Who Is Jeff Watson?

1. Who Is Jeff Watson? • Ohio Bar Member for 19 years • Full-Time Attorney with an active trial/hearing practice • Real Estate Investor since 1993 • America’s “Top Short Sale” Lawyer • Co-founder of Realeflow LLC, Strategic Real Estate Coach, Inc., and Venture Land Title LLC • Frequent guest speaker at various RE Investors meetings. • Legal Counsel to Nova Star Real Estate Brokerage Ltd, Sharp Concepts Realty LLC & Eagleville Bible Church Inc. “Lawyer To The Gurus”

3. To Inc. or to LLC C Corp Sub “S” Established precedent Know Liability Shield Tight Ownership Rules Rigid Profit Distribution More Record Keeping SM LLC MM LLC Newer & Evolving Uncertain at Times Flexible Rules Creative Profit Distribution Less Record Keep

4. Entity Basics • What is an entity? An entity is a business organized according to state law to limit the liability of the owners. Entities can be corporations, limited-liability companies (LLCs) and limited partnerships (LPs). All provide much greater asset protection when compared to a sole proprietorship or general partnership.

5. Sole Proprietor Written Partnership Verbal Partnership Sub S. Corp Assets $$$ C. Corp Single Member LLC Multi Member LLC Limited Partnership

6. Creditors Easily Attack Sole Proprietor Written Partnership Verbal Partnership Sub S. Corp Assets $$$ C. Corp Single Member LLC Multi Member LLC Limited Partnership

7. Sole Proprietor Written Partnership Verbal Partnership Sub S. Corp Assets $$$ C. Corp Single Member LLC Multi Member LLC Limited Partnership

8. Sub “S” Corp Basics • What is an S corporation? An S corporation is a corporation that has elected to be taxed as a flow though entity (similar to an LLC or LP). The “S” also refers to an IRS code section.

9. Sub “S” Corp Basics • The S election allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C corporation.

10. Sub “S” Corp Basics • The S corporation still provides limited liability protection and is a good entity for many business situations.

11. “C” Corp Basics • What is a C corporation? A C corporation is a corporation that is taxed at two levels. First, the corporation pays corporation taxes on corporate profits. Then, with any money left over, the corporation may distribute profits to the shareholders.

12. “C” Corp Basics • These profits, or dividends, are taxed to the shareholders. Thus, resulting in “double taxation”. The “C” refers to an IRS code section. Despite the double taxation, C Corporations offer many planning and benefit opportunities.

13. LLC Basics • What is a limited-liability company? A limited-liability company (LLC) is also a separate legal entity formed for limited liability and asset protection purposes.

14. LLC Basics • The owners of an LLC are called members and the management is referred to as managers. LLCs are frequently used for holding real estate and other personal assets.

15. LLC Basics • Single member means one owner. Taxed on a flow-through basis usually via Schedule C • Potential for higher audit risk. • Greater risk of mismanagement due to lack of business formalities.

16. Employee or Independent Contractor Control Equipment Duties Location Hourly/Job Just “Agreeing” may not be enough Just using “1099” not enough Can they go Broke or get Rich Question or Fact I.R.S. HAS Final Say

17. Liability Insurance Basics Interview several independent Agents Home based Business Rider A simple & cheap “must do” Umbrella Liability Policy Affordable Legal Defense Basic General Liability Business Policy Auto owners insurance Improve and maintain properties

18. Cash Flow is Critical • Active Income • “Passive” Income • Rent • Dividend • Owner’s Profit • Truly Passive Income • Money Making Money • Ideas Making Money • Money & Ideas Making More Money

19. Increase Cash Flow by Lowering • Expenses • Taxes • Here ‘s Some Specific Ideas to Help You:

20. You can deduct the cost of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense.

21. Start-up Cost Deductions You can deduct up to $5,000 in start-up and $5,000 in organizational costs for the first year of business. These deductions apply to expenses paid or incurred after Oct. 22, 2004. The rules differ if your costs exceed $50,000. Expenses that are not deducted can be amortized over a 180-month period, which begins when you open your business. You can write off or amortize market research, advertising, employee training, business-related travel, legal advising and other costs.

22. Entertainment Deductions The IRS doesn't mind your mixing business with pleasure – within reason. You can deduct up to 50 percent of entertainment expenses for unreimbursed business meetings. The entertainment must be within a "clear business setting" (such as at a conference) or should immediately precede or follow a business meeting. If you are self-employed, the 50 percent deduction limit does not apply.

23. Travel Deductions Travel expenses are tax-deductible. The IRS recommends keeping a log of your expenses and receipts. Transportation, (airfare) lodging and even dry cleaning can be deducted, and half of any business meals. You also can deduct expenses for business associates traveling with you. You can't write off expenses for family members or friends if they accompany you, unless they are employees and are professionally involved in the business end of the trip.

24. H.I.N.T.

25. What is H.I.N.T.? High        Income          No                Taxes

26. Self-Directed Account Many People hear about it Some know about it Few actually do it Wall Street Keeps it Secret Few Custodians allow it Complex Rules U.S.C. 4975

27. Some of What Your S.D. IRA Can Do Flip Houses • REO’s • ShortSales • Probates • Rehabs Lend Money • Secured • Unsecured Borrow Money • Non Recourse • U.B.T.I. Own/Lease • Houses • Mobile Homes • Land • Oil Wells • Equipment • Businesses LLC’s Partnerships C Corp’s • Notes New Defaulted

28. Roth Magic If you left a Roth IRA with just $30,000 in an account earning 10% annually to an eight year old child, the distributions over the child’s lifetime would total over 5.5 million Completely Tax Free

29. ROTH Magic The owner of a 500k Roth IRA dies leaving a 20 yr. old as beneficiary. If the account only earns 8% yearly and the beneficiary chooses to take distributions over her lifetime, based on IRS tables the distribution would total over 14,000,000.00 Tax Free

30. I Pity Trust Fund Babies • Lawyer’s in Control • Taxes at High Rates

31. Trust Fund Babies Drool Roth “Bennies” Rule

32. More ROTH Magic Greg, Jeff, Tracy & Lorri meet each other at an event Each has 15,000 in Roth IRA Each needs Working Capital Each Loans from IRA 5,000 to other 3 Each loan/note at 21% annual interest And contains 8% Profit participation Clause 1 year maturity/option to renew Aware of “Step” Transaction Rule

33. After 1 Year Greg’s LLC Earns/net 150,000 Jeff’s LLC Earns/net -0- Tracy’s LLC Earns/net 75,000 Lorri’s LLC Earns/net 60,000 After 1 Year

34. Jeff’s get cancelled Greg look for better deal Lorri & Tracy renew 1 more year R.O.I.’s 93% to 173% TAX FREE

35. Short Sale Deal • Marty Buys at $178K • Marty Sells at $200K • No Realtor • $22K Profit…Right? WRONG!!

36. Short Sale Deal • $22K Profit – WRONG! • Marty has partners! • FED • STATE • LOCAL $22K becomes $11K

37. Same Short Sale Deal Smarty Buys at 178,000 Smarty Sells at 200,000 No Realtor Held House 21+ Days

38. 22,000 Profit All Tax Free Did Deal Inside Roth IRA

39. More to come tomorrow…

41. Module 1 - Types of Accounts and Basic Rules of Self Directed Accounts

42. Chapter 1 - Tax Deferred Account • Traditional IRA • Structural Rules • Code Section • HSA's • Structural Rules • Code Section • 401k's • Structural Rules • Code Section • SEP's • Structural Rules • Code Section • SIMPLE's • Structural Rules • Code Section

43. Chapter 2 - Tax Free Accounts • Roth IRA • Structural Rules • Code Section • Roth 401k • Structural Rules • Code Section • Chapter 3 - Custodian Selection • A Few Choices • Selection Criteria • Reputation • Experience • Location/Time Zone • Website functionality • Phone service quality • Fee vs. Service • Which matters more?

44. Chapter 4 - Setting Up Self Directed Accounts • Opening the account with the selected custodian • New accounts • Conversions • Qualified plans • Re-characterization • Re-convert • Rollovers • Transfers

45. Module 2 - Detailed Study of Rules Unique to Self-Directed Investing

46. Chapter 1 - Eligibility and Contributions • Traditional IRA's • Roth IRA's • 401k's • Regular Roth 401K • HSA's • Chapter 2 - Account Conversions • Qualified Plans to Traditional IRA • Traditional Converting to Roth • All, Some, or None

47. Chapter 3 - The Rules for Self-Directed Accounts • Prohibited Investments • Disqualified Persons • Prohibited Transactions • Distributions • Chapter 4 - IRA-Owned Entities

48. Module 3 - Tax Free Living Before 59 1/2

49. Chapter 1 - Gifting From Existing Accounts • Annual Exemption • Unified Credit

50. Chapter 2 - Inherited Accounts • Qualification Rules • 5 Years • 59 1/2 • Required minimum distributions