There is no shortcoming of bad tax advice on social media.
It feels like everyday I see a new post, video, etc. with some fragmented piece of tax advice that is so far away from how it works in the real world. It makes it hard to know what is real and what is not.
I have seen this in my day to day as people I work with reach out and ask about a specific strategy they hear online.
I want to help you avoid this.
An LLC is not some special tax planning tool in itself. It is a liability protection tool.
If you get paid self-employment income, whether you are an LLC or not, you get the same tax benefits like deductions, retirement accounts, etc.
This is something I see way too many believe.
Many people believe that if you spend money on something for your business it saves your dollar for dollar on your taxes, but this is not how it usually works. Tax deductions end up saving you (cost of expense x marginal tax rate). So if you are in the 24% marginal bracket and spend $10,000, you end up saving $2,400 on taxes, but you still spent $7,600.
However, there are some, but not a ton of tax credits that do save you dollar for dollar on your tax bill.
Many people believe that the entire cost of a vehicle reduces their tax bill dollar for dollar, however this is not true. You have two main ways to maximize tax deductions for the vehicle:
You want to compare the two and use the method that leads to the largest deduction.
There is also section 179A, which allows you an immediate tax deduction on depreciable property like a car. The IRS treats vehicles differently based on their weights and the limitations can differ a lot.
If you have a qualifying heavy vehicle (one that is over 6,000 pounds) you use for business at least 50% of the time, you can claim a section 179 deduction up to $28,900. If you use that vehicle personally, the deduction scales proportionately just like we discussed above with the “actual expense method”. For example, if you use it only 50% of the time for business, the deduction that you’ll be able to claim is $14,450.
You can also just take the bonus depreciation deduction which is 80% of the vehicle’s cost and the first year’s regular depreciation on top of that. For higher cost vehicles, this can make a lot of sense, but note that bonus depreciation has started to phase out and will be 60% in 2024.
If you have a light vehicle (one that is under 6,000 pounds), the same conditions apply, but the deduction is limited to $20,200. Also, bonus depreciation is hard capped at $8,000, unlike the 80% cap for a qualifying heavy vehicle.
Keep in mind that this deduction is only available for the first year of use, and you cannot use the standard mileage deduction after you elect into taking the depreciation deduction in any following years.
You need to work with a CPA to determine the best methodology for you.
This is not typically how it works. I have seen people I know say all you need to do is set up an LLC and then your cars, Rolexes etc. are all tax deductible.
This is flat out false.
Let’s say you buy a Ferrari and use it in one video, that does not make the entire cost deductible. It would be based on the percentage of use for work specifically.
However, there are still a ton of deductions you can use like: home office, marketing, meals when you travel, potentially some clothes you use in videos, etc.
This is something so many people get wrong. They think if they convert Bitcoin to Ethereum it is just a conversion and not a taxable event. Wrong.
The IRS sees this as selling Bitcoin for cash, then buying Ethereum with that cash. You owe short term or long term capital gains taxes at each conversion, sale, etc.
Everyone knows that taxes are due typically around April 18th, but you can also extend your taxes till October 15th. However, many believe that because you delayed the tax filing till October 15th, you can also wait to pay the tax bill.
You can’t.
Your tax liability is still due on April 18th or you will have to pay penalties.
For most businesses like LLC’s, S corps, Partnerships, etc. they are considered pass through entities. This means that whatever profit you have in a given year is taxed in that year whether you pay it out or not. I have numerous conversations a year with people stating they hold extra cash to avoid taxes, but it does not work that way with passthrough entities. Holding money in the business should have a purpose like:
Everything else should end up getting deployed as you are taxed on it anyways.
Many high income earners hear that real estate can have losses via depreciation (cost segregation + bonus depreciation) and think they can buy a property and use those losses to offset their active income. This is only half the story.
For long term rentals, you need to be a real estate professional to have these losses offset your income. To qualify, you need to work 750 hours a year in real estate and do more work there than anywhere else. Almost no high income earners qualify unless their spouse does due to the rules.
The only way around this is by using short term rentals and materially participating. Here’s a great podcast I have done on this topic to learn more.
There is some truth to this one, however many believe you can just have a baby, pay them the $6,500, fund a Roth IRA, and call it a day. In order to pay the baby, they need to actually earn the income. Some say you can pay a baby $50 an hour for modeling. This means it would take 130 hours to reach the full $6,500.
You are lying to everyone involved if you use your baby for that much for modeling.
Taxes do not work like this.
Taxes are progressive, which means the more you make, the more you are taxed. However, they are also marginal, which means not all income fits in one bracket. You are taxed some at 10%, some at 12%, some at 22%, and so on (You can read more about this from lasts weeks post “how am I taxed”). So as you make more, only those additional dollars get taxed at higher rates. I don’t know about you, but I would still rather take home 68% of the income in that bracket, then choose to not make more.
Just because you work from home does not mean you can claim the home office deduction. In most states, you have to be self employed to take advantage of this deduction. Then you can deduct your home office based on what percent of time you use for just work and what the square footage is.
For me, I have an office that I just use for work 100% of the time. So I get to deduct based on square footage of that office plus some bills.
Many do not understand that there is a difference on capital gains taxes based on your holding period. If you hold an investment for less than 1 year, you are taxed at short term capitals gains rates, which is equal to your income rate. When you hold for greater than a year, you are taxed at long term capital gains rates which are more favorable. The rates are 0%, 15%, and 20%. Then you may have 3.8% net investment tax on top of that based on how much you make.
This is a common misconception I see around stock options. It is important to note the difference between ISO’s and NSO’s.
ISO’s do not have a tax when you exercise. So if you exercise at $10 a share and the market value is $20 a share, you do not owe tax on that difference. However, you can trigger AMT (alternative minimum tax) which is taxed at 26% or 28%. This is something you want to make sure you plan for as I have seen many people get hit with 6 figure AMT bills that they were unaware of.
NSO’s however do have a tax upon exercise. Using the example above, if you have NSO’s where you exercise at $10 a share and the fair market value is $20 a share, then you are taxed at ordinary income rates on the discount, that $10 difference.
Distinguishing between the two is crucial and so is planning around AMT on ISO’s.
I just had an argument with someone on twitter about this last month. Many believe you have to hold RSU’s for a year to get long term capital gains (which is partially true).
Here’s what is wrong about this. When RSU’s vest, taxes are due the day they vest. Most times your company will sell x number of shares to withhold for the taxes that are due (note they might underwithhold at 22%). So if you were to sell that date, you would have no more tax. However, if you hold on and then sell within a year, then any gain is taxed at short term capital gains rates. If you hold for greater than a year, it is taxed at long term.
Hope this helps you better understand what is and isn’t true from the tax advice all over social media.
Disclaimer: None of this should be seen as advice. This is all for informational purposes. Consult your legal, tax , and financial team before making any changes to your financial plan.
Financial Advisor