Tax Reduction Podcast

Episode 22. Hidden S-Corporation Tax (DO NOT PAY THIS)

• Boris Musheyev • Episode 22

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Discover the hidden taxes of S-Corporation and how to use a tax strategy NOT to pay the Net Investment Income Tax for an S-Corporation! This podcast explores powerful tax planning techniques that can reduce your net investment income tax. Learn from top tax advisors on how to effectively utilize tax write-offs, ensuring your business maximizes its savings. With these expert tax strategies, you can keep more money in your pocket and optimize your financial outcomes. Don't miss out on these crucial tips for smarter tax planning!

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

If you have an S-corporation, chances are you're paying an extra 3.8% tax on the net profits of your S-corporation. I will help you identify that extra 3.8% tax, see, if you paid, how you should stop paying it going forward and if you did end up paying it, how to actually amend your tax return to get the money back from the IRS. Ready, let's get going.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Tax return to get the money back from the IRS. Ready, let's get going. Can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

So let's get started. So I've broken this down into three steps for you. So this is exactly what we're going to do. First of all, we're going to identify this 3.8%, which is the net investment income tax. I'm going to refer it as a NIT tax. Then we're going to talk about who does it apply to, who does it not apply to? And if you have an S corporation, chances are it doesn't apply to you, but you're most likely, or probably maybe, paying it on your tax return. And then we're going to talk about how can you spot this tax on your tax return, how to question your accountant and how to amend your taxes.

Speaker 1:

Let's get going over here. First of all, what is NIT? Nit is a 3.8%, which is Net Investment Income Tax. The name speaks for itself. You pay this tax on your investment income. What happens many times is there's some tax preparers when they prepare your S-corporation tax return the K-1 income from your S-corporation that flows through to you personally they accidentally, accidentally, right, classify it as an investment income, which may trigger the 3.8% tax Now, generally on your net profit of S-corporation, you pay two types of taxes. Tax number one is the federal tax. The tax number two, the state tax right If you're in a state that has income taxes in that state, so you pay taxes on your S-corporation profit, those two taxes. Some S-corporation owners also pay an extra 3.8% tax, mistakenly. All right, that is the net investment income tax. I've seen many tax returns where when we get a new client and we review it and we audit their three-year look back which means we review their tax returns we spot this tax and then we amend it and we get the money back. Now, what is really a net investment income tax and how did it really creep on on your tax return? Let me tell you a little bit of a history. We'll take like a minute into this history lesson, so to speak.

Speaker 1:

So in 2013, president Obama enacted Affordable Care Act okay, also known as Obama Care Act which is basically providing health insurance to everybody. So everybody who needs it they can apply for it and you know all of that stuff with the health insurance. This was back in 2013. Now, to fund this program, the ACA, they've enacted an extra 3.8% tax on those individuals that have a net investment income. So after they did their calculations, they're like, all right, where are we going to get some of the money to fund this. So they came up with this 3.8% tax.

Speaker 1:

Now the law said that, hey, if you're modified adjusted gross income, if you're a single filer okay, it's $200,000 or more you start paying that 3.8% tax. Now, as you guys know, there's a capital gains tax rate which is capped at 20%. Right, everybody knows, hey, capital gains tax when you sell a property or assets that you hold over one year, and everybody's like, oh yeah, great, I only pay a 20% tax. Not necessarily, a lot of you may be paying actually 23.8% tax because of this net investment income tax, which is NIT 3.8%. Now, if you're married filing jointly, you're filing a joint return, then that would be the income threshold will be $250,000. And if you're merit filing separately, $125,000. So really, just keep those numbers in mind, because if you make this in this, so to speak, threshold in terms of your income, taxable income, then what happens is that 3.8% tax kicks into you. Now we're going to talk about a strategy of how you should know what you need to pay this tax on, what you should not be paying this tax on, right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner. Okay, welcome back.

Speaker 1:

Let's talk about who does this really apply?

Speaker 1:

To Click on the link in the description below for a free download On your tax return. How to calculate that tax right. It's either on the excess of the income or on your investment income. The calculation kicks in of how to pay that 3.8% tax. But what's important to note is not technicality, is what does this tax apply to? Rental income? This tax also applies to rental income because rental income in most cases, if you're not a real estate professional, is considered passive income. So that is considered passive income. So that is an investment income. So you pay 3.8% tax on that. Also, passive businesses In any business where you're not actively participating and you're receiving a K-1, let's say you're a silent partner or you put in less than 500 hours a year and you're considered a passive partner.

Speaker 1:

Well, guess what 3.8% tax applies to? Only this bucket. You can't do anything about it, so to speak. But let's talk about what this tax does not apply to. Okay, this tax does not apply to your S corporation income or even your LLC income. Why? Because that is considered an active income. It is not an investment income. Even though you get a K-1, the K-1 should be marked. That is an active income. It's not an investment income.

Speaker 1:

Now what happens is that many times when we get a new client, we review their prior tax returns. The first thing we pay attention to is that K-1. How did that prior accountant classify this K-1 income on the person's personal tax return If they have accidentally classified it as an investment income? And you might say well, boris, how can an accountant classify something that is not investment income as an investment income? Really, it comes down to some simple things overlooked mistakes, for example, making a checkbox on the tax return or not making that checkbox. So if they didn't make that checkbox, then the software will automatically classify this investment income. The software will automatically calculate the 3.8% tax. It's a hidden tax. You don't even know about it. When your client, when your accountant, says, hey, you've got to pay this tax, you're like, okay, wow, I'm in a very high tax bracket. Well, guess what? That's? Because the 3.8 tax was kicked in for no reason, because the income from your s corporation or llc has been misclassified. We've seen many of those situations happen and actually reef, uh, audited, excuse me, amended those tax returns to get back that money, that 3.8% tax the business owners paid.

Speaker 1:

Now another area where you will not be paying a net investment income tax is if you have a self-rental. So remember I said earlier that you pay a net investment income tax on the rental income. But if you have a self-rental, meaning to say you have a building that is not in your S-corporation or in your LLC, to say you have a building that is not in your S-corporation or in your LLC, it's in a separate entity or even under your personal name, and you pay rent to yourself from the business to yourself, that income is not classified as an investment income. It is an active income because it's part of your business. It is combined together, it's grouped together with your business on your tax return, on the section 469. I'm not going to bore you with details, but it's important to know that if you have a self-rental, that's another area on the tax return where this hidden tax just bam kicks in. Now on this one, there's more mistakes done on this one by other preparers than actually classifying the S-corporation as a passive income. Because when there is a self-rental they don't even specify on the tax return hey, it's a self-rental, so the software on which they're preparing a tax return thinks oh, it's a rental income, so let's kick in this extra 3.8% tax. You really need a knowledgeable tax accountant. If you're working with a tax preparer and only speak to them once a year, I can guarantee you there may be a chance that you are overpaying this tax and really do not not supposed to pay the taxes if you are in these brackets, excuse me in this situation.

Speaker 1:

Now let's move on to the short-term rentals. If you have a short-term rental, in many cases short-term rental, if structured properly, can be classified as an active income. An active income is not subject to 3.8% net investment income tax. This is another area of your tax return. If you have. Again, if you own an S-corporation, llc, a self-rental or a short-term rental, you might want to check your tax return, get it reviewed by somebody who knows taxes and be like hey, do I pay these extra taxes that I'm not supposed to? You will be surprised how many taxes are there that can be latched to your tax return if done improperly, if the tax return is prepared improperly.

Speaker 1:

The next thing is a real estate professional. A real estate professional, by definition, is an individual whose most of the time is spent in real estate. You don't necessarily have to be a real estate agent, but you may have a lot of properties that you own, you or your spouse, and you guys manage those properties and really that identifies you in most cases as a real estate professional. But if you're classified as a real estate professional and you may know this, meaning to say if you're a real estate professional you most likely know that you are okay because you're taking all those depreciation losses and rental losses on your taxes and you might want to check if you have a rental income from any of the businesses. You might want to check if you have a rental income from any of the businesses, are you paying an extra 3.8% tax? If yes, that's another thing that has to be changed on your tax return. So really it's a huge, huge tax that could be latched on your tax return without you knowing it.

Speaker 1:

Now let's talk about how you can audit your tax return. First of all, you've got to ask yourself which one of these incomes do I have, right, do I have investment, rental income, which I'm not a real estate professional, or do I have other passive businesses? Also ask yourself, hey, do I have an S-corporation, llc, self-rental, short-term, or am I a real estate professional? Any of these right here, and if you are over the threshold of this income right here which majority of business owners are right, especially like merit filing joint over $250,000, you definitely have this tax on your taxes earn if you have some sort of an investment income and then it could be triggering and latching on on other activities that you do not qualify on to pay this tax on. So ask yourself, where am I on this chart right here? Where am I on this chart right here?

Speaker 1:

Second of all, check if you have Form 8960. Form 8960 is IRS form where the 3.8% tax is being calculated on the income that's not supposed to be there, such as your S-Corporation, for example. If your S-Corporation is an active business, question your accountant If you know your income is over these thresholds and you see Form 8960 or you're in any one of these sections right here. Definitely ask your accountant. Hey, let me ask you how much did I pay in net investment income tax of 3.8%? Please let me know. And what did I pay it exactly on? Ask your accountant and amend your tax return. And what did I pay it exactly on? Ask your accountant and amend your tax return If you find out that you actually paid this tax on the income that you're not supposed to pay.

Speaker 1:

You can amend three years' worth of tax returns and request money back from the IRS. Your accountant should be able to do that, but I would really recommend if your accountant has made this mistake, made you pay an extra 3.8% in unnecessary tax, at this point, I would tell get yourself a tax advisor. I strongly recommend. If you're a profitable business owner and you want to start paying less in taxes, you've got to stop working with somebody who you're meeting only once a year, sending them documents to prepare your tax return, to put the right numbers in the right box. It doesn't matter who it is a CPA or EA. It doesn't matter if that person is just a preparer. What you need is to get yourself a tax advisor, somebody that specializes in tax strategy and helping you pay less in taxes by really catching things like this. Thank you so much, until the next time.

Speaker 2:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.