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Tax Smart Real Estate Investors Podcast
351. Year-End Tax Planning 2025: What Every Investor Should Be Doing Now with Justin Shore, EA
00:32:50
In this episode of the Tax Smart REI Podcast, Tho…
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Tom
You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors.
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Justin
Your source for.
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Podcast Host/Producer
All things real estate, accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.
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Tom
Hey everyone, thanks for tuning in to.
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This week's episode of the Tax Smart REI Podcast.
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As we're in, you know, Q4 right.
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Now, this episode is being recorded towards the tail end of October. It is that time of the year to start thinking about year end tax strategies and what you can do, what levers you can pull in order to finish 2025 strong. That's exactly what we're going to be covering today. We're going to be going through vehicle deductions, short term rental considerations, reps, cost sake, timing, salt deductions, and so much more. This is an episode you don't want to miss if you are planning to make any moves before the end of this year. Stay tuned. We'll be diving to all that in just one minute.
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You've probably never found a real estate.
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Newsletter worth reading, and that's because we.
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Hadn'T created ours yet. The REI Daily is a newsletter you actually want to read whether you own one property or 100. We created this for you. Each issue delivers crucial tax saving strategies, legislative updates, as well as real estate market insights. Everything you need to stay sharp and.
- [01:27]
Ahead of the game.
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Get the real estate and tax news that actually matters straight to your inbox. Subscribe to the REI Daily newsletter today@therealestatecpa.com subscribe that's it for now and right back into today's episode.
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All right, and we're back and I promise you we'll be getting into year end tax strategies in just one minute. However, I've been taking a lot of discovery calls recently with potential potential clients and been hearing a lot of great feedback here on the podcast. So really want to appreciate everybody who tunes into this show. We wouldn't be doing this if it wasn't for you. So thank you again for tuning in. Some of the feedback that I had received is we want more commercial real estate. So I'm going to be looking at how we can talk more about commercial real estate here on the show in the coming weeks and months and weaving that in there because to be very fair, it is a topic that we've not talked about touched on enough here on the show. If you are interested in that though, you can check out the Major League Real Estate podcast with Matt Hamilton and Nate Sosa out Now on Spotify, YouTube, Apple Podcasts, wherever else podcasts can be found. They do sometimes talk about that there. Also got some feedback about more counting content here on this podcast. I was a little surprised to hear that, to be honest, but it welcomed the feedback nonetheless. So we'll be sure we touching on that as well. And then the last thing I will mention is that someone gave me feedback that the advice we gave here on the show, quote unquote advice, and I'll get into that in a second, did not apply to their situation or that they misapplied it to their situation. And what I just want to remind everybody who is tuning in. While we do share, we do give away all of our secrets here on the show and we do probably give a level of detail and nuance that goes beyond what other people might do. Other people in this space, it would be virtually impossible to go through every single detail that may apply to your personal situation. So really what you're doing here is with this show and really any other content you might find on YouTube or out there on the Internet is this is helping you understand what is available out there for you and then so you can go have constructive conversations with your tax advisor on how this all fits into your situation. So you're piecing the puzzle together in such a way that makes sense because it's really easy to overlook some details or some nuances and blow up your strategy because it sounded like it was easy. Okay. Or that you had all the information. So bottom line is what we talk about here on the show is high level. And while we do try to give as much detail as possible, we'll never be able to practically give every single nuance and thing that could come your way. So please do take this information, speak to your current CPA before implementing anything so that you can make sure that you're doing it appropriately and in compliance with the irs. All right, so I'm off getting off my soapbox. Again, thank you everybody for tuning in. Love to have you here. If you know anybody who is interested in real estate that might benefit from the show, please share it with them. That's how we spread the word. But with all that said, we're going to dive into year end strategies here. And Justin, let's just kind of start off with what is your top strategy for your end?
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Justin
Yeah, yeah, that's a Great question. There is a lot I don't know if I necessarily put, you know, one's on like a higher level of importance per se. But I will say like one of the ones that questions or topics we get a plethora of inquiries about like this time of year is definitely ways to utilize like the vehicle deductions. For anybody who, you know, isn't like real familiar. There, there are ways for you to say purchase a vehicle in your rental real estate business and potentially now, thanks to the 100% bonus appreciation coming back, thanks to the big beautiful bill that you could potentially write off the entire purchase price of the vehicle as well as all the other expenses that you have with it like fuel and insurance and maintenance and things like that. And the key thing to keep in mind on this, in order for this to work is you have to have at least 50% business use of the vehicle. But ideally you want to keep it as close to 100% as possible because even if you're at 95% business use on the vehicle, you only get to take 95% of the deductions, essentially. So. And the reason why I say we get inquiries around this a lot at the end of the year is it is a granted, you have to, it's a cash outlay. Right. And maybe you get a loan for the vehicle as well. But I said it's a relatively easy lever to pull. It's not super like labor intensive as compared to some of the other real estate strategies where we're talking a lot about getting material participation hours and things like that. So other key considerations there too is if you want to be unfettered on the amount of deductions that you can take there. Ideally you want to go for a vehicle that's over 6,000 pounds gross vehicle weight, so the GVW on that vehicle. Because if you purchase a vehicle below that, there are limitations on how much depreciation or section179expensing that you can take on the vehicle. So if you're wanting to be able to just maximize that completely, you're going to want to go for that £6,000 or greater. That's like most of your full size pickup trucks and even a lot of crossover SUVs and things will fall into that category.
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Tom
Yeah, no, for sure, for sure. Vehicle deductions definitely one of the more popular year end strategies. To your point, it's really easy to execute. Two things I'll leave here is that a, you don't want to let the tax tail wag the Dog, you really want to ask yourself, do you have a use for the vehicle or do you need a new vehicle or could you use a new vehicle? You just don't want to be purchasing vehicles just for the tax deductions. Obviously there needs to be some utility to it for yourself to make it a prudent investment purchase. So just kind of keep that in your back of your mind. Additionally, one of the reasons why it is really good from a year end perspective, and Justin may have mentioned this, is that your deduction is going to be based on your business use in the first year. Right. So if you buy it towards the year end, it could be possible. You could use 100% for business or at least very, very close to it, and then get the full write off using 100% bonus depreciation, assuming the vehicle qualifies. Right. And then in subsequent years you only have to use it more than 50% for business. Right. To maintain those deductions. So year end can be a great time to acquire these. But of course the next question we're going to have is what about short term rentals? And we've been getting this question a lot and we're not going to spend too much time on short term rentals here on this episode, I promise you. But we do a good question. Is it possible to do a short term rental at this time of the year in Q4? And what precautions do you need to take? What do you need to be making sure that you're doing in order to lock that in?
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Justin
Yeah, yeah, it's definitely possible. Right. So it's a heavy lift going into the fourth quarter, like Tom said. You know, we talked really extensively on all the requirements around short term rentals on other episodes. But I mean, just mentioning quickly there, the, the big one, getting a hundred hours of material participation time and more than anybody else, you know, before the end of the year is pretty tough. We, we have clients that do it every year though. And the other part that makes it feasible to be like actually do that is that spouses can combine their hours there too. So like a hundred, it sounds like a lot, but if you kind of break that out into, well, if we really plug away on this, we do a lot of the setup ourselves and things like, okay, two people realistically could get 32 hours in one weekend racked up, you know, just two eight hour days working together, you know, quick math there, 32 hours. So it's definitely possible. You've got to be willing to really commit and put the pedal to the metal Though on getting the hours in. For sure.
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Tom
Yeah, for sure. Definitely still possible. We see it every year, people doing this up till November and December. So if you're diligent, you, you got your ducks in a row, you're making the moves. It is certainly possible. What I would say here, short term rentals, you know, just make sure you get at least two guest days, right? You want to make sure you have the average. Those guest days should be with third parties paying market rates to avoid any potential crossover with personal use. Document your time and again, don't let the tax bite the dog. Don't rush into a property, don't rush into a property that may be a poor investment. Just for the tax savings here at year end, you want to make prudent investment decisions and also just remember that bonus depreciation is here to stay. So if you can capitalize on this in 2025, all the better. But guess what? Next year you have the entire year capitalize on it too. So got to put some things into perspective sometimes. One last thing I want to touch on this, Justin. And I know it's not related to directly short term rentals, but it is something that we've been running into a lot. I've seen this a lot on the, you know, on discovery calls, potential clients, is I know there's some ambiguity around the date, place and service or people feel like there's ambiguity around the date, the property's place in service to get eligible for 100% bonus depreciation in 2025. I know it's not specifically year end, but can you touch on that a little bit?
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Justin
Yeah. The first, like weird detail is that if you had a property that was acquired or was under a binding contract, what's quote unquote air quoting here? A binding contract before January 20, so like up to January 19 at the beginning of this year, then it's possible that it would have to be treated under the original 2025 tax rules, which were 40% bonus depreciation. And we've actually had a lot of clients, we. I didn't think that 19 days was gonna make that big of a difference with quite a few people that were in that boat. So you definitely want to check that out and again, review like, you know, contracts. If you did have something that was under contract that maybe didn't close until February, but you had that under contract, if it was under a quote unquote binding contract like prior to January 20th, then it would potentially still be subject to 40% rate instead of 100% bonus appreciation.
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Tom
Yeah, no, tricky. 100%. That's where the devil is in the details. There's things to be aware of and why. So want to make sure you're speaking to a tax advisor about how this all applies to your specific situation there. All right, Moving along from short term rentals, we do have the real estate professional status here, of course. Now the one thing I'll say on the real estate professional status for I kick it over to you, Justin, is that if you've not already started the real estate professional status at this point in the year, not been working towards it for a significant portion of the year, getting it starting fresh from, you know, end of October through the end of the year is, is maybe not impossible, but extremely challenging, if not just unlikely to actually come through to fruition. Something to keep in mind with the year end timing there. But what do you think, Justin, needs to be taken into consideration for reps into year end?
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Justin
Yeah, yeah. If you were starting today, I would say almost impossible. Right. There's, there's roughly 70 days left in the year, so you'd have to get 10 hours a day, give or take every single day and not take a day off until the end of the year to be able to get there. So that would be pretty tricky. I would throw out like one other consideration and this is another one of those like subtleties that depending on your situation versus another person's. Right. Is just the, the place in service like considerations there too. Again, like we talked about the whole beginning of the year thing, but if you're talking more about at the end of the year here and this, again, this is where like some of that dichotomy and some of the confusion around there, if you get out online and look at forums and stuff like that, where people disagree about this place in service. Oh, short term rentals, they should be in service before I even get any stays. And it's because there are really two different considerations there. The place in service is just that the property is, it's basically rent ready, it's available for rent. There's nothing in the code that says you specifically have to have like a tenant move in to the property to be considered place and service. And that's partially because place and service considerations are addressing all assets across all industries. So it's a little broad, it's a little vague. But so if you're, if you are achieving real estate professional status and you do have a property that's potentially, you know, say you close on it November 15th, November 30th and you don't get a tenant in before the end of the year, that doesn't necessarily mean it's not in service. If it was fully ready and you can prove that it was being marketed listed for rent, maybe you were getting inquiries via your property management software or something like that to build a document, hey, this thing was ready to go. We just didn't have anybody physically move in until January. It could still be considered place and service based off the rules. This is completely different though than what we were just talking about. Short term rentals needing to get a couple of stays. The reason why that's different, why that's important is because for the short term rentals, you have to be able to prove the average period of customer use is below 7.0 or less. And you can't do that without any stays. And that's, that's been, we've discussed that in previous episodes too, but that's been established by a lot of case law over the years. So that's where like that, I would say like that confusion comes into play and that dichotomy comes into play. If you're looking at, you know, conversations around when, when is the actual place in service state happen?
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Tom
100, 100 that, that super key, the nuance there in between reps and short term rentals.
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It's that time of the year again.
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The New Year's right around the corner.
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If you've been listening to the podcast all year thinking I really need to get proactive about my tax strategy, then.
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This is your moment.
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Because the truth is you probably don't even know how much money you're leaving on the table. At whole cpa, our team helps real estate investors and business owners save thousands of dollars through proactive year round tax planning. Whether you're looking to optimize cost segregation, leverage the real estate professional status or short term rentals, or structure your investments for maximum tax efficiency, then we've got you covered. But here's the deal. Spots for new clients are limited as we approach year end. So if you want to lock in your strategy before tax filing hits, don't wait. Check out the link in the show notes to request a consultation and start working with our team before you miss another opportunity to keep more of what you earn.
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Next up, we have cost tag timing right? So cost segregation does not need to be done before year end. Okay? Some cost segregation companies may suggest or insinuate that it has to be done before year end, perhaps because they have quotas to meet. However, you have up until you file your tax return in 2026 to do a cost seg study. So if you bought a property in 2025, for example, you can do a cost seg study in January or February or whatever the case may be and you're in good shape. One thing I do want to add in here while we're on cost seg timing before I kick it over to you Justin, is for people and this kind of crosses over with reps a little bit. This is not going to help you if you have, if you're using the short term mental loophole it's going to basically be for reps or passive investors is if you're looking for losses to offset say your W2 or your business income or your spouse's W2 or business income and you do one of you, one of your spouse, you or your spouse qualify for reps and you're doing a married filing joint return. One way to get losses in the books before the end of the year is, is to invest in syndicates and funds. Right? We're going to generate losses and you can group them with your, the rest of your long term rentals. Now you do have to spend more than 500 hours typically on your long term rentals to make this work so that when you group it all in, you're making sure you're spending more time than anybody you know. The 500 hour test is and you're in the clear and that's really what makes that grouping election work. But did want to point that out that investing in syndicates and funds makes sense at this time of year for the tax savings or on the flip side say you stole the property or you have significant net rental income. Investing in syndicates and funds if you're on the passive side of the coin can also be a good play. And of course I have to wrap it all up here. My spiel with saying don't let the tax wag the dog. Invest in good syndicate and funds that meet your criteria that you're comfortable with from your risk tolerance. Don't just go gung ho investing in the first deal you see or investing in a risky deal just to get the tax savings.
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Justin
Yep, totally agree, totally agree. Yeah and I would like to like addressing just like one of the common misconceptions in this area too is that what Tom's talking about is like syndicates and funds like you're going to be a limited partner, right. So you're, you're not going to have really any hours in that specific investment. But with that 500 hour material participation test. If we use a grouping election, we can group those limited partnership investments into your rental properties that you own 100% of, for example. And where this often gets confused is there is a section in the code that says that your participation as like a limited partner will mean that you are passive basically, no matter what. And I say basically because there's always an exception to the rule. Right. But there's a specific exception in the treasury regs that says if you are using the 500 hour test for material participation, that is the one way to work around that via the grouping. So like specifically you can't be using 100 hours and more than any other individual material participation test to be able to do this. It specifically calls out that 500 hour material participation test there. But you've got to jump through all the exceptions to find that.
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Tom
Exactly.
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Justin
In case you hear contrary out there. That's why. Okay, well, yeah, so next thing I'd love to jump into is just another one of the fun updates from the one big beautiful bill too was that we had an increase to the SALT cap. That's the state and local tax. For those who aren't familiar with the acronym SALT, but this went from $10,000 up to $40,000. But they put a little bit of a twist on it. Your AGI has got to be below $500,000 to get that full $40,000 state and local tax deduction, that higher threshold. So there is a phase out range from 500,000 to 600,000. And I should say I'm talking married filing joint numbers like this gets cut in half if you're single. But for married filing joint, that phase outs from 500 to 600,000. So when we're talking about all this kind of stuff like year end, fourth quarter, when you're analyzing this, and this is again why you'd want to talk to your tax advisor in a lot greater detail on this is to find out if you're in this range. We've been talking to a lot of clients that are in the, you know, anywhere from the 500,000 to like 650, $700,000 AGI range to say, okay, how can we get this down below the $600,000 phase out? Can we get it all the way down to 500? Because obviously if you're at a $600,000 AGI and we're able to generate $100,000 of losses and offset W2 income, that's great. We're saving roughly 32% on $100,000 savings. The great thing with this though too, where this kind of adds even more weight to it is that that also might be increasing your itemized deductions from $10,000 all the way up to as high as $40,000. Especially if you're in a state that has a high income tax rate like a California, New York, or you just have high property taxes that you're paying a lot like through, let's say like Texas doesn't have high. It doesn't have any income tax but has really high property taxes. So it's definitely something to keep an eye out for if you're anywhere in that range. If you're below 500, great. Yeah, you get to tap into the up to that maximum amount already and you don't have any limitations there. But just wanted to at least like squeeze that here in the middle while we're talking about some of the extra benefits to getting these additional deductions at the end of the year.
- [19:14]
Tom
You know, definitely important to know. Definitely important to know. And keep in mind that is good. A lot of people battle that, that salt tax update. All right. We're going to move into some of the more normal stuff now, I guess the usual type of stuff that you might see. So tax loss harvesting. So basically what happens is if you have assets that are in a loss position, especially equities, you could potentially sell them this year, recognize a capital loss and you can use that capital loss to offset capital gains from the sale of other capital assets, be it stocks, real estate, what have you, and up to $3,000. So that can be offset against your W2 income and any remaining loss does carry forward. But when it comes to tax loss harvesting, of course, again, I'm going to say this a million times here on this episode, do not let the tax tail wag the dog. Right. You have to understand timing the wash sale rules. If you buy it back within 30 days, then you don't get to recognize the loss. You know, that's something you have to keep in mind there. But it is a year end strategy. Some people do sell their laggards or whatever for the year, lock in some of those capital losses before year ends. Any comments on that, Justin?
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Justin
Yeah, just comment that to that point. You know, there's. This could even be like a creative solution to something like a failed 1031 exchange that you had earlier in the year. Like Tom said, you know, if you have a big capital gain event, it could come from real estate, but you can generate capital losses from selling like securities or Maybe you pick the wrong type of crypto. Right, right, right. For example, and you have a large loss, capital loss there. You know that that can be. Or maybe you're under a 1031 exchange right now and you're really worried about, you know, failing because you're on your third replacement property or something. And maybe again planning opportunity for the end of the year that, hey, let's hopefully 1031 works, but let's get the safety net set up and if we have some of these capital losses we can secure now before the end of the year.
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Tom
Right, right. For sure. For sure. Okay. Then we have retirement accounts. Okay. Some of this basic stuff, right? So retirement accounts for 401ks and I'm pretty sure 403bs and all those, all that stuff. You typically you have to make the employee contribution prior to the year ending. So meaning prior to 1231, 2025. So you need to speak to your employer or whatever system that you're using for your 401k and make sure that you're making any of those employee contributions before the clock strikes midnight on 1231. Okay. Whereas for IRAs, okay, IRAs, whether it's Roth traditional, whatever, those individual retirement accounts, typically you're able to make the deduction or make the contribution to the account up until 4:15 of the following year. So 4:15, 20, 26. So those don't need to be made before year end. But you just keep in mind the differences there. Anything you'd want to add in there, Justin?
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Justin
Yeah, I'd say the, the other little like, I guess caveat to that is where it say like falls in between the two things Tom was just describing there too is that if you are self employed, whether you've got just a sole proprietorship, like a schedule C type of business, or if you have an S corporation, then you will have like opportunities there for making like SEP IRA contributions or could be solo 401k contributions. And to that point, if you're making like the solo 401k contributions, to Tom's point is you're the employee, but you're the employer as well need to make those employee contributions still by the end of the year. But your employer portion of the contribution could be up to the deadline of say like your S corporation filing filing deadline, which would be March 15th. Similarly, if you're just like a schedule C type of business, sole proprietors, you don't have a corporation, but you're making something like the SEP contributions, those would be up to your again filing deadline for Your business, which in that case would be April 15, because your business gets filed, your schedule C gets filed with your personal return. That's another one right. Where again, we're like, we can say this probably 20 times on here is like, you definitely want to talk to your advisor on this on. Because there's all these different scenarios and exceptions to what type of business do you have, you know, and what does its filing requirement look like? And you know, do you have the right, like retirement plans, like set up and everything at the appropriate times?
- [23:08]
Tom
Yeah, yeah. No, for sure. Definitely want to make sure you have those nuances ironed out. Making the right moves there. Touching health savings accounts, HSAs. Right. So if you're eligible for an HSA, you can make the contributions up until April 15th of 2026, much like an IRA. However, you do have to have the account open and established within 2025. So you have, you know, a few more weeks here by the time this is going to be airing, roughly two months to get that done. Don't wait till the last minute. I remember somebody years ago waited till 1231, so New Year's Eve to try to get something like this done and was infuriated when they found out that the person had left for the day at one of these companies. Don't wait till 12:31. Get this done now. Don't drag your feet. There's no need for it. So the max HSA contribution is $8,550 if you're for a family plan, if you're under that. That category, or roughly half that if you are single. Anything there, Justin?
- [24:05]
Justin
Yeah, no, just I. Yeah, I'll reiterate that. That timing at the end of the year definitely don't wait till last minute. I compare this to if you've ever closed on a piece of real estate in that window, December 20th to December 31st. And I'm speaking from experience of I'll never do that again. There's a lot of people in this professional, like service industries that are not in the office or like for the majority of that time. So definitely try and get that knocked out at the latest, like beginning of December or something.
- [24:30]
Tom
Yeah, kind of. Once you kind of get into that, that last week or two of December and that holiday season, like, all bets are off you, like you might, you're. You're gambling. You really need to get stuff done before that. Okay.
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A few more things.
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Of course you want to get your documentation in order prior to year end. Get everything organized sooner rather than later. It's not something you want to be piecing together during tax season when there's a lot of stuff going on and there's a lot of information you need to provide your tax preparer. And also bookkeeping, right, Bookkeeping, super important. It's the foundation of the numbers behind your business. It's how you tell whether or not your business is profitable. You know, it's the foundation for calculating almost all KPIs related to your, your financials, but also for tax purposes. It's one of the things that your tax preparer is going to need in order to prepare your tax returns. And if they have to, if you don't have your bookkeeping ready, you can't file your tax return. So the sooner you get that in order, the sooner you get that organized, the better off that you are. And that is something that we can help you with as well. And we're going to be, I'm sure we're going to be doing a ton of year end accounting cleanups and setups as we kind of move into the rest of Q4 here. So that is something that you're interested in. You can follow a link in the show notes to this video or to the podcast wherever you're you're tuning in to schedule a discovery call. With our team, we'd be more than happy to see how we can help. But Justin, anything else that we, we've not covered or that you think is important to cover here on this episode?
- [25:52]
Justin
Yeah, you know, I, I think this is sort of year end, I would say related type, type of information, slash January. Like a lot of our clients will deploy the strategy for shifting income to kids, like paying kids out of your rental business, for example. Great strategy, love it. You know, we've done like dedicated episodes on mechanics on this and everything. So I won't go into full details on this, you know, but real high levels, keep it reasonable. Like, I don't want anybody to hear this and say like, oh, I should go out, pay my kid $10,000 before December 31st and they're only 5 years old and they didn't actually work in the business, don't do that. Then definitely make sure that it's, it's. If you have been doing it throughout the year, at least for having that documentation ready, is making sure that you do have, you know, some record there of the type of work that they did, the number of hours that they spent, so you have that substantiation for what you paid them. But going into January, why say it's quasi year End slash January is that if you were paying your kids to your business and again, assuming that you did this correctly and you didn't do it through a corporation, you did this through like your llc, that's your rental holding company, for example, you would still want to file a W2 for them in January and the deadline for that filing is January 31st, so that it kind of sneaks up on everybody. That lasts kind of all year long. You've been maintaining documentation, trying to make sure you issue them a W2, even though you ideally had no withholding on their income. Again, if you executed the strategy correctly and did it through the right entities. Just don't forget to file that W2 in January. And you know, that can be done electronically. We regularly recommend. Avalara recently bought out the the Track 1099 folks. That's the one we used to recommend. But I use Avalara now just to get that electronic filing done. It's relatively quick and painless. So that's kind of a buttoning up your year end documentation.
- [27:35]
Tom
Yeah. And I'm sure your communication from us via newsletters and whatnot. For those who are subscribed to the newsletter link is in the show notes, by the way. But 1099s are also due on the 31st of January and so you want to make sure you get Those done. Track 1099 free shout out for them. They can be an effective solution for that. So Justin, when it comes to S corporations, people, owners, I know there's reasonable comp considerations around your end. What do people need to consider? There's.
- [28:01]
Justin
Yeah, definitely again, you know, have that conversation with your tax advisor, tax planner, your CPA or something around like reasonable compensation and just make sure that, you know, especially if this is something that you're hearing about, like you had an S corporation set up, you know, earlier this year and you're going, what? What in the world's reasonable compensation? That's the quick and dirty there is. Like as an S corporation owner, you have to draw a W2 salary from that S corporation. So you'd want to make sure. And again, we're talking about this in October, so it's kind of short notice. But you could still get this set up. If you don't have payroll set up at all is that you could get that set up before the end of the year and process yourself w2 wage payment. And the thing you have to be like, keep in mind though with that too, is that if you have had this S Corp for the entire year, you would basically need to like true up your wages. Like you don't want to just pay yourself like a $5,000 W2 paycheck, for example in December and call it good. You don't want to look at that, analyze what your wages should have been for the entire year and if that's $100,000 then you ideally would need to pay yourself that W2 wage, $100,000. Now obviously you got to have those conversations around like how much cash does the S Corporation have in its bank account? Like what do we need to do to fix that? But just make sure that it gets processed before the end of the year is really, really critical because having no wages or underpaid, a reasonable comp wages for a S Corporation officer is a pretty big red flag. So definitely you want to get that in if you can before the end of the year and have those conversations around. Like hey, if you were just paying some random out of the blue flat dollar amount, you want to have that conversation again with your tax planner for the end of the year, make sure it is something that's, that you can document on why you think a reasonable compensation should be that much. The other last like quick little thing I'll mention on that is if you're hearing this and thinking like S Corporation, what's the deal? What's the benefit? There can be some pretty hefty tax benefits there with S Corporations, most notably reducing your self employment tax. So if you have like schedule C business, you know, sole proprietor type business or you know, single member LLC that you're running all this through, you're just now learning about it, kind of hearing about it late in the game. You know, unfortunately in most situations you can't go back to the beginning of the year to make that change. But at least what you can do, like my recommendation for a lot of clients that are asking us about these this time of year and say hey, you know, it's a shame like you didn't know about this or you weren't working with a group like us to do planning a year ago is let's just get ahead of it for next year because you could go ahead and take care of making the S Corporation election now and just have it be effective for 1-1-2026 and not have to worry about hitting the deadlines for that S Corp. Election filing next year. So at least you're not in the same, you know, in the same boat come fourth quarter of 2026.
- [30:36]
Tom
Not important, important stuff, important stuff.
- [30:39]
All right, so I think we covered.
- [30:40]
A lot on this episode. Now this isn't a full tear down of every little possibility, every little possible thing that you could potentially do. So definitely want to make sure that you speak to your tax advisor about anything else that you might be able to do for your end, as well as how this all fits together and makes sense for your situation. Okay? The devil is always in the details and don't want to make any missteps or make any major investments thinking that the tax benefits are going to be there for you when there might have been a detail that might be missed. And you you can't proceed in the way that you thought. So thank you everybody for tuning in. We'll catch you on next week's episode of of the Tax Smart REI Podcast.
- [31:20]
The Tax Smart Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the podcast show or show Notes. Do not create a relationship between the reader, user or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.
- [32:08]
Podcast Host/Producer
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