The Mark Perlberg CPA Podcast

EP 037 - Tax Planning for Your First Year in 7 Figures

August 28, 2023 Mark
The Mark Perlberg CPA Podcast
EP 037 - Tax Planning for Your First Year in 7 Figures
Show Notes Transcript Chapter Markers

Ever wondered if you're overpaying taxes as a seven-figure business owner? Imagine transforming your tax fate with strategic planning. This episode is an eye-opener on minimizing your adjusted gross income, leveraging charitable tax planning, and maximizing tax credits. We delve into the nitty-gritty of creating business tax deductions from routine events, thus setting the foundation for long-term savings.

Get ready to redefine what you thought you knew about tax deductions! We explore overlooked incentives related to charitable giving and real estate investments, and the power of creating tax deductions that surpass the actual cost. 

Finally, this episode is a goldmine for real estate developers! From the Employee Retention Tax Credit, Research and Development Tax Credit to Solar Business Tax Credits, we discuss all. Learn how to purchase tax credits from other entities, and how to create long-term tax savings. The cherry on top - we give you a step by step guide on how to create a financial vehicle to take full advantage of these incentives. We also share other creative options to help reduce your tax burden. Listen in and learn the art of successful tax planning.

Speaker 1:

Okay, welcome everyone and welcome to our conversation on tax planning for your first year in seven figures, and this will apply for some of you folks in your second and third year in seven figures who are likely overpaying in taxes as well. And the reason why I wanted to present this is because we meet many seven figure owners who are being misguided and misled and misinformed about how the tax code work and applies to their situation and what they should be doing to minimize taxes and protect themselves from the IRS. And some of the things I want to talk about before we jump into this is some of the challenges with high income earners. If you are earning seven figures or even less than that really anyone over a half a million, but really this is especially true with anyone at seven figures and over what we find is your strategies are likely outdated. So when you were first starting off a lot of our seven figure clients, they maybe started off they were lean businesses operating out of their bedrooms and basements and taking out loans and they weren't paying a lot of taxes and you were just using all the deductions you can. You know, hopefully you were well equipped to have some of the basic foundational deductions and maybe you have an S corporation when you hit $100,000 a profit and that's all wonderful stuff. But most of our, our advisory and the low hanging fruit opportunities here are not enough to continue maximizing your tax savings when you reach certain thresholds. Some of you guys are looking at your CPA as a cost and not as an investment. Why? Because most CPAs do not focus on telling you how much. Well, none of let me say that again. You guys are looking at your CPAs as an expense, because your CPA focuses on telling you how much you owe in taxes at the end of the year, and the most tax accounts are not well equipped to show you what you can and should be doing to minimize taxes. Most tax practices are what I call 1040 factories. They may provide good reports, complete and accurate reports, but that's just about all a lot of them will do and they're not trained and they don't even know how to take things a step further. A lot of times you have an inadequate tax team and that may not just be your CPA, but your attorney on how their structuring deals and your financial advisor. And then there's a lack of collaboration. Most tax accounts are taking off their summers and falls and recovering from busy season and working three day work weeks, or maybe they're catching up on extended returns, but they aren't investing back into the relationships and saying what can we do all year round and how can we check back in on our clients and minimize taxes? And then there's also what we find is a lot of our higher income in our clients are outgrowing their CPAs. Maybe this tax accountant was a family friend, or maybe at one time they were the perfect accountant for you, and maybe they are really good accounts, but they are not prepared, nor is their business designed, to show you how you can minimize your taxes at the current income level you're at, and that's very hard. Some of you may have really strong and wonderful relationships with your tax accounts and may they may do a good job, but when it comes to saving money in taxes, they don't know where to get started because no one else that they serve is in your income bracket and they're not going to have the ability and capacity to explore what can we do to minimize your taxes and drive down these tax liabilities legally. So here are some of the challenges that we find with high income earners, and now let's talk about some of the solutions that we're going to be diving into in this conversation. There are four topics we're going to talk about, and we're really doing this in the order of what you should be considering for the most part. First, we want to talk about how can we minimize your adjusted gross income, which is, for most of you guys, this is going to be the amount of. The most important element of this is going to be the amount of profit in your businesses. Next, we're going to talk about charitable tax planning. Every entrepreneur that's a high level entrepreneur think about any multi-billionaire. They all have massive charitable tax deductions. Why? Because the tax incentives exceed the amount of cash that it costs to create and have these tax deductions, and we'll talk a little bit about how that works. If you are earning seven figures or more and your advisor hasn't shown you at least one charitable tax strategy, you are missing out on tons of opportunities and, at the very least, we can definitely conclude that this advisor hasn't shown you everything possible to minimize your taxes, whether or not they think it's right for you or you'd be interested in it. Next we're going to talk about maximizing tax credits and what are tax credits and how that can create additional tax savings and then finally planning for long term tax savings. All right, so let's jump into it Minimizing adjusted gross income. So how do we take this five million dollar profit from your S corporation or your business or your C corporation and how do we minimize the income that the taxable income that is generating? So first we add at the very minimum, we want to make sure that we have these foundational elements in place, and I'm always surprised by how few people know about what these are. Okay, then, I think that every business owner, at every level, should at least have that initial conversation with their tax accountant on how can I maximize my tax deductions, understanding what is tax deductible and then moving on to understanding where are some new strategies and advanced strategies and how do we take ordinary events and activities, make them tax deductible and further drive down our taxes. This can be through creating business tax deductions. A lot of it may involve travel. How can we create meetings? You may have heard of the Augusta rule where you're running out your property to your personal residence, to your business. We want to make sure that we've exhausted every opportunity to maximize these tax deductions at the very minimum, and a lot of people aren't getting that opportunity to even have that conversation with their advisor. The advisor will take the tax preparer will take your income statement, they will assume everything is complete and accurate and they'll plug it in Income shifting. So what can we do here to shift income between different parties, different entities, different people, different time periods? All this could create lots and lots of savings here. Some of this may involve creating past spin off entities great passive income, maybe additional entities that will serve your entity to pull your income out and into an entity that's taxed at a lower rate when you're in the seven figures. These type of advanced strategies should be considered Bonus depreciation in section 179, depreciation deductions. This has to do with, at the very minimum, consider putting your vehicle in your business but also equipment deductions. And how can we strategize and maximize that? That goes, really goes well, really well with real estate investing Pass through entity tax selections. As long as you don't live in a state like Nevada or Florida with no state income tax, here's an opportunity where we can create tens of thousands and hundreds of thousands of tax savings for our clients by understanding pass through entity tax selections. And what this is is this is going to allow you to deduct more than $10,000 of state taxes against your federal taxes. This only became important in 2017 because before that time, there was no limitation on how much your state taxes you can use to offset your federal taxes. However, after the Tax Hunt Jobs Act, they kept it. They said you can only deduct $10,000 of state taxes against your federal taxes, and then all the states started coming up with ways that they can help out their taxpayers by creating opportunities, and each state has their own methodology by which you can pay those taxes up front through your entity and either get a credit or a tax deduction that allow you to use more than $10,000 of state tax payments to reduce your federal taxes. Now, this is going to take a decent amount of research, especially if you have clients in multiple states, and what we find is that the clients who are served by tax accounts who are only focused on getting the returns out the door and don't have the time to go above and beyond for that client, they're going to miss this opportunity. They're going to wind up overpaying by tens and hundreds of thousands of dollars in taxes simply because their tax firm is used to serving lower income clients and is just there's not enough return on investment. There's not enough meat on the bone to develop a system to maximize pass through entity tax elections. At our firm we have a whole task force. We have two people diving into the tax code and legislation, straggling with the clients throughout the entire year to make sure that this has been implemented and before the end of the year we've done every action we can to maximize that pass through entity tax election. On your state level taxes, I put maybe retirement accounts, because yes, you should at least consider retirement accounts and not just 401ks and IRAs, also consider pension plans and also look into annuities as well and how that can maximize your tax savings and the creation of long term wealth. And finally, actually not fine, but oil and gas is another wonderful vehicle where we can reduce our taxes, create massive cash flow. You don't have to wait until you're 60 years old to pull the funds out of your retirement accounts and they are profitable. They're passive income alternatives to real estate. They combine really well with real estate because now, if you don't have rep status, you can use your passive real estate losses to offset your profits from the oil and gas. It's just a really nice vehicle to generate profit and reduce your taxes that if you make over seven figures, you should at least understand and consider the economic benefits and the tax benefits of investing in oil and gas. We have a webinar out on that right now. We got another one coming under way. Really fantastic vehicles. We have some clients flying to Houston, texas to check out the oil rigs that they're investing in. Lots of exciting stuff, amazing opportunities to build tax advantage, wealth and cash flow. And then, finally, real estate investment and ownership. If you have real estate professional tax status, we have tons of content you can see on our podcast and YouTube page on how you can use cash flow positive real estate to reduce your taxes, even if you don't have rep status. Short-term rentals are a magnificent vehicle where you can create tons of tax savings, especially when you're using leverage. We've seen instances where clients are putting 10% down and writing off as much as 40% in their first year on that purchase, so the tax savings exceeds their contribution and the cash output to purchase this property. And then we have cash flow and passive income. Now we're seeing the impact by which we have this compounding effect, by which we are building wealth, minimizing taxes, taking the tax savings and put it back into more structures that reduce our taxes and create cash flow. And then real estate ownership. If you own a real estate, if you own a building that serves your business, if you own commercial real estate or your office space, these are wonderful tax savings opportunities. We got to look at the cost segregation studies for these to maximize our depreciation and really set you up for success to create that tax savings. And also you own an asset now that is going to increase in value. It will appreciate while you get that depreciation vehicle and then you can eventually sell it at a profit at the long-term preferable capital gains bracket. Maybe down the road we'll talk about 1031s or maybe even a DS Delaware statutory trust to defer the taxes on those chains, actually indefinitely. But all these are opportunities that you should be aware of as a seven-figure business owner or a high-paid W-2 that could create significant tax savings for you. And we have considered and utilized all these methods to help our clients out and at the very least you should be aware of them and see what fits your interest and see how it impacts you on your taxes. What's the cash flow looking like? How do these strategies align with your goals? So let's say we start off with $2 million. We've used some of these strategies and we've now brought our adjusted gross income down to $1 million. Well, that's fantastic. We're down to $1 million of AGI, but we're still paying taxes on a million. Still paying taxes on oh, wait a second, I got to fix my audio USB. Oh, we're good. Sorry about that, guys. So we're still paying taxes on a million dollars and we're still paying six figures in taxes, and more than the majority of Americans. So where are some other things we got to look at now, now that we've optimized our entity structure, we've explored all of these investment opportunities and maximize our tax deductions and income shifting strategies with other entities. What else can we do here? And, by the way, if you're making over two million, you really got to consider a captive insurance company's. Had a great conversation with Keith Langlin A lot of opportunities we're creating with our clients. So, after minimizing our adjusted gross income, we have to look at charitable strategies. There's a reason why Bill Gates, warren Buffett, elon Musk all have foundations and multi-billion dollar charitable tax deductions. Is it because they're great people and so charitable? Maybe that might be part of it. Yeah, sure, but the economic benefits, the tax savings, are so significant and impactful that they oftentimes will exceed the cost to set up these vehicles. That's right. Imagine an instance where you are paying $100,000 to get a $500,000 tax deduction, meaning if you're in a tax bracket above 20%, that type of vehicle would benefit you. So what you should be aware of are tax incentives to create asset deductions where the fair market value of those assets that you are now donating exceed your costs, and we have seen instances where you will get anywhere from four to six times the cost of that item as a tax deduction. Charitable giving if you can create a financial vehicle where money is either paid immediately or set aside for a charitable organization, you could potentially use a get a charitable deduction that will offset as much as 60% of your adjusted gross income. So with one of our charitable giving strategies and we have one where you're using other people's money, we could potentially take that million dollars and now get a $600,000 tax deduction. Where you're not paying $600,000 to get that tax deduction, you're using leverage and other financial instruments and other people's money, and eventually that money will go to charity after a certain point in time. But when you consider the time, value of money and what you're going to do with it. It's an amazing opportunity where you are using a timing strategy to get an immediate tax deduction to offset $600,000 of your $1 million remaining income and now we're down to $400,000 of taxable income before we look at your standard deduction and itemized deductions. And, as I talked about, there are timing and valuation strategies that allow us to get these massive tax deductions that exceed the costs to get them. So, in all of these charitable strategies that we're mentioning here, oftentimes you're going to find that the cost it takes to set it up and to have this charitable entity is going to be less than the tax savings you create, and this is why the super wealthy all have charitable endeavors. Finally, there are also real estate charitable tax deductions. Now, there are two ways where you can invest in real estate and also get a charitable tax deduction. I want to talk about One. There's something called a historical facade or historical preservation easement where, if you are maintaining certain historical attributes and features of a commercial piece of real estate, typically and as an unlimited investor, you're going to get a tax deduction that's 2.5 times your investment. So imagine you're at a 40% tax bracket. If you're at a 40% tax bracket, you invest $100,000, you get a core million dollar tax deduction. The tax savings is equal to your contribution. So you're investing in real estate for free. Then they run a cost segregation study. Now you're creating losses that could potentially offset your active income if you have rep status, or offset other passive income and you're going to get cash flow and you're going to get capital gains from this investment. So you're investing in real estate for free and even taking some losses to further reduce your taxes and if your combined federal and state taxes exceed 40%, for instance, if you live in California where you're getting a hose, now the government is paying you to invest in real estate and to see the cash flow and the tax advantages from that, imagine that the IRS is paying you to invest in real estate. Another method I want to talk about real estate deconstruction. I love this for real estate developers. Instead of throwing out your items when you're doing a heavy renovation, instead of calling someone to haul things out and having storage, et cetera, et cetera, you can call an organization and they will find opportunities to reuse some of the pieces of that real estate whether it be furniture, fixtures, lumber, pipes, et cetera, et cetera and they can donate it to an organization like Habitat for Humanity and instead of throwing the things out, you're now going to get a tax deduction equivalent to the fair market value of those items that you have now donated. So you are getting a tax deduction for the items that you were originally planning to throw out and you're using a third party to help facilitate this and come up with the valuation of your tax deduction. You may even find that the third part that the chair of organization, will come and pick it up for free for you. So now you're not only saving money in taxes, you're saving money in your business. So lots of really exciting and interesting charitable deduction strategies. We can talk for days and days and days about what's available. We consider about eight to 10 of them with our clients typically and show them what's going to create the most savings and what best fits their interests. But these are the types of things that if you are making over seven figures and if you are paying over a hundred thousand dollars or over a million dollars in taxes, you have to be aware of these things because, at the very minimum, you want to know what else is out there. What is everybody else doing to drive down their taxes that you should be aware of to set yourself up for success. And again, don't hesitate to put any questions in the Q&A to discuss further on any of these topics. Now let's discuss tax credits. So once we've driven down our AGI, our taxable income, our taxable business income, now we've maximized our charitable tax deductions. Let's say we started at $5 million of income and now we're down to $2 million. We still have a couple of hundred thousand dollars we're paying in taxes and we fully exhausted the charitable deductions, because the charitable deductions are typically limited to 30, 50, or 60% of your adjusted gross income, so you can't offset all of your income with charitable tax deductions. We may have some remaining tax liability. So what's the next step? We want to look at tax credits. Now we may look at tax credits beforehand. If we can talk about ERC, employee retention tax credits that may have applied to you, research and development tax credits, any other state level tax incentives we want to talk about that forever but we want to look at what are some employment tax incentives and tax credits, federally and statewide. For instance, there are tax credits to incentivize you to hire people who are unemployed or who are veterans. Each state has its own tax credits. And if you have a tax team that has the opportunity and the structure to dive into these things and fully explore the tax opportunities available, they're going to explore state level what is available to further reduce your taxes and they're going to find some opportunities for you. For instance, in New York they have something called the beer tax credit, believe it or not, and there's an incentive to encourage breweries in New York and you're not going to know about that unless you have set aside the time and are designed to strategize with your client and identify these opportunities. Another one that we really like right now is solar business tax credits, and it's not incredibly hard to set up a solar company. There are organizations that are pretty much set up for you. You take it over and you're going to receive a little bit of passive income. But more importantly to a lot of our clients is the tax savings and what you're going to find is for every 80 cents you get a tax benefit of $100 to $120. So let's say we have $500,000 of tax liabilities. Sure, you could pay it, but wouldn't you rather pay $400,000 to create this company that's going to give, that's going to create the tax benefits and credits to completely eliminate that $500,000. And then we're going to get cash flow on those business assets. So wouldn't you rather put your funds into an asset and use the credits to offset the taxes, and then at least you're getting some cash flow from those assets, instead of just giving the money to the IRS? Now, likely you'll still be paying some amount of taxes, but these are the things that we're going to strategize with and you should be looking at with your tax advisor to optimize your situation. And then let's talk about tax credit purchases. There are ways that you can actually purchase the tax credits where you're getting a discounted cost on your taxes because of the cost to purchase those tax credits from other entities and corporations. That's going to involve some collaboration. Your CPA is going to need to have those connections and resources to facilitate the purchase of those tax credits. Now let's talk about creating some long-term tax savings. There's no slide for this. But not only do we want to create tax savings, but we want to set you up for success, and you want to be talking about how can we prevent future taxes. It's fantastic if we can drive you into a $0 tax bracket, but that's not where we stop and maybe we can't drive you into a $0 tax bracket. Maybe we drive you into a 15, 10, and 20% tax bracket, or significantly lower than what you were in the past. Hopefully we can drive you into a 10% or lower tax bracket, but we also want to think about what's going to happen in the future and where are potential tax implications. What can we do now to prevent future taxes? Are you considering what you're doing with your cash, what kind of wealth you're building with your cash and what kind of tax savings opportunities you're going to have with those vehicles? Are you going to consider having real estate that is offset, where the cash flow is offset by depreciation? If you're going to invest in securities, are you going to do it within a Roth, an IRA, a 401k? Are you putting funds into annuities where you can grow money in a similar fashion as a Roth, where you're not going to be paying taxes on it and you can borrow from it? What type of events are going to happen in the upcoming years that we can plan for now to mitigate against future business dispositions, capital gains events, stock sales? What can we do to build a foundation for long term tax savings and to minimize or completely eliminate the taxes on future events with successful, proactive tax planning. These are all the things that you want to be discussing to maximize your tax savings, not just now, but to create long term tax savings. To build wealth in a sustainable manner, build a legacy and set yourself up for a lifestyle where you'll never worry about money again and you can live a relaxing life, have more time for your family, fun and passions, or take those risks and explore other entrepreneurial endeavors, knowing that you have the financial support and instruments and protection in place to allow yourself to really pursue the things that you love and live the life that you love. So that's about long term tax savings and let's talk about next steps. What I want you to make sure that you are doing is work with the tax strategist who understands all of these tax strategies. Obviously, we specialize in advanced tax reduction strategies for high income earners and you want to make sure that your advisor is qualified to talk about these topics. Make sure that they're educated and you have a team together, working together. You want to collaborate with your advisor. Don't wait until April to call your tax advisor. Don't even wait until the end of the year. You want to work with your tax advisors throughout the entire year and I always tell my clients, regardless of how wealthy they are, the most valuable time they spend for building wealth is with us, because, whatever they're making in their business, let's say that your time is worth a thousand, five thousand ten thousand dollars an hour Because you have such an important role in your business and your business is so lucrative. In that case, the taxes you're also generating a couple of thousand dollars an hour in taxes, and what we find is that the time you spend investing the time and money you spend investing into a tax plan will create hundreds and millions of dollars in tax savings, and it typically comes out to anywhere from a thousand to tens of thousands of dollars per hour in tax savings you will generate for the time you invest in developing a thorough, complete and effective tax strategy, and whatever cash you have to invest into these strategies and financial instruments are likely going to give you a tax savings that will produce a return on investment far greater than any real estate or any stock purchases that you will ever see. So, just to highlight these concepts work with the strategists strategists who knows these strategies, collaborate with your advisor and also connect your CPA and your tax advisor, with your attorney and with your financial advisor. Get everybody working together on the same page and do not wait until the end of the year to implement these ideas. This is a year round conversation. We want to make sure throughout the year we are setting you yourself up for success. Don't wait until the last second, because after the year is closed, there's a limit on how much you can do to minimize your taxes. If you're interested in learning more about what we do, feel free to check out my site, check out some of our other conversations on the YouTube page and podcast and if you are interested in being a client, email info at markprobertcpacom. Also, we haven't put it on our website yet, but we will have a quick form. You'll fill that out. Is you got to answer maybe five or six questions? And if you, if you qualify for our services, you'll automatically be sent a link to either myself or someone else on my team to schedule a discovery session to further explore how we can help you, and that'll all be done instantaneously through the form. And if you know anyone else who can use us, feel free also to send them our way and send them. Tell them to email info at markprobertcpacom. Being aware of these strategies will be one of the most important things you do as a seven figure owner and can legitimately change your life for the better. Okay, let's see. All right, you guys, I'm going to just hang around for some quick questions before I sign off. If you have any questions, put them in the chat or the Q&A. Any last second questions you let me know and I'll try to give you as much guidance on any of these topics as I can. But if not, this concludes our conversation and I hope to hear from you guys in the future.

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