The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 88 - Avoid Costly Misinformation & Tax Myths w/ Tom Gorczynski
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Tom Gorczynski, enrolled agent and tax expert, joins us to debunk common tax planning misconceptions and reveal frequently missed opportunities that can cost taxpayers thousands of dollars. We explore how social media oversimplifications of complex tax strategies can lead to compliance issues and missed savings.
• Social media tax advice often omits critical nuance, making strategies seem simpler than they are
• Entity selection requires analyzing numerous factors beyond just income level
• The "family management company" scheme likely violates economic substance doctrine
• Common tax strategies like hiring children are legitimate but frequently misrepresented
• Section 199A deduction remains widely misunderstood and underutilized
• Quality tax preparation often costs more but provides significantly better ROI
• Tax professionals working excessive hours likely produce lower quality work
• Many business tax credits go unclaimed due to lack of awareness
• Reasonable basis standard allows taxpayers to take supportable positions even in gray areas
• Missing tax opportunities can cost hundreds of thousands over time
For more tax insights, subscribe to Tom's newsletter at TomTalksTaxes.com or explore continuing education at Compass Tax Educators.
So I want to start off by telling you guys a story. I had a client that we did the short-term rental loophole for Over the course of a couple of years. That client was a high W-2 earner and he has reduced his taxes by literally millions of dollars with the short-term rental loophole combined with some other strategies and you can look at my previous podcasts where I talk about how powerful that short-term rental loophole can be in reducing your taxes. And then we came under audit. Now, the short-term rental loophole, as many people call it these days. I wouldn't consider this a red flag. However, this is what triggered the audit. The client didn't give us his 1099Bs to show his capital gains and now everything became under scrutiny, and I don't know what kind of childhood trauma this auditor went through that. He just wanted to unleash it all out on us on this audit and he pretty much reinterpreted how cost segregation studies work. And so I said if this is the way the law works, then not only are we off, but the rest of our profession is off as well. But anyways, we lost the audit because of that and it was a very strenuous time.
Speaker 1:Luckily, I have this wonderful guest here, tom Gerzinski, and we appealed it and we actually got a result that was more favorable had we not been audited, and he gave us the right docs. So I just want to illustrate how important this is to have expertise, and not only your own internal research, but to have mentors and people who know more than you and people who have more experience than you in certain topics, to really be the best that you can be in different things. So today I'm joined by an awesome guy, tom Grzynski. He coaches me in a group we meet weekly and we geek out on the most complex, which is me and a group we meet weekly and we geek out on the most complex, confusing and ambiguous challenges in the tax code. And he also helped me get through this audit and it helped hold my hand to make sure we had the most favorable results. So I really appreciate you, tom. But, tom, can you introduce yourself in 60 seconds or less? Tell everybody a little bit about who you are and what you do?
Speaker 2:Sure. Thank you, mark Tom Gorzinski. I'm an enrolled agent. I'm also a USTCP. I'm admitted to practice for the US Tax Court as a non-attorney. I'm a certified tax planner with the American Institute of Certified Tax Planners my business. I have a tax practice here in Phoenix where I focus on tax representation and tax planning for clients. That's about, I would say, 10 to 15 percent of my time at this point. I kind of a small client base, high volume or high dollar amount amount. The rest of my time is spent with consulting and educational opportunities helping the tax community. So I have a newsletter online Tom Talks Taxes. Most of the content is free. I have the Inner Circle program, which is more of a one-on-one small group program for certain tax practitioners. I do webinar education through my business compass tax educators and I also teach live in-person seminars around the country if I have time during the year and you know we have a large audience that is either high income earners looking to reduce their taxes, but also other CPAs.
Speaker 1:A lot of them, I've found, listen to this podcast to gain ideas, and so maybe 25% or so or more are other CPAs here, and so one thing I'll tell the audience is I wish I knew you when I was starting off a little earlier, because there were times where I spent hours of going down research rabbit holes and agonizing pain, wondering how to do something and just tearing through stuff where, if I could have just asked someone who had figured it out and could collapse the amount of time to figure these things out, I would have been more profitable, I would have slept better at night and my life would have been a lot easier. Luckily I found you soon enough, slept better at night and my life would have been a lot easier. Luckily I found you soon enough. Now, one of the things I noticed about you is you.
Speaker 1:I hear a lot of people on social media and experts who will share these ideas and strategies, and they may even cite sort of the tax code because it makes them look smart. They might say 160-88a, 1679d, but when you actually hear them talk uh, you know, if you're a common, if you're just an ordinary guy, you're like, oh, he said I did a section of the ir, the internal revenue code this guy must know his stuff. But when you are someone who's actually read the law uh, as as tom has, and he's the type of person that'll go really deep into this stuff, he's the one who could smell out the BS much more quickly. So one of the things I want to know from you, tom, is what are some of the biggest lies and some of the things that just hurt your head when you hear people talk about it.
Speaker 2:Well, I think on social media it's very prone to I don't even want to say misinformation, but oversimplification of tax planning and tax strategy. Because if you think about social media it's all meant to be in small, you know, 20 second, 30 second. Here's the way it works. But unfortunately, with what Congress has given us in the tax law, very little can be done accurately in a 20 or 30 second blurb or description and what's often lost is the nuance. And so what will happen is people are given an impression that something is easy or simple or can be done with no problem, but all of the nuance being omitted.
Speaker 2:It's easy for people just to kind of being omitted. It's easy for people just to kind of fall down into a hole where they're noncompliant. You know, hiring your kids is the perfect example. Yes, you can hire your kids in the business, but they want to make it sexy. So they try to say, well, you don't have to do a W-2. You can pay them $15,000 a year and all of these things, when in reality the strategy, if you look at the tax court and what they've said, is legitimate and not it's not as sexy.
Speaker 2:Most people cannot hire their 15 or 16 year old kid to do $15,000 of work a year. That's just the reality of it. If you're paying a reasonable wage to somebody who's going to school full time, you're probably looking at $4,000, $5,000 at the most right, and so again, it's just oversimplification. I don't know if there's ill intent Sometimes I think there really is, with an intent to take money from people, but I really think it's a lot of it just getting clicks and attention and accuracy is not necessarily at the forefront of what they're doing.
Speaker 1:Yeah, you know, in particular, I've seen it when they talk. Anytime they talk about entity selection, I'm like it's good to know what an S-Corp is and does, but there's it's impossible for you If you this is. This is why this is a professional service, right? Just like you wouldn't want to do your own root canals, you wouldn't want to deliver your own baby, you don't want to do your own entity structure, because this is a professional skill and it really involves looking at so many variables.
Speaker 1:And unless you are a professional tax advisor who understands the law, you're just not going to be able to make these decisions with absolute certainty. You're not going to be able to consider all the variables. Here, for instance, x-force in Tennessee, you have franchise and excise tax that make it more expensive and then you're paying more fees. There's just so many moving pieces in this thing that all you can get here is maybe you can understand the impact and the importance on the tax side, but is it right for you? Can you really make any decisions? The only decision you can really make from social media is to hire a strategist that you're paying a lot of taxes.
Speaker 2:Yeah, the biggest problem with the S-corp dilemma, as I call it, is that on social media they say if you make at least $100,000 net, you should be an S-corp. Well, that's false. First of all, they ignore the fact that C-corporations pay a 21% rate, and so maybe that actually would be better for a small business owner, but with the S-corporation, in order to make any of these determinations, in order to make any of these determinations, there's one thing you need to know, and that is that particular worker's reasonable compensation level. Without knowing that, you actually cannot figure out whether the S corporation would make sense for someone who's currently a sole proprietor, because that number drives the cannot actually make that determination. So when someone says, based on net income, you should do this or that, it's generally false.
Speaker 2:There are very few things in tax planning that everyone under this amount does X, y or Z. You have to do a customized planning strategy for each taxpayer. Now I'll give you a perfect example. Let's say there is a sole proprietor making $100,000, right? Well, what if they're married? Their spouse's income on that joint return has a huge impact on what they decide ultimately to do. If their spouse makes no income, that's one direction. If their spouse makes a million dollars on a W-2, that's another direction. And all of that nuance is lost when someone says, oh, you net $100,000, be an S-corp.
Speaker 1:Yeah, you know, to quote the great Mick Jagger, there are no absolutes in life, only vodka Right, correct. So when an entity is structured, or maybe you have losses from oil and gas to offset your FICA, or maybe this is the only you know, you're not expecting similar profits in the future. So it's not worth setting up the S. So it's like the list goes on and on, and it's like you need someone who's really thought about this deeply to do these things. Now, what I'm curious about as well, let's talk about something that you said in the comments, and you know I always kind of thought it, but you know even me as a professional and seeing what other people are doing around me, it's like.
Speaker 1:it's easy to fall into some of these traps because you're not reading the law and you're seeing what other people are doing and, in particular, this is something that you see a lot of people present, and that is the family management company I need a company to manage my family like I can't think of any legitimate.
Speaker 1:I still, you know all the masses are doing it. I'm trying to. I I still don't understand the legitimate purpose here. Maybe someone could say it provides asset protection. I don't know. What are your thoughts on people doing their family management companies here? I want to hear you talk about this. The CPA is listening here. Their ears are perking up as we cover this topic because a lot of people have done this.
Speaker 2:I wrote a whole newsletter article debunking this, because I think it's a classic example of someone trying to use a tax strategy for a not ideal prospect. Right, so hiring your kids in your business is ideal in certain circumstances, and in certain circumstances it just doesn't make sense. And that's okay, because we can do other things when that doesn't make sense, right? Tax planning is about having a toolbox and you select the proper tool for each situation. It's not. You use the same five tools for everyone. That's not tax planning. It's just not. So with the family management company it really is.
Speaker 2:I hate using the word scheme, but it's a scheme to try to get somebody to get a benefit from hiring their child that they really aren't entitled to. And the way it works is if you have a sole proprietorship we'll just use that as an example you hire your child in the sole proprietorship who is not 18, yet you don't pay FICA taxes. The child doesn't pay FICA or unemployment. So it actually means it's much easier to get tax savings because you're simply shifting income off the parents' return, you plop it on the kids' return, where it's taxed at 0% and there's no FICA to pay.
Speaker 1:Now, if you're in an S corporation, that's a 15.3% tax.
Speaker 2:Right, if you're in an S corporation you have to pay FICA corporation. You have to pay FICA. So basically, that tax reduces the value of hiring the kid in the business. So what some people are purporting to do is they create this family management company which is the S corporation, pays the owner or the owner's spouse and then the owner or owner's spouse individually pays the child. The problem is well, there's a couple of problems.
Speaker 2:There's something in the tax law called the economic substance doctrine which says, essentially, if you undertake something only for tax purposes, it's disregarded. And the truth is that family management company has no reason to exist except to save tax. It's an unnecessary intermediary. So it's very likely, if ever challenged, to be just completely disregarded. Likely, if ever challenged, to be just completely disregarded. The second thing is that's not a trade or business activity. It really isn't. If you're just putting money into this management company and then paying your kid, it's not a trade or business activity under Code Section 162, which means you can't deduct the wage. So in the end it doesn't get you the benefit you're entitled to. So rather than creating something that's questionable, I would rather look for other strategies that make sense for that S corporation owner, rather than trying to fit a square peg in a round hole yeah, you know.
Speaker 1:So one of the things that we like to do is, instead of paying them from the s corp, if you could find them to do things with your real estate investments. Now you have a sole prop, then there's no fika, and you know there's a lot that you can do now. Another, another thing I'd like to dispel. A lot of people say you pay them up to the standard deductions, there's no taxes.
Speaker 1:And I'm saying to myself well, hey, let's say you have a kid who you know, who's a little older, and maybe they're competent and able to do more than the standard deductions worth of work. Well, after the standard deduction they're taxed at 10%. So you still might find that you're creating a net tax savings by paying them above the standard deduction and maybe they're gaining access to the American Opportunity Tax Credit to come to college. So again, there's all these nuances here when you're considering hiring your children that you're not going to be able to figure out in the social media post here. Now I have a question.
Speaker 1:I've been thinking about this for a while. We may have talked about this. So you know, the family management company is kind of a sham. People are getting away with it to some degree because it's just so common. But you know, obviously you know, it's I. It's. Simply, if you look at the law, it just doesn't make it, doesn't? It's really illogical here. So if we need to show economic substance in the things that we're doing to justify what we're doing, where's the economic substance where we elect to be taxed as an X corporation from an LLC? Because I don't see any motivation besides for tax reduction when we choose our S corporate language. So why is that not an issue in those times? And where do we draw the line? Where it's okay to do something to reduce your tax, it's not okay in other situations.
Speaker 2:Right. Well, for the S election, I think that's a specifically excluded item, right? I think if you look at some of the guidance the IRS has put out on the economic substance doctrine, you know whether you choose to be a C corporation or an S corporation, that's totally within your purview. But when you take other actions, like setting up entities or engaging in financial transactions where there is no bona fide business purpose to doing it, that's when you'll run afoul of it. But the code specifically says you are allowed to be an S corporation if you meet these requirements. It is your choice, the code says it, so it is permitted in that case. And yes, you can choose it again if there is a tax benefit or if there's not. That's your choice. But what we're looking at under this economic substance doctrine is doing other more convoluted things where there's really no other reason to do it except for a purported tax avoidance reason.
Speaker 1:Unfortunately, when we riff on economic substance of transactions, we're less likely to get as many clicks as we would if we were talking about writing off your G-Wagon and your Ferrari and your boat because you just put it in the business. Sure, so you know this is the nitty gritty stuff that you really got to know that's actually important here, and you know especially going to protect yourself against. You know the IRS and you know also what I have found in many circumstances is if we are resourceful in our understanding of the tax law, we can sometimes create incredible tax savings just by understanding the law. And some folks who are afraid of the idea of tax planning or some CPAs who shy away from things like cost segregation is not because they're trying to follow the rules, they're just trying to, they just don't know the law. So they'll shut down all these ideas mainly because either they don't know or they're too lazy to figure out how the law pertains to some of these topics.
Speaker 1:And so, for instance, one of our clients, his prior accountant, said hey, just take half your profit, pay yourself a salary based on 50% of profit. Well, his profit like tripled in one year and all it was going to his officers. So we did a reasonable compensation study where not only did we have a more legitimized, substantiated salary amount, the reduction in salary saved him like 50 grand on his taxes just by doing a regular compensation study.
Speaker 2:Right, yeah, and I think the thing you have to realize is not everybody wants to do advisory, some people just want to do compliance. So this is what you did last year. We're going to record it on the tax return. Maybe we've recorded correctly, maybe we don't. And they don't advise proactive changes.
Speaker 2:Like, for example, I had a client a new client of mine who had some questionable ERC claims. So I helped them participate in the voluntary disclosure program to repay two of their quarters. But when I was looking at their returns I noticed lots of opportunities that their CPA never advised them that they could take. So, for example, they were a restaurant, never took the FICA tip credit. So I calculated over 10 years Now Mark don't get shocked they lost over $200,000 of tax credits that they were entitled to because they were never told they were eligible for this credit.
Speaker 2:Now I did not want to take this person on or this client on as an ongoing client, but what happened was I was still working with them on their ERC matters. So I said I will look at your 23 returns before you file them, just to make sure we're good. And even though we had told the CPA they qualify for this credit and please claim it. Do you think it was on the returns? I reviewed no. Again, he refused to take the credit, I don't know why. And then, when the client pushed back, the CPA fired the my client and said have Tom, do the returns. I'm not doing your returns anymore. Like some people just don't want to go the extra mile for tax reduction, which I don't. I personally don't understand that, that mindset. I think when we're doing tax returns we should always be looking for ways to use the law to our client's advantage, like that should be always at the forefront of it.
Speaker 1:Yeah, you know, we have a client we took on and the account said, hey, this is over my head. They're like you got to find someone else and he had a pretty heavy liability. Find someone else and he had a pretty heavy liability and what we found was one of the things immediately that stood out was they were paying net investment income tax on capital gains even though they had real estate professional tax status. And it's like you know, the law is incredibly complex, right, and you're not going to really know that and your tax software is going to assume that investment income tax, so you have to manually go in there and it takes, you know, thousands of hours to be able to recognize those things. But you know immediately. We noticed that in the past there tax selection, tax credit right there, 40 grand by just understanding the law, which is incredibly hard and complex, which is and, and and you know I'll tell you what our fees are going to easily be twice as much as the prior account.
Speaker 1:But the ROI, there is really good with the additional tax savings immediately by just pointing out those little things.
Speaker 2:Absolutely. I mean, here's the thing Mistakes are opportunities, right. So prior accountants make mistakes, that's fine, everybody makes mistakes. But when you find those mistakes and they're costing them tax and you can shift them into being correct and reducing tax, that's also a planning opportunity. And you are absolutely right, the law is extremely complex. So a lot of tax pros will touch returns that they maybe shouldn't be doing because it's outside their scope of knowledge. And when they do that they are more likely to make those mistakes that cost money. And I'm not saying that doesn't mean tax pros shouldn't do complex returns if they haven't done previously.
Speaker 2:But you need the education and experience to build yourself up or have a relationship with someone who can mentor you in those areas so that you're not experimenting on your clients. And that's the one big pet peeve I have is that people will take on a client, know nothing about the issues on their returns and just fumble their way through it, and I can guarantee you that there's going to be a problem on that return. I see this a lot in the foreign reporting area. Oh well, they have foreign accounts. I'll just try and figure it out. But if you don't work in that area, you can create damage penalties five figures for that client if you don't do the work correctly. So sometimes it's better to refer to an expert to get a mentor who can work it through you or get the education before taking that client on.
Speaker 1:Yeah, you know, I refer a lot of business to just say, hey, you know, for this return you just go to your local guy or H&R Block.
Speaker 1:It's a very simple return.
Speaker 1:But there are other times, and when I was starting out and even now, how I leverage you and even I leverage my team to do research, and when I was starting out, and even now, how I leverage you and even I leverage my team to do research, and when I was starting off, I hired people with more experience than me to help me do the prep work and review my work, because I was so paranoid about making mistakes and I probably still make mistakes and every return is likely going to have something off about it, which that's just because it's so hard. You know, hundreds of thousands of data points are getting plugged into this thing Too much room for human error. But what I've found is, you know, as your income increases and your revenue increases, especially as a business owner, you eventually have to take even if you love your accountant and they're your family friend and they send you a box of chocolates for Christmas, you eventually have to realize that that CPA could be costing you hundreds of thousands of dollars that you don't even know about.
Speaker 2:I agree, and you know. Back to your point about errors, anybody can make an error, you know. I think the problem is, or the thing to consider is, if you make an error, you admit it and you fix it, that's fine. Every like you said, everybody makes it. There's just too much data, too many clients. Even with robust review, something is going to get through. So I mean, it's just a reality of our industry that nobody is 100% perfect. It just is. The law is too complex, the information is too much for that to happen. I think the difference is when somebody tries to hide it or they propagate every year simply because they don't want to deal with it. That's the sign to walk away. When somebody owns up to it, admits it, fixes it and moves on, that's someone that should be commended for doing the right thing, for that client.
Speaker 1:Yeah, and I think another challenge here in our profession is people are a lot of our CPAs out there are very. They're competing on price and if you charge fair what most people will charge is fair market for an S-Corp or 1065. No-transcript. And then if you're a price shopper type of guy, you know you're going to put yourself at risk if you're only thinking about price. And also these firms who are undercharging because they just want to make you happy, because they don't want to feel guilty and bad for charging more than the prior year, or their competitors. They're now at risk because they don't have the resources to do that research and to train and hire the staff and retain the staff to really do the work that they have to do at the level of professionalism, not only to protect you against the law but to maximize tax savings. So you know, be very cautious when you're investing into a low-cost provider, because they have.
Speaker 2:Be very cautious when you're investing into a low cost provider because they have, when you pay, when you're trying to negotiate costs, there's less resources to serve you. When that price goes down, your pricing system impacts your ability to do due diligence. It's just. It's just the truth. So if you are lower priced, you have to do more returns to meet your revenue goals, which means during the day you are doing more work, which means you have to get more done, which means you have to cut the time you spend on each return.
Speaker 2:And when our colleagues brag and people do and I'm still shocked by this about working 13 or 14 hours a day straight doing tax returns, I always ask the question do you do the same level of due diligence and attention to detail on hour 14 as you do on hour one? And if they say yes, I know they're lying because there's just no way that's possible. But at some point, the more you work in a day, the more files you touch in a day, the less of quality of a job you do on that return. It just is the way it is. And so to me, practitioners who are consistently working 12 to 14 hours a day, six to seven days a week, are asking for trouble because their error rates are going to be higher. They're going to miss opportunities for tax reduction and tax optimization because that's not their focus and the taxpayer may be getting a good price, but in the end it's going to cost them in an inferior product. Either it's wrong or not optimized.
Speaker 1:Yeah, you know, we had to do a price increase this year and part of the reason why is it's so hard to find staff. I had to drop an insane amount of money on a recruiting firm to hire a manager and I just said, hey, you know what you guys are going to pay for this, because I need this to serve you guys. And what's happened as a result? We lost a lot of clients, which I'm okay with, because our revenue didn't really drop. And now I have the opportunity with this additional manager and also keeping my staff happy. I have some wonderful people on the team. I've had the opportunity. Not only do I not work 14-hour days I wish I worked less, but I don't work 14-hour days but also I had the opportunity to research and grow, me and my team, and through Compass Tax. I'm going to just give credit to you guys and what you run there.
Speaker 1:I was able to sit in on the solar tax, cpe, and that was really good. I stopped. I like to watch recordings so I can speed it up at times or I can stop and think about it and I stopped and thought about all the possibilities here that nobody's telling you about on social media this is not sensationalized, but how often do you find a way to reduce your taxes and reduce your costs in your business at the same time and crunch the numbers? Now I have an Excel sheet that allows me to crunch the numbers on what those benefits mean. Now I have an Excel sheet that allows me to crunch the numbers on what those benefits mean the bonus appreciation and the tax credits, and how it all comes together, and I can articulate this. And now we're throwing a workshop where we have a national solar distributor to talk about how you can use solar to reduce taxes on your rentals and your home.
Speaker 2:I couldn't think about all that and add all that value if I was charging market rate. Oh, I agree. And I mean, just let's talk about oil and gas, which is a very common strategy right now. We're actually doing a webinar on that on February 13th, a one hour. And again, as I was reading the content because we have an instructor teaching it, I'm not doing it I was shocked how many ways someone could lose the benefits they think they are getting with an oil and gas investment.
Speaker 2:Right, it's not simply I invest the money and get the deduction. There are pitfalls that are very easy to hit. Amt, for example, is one of them with oil and gas investment. So you know and it kind of goes back to what we started with People think that these strategies are just oh, I do this and I get this tax benefit. You need someone who can think through all of the iterations of what the downstream consequences are. And is there something in your tax profile that will prevent you from getting the benefit that somebody else may get out of that and is widely marketed with that strategy? So you have to. Just that's why tax planning is so individualized and why you need someone with a deep understanding of how everything on the return comes together.
Speaker 1:This is the vegetables. This is the stuff that you should be doing but you don't want to do when it comes to as you as a consumer, to really think about here, because this is the stuff where you really do have to get granular here and it's probably not as sexy as someone to say, hey, I got a short-term rental to eliminate all my taxes. So there's a lot of stuff that is going to be really good clickbait and what I want to know from you is what are some things that you're finding in particular Now you point out to some of the missed tax credits right, that are specific to different circumstances what are some things that you are most excited about or likely to find that you don't see as widely spread? So this is not about, you know, bonus depreciation and cost sags and all these other things that everybody you know that you're going to hear about over and over again. What are some of these things that you're finding that are less known or identifiable to people who are just looking for those big ticket, wildly promoted ideas?
Speaker 2:So the big one that I still see people miss all the time is the Section 199 Cap A deduction. I mean we've had it since 2018. It technically expires this year, although I do believe it will. Some version of it will be extended with tax legislation this year. I see this as a missed opportunity on so many returns. See this as a missed opportunity on so many returns. I see people misapply the limitations such that a taxpayer who qualifies for it doesn't get it. That's one and that could be easily five figures per year of tax reduction missed if you don't get it. I also see it misapplied.
Speaker 1:Who's not accounts. That's a 20% tax deduction for your business, essentially your business income.
Speaker 2:Right. I also see it misapplied to rental properties a lot. Almost all rentals will qualify for it. So if you have someone making six figures of passive income, or even if they're a real estate professional in real estate, they should be claiming this deduction on their rental income because they generally will qualify for it. And again, I would say, at least half the time the deduction is either missing or below what they're legally entitled to and it should be. I mean, we've had it for so many years now. I would hope our profession would understand this, but it's just not there yet People are still missing it.
Speaker 2:Tax credits are another big one. So a lot of people look for tax deductions right, like you said, bonus, depreciation, cost segregation but they don't look for tax credits. There are literally hundreds of tax credits that are available to businesses. I can't even go over all of them because there are so many of them Like the one that just comes to. The top of mind is the work opportunity tax credit. So the work opportunity tax credit is designed for people or businesses who hire workers who are traditionally in categories that have experienced high levels of unemployment, so formerly homeless individuals, veterans, former welfare recipients. You can actually get several thousand dollars of tax credits per employee to subsidize in their initial period of work. The government simply gives you cash saying thank you for hiring this person. Here's free money. But again, we don't see a lot of people taking advantage of these credits because they don't know they're available taking advantage of these credits because they don't know they're available.
Speaker 1:I want to get your thoughts on something I heard recently and I'm going to start exploring this soon. If you have a doctor's letter to justify an expenditure, you can write it off as potential health-related tax deduction. Potentially, what are your thoughts on people now maybe taking a little extra initiative to get their doctors to recommend going to the gym and writing off their gym memberships?
Speaker 2:Well, the problem is something has to be in general for it to be eligible for a medical deduction. It has to be prescribed by a doctor to treat some type of medical illness or medical issue. Right now some things are easy, right. So if you're prescribed an expensive drug, that's going to be very little to question. Where it gets questioned is when you are prescribed something that most times is not deductible, right? So, for example, the gym membership A gym membership is generally a not deductible medical expense because it's for general health, right. Personal trainer Same thing Generally non deductible.
Speaker 2:There's a code, section 262. You cannot deduct your personal family living expenses in general in general. But potentially if the doctor does prescribe it, you may be able to fall into a narrow exception. But I would really want to tie that out very carefully because it's easily challenged, right? So again, I feel like with a lot of these deductions it's not black or white yes, you get it, no, you don't, right, it's a continuum and the question is can you prove it in court that, more likely or not, you're entitled to claim that deduction or credit, right, it's not beyond a reasonable doubt.
Speaker 2:Some auditors think you're in a criminal trial and you have to prove it beyond a reasonable doubt. But that's not the standard. It's judge duty, not law and order right, 50% plus. So there can be bad facts or things that indicate maybe you aren't entitled to it. But if more facts show you are entitled to it, you're able to get it if you push it far enough and are not afraid to litigate it. I mean, ultimately, if you're taking a big dollar deduction and it's a grayer area, but you have enough support to claim it, you might have to be prepared to go to court tax court to defend it. And so you have to recognize am I willing to do that or am I not?
Speaker 1:You know, I'm doing a workshop today and I spent a ton of hours last night reading through hobby loss rules and whether or not you can write off the costs of things that may be treated as hobbies and may not, and there's a lot of ambiguity. There's factors, but there's no tests and what we found, what I'm seeing is if the IRS makes a certain decision, they're usually going to stick to it and I don't know. It seems like a lot of people like to come up with businesses to ride off their horses, but one of the things I'm saying here is there's a spectrum here. Certainly side hustle is just fine and then if you want to take a more aggressive stance, hopefully once that return gets audited, hopefully there's nothing else that they're going to scrutinize if you want to take that stance. So sometimes it's a judgment call on how far you're going to take this, and certainly you want to be aware of how the law looks at these different things and in court cases can help us in navigating some of these ambiguities.
Speaker 2:So one thing I always tell people is a big misconception you can take a position on a return that you're not sure is going to be upheld. The standard is if you have a reasonable basis in the law and you adequately disclose it in that return, you can take it. But reasonable basis in the law does not mean a 90% chance of winning a tax court. It does not mean a 50%. It means more than like 25%. It's actually a relatively low standard. So if you have a piece of tax law or guidance that supports what you're doing and you disclose it, even if you don't think all of the facts are in your corner, you can still legally take the position on the return and potentially avoid an accuracy-related penalty if it's later disallowed.
Speaker 2:A lot of people and tax pros think that you have to be 100% crystal clear, certain on everything you do on a tax return. That's not the way the law works. Nothing, very little, of what you put on a tax return, especially when you're working with a business owner or a rental owner, is crystal clear 100%. Yes, it's somewhere in the continuum of gray. Now maybe it's closer to one side or the other. It's okay to be in the gray zone and claim the benefit.
Speaker 1:You hear that engineers, you are our clients that always want to scrutinize every line item yeah, fantastic. Well, tom, this is a really wonderful conversation and I know the professionals listening will really appreciate this, and and also the business owners and investors and IW2 folks as well. Can you tell and obviously I'll put this in the notes, but tell everybody some of the things that you offer? And if you want to connect with Tom and tap into his brain, where can people go?
Speaker 2:I would say the first thing to do is subscribe to my Substack newsletter, which is TomTalksTaxes. So, tomtalkstaxescom, most of the content is free. There is a paid version where you get some bonus stuff, but the vast majority of the content is free. I put out two or three articles a month of free content, so feel free to sign up. I do send out some additions a couple of times a year with other opportunities that I offer. Also, if you're looking for continuing education, compass Tax Educators. We do 30 plus hours a year through our webinar company. I teach most of the courses, though we do have some guest instructors as well, so you can come to our website, sign up for our email list. That's another really great way to keep in touch.
Speaker 1:Tom, thank you so much for your time. You guys, if you or anyone you know think you can use our services, go to prosperwithanelpcpacom slash apply or go to taxplanningchecklistcom to get a free mini course in tax planning checklist. Have a good one, guys.