The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 64 - How to Minimize Taxes Without Worrying about the IRS
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How do you create significant tax savings without getting on the IRS's radar? Join us as we break down the unique tax planning DNA that can help you legally minimize your tax liabilities. From conservative to aggressive strategies, we discuss how to optimize write-offs and substantiate deductions with precision. Learn how open dialogue with tax advisors can align your financial goals—be it liquidity, cash flow, or future wealth creation—with optimal tax outcomes.
Ever thought about leveraging your investments for tax advantages? We explore how intangible drilling cost deductions can offset your W-2 and business income, and why proper documentation is key when hiring family members. Discover the tax benefits of investing in real estate syndications, energy-efficient technologies, and more. We also shed light on various business tax incentives and credits, emphasizing that strategic tax planning is a legitimate and effective way to save considerable amounts annually. Don't miss this opportunity to learn how to navigate the tax code and maximize your savings!
Let's discuss how to minimize your taxes without worrying about the IRS.
Speaker 1:A lot of folks stress about overpaying in taxes and how they're going to afford their tax bill, and then, when we start talking about tax strategy, we find many business owners start to get concerned. Wait, tax strategy oh, if it sounds too good to be true, it probably is. Is this going to get me arrested? These are common concerns we get from entrepreneurs and affluent business owners and highly paid W2 folks, and when it comes to tax planning, there's so many ideas. So we're going to discuss how you can effectively tax plan and reduce your taxes significantly and maybe eliminate all your taxes in a way that is not going to raise red flags and is not going to get you in trouble with the IRS. So first let's talk about when you're doing tax planning, and this is how we look at it with our clients. When it comes to tax planning, every client we have has their own what we call tax plan DNA. Some folks want to be very, very conservative and they don't want to take aggressive stances and they don't want to invest in things that may wind up losing or being less profitable than they'd like. They want to take very traditional, conservative approaches with their tax planning, and that is totally fine. And we have other clients who think about tax planning a little differently. Some people, when it comes to tax planning, want to take more aggressive stances and will do whatever is possible to minimize taxes and maintain liquidity. This may involve making more ambitious purchases and investing into different types of real estate and partnerships that will create significant write-offs in tax savings, even if there's leverage and there's greater debt, which always comes with greater risk, and even if maybe the audit risk in some of these scenarios might be a little higher because these are aggressive stances. Now, even if there is audit risk for some of these folks on the other side of the spectrum here, that doesn't necessarily mean that it's not suitable for them. When you evaluate what is the audit risk, what is the likelihood of things going south if you're doing things properly? And some of our clients decide that they want to take a decision, that is on the more aggressive side of things, and we show them how to do this in a way where they're protected, but let's. And then there's another type of people out there, which is what I call, in the Wesley Snipes category of tax planning, the Willie Nelsons and the Wesley Snipes, and I don't know, maybe Shakira would be in this category. I'm not sure what happens to Shakira, but there's that other side of tax planning that we do not mess with. We don't play in that sandbox and we stay away.
Speaker 1:So let's get back to talking about how you can do this in a way that is going to minimize audit risk, minimize any notices or anything going wrong, and one of the first things you want to do here, before we even go into the strategies, is, when you do your taxes, give us all your 1099s. Now I know this doesn't have to do with planning, but let me tell you we've done some even very traditional and conservative tax planning methods with our clients, and they got audited because they didn't give us their 1099 B's for their stocks. We requested it, they didn't give us it, and now everything is becoming scrutinized under a magnifying glass of an IRS auditor who is looking for a win over you. So make sure you're being compliant with your tax returns. That's one of the most important things you can do. Now let's get into some very foundational ideas on minimizing your taxes, and there's something that we call tax coaching, which includes what we call write-off optimization, before we even consider complexities and various entity structures and investment vehicles. We want to make sure we are getting all the write-offs that we are entitled to, that the law allows for, and by doing this we are taking advantage of things that are already written in the tax code and we're incentivized to do so.
Speaker 1:We often find a lot of business owners most business owners never had a chance to meet with a tax advisor and actually discuss what can I write off on my taxes and how can I maximize these tax deductions. Is this travel tax deductible? How could I make this travel tax deductible? Could I potentially hire my children? All of these conversations are often not had with their tax advisors or their CPAs or EAs. Not only should you be having these conversations on what you can write off, but you should also have a conversation on how do you substantiate your write-offs and tax elections made on your behalf. How do you keep good records? How do you prove that that travel was tax deductible? How do you prove that this was a legitimate hire of your son and how do you prove that you materially participated in the management of your rental, and do you understand the law and how it applies to you and what you're expected to provide if scrutinized by the IRS, so under an effective tax strategy. Here, at the very minimum, we want to make sure that not only are we writing off as much as we can legally, but we're also, as we increase our write-offs, we're going to increase our protection against IRS scrutiny, because we have the right documentation and systems and procedures and understandings in place with a collaborative conversation with an advisor.
Speaker 1:Now let's get into strategies here. So again, every client has their own DNA. We might find two clients with all the same business activities and profits and we might wind up with entirely different strategies and resulting opportunities and recommendations, each because of what we call the tax planning DNA. Some of them are going to want to implement a strategy that involves maximizing liquidity. Some are going to want to have a strategy where they're investing in things that only also create cash flow, and others are going to want to do strategies that are going to create future wealth more than current wealth in the form of tax savings. So there's all these different things that we're looking at here to see which combination of strategies, plans and ideas work for the client, and here are some of the strategies and ideas that you may want to stay away from if you want to avoid the IRS Listed transactions.
Speaker 1:So a listed transaction and you can look this up the IRS has what they call their dirty dozens and these are transactions that'll create significant tax savings, and they include conservation easements, where you're buying land and donating it to charity and the tax deduction is in excess of the cost. There are captive insurance companies where you can create a cap. Basically, you own an insurance company, you create a tax deduction for insuring against risk and then, because you own the insurance company, insurance companies receive this money and they don't pay taxes at all. It's an amazing opportunity. Insurance companies have all these tax advantages and you can create them. Some business owners want them and have legitimate reasons. Other business owners wind up abusing this. In either circumstance, when you have a captive, you're increasing the risk of IRS scrutiny, so many business owners are going to be discouraged by these and other types of listed transactions. Other business owners have legitimate reasons and will want to pursue these. So again, what is your DNA? If we are going to avoid risk and avoid IRS scrutiny, we are going to avoid these listed transactions. Now, you're going to see.
Speaker 1:You may find some of your friends and colleagues have implemented these listed transactions and create hundreds of thousands or millions of dollars of tax savings, and you may get a little upset to see that they're getting away with these aggressive strategies and wondering what am I going to do? Well, don't worry, there are still so many things that you can do to minimize your taxes when you are knowledgeable and resourceful in using the tax code to your advantage. So let's talk about some of these things that are lower risk Retirement accounts, 401ks, iras. These strategies are not aggressive. It is clear as day and maybe you're not so excited when you think oh, you know, I can't even put you know a whole lot more than you know under $100,000 into 401k. What's so exciting about this? Well, you can do a cash balance plan and maybe put hundreds of thousands of dollars into these strategies.
Speaker 1:We also like to see Roth conversions. I always say don't let a good tax bracket go to waste. So, after we've implemented all these other strategies and we drive down your taxes, that doesn't mean our job is done. How can we prevent future taxation? So, instead of having your 401k grown compound year after year and then eventually paying taxes on it, we're going to move it into that Roth and maybe pay no taxes on the conversion if we're in a low enough bracket, or pay at a low amount now and then avoid millions of dollars in taxes in the future as this thing grows and compounds and builds your wealth over time.
Speaker 1:Some other ideas that we want to think about here as far as what we can do here to create tax savings in a way that is going to be low risk no questions from the IRS legitimate expenses, expense timing and income timing the timing of events can create millions of dollars and has created millions of dollars of tax savings for our clients. So one example that is one of my favorites here is if, again, if we drive clients into a low bracket through our other strategies strategies we want to take advantage of that $0 long-term capital gains bracket In 2024, the $0 tax bracket is around and we'll have to fact check this is around $90,000. So that means if you were to create a long-term cap gain from just selling some stock recognizing some unrecognized long-term cap gains, you're avoiding paying taxes on a future $90,000 capital gain. So if we were to do imagine we did this five years in a row we're now completely eliminated $450,000 of taxable capital gain just by timing these events and moving them into the years in the $0 long-term capital gains tax bracket Cost segregation.
Speaker 1:I've said this a million times this is not a risky strategy, it's not a listed transaction. It is extremely common and it has created hundreds of millions of dollars of savings among me and my colleagues. We've probably created at least I would say at least $50 million of tax savings just from cost segregation with our clients at this point. Then, hundreds of times we've survived the audits from the IRS and they expect a knowledgeable advisor and client to take advantage of these incentives that are written in the tax code. So here's another way where we can properly time these cost segs and create significant tax savings without stressing about the IRS scrutinizing your tax return.
Speaker 1:And also there's an opportunity to be strategic. Also there's an opportunity to be strategic. There's different ways we can look at the timing and the depreciation elections of these cost segregation studies to maximize the tax savings. Again, the timing of when we recognize these expenses can have a profound impact on your ability to minimize taxes and build that long-term tax-free wealth with your real estate investing. So Some other ideas is when we think about timing our expenses.
Speaker 1:We've also had instances where clients have unexpected spikes in their income. Maybe they have a life-changing exit from their business or maybe they especially commercial real estate agents where they get a gigantic commission that they don't know is going to happen. We see these significant spikes in their income and now we can time our expenses to offset the taxation of that income. And sometimes that might be even leveraging the purchase of a vehicle, and most people finance their business vehicles anyways. So we had one client who purchased several trucks in their business which they were going to purchase anyways, but they purchased them sooner because they knew that they were going to be in a high tax bracket and can use the depreciation. Now here's another example of where we're creating expenses and timing them in the proper years to minimize our taxes, and we're not doing anything fancy, nothing sexy. We're just having a collaborative conversation with our tax team, our tax advisor, and we're making decisions that are going to reduce our taxes and that are also going to be beneficial for our business. Some other things you want to think about. Here are some other ideas that you can implement that are not going to be risky with the IRS and are not going to get you in trouble or raise any red flags.
Speaker 1:Oil and gas we love talking about oil and gas investing. The tax deductions are going to be around 80 to 90% in year one when you invest in working interest with a lot of these securities and they're going to create cash flow in the following years. Now, a common objection we get from oil and gas and especially if we're talking to a risk adverse population here is well, what if no oil is found? I don't know about oil and gas, how can I invest in it? What if they just poke a hole in the ground and there's no oil and then we lose all our money? Well, there's always risk in any investment. However, if you want to hedge against that risk not only of being audited by investing in this and to backtrack, it is clear as day. This is not a subject for debate.
Speaker 1:The intangible drilling cost deductions to offset your W-2s, your business income, is in the tax law is to incentivize domestic energy. But let's get back to addressing our concern about if we're going to lose our shirt and if we're going to lose money on these investments. If you work with the right people, they have the most advanced technology, they have methodologies that are going to allow them and has allowed them to do this thousands of times with success. And even then, if you still want to mitigate your risk, you can invest in a fund across many wells. So if, let's say, one well is unprofitable, you're also investing simultaneously in 20, 30, 100 other wells at the same time to hedge against your risk of one particular project being unprofitable and because we're creating an initial tax savings. That initial tax savings is a return of your investment. So in year one, when you get that intangible drilling cost deduction that's non-passive and offsets your business or W-2 income, you're already getting a portion of your investment back, which reduces the amount of money you can lose on this investment.
Speaker 1:From this idea, we'd love to see hiring the family. Obviously, you want to have your docs in place, so we'd love to see you putting your family in the business, hiring your kids, getting a management company putting them into payroll. That's not going to trigger an audit or a red flag. However, if you were to be scrutinized, you would want to have proper documentation to substantiate what you're paying them, and that kind of goes back to talking about the concept of tax coaching and being aware of having the right documentation in place so you're protected. We're preparing you ahead of time for any scrutiny of the IRS.
Speaker 1:And then there are tax advantage investment vehicles, vehicles. So there are so many ways where their incentives and just the structure and the nature of these investments are going to have tax advantages and these are not risky tax advantages. So, for instance, if you were to invest in real estate passively syndications they're going to run cost segregation studies that are going to roll onto your 1040 and offset the rent revenue. So, even though you have cash flow positive investments, the depreciation offsets that rent revenue and you're going to get distributions that bring more cash into your pocket without paying taxes. We also see these other forms of alternative investments, like investing in car washes that give tons of depreciation and ATM machines that give you a gigantic amount of bonus depreciation to ensure that you're not paying taxes, at least on your initial investment.
Speaker 1:And a lot of times these passive losses can be utilized to offset the positive cash flow from other passive investments. That's why we really like combining oil and gas with real estate. The oil and gas creates a lot of savings. You invest your savings in maybe more in oil and gas for more tax savings or more real estate, and even without rep status. Your passive losses will offset the passive income from the oil and gas Just so many ways where we can look at a combination of strategies that fit again your tax planning DNA, but also your DNA as an investor, where we're using all these concepts and take advantage of the tax treatment of all these losses that are easy to get with the right investments, to create a favorable circumstance where money is coming in and you're not paying taxes on it and you're not doing work because you're a passive investor.
Speaker 1:There are also tax credits and there are tax incentives associated with hiring your family and not, well, not really your family here, let's let's, we'll probably revise this in the recording, but there are tax incentives to having retirement accounts for your staff. Hiring different types of demographics of people out there and just being aware of the tax credits that may incentivize you to create benefits and credits for your staff are going to be very useful. Tax credits for energy investing, for solar investing. These are all opportunities that have been designed deliberately in the tax code to encourage you to do certain actions and you're going to perform those actions and the government rewards you with tax savings and tax incentives. So to wrap all this up on how you guys can look at this.
Speaker 1:Tax planning is not a dirty word. You can be a tax planner. You can be saving millions of dollars in taxes every year when you have a strategic relationship, collaborative relationship with your advisor and you don't have to break the law, you don't have to twist and manipulate the rules. There are many opportunities, when you are resourceful and knowledgeable, that you can use to minimize your taxes and not worry about getting in trouble with the IRS. If you found this useful and you want to learn any more about the situation, if you found this useful and you want to learn any more about this situation, email info at prosperlcpacom.