Are you overpaying the IRS by $50,000? For this S-Corp owner, the answer was YES. 

Here’s what we did to slash his huge tax bill. 

I did a live case study on Eric, a small business owner running a successful appraisal company and a martial arts school. Eric took home solid profits but also handed the IRS more than $50,000 in taxes last year. 

On the surface, everything looked fine… But when we took a closer at his finances, it became clear he was overpaying. 

How to Calculate A Reasonable S Corp Salary

Eric was paying himself a salary of $120,000 to $140,000. 

This pushed his payroll taxes too high. 

Here’s a better approach: 

• Start with 30-50% of profit as a baseline.
• Break down hours spent on tasks (admin, marketing, core services).
• Use the Bureau of Labor Statistics data to match those hours with fair market wages.

This creates a defensible salary if the IRS ever asks while freeing up more income to flow through as distributions, which aren’t subject to payroll tax. 

For Eric, lowering salary by $20,000 could save him nearly $9,000 per year.

Why Two S Corps Were Costing Him More

Eric had both his appraisal company and martial arts school set up as S Corps. 

Meaning double payroll, double tax returns, and unnecessary complexity. 

For most owners, multiple S Corps don’t make sense. 

Instead: 

Run everything under a single holding S Corp that owns multiple active businesses. This structure streamlines filings and reduces compliance costs by half.

⚠️ One caveat: this only works for active income streams. Passive income sources, like rentals, should stay outside the S Corp to avoid triggering unfavorable tax rules.

Retirement Savings Done Right

Eric wanted to put about $12,000 a year into retirement. Instead of guessing, we looked at the smartest order of contributions:

1. HSA first, because it offers a triple tax advantage.
   
   
2. IRA or Roth IRA, depending on eligibility.
   
   
3. Employer plans like a SIMPLE or 401(k) for larger contributions when cash flow allows.

Everyday Deductions Business Owners Miss

Eric wasn’t fully using deductions available through an accountable plan, a home office, or everyday mileage, meals, and travel.

Many entrepreneurs think deductions only come from big-ticket items, but the smaller recurring expenses add up fast.

If these are legitimate expenses tied to business activity, shifting costs you’re already paying from post-tax to pre-tax can create thousands in savings every year.

Board Meetings and the Augusta Rule

One simple but overlooked strategy is forming a board for your business. Even a small board made up of family or trusted advisors counts. 

Not only does this add accountability, but it also enables the 14-day home rental rule (known as the Augusta Rule).

Here’s how it works: 

• Eric could rent his home to his business for up to 14 days a year for board meetings. 
• The business gets a deduction
• Eric receives the rental income tax-free. 

That’s money pulled out of the business completely untaxed.

Hiring Your Kids

One of the simplest family tax strategies is paying your children to work in the business. 

For kids under 18: Wages are deductible to the business and tax-free to the child up to the standard deduction. 

Once they turn 18: it’s often better to shift them to a 1099 contractor role instead of a W-2 employee.

This reduces the parents’ taxable income, moves money into the child’s lower bracket, and gives kids real financial experience at the same time.

Advanced Strategies: Real Estate and Beyond

After the basics are in place, real estate can unlock major tax savings. 

If Eric or his spouse qualifies as a real estate professional (REPS), they can use cost segregation studies to speed up depreciation. 

• Paired with 100% bonus depreciation, this can create six-figure deductions that offset income from his active business.

These are advanced strategies meant for higher income levels. 

The sequence matters: master core tactics first, then explore REPS, cost segregation, or even tools like captive insurance once growth justifies the move.

In Summary

We learn that even a business owner who “looks” like they’re doing everything right can be overpaying the IRS by tens of thousands. 

By adjusting Eric’s salary, simplifying his structure, and capturing deductions already available, he can cut his tax bill dramatically.

Transcript

[00:00:00] Introduction: Meet Eric and His Tax Dilemma

[00:00:00] What would happen if we took a real small business owner, put them in the hot seat and broke down their tax strategy? Live right here. That's exactly what we're doing today. Meet Eric. He runs a successful appraisal business, pays himself through an S corporation, and just dropped over $50,000 to the Iris last year in taxes.

[00:00:17] But could that number be slashed legally the right way? You're about to hear a real time unscripted tax saving strategy session. That might just change how you think about your own taxes. And if Eric's story sounds familiar. It should because this could be you as well.

[00:00:31] 

[00:00:50] So Eric, welcome to the show. Thank you, Mike.

[00:00:53] Thanks for having me on. Yeah, and I'm super excited for this. This is the first time we're doing a live case study, and Eric and I for the first time we've had [00:01:00] conversations through email, you know, back and forth. But this is the first time meeting you know, this isn't some prescripted type thing.

[00:01:06] This is just me and Eric kind of hashing out and we're gonna have a fun discussion. Absolutely. 

[00:01:10] Eric's Business Breakdown

[00:01:10] What I want to do first is give a little breakdown about Eric's situation, kinda what he has going on that's gonna help lay the groundwork for some of the things that we're gonna be talking about today.

[00:01:20] A couple things that Eric has. He has a Vander wall appraisal group which is an LLC text as an S corporation with annual revenue between a hundred thousand or $250,000 in profit of a hundred thousand to $250,000 as well. We're talking pre-show and just to give you a little bit of context that profit from that business prior to any kind of salary or anything like that is closer to the $200,000 mark.

[00:01:44] Eric also has a martial arts school that's taxes and s corporation with his wife and currently not making a ton of money. We'll talk about some of the options around that. Been in business for five years, has three employees. And again, last year, paid taxes of about $50,000. Eric, anything that I [00:02:00] missed there that's kind of important, at least to that initial kind of outline of what you have going on?

[00:02:04] No, that pretty much sums it up. Okay. Excellent. 

[00:02:08] Household Income and Salary Structure

[00:02:11] So to get started, I just wanna kind of dive into some of the things about your personal story that we can help get down and drill into some of the strategies that we wanna talk about today. So the first one is tell the audience a little bit about your household income, where that break in.

[00:02:22] I know we have a household income around $250,000. What is the breakdown of that household income? Yeah, so the majority of that is through the appraisal business. That's about about 200,000 a year comes from that. The martial arts school, generally speaking, breaks even for the most part. We do, we did make a little bit of a salary LA or a little bit of income last year through the martial arts school.

[00:02:45] And then my wife has a part-time job as well. Those are the three main sources of income we have. Okay. And for the appraisal business, we have about profit and pres salary, a profit of about $200,000. What is the [00:03:00] breakdown of salary that you're taking, reasonable salary you're taking for yourself in that versus profit from that business?

[00:03:06] Yeah, so the salary I take generally goes about between about 120 and 140,000. Okay. A year is what I take through the business. Got it. So 140,000, 60,000 in K one income from the S Corporation. Any salary you're taking outta the martial arts business? You or your wife? No, we don't take any salary out of the martial arts school.

[00:03:27] On the business side, since both businesses are operating as an S corporation, we'll kind of talk about, you know, proper entity optimization, what we like to look at there. But since both are operating as an S corporation, are you utilizing an accountable plan at all, or do you have an accountable plan set up in, in your business?

[00:03:41] Yes, we do. Okay. And what specific items are you using that accountable plan for the reimbursement pieces? I have a home office deduction. And and then a dividend that I take. And then the salary part. Yep. Makes sense. Do you have a board for your business?[00:04:00] 

[00:04:00] No, but we're setting that's one of the things that I'm gonna be setting up. Okay. Yeah. Children, you have two children. What are their ages again? 24 and 21. Okay. They live locally, work in the businesses all or have any part in that? Yeah. My son, who's 20, the 24-year-old actually works for me in my appraisal business.

[00:04:19] Okay. And the 21-year-old. Yeah, she's still finishing up school. She has worked part-time in the martial arts business. She's currently not at the moment. Any high medical costs or any outside of like typical insurance, things like that, is there any high medical costs that you guys are paying out of pocket?

[00:04:39] No, not to not nothing beyond the regular thing, seeing the doctor for typical medical. Things. So nothing out of the ordinary. Okay. Makes sense. And health insurance. So I know you mentioned your wife has a part-time job. Are you paying for health insurance through the business?

[00:04:56] Are you getting it through that part-time job? What does that look like? Yeah, we get it through [00:05:00] her part-time job. In fact, that's the main reason she works, is so we can get the health insurance. Perfect. Now before we go into more strategy, if this is something that you're enjoying or would like to go some through something like this, we work with small business owners going through hundreds of different strategies every single day.

[00:05:16] And at tax m we not only do we offer unlimited access to our team of tax pros, but we also have a complete system to fully implement every strategy available. So go to tax.com if you're interested in that and book a free discovery call with our team. Alright, back to you, Eric. 

[00:05:30] Entity Structures and Optimization

[00:05:30] When we talk about, entity structures in a business like you have set up, typically what we like to see is to have a main holding company, s corporation that you own a hundred percent of. And so the Ben benefit of that, and you already have that with the appraisal business, which is good. the difference is that when you have separate multiple businesses, ideally we wouldn't want to have them also set up as US corporations.

[00:05:53] When you have an S corporation, you're required to take a reasonable salary for yourself as an owner and obviously the martial arts business [00:06:00] you mentioned last year did 40, $50,000. Yeah. And kind of breaks even every year. So you're probably not taking much money outta that business because it's breaking even.

[00:06:09] And so it's not a huge deal right now, but as you start to grow that business along with the appraisal business, the problem that we see with two S corporations is one, you're filing an S-Corp tax return. Times two. And you're running payroll to yourself times two, so you know, there's obviously a payroll cost associated with that, and those costs just can be unnecessary. And so typically when we have somebody with multiple businesses, our favorite setup to do is to have an entity at the top. You own a hundred percent of that's your S corporation in any other business that you're associated with, would be owned by that S corporation.

[00:06:46] So we can still have separation for legal purposes, so that one company's not going after the other. They can still be a separate entity, but instead of setting that separate entity up as an S corporation, ideally we'd have it owned by your S corporation so that you have [00:07:00] three, four, or five different businesses underneath.

[00:07:01] They're all flowing through to your One S corporation. Where you run one as corp tax return and one payroll from Okay. Makes sense. Does that make sense? That makes sense. Yeah, absolutely. Yeah that's good news. I didn't even know about that. Yeah. And it can become especially beneficial if you get into other partnerships.

[00:07:17] You know, let's say you're an appraiser, but now you have a friend that wants to start a business that helps. Consult other appraisers on how to grow their businesses, everything like that, and just imagine that you got into business with them.

[00:07:28] Same thing we would do there is we'd have, even though you're a partner of it, we'd say start that business up as a partnership, but let's have your ownership in that partnership be your S corporation. Again, sort of full flack that all of this business income that you're active in is flowing through your S corporation and up to you to that point.

[00:07:45] Okay? So just something to consider as that martial art business starts to grow as you continue to potentially get into other businesses. With one big caveat to that. If it's a real estate, a rental business, something that you're not active in. We do not [00:08:00] want that owned by the S corporations.

[00:08:01] We always want to keep that separate. Okay, so you have a friend that says, Hey, I'm opening up a car wash. Do you want to be the investor in it? You know, you just fund it. You don't do anything with operations. You just give 'em the money for it. We wouldn't want that to be owned by your S corporation because that's a passive business.

[00:08:15] And the real purpose of an S corporation to help minimize the amount in self-employment taxes. Okay, so any questions on that? No, that I like that idea. Yeah. Which talking to that point, and I think you might've put this into some of your questions, but do you currently have any type of real estate?

[00:08:31] Not that you own and live in, but any rental real estate currently? No, but that's one avenue I would like to pursue as well. Okay. We'll talk about that in just a second. Sure. Just kind of talk about from a strategy standpoint, what that might look like. Okay. The second piece that I wanna talk about is retirement.

[00:08:48] So it looked like you have a simple IRA currently. Is that correct? Correct. And how much are you ideally looking to put into retirement? And that's from a standpoint of how [00:09:00] much do you want to fund retirement. Some people love retirement, love Max. And other people are like, I just wanna put enough away and I'd rather do, you know, my own investing with other things.

[00:09:08] But how much do you want and can you afford to put away in an ideal world into retirement? Yeah. On a annual basis. Yeah. So I have kind of three I have a traditional IRA, the simple IRA and then a health savings account. Okay. And so one of the things that I need to I'd like to put in about a thousand dollars a month.

[00:09:28] I just, which one to put it in or split it between some or, and then how to get that money from the business into those accounts. Okay, perfect. 

[00:09:40] Reasonable Salary and Tax Savings

[00:09:41] So we'll talk about that, but before I talk about that, I wanna talk about your salary of your S corporation. And the reason I was asking about retirement is because the salary proportion that you have is what I would call a very safe an area that I think you can get a little bit more aggressive in.

[00:09:57] And. The times when we see people [00:10:00] take a big salary unless owner's distributions or draws. Sometimes that's related to them wanting to fund a retirement account up to a certain amount that maybe they couldn't do if they didn't have as high of a salary. Gotcha. But at the levels you're not, that you're looking at, you don't necessarily need to fund it.

[00:10:16] You don't need that high salary for that. Let's talk about your salary a little bit and let's just assume last year's numbers were. $140,000 salary and then 60,000 in draws or profit from that business. When you're determining or looking at that salary, is that just a number you kind of picked and so that's what I think is good.

[00:10:35] Or what are you basing that $140,000 off of? Yeah, that was a previous accountant. That was the number that that she suggested. Okay. Makes sense. So when we look at a reasonable salary, of course, with an S corporation, we're required to take a reasonable salary. The big reason we go into an S-corp is to help minimize the amount we pay in self-employment taxes.

[00:10:56] And so when we open up an S corporation, we split our income into two pieces. [00:11:00] Salary, W2 salary. We still pay self-employment taxes on that. It's not necessarily called self-employment taxes, but it's essentially the same number. And then the other half is owner's draws or distributions, and we avoid self-employment taxes on that.

[00:11:13] And so that's the big benefits of an S corporation is you can avoid. Self-employment taxes on a portion of your income, whatever you don't take as a salary. And typically our rough numbers, when we're just talking to someone, they say, what's a reasonable salary? Our quick kind of thumb in the air is to say, let's do 30 to 50% of your profit.

[00:11:31] Okay? So you're gonna make $200,000. Let's go anywhere from 60 to a hundred thousand dollars for your reasonable salary. Okay? That's our quick back of the napkin number. From there, we say, okay, we got a starting point. 60 to a hundred thousand dollars is a good salary. Let's look at how many hours we're putting in.

[00:11:48] What's the hourly rate for someone doing my job? Let's break my job into three pieces. You know, how much do I spend being an appraiser? That's gonna be probably the highest hourly rate of your jobs. How much do you spend [00:12:00] in marketing? You know, being a sales agent, going to conferences and you know, doing those, selling your services, how much you do on that?

[00:12:06] That's gonna be a lower dollar amount because you're not appraisal now you're a marketing person. Likely get paid less in appraiser. And then the third one is, how much do you do doing administrative tasks? So think of things like kind of answering random emails, doing bookkeeping, those types of things.

[00:12:21] And so we like to break the amount of time we're spending in those categories out. Find how many hours we're spending on there on, on average, so we don't need to like track for six months or anything like that. Just say, okay, on average 10 hours a week is marketing, 10 hours a week is administrative, and then I'm actually being an appraiser for 20 hours or something like that.

[00:12:40] Yeah. Then let's look up wage rates in your area for each of those different categories and try to back into a salary. Okay. Okay, so we have a starting point. If we tell the IRS, oh, we just did 30% of our income as a salary, I was gonna say, okay. That's not acceptable. Yeah. But when we tell the [00:13:00] IRS, Hey, here's how we determine our salary.

[00:13:02] Here's how much time we spent on marketing and advertising and administrative work and actually being an appraiser. And here's the hourly rates. That's what the IRS wants to see. So I like to say the 30 to $50,000. It's pretty much what's going to, or 30 to 50% is pretty much generally what's gonna keep you under the radar.

[00:13:20] The IRS isn't gonna balk at those numbers generally stating, okay. And that study of looking at how many hours and hourly rates that's going to build that audit protection, that if the IRS were to balk at it, now we have that audit protection to back it. I always tell people to start with that 30 to 50%, but also run those numbers and see where that ends up.

[00:13:40] And if that ends up in that 30 to 50% range, we have a concrete salary that we can dump, bump you down from 140 to 90 or 140 to, you know, 80 or whatever that number might be. Okay. And just as an example, if we took you from 140,000 to, so let's just say 80,000. Okay. We're [00:14:00] reducing your salary by $60,000.

[00:14:02] The only thing that changes, instead of taking as a salary, now you're taking it as an owner's distribution or a draw. And by doing that, you're saving I'm just doing the quick math. Sure. Roughly, you know, 8,000, $9,000 in taxes from just that move. Just that change. Oh, that's good. So that's where that reasonable salary could be a really key piece to start to drill into.

[00:14:25] And obviously a lot of people are like, my accountant told me to do it. I did it. I left it alone. And we stayed with that. Which is fine. Yeah. But now it might be time to say, Hey, is that too high? Is there a way that we can adjust that and be a little bit more aggressive, but still stay in the radar?

[00:14:41] And the aggressive piece is the 30 to 50%. But so many people, when we go through this practice of actually taking out the hours of spending on these different tasks it ends up being close to that 30 to 50% and that's not aggressive at all because we have full backup of saying, here's how we're determining the salary.

[00:14:57] I think that's much better than just saying, oh, my [00:15:00] accountant threw this kind of number at me. If that makes sense. Yeah, absolutely. So do that practice, run through. How many hours you're spending in administrative, in marketing, and then being an actual appraiser. Okay. And there's a, it's, if you go to gs.gov, I think it's gs.gov.

[00:15:15] It's a government website that has labor statistics. Okay. You can look by city and then you can look at job type. Okay. And it'll show you what the average hourly rate is based on your city and job type. Okay. So you would do okay. For marketing, if most of your marketing is done on the phone, you don't like what's a telemarketer make on an hourly rate in that area.

[00:15:34] Gotcha. And then what's an administrative assistant make and then obviously appraiser. Okay. And so this is something you can revisit oftentimes because we see a lot of business owners that. Are in the height of their career, they're working a lot of hours, and then all of a sudden they get deeper in their career.

[00:15:49] They have other people working for them, and they start to lower their hours. And thus, your salary should also reflect that even though you might be making the same amount of profit or more. If you're spending less time in it, that's [00:16:00] okay. You know, we had a client that was making over a million dollars a year that was taking a salary of $60,000 in an S corporation, which initially you're like, that is way too low because your 30 to 50% is blown outta the water on that.

[00:16:11] But they were spending 10 hours in their business and literally what they were doing is sweeping the warehouse. Like it was just something to keep them busy. Yeah. Yeah. That 60,000 that they were taking a salary was actually more than what they probably really should have earned based on what they were doing.

[00:16:24] But that's just kind of some context of shifts, you know, in your career. Yeah. Okay. So any questions on that? No, that, that makes that makes sense. Yeah. I've never, yeah. That was never explained to me that way. It was always just take a reasonable salary and that was it. So this is good. This is great.

[00:16:42] Yeah. And people get scared by that because, you know, this is the part that the Iris can audit and, you know, knock on wood, I have never gone through a reasonable salary audit with a client. I've never had a client audit for reasonable salary. And that's because we always stay in that 30 to 50% range.

[00:16:56] And that's my basis for saying why that's a pretty safe range is [00:17:00] because we've never had problems with it. Again, not to say that's defensible, but we've never had problems with it. And if someone's scared about it, then I say, then let's back it up with that real data so you can put it on file.

[00:17:09] We're not sending that data to the IRS, it's just if they come knocking, we have something to support that and know that we feel comfortable with the salary that we're taking. Yeah, that makes sense. So accountable plan, I know you said you got an accountable plan put in place. 

[00:17:22] Maximizing Deductions and Setting Up a Board

[00:17:23] That's important, especially with an S corporation and definitely a way to get that home office deduction. Automobile, I'm assuming that you have an automobile inside the business. I use my personal vehicle. Okay. So I do the mileage. Okay. So I'm assuming you're using that automobile reimbursement via the accountable plan as well? Correct. Okay, perfect. The next thing I wanna talk about was this concept of maximizing deductions and, when we talk about maximizing deductions, we're not saying let's go out and buy things that we don't need. When we talk about maximizing deductions, we're saying, how can we look at spending that we're already doing on our personal side and find business [00:18:00] purposes for that spending that we can shift that into a business expense. And so it's saying, we're gonna spend this money anyways, but can we find a business purpose for it? Gotcha. A good example is a home office, right? You, you have a home, you're gonna live in it. Now you're getting a business deduction for a portion of those costs that you had anyways, and that's a great thing, right?

[00:18:18] But one thing that I noticed kinda looking at the p and l that you sent over, is that I don't see, especially on the Vanderwell appraisal, I don't see much for meals. I don't see much for travel related costs technology costs, talk to me just a little bit about that, you know?

[00:18:33] I feel like there might be opportunity to expand or look into some of those areas to expand. After tax spending versus pre-tax spending. Yeah. Yeah. We don't have a lot of equipment, software, things like that. So there's not a lot that goes with the business that regard. We do I've started to use a little bit more of the meals looking at travel.

[00:18:58] We had a trip back in over [00:19:00] Memorial Day weekend and I looked. Everywhere for some sort of real estate related or even martial arts related event going on at the same time. That, but I just couldn't find anything that weekend. But yeah, that's one of the areas that I definitely would like to use more of the, of that travel expense.

[00:19:17] Yeah. Tying it into the business. Yeah. And one thing that a kind of a practice I like people to look at is, and this doesn't have to be something we do every month or anything like that but take a chance. Look at like your last six months of your, if you're a credit card user and that you just pay your credit card off, look at your last six months of credit card on the personal side.

[00:19:34] Or a checking account, you know, and look at some of the expenses on there. And, you know, it's surprising. I did this practice myself. And I was going through, I was like, oh, I had a lunch with my buddy John the other day. And I was looking at that, I was thinking about that expense came through on my personal side.

[00:19:49] I'm like, we talked the whole time about business and we were talking about, you know, how he had a client that was needing some tax services and things like that, and like the whole conversation this. A friend, we were just grabbing, you know, [00:20:00] a lunch and a beer together. Yeah. The whole conversation was about business.

[00:20:03] And so those are some opportunities that sometimes you just don't think about those things when they come through, but all of a sudden looking backwards, it can sometimes open that up. And once you start to change that mindset of understanding, Hey, can I find a legitimate, a real business purpose for this spending?

[00:20:19] Once you've changed that mindset, you start to see these opportunities pop up more and more often, gotcha. Yeah. Just something to keep in the back of your mind as well as we talked about a board and you said you, you're looking to set up a board. Yeah. I'm a big believer that every business should have a board in their business.

[00:20:36] Whether it's just you solo owning it, no employees, no other partners or anything like that. Or it's a multi, you know, billion dollar business, obviously you're gonna have a board as well. And so I think that you know, one, you should have a board for vendor appraisal and you should also have a board for the martial arts school as well.

[00:20:53] Okay. That board is just basically saying this is an, a group of people that we're putting together that, that are [00:21:00] trusted in our network. We you know, look to them for advice. This could be friends, family members, it could be colleagues, whatever it might be. Okay. It could be three people, it could be six people, but we're, or finding people around us that we want to have as part of our board.

[00:21:14] Okay. A couple benefits, obviously, we'll talk about the tax benefits. But one of the benefits non-tax related that I really like is it allows me, and I do monthly board meetings, so it allows me on a monthly basis to step away from my business and say, okay, I'm always deep diving into this. 

[00:21:31] High-Level Business Strategy and Accountability

[00:21:31] Once a month I can step away from it and just talk high level about.

[00:21:35] Where are we trying to go? What are we trying to do in our business and what are some of the struggles that I'm facing that I don't really maybe understand or see from a day-to-day basis? And all of a sudden you get these outside people, whether it's family members, friends, colleagues, whatever it is, start to kind of.

[00:21:49] Get some ideas rolling for you. It allows you that kind of stress relief day to step away and look at it from a bird's eye view because the people around you, the trusted people around you, will see your business a [00:22:00] lot differently than you see your business. Yeah. So it's a great way for that as well as being held accountable.

[00:22:07] So if you say I'm really getting kind of, you know, really getting stressed, really getting, putting a lot of work in, and I just need to hire somebody, I need to hire an administrative assistant, or I need to hire another appraiser, or whatever it might be. We can talk about this at your board meeting and then guess what?

[00:22:23] You're gonna see them in a month from now, or two months from now, or once a quarter whenever you do your board meetings. And they're probably gonna say, so how is that, you know, hiring the new appraiser going. Those kind of things help keep you accountable. 'cause you know you gotta meet with your board down the road.

[00:22:36] Yeah. Okay. 

[00:22:37] Tax Benefits of Board Meetings

[00:22:45] The other benefit is obviously when you have these board meetings, there might be travel involved with it, there's gonna be meals involved with it. You might be renting out a space that's involved with it, so there's gonna be costs from a tax perspective too. And if these are board members that you want to hang out with, you want to be around anyways.

[00:22:54] Now you're kind of tying into those costs and thinking of that after tax versus, versus pre-tax spending. [00:23:00] Okay. That makes sense. 

[00:23:02] 14-Day Home Rental Rule Explained

[00:23:06] The one thing that we also like to combo with a board is, especially if it's all local, all people that are close to you, is to utilize something called the 14 day Home Rental Rule.

[00:23:11] Have you heard of that strategy before? Yes. So basically how it works. If you rent out your home for less than 14 days total throughout the year. Any type of rental it's not rental income to you. You don't get any expenses associated with, but there's no income to offset anyways.

[00:23:26] So it's Right. It's tax free income to you. Okay. And typically this makes sense let's say the Super Bowl's in your town and you can rent out your home for, you know, $5,000 a day for a week. Obviously. If you do that for a week, rent out your home for $5,000, you don't have to pay taxes on that's great.

[00:23:43] But if you don't have a situation like that, we'd love to kind of combo this board meeting with this home rental. Gotcha, gotcha. And so the key thing, when we talk about the 14 day home rental, it'd be a way if you did that, let's say you said, okay, the third Wednesday of every month, we're gonna have this board meeting at my [00:24:00] house in an area that's not where I normally do business.

[00:24:03] Okay. So it's not gonna be in my home office, it's gonna be somewhere else. Gotcha. We find out, okay, what would it cost to rent out a boardroom at a local hotel or a coworking space and let's say that's $500 a day. Now we could rent out our home to our business, get a business deduction, and we pay no income taxes on that, as well as the meals and everything else associated with that board meeting would all be part of that deduction.

[00:24:28] Part of that, okay. Key thing is can't be hosting this board meeting in the same place that you do business. So if it's, if you're hosting your board meeting in your home office, that's just gonna be part of the home office deduction. Not a separate deduction. But if you're hosting it in your kitchen, in your living room, in your dining room and everything else, that would be, you know, a separate location.

[00:24:45] Gotcha. And then the second piece is understanding what is a reasonable rate, so what would coworking space down the road cost for me and what does that look like? Gotcha. Okay. Any questions on that? No. Is that kind of part of what they call the [00:25:00] Augusta rule? Is that the Exactly, yeah.

[00:25:02] Yep. Same thing. Same strategy. Yeah. The Augusta rule is kinda where it got it's name from because if you think of if you're a golfer, watch the Masters tournament that's in Augusta, Georgia, and yeah. There's a ton of people come there and they just have no place to stay.

[00:25:15] So they rent out their homes for really high dollar amounts during that week, and that's kind of where that concept kind of came around, kind of came from. Yeah. Yeah. We've done it with the martial arts school where we've had like a summer party and Yep. And used our house for that.

[00:25:28] I love that. Love doing it. You having a team retreat, something like that where you're doing it the same way. Again, biggest thing is business deduction. No taxable income to you up to 14 days. So you could ev you know, if you do quarterly board meetings, you could do that. That's only four, four times.

[00:25:42] If you do monthly board meetings, that's 12 times. If you do a monthly board meeting and a team retreat, now you're at 13 times. So there's ways that you can kind of adjust that. Yeah. I've also done, seminar. So it's like a virtual online seminar, a couple days long. Gotcha. Where normally I would do it in my home office, but for that seminar I decided to have a different [00:26:00] setting did in our living room, different things like that, different background backdrop and utilize that strategy for that as well.

[00:26:05] So a lot of kind of potential. Yeah. 

[00:26:07] Hiring Your Kids for Tax Benefits

[00:26:07] Hiring your kids. So you mentioned your son. Is your son working full-time in your business? Yes. Okay, perfect. And your daughter is finishing up school? Correct. Are you supporting her in any way? In either paying for the school, paying, you know, paying for meals, car, supporting her in any way? Currently while she's going to school?

[00:26:31] Yes, we help her out with some of those expenses. So the biggest thing that when we talk about hiring the kids, it's a super powerful strategy, right? Because as a father too, you know, we're always supporting our kids in many different ways. Yes. And so when we're hiring our kids in our business, it's taking that concept of after tax spending versus pre-tax spending.

[00:26:51] And so when we talk about kids under the age of 18 we can hire them where we get a business deduction. They [00:27:00] potentially pay no income taxes on that, and there's no FICA withholdings and there's workarounds and things that we can do for that. But once they turn 18, now, if we hire our kids in our business, now we have to do the FICA withholdings.

[00:27:09] We have to do those different things. If we're hiring them as an employee, if we can hire them as a contractor. Then it would just be a 10 99 for us. They'd get a 10 99, they pay self-employment taxes on that. But since they're a 10 99 contractor now, they're gonna have costs associated with that as well, that they can offset some of that 10 99 income.

[00:27:28] You know, for example, with your daughter, I don't know what she's going to school for, anything like that, but what I would always encourage people to say is, can we find something that they can do in our business, whether it is social media posting, you know, we send all of our, pictures, videos, things like that, that we won't be posted on social media.

[00:27:45] We'll send that to them. They'll post it for us. Maybe it's a thousand dollars a month that we're paying them $12,000 a year. They can now offset that with costs related to their internet, their home office that they're operating in. Maybe they travel to see their client, which is now used. So there's [00:28:00] cost associated with that.

[00:28:01] Those are just some really good opportunities. Again, you're gonna be supporting her anyways. is there a way that we can at least get a business deduction for some of that support? Interesting. Once they turn 18, we typically say we don't want them to be a W2 employee anymore. Now we want them to be a 10 99 contractor.

[00:28:17] Okay? So we can pay them as a 10 99 contractor, but they can offset a lot of those expenses. Now, they're probably still gonna have some taxes to pay on that, but they'll be able to offset a lot of that income with regular, everyday expenses associated with the work that they're doing. Okay? Okay. The biggest thing is that if they're a W2 employee, so like this probably wouldn't work for your son because.

[00:28:38] If he's full-time in the business, he's a W2 employee. He looks like an employee, acts like an employee, everything's an employee. They gotta be an employee. Yeah. But if it's a college student doing some social media work for us, there's some random administrative work for us. Much more dual to kind of work in a contractor type relationship.

[00:28:53] Okay. Interesting. Does that make sense? Any questions on that? Yeah. I had not heard of that before, so that's [00:29:00] interesting.

[00:29:00] Retirement Savings Strategies

[00:29:00] Alright, let's talk about some of the questions that you had. Related to traditional ira, simple, I-R-A-H-S-A real estate. Let's start to kind of dive into some of those things. So you mentioned that you are looking to put about a thousand dollars a month away towards retirement.

[00:29:18] Something semi some way. So $12,000 a year. And your question is. How much of that should be a traditional IRA? How much of that should I put into a simple, how much of that should I put into an HSA, and where do I pay that from? Is that pretty accurate? Yeah, that's exactly it. Yes. You know, the first thing is I love doing an HSA.

[00:29:41] Maxing out an HSA every year. Yeah. And the question is why you get a tax deduction going into it? And it gives tax-free growth and tax-free withdrawals. So it's like a retirement account, but it's on steroids, the good thing about a Roth is it grows tax free, withdrawals tax free.

[00:29:57] Bad thing about a Roth. You don't get a deduction going in. The [00:30:00] good thing about traditional IRA is you get a deduction going in, but gross tax deferred and tax on the withdrawals down the road in the future. Where in HSA has the benefits of both of those? Both, you know Yeah. Deduction in tax-free growth, tax free withdrawals.

[00:30:12] The only difference is it's limited on, has to be medical costs that you're paying with it. And so a few things that I would say, my just off the cuff recommendation is to first fund the HSA. Okay. Because a couple different reasons and a couple things that we need to be. Be, make sure that we're keeping it top of mind as we're funding this.

[00:30:32] HSA first one is, I like to pay for medical costs out of pocket as they come along. So even though we have an HSA with funds in it, as long as I can afford medical costs, I'm gonna pay for them out of pocket. As it comes along. And the beauty behind that is that let's say seven years from now, you hit a money crunch.

[00:30:51] You're not into retirement yet, so you can't access any type of retirement accounts anyways. But you're in a money crunch. What you could do is you could take those receipts from those [00:31:00] medical costs that you've been accumulating over the last seven years. You can ask for a reimbursement from your HSA, they'll be tax free for that.

[00:31:07] So it allows you to an HSA, you can start to access a lot of those funds prior to prior to a retirement type age. The other thing is is that it grows tax free. So we like funds in that vehicle to be growing, to be really doing good things in tho in those. Okay. So many people will fund an HSA and it'll sit in like a high yield retirement account earning like 3% interest or something like that.

[00:31:31] That's fine. But I, if we're gonna do this HSA and we're gonna max out an HSA and we're gonna do it as sort of a semi-retirement account or a secondary retirement account. We want to make sure that we're investing those funds in that HSA, just as we would a retirement accounts. Gotcha. So we want be just as aggressive or just as safe as we would in our retirement accounts Okay.

[00:31:50] With those HSA funds. So as we're do funding that HSA and then not using those funds from medical costs unless we need to from a cash standpoint, [00:32:00] Uhhuh we wanna make sure that we're actively investing that in the type of market, in the type of things that we would invest anyways in. Okay.

[00:32:08] Does that make sense? Yeah, absolutely. And so then the next piece is, so I would go HSA number one. Okay. Then I would max out your IRA. As long as you qualify, you're under the income limits, max that out. Okay. And then anything else go into the simple, okay, so your IRA and your simple. Are gonna be treated very similar.

[00:32:26] You know, as far as tax purposes when they come to withdrawals. Treated very similar. What you can invest in treated very similar. So whether you're funding a traditional IRA or a simple I rra. Doesn't make much of a difference to me. It would just be the role the amount of money you can put in there.

[00:32:42] So obviously you're capped at traditional. Once you hit that cap, move to the simple. Okay. If you hit the simple cap, now we're probably gonna look at, let's look at a solo 401k for your business. Obviously with $12,000 a year, we're not gonna have to worry about the simple cap. Yeah. But if you were to ever to hit that simple cap, now [00:33:00] we might be looking at.

[00:33:00] Let's transition to a 401k for your business. If you have employees who would be a Safe Harbor 401k that we could do that would increase that cap as well. Okay. As far as, do we fund it from the business account or the personal account? So the HSA, you have two options. You get the deduction for the HSA contribution, you get that deduction on your personal account.

[00:33:23] So that's one thing to consider is that deduction's gonna come from your personal account. Okay. But a cool thing with an S corporation is that we can make that contribution to an HSA through the S Corp business, and it will be included as reasonable salary to you, but it's not gonna be subject to self-employment Taxes not gonna be subject to FICA taxes.

[00:33:46] So it's a little bit more complicated. It takes a little bit of tweaking with your payroll provider. But there is a really cool benefit there where we can get that HSA inside of the business and add to that reasonable salary that we talked about [00:34:00] earlier but not getting hit with FICA taxes. So if you're funding an HSA for $8,000, as an example, that's $8,000.

[00:34:08] That would be considered reasonable salary. That you're, again, double avoiding FICA taxes on. Interesting. Traditional IRA you're gonna pay for personally. Now if you pay for it through the business, totally fine. Just mark it as a draw or a distribution. Gotcha. No business deduction for that. And then the simple any employer contributions would be you would fund the simple through the business.

[00:34:29] You're gonna be at the employee contributions that are gonna consider wages. They'll show up as a wage expense, and then the employer contributions are gonna be a separate line item on that business return. So I see. You can fund all of these through the business. Traditional, it's gonna be an owner's draw no matter what.

[00:34:43] So you're not gonna get a business deduction for that. That's why I always just say fund it personally. Gotcha. It's simple. You would need to or need to run through the business as well as, you know, factor into your payroll. Okay. And then the HSA, you have an option of funding it through the business or funding it personally.

[00:34:56] Okay. The tax deduction's gonna be the same on the personal side, you're [00:35:00] still gonna get that HSA deduction. And you fund it through the business, you have that possibility to avoid some flight taxes, but a few hoops you have to jump through, gotcha. If you're using a software like Gusto or something like that, you'd wanna kind of talk to them about those options.

[00:35:12] Okay. Yeah, we use Gusto, so I'll reach out to them. Any questions on that? No, I don't think so. That makes sense. So I'll I like that. Okay. Perfect. 

[00:35:21] Real Estate Investment and Tax Strategies

[00:35:21] And then talk to me, last item here before we cut off. Talk to me a little bit about real estate and kind of what you were thinking from that standpoint.

[00:35:28] Yeah, I'd like to so I, as I understand it, through my appraisal work I may qualify for professional real estate status. So I was looking at purchasing a rental property and. Trying to decide if I should fund that through like a HELOC or I've also I've heard that you can do like a Roth IRA fund it through a Roth IRA, something like that.

[00:35:52] So that's one area that I'd like to explore. Yeah, so rep status real estate professional status can be super powerful when you [00:36:00] qualify for it because it allows you to take losses from real estate, which real estate generally will create a loss, especially if we're doing, you know, a cost psych study with that real estate.

[00:36:09] But allows you to take losses with that in offset W2 income. Business income, which can be super powerful. Yeah. Now if we do that investing inside of a Roth ira, and I love self-directing retirement accounts, but if we do that investing in the ira, you're not gonna see any advantages on the personal side from that.

[00:36:26] So you're not gonna be able to rep status. Doesn't matter, you know, if you're investing inside of a retirement account. And that could be a Roth IRA, that could be a simple ira if there's a self-directed piece to that could be an HSA. You can self-direct an HSA account and invest in different things that you want too.

[00:36:40] Gotcha. So you could choose all those different options, but you're not going to need rep status if it's inside of that retirement account. I see. You rep status comes into play when you want to take losses to offset W2 income or business income. Okay. Using a HELOC to fund that, using some another, you know, just an investment type loan to, to put, make the [00:37:00] down or to purchase that house with some down payment, things like that would all be allowed in available for that.

[00:37:06] Okay. The biggest thing is understanding what type of property we, looking at, what type of. Tax advantages are we looking for? And do we wanna run a cost seg study on it or not? Do we want to accelerate the depreciation, you know, with one big, beautiful bill. One of the advantages to that was bonus depreciations back at a hundred percent.

[00:37:22] Gotcha. So what that means is that if we did a cost s study, let's say that you bought a house or a rental property worth $500,000. Let's say the land value of that was a hundred thousand, so the actual building value was $400,000. Gotcha. We can run bonus depreciation, but we don't get bonus depreciation on $400,000.

[00:37:44] We only get bonus depreciation on the property that we can pull out of that building that is less than 15 years in, in a life lifespan of it. Okay. Typically, we say roughly 30% of the building cost can be depreciated quicker. So we would take that [00:38:00] 400,000, we'd multiply it by 30%, and that would give us $120,000.

[00:38:06] So if we did a cost segment, we bought a building for 500, there was a hundred thousand dollars that's attributed to land, we can't depreciate land. So now we have a $400,000 building. 30% of that's $120,000. In that 30% we could likely bonus depreciate. Obviously they're just rough numbers and rough ideas.

[00:38:22] But that would somehow, that we could take as bonus depreciation. Okay. Let's say you bought a house for 500, you put 20% down, that's you know, a hundred thousand dollars. You are getting $120,000 deduction in year one at a loss that can use, be used to offset your W2 business income. So that can be a super powerful way that we can just continue to compound down that.

[00:38:42] Yeah, and even if you weren't a real estate professional, you could also do it with a short term rental. Gotcha. So if it's a rental that had an average rental day of seven days or less, that would be possible as well. So a lot of planning there. Just know that if you decide to self direct purchase that through a retirement account that's gonna look a little bit [00:39:00] different.

[00:39:00] If there's the tax benefits, I love getting into real estate and retirement accounts, but you're not seeing that tax benefit today, you're gonna see it down the road when that's appreciating and everything else. Gotcha. Makes sense. Okay. 

[00:39:11] Conclusion and Next Steps

[00:39:11] Now real quick if you're, if you are not quite ready to book a discovery call with our team at Tax Home but still want More, we just released a brand new Tax Savings Starter kit and it's a hundred percent free.

[00:39:20] Inside. You'll get our ultimate list of business deductions. You'll get a real case study similar to this showing how others have saved five to $25,000 or more in taxes. Just head on over to tax Savings podcast.com/starter kit to get your free copy. Again, that's tax savings podcast.com. Forward slash starter kit.

[00:39:37] Eric I've really enjoyed this conversation and I know we've kind of walked through a lot of different things at a high level. Really what I say is this is just kinda starting to scratch the surface. There's a lot of work to do from here. If we look at reasonable salary and adjusting that, doing some work there, we want find out what is that reasonable salary.

[00:39:53] And maybe we're just stopping salary for the rest of the year. If you've already hit your reasonable salary, maybe we say, okay, we're gonna turn that off. We're not gonna run any more [00:40:00] salary. Just take it as owner's, distributions, owner's draws. But there's some work that we need to do there. If we look at the 14 day home rental rule and the board and getting that set up and maybe hiring your daughter and your business.

[00:40:10] A lot of things that we can do from here. But again, I want to just kind of do an intro call just to kind of unpack some of the potential in, in, in tax planning opportunities. Was this helpful? Was there some kind of things that you're like, oh yeah that's something I need to be doing or thinking about doing, or some next moves that you're gonna be taking based on our discussion today?

[00:40:27] Absolutely. Yeah. I learned a lot just in the time we've spent here, things that I didn't know about. So yeah, I'm really excited. Yeah. And once income hits, say 250 to $300,000 or more, which you're kind of right on the edge of that cusp it really opens up the door for not only what we call core tax strategies.

[00:40:45] And a lot of what we talked about today is core strategies. You know, the S corporation, real estate, retirement planning, hiring your kids, 14 home rental rule maximizing deductions and all those different things are what I call core tax strategies. And we want to utilize them to their fullest extent.

[00:40:59] Once [00:41:00] we've fully utilized them. Then we look to what we call advanced strategies. And typically, again, that's gonna be once your income hits 250 to $350,000 or more. It opens up the door to some more advanced strategies that we can look at and, you know, a lot of different planning opportunities along with that too.

[00:41:15] You know, as you're growing your business, as you're saying, okay, we got this down now, we've lowered our tax bills from maybe $50,000 last year to maybe 30,000 or $20,000 this year. Let's look at those savings and then. Business is growing again. Next year we're back at that $50,000 just because we've had so much more income, again from business growth.

[00:41:34] Then let's start to kind of look into some more advanced strategies as well. Makes sense. So Eric came in thinking 50,000 in taxes was just part of doing business, but today we uncovered real actual ways that he could bring that number way down. And here's the truth. Most small business owners are in the same boat.

[00:41:50] They're leaving thousands of dollars on the table without even realizing it. This live case study wasn't just about helping Eric, it was about showing you what's possible when tax [00:42:00] strategy is done right, and intentionally. So if you found this helpful, don't forget to subscribe. Hit that like button and share it with a business owner who's sick of paying too much in tax.

[00:42:08] And if you want help from our team of tax professionals implementing a lot of what we talked about today along with so many other tax strategies, visit [email protected]. That's T-A-X-E-L m.com, or click the link into the description for a free discovery call. We are helping people like you legally lower your tax bill every single day.

[00:42:26] Eric, thanks for coming on and everyone else, we'll see you on the next one. Thank you.