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S Corp vs Partnership [LLC or Not] Tax Basis Form 1120s vs Form 1065 [Limited Liability Company] - YouTube
Channel: JJ THE CPA
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jj the cpa here hope you're doing well
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so when would you select
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somebody to be taxed as a partnership
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versus an s corporation i'm going to
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back up for one second
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and tell you that a limited liability
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company an llc can be taxed as anything
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it can be a c corp it could be a sole
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proprietor it can be called a
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disregarded entity and no separate
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filing it could file schedule e is
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schedule f it could be a
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anything okay
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so when you say well should i be an llc
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or a partnership that's
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not at all what you're saying it's like
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saying well should i be a texan
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or a or an american
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what no if you're an american and you
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live in texas then you're a texan see
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what i'm saying point is is that if
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you're an llc all that's saying is
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i'm legally
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put together as an llc we're now talking
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tax classification
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when would you be a partnership versus
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an s well there's unlimited
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circumstances but i wanted to share with
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you one that i dealt with a client's uh
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determination here actually today and
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we're trying to determine based on their
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investment and their activity should
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they be an s corp or should they be a
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partnership
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well what it came down to in these
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circumstances i'm not going to talk to
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you about every circumstance under the
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sun
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i'm telling you about these
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circumstances and then the choice that
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we made
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so because of this client we chose for
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them to be a partnership just to get to
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the net of it
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but we could have chosen for them to be
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an s corp now they're an llc
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right
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now the reasoning for the partnership
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versus the s corp is that we are
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anticipating in the early years of there
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being losses due to depreciation and
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significant depreciation
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now don't worry fellow tax bros this is
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going to be a passive activity that
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didn't really come into play here
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believe it or not but it's gonna be
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passive
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but it wasn't the reason that we chose
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to be a partnership just because it's
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gonna be passive because it could
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someday be non-passive but it's
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definitely passive in the near future
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because s corpse can be
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passive okay but that wasn't our
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reasoning it was
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in anticipation of losses
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when it's a partnership you get to take
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losses to the extent of your partner
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capital which typically
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is in the early years money that you put
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in
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okay so if we're just talking about
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losses in the beginning there's going to
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be no income coming out not going to be
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any distributions coming out there's not
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going to be really anything other than
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losses in the beginning
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so if we have losses and we have passive
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losses i get it passive losses are only
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to the extent of passive income but
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guess what that's the next step
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in somebody's tax picture excuse me
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what i'm looking at though is that i
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want to allow maximum passive losses
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because with a partnership we have tax
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basis which is partners capital but then
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we also have at-risk basis
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which is
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losses are able to be taken to the
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extent of what the partner is
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responsible for
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on loans meaning they got skin in the
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game they are on that loan they are
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on the hook for that loan okay
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then they get to take losses to the
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extent of their investment plus whatever
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that loan is now with an s corporation
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it's not the case in the second aspect
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of that
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yes you get to take losses to the extent
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of your
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capital which is or your shareholder
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basis
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right so that would be well how much
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money did you put in you get to take
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losses to that extent you gotta remember
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i'm talking about in the beginning here
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okay there hasn't been any income yet
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right
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so if we want to take losses beyond
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whatever their investment is
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and there's loans in the s corp it
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doesn't matter that's an llc
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if there's loans in the s corp
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they're not going to be able to take
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losses to the extent of those loans
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unless it's a shareholder loan
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so the partnership
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is going to allow this person to be able
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to get maximum passive losses to the
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extent of their basis and to the extent
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of the loans that they're on the hook
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for that share liabilities
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that is why we chose the partnership in
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this one
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so in a s corporation
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you're right shareholder basis just like
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partner basis
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that's what we would call tax basis
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money in money out income losses right
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that's what that basis is for an s corp
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that's the extent of what you can take
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for losses
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passive or not that's your first step
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right
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now if the shareholder makes a loan to
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the
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s corp then they can take losses to that
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extent now if those loans get paid back
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they have to reduce down their basis for
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that
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but the partnership here was we're
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expecting massive losses in the early
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phase
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it's definitely passive but we want to
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be able to take still as many losses as
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we can to the extended basis the
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partner's capital as well as then the
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share of liabilities now you have to
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look at this carefully it's not just oh
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there's a llc it's taxes of partnership
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there's loans i have share liabilities
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because there's all kinds of different
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types of liabilities you're signing off
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on it has to be one that the partner is
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on the hook for and in writing and the
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operating agreement indicates that they
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are on the hook for it and if there's
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other partners the operating agreement
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needs to indicate what happens if that
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partner is on the hook for it until then
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whatever extent that partner is actually
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on the hook
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then they get what's called share
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liabilities which is on the schedule k1
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and then they can take losses to the
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extent of that as well it's called
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at-risk
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basis to then take losses so with this
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client
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they do have passive income
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from other sources
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they also have active income so it
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wasn't even a matter of what we're
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trying to manipulate something to have
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passive losses they have got plenty of
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passive income and they got plenty of
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non-passive income that actually wasn't
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what the factor was it wasn't even a
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factor in the s corp versus a
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partnership what it came down to is
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basis and thinking ahead
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and allowing them the loss now they're
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gonna have way more passive loss than
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they have passive income which is
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actually not a bad thing for the client
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because then they'll allow the losses
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over the years they'll have the basis to
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take the losses
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and then as they have passive income
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either from this activity or other
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activities they'll be able to take the
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passive losses to offset that
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taking then that income kind of off the
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top if you will at that higher tax rate
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so that's where you're kind of in the
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minutia
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in terms of these circumstances of why
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we chose a partnership instead of an s
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corp all right hey
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thanks for tuning in i'd love it if
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you'd subscribe check out my cpe as well
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put a link in the body of the video to
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that
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here and uh
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well i forgot what i already said so i'm
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just going to say it again because just
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so you know you probably don't know this
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but i've just done probably about 15
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videos in rows my last one all right hey
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thanks for tuning in i'd love it if you
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subscribed and then don't you ever
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forget you've never met a cpa quite like
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me have a great one
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