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Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate

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tax and break down complex concepts into
understandable, entertaining tax topics.

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My name is Natalie Kalady, I'm
your host, and I am so excited

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that you've decided to join me.

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Microphone (Shure MV7): Issuing
10 90 nines are a crucial step for

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the majority of business owners.

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And unfortunately there are some
commonly made mistakes regarding

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who needs to issue these.

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I'm going to walk you guys through
three mistakes people make, when

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it comes to issuing 10 90 nines.

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The first mistake that I often see
when someone is issuing a 10 99.

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Involves a business where parents are
employing their children who are under 18.

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To work.

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In their business.

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Well, employing your children
is a fantastic tax strategy.

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And can allow you to pay your minor
child without incurring payroll taxes.

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And effectively shift income
from your higher adult bracket.

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To their 0% tax rate.

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It has to be done correctly.

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Check out episode 17.

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If you're looking for more
information on this strategy.

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When someone is employing their children.

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It needs to be treated as though
they are employing their children.

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And the IRS has very specific
requirements about who qualifies to

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be a 10 99 independent contractor.

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Versus who needs to be issued a W2.

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And treated as an employee.

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One of the key differences
between the two classifications.

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Is if someone has control over
only the outcome of something.

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Versus if they are being controlled
with the entire process to

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get to that outcome as well.

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When it comes to a minor child who
is working in someone's business.

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It is very unlikely that they have
absolute free rein to accomplish broad

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tasks with no additional guidance.

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Or oversight from their parents.

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Because of this, it is
incredibly unlikely.

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That's someone who is
employing their children.

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Could issue them a 10 99 and have that
be correct for the work they are doing.

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Additionally.

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One of the key benefits to
paying someone's children,

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to work for their business.

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Is the fact that the child is able
to earn up to the standard deduction.

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And not have to file a tax return.

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The standard deduction is $14,600.

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However.

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If someone has any more than
$400 of self-employment income.

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They are required to file a tax return.

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So the first huge mistake I see
with businesses issuing 10 99.

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Is one, a business.

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Issues their child or
children, 10 90 nines for work.

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They completed for the business that
should have been paid as a W2 employee.

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The second mistake I see when
it comes to issuing 10 90 nines.

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Is for landlords to believe they
have no requirement to issue a

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10 99 to anyone who did more than
$600 of work for their properties.

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This used to be the case.

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If someone was indeed not in the
trader business of operating a rental.

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But the majority of rental properties.

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Do rise to the level of
being a trader business.

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Which is broadly defined.

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As a continuous, ongoing
regular involvement.

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For a profit motive.

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So unless someone has really
just inherited a property,

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they've never visited it.

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They've never raised rent.

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They ignore it.

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If you are someone who
intentionally bought real estate.

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To lease to others.

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With the intention of
making money from that.

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Especially if it's more than one property.

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There is a very good chance.

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It rises to the level
of a trader business.

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And you should also be issuing 10
90 nines at the end of the year.

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This became a more prominent matter.

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When the 1 99 a QBI deduction
was released a few years ago.

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There was a lot of controversy on
whether or not rentals qualified.

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And based on the defining code.

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Uh, rental that rises to the level of a
trader business will absolutely qualify.

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However, because a lot of
people were uncomfortable with

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having to interpret that level.

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The IRS did also release a safe Harbor
related to rentals and the QBI deduction.

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I personally ignore that safe
Harbor and just go off of the

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actual code provision of activities,
rising to a trader business.

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What the QBI deduction is, is it allows
a business to have a 20% deduction.

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On any net.

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Income.

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After all other expenses.

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So if your rental activity rises to
the level of a trader business, you

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are involved for a profit motive.

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Then there is a good chance that
you are a trader business and that

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you qualify for the QBI deduction.

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And to farther and forced that and
make sure you are not misclassified.

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That you should be issuing.

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10 90 nines to anyone you pay more than
$600 to in the course of your business.

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I will add as a caveat that corporations
do not need to be issued 10 99.

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So if you know that a contractor
or someone who has done work

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for you is definitely structured
as a C or an S corporation.

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They will likely not
need to be sent a 10 99.

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The final mistake.

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I see when it comes to a
business issuing a 10 99.

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Is when a business.

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Chooses to issue a 10 99.

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To an owner shareholder who
should have received wages.

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The premise here being.

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That if someone is an S or a C Corp,
part of the requirement is that

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they take a reasonable payroll.

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What we often see is
an S Corp shareholder.

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Who did not take any W2 wages
during the year as legally required.

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Because that is part of the legal
requirement that shareholder would

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be paying normal payroll taxes on the
amount of that reasonable payroll.

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So there are tax professionals,
bookkeepers people

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preparing their own taxes.

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Who will think?

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Well, because I didn't do that.

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The next best thing would
be issuing myself a 10 99.

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So that I am still paying some type of
payroll tax on some amount of the income

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I'll be paying self-employment tax,
both halves of it on that full 10 99.

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Unfortunately.

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This is still incorrect and two wrongs.

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Don't write the tax situation.

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So while the intention.

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For still having to pay
some type of applicable tax.

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Is a good mindset.

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It, unfortunately, isn't the
correct way to fix this problem.

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In this situation.

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There has been lots of guidance that
a salary cannot be distributions or

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a salary can not be paid as a 10 99.

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When it comes to this, we do have a
tax court summary opinion, 2013 dash

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62, or this was really reiterated.

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So if you are a shareholder
or if you are working with a

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client who has a shareholder.

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And maybe they have an S corporation.

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They are in a position where they should
be taking a reasonable amount of salary.

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And that didn't happen during the year.

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You now have to make the choice.

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To do an after the fact payroll.

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And have some penalties on
doing those reports late.

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Or to correct the matter going forward.

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But doing an additional thing
incorrectly because a W2 wasn't issued.

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And instead issuing a 10 99.

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That is not a valid fix.

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For a shareholder not having taken.

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An appropriate reasonable
amount of a required W2 payroll.

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This creates in addition to just
being an additional incorrect action.

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It opens up several liabilities
for that shareholder.

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At the starting point.

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If this is reclassified to
W2 income, if ever looked at.

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By the IRS.

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Then not only will it be switched
over to the correct form?

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But there will be penalties, interest,
et cetera, that relate to that.

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Having not been filed and done correctly.

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Back when it should have been.

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So in issuing a 10 99, when
there should have been a W2.

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You are not fixing the problem.

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You are creating a second inaccuracy
and leaving something open to

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incur penalties down the road.

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The next issue with this.

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Is it as not.

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An allowable payment.

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For what it was made for, you are
not allowed to pay a wage on a 10 99.

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So then the next question become.

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Is that amount paid on 10 99.

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Actually a deductible
expense to that corporation.

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Because it was improperly used.

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It was not an actual valid payment.

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So can that corporation actually
take a deduction for giving

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the shareholder a 10 99?

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When, what it was a payment for was wages
and wages can not be paid as a 10 99.

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the intention is to try to correct the tax
owed, but in doing so you are opening up.

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A lot of risk for the taxpayer by now
having multiple errors on that tax return.

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Instead of just one.

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I'm sure there are countless other common
mistakes that come up with 10 90 nines,

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but these are the top three that I run
into and I wanted to make you aware of.

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If you are currently paying a child on
payroll, but issuing them a 10 99 instead.

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Or if you are currently someone who
owns rental real estate, but you are not

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sending 10 90 nines to those who do more
than $600 of services or work for you.

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Or if you are an S corporation shareholder
who is not taking a W2 and do you or your

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accountant has issued you a 10 99 instead.

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Any of these actions are incorrect
and you should look at the best

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way to correct them and discuss
this with your tax professional.

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Looking at the potential risks and
benefits and the most reasonable way.

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To get in compliance.

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As always, I hope that this
episode added some value.

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And if you know someone who might be
having one of these 10 99 issues, Please

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feel free to share this episode with them.

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And I will talk with you guys next week.

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Mhm.