if they were one entity on the personal tax return. This resolved the passive activity rule issues.

 

Final Notes

There are no drawbacks to separating the real estate and business into separate LLCs that I’m aware of. Every attorney I’ve ever spoken with agrees with me on this. Real estate should never be held inside an S corporation or LLC treated as such. Any tax negatives are easily resolved with elections.

The issues involved with combining real estate and a business under a single S corporation are many. Legally you limit your options and put assets unnecessarily at risk. The tax problems are hard or impossible to resolve without inflicting additional tax pain.

Structured properly your business and assets can enjoy legal protections while basking in the light of lower taxes.

 

 

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. 

Hiring a World Class Tax Professional

It's your money. Finding the right tax professional to serve your needs is important. It's not just about adding a few numbers to a return; it's about helping you pay less in taxes and build your nest egg for retirement. Your family is counting on you. Make sure you have the right accountant on your team.What is the largest expense you’ll have in your life?

Some will say it’s the purchase of their home or their college education. Others, thinking about it a while, feel transportation expenses lead the list of lifetime expenses. You would be justified in thinking medical costs, including medical insurance, are the biggest expense you will face in life.

Yet none of these expenses are close to what you will pay in taxes over a lifetime. 

Taxes will consume over half of what the average American earns over a lifetime. This means no other expense can possibly be larger.

The list of taxes in nearly inexhaustible: federal income taxes, state income taxes, sales taxes, excise taxes, payroll taxes, property taxes and now tariffs are being added to the costs of many goods you buy.

Let’s take a look at the taxes a typical American pays:

  1. Federal income taxes: 20% (yes, you get deductions and credits, but many pay 20% or more after these tax reductions)
  2. State income taxes: 5% (some states are higher while some have no income tax)
  3. Sales taxes: 5% of spending (some items are not subject to sales tax however)
  4. Property taxes: 5% of income, but is levied against the value of the property so it can be a larger (or smaller) slice of your income
  5. Payroll taxes: 15.3% (half paid by employee, half by employer)
  6. Excise taxes: What isn’t taxed? From alcohol to fuel to tobacco to vehicle registration and so on.
  7. Import taxes: Tariffs are a tax paid by consumers of the country levying the tariff and that is going up in the U.S.
  8. Other taxes: As a consumer you pay the taxes of businesses in the form of higher prices. Taxes are built into virtually every product and service. Medical expenses are usually exempt from sales taxes, but the taxes on the system are passed on to consumers. If they didn’t they would go broke meaning the survivors do pass on the cost of their taxes.

No one tax seems insidious by itself, but added together they take a massive chunk of your wealth unless you take actions to lower your tax liability.

Some taxes are difficult to reduce. If you buy gasoline you will pay the excise tax, for example. 

You can avoid many taxes by refusing to consume. That is easier said than done after a certain point. Frugality can save a lot of money, but go too far and you cross the line into being cheap. And there is still something to be said about quality of life.

Reducing consumption doesn’t avoid all taxes. Less consumption means less sales tax, but your wages still get hit with payroll and incomes taxes. 

The good news is you can use the tax code to reduce taxes beyond the mere consumption taxes (sales and excise). The United States has a progressive tax system which means your tax bite increases with your level of income. The first $24,000 of income on a joint return is tax-free because that is the standard deduction. Earn several hundred thousand and your top dollar earned can be taxed at over 30%. And that is just federal taxes. The state you live in wants a chunk too.

 

Investing in Tax Avoidance

Tax avoidance can be a dirty word in the tax profession since it is often the words we use when illegal activities are involved to avoid taxes. However, tax avoidance can be 100% legal!

There are two type of tax avoidance you need to consider: tax deferred and tax-free.

Tax deferred strategies push the tax into the future when you pay them with deflated dollars and potentially a lower tax bracket. Tax-free strategies avoid income taxes completely.

Is your tax professional Wealthy Accountant Certified? The right accountant can  reduce your taxes, help you accumulate wealth and achieve your financial goals.The Tax Code is massive and changing all the time. At the risk of sounding self-serving, you need a qualified tax professional if you are serious about reducing your tax liability. The Tax Code is too complex to navigate effectively without experienced help.

I could go into several tax reducing strategies today, but this isn’t a post on specific strategies. Besides, your facts and circumstances will probably dictate a slightly to radically different approach to meet your needs.

This is where you might think I would recommend my office for your needs. Except that isn’t going to happen.

I closed my office to new clients six months ago until June 1st (which is fast approaching). Unfortunately, a few factors will not make that a good choice for you after June 1st.

First, my regular clients filled May and June to the hilt so in reality July is the earliest I can get a new client in for a consultation.

Second, I decided (with my team) to focus more on local clients. (I owe my community my services. They breathed lifeblood into my firm and spreading myself too thin is very problematic.)

Third, my health had deteriorated significantly.

Before we continue onto solutions you can use I will take short detour into my health issues.

 

Learning to Breathe

When I was 18 or 19 years old I entered a silo with silo gas. Like a good worker I toughed it out to finish the work. Unfortunately, silo gas damages the lungs.

The best accountants do more than prepare taxes; they advise their clients for maximum wealth. You work hard for your money. Keep as much as legally possible while growing your net worth.I’ve since had short bouts of difficult breathing. These bouts are accompanied with persistent coughing. Cold weather makes it worse.

This past winter started early and lasted long. It isn’t hard to say we had a good six months of winter in the Northwoods of Wisconsin this year. 

I started out good this winter, but didn’t travel south for a short respite from the cold this year.

Around mid-February I started losing my voice (some might actually think that is a good thing). The cough soon followed. With tax season in full swing I was never granted a reprieve. The cough got seriously worse.

Here it is mid-May and the cough is still running strong; three months of hell and still going. The doctor said there is nothing she can do and recommended extended rest. (Well, that doesn’t work well with me.) 

I hurt. A lot. Nothing I do or take seems to work. Summer heat can’t come soon enough.

The cough has sapped my strength to the point I nearly faint when coughing spells hit which is often (like 5-10 times an hour).

To top it off my voice is gone. It has started to come back a bit, but the last days of tax season were so bad I couldn’t talk and breathe at the same time. It was difficult breathing at all! I still find it hard to breathe often. (And I never smoked, in case you’re wondering.)

 

Finding an Ace Tax Professional

No one person can be the go-to guy of the industry. I might be good, but pushed my body too hard and now the price is being paid. 

My openings available this year will be limited so I can produce two courses you will find valuable and to make Camp Accountant a reality. If my health does not improve I will take no additional clients this year.

But that doesn’t mean I’ve been sitting around twiddling my thumbs! I am fully aware of my limitations and have taken steps to provide more qualified choices for you.

Hopefully you have noticed the Finding a Local Tax Pro link at the top of most pages of this blog. The list of tax professionals is still small, but growing.

Not all areas of the U.S. are covered. If you are a tax professional who follows my philosophy, consider adding your name to the list. If you know of a tax professional who does outstanding work, consider nominating them for inclusion on the list. I will contact them before adding them to the list. (They have to want to be a part of this.)

 

Certified Wealthy Accountant Tax Professionals

And that brings up a good point. What level of quality do the tax pros on the list have?

The question recently arrived via email. A reader wanted to know what I thought of one of the tax pros on the list. In that instance I confessed I did not know the tax pro mentioned and could not vouch for their level of competence.

However, those on the list had to take action to get there. They either read this blog or follow my work as I post it around social media. I would be surprised if they were below average. (Let me know your experience. Too many bad marks and they will be off the list. The good news is I have received no bad comments on any tax pros on the list! Fingers crossed that continues.)

Still, it is not good enough to just put names on a list without vetting them. Over the next year I will take steps to “certify” tax pros on the list as Wealthy Accountant Approved. (They can be still be on the list if not “certified”, but I think people visiting this blog will steer toward the “certified” names.) It might eventually roll out to a national designation showing tax professionals who not only are competent, but can add value to their clients by consulting and providing actionable tax strategies to increase wealth (like maxing out retirement plans, maximizing tax credits, et cetera).

Tax professionals who attend Camp Accountant will be offered the “certified” designation. Tax professionals I have worked with personally and trust their work will also gain the designation. 

Rather than simple testing, I plan an in-depth vetting process to include the best of the best tax professionals on this blog’s list with the Wealthy Accountant Approved designation.

This is a valuable resource for you and the tax pro. You know the tax pro meets a high standard and the tax pro can charge more for their exceptional level of professionalism. (Smart people are never afraid to pay more for quality. It is the high price for mediocre quality that irritates.)

 

Putting a Good Tax Pro to Work

Top-notch tax professionals are always busy. The good news is you don’t have to settle for one tax pro!

As the tax pro list grows you will have more opportunities to find a Wealthy Accountant tax pro locally. Until then you can keep your current accountant while gaining the full benefit of using a Wealthy Accountant tax pro.

You work hard for your money. The right accountant can help reduce your tax burden while helping you build your retirement accounts. Save for your future; have more time with friends and family; travel the world. It all starts with the right accountant on your team.Tax season is not the time you save money tax planning. Tax season is triage in ALL tax offices! The options for saving taxes on the return being filed is massively limited (y’all want an IRA deduction with that, is about all we can do).

Reducing your taxes happens now, outside tax season. A few hours of consulting can pay off with a massive return. It is not uncommon for my clients to save 10 times or more than my fee in taxes. This is a 1,000% return! Some clients save even more. In some cases I don’t reduce their taxes but help them understand their tax and financial situation better so they can maximize wealth creation even if taxes are not reduced.

It is rare for a client consultation to end with tax reductions less than my fee. In those cases the value is usually increased wealth from other sources or fixing a tax issue that is sure to bite the client in the future.

I encourage you to use this resource: the Finding a Local Tax Pro list. I do NOT charge anyone to be on this list! This is for you, kind readers. There is no financial benefit to me. You get the value and I get the warm fuzzy feeling more of you are getting the service you deserve and that I can no longer provide. Yes, Camp Accountant has a fee, but that is to cover the costs of the Camp. I want Wealthy Accountant Certified to mean something everyone can trust. I want a day to come when everyone demands their tax professional be Wealthy Accountant Certified whether on this list or not.

 

As much as I want to help the world, I am one man who has pushed his body too far. I have to think smarter if I am to help every one of you kind readers. Just because I can help someone doesn’t mean I should. Too much work can break the horses back. Well, this horse is struggling with health issues as a result. 

I’m never one to shy away from work. I love what I do, even when it hurts. But if I go down no one is helped. I owe it to you, every one of you, to act and think smarter. The audience is too large for one small office in the backwoods of Nowhere, Wisconsin to handle. 

I need a team and one is being built. I will give all I have because you deserve only the best. When I push too far it is impossible to give the best. 

With the expanding team of tax professionals around the nation we can serve you at the highest level possible.

Don’t be afraid to hire a tax pro from the list. Ask the right questions before hiring. I published two posts on this in the past: 7 Questions Rich People Ask Their Accountant and Finding a Good Accountant.

Ask questions to verify the tax pro can serve your needs. Many tax professionals specialize. As long as you’re going to pay for the service you may as well get the best one possible.

 

In parting, do not worry about your favorite accountant. I thought the end of tax season would give me a breather (pun intended), but so far the cough and breathing issues have not improved. Warmer weather and time off (tax season really doesn’t end until June or so as extensions and questions come in rapid-fire until then) should allow me to heal. I am a bit worried this has lasted so long and so strong.

I’ll survive, no matter how much it hurts. I always do. I am fully aware of your presence and need, kind readers. I will find a way to get every one of you served to the level you deserve and more.

 

 

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 Once-in-a-Lifetime IRA Transfer to an HSA

Take a once-in-a-lifetime distribution tax-free from your traditional IRA. Maximize your tax savings.The Tax Code is riddled with esoteric deductions even many tax professionals are unaware of. So rare is the topic of today’s discussion that I never once in my career had a client use what I am about to point out.

Before you get too excited, know that just because you can do something doesn’t mean you should. Only under a unique set of circumstances would using this tax strategy be beneficial so read carefully. You only get one shot at this strategy because it is only allowed once in your lifetime. 

It’s called a Qualified HSA Funding Distribution (QHFD). In short, a QHFD allows you to fund your HSA with pre-tax monies in a traditional or Roth IRA or inactive SEPs and SIMPLEs. 

Let’s dig into the details before we discuss when it is appropriate to use your once-in-a-lifetime election and when it isn’t. 

 

Characteristics

  1. You must still qualify for an HSA contribution when using an QHFD. This means you must have an HSA qualified health insurance plan with applicable high deductibles.
  2. You must remain eligible for an HSA for 12 months or longer after making a QHFD. If you are not HSA compliant for at least 12 months after the QHFD you must include the distribution in  your income along with any penalty if under age 59 1/2.
  3. You must use a trustee-to-trustee transfer. You are not allowed to take the money out and then put it in the HSA. (Well, actually, you can, but the IRA distribution would be included in income — along with penalties if under age 59 1/2. But you would get the HSA deduction, offsetting the IRA distribution included in income.)
  4. A QHFD does not increase the amount you can put in an HSA for that year. Contribution limits still apply.
  5. You also do not get an HSA deduction for funds transferred from an IRA; the money is already pre-tax.
  6. An inherited IRA can be used for a QHFD.
  7. The QHFD lowers your RMD by the amount transferred for the year of the transfer.
  8. There is no 10% early distribution penalty with a QHFD as long as you follow the 12 month rule and qualify for an HSA.
  9. This strategy can only be used once-in-a-lifetime per taxpayer.

 

Why Would Anyone Do This?

Learn how to use your once-in-a-lifetime tax election to transfer money tax-free from a traditional IRA to an HSA.When you think about this for awhile it might seem a counter-productive tax move. (We will discuss instances where the QHFD is advantageous later.) You are not allowed a larger contribution to the HSA with this strategy and you get no additional deduction either.

Roth IRAs are a non-starter. rIRAs are already growing tax-free so moving money from a rIRA to an HSA provides no additional advantage with the added restrictions, such as the 12 month requirement listed above and a QHFD is limited to pre-tax dollars.

SEPs and SIMPLEs must be inactive to employ this strategy. This means contributions are no longer added to the account. The IRS is silent on how long an account must go without contributions to be considered inactive or if the SEP or SIMPLE can become active in the future.

There are a number of situations where the QHFD is superior to just funding the HSA and getting an additional deduction:

  1. You don’t have the money to fully fund your HSA this year. Since you would not fund your HSA anyway you end up with additional cash in the HSA that now grows tax-free instead of tax-deferred (I assume throughout this post that you use a QHFD from a tIRA to an HSA.) 
  2. If your tIRA is large and significant RMDs loom, any tax-free distribution from the tIRA is advantageous. It also lowers the RMD by the amount of the QHFD for that year.
  3. This strategy is better than taking an IRA distribution and paying the penalty (if under age 59 1/2) and then contributing to the HSA.
  4. You want (or your facts and circumstances dictate) to turn tax-deferred growth into tax-free growth. Remember, a tIRA grows without tax until withdrawn; an HSA grows tax-deferred and if used for qualified medical expenses and/or Medicare premiums the money comes out tax-free at any age.
  5. High medical bills make it difficult to fund the HSA and access to HSA funds are needed for uncovered medical expenses.

There are other reasons to use a QHFD, based on facts and circumstances and personal preference. Personally, I think people with large IRAs might want to employ this tax strategy and these that lower their future RMDs

 

Gaming the System

For 2019 you can contribute $3,500 for individual health plans and $7,000 for family plans into an HSA. (Those 55 and older can add another $1,000 to their HSA as part of the catch-up provision.)

There is a little-known tax strategy that allows you to transfer money from your traditional IRA to an HSA tax-free and penalty-free. Learn how this tax strategy affects you.In The Wealthy Accountant private group on Facebook a member asked about this tax strategy. Since the issue never arose in my office I wanted to dig a bit before answering and then couldn’t find the original post on Facebook (fingers crossed the person who asked finds this post.)

His question was about gaming the QHFD to double the tax benefit by transferring two years of contributions by making the contribution in the cross-over months (up to April 15th of the following year without consideration for extensions). He wanted to know if he could make, say, a $14,000 family plan contribution: half for last year and half for this year.

He did his research and found the IRS and all other sources silent on the issue. I found the same thing.

However, after I thought about it for awhile I realized this would NOT work. The once-in-a-lifetime QHFD would have to go on two tax returns if you doubled the transfer during the cross-over months which would make the second election disqualified. Sorry. But I like the way you think.

 

Round Up

The concept is rather simple. The benefits are fairly small, but worth it if your situation dictates. Those facing large RMDs and those seeking to turn a small portion of their tax-deferred tIRA into tax-free growth in an HSA will find the most value.

Now I need to make a confession. When I first saw the question in the private Facebook group I thought the person posting was smoking something. I never heard of such a tax strategy (or it went in this ear and out the other.) I had to look it up to believe.

If you plan on using this strategy don’t get mad at your tax professional if they never heard of this. Just tell them to go to their software’s Special Situations tab on the 1099-R screen. All they need to do is add one simple number (the amount transferred to the HSA up to the contribution limit).

If you run across a tax strategy you never heard of before be sure to leave a comment. If possible I will leave a short answer. And, as in this situation, I may flesh it out a bit more in a post. 

Many of these strategies provide only a small tax benefit. Added together with several other small tax strategies can accumulate to serious tax savings. 

Hope this one works for you or at least gets you thinking about another tax saving strategy that improves your financial situation.

 

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. 

Challenges of Running a Successful Blog

Learn how successful bloggers grow their business.

Blogging can be fun, but takes a lot of work.

Blogging is a business. Sometimes it’s hard to believe, but it is true. Along with podcasting, speaking and every other form of training and education, blogging is a business. Sometimes a really big business. And businesses take work to manage and grow.

It is easy to forget that those friendly bloggers you communicate with work some serious hours to bring you information and perhaps a laugh or two. Most people don’t realize bloggers are sweating it out at the keyboard in the wee hours of the morning to get a post out on schedule. 

And then there is the invisible work. It seems like blogging is about the cheapest hobby going until you realize that every part of the platform demands a fee and usually loads of time. And that is where this blogger enters.

I originally planned a detailed post of the coming collapse of China when the IRS released another 249 pages of regulations on Section 199A. The ink wasn’t dry before the calls flooded in for a brief post on the IRS release. The good news is we finally have a definition for a trade or business as it applies to 199A. The bad news is those 249 pages contained a lot of material and one simple post wasn’t going to cut it. A series was in process before the next hammer fell.

 

Time to Get Social

If I’m going to put in all this work I may as well bust tail to acquire a few readers. You see, people don’t magically find my glistening prose. (Yeah, I know. Surprises the heck outta me too.) I’ve done all the obligatory stuff: auto-posting, email list, attend conferences, remind everyone I see I have a blog. And traffic has been good for a tax blog with heavy doses of personal finance mixed in. 

But more is always better, I heard, so I purchased a few courses to hone my skills. First I attended a course on Pinterest and saw my Pinterest traffic go from nothing to several hundred page views per day and still climbing.

Then I cracked open my wallet for a very in depth Facebook marketing course called Moolah. (Hint: Rachel is one awesome lady when it comes to Facebook. She knows her stuff.) Here is an example of some of the free stuff she offers from her course, banned words on Facebook, for example. The free Facebook group alone will send your traffic higher

Increase your blogs ad revenue with tricks used by the most successful bloggers today.

Automate the hardest part of blogging.

The Moolah course is an intense 10 week program. (You have access to the videos and other materials for at least a year afterwards and there is a special Facebook group for graduates to keep pushing their traffic and sales to the moon.) While in the course I was informed I wasn’t handling ads correctly. I used Google ads, of course, and another platform called IMS. It was a small, yet steady stream of income to cover blog costs. With my traffic levels I was informed I needed to move to a more robust platform like Mediavine. So I took the plunge.

As this was happening another serious request came into the Facebook private group. (Y’all are invited to join our august group and The Wealthy Accountant business page. It is a great place to meet like-minded people and learn how to cut your taxes and manage your money for greater returns.) A reader asked about stock options, the kind granted by an employer, and that wasn’t a simple answer.

So, the China post was on hold even though this reporter has inside information about China that will shock most readers. I will post on this soon due to the serious financial consequences. The 199A post is also delayed due to the imminent incentive stock option issue. 

And now all those posts are on hold as I just spent 30 hours of my weekend before the approaching tax season ripping code from this blog. Why? It seems Mediavine is a vibrant platform requiring all old code removed before they go live. Well, once the process was started my other ad revenue was reduced to zero as the transfer took place. What was supposed to be a quick flick of the switch turned into a detailed review of all 454 published posts to pull out rouge ad code and other issues from the early days of the blog. This became priority if I wanted this blog to stay viable.

The good news is I did it. It is Sunday night as I type and I think I got all the problems fixed. I’ll find out tomorrow morning (probably as you read this). If you don’t see an ad anywhere on the blog you will know I’m still toast. Now I have to sweat it out as Mediavine is an automated system; I have no idea how they will display ads. I demand it is tasteful and useful to my readers. Time will tell.

 

Writing Shtick

The best news is that publishing posts from now on will be faster and easier. This weekend opened more of my time in the future with the improvements. (As long as I live long enough to reach the time break point.) 

But publishing a post is not the most time sensitive part of the process: research is. Tax issues take time to unravel. Answering a client question is faster because I only deal with one facet of the issue facing the client. When writing I must take into consideration all other possibilities a reader might encounter. This is more challenging than it sounds.

The China post requires a modest amount of research. I already have the links built. However, I need to pull from multiple sources, including a source inside China, to complete the post. Still, there wasn’t enough time to do it justice.

The 199A issues are so massive and time consuming I don’t know when I’ll be able to tackle the issue for the blog, but I am committed to a short series before tax season gets too far along. This is important for readers! The weekend workload just didn’t offer anywhere near the time I needed to get a quality post out on 199A.

The same applies to the incentive stock option post.

So, if time didn’t cooperate, offering me the chance to write a detailed financial or tax post, what was I to do? Well, you’re reading it. A post outlining some of the back office headaches of running a blog is easy to write because I can just tell the story of my weekend. Other bloggers should find value in this post while non-bloggers will gain a greater understanding of what it takes to keep a web page up and vibrant.

 

Whether You Believe it or Not

And if all the stuff above isn’t enough, we get some wonderful Wisconsin weather. The forecast has a foot of snow in it for this evening with plenty of blowing to make it as miserable as possible. Then temperatures will dip colder than -20 F. Wednesday’s high is forecast at -12 F. Yes, that is the high for the day. Welcome to the backwoods of Wisconsin.

None of this is meant as whining. I should have known better things wouldn’t transfer to Mediavine as smoothly as predicted. It’s still an excellent learning experience which should increase ad revenue by a significant margin and save time posting from now on. 

As for the weather, there was a hint the weekend would end with snow so I brought plenty of work home with me Friday. Technology today allows me to work from home and it’s as if I’m sitting at my desk. The bad news is I don’t know if any employee will make it in tomorrow. Everything is closed tomorrow: every school, program and every business I checked. 

Write viral blog posts, increasing traffic, revenue and sales. Write something meaningful for your readers. Provide value. Killer titles meant to go viral.

Write something meaningful for your readers. The rest will take care of itself.

And good thing. I can’t get the tractor running tonight so I need to get up early if I’m going to get snow moved so I can get out my driveway. Ah, when it rains, but it pours. Snows, I mean

Actually, I had a great and productive time last week and this weekend I killed it. Things were looking ugly for a while when I found some crazy code from the legacy platform when this blog was set up. But I broke through to the other side. It looks like the code is clean now.

Technology also bails me out. Twenty years ago a snowstorm would devastate my schedule. Today I log in from the living room couch and get more work done than if I was at work because there are no interruptions. 

By noon or so things should be clearing out as the plows get the roads open. I’ll break down and wander into the office if possible. 

I just wanted you, kind readers, to understand why I didn’t provide a tax post as tax season bares down on us. There is plenty of powerful stuff in the queue, but those golden nuggets take work to produce. Frequently it is required I call experts to dig deeper into issues these days. It’s almost like journalism for advanced tax strategies. 

Before I sign out I want to whet your appetite with a few more items from the queue: investing in conservation easements for massive tax deductions (special handling required to avoid problems), Medicare complaint annuities (the one annuity members of the community I run in will want to own), the wealth gap, income inequality, Form 3115 (for cost segregation studies), and more. My guess is I’ll need to live to 135 to get all these things published. 

One thing is certain; I enjoy tackling the difficult issues. And for good reason. The stuff regurgitated ad nauseam in the traditional press doesn’t really help you. I want to provide the power tools you need to control your taxes and financial life. It’s a lot of work and worth every bit of effort. 

Before I sign out, can I ask a favor? I busted tail this weekend (and a lot more) working on this blog. The upgrades make it easier and more user friendly to share posts on social media. Would you be so kind as to help out an old wayward accountant by sharing a post or three on Facebook, Twitter, Pinterest and other social media. I need the ego boost. Thanks.

Now I need to get back to the tractor. The snow isn’t going to move itself.

 

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.