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December 22, 2023
Author: Adam Kintigh

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I had a great phone consultation with a client “Nick” this past weekend. This guy runs a construction company and has been operating as an S-Corp since 2020. As I went through a few questions, I realized Nick’s CPA is terrible. Thank goodness we took some time to review what he’s been doing, and how he’s been doing it.

This client is married, has the construction company, and a couple rental properties, and a brokerage account (not an IRA). We talked about tracking his income and expenses by breaking their income and expenses into 3 buckets: Active Income, Passive Income, and Stock Trading Income.

Why the three buckets? Active Income can only be offset with active losses. Passive Income can only be offset by passive losses. Stock Trading gains can only be offset with stock trading losses.

Active income includes his wife’s w-2 and his “self-employed” income from the construction company. The construction business is taxed as an S-Corp, so Nick is required to take a reasonable salary from his LLC. Reasonable is typically no less than 30% of his net profit. The mistake Nick had made: He has $100k of profit and has not taken w-2 paycheck. This is a huge red flag for audits. Thank goodness we were able to get his payroll set up and issue the w-2 appropriately.

Nick also explained that he has a home office, and a barn that he stores construction equipment. His previous CPA was not writing off the home office, nor the barn. Nick’s CPA didn’t even ask…

You see, the penalty for not taking a reasonable salary is double. Had we not spoke, in 3 or 4 years, the IRS would send him a letter. Something to the effect of, “Since you didn’t take a reasonable salary, we’ll make one up for you. We think the salary should have been based on the full $100k profit. Since you didn’t do it right, you now owe 15.3% on the full $100k. Oh, and by the way, your penalty is double. You now owe 30.6% on the full $100k!

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Nick also explained that he has a home office, and a barn that he stores construction equipment. His previous CPA was not writing off the office, nor the barn. Nick’ has no idea that this was even an option. His previous CPA didn’t discuss any of these details.

Rental income and stock income is NOT subject to self-employment taxes, so we don’t have to worry about the salary and such. We discussed the importance of tracking Repairs & Maintenance separate from Capital Improvements. Nick just invested $20k on a new roof, thinking he would be able to write that off this year. However, since replacing the roof is a capitalized expense, he must amortize the $20k over 27 ½ years. Nick said, “I sure wish I knew this before. I could have easily repaired the roof for a couple thousand dollars.” If he would have repaired the roof, the $2k would have been 100% tax write off in 2023.

The details of your accounting make a huge difference. If you’re not discussing the details of your business and investments, you probably should! Let our team at NCH know if you need help. The end of the year is coming quickly. Let our team at NCH know if you’re needing help.

With NCH, the state’s top business formation service, you can register your LLC in Nevada quickly and easily. Our specialists will help you choose the right entity for your company and understand why an LLC in Nevada is your best option. We’ll assist you with all necessary Nevada LLC forms, including the vital Articles of Organization, and help you comply with state regulations. In addition, we offer expert assistance with tax compliance, credit building, and payroll management. Schedule a private consultation to explore effective solutions to minimize tax liabilities and protect your wealth. Start unleashing your LLC’s full potential today with NCH. Schedule a consultation with Adam Kintigh today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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