The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 97 - What You Should Think About w/ Mid-Year Tax Planning for 2025
What are you thinking about as far as tax planning as we reach the mid-point of 2025? While we eagerly await finalized legislation, we're focusing on foundational tax reduction methods that require little cash outflow while delivering substantial benefits. Some topics discussed with our clients and in this episode include...
• Augusta Rule allows business owners to rent their home to their business for up to 14 days tax-free, potentially creating $42,000 in deductions
• Hiring family members can generate significant business deductions while keeping money within the family
• Solar panel investments offer both immediate tax credits and potential positive cash flow through energy savings
• Medical expenses can be converted to valuable business deductions through proper fringe benefit structuring
• Advanced charitable strategies can eliminate up to 60% of taxable income at a fraction of the cost
• Building systems around these strategies creates compounding tax benefits regardless of future tax law changes
If you want to learn more about these strategies, go to prosperalcpa.com/apply for a personalized review of your situation, or visit taxplanningchecklist.com for our mini course.
Greetings. I wanted to film an episode about what to think about tax planning this year because it's a very interesting time and we do mid-year planning with all of our planning clients. And this is a unique year because everybody's getting hyped about this tax bill that just passed the Senate and everybody's getting super pumped about 100% bonus depreciation and we're all getting ready to jump for joy in the opportunities that creates and especially true for our real estate investors and for some of you guys who've been listening for some time now. As you know, when you do a cost-series study, you can accelerate the depreciation on your rentals and without bonus depreciation, you're going to depreciate a portion of that property over. You're going to write it off over 5 to 15 years, which is less than the normal amount, but it's not that exciting. The 100% bonus allows you to immediately write off anything in that property you identify as being non-real estate. So the furniture, the land improvements, the carpet, the refrigerators, appliances all those things can get written off immediately in the home and this really allows you to get a lot of your down payment back in the form of tax savings with real estate. So obviously the real estate investors are getting pretty excited about this, but nothing's been passed yet. And we thought it was going to pass last year, but things got stalled and never went through. So what are we going to do here? So when we talk to our clients in the middle of the year about planning for 2025, when we suspect and everybody seems to promise that there's going to be major tax law changes, but nothing has been fully signed yet? So a few things here.
Speaker 1:One of the things that I have been really emphasizing our team to think about here is to really really strengthen our foundational concepts of tax planning. We've shared a lot of ideas with our clients in the past and strategies that require them to take action, but we're finding that they aren't taking the action. But we're finding that they aren't taking the action. You know, we're showing them these ideas and we're showing them how to do these things and yet they're not doing them or seeing the benefits. And, in particular, the two items that we're really talking a lot about right now is hiring your family and the Augusta rule. These are two strategies where you can reduce your taxes and really the net effect is like you're not really spending any money at all in many circumstances. So with the Augusta rule, it allows you to rent your primary residence to your business 14 days or less. This works if you're a partnership or a S corporation. It doesn't really work for sole proprietorship, but essentially you host business events in your personal residence and your business, which is an S corporate partnership, pays you rent to do this. Now the beauty is that if you rent out your primary residence 14 days or less, you don't have to recognize any of the revenue on your tax return. So the business gets a write-off which reduces your taxes, but you don't recognize any of the revenue on your tax return. So the business gets a write-off which reduces your taxes, but you don't recognize any of the revenue. So essentially, your business pays you, you collect the cash and you get a write-off, but really no cash leaves your pocket because you're paying yourself indirectly through your business. So we've shared this idea, but no one's really doing much. So what we're doing now is, as we jump into mid-year planning, because there are some different scenarios and outcomes that we really don't know exactly what's going to happen in the law. So we're really strengthening these concepts.
Speaker 1:When you think about it here, especially for some of our clients and our clients tend to be more affluent when you have a really nice home and you look at the comps on what you can rent that out for. If you had to rent it out on Airbnb I mean some folks, some of these lake houses people are paying $2,000 to $5,000 a day. So imagine if you can utilize the Augusta rule and your business pays you, let's say, $3,000 times 14 days. So what are the numbers here? $3,000 times 14 days is going to we're going to get a write-off of $42,000. And then you also consider the possibility of hiring your family. Let's say you have two kids and a lot of people on social media and I've given my thoughts on this will say pay your kids $15,000, whatever the standard deduction amount is, they pay no taxes. You get the write-off because they're in the lower bracket. So let's say we have two kids and we pay them $15,000. That's $30,000. Between the two of them we now have a $72,000 write-off without really having anything leave our pockets.
Speaker 1:So if we could just get the systems in place, not only will we save taxes this year without having to think about investing in all these fancy private placements and buying more real estate. This is a chance to develop the strategies that will create us savings year after year after year after year, set up the payroll, create the job description, build the systems for renting out your home to your business, and this is something that can really grow and compound year after year. Regardless of what the depreciation percentages are and regardless of how successful you are, what your profits are, you're always going to see value in those tax losses. When it comes to some of these bigger ticket items, maybe you're not in the highest bracket, maybe it's not worth doing certain things, maybe you need your cash to preserve your liquidity there's all these other variables but for these strategies you're not really, you know, losing cash to reduce your taxes, so you should be doing it year after year after year. Now, another thing that we're helping our clients consider is some things, some strategies with solar panels. The reason why I'm going to be really pushing this and for our clients to consider this is a few things here.
Speaker 1:Now, the current state of the proposed tax law is anticipating the phasing out of tax credits for energy, energy related tax credits. So in the Inflation Reduction Act, which I believe was 22, I'll have to double-check the year, but it created all these opportunities and incentives for alternative energy and it made solar really advantageous. Now, if you're going to rent solar to third parties, the profit margins aren't that high. I mean, there's a reason why oil and gas is still the number one preferred source of energy. It's going to be a very long time before solar or anything else would replace oil and gas. It's just so much more economical. But when you factor in these tax credits, especially for people in high brackets, all of a sudden these solar panel businesses become very, very attractive. Now we've done this with some of our clients where the numbers make sense, and sometimes we'll stack this on top of oil and gas investing and you can watch my prior episodes there's some fantastic tax incentives and incentives to invest in oil and gas.
Speaker 1:But here's something that you can do where you can. Again, we're reducing our taxes, but we're not going to really be spending or having much additional cash leaving our pocket, which is installing solar panels into our rental properties, because think about this you are going to be financing your solar panels. So if you're financing your solar panels over 25 years, you're likely to find that the cost to pay off this solar panel is going to be around or less, depending on what state you are and the cost of the energy. What we have found is that the cost of financing the purchase of these solar panels is less than the actual energy costs. So you're actually reducing the cash that leaves your pocket to cover the energy costs. Additionally, you get the tax credits and you get the depreciation off up front. So in the year that you install these panels, your taxes go down, but again you're not really seeing cash leave your pocket to see the benefits of these opportunities.
Speaker 1:So we're really this is another thing we share with our clients to say, okay, that's really cool, and then they move on with their lives. Maybe they're getting sued, maybe they have all these other opportunities and life events and family events and they kind of forget about these ideas. So what we are doing is we are really turning into more of a coach and more of like a personal trainer compared to a lifetime fitness. Instead of just saying here's your membership, great, it's fantastic that you have your New Year's Eve goals and it's January, go out and you know, go to the gym and do your thing, we're actually holding our clients' hands and holding them a little more accountable to exploring these things and following up with them, making the connections and helping them see this through, because this is really cool stuff and we may lose this in the future.
Speaker 1:So the time is running out to see these benefits and we would expect overall, as energy prices continue to rise and you have a fixed interest rate and fixed payment on the panels, that you're actually going to wind up saving money on the energy costs for your rentals. And this is really popular with short-term rental Airbnb investors, because they're already covering 100% of the energy costs. They're not passing it off to the tenants percent of the energy costs. They're not passing it off to the tenants. But this can also be good for you if you have a building for your business or an office space for your building or a self storage facility, et cetera, et cetera. Now, we did propose this to some of our self storage investors, but one of the challenges with that is you lose your credit if you take more than five years. So we haven't seen any folks who syndicate be able to take advantage of solar, but still a really cool idea.
Speaker 1:So one of the other concepts here and you heard me speak about this a few episodes back on the tax incentives and advantages of healthcare and medical related costs. This is another no brainer If you can just take the initiative to set this up, assuming that you have healthcare related costs where it's worth the energy. But essentially we're turning our medical expenses and our out of cost expenses into business deductions with fringe benefits. This works really well if you're a sole proprietor, a real estate investor, or you have a sole proprietorship. Let's say you're in Tennessee and you can hire your spouse. Or if we want to create a C corporation, we see this factoring as well, where the C corp can hire you and issue these fringe benefits. But essentially what it allows you to do is, instead of having your medical costs be lost because they don't hit the right income thresholds for itemized deductions, they become business expenses in tax deductible and business expenses are more valuable Even if you're in a $0 tax bracket. You want those business losses because they carry forward and offset future profits.
Speaker 1:So this is another strategy there we're working with our clients to now consider, because we don't really need a 100% bonus. It really doesn't matter what the tax bracket is. This is still going to be a win, regardless of your situation, how much money you're going to make and what you want to do with your cash. So these are the things that we're going to be diving deep with our clients in and really getting them to take action. But that's not all. Let's not ignore what's going on here. If we can get 100% bonus, that changes a lot for our clients and a lot of our clients already know about this possibility and they know how to buy rentals.
Speaker 1:Most of our clients are investing in rentals. As you know, we do serve affluent real estate investors, entrepreneurs and high-income W-2 folks. Do serve affluent real estate investors, entrepreneurs and high-income W-2 folks. So you know we can't force them to buy more rentals, but we can connect them with some other strategies that involve leverage and rentals. So equipment rentals, where you're renting out heavy machinery, we can make those introductions and help them gain comfort with that strategy. Or then back to renting out solar panels. While the profitability isn't amazing when you factor in the tax credits that you get up front, you're using leverage and then you can get bonus depreciation If and before these credits phase out. If we can get 100% bonus on those panels after we've taken the tax credits, that's going to be a huge win and the panels are going to be even more advantageous than the rental properties or the heavy equipment because the credits are going to be a little more powerful. You can get even prior year taxes back. You can go back three years and get your taxes back. So this is going to be really exciting for us if it's possible.
Speaker 1:But because we can't run any projections I don't want to run any projections for clients based on a law that hasn't been made. So we have to be prepared for what happens if the law doesn't pass. So we have to get our clients familiarized with these depreciation strategies and maybe if we get 100% depreciation, that's all they really need to further reduce their taxes. But let's say we don't for any reason, or let's just say things just don't turn out as beneficial as we had hoped. So we want to get them familiar with other strategies that are going to take huge chunks of taxable income off of their 1040. How can we eliminate hundreds of thousands of dollars in taxable income?
Speaker 1:The next thing that we can do that can really be very powerful here is considering some of our advanced charitable strategies, and I've talked about that in the past. But there are a handful of charitable strategies where the tax savings created from the charitable deduction is less than the cost to create it, so the net savings is going to be very significant, depending on the vehicle you use and really who you're connected with and what you're comfortable with doing. There are instances where you can eliminate up to 60% of your taxation with these strategies and the cost to eliminate 60% of your taxes is a fraction of the savings. Taxes is a fraction of the savings. So, because the charitable strategies are capped at a percentage of your income and many of our clients can use depreciation to wipe out all their income, a lot of our clients are going to be hoping that the depreciation goes up to 100% and they can wipe out all their taxes. And maybe we stack it with things like oil and gas or some other tax reduction strategies. But let's say we don't. We want to be ready to pull the trigger and use those charitable deduction strategies.
Speaker 1:So this year what we're really going to be doing is emphasizing becoming familiarized with a variety of strategies and being ready to take action as soon as we know what the outcome is going to be, not only in the tax law but in their personal situation. And when that happens, we are going to make sure that our clients not only are prepared to take action here and understand that they also got to understand their own financial. There's a lot of other variables that are not even related to the law, like their own profitability, their own personal circumstances, et cetera, et cetera. We're ironing. We're really strengthening the foundations here and then, finally, when we gain clarity on the tax law and all these features come together, we understand what's going on. Then we'll be we want to be ready to take action fast and really have an impact where we can consider all these factors and really do that holistic tax planning.
Speaker 1:So I hope you're thinking about this in the same way and if you want to have a further conversation, obviously you can go to prosperalcpacom. Slash apply and we will. I personally. I will personally review your situation and send you a custom video talking about what's possible for you. So please, if you're interested in learning more, just go through that process and you'll talk about how we can help you out. Also, go to taxplanningchecklistcom for a mini course. You out. Also go to taxplanningchecklistcom for our mini course. All right, I hope this helps. Gives you some clarity on what really to do to optimize your situation. Stay tuned. We have more wonderful episodes coming your way and happy tax savings. Have a good one.