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Dr. Friday uses this episode to step back from the rush of tax season and look at what taxpayers can still control after the Tennessee filing extensions. She covers retirement contribution timing, business-loss documentation, estate and trust tax handling, and why good records matter when the IRS asks questions. A caller also asks how to distribute an IRA that was paid into an estate trust, leading to a practical discussion of Form 1041 and K-1 reporting.
Summary Points
- Tennessee filing extension: Dr. Friday notes that Tennessee taxpayers now have until June 8 and discusses remaining opportunities for certain 2025 contributions.
- Retirement and withholding planning: She compares traditional retirement contributions, Roth choices, capital gains, Social Security taxation, and the impact of under-withholding.
- Business versus hobby losses: The show reviews startup education costs, repeated Schedule C losses, short-term rental use, and the need to prove a profit motive.
- Estate IRA distribution question: A caller asks about an IRA portion paid to an estate trust, and Dr. Friday explains using a 1041 return and K-1s for the beneficiaries.
- Entity structure decisions: Dr. Friday compares LLC and S corporation tax treatment, payroll, self-employment tax, and Tennessee franchise excise considerations.
- IRS problem resolution and basis records: She discusses payment-plan problems, Taxpayer Advocate help, amended returns, and appraisals for inherited homes.
Episode FAQ
Q: Can I deduct business classes before the business is actually making or trying to make income? A: Dr. Friday says not automatically. The taxpayer needs to show a real attempt to operate a business and make money, not just take courses.
Q: How should an IRA paid into an estate trust be distributed to beneficiaries? A: In the caller’s situation, Dr. Friday discusses filing a 1041 trust return and issuing K-1s so each beneficiary reports their share.
Q: Why does Dr. Friday recommend appraisals for inherited homes? A: She says an appraisal helps document basis at the date of death, especially if the property is sold later or multiple heirs are involved.
Transcript
Announcer
No, no, no, she’s not a medical doctor, but she can sure cure your tax problems or your financial woes. She’s the how-to girl. It’s the Doctor Friday Show. If you have a question for Dr. Friday, call her now. 737-WWTN. That’s 737-9986. So here’s your host, financial counselor, and tax consultant, Dr. Friday.
Dr. Friday
G’day, I’m Dr. Friday, and the doctor is in the house. Have we had some busy times lately with the whole Extension on taxes and then a second extension on taxes. So right now it’s June 8th that we have to have everything filed by um in Tennessee. They did all 96 counties. So um We uh obviously are are working on taxes. Not this weekend, thank goodness. So we get a little break. Normally it’s uh been crazy for a while here, but We are moving forward. And then if you’ve got additional questions or you want to join the show, you can at 615 737-9986. It’s actually a really nice Saturday out there. Everyone’s heading some time to uh start working, but we are just about done. with the month of April, which means that we should be seriously considering not only we can’t change a whole bunch that happened in 2025.
Dr. Friday
Sure, if you are a self-employed person, you can have a self-employed Except that you don’t fund until as long as as October. Um and for some people, if you did not and you wanted to fund your HSA or your IRA for 2025. And even though we are past the April 15th deadline due to the federal extension, we would be able to still contribute the proper amounts into those accounts depending on your age and your income if they applied. So so there is a little bit of a window for some people that may find out that they owe money and they One way to reduce the amount you owe the IRS is putting it into a deferred account. I would always suggest talking to a financial planner, uh, tax people. We’re always looking at instant gratification, meaning if I’m going to save money today by giving it to a retirement plan versus to the IRS, guess what?
Dr. Friday
I would say it’s usually a good idea, but then I have told people sometimes it’s better to do the Roth because you’re in the 12%, even though you might owe the IRS. You’re only saving eight or nine percent if you put it into your retirement now. Um, if you put it into the Roth, then you know it will grow tax free. And even though right now you may still owe the IRS it will be a better investment. But again, I’m looking at tax situations. You should always double check whatever Unless your tax person happens to be wearing two hats, one as a financial advisor, one as a tax exput, then you should always check. Um just like if your financial, I had a case this year where the financial planner thought they had done the math correct and they had done uh some conversions and um and then of course I did the taxes and they were quite a bit off They um I I don’t know if they just didn’t have the right numbers to start with.
Dr. Friday
I wasn’t there. So all I can say is the client wasn’t happy. They owed an additional $17,000 um because of Social Security being taxed more, different things came into play. And it may have been that they didn’t know that they were going to have quite the capital gains that came in. A lot of times it’s a lot of little things. I had a another client that we just finished up last Friday, and um he’s like, why? Why do I owe money? I never owe money But they had overall had $60,000 more income because of capital gains, a larger distribution from retirement, which then made more of the Social Security. They were not at the 85% normally. So 85% of their Social Security became tax, a little bit more interest overall, and it all kind of trickled down. And most of the things that had um increase capital gain, social security, they were not having any kind of withholding.
Dr. Friday
So it was um another case where they owed, it wasn’t horrific, it was like 3,900, but it was a lot when you don’t think about it, right? When you don’t normally owe the IRS. It’s quite a bit when you have to. So if you’re in the process of doing that kind of thing, you do need to make sure you’re tracking everything. Today’s show, I kind of wanted to touch on one of the couple things I’ve ran into this tax season. And maybe part of it is obviously a lot of you guys know I do um I now have a home farm. But also um small business owners. You have to have some reasonable concept. I mean I had a person that came in and They started a business and they um they they went and done a whole bunch of classes and took um took a a lot of courses uh from supposed experts in the field.
Dr. Friday
I’m talking like up in the forty-five thousand dollars um of doing and um and then you know never generated any income from this business at this point at least. And um and she’s like, well I can write all this off because I was self-employed. And I’m like The tax law isn’t quite that simple. First, you have to be making the attempt to make money. You have to be able to show that you have done this because you’re able to make money. The IRS says, hey, if you’re going out and learning how to make pots and you’ve never made a pot, you’ve never sold a pot, you’ve never done anything, but you’re taking these courses When you do start selling your pottery, that would be part of your startup to learn how to do it. It would not be something you could write off. at the time of taking those courses and not not having anything to sell, any product, any classes, anything that shows that you actually took this um education and created a business that is now at least attempting to make income I mean, maybe you’ve got a full website and you can show that you put out a marketing uh plan and and that, I mean, it doesn’t mean you have to have shown that you made a profit.
Dr. Friday
But keep in mind, the IRS does also say for uh small businesses or anyone that operates as a Schedule C, um, two out of five years, you need to have been making money So a lot of times the first year or two, we don’t expect to make money. You know what I mean? By the time you get all your startup costs and you learn how to make and get clients Sometimes the first year or two is a dry year or an upside down year, whatever you want to say. Then you go into the third year and and you’re you’re least breaking even. The fourth year you made a profit. And goodness gracious. The fifth year you’re actually paying back the first year’s losses. That’s the way the IRS sees it. If you’ve been at this for four, five, six years, and I’ve had a couple clients come in this year, and they’ve been taking losses I mean, you know, they forever is what they basically have said, but let’s just say for four or five years.
Dr. Friday
At that point, I’m questioning, is this really a business? Is it a legitimate business? Is this something that’s a hobby? Um Something that uh another one is the a um the short-term rentals. Um if this property is a short-term rental and we put that on Schedule C so we can take the losses Um, if this is actually your vacation home and you are using it more than two weeks in a year. Keep in mind you cannot take all of those losses because it’s personal use. It is not just a business now. You’re using it or giving your family and your grown children and your grandchildren. Everyone has access to this home. That turns around and now you’ve got a situation where if you’re ever audited, they’re going to say, well, was the home available for rent for 365 days? And you may say, well, no, I had this week that we had to go down there for repairs and this, and we had another week where we came down and we we did three more days of repairs.
Dr. Friday
I’m not saying you can’t work and be down there. I’m just saying the tax law specifically says you have to be repairing something. Doing something, you can’t just be down there enjoying the house with your kids and your grandchildren and calling that a repair weekend or just using it. But you know, so if you do have those kind of homes. You need to figure out the percentage of actual rental days and how much of the mortgage, the HOA, the depreciation, the utilities, all of that that’s a deduction because Every year you’re showing a $35,000 loss. That doesn’t make sense. Nobody can have, and the IRS basically says, who can afford to lose money if it’s a legitimate business every year? I mean, if it’s your hobby, if it’s a place that you’re looking at, like, oh, this is a great vacation place. You know what?
Dr. Friday
Someone pays most of the stuff. So I don’t mind having $35,000 a year going out because I I use it for personal use. That’s cool. But then you can’t take it as a tax loss because it’s not really a business. So you’ve got to sit down and really look at these businesses that you’ve been using for years to offset Your gains, your personal income, your other lifestyle. And then saying, hey, I I’ve lost 15, 20, 25 It’s going to catch up with you. I’m not I’m not the IRS guys. I’m not telling you this because that’s going to, I don’t know. You may you may be able to do it for 30 years I have people that barely got away with it one year and then they end up audited. So no one knows when or what’s going to happen on that element. But when we do our taxes Hopefully we’re doing our taxes with the idea that we can justify the numbers on that return so that way you can sleep at night.
Dr. Friday
You put all that together. You scan it all in or you put it someplace safe. And if Uncle Sam comes knocking or the IRS, you have the documentation that you need to justify whatever they’re questioning. You’re not there sweating it saying, oh my God, I’m being audited. No one likes to be audited. It’s never going to be a good. Unless you’re one of my very first clients, I’ll just call him Earl. He he got audited Oh goodness, this had to be twenty plus years ago now. And um and he was when he was done, the IRS owed him like twenty-five dollars. But there was um a couple things that you know, but he had and enjoyed. I think he really enjoyed going through that audit. Um, but most people, most of us are busy. We do not want to be spending time dealing with all that.
Dr. Friday
So when you finish your taxes, you scan in, and I’ve got some awesome clients. I see, I mean they come in with their whole box And you know who I’m talking about, girl, of all your receipts, all of your folders, everything in there, so that if something were to come back, you have everything organized in one place Um, and many of you that do. But um but you you need to have that. And if you don’t have to have it in paper form, IRS accepts electronic. In fact, nowadays we almost have to upload them into a link To give them the documentation. So having it electronically is almost better than having it uh in paper nowadays. But that is the way you want to live. So if you’re a self-employed person or you’ve got a bunch of um short-term um rentals that you’re using a schedule C because let’s be honest, short-term rentals for people that make more money, you get a better tax deduction.
Dr. Friday
If you’re making more than about 125 on a schedule E, most of us do not get to claim the losses in the year that happens. We’ll eventually get to claim them when we sell, but it’s not an instant gratification. All right, we’re going to take our first break here. If you guys want to join the show, you can. 615-737-9986-615. 737-9986. We’re talking about taxes. But if you’ve got a question or some sort of love letter you’ve received You can also join the show and share it with us if you’re brave enough. We’ll be right back with the Dr. Friday show. Alrighty, we are back. Here live in studio. You can join the show at 615-737-9986. 615-737-9986. And we’ve got Robin in Murfreesboro, which I appreciate. the phone call, Robin. Thank you. Sure. Happy to happy to be Yes, I’m here.
Caller
Can you hear me?
Dr. Friday
Good. Yes, I can hear you now. Yes.
Caller
Okay, great. Thank you for taking my call. I have a question not exactly about small business, sorry. Um, but this is about taxes and um It’s about I I actually lost my father um last January. He left um an IRA that has there are five daughters and he left those uh to us All of them were marked and we were named as the beneficiaries with the exception of about eighty thousand dollars So that did not have a designated beneficiary listed for that part of the IRA. So the um the company that it was with Right. Decided they they wanted to put that into his trust and they wrote that check to the estate his estate trust. which it is in a uh bank account with an EIN number. Um but my question is how do I disperse that to the beneficiaries properly to pay the taxes um legitimately.
Dr. Friday
Right. Well it sounds like Robin that they actually cashed out that eighty thousand, wrote you a check to the trust. So theoretically That is now cash, correct? So we have to pay the tax. I should say the five girls, if you’re splitting it evenly, will all have their share that needs to be taxed. You have two options. My First option, it does depend on the tax bracket of the beneficiaries. Okay, just putting it out there. But normally a trust is at a higher tax bracket than individuals. It starts out at 24%. Individuals start out at zero theoretically and work their way up. So the easiest way would do is a 1041 tax return, a trust tax return. And then do K1s where you’re distributing interest. There could be interest being earned on it, maybe not. And then their percentages at the end of the year, they then would file those with their personal tax return and pay their share of that $80,000 because the other ones each rolled into inherited IRAs, they can do whatever they want individually on the distributions of those.
Caller
Okay. And and we did that on the rest of the IRA. I just know that as the estate trustee, I I didn’t know how to disperse that money. So I can I can take that and actually just give that. And then you said it’s a ten forty one
Dr. Friday
1041 and then they’re going to be getting a K1. So just make sure they understand at the end of the year that the money they’re receiving today is going to be taxed at their current Tax rates. I d each of them will be different, right? We don’t know. So they need to be setting aside their share. Let’s just say it’s uh well, fifteen thousand dollars. So whatever you know, 10% somebody’s in, they need to set aside, you know, 1500 of the 15,000 and they’ll be responsible for paying that tax themselves.
Caller
Okay, perfect. And then what would I need to save? Like I don’t want to be liable for that as the estate trustee. I want to make sure that gets done and like for because I’m gonna have to close out that uh estate at some point.
Dr. Friday
Right. So depending on uh what the I mean an a ten forty one can be done any time Okay, so theoretically you’re they would be filing this with their 2026 since it hasn’t happened, right? So you can distribute And then file the 1041 as final. And then we can provide the K1s so they’ll have them plenty of time. to do their 2026 taxes. So they’re not waiting at the first of the year for it, you know, um, and then then that account can be closed. you could physically send them the check along with their K1s. Um so that way everybody with a cover letter saying here is the check, here is the taxable for. So if they have a tax person, if you were my client I would say, hey, what is the K1 based on last year? Your estimated tax for this year would be this, right?
Dr. Friday
Based on whatever that dollar amount is. And then that way they have time to say, I’m going to take the 15, I’m going to send in 2500, the rest of it I can invest or pay off something or whatever they want to do with it.
Caller
That is great news. I really do appreciate your help with that.
Dr. Friday
Sure, no problem. If you need help with the returns, let me know.
Caller
Thank you so much.
Dr. Friday
Had a great day. Appreciate it. All right, that was a good call. We do a lot of estate tax returns. Um, and you know, no matter how well people like to be organized, which sounds like pops are their father. Um, it’s funny they had five girls, my parents had two girls and six boys, so It’s with bigger families, it’s always difficult, but sounds like he was well organized. But something got missed, happens all the time. Um and that that makes it simple for um I say simple, probably wasn’t all that simple, but simpler to deal with some of that than other things. So that being said, um a lot of times you end up with either an estate or a trust um being open uh even through probate for an estate because sometimes people have a house, they need to be able to sell the house.
Dr. Friday
A home can be titled into a trust, but if it’s not, then it’s likely going to have to go through probate to make it work So it sounds like all in all everything was organized. But you know, you’re you’re helping your children out a lot. We do a lot of these conversations in my office because let’s be honest, none of us are getting in younger And um and I think as we get a bit older, we start thinking about um how some of this can actually work um as far as well if something happened to me today, what would happen? Is everything organized? You know, if you’re young, I mean, I had this conversation a few days ago with with somebody that was in my office and um their their parents were there and they were all like, yeah, they’re they need to get organized.
Dr. Friday
And I asked them, I said Yeah, you have two children and um I said, Do you have a will? Do you have an estate plan or some sort, you know Do you have something? Because who’s going to take care of the kids? And everyone’s like, Well, no, you know, no, uh you know, but I mean we’re we’re young is what was kind of said. And I’m sitting there thinking, I am quite assured that there’s a large number of young people out there that have not um made it to the age they should have. And that is when you have to start thinking, especially when you have children, right? My opinion. Because If you don’t have a plan, I want my parents to raise them, I want my sister to raise them, I want them to be um, you know, managed this way, the court’s gonna get involved, and then somebody you don’t might not wanted to have your children.
Dr. Friday
could end up being the one raising them. And that’s serious. So you know you always need to have as soon as something like that happens, you need a plan. That’s all I’m gonna say. Um not an attorney. And again, if you’re gonna do a will or a trust And you know, there is differences and it does depend in my opinion, depends a little bit on how much control you want. A will is great if you only have a few things and you can POD like her father did, paid on death. um a lot of your bank accounts, your retirements. I mean I will we cover some of the, you know, my car and a few things like that, right? That people have. But you do need to consider talk to an attorney. Um I use Russ Cook and Jack McCann. They’re both awesome estate attorneys.
Dr. Friday
Jack’s also really great at real estate, which everyone knows I get into. So, you know, if you need help with any of that, you can certainly move forward. But you you need to spend the, you know, you You can spend the money now for a trust, or you spend the money when you pass away, your estate spends the money on probate Sooner or later the lawyers are going to get their share. I mean now I’m sure there’s a handful of people out there that said, hey, I have done my own probate, and I’m sure you can if you’re very good at it. I don’t know if I would take on probate Personally speaking, um, but you know, some people are very good at that kind of thing. Um, but most of us are already devastated with the people we’ve lost. We don’t really want to have to take on dealing with the rest of It so if you um have a question and it doesn’t have to be about small business or about estate planning um or tax estates how taxes are handled with estates, different things like that.
Dr. Friday
You can just call the show now, 615-737 9986-615-737-9986. If you haven’t really known who I am, we are been doing this close to 17 years on the radio. And um And I am Dr. Friday. I’m an enrolled agent licensed by the Internal Revenue Service to do taxes and representation. It’s that simple I do taxes and I represent people because the IRS basically says, hey, there’s a lot of complication when it comes to dealing with taxes And um I just had a case that closed last week in and uh Lewis awesome guy took us I think almost two years to probably make this deal. It kept coming back at us. They kept trying to do this and we kept trying to say that’s not, you know, the way it is. And you gotta really get both sides on the same Story. Um, but I think it was about 400 grand that we settled for about 140, uh, which you know Lewis is very happy with uh because now he can move forward, he can get this paid off He can he’s and don’t get me wrong, this gentleman is selling off his stocks to pay off the IRS, but he’s able to close the door.
Dr. Friday
He’s able to say, hey, if I sell this I can then pay off the IRS. They’re no longer in my business. He’s been current for a number of years. This is something that happened a number of years ago. And so that’s what we help with. And it’s if anyone thinks that you’re just going to go on, make a deal with the IRS and have it happen. It’s not going to happen. The IRS, you know, does their research. The IRS looks at everything. So if you have money in retirement, you have a lot of equity in your home, you have a collection of some sort or a number of cars All of that is money the IRS says you can afford to pay us. Right? I mean, why not? You purchased this car and didn’t pay me. You put your mortgage every month paid, but you didn’t pay us.
Dr. Friday
You know, uh you put money into your 401k, but you didn’t pay us. You know, and I’ve had people come in my office and not like to hear what I’m saying. Let me tell you that They’re basically, I’ve worked my whole life to pay down my house. This is ridiculous. And they owe, you know, $150,000 to the IRS and they have almost a fully paid off house. What do you think the IRS is saying? They’re saying take out a second mortgage or refinance and give us our money. And then you can worry about paying off that mortgage because we’ve right now paid your mortgage. And people don’t like to hear those words. They don’t like to hear that that’s the way it works. But I hate to tell you guys, that’s the way it works. If you want to have the truth and figure out the best way to do it, I’m the person for you All right, we’re going to take our second break.
Dr. Friday
You can join us here live in studio. If you’re getting a bunch of love letters or anything like that, give us a call. We can help you figure out what’s the best way to move forward The phone number here in the studio is 615-737-9986. Again, 615 737-9986. I’m Dr. Friday. This is the Dr. Friday show, and we’re talking about taxes and how they affect you and me. Every day. We’ll be right back with the Doctor Friday show. Alrighty, we are back here live in studio. And it’s actually a really nice day, but I think it’s actually raining again here in Spring Hill. Um, so I mean it’s a good indoor day for you guys to be listening to the Doctor Friday show. Uh you might be sitting around trying to figure out how you’re gonna save more money on taxes Keep in mind tax planning is the only way you’re going to actually do that, right?
Dr. Friday
So we started talking at the first part of the show about people that may be taking um expenses on an ongoing basis thinking that they’re incurring them legitimately because they think they’re in business, but really legitimately you you might not be in a legitimate business because you’re really not attempting to make a profit. You’re putting in something that you enjoy and then you happen to be able to lose money at that, which also helps you for your taxes. Same thing can be said about different things. I have um a backyard farm, I guess you would call it. It’s a small farm. I don’t I live on fifteen acres, so I certainly don’t compete with any of the people I do big farm things with but there is some advantages to using and producing something if you have land. There’s no question. I mean I have a lot of beehives now and um chickens and you know of course you guys always hear my dogs in the backyard so I’m becoming quite the little bit of a country girl but the the there are some tax advantages I won’t say there isn’t to uh having the ability to produce something that you can then turn around and and sell and then use that money to improve your properties and you know pay for the the f cost of the chickens and the bees.
Dr. Friday
And I mean, be quite honest with you, especially bees, I love the idea of them because they are um amazing ladies and they um with exception of drones obviously but uh but also just honey and its properties, right? And so, you know, if you’re looking at ways to save taxes and you have things that you can produce that then becomes a product that you can sell and you’re selling those. I have a number of people that do a lot on I’m not too sure if I’m gonna say this right. I call it itsy. It may be Etsy. I’m not too sure what the proper term is Uh but either way, um I’ll have a large number of people that make um have small and they are small businesses that make product and they sell them and you know that makes them a legitimate business is all I’m trying to say.
Dr. Friday
So if you need or want to talk about how to establish your business, what you’re going to do, we do that a lot. Um, we often talk about, you know, should it be an LLC, should it be a sub-es corporation? And you know what? There was an email in my inbox uh before when I sat down to get ready for the show today. And I thought that might be an interesting conversation because I have a number of people that are wanting to, some are wanting to change from S corporations to LLCs. because of the franchise excise and being able to be under what they call a fonts or a um liability where you are non-obligated. Um, so you don’t have to pay the franchise excise. Now there are legal reasons you may not want to do that, and there may be legal reasons you do.
Dr. Friday
Again, that is the attorney that needs to answer that question. But if you are a sub-s corporation, you cannot elect to be non-obligated. So I have some that are wanting that. And then I got the opposite. I’ve got a lot of people that keep hearing they should be a sub-s corporation. So why? Why would someone want to be an LLC versus a sub-s corporation? Well I will tell you, the accounting standpoint, this does not cover legalities. So putting that out there because again, guys, I’m not an attorney. I don’t know your business. I don’t know what type of thing, but I can tell you from the standpoint of what the IRS and how LLCs, multi-member, single-member LLCs versus a sub-S corporation, uh, first. If you’re a corporation, you are an individually independent company versus the individual themselves. So Friday And then her sub-s corporation, Dr.
Dr. Friday
Friday, if it was a sub-S, it’s a C, but um, so that would be two, right? Friday under her social security number. Dr. Friday under an EIN number. For me to run that company, I need to have employees. If I’m working for that company, I need to be an employee. I need to pay all the normal taxes and set everything up. So at the end of the year, if there is said profit, Which I try not to have any because I like to do distributions through payroll, because then you would end up paying less. So if there’s a profit in Dr. Friday, which is supposedly a sub-es corporation. It would distribute through a K1 and I would not have to pay self-employment tax because it’s profit above what I’ve been claiming for my actual true earnings. Okay, so if I need to make $80,000 a year, I’ve got a salary coming out of $80,000 a year.
Dr. Friday
That covers my lifestyle. That is my cost. And then if I made 100, then I would get 20 out of K1. But keep in mind that that 20 is also going to pay franchise excise tax. So even though you’re not going to pay self-employment tax, Social Security Medicare, you will pay franchise excise. So that’s why, in my personal opinion, I like to run everything through payroll. I like to have my company, if possible, end up with a zero. So I don’t pay any franchise excise because at least if I’m paying into Social Security and Medicare, I’m going to get benefits somewhere later in life That’s the hope. There’s no guarantee, guys. I don’t have a mirror. I don’t know if it’s going to actually um end up, you know, the mirror ball saying, oh, you know what? We’re all going to have Social Security until forever.
Dr. Friday
And we all know that It’s always hurting as far as funding. So it’s going to be interesting. So with an LLC, be it a single member or or multi-member. All income comes to you on a K1. You have what’s called a partner guaranteed wage. That is what we claim for your ordinary, but normally basically all money coming through is going to be tax, Social Security, and Medicare It’s almost like a sole proprietorship. It’s basically going to come that way. Now, if you are a limited partner, maybe you’re not, you don’t work for it, you just invest it in. You can be a limited and therefore none of your income, it will pass through to you without self-employment tax because you are not actually working. But anyone that runs their own small LLC or a single member which just falls on a Schedule C, which all those, but if you’re a multi-member and you’re working, you’re gonna pay self-employment tax.
Dr. Friday
So that’s why people like the idea or what they’re being told. is that you can pass money from a sub-s corporation to you without all the self-employment tax, or if you’re an LLC, you’re going to pay that tax. So again, sometimes it’s you pay now, you pay later. So just keep in mind that if someone’s telling you you don’t pay taxes on the money that or you’re not only having to pay ordinary income tax, then they’re not telling you about the state. franchise excise, which can be a minimum of three up to six percent, depending on if it’s based on um profits and or um net worth So you can pay up to 6%. And keep in mind, Social Security and Medicare is only 7. 65%. And if you’re exceeding the the limits of social security, which I think last year was like 175, 185.
Dr. Friday
I think this year we’re almost up to 200. Um once you make past that you’re not paying Social Security anyways So, you know, I’m just saying, and that’s a an important thing to know because if I my salary maxes out my social security and then any profit above that gets distributed, I might as well do it as a bonus because I’m only paying 1. 45 where if I pay to the state Franchise excise even at 3% is higher than mine. So just make sure whoever is telling you this, whoever’s saying, hey, you know what? It would be better for us to be a sub-s corporation so we can get this passed through and not have to pay so much money in self-employment tax. Anyone that’s listening that is self-employed will tell you that we all hate self-employment. It is no different than all of you that work, quote, a real job and get WTs and you guys pay it just the same way, but your employer pays half and you pay half We get credit if you’re self-employed.
Dr. Friday
We get credit for half and then we pay the the 100%, but we get a credit on one side or a deduction, I should say, on the front side, and then we have to pay the whole thing It hurts. I mean, I mean I have people that basically, you know, make two or three thousand dollars in their business and yet they still have to pay, you know, a couple hundred dollars in self-employment tax. And it it’s never good. But remember that self-employment tax is your Social Security and Medicare. And at some point, you’re going to want it. Well, I don’t know. Again, I’m my heading to 60 almost there. And so anyone that’s close to that, you’re looking at the other side, where if you’re in your 20s, you may say I’d rather invest my own money, but you could put money into a SEP.
Dr. Friday
And again, you need to talk to a good financial planner, especially young people. I have a number of people I haven’t some of my clients are like totally into whatever you want to do Friday if the Trump accounts whatever. I can honestly tell you I don’t know a whole bunch about the Trump account I do know if you had a baby in 2025, there’s no reason not to have signed up for the free money. What’s going to happen after that? What kind of funding is going to be available? Will you be able to do a $529 and the Trump account? Far as I know, yes. It really depends on how much money the parents and the grandparents and the aunts and the uncles, all of us can help contribute to these kids’ accounts. And anything we do that helps now would be a way of helping these kids even when we’re not here.
Dr. Friday
I mean, you know, I mean, we’re not gonna live forever, but it’d be a great way of a legacy. But I don’t understand how it’s being invested I am sure there’s experts out there that have done the research or maybe not. I don’t think the Trump accounts even open till after July 4th. Um so I’m not gonna tell you or even really talk a whole bunch about being an advocate or not I’m not a financial person. All I know is that if you had a baby in 2025, they’re going to give you like $1,000, $1,000, $1,000. Let’s not turn it around. If you decide you don’t want to continue, I don’t think you can close the account. I don’t believe Until the child hits 18 is when the money is going to be given to the child, never going to go to the parent, which I kind of like.
Dr. Friday
Because divorce and all this sometimes messes with monies that’s been put into retirement for the kids or 529 plans, etc. And this way, no matter what happens in divorce, the money goes to the child, not to somebody else. I kind of like that. But I’m sure there’s other ways if you have a good financial person to protect all of them. All right, we’re going to take our last break. If you want to join the show, you can. 615-737 9986-615-737. 9986. I’m Dr. Friday. We’re talking about taxes. Maybe you’ve inherited or gotten some love letters and you’re not sure what the next step is, give us a call. We’ll be right back with the Dr. Friday show. Alrighty, we are back here live in studio for just the last 15 minutes or so. So if you’ve been waiting to call, well, now’s the time to do it, guys, because after that, you’re gonna be on to the next show So if you have questions, if you’ve been receiving love letters and you’re like, oh my gosh, I don’t know how to do it.
Dr. Friday
And I will tell you, another case that we’re working, and goodness knows, we’ve worked a long time Um she has been trying to set up a payment plan. Now it’s not for you know ten thousand dollars or something. It’s a it’s a good size amount, but She has been calling, she gets through the system, they sell her it’s it’s set up, and then 60 days later nothing comes out. Um, and so we’re having some fun. And if you’re in one of those situations, um what we’re finding and we’re figuring this out as we go, is that we’re gonna probably end up again, you guys hear me talk quite a bit about the tax advocate office I will tell you, I am a fan of the Nashville one. I don’t deal with a lot of other ones. But the Nashville uh tax advocate office, if you’re working in the world of taxes, which I do, um, and sometimes things just don’t make sense.
Dr. Friday
They really don’t. Sometimes things are just going and they just don’t make sense. And you’re like, why is the IRS doing this to me? And blah, blah, blah. And you’re sitting there going, I can’t figure it out. They are good A lot of times we can go back and forth for a year and we, you know, we have everything documented, but every time we think we’re getting close, something happens. And next thing you know, we’re right back to the same collection letter we started with a year ago. And so if you go to the tax advocate office, you need to be organized. You need to understand what you want them to do for you. And in many cases, you’re just basically outlining, okay, this is what we’ve done. Here’s everything we’ve done. Here’s the amended return. Because it usually goes back to an amended return, at least in my world.
Dr. Friday
And the amended return never seems to get processed yet. We’ve sent it and we’ve resent it and we’re never getting anything. We get a letter saying, well, we need more time, but we’re never getting anything, right? We’re not getting Clear reason why the ex the the amended return may not be being accepted. There may have been a problem. We did something wrong, but we’re not getting any of that. All we’re getting is we need more time and then boom, it goes back into collections So if you if you’re if you’re frustrated and you’ve got the documentation, my suggestion is to go, because if you get on the phone. You’re going to end up with a different person every single time. And that person isn’t going to really know what they can do because sometimes a lot of them are new. But even if you get lucky and you get someone that really does understand their job is customer service, um then you know that they may be able to get you in the right direction.
Dr. Friday
But normally what they can do is tell you that they see someone might be working out, but they can’t tell you who it is They can’t give you that person’s direct loan. So you’re kind of back to the same square. Even if it is being worked on, you don’t have any human. And that’s where the tax advocate office of Nashville is They are humans. They are people that you can send something to. They within 30 days usually will call you, give you a status update. Help you get resolution. Um, and not every single time. I mean, sometimes they can’t fix the problem because the problem isn’t something that seems to always Even though as a taxpayer it makes sense to us, we’re not able to give them what they need to solve it. So we usually have to go back to the drawing board start again with a new amended redo it now sometimes if it’s something simple and you can justify it they can help you move past some of that resubmit it to the person that is handling a reconsideration or something But, you know, sometimes you just have to reopen the whole audit, do a reconsideration, redocument the reason.
Dr. Friday
And it it doesn’t always Um it’s not gonna always go your way. Even if it doesn’t always make perfect sense. Sometimes the time limits went out, sometimes the information that you think is so black and white They’re not seeing it on their side, therefore not so black and white, right? So documentation is the true bread and water of my world and to yours if you’re wanting to have good tax issues You need to be able to document and things happen. You inherit a house 10 years ago, then you brought out a sibling, and then you know, next thing you know, you know, you’re selling this house. The cost basis was nothing because you really didn’t. buy the house and you inherit it, but at the time of inheritance, like the 10 years ago, it was valued at 50 and now you just sold it for 500,000.
Dr. Friday
Um and getting all of the information together to properly document those kind of situations. And I will tell you, you need, I’ve had a couple cases like recently where I tell people, you guys have been listening, thank goodness, that you need to get an appraisal on the home that you’re inheriting. Um and if you’re going to immediately then sell that house, that makes life easy. You’ve got the original appraisal at the time of death. And then normally whatever it sells for, black and white, normally it’s almost the same amount. But sometimes you can’t sell it You won’t sell it. You’re sentimental. You don’t want to, or it’s a second home, or whatever. You need to have that documentation. And ideally it needs to be an actual appraisal. I know I’ve said in the past sometimes that you can use comps The problem that we’re having with comps and the IRS is coming back on, and it’s legitimate, is that a comp just basically says there was a 2,500 square foot home, just like the one you have here But no one’s went inside that home.
Dr. Friday
No one knows that the roof is half falled in. No one knows that there the that the house hasn’t been maintained inside. And the home that you’re looking at, the comp you’re looking at has just got a brand new roof on it, and that it the only similarity is is they’re both 2,500 square foot within the same basic area. The IRS is saying, how do we know that that home with this comp is the same? They want someone to sign off and say, we did an appraisal. Someone walk through the house, use that information to come up with an actual dollar amount that can be used to justify the price of the home at the time of death. Um again if you if you’re inheriting a house and basically you’re turning around and putting it right back on the market, you’re not putting a hundred grand or even five or ten grand into it Then the assumption would be it would be what you’re selling for and what you’re buying, uh what do you inherit it would be pretty much the same price as long as it’s not going to a family member Um but uh if you’re ever audited, the IRS is now requesting appraisals, guys.
Dr. Friday
Appraisals signed off, knowing that someone walked into the home that you’re selling um or that you’re inheriting, I should say. And they have approved that this home is like these comps and they’ve documented what the difference and why it’s this and that uh just as a regular appraisal. And I know it’s it’s not cheap sometimes to do them, but if you want to have a justified number that you’re putting on tax return, especially if there’s three, four, or five of you and you’re each inheriting a portion of it and you’re the executor of the estate. I would say it’s well worth the investment because if something happens and one of them gets audited, they’re going to come back to the executor and say, well, did you do this? Did you provide this? And, you know, and so I personally say it’s worth the $550 or $700, I don’t know what costs, guys.
Dr. Friday
But just putting that out there because I know I’ve used the words comp and And I do believe there are some circumstances where a comp would be acceptable, uh, but I think in many cases under the new tax laws, I’ve been, or not new maybe, but just looking at the tax laws Um, they’re basically ruling that a a comp is not going to clear. And then if they don’t accept it, keep in mind they could go to zero in one of these cases they were Basically coming back saying, since you couldn’t prove what it was worth, we’re saying it’s zero, and therefore you sold an $850,000 home and have no basis. So you’re preserving that basis by making sure you have the proper documentation. That’s what today’s show is all about. Making sure we are documenting things so that way we can sleep at night and not have to worry about doing some of the other crazy stuff.
Dr. Friday
All right, so we’re almost at the end of the show. So if you’d like to reach us on Monday, you can 615-367-0819-615-02 367-0819. You can also email Friday at drfriday. com. I think we’re pretty caught up now, guys. Tax season gets crazy, but Friday at drfriday. com or you can also check us on the web, drfriday. com. I am an enrolled agent licensed by the IRS. I have never worked for the IRS. I am licensed by the IRS to do taxes and representation. An enrolled agent is what we are. You probably see a lot of us. out there and that’s who you really want to be dealing with your taxes. Nothing wrong with the CPA, but they’re certified public accountants and they are not licensed by the IRS. They’re licensed by the state Now some of my best friends are CPAs and they know their tax law, but you want to make sure that whoever’s doing taxes understands taxes You don’t really want your plumber doing your taxes.
Dr. Friday
And the deathly guarantee, you do not want me as a tax person doing your plumbing Um, but if you have questions or you’ve gotten some love letters or maybe you’re just kind of not sure where to start, I’ve had a couple of those come in this last week or so Um and we can tell you. We can help you. We can get you on track. We can help get transcripts so we can tell you what the IRS is starting with and see if there’s income and expenses and all that that we can help you create so that you can move forward and just Put the IRS to bed, right? I mean, at least for the next year, and just keep doing that every year staying current. If you need help, again, the phone number of the office 615 367 0819, or you can email Friday at DR Friday dot com.
Dr. Friday
Cop you later.