The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 46 - Year-End Planning: Minimizing Liabilities, Maximizing Deductions, and Growing Wealth
Ready to decrease your tax liabilities and increase your savings? We promise to equip you with year-end tax planning strategies that can save you a fortune this tax season. We start by exploring the power of proper bookkeeping and the importance of entity structuring. You'll learn about minimizing adjusted gross income and harnessing tax credits to your advantage, especially if you're a high-income earner. We underline the significance of understanding tax deductions and foundational concepts for business owners. So, get your pens ready and prepare to take notes.
As we proceed, we'll share real-life examples and discuss various strategies for reducing taxes for business owners. You'll hear the story of a client who was able to write off 80% of the cost by investing in equipment and how stock losses can offset capital gains. We'll reveal the benefits of cost segregation for real estate owners and the tax deduction potential in investing in oil and gas. We wrap up by looking at how tax strategies can be used to grow and compound wealth.
Welcome. We're going to talk about year end tax planning today. We're going to dive really deep into this stuff. For some of you Now, there's so many things to explore, but overall, what our mission here is is we want to help you minimize taxes for the current year as the year is coming to an end and you want to think about what can we do now to prevent future taxation. How can we mitigate the taxes on future events and sources of income that are going to create taxation? What can we do now?
Speaker 1:Now, a lot of the people you work with are going to focus on just tax savings for this year, and this is where we can really make a difference. So we have a lot to cover, but some really important stuff. So I want you guys to take out a paper and pen and take notes for this. If you have the chance to listen at your home on the YouTube channel, and if you're listening in the car, you may want to re-listen, because this is going to be one of our more dense conversations here, and if you're a CPA listening, you might get some good stuff out of this as well. Now, before I go any further, I just want to let you know if you look in the comments of this channel or this posting or YouTube site, you're going to see a couple of things going on. Obviously, you want to like and subscribe to hear more information. We do discovery sessions. We're also running a promotion and you'll see the link and you can also find it on wwwmarkprobercpacom. We are doing a promotion. If you pay over $100,000 in taxes every year, we will help you identify at least $50,000 of tax savings in a 10 minute call and if we can't, we'll send you a check for $100 to your house if we fail to find that Now.
Speaker 1:Anyways, let's move on with the good stuff and get into what you should be doing at the end of the year to maximize your tax savings. What we're going to cover in this conversation are first, you want to make sense of your books and records. We're going to talk about how to do that, some key items there and strategies for you guys. Next, we're going to talk about very quickly on this one, entity structuring, and then we're going to discuss minimizing your adjusted gross income, your income, your business income or even your W2 income. What can we do to drive that down, to minimize the taxation on that? Finally, we're going to talk about tax credits a little bit on this topic, because most of our listeners are not quite ready to delve too deep into this. This is one more for our higher income earner audience, and then we're going to talk about what can we do to prevent future taxation. So this is going to be a really valuable episode. If you don't quite have a CPA who is strategizing with you yet although you should and if you're a high income earner and most of our clients are high income earners you're going to get some really wonderful details. And then also anyone in between who is an entrepreneur and, in particular, a real estate investor, you're going to see a lot of value.
Speaker 1:But now let's get into the good stuff. Let's start talking. First, we want to make sense of our books and records. This is so important because we cannot plan for your tax liabilities in 2023, as this record is, this being recorded until we at least have some sort of feel what your profitability here is. Now we come across people who are slacking on their books and records, and they're they haven't reconciled their accounts in a while and they just have some general ideas of what their tax, what their taxable income, is going to look like from their businesses. This is a huge mistake because we've seen this before, where clients give us their projections of what their profitability is and these are not our bookkeeping clients, obviously and then when we implement the strategies, then we later on do their tax return. We may find that we may have done something that's completely inappropriate for their income. Maybe their income was far higher than we expect and now we have additional tax liabilities we couldn't plan for. Or, on the other side of the spectrum, maybe they have over invested into a tax plan that is more sophisticated than we need. So you really want to do as a step one make sure you have a as good an understanding as you can of what your profitability is going to look like from your business and businesses in real estate for before the end of the year.
Speaker 1:Now let's talk about how we can do this. Obviously, you want a bookkeeper all that great stuff. Let's say you don't have a bookkeeper and you have a business. Export your statements into Excel. You can turn this into an income statement, a mock income statement, pretty quickly. If you don't know how to do this and you want a cheat code on how to do this, just email info at mark proberg, cpacom. We have some templates that'll show you how to do that, where you can export your transactions, classify and get sub totals and put together a mock income statement.
Speaker 1:Also, I want you guys to consider the fact that we often see, especially with early stage in business owners and even more veteran business owners you want to make sure you've captured all your appropriate tax deductions. So In order to do this, you really want to make sure you understand the foundations. Have you considered your home office? Are you writing off all your travel? Are you writing off all of your meals deductions? Do you know what's deductible? The very least, you should have an understanding of these foundational concepts. Hopefully your advisor is coaching you up on this. We're going to be putting up some courses for beginning business orders soon on this topic. We're going to also help you understand what your profitability is looking like At the very least here.
Speaker 1:You want to do this because it's going to immediately minimize your taxes. You don't want to wait until April 14th and then find out you haven't invested the proper time to identify some of your tax deductions. I want to clear a myth of an urban legend that everything has to come out of your LLC to be tax deductible for your business. Let's say you messed up. You didn't realize your travel is tax deductible. You want to get points on your credit card or whatever it was to get that right off? Well, you can still take the tax deduction, even if it's not coming out of your business bank accounts or LLCs. If you have an S corp, what you can do is the S corp can reimburse you for your expenses that came out of your personal accounts. If you have an LLC that's not an S corp and just a flow through entity, you can still write off those deductions even if you're never reimbursed. Just make sure you have good records and put it in an Excel chart or something that is going to help you easily communicate this with your advisor.
Speaker 1:Okay, now that we've made sense of your books and records, we also want to try to do our best to project what our future profitability is. Where's some significant capital gains events? How is our revenue and profit growing? Because at the end of this we're also going to be talking about what kind of tax bracket are we going to jump into in the future and what kind of taxable events are going to have tax implications that we can potentially plan for before the end of this year. So entity structure.
Speaker 1:Next topic here the entity structure. For most of you guys, you want to make sure that you have the right entity structure setup that's appropriate for your business, and the right answer for you of what entity structure is appropriate may change over time. Most of you guys, when you're starting off, are going to have to decide between just a general LLC or an S corp. When is it worth investing into that S corp? You're going to want to work with a tax advisor, generally speaking, the way that we've evaluated this, and you're going to see a bunch of different people giving you different suggestions. But we need to see that you have profitability in your active income sources not your real estate investing, not your rental portfolio, but your active income real estate agents, house flippers, you know, insurance agents, just your typical business owner. What we like to see is at least $100,000 a profit and then expected continued profit and growth of profit over time.
Speaker 1:If you just had a one off year, maybe you're going to be leaving your business and go into a W2, you may find that it's not worth investing into an S corporation. You also may find that, after you've utilized all of these foundational strategies. Maybe you could write off a car in your business and get a massive deduction. You had some other costs that you finally recognized from step one of making sense of your book and books and records. You've reduced your profitability to the point that you don't really need an S corp to further mitigate your self employment taxes.
Speaker 1:In addition to that, for some of our more sophisticated, higher income earners, there are other more advanced entity structure opportunities to further reduce your taxes. Some of them involve creating charities, spin off entities, risk entities that will mitigate your risk. There's a whole world of complex entity structuring that'll reduce your taxes and we don't have a lot of time to go into it. Some of this stuff you really want to make sure you're working with someone who knows the tax law and doesn't abuse the tax law, and also someone who doesn't abuse your wallet, because they'll sometimes over complicate things and do structures that'll only save you a couple of bucks, but you pay them thousands in fees. You want to make sure each year that your entity structure is appropriate for mitigating taxes and also for mitigating your risk and providing you with a decent amount of asset protection.
Speaker 1:So now let's talk about the big ticket item here and really, what's the most important thing here, which is how can we reduce your, adjust your net income, your adjusted gross income from all of your business sources? Now, first and foremost, we want to make sure that we've made use of all of our foundational strategies and hopefully you're collaborating with a tax advisor to discuss these things the basics here, the stuff you hear about people talking about on tick tock and Instagram, which are useful. Now, don't don't take everything they say literally. Don't just buy a Lamborghini so you can write it off because you saw someone do it on tick tock. But we have our basic strategies like hiring the family, writing off your travel and your meals. We want to make sure that we're doing that and looking back, as we said earlier, here's a great strategy now for some of you guys, once you've looked at all your bookings and records and realized that you may be getting hit pretty hard with some taxes. You know we can go through tons of complexities and advance and sophisticated strategies, but here's a simple one Make sure maybe you can find some additional deductions before the end of the year. You can prepay expenses. If you're attending an office building, prepay the rent.
Speaker 1:We just talked to a client who had about a million dollars of profit in their business, and we found a simple solution that doesn't involve complexities. They found that they can use some additional equipment, so they bought some. I forgot what they were like some fancy trucks, but they were able to invest about $600,000 into some trucks that they will write off 80% of Easy, before we even talk about the cost segregation and there's all a whole world out there of other fancy moves that you can do to reduce your taxes we can keep it simple and just say what kind of expenses are we going to be able to utilize to invest in our business? Let's take advantage of them now, and I really like it with heavy equipment and trucks, because you can often finance those purchases. So you're getting the deduction upfront, but the cash isn't going to leave your pocket until you've paid off the financing fees over time. So you paid off over time, but you get the deduction upfront and you reinvest your tax savings and grow your wealth. Now, that's the simple stuff, right, but let's say we don't have any other ways to reduce our taxes.
Speaker 1:Let's look at some other things that we want to look at here. First off, we want to look at your potential capital gains in your stock portfolios. So if you have capital gains events from your stocks, maybe you can create capital losses to offset the stocks. Advice first, and what's really interesting a lot of people miss out on, is you can use stock losses to offset real estate capital gains capital gains, even though you know you hear about all of these complexities on active or passive portfolio income and whether or not they can net. You can always net your different capital gains events, whether they're from your stocks or your real estate or sale of a business. So here's an opportunity to look at any potential capital gains and losses. Net them out together so you're not paying taxes.
Speaker 1:There's another thing that I want you guys to all think about, now that we've exhausted all of our General strategies and maximize our tax deductions. This is for you if you have an s corporation and be very careful, because a lot of CPAs are gonna miss this a lot of times Because they don't focus on advising their client and that is the pass-through entity tax election. If you live in a state that charges you income taxes and you have an s corporation and you have profit, you have an opportunity to take care of a tax election that will allow you to offset more than the cap of $10,000 of state taxes to offset your federal. We've utilized the pass-through entity tax selection for some of our clients and created additional savings Anywhere from as little as a couple thousand to hundreds of thousands of dollars. Especially if you own an s corporation in California. You really want to make sure you're collaborating with your tax advisors throughout the whole year, considering that p-tech the pass-through entity tax Election, which is gonna create massive tax savings for some of you folks, and especially in the higher income brackets and states charge you taxes. If you live in Texas, nevada, florida, you don't have to worry about it.
Speaker 1:Okay, now here's some low-hanging fruit for you guys investing in real estate cost segregation. I'm not gonna go into this too much, but you will see I. I think I say cost segregation Maybe 30 times a week minimum. I have a whole episode with Yono Weiss, the king of cost egg, talking about cost segregation. I have an episode on depreciation. Cost segregation, for those of you just tuning in, allows us to frontload our expenses on Real estate that we own, so we get more of that depreciation up front. So if you have an office building or a rental property where we can use those losses as non-passive Short-term rentals and reps. We use a cost segregation.
Speaker 1:So we want to look at what kind of cost-segment studies Can we do on our properties and how further can we reduce our taxable income. We want to get a feel for this because, again, talking about our basic strategies, how low can we drive your income with depreciation before we look into the summer, more sophisticated in advance and expensive and maybe aggressive strategies that you want to really Evaluate and also talk to your tax and legal team. So you do the cost segregation studies and you know our rule of thumb. Right now we're at 60% 80 sorry, 80% bonus right now, as this is being recorded in 2023. Our rule of thumb is, if it's a short-term rental with furniture, we will write off approximately 25% of purchase price. If it's a long-term rental or an office space, we are gonna approximate a 20% of purchase price being deducted from the cost segregation study.
Speaker 1:So we've looked at the cost tag and we want to look at what else is remaining here. What can we do now to maybe shift some expenses? You know, obviously we have our foundational concepts here hiring your family, you know, finding tax deductible events. Can we potentially do anything else, that'll create tax deductions and shift some expenses into this year. And then here's another one that I really like for you guys. So let's say you can't find real estate and you want to further reduce your your taxes and you you're not coming up with any other Business deductions. If you did, it would probably not make sense for you and it would cost you more than it was worth for the tax savings.
Speaker 1:How about consider investing in oil and gas? You're gonna write off approximately 80 to 90 percent of your cost Sorry for your capital contribution into the oil and gas fund and that is gonna give you an Intangible drilling cost deduction is treated as non-passive and it will offset your W2 income or your active income for your business. You don't need rep status, you don't need material participation. You could be a passive investor. You do nothing at all and get the tax deduction and you get some tax you, so you get some cash flow in the future from these investments. So look into oil and gas as one potential option, especially if you can't find real estate this year, because you can't find a good deal and nothing else makes sense.
Speaker 1:And the next step, after we've reduced our taxable income, is how can we read Sorry, we've next step, we next step. Let me say this again the next step, after we've reduced our Our net income from our businesses and maybe mitigated the taxation on our W2 income, is we want to look at how we can reduce our taxable income. That's a little bit different here, because we have our net income determined by our profits and our salaries, and then we can further reduce our tax income with charitable tax deductions. So there's a whole world of charitable tax strategies that we consider with our clients and that are out there. Some are extremely aggressive and you want to be careful. You may not be comfortable with the way that they are run, so you want to really work with a sophisticated and knowledgeable tax team when considering some of those more sophisticated and advanced strategies.
Speaker 1:Here's something that you consider that is simple though Real estate deconstruction is called. Instead of throwing out items when you're doing a renovation, or maybe your tenants leave some furniture behind, this is the only strategy I know where you're going to reduce business costs and save money on your taxes. Call the Habitat for Humanity. They will come to the apartment and pick up the furniture for free. Also, donate that clothing that was left behind. If you're removing cabinetry and fixtures, you can donate that to Habitat as well and you will get a deduction, a taxable deduction, a tax deduction equal to the fair market value of those items. You are turning trash into a tax deduction. So we love that strategy and then we collaborate with our clients to see what else is available to create charitable tax deductions. There's a whole spectrum. There's cruts, crats, there are DAFs, donor and VAIA-vised funds, and so we want to make sure we're optimizing your situation with charitable tax deductions.
Speaker 1:Another strategy that we consider and this is really mostly for our more sophisticated investors it's not for everybody, but for more of our sophisticated entrepreneurs and investors is tax credits. So there are ways potentially to purchase tax credits for your state to reduce your taxes, where maybe you pay 80 cents and you get a dollar's worth of tax credits that you're paying for your state. There are also some investment vehicles and businesses and business opportunities that give us tax credits as well, where we can actually not only instead of we're paying the IRS, we're getting a credit by purchasing a business asset that's going to give us cash flow and we can even get our tax credits carrying back three years to the prior year returns. Your losses don't carry back your credits too, so at least if this is an opportunity for you, especially for your folks making over seven figures, we want to see if we can get some additional tax credits before the end of the year.
Speaker 1:Final topic here and this is extremely important and this is where most people will neglect you as your tax advisor is how can we prevent future taxation with part of our year-end planning, and this is something that really involves a conversation and understanding of what is your income going to look like next year, what kind of taxable events are going to happen next year, what kind of bracket are you going to be in and what opportunities can we do now? What kind of investment vehicles do we have now to prevent future taxation on those activities and investments? So what are some of these things that we want to consider? We want to look here at again some of the basic things we can look at here Roth conversions this is great, especially if we've driven you into a low bracket, maybe with the cost sag or putting a vehicle in your business, or maybe you're in a startup phase with your business or you're taking an off year, we're in a zero bracket, or even we're paying, we have a negative income. We don't want to let that negative income go to waste as an amazing tax bracket. So we just had a client where we did a cost segregation study that drove them into a negative adjusted gross income. They have a negative amount reported as their income on their tax return.
Speaker 1:Now a lot of people would stop and say, hey, my job is done, you're not paying taxes. What more do you want from me? Well, there's a lot more you can do. We want to look at how can we now use these losses to our advantage for growing and compounding our wealth in the future with tax advantages. So what did we do? We took their 401k. We rolled about a quarter million dollars of that 401k into a Roth. The cost sag losses and all the other business losses eat up the taxation on that. So there's no taxes on the conversion. Now it grows tax free and invest in vehicles are going to grow and compound their wealth. They don't have to worry about paying taxes ever again on that fund and the earnings from that vehicle.
Speaker 1:Additionally, what we did is not only did we consider the losses, but we also consider that the client had a significant amount of itemized deductions and even, unlike losses, that carry forward if you don't use your itemized or your standard deduction. So you got that it was like $26,000 around that amount for next year. If you don't use it, you lose it. So when the Roth conversion, we get to activate $50,000 of deductions relating to the mortgage interest, relating to the state taxes, all those itemized deductions that you really don't get to use. If you, if you, if you're, if you're not going to use those tax deductions, you lose them. They don't carry forward. So we make sure that we activate those deductions by triggering additional income with the rollover. And then, finally, we took advantage of the $0 long term capital gains bracket. So, again, taking advantage of your low brackets, we were your first. Approximately 80 to $90,000 is untaxed for long term capital gains If you have a $0 adjusted gross income, which we were at. So in this situation we were able to sell some stock and free up $80 to $90,000 of capital gains and we will no longer have to worry about paying that amount of capital gains in the future. So now we've eliminated future taxation on that amount tax free.
Speaker 1:And so some other things you guys want to think about growing it tax free in the Roth. Maybe you want to put funds into life insurance. Where are some other tax advantage investments where you get cash flow and can create tax losses? You mentioned oil and gas real estate investing where you get lots of depreciation offsetting the cash flow. Another popular topic right now investing into ATM machines, so you can invest passively into funds that are investing into ATM machines and getting all that bonus depreciation. Treasury bonds are going to potentially give you the opportunity to grow and have cash flow and and to build your wealth tax free as well. It's becoming a little more popular with the interest rates being where they are. And how can we structure our entity at the end of the year or in next year to prevent future taxation? That could be a pretty sophisticated conversation, depending on your income level that you'll want to have with a qualified tax advisor.
Speaker 1:And when we do all this, we really want to make sure that at the end of the day, we are aligned. We are aligning our tax plan with our goals. So make sure that your advisor at the end of the day, like I said, what we want to do is we want to make sure that our tax strategy is aligned with our goals in life, aligned with the direction of our business and is considering all the sources of income coming into our 1040, whether it's interest income, dividend income, stock income, w two business income and investing income all of this is considered at the same time and what is the direction of all these items and where we're going in life, and that the tax plan is continually evolving and adapting to consider all these items. So we're aligning all the time, making course corrections along the way as your situation changes, changes and you're having a productive relationship with your tax advisor so we can maximize your wealth, build your wealth to help you achieve the financial freedom and also create legacy for you and your family. So these are some of the topics that I want you to consider and, if you're a CPA, listening as well, consider this with your clients, but especially for you guys.
Speaker 1:You know some of these things. I hope that they resonated with him, with you guys listening, and also for some of you, some of the topics you're not quite ready for. So pick and choose some of them and, you know, take some time to make sure that you're being thoughtful at the end of the year, making sure that, before the year closes, that we're doing everything we can. And then another thing I didn't mention also looking at your retirement accounts. We talked about the Roth. We can also put funds into the 401k and your IRA. After the year is closed, we might have to put that clip and bring it back up, but look at those things as well and really make sure that you're making the optimal decisions for all these sources of assets and income to maximize savings and building your wealth.
Speaker 1:So if you found any of this interesting or if there's any topic you'd like to learn more about and you're not sure if you're really fully utilizing these ideas and taking advantage of them, I want you to email info at markpearlbergcpacom to see if we may be able to give you to help you out. Make sure you like and subscribe and continue to listen to us. We're going to give you tons of wonderful ideas, tons of thought leaders coming to the podcast and YouTube show and join our mailing list as well. You can join that at markpearlbergcpacom. Find a way to sign up so we can keep you educated and informed. Join our community and we're so excited to give you to share these ideas and continue educating you guys and providing great content. Talk to you guys soon. Hope you enjoy it.