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Accountable Plans (EXPLAINED - 2020) - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
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- Hi guys, my name's Toby Mathis,
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I'm with Anderson Business Advisors.
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I'm going to be talking to you today
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about something called
an accountable plan,
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what qualifies for it, what it is,
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why there's so much
misinformation out there,
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why more people aren't using it,
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all that good stuff's going to start
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to make sense here.
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So the first thing is what
is an accountable plan,
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an accountable plan is an agreement
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by a company to reimburse its employees
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for expenses they incur for the benefit
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of the employer.
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So the easiest way to think about this
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is if I am an employee of a company
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and they tell me to go out there
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and incur an expense, they go get
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a cellphone or whatever,
and that reimburses me,
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that's an accountable plan.
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Now this is the most important section,
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is whenever you look
at an accountable plan,
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you're actually going to be
going into the internal revenue
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code, and this is actually
contained in a rag,
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it's 1.162-2 for those of you guys
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that like to read this stuff.
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And we're going to go way
down and we're going to
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go into the code for a little bit.
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We're going to find a Subsection 4.
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And what it's going to say is Treatment
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of Payments Under an Accountable Plan.
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Amounts paid under an accountable plan
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are excluded from the
employee's gross income,
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are not reported as wages
or other compensation
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on the employee's Form W-2, and are exempt
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from the withholding and
payment of employment taxes,
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which is FICA, FUTA, retired railroad tax,
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you name it, all those
things come into it.
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Now the reason this is
important is because
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that means it's not reported money when
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it goes into your hands,
but on the same token,
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your employer still gets to write it off.
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Now you're saying duh, I've
been doing this forever.
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Well this is what's interesting, most
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folks don't realize
that when you are a sole
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proprietor, or if you are a partner
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in a partnership, you are not an employee.
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That's why they don't
have accountable plans
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in those types of
organizations for the owner,
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because you do not qualify, everything
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you receive is considered a draw.
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You also can't take wages, you can't.
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There's some downsides.
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In order to do an accountable plan,
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you need to be some sort of organization
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that could have employees.
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In the case of an owner or operator,
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somebody who runs their own company,
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you're going to be pretty
much stuck with two choices,
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an S corp or a C corp.
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Under state law, they're both the same,
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it's either going to be
an LLC or a corporation,
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but its tax is going to be as a C corp
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where the corporation pays its own tax
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or an escort, where you elect
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to have it passed through.
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In either one of those,
you get to be the employee.
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Even if you're an owner, and the reason
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this is important is because then,
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these employer reimbursements
are not reported.
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Now why is this important to you?
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Because if you're having to report it,
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it's going on your 1040 somewhere,
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and some people would say, well I used
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to write it off on my Schedule A,
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un-reimbursed employee expenses.
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Okay, that's before
the new tax law changes
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because they removed
miscellaneous itemized deductions,
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including employee, including
these types of expenses.
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But even before that,
you are still subject
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to the 2% adjusted gross income floor.
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And, those types of things still counted
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towards the alternative minimum tax.
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So we don't want to
have something reported,
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because chances are right
now, you're going to
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get zero benefit from it.
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So, we want to make sure
that you get benefit,
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you get to have the cash, you don't have
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to report it and the company
gets to write it off,
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and that's where the
accountable plan comes in.
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Why more people don't do this,
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beyond me 'cause we've been talking
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about it for 20 years.
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Still shocked that there's accountants
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that don't know what this is.
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In order to have an accountable plan,
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you need to have an
agreement, and technically
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I always say put it in writing,
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although I don't believe
there's actually a legal
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requirement, technical requirement,
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but you have to cover four things.
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Number one, you need to
have a business connection
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with the expense.
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So one of them that I talked about often
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is using administrative
office in the home.
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And it would still qualify as
a principal place of business,
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you can actually do a reimbursement
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on the expenses associated with that home,
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and then everything traveling-wise
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between locations, if
you have a main location
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and then you have your home location,
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becomes a business expense which makes
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the car, mileage, things
like that deductible.
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But you have to have
a business connection.
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In other words, there has to be a reason
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that it's benefiting the employer.
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Number two, you have to
substantiate the expense,
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in other words you can't just say,
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hey I have a cell phone for 200 bucks.
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Please reimburse me.
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You actually have to produce something
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that shows that you spent
the requisite 200 bucks,
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the company reimburses you.
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Number three, you cannot have excess.
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In other words, if your expense is $170
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and the employer gives you 200,
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the amount in excess is
considered income to you.
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So, you only incurred $170 and it gave
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you 200, you got $30-worth of income
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that you are not, you
haven't properly reported,
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so you'd have to report it, more unlikely
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if you're an employee,
you have withholdings
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that you missed, the employer gets fined,
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you get fined, everybody gets fined.
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It's not good.
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Last one is timely, is this needs
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to be done within a
certain period of time.
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Now, there's rules on this, within 90 days
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you should be good.
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Within I think 120 days, coming with
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some sort of quarterly accounting,
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I would just get in the habit of monthly
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going in and checking, saying here's
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the expenses that I incurred individually,
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please reimburse me.
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Now if you go beyond those, the six months
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or quarterly, or excuse me the 90 days
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or quarterly, it doesn't mean it blows
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you out of the water, it
just means you're no longer
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in a safe harbor for timely if they come
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in and audit you, there's always
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that light, and there's always the chance
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that they can say, hey, you
didn't substantiate this,
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you don't have a true accountable plan,
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though I've never seen it.
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But that would be the argument
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that the service could make.
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I suppose they would say,
hey, you're not timely keeping
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this, just keep some sort
of record of these things.
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The who, what, where, when
and why of your expense.
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Use a smartphone, use
a notebook, whatever.
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If it's something where the employer's
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going to be reimbursing
you, in other words
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if I have the C corp or an S corp,
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and it's something where it's
going to be reimbursing me,
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just make sure I am keeping
some sort of track of it.
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Now what types of things
does this involve?
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Everything from your cell phone
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to internet, to cars,
to computers, to access
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to services, to subscriptions,
to even education,
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all sorts of things come into play.
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Reimbursing for meals, reimbursing
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for items for the
business, office supplies,
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you name it, chances are this company
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can start reimbursing you for things
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that it is using that you may have
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already paid for or that
you've been paying for,
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and the company can now
start reimbursing you.
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Literally writes you a check for the item,
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and you don't have to report it,
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so it's not going on your 1040
as an employee reimbursement
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or anything like that, you literally
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just don't report it.
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The clear, black letter
law makes that undeniable,
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you don't report it.
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Now, in order to take advantage of this,
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obviously you have to be an employee.
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And if you're an owner or operator,
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it leaves you with you two choices,
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and that's through a C corp.
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Now that's a tax designation.
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From a state level, you could be either
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a corporation, or you could be an LLC,
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and then you could be
taxed as a corporation.
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If that doesn't make sense to you,
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watch some of our other videos
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and we'll sink it in.
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Just know that from an IRS standpoint
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you have to be an employee,
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and in order to be an employee
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of an owner-operated
business more than likely,
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the vast majority, you're
going to ask for a C corp.
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And boom, you get to take advantage
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of an accountable plan, again one
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of the few areas that is truly beneficial
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for both you and the company and works
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like a charm 100% of the time
if you're following the rules,
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which is awesome.
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Alright guys, this is Toby Mathis
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with Anderson Business Advisors.
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Hope you learned a little bit something
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today about accountable plans.
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(uplifting music)
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