Tax Expert: This Is How Billionaires Legally Avoid Taxes

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0:00 How Billionaires Pay So Little in Taxes
4:49 How the Wealthy Pass Down Their Money
8:17 Why the Tax Code Favors Wealth Over Wages
14:48 Is It Wrong to Use Tax Loopholes?
17:50 Wealth Taxes, Tariffs & Tax Reform
24:06 Tax Strategies at Every Income Level
24:44 Tax Strategies for W-2 and 1099 Earners
32:00 Tax Strategies at $1 Million in Profit
45:59 Should You Move to Puerto Rico for Taxes?
49:52 Tax Strategies at $10 Million in Profit
1:07:58 Tax Strategies Above $100 Million
1:13:31 IRS Audits, Red Flags & Extensions
1:23:52 The Biggest Tax Savings—and Worst Advice

Transcript

SPEAKER_01 0:00

Have you ever wondered how some of the wealthiest people in this country pay so little in taxes compared to their cumulative net worth? People like Elon Musk, Jeff Bezos, Mark Zuckerberg, and so many other billionaires today are utilizing tax strategies that most of us know nothing about. So today I sat down with Carlton Dennis, who's a tax expert, and we not only broke down all the different tax loopholes that are legal within the tax code that billionaires use, but also tax strategy that you can use at every level of income, whether you're a W-2 or a 1099 earner, if you have a seven-figure business, multiple seven-figure business, eight-figure business, or even if you're doing nine figures, if not. So, Carlton, how do the wealthiest and richest Americans in this country pay so little in taxes compared to their actual net worth?

SPEAKER_00 0:42

It's because of the type of income that they earned. Most wealthy individuals aren't making earned income. They're making portfolio income. And portfolio income is subject to a completely different tax rate. As a matter of fact, portfolio income is subject to zero, 15%, and 20% capital gains rates, whereas the average individual is paying upwards to 37% in taxes. Not to mention, most of these investors and most of these high-income earners are probably borrowing from their ownership of stock rather than actually selling their stock.

SPEAKER_01 1:10

Right, which is how they pay for a lot of their day-to-day expenses. So for the audience, explain what that strategy actually is.

SPEAKER_00 1:16

Yeah, guys. So one of the best parts about being an entrepreneur is you can choose to transition your business to an S corporation or a C corporation. And now you're issuing yourself shares or stock options. One of the best parts about having shares inside of a corporation is if you're issued shares inside of a corporation, there's value associated to those shares. So if my business is valuated and I know exactly what those shares are worth, I can go to a bank and use my shares as collateral and take a loan against my shares of my own organization. A loan is non-taxable. And if I'm using the money to go invest it into something that's going to make me more money, possibly even more money than what I'm paying on the interest rate on that loan from borrowing against my stock, I'm recycling my own dollars to make wealth. And this is how the wealthy have been doing it for years.

SPEAKER_01 2:03

Right. And so, but people use this strategy called buy, borrow, die. So, like, take like Elon Musk just became the first trillionaire. And a lot of people are upset that he's not paying taxes or he pays so little in taxes compared to his net worth. Not necessarily his wages, but he doesn't take out a lot of wages. So isn't there a way where people can essentially use this strategy to just keep borrowing until they pass away? And then the it essentially passes down through an inheritance, but then there's like a step-up basis or something like that. Can you explain that?

SPEAKER_00 2:31

Yeah. So it's called the buy, borrow, dive strategy. And essentially what you're doing is you're buying assets that'll appreciate in value. And then instead of selling those assets to become liquid, you will take a loan against those assets. And Cole, loans are non-taxable. Right. If you keep doing this, technically the government, the IRS, they'll allow you to keep borrowing against your assets all the way until your death. Now, the reason why the wealthy will choose to wait until death to not doing anything is because when you pass those assets on to your inheritance, your children, they're going to get what's called a step up in basis, which means the assets at the value of the date that your parents pass away is what the assets get stepped up to. So from the moment that they may have acquired Apple stock back in 2020 to the date that they pass away in 2080, all of that appreciation gets essentially wiped away from taxation. And you can sell that asset and pay zero capital gains tax.

SPEAKER_01 3:19

And so I could see how somebody like Jeff Bezos or whoever could do this, right? And they can basically fund their entire lifestyle in perpetuity just by taking out loans and their stocks appreciating, right? So it's like really at the end of the day, their stock appreciates faster than the interest rate. Could somebody who, let's say, is making five million or 10 million a year in their company, right? Could they utilize strategies like this? Would you recommend that? How would that actually work?

SPEAKER_00 3:44

Yes, they could. Yes, absolutely. You can transition over to an S corporation or a C Corp, issue yourself classes of shares. C corporations have multiple classes of stock. S corporations only have one class of stock. So it'd be preferably if you were in a C corporation. And then once your business is evaluated, you need to go through a formal valuation process. You can then put up a certain amount of your assets as collateral in order to then take a loan against those assets, aka your stock.

SPEAKER_01 4:07

Yeah, is that a good idea? Like, should I like I mean, obviously I have a lot of income, but would you recommend somebody with only 10 or 20 million of assets actually do that?

SPEAKER_00 4:15

Absolutely not. To be completely honest with you, I would prefer you not look at borrowing like that early on. I think it makes more sense to build up your assets to a bigger amount first before you start playing in that game.

SPEAKER_01 4:26

And then maybe in your 50s or 60s.

SPEAKER_00 4:28

And then maybe in your 50s or 60s. And the reason why is because opportunity costs, I think you are probably going to have a better opportunity of keeping that money in your business, growing your business to get out of a place where you're only doing maybe 10 or 15 million, growing your wealth a little bit higher, and then being able to borrow against a big lump sum of your own personal wealth. I think that's a better strategy. Right.

SPEAKER_01 4:49

And so then also, how are these wealthy people passing down their assets in a way? Can you explain what the estate tax is, right? What it's supposed to be. And there's a big controversy right now in terms of people are really allowed to get around that and pass down a massive amount of their assets without having to pay tax on it. Yeah. Essentially. I saw the stat. It was like, I feel like out of all the essential uh taxable income that was collected by the IRS, it was a crazy small percentage, like under 100 billion or something like that, that was actually generated from the estate tax. That might not be true, but it was very, very small relatively, even though a lot of these families have massive wealth that keeps getting passed down and passed down. So how are they avoiding that? What are the actual strategies and have a follow-up question?

SPEAKER_00 5:31

Yeah, absolutely. So first off, I'm not an attorney, so I'll preface this. But when it comes to estate planning, how most people will try to reduce estate taxes is by setting up trust structures. Right. A revocable living trust is awesome while you're living because you can put things in, you can take things out, and God forbid something happens to you when the assets transition over to your heirs, they'll get that step up and basis that you intended for them to get. But the issue with having the revocable living trust is items are still in your state. And if you have over a certain amount, such as 15 million, I believe. It was 23. Okay, they updated it. So it might be 23 if you're single.

SPEAKER_01 6:04

I I don't know. I think my number was 23. You're telling me.

SPEAKER_00 6:07

I believe it was like it was around like 15 and 15 million if you're single and 30 million if you're if you're married finally joint. But they alter these every single year due to inflation. If you have an estate that exceeds that 15 or 30 million amount, for the, for example, anything in excess of that amount is subject to estate taxes, and that's at 40%. There's not a 30%, there's not a 32%. It is straight 40%. So you can start transitioning assets out of your revocable living trust into an irrevocable trust. And irrevocable trust has a lock and key on it. Once you put something in there, it's very hard, very complicated to really get those assets out without causing a taxable event. But the reason why you're able to take them out of your estate but still control them is because it's an irrevocable trust. Anything that you place inside the irrevocable trust is not subject to the estate taxes that you might end up experiencing if your parents were to, or sorry, if your children were to inherit assets after you pass away.

SPEAKER_01 7:01

Right. And so with those strategies, what what is supposed to be past the 15 million or whatever? What is supposed to be the estate or the death tax, right? Like the raw number that's in the code versus, and then how exactly, like how far can people get that down through these strategies? Yeah.

SPEAKER_00 7:18

Just generally speaking. If you can keep your, if you're married flying joint and you can keep your estate under 30 million, your children will inherit that estate without paying any taxes on it. So 30 million or less, 50 million or less if you're single, that's kind of the magic number. But let's just say you're over that amount when it comes to your estate. Right. Then what you can start doing is start transitioning assets between your revocable living trust to your irrevocable trust. Right. Let's just say that you have 50 million in assets, you transition 30 million in assets over to the irrevocable trust. You keep 20 million in assets in the revocable living trust. The revocable living trust assets will get the step up and basis. The irrevocable trust assets will not get the step up basis trust. None of those will get the step-up basis. And this is the benefit to you. You get to avoid estate taxes on this over here, but you're not getting a step up and basis. Whereas these assets that remained inside of your estate are subject to estate or are subject to the state uh step up and basis rules, but it also impacts your estate taxes over here.

SPEAKER_01 8:12

Right, which is how much? How what percentage? 40%. 40%. So they're avoiding this 40%. So let me ask you, because we we have basically a tax code right now that, in my opinion, you know, it's heavy on labor and active income, right? So like it's really heavy on the doctor who makes two, three million bucks a year. Or even, you know, businesses like ours where we're providing a lot of service and a lot of our income is active. I know you are really good with tax, obviously, but for me, like I get killed with just my active income. Whereas on the capital side, it's much easier. You know, it's like 21% or whatever it is. And there's a lot you can do. Like I find with tax strategy, there's always if somebody's given me a lot of tax strategies, I feel like 80% of them will fall into the bucket of reducing passive income tax or capital gains tax. Yeah. So do you think that in a better world there should be a reform potentially where we're maybe taxing capital more, but then there's more of an alleviation on labor.

SPEAKER_00 9:07

Yeah.

SPEAKER_01 9:07

Right.

SPEAKER_00 9:08

One of the things that people always talk about is we should tax the rich more. And the issue is if you go to the federal tax code and you try to increase the tax rates, you're only going to tax the middle class because the middle class operates off of earned income. They have W-2 jobs, they're 1099, they're self-employed. That's the middle class you're hurting. What you should be looking at is the capital gains tax rate and the corporate tax rate, because large corporations, large business owners are subject to capital gains rates, zero, 15, and 20%. They have a 17% delta on the rest of the population. Exactly. And then if they're a big corporation, they're only subject to 21%. Plus, they're able to do retained earnings. They get to decide how much they want to retain and not subject to tax that year versus how much they want to roll over into the next year and subject it to tax. So you can play so many different games when you're wealthy and you're rich versus when you're making earned income, you're showing up and trading your dollars or your time for money, you're always going to be penalized the most.

SPEAKER_01 10:00

If you ever wanted to get my one-on-one help in terms of scaling your business, then listen up really fast. So we're taking on a few clients to where I can personally one-on-one audit their business across marketing sales, operations, fulfillment, finance to be able to tell you what your constraint actually is. And ultimately, what are the one to three things you need to do next to be able to scale, working entirely one-on-one with me? So if that's interesting, there's a link in the description that'll say call one-on-one that you can go book. But essentially, not only will you get my personal advice, but we'll also be opening up our entire playbooks of my $36 million year company across marketing sales, operation fulfillment, finance. So you can basically model the best practices of what we've done right into your business. And it'll include the opportunity to meet in person up at an event with me. So if that's interesting, click the link in the description and mount back to the video. Yeah. And the crazy thing is too, is the wage earners are the ones who get hurt the most with inflation. Because if you're a capital earner, if you're a capital accumulator, essentially inflation actually makes you richer. So not only is inflation making you richer, it's making this other side poorer. This side is taxed more and this side is taxed less. Yes. See, that's how I look at it. And like obviously, I um I don't like taxes more than the next person. Yes. But if we're going to pay them, I would rather have it more skewed this way, which is a progressive tax in a way. Correct. And then other people who earn the wages pay less. Why is, I mean, I feel like everybody could probably agree on that. Why is the tax code written in the way it's written?

SPEAKER_00 11:25

Yeah. It's funny because if you kind of go back, I mean, we were dumping T chess into the ocean in the Boston in the Boston River over taxation without representation. Over taxation without representation. And then taxes only started during the Civil War. It was like literally during emergency situations. Then the government said, okay, we're going to take a tax. And then after the Civil War, it got repealed. Then large corporations tried to lobby for taxation to be worldwide. We want taxation in anyone in the United States. The Supreme Court ruled it unconstitutional. Then the government went into turmoil, and the 16th, the 16th Amendment happened, and then taxation became permanent. It started off as just a 7% tax on all your income, then eventually became estate taxes, then eventually became property taxes, then eventually gift taxes got introduced, then estate taxes got introduced, then sales tax got introduced. Then we just kept voting and making the taxes higher and higher and higher. The issue is that these big billionaires and business owners, they were never going to pay the highest tax rates. They are the ones who are lobbying for how the tax code needs to be written. Hey, if you're going to go ahead and build this system, make sure investment income is only taxed like this. Make sure business owners are able to claim expenses because they're the ones that are actually providing jobs for the economy. Right. So they're lobbying for these things, right? Yeah. And when you think about how this country runs, this country is a business, brother.

SPEAKER_01 12:54

Yeah.

SPEAKER_00 12:54

Entrepreneurship is how we got here. The government isn't the best entrepreneur in the United States. No. See what I'm saying?

SPEAKER_02 13:00

Yeah.

SPEAKER_00 13:00

So they're going to go to the best entrepreneurs and ask them, hey, what do you guys want? And they're going to tell them this is what we want. We're going to keep the workers working. They're going to pay this fair share of tax. And it's going to be the tax code is going to be so complicated for them to even figure out that they're just going to be stuck there.

SPEAKER_01 13:14

Yeah.

SPEAKER_00 13:14

And we're going to be over here subject to different taxation because we have investment income and we're business owners. And we're just going to keep expanding the tax code to allow for us to take all these different types of deductions. But if you're W-2, it's very black and white for you. You make money, you pay taxes, you spend what's left over. If you're a business owner, you make money, you can do boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, boom, then pay taxes. Yeah.

SPEAKER_01 13:34

And I think most people think that we live in a progressive tax system. And I would argue it's actually much more regressive. Yeah. Because you have to factor in what we're talking about with labor is taxed more than capital. And on top of that, inflation really is the biggest tax, especially on the middle class or any wage earners, period. Because I mean, if you think about how much inflation's gone up in the last five years, wages, and which is not even reported correctly, by the way, wages, it's no way it's kept up with that. Absolutely not. So they're getting hit in both ways. Whereas, again, if you're in capital, the inflation actually makes you richer and you have way more that you can do. That's right. Right. So it it's interesting why it's just rigged in that way.

SPEAKER_00 14:13

Yeah, people have less take-home money and then their expenses to live are increasing because of inflation. Inflation is like this hidden tax that's not being factored in and it's penalizing the American people.

SPEAKER_01 14:22

And you know, when you I heard this, I don't know if uh if you would agree, but when they first introduced the income tax, and it was like the very, very top one percent, obviously it cascaded down. But even as they kept that 90% rate after World War II, there was so many loopholes in that between oil and gas and all these other things you could do back then, that the effective rate for almost all those people from my research was only 30 to 50 percent because there were so many loopholes they could take advantage of. Right. Right. So um is taking advantage of the tax code, the way it's written, is it immoral? Is it moral? How do you feel about that?

SPEAKER_00 14:58

I 100% feel like you should be doing absolutely everything you possibly could do to use every legal deduction that was already written in the tax code for you. It is literally an incentive system. The IRS rewards certain behaviors. And if you are willing to figure out what those behaviors are, it's very simple and how you're gonna be able to reduce your tax bill. Failure to understand what those behaviors are, failure to adopt what those behaviors are, you're gonna constantly write checks and you have to be okay with it. The IRS is not going to change how they have built that system, which is we need more affordable housing, we need more renewable energy, and we know us, the government, is not gonna be able to print out stimulus checks for every single person in the United States to get them there. So we're gonna partner with the business owners, we're gonna partner with the investors, and we're gonna structure incentives in the tax code that will make them buy oil and gas, that will make them turn around and become real estate investors or landlords. And this is gonna give us what we need. Plus retirement. We want people putting money into 401ks. We want people delaying retirement until 59 and a half, so they're less reliant on the government. So they're creating these different behaviors or incentives inside of the tax code that most wealthy people just choose to focus on that the average public does not.

SPEAKER_01 16:07

Yeah, and I think a lot of people don't understand like the reason you get such a big deduction with, let's say, oil and gas. Like I just made an investment today in my oil and gas that you could write down, write off a ton against active income. But why it explain for people like why would they give somebody such a deduction for oil and gas? It's not just the oil and gas lobbyists and whatever, which could be a part of it. Yeah. But, you know, energy is really important in this country.

SPEAKER_00 16:28

It's extremely important. I mean, you turn on your stove, you get into your car. I mean, even some streetlights in certain communities are actually operated off of gas and fuel. Uh Hawaii went through a uh tsunami situation. One of the most important things they needed was access to renewable energy right then and there to be able to turn things back on. So when you ask me why is energy production so important, it's the life force of how we operate and keep machines and equipment and hospitals even functioning and operating. It is absolutely essential.

SPEAKER_01 17:02

But I was gonna say the way I think about it is like the tax code is like subsidies, and anything you subsidize, yes, you get more of. Yes, of course. Right. So that's what you're meaning by what was the way you put it? Incentives.

SPEAKER_00 17:11

Yes, yeah, incentives. Exactly. They're all incentives inside the tax code. And when you invest into oil and gas, yeah, the IRS will allow for you to write off uh, they called it IDCs and TDCs, and tangible drilling costs, intangible drilling costs, the things that go into oil production and the things that you can't naturally touch that are actually a part of the production of oil. The beautiful part is all these deductions are active and year one deductions in the first year you make the investment. So for a lot of taxpayers that are putting money into an oil and gas, well, they may drop 100K in, but they may get 75,000 or 80,000 of that first year investment as a year one deduction or loss on the tax returns, which is an active loss against active income because operating and manning an oil and gas field is considered an active investment. Absolutely.

SPEAKER_01 17:50

So, and we might circle back to that later as we go through the levels of tax strategy. But first, I gotta ask, because we're in California and it's it's beautiful, but we also have the wealth tax on the ballot, right? So, what's your thoughts on the wealth tax?

SPEAKER_00 18:03

My thoughts is it's silly. What you're doing is you're penalizing people that have a certain amount of assets, and then you're saying, okay, well, because you make this much money or you have attained this much amount of wealth, automatically subject to taxation. People forget that wealthy people have choices. They can get up and move. They've done it before. Elon and all these other business owners have moved out of California. They've shown you they are not afraid to take their dollars elsewhere. And California is in a very particular situation here where they're trying to penalize the taxpayer at the same time that information is being uncovered about how tax dollars have been misappropriated in California. It's a weird dichotomy going on right now. You have a lot of people that are like, well, where are my tax dollars going? You have a lot of fraud happening over here in California. At the same time, you're trying to slide in this little wealth tax onto the ballot. What it's going to force billionaires to do if they decide to stay in California is they're going to have to sell their assets in order to cover their taxes because most of their assets are illiquid, which is why they're so wealthy. They actually invest in real assets. They don't sit around in cash. Just because it says they're worth $5 billion doesn't mean they have $5 billion sitting liquid inside of their bank account. Their assets value is $5 billion. So what do you want them to do? Loan against their assets to cover tax debt? They're not going to do that. That's not a return. It doesn't give them any return on their investment by giving the government money. Tell them where the money is going to go and they're they're not going to be able to trace it. They would rather pick up from where they are to go move somewhere where they are appreciated. Billionaires love to be appreciated. They're willing to give back, trust me, they're some of the most generous people in the world, but they simultaneously want to be appreciated and they will go to places where they feel appreciated.

SPEAKER_01 19:32

Well, and now there's a lobbying to get this on the national ballot, right? Especially in 2029 beyond. Yeah. So if this was implemented, what would be the second, third, fourth or fourth order consequences of it? Right. Because, you know, if it's implemented nationwide, yeah, there's kind of nowhere to go. Yeah. You know, I mean, you because you're gonna have to what's the exit tax is like 40% anyways. Yeah. So what would that look like?

SPEAKER_00 19:55

I that's a good question, Cole. You're asking, you're asking a situation that could end up causing major corporations to unwind their footholds that they have in the United States and really expand on their, you know, international business lines. Um I've seen a lot of business owners try to do the whole Puerto Rico thing. Many have have come back, some have set up footholds there. But it would get people to start thinking about whether or not the United States is my forever home. And that's a really sad, sad place because entrepreneurship was a big part of how the United States got here. And then you're coming now to say, hey, those who became the most successful, sorry, you're gonna get penalized.

SPEAKER_01 20:31

Yeah, well, also corporate individuals, not so much because there's the exit tax, but corporations. Like you remember this Ireland situation where you could set up a corporation, C Corp in Ireland. I still think you could do it. I just think since Trump's tax cuts, yeah, it doesn't make any sense anymore with all like the fees and the loops you have to go through. But you can essentially pay a 10% tax if your IP and everything is in. And I don't know how legit that is. Yeah. But I know like Meta Hat used to have an international structure. Yes. And then when Trump got in office, they took it back domestically, from what I understand. But stuff like that could happen because corporations can move. Yeah, 100%. Right in terms of their business lines, their revenue, et cetera. Individuals, not so much. Absolutely. What I would worry about is, like you said, the, you know, most people who are very wealthy, their assets are illiquid. So in order to pay, like you might think it's only 1% or 5% or whatever, but it might be 30% of their actual liquidity. Right. And so if they're selling 30% of, let's say, what they have in the market, what does that do to the market? And then therefore, what does that do to everybody's 401ks, their retirements, and all these things? Their pensions. Uh, let alone, like, does this mean you're nationalizing control of companies? Because if you have to sell your ownerships of your shares of Google or whatever it is to the government, there's that too. And then have you heard of this like voting rights thing to where the wealth tax scales based on your voting rights? So, like for Sergey Brin, based on how their voting rates, they have like supermajority control and Google, yeah, if they essentially if the wealth tax passed, they would have to sell their entire net worth because their voting rate, since they have essentially I'm not explaining it, you know, super tactical, but because their voting rates are like a super majority, yeah, that's what the wealth tax reflects, not necessarily their actual assets. Does that make sense? Interesting. Yeah. Because there's a lot of problems. Yeah, there's a lot of problems. And I would imagine, you know, oh, there might be solutions to it, whatever. They could securitize private, you know. But the thing is, is the government's just not very good at doing it. They can't even run the DMV. So I just I I I feel like that attacks like that, there's just very little chance it could even get implemented successfully. Yeah.

SPEAKER_00 22:38

And it would just be a mess. But the IRS is also understaffed right now. Yes. Trump and what he did got a lot of IRS agents to kind of quit, and there was like this huge like exodus of IRS agents. And now the IRS just came out and said, we're understaffed, we're trying to hire people aggressively, we're trying to get them through programs and audit training as fast as we possibly can.

SPEAKER_01 23:01

And like you said before, and I know this is like this is the scare tactic everybody's using, but it is true that every tax that's ever been introduced was always to the wealthiest people. And then it slowly goes down and down and down, right? That's how the income tax was. So the wealth tax could be the same. Uh, what do you think about tariffs?

SPEAKER_00 23:19

I mean, tariffs was an interesting idea that Trump imposed that I felt like was a mind game. I don't think it really led to us really benefiting as much as we initially thought because we ended up having, I believe, to refund back a lot of the country.

SPEAKER_01 23:32

The Supreme Court struck it down. Yeah, but now they're shut it down.

SPEAKER_00 23:35

We ended up having to refund a lot of uh people based off of that. I think the initial idea of wanting to have a fair playing ground was great. I think it got people talking. I think deals got done that would have never got done, and people view American as view view America as a powerhouse like they should, because of the fact that Trump decided to go do the tariffs. So there's pros to what he was trying to lobby for, pros to what he actually got approved, negatives now than what we're seeing um as of today in 2026, relative to when he rolled it out in 2025.

SPEAKER_01 24:06

Yeah. So what I want to do now is I want to go through four levels of tax strategy. So starting with W-21099, yeah, what should they be doing if they're high income earners, but they're an employee or they're a contractor to minimize tax, then we're gonna go 1 million, 10 million, and 100 million plus. So if you're let's say W-2, you're a sales guy making, well, let's actually say this you're W-2, you're an executive making a half a million a year. Or maybe you're a 1099, I know these are slightly different situations, and you're a 1099 sales guy making 500 grand a year.

SPEAKER_00 24:36

500 grand.

SPEAKER_01 24:37

In each of those, each of those situations, how should they think about minimizing their tax burden based on the way the tax code is written right now?

SPEAKER_00 24:44

Yeah. So if you're W 2, you have what's called the excess business loss limitation rules. All this means is that you're capped at how much losses you can use from something that's in the business space to offset your W-2 income. So you're gonna go max out your retirement accounts at that point in time, the $24,500 or $23,500 you can put into your 401k. Like take that. And if your um employer is matching, absolutely take that. That's the first thing you're gonna do. You're gonna go ahead and hit up the HSA, which is the health savings arrangement plan that gives you $8,300. If you're a family, it has a triple tax benefit. You get a tax deduction when you put the money in, it grows tax-free. And then when you pull it out, it's tax-free for health-related reasons. Like those two you just automatically cover. Now that you've gotten the basics out of the way, I'm thinking a W-2 person wants to max out that excess business loss limitation rules, which is around $514,000 if you're married filing joint, and a little bit less than that if you're single, about cut in half, about $230,000, $250,000, give or take. So if this is my limit on how much losses I can take, I can go manage one short-term rental property. Buying a short-term rental in the month of October means that you only have to manage it for 100 hours in the year and that your tenants stay in that property seven days or at on it on average. If you're able to execute seven days on average per tenant, 100 hours of total management time on that property, you can now treat that as an active business instead of a passive business to offset your active forms of income. So, what we need to do now is we need to do the strategy called the cost segregation study.

SPEAKER_02 26:08

Right.

SPEAKER_00 26:08

That allows us to accelerate depreciation on the property. It breaks all the components down into little itty bitty components so you can write it all off in as quick as five, seven, or 15 years. If you apply bonus depreciation, you're saying I'm just gonna write all that, all these little itty bitty components off in one year. On a half a million dollar property, you might be looking at close to about $100,000, $150,000 in a cost segregation study. So for somebody that's making half a million, maybe we push it up to $750K, $800K purchase price. And now they're getting close to around $200,000 to $250,000 in a cost segregation study on a short-term rental. Now, once they get to December 31st, they'll go ahead and file their tax returns come April 15th. And then that following year, they can turn that property into a long-term rental. Doesn't need to be a short-term rental anymore. They already got their cost egg, they already got their tax savings. And now they have this $250,000 loss sitting on their tax returns, just reduced their taxable income from half a million down to $250. Plus, they took advantage of their 401k, they took advantage of their HSA. That person went from having taxable income of half a million, probably closer down to about 200 grand.

SPEAKER_01 27:10

Yeah, that's wild. And that and is 200 grand a different marginal rate too? Yeah. Yeah, because it's 400 grand is.

SPEAKER_00 27:16

Now you're back down into like the 22% or the yeah, you're you're definitely down.

SPEAKER_01 27:22

And you have an asset that's also producing you income that's appreciating that stuff, right? That's correct. So the really the strategy is, and they can only can you only do that one time? Or you can keep doing it multiple times. You can do it multiple times. So you can get a short-term rental. You do got to show that you're managing it. You can't hire a property manager essentially. You can have a cleaner, you could have somebody who, you know, I know people who it's like they don't have a property manager, but they have a cleaner who virtually can help you kind of basically coordinate everything with the property, et cetera. But you're kind of, you have to oversee it. You can't use a real PM company. And then why switch it to the long-term rental in year two? Is that just to reduce complexity for like the average day person? Yes. Yeah. Yeah. Last year I feel I feel that, man.

SPEAKER_00 28:01

Had 200 clients do the short-term rental strategy, of which 60% of them already converted through STRs into LTRs. Yeah. Why? Because they're not short-term rental operators.

unknown 28:10

Yeah.

SPEAKER_00 28:10

They don't know how to really use business. Yeah, they don't really know how to operate short-term rentals. So they only did it for eight to 12 weeks out of the year. And then they really wanted a passive investment. So they played the game. They did what the the behavior that the IRS wanted them to do, and they managed the property themselves active. They got the active deduction, said, okay, now I'm going to go back to playing the passive game and I'm going to have it managed by a paid property manager.

SPEAKER_01 28:32

Can people in this level two do backdoor Roth IRAs? Like, what's that? And isn't that what Peter Teal used to put some of his PayPal stock in or something? And it like grew to like $5 billion tax-free. He did a self-directed Roth. Okay, that's what it was. Yeah.

SPEAKER_00 28:43

So uh a backdoor Roth is when you make too much money to contribute to a traditional Roth IRA. So instead you make a non-deductible contribution to a traditional IRA, which is $7,500. And then about, you know, 10, 15 days later, all you have to do is just switch it into a Roth IRA. Now you're going to report the $7,500 on your tax returns. You'll pay taxes on it one time. And then now the appreciation grows tax advantaged. And then when you pull it out, it's tax-free. That is the backdoor Roth strategy. Anyone can qualify to do the backdoor Roth who does not qualify to make Roth dollar contributions. What Peter Till did was the self-directed Roth IRA. So he had a lot of money sitting inside of his retirement account. So he rolled his retirement account into a self-directed Roth retirement account. When you self-direct a retirement account like an IRA, you can invest into businesses or real estate. So he decided to take his uh his Roth dollars and invest into PayPal. And then when PayPal went public, the millions in Roth dollars that he had became billions in PayPal stock inside of this.

SPEAKER_01 29:45

Because there's a small limit you can do. But what I think the really wealthy people do is if they have a portion of the company and it's public, they just put the stock in there. Yes. And it's very small, but it's going to grow crazy tax-free.

SPEAKER_00 29:57

That's exactly what he did.

SPEAKER_01 29:58

What's also your thoughts on tax loss harvesting, direct indexing? There's like a lot of funds now. Like so, for instance, I'm a part of a fund to where I'm going to put in a lot of money this year. And I mean, this was a really good one. And it's 93% of the value in which I put in gets rolled forward as long-term cap gain or sorry, long-term cap write-off. Um, you get what I'm saying. Like losses, long-term yes, losses. Losses. Uh, because of the direct indexing, right? So can you explain that? And that's probably something even this level of people can use to an extent if they get into the right funds, et cetera, because it's just investing in the stock market.

SPEAKER_00 30:34

Okay. What type of fund were you in, if you don't mind me asking?

SPEAKER_01 30:36

So it's called AQR, but essentially it models the S P 500. Yeah. But let's say you have like 500 companies in the SP, the bottom 20%, they might have went, they might have taken, let's say, a 40% loss. Yeah. And so then what you do is you they sell that company, and then essentially they find comparable company. Yeah, but it's in an actual fund where like this is happening automatically to where you're really just to you it feels like participating in something that's already going on. To you, it feels like I'm just investing in the index. And really it tracks the index over the past 20 years. Yes. But you're you're spitting off these long-term cap losses that keep rolling forward each and every year.

SPEAKER_00 31:13

Yes. And those capital losses get issued out to you in a K-1, of which you can use those cap losses against passive forms of income. So for someone like my client who did the short-term rental, she might have used the strategy to offset her W-2 income in that year. But in the following year, she has passive income again because now it's being managed by a paid property manager. So she might want to get into a fund like yours to where she has passive losses that are offsetting her passive forms of income. And then she can go do another short-term rental at the exact same time. You can leverage these strategies applicable to your situation.

SPEAKER_01 31:43

And I think I confuse you because you can't use that to offset active income, obviously. No. But I was saying just pretty much, I mean, there's a lot of public options for this. Yes. And any everyday person, if they're investing in the stock market, a little sleeve of what they normally put in the S P500 could be this. And then they're just racking up these long-term cap losses. I like this. I like that strategy. So let's say you have now you're making, you know, imagine you know everything about what you know about tax now, but you're making a million bucks a year. So what would you be doing in terms of tax strategy as a business owner making a million bucks a year net to mitigate your taxes now? Because there's a lot more you can do once you have a business.

SPEAKER_00 32:18

Yeah. Well, for me, I did a lot of equipment leasing. Um, so equipment leasing is where you buy a piece of equipment and you take out leverage on that equipment, and then that equipment is then going to be leased out to a third-party company that's going to contract out your equipment to be utilized. So for me, I bought a bunch of uh tractors and commercial uh vehicles that are being used right now. And my $100,000 that I put down might have taken out $400,000 worth of leverage. So I have a $500,000 deduction on my tax returns. So I'm able to write off $500,000 with code section $179 plus bonus depreciation because it's equipment. Government says as long as it's over or under $2 million, you could take the full value of this equipment under $179 as a write-off. Even bonus depreciation says, well, you can write off the full purchase price in one year. So my $100,000 investment gave me a $500,000 deduction. But the beautiful part is that my equipment is being leased out to a commercial uh site. So I'm earning, you know, 11, 12% a year on my money by my equipment simply being leased out. So that already just takes my tax bill down, right? To half a million dollars. Now, for me, I have a private family foundation. My wife is extremely charitable. The private family foundation allows for you to roll over 30% of your adjusted gross income into your own philanthropic entity structure. So my wife writes a check every single year from our personal bank account into our private family foundation. If I have about half a million dollars in taxable income, I can write a check for about $150,000. Or sorry, uh 30% of that. So yeah, about $150,000. And then I'm pushing that over into the private family foundation and it's reducing my taxable income by that $150,000. Right.

SPEAKER_01 33:59

So now I'm at $350, and isn't there like I've heard people will hire like their family in the foundation, or they can even I mean, I'm sure there's like good ways to do it and bad ways to do it, but I know certain people like pay themselves out of their foundation. What are like the tax strategies once you have the foundation that people can do?

SPEAKER_00 34:15

They even hold assets in there, I guess. Correct. You can hold assets inside the foundation. So the big part about the foundation is putting appreciated stock inside of the foundation. That is where you get the real big bang for your buck, is having like rolling over appreciated stock, rolling over appreciated real estate that you don't want anymore, that you want to remain in the foundation. That's when you get like the fair market value of the appreciated stock as a tax deduction. If you simply put cash in there, that's one of the weakest ways to use the foundation, but it's one of the most straightforward ways to use the foundation. And the IRS says you can roll over 30% of your adjusted gross income in cash, 20% of your adjusted gross income in appreciated stock. Right. Once the money is sitting inside the foundation, it's charitable assets. So you can put on your own charitable events or your own fundraisers, your own parties. That is your charity to run, and it's like a real business. It comes with its own credit card, its own bank account. You're gonna swipe that credit card for expenses related to your business, which means, Cole, if I have, you know, employees and those employees happen to be my family members and they're operating on legitimate working principles inside of the foundation, I'm shifting income from a place where I might have paid taxes on it into a foundation and then from a place where it's non-taxable to then their pockets, right?

SPEAKER_01 35:24

So what a lot of these wealthy people are doing. Let's say I have a fund. And I'm raising a bunch of money. So these things pair together quite well because I could have this basically tax-free entity with these assets. I'm throwing galas, I'm doing whatever, but I'm also probably raising money for, you know, potentially in my fund as well. I'm I'm sure you can't explicitly probably get up on stage and be like, join my fund. Oh, but those connections obviously matter, right? Like if you're raising money there, you got to raise money for the charitable things you're doing. Yes. But, you know, especially a business at the highest level, it's a lot of peer-to-peer, a lot of network, right?

SPEAKER_00 35:57

I don't know any philanthropists that does not have another business that everyone is aware of. Yeah. When you are putting on a charitable event, people know that that is one leg of many of other legs that you are a part of. They're choosing to come in through your charitable business structure that you've set up through a charitable event, then they're gonna learn about your other different business arms that you may have. Another big benefit to why these uh wealthy individuals use these private family foundations is because there's no capital gains tax inside of a private family foundation. Exactly. So if I have real estate or stocks and I NVIDIA goes to the moon, I could sell all that inside the foundation, not pay any capital gains tax. There's only like a half a percent excise tax that's inside of a private family foundation. It's so nominal, it's so minimal.

SPEAKER_01 36:37

And you know what's wild that nobody told me, I wish they would have told me, is if you're donating to charity, probably whether it's through your foundation or just like, I'm just gonna donate to a charity, you're better off donating stock that's appreciated because it doesn't trigger capital gains and then just taking the cash you would have invested and then just buying the stock, essentially. Because you have that that you basically reset your basis. Yes, you reset your basis. You're doing that. You're absolutely right. Because and it you end up net the same with less long-term cap gains liability. I wish before I donated, I mean, I'm I'm I donated a lot to Tim Tebo Foundation and I'm glad I did. I wish though somebody would have told me that that I could have done that because no, I had no idea. So you do the uh I'm I'm a minute, I'm satisfied. I just did my research, man.

SPEAKER_00 37:21

So um tell me about the rep strategy because I know this is something you do with Janet. Real estate professional status is one of my favorite strategies I leverage with my wife. What my wife does in our family allows for me to go run up the score inside of our S corporations. So I make a lot of earned income through our S corporation into the multi-millions every single year, very much high profit. But I need a way to get that high profit down without me just spending more money inside of my business. Janet's participation in real estate allows for us to have an active real estate business. But in order for her to be an active real estate investor, she has to pass two tests. The first test is she has to spend 750 hours in her real property trader business or running a real estate operation, which she does every single week, 14 to 15 hours a week. And then she also has to show the IRS that she's spending more time in real estate than any other job she has. Because she is essentially only running a real estate operation, that's the easy part. So by her taking over the full-time real estate management for our family, I've been able to buy real estate. She performs the management. We both execute the cost segregation studies together. And the paper losses of doing that offset a lot of the flow through income that comes over from my S corporation. And if you're a taxpayer that's watching this right now, this can happen on W-2 income, capital gain income, investment income, retirement income, social security income, any income you want to offset, you can use those the active losses from being a real estate professional to offset your other forms of income.

SPEAKER_01 38:41

What's wild about that too, if you do the math, it's a 30% return on day one of buying the property, which is what investment do you get a 30% return on day one? But uh the key is is Janet actually knows what she's doing in terms of managing these properties. And I think a lot of people want to utilize this strategy, but you know, real estate is a real business. It is a very much so a real business.

SPEAKER_00 39:04

And you're using leverage and debt, right? Yes, you're absolutely right. So one of the things that she's done is she's created this real estate professional log booklet and she enters in almost every single day what she's doing that's real estate related, but she also has to be very intentional about creating things in her life that allow for her to be more of an operator. Right. So she goes to events, she goes to um property management conferences, she'll sit in on the tax events that we'll host to learn a little bit more about entity structure and LLCs. And then she does a lot of the inspections with the inspectors when we buy the properties because she knows the inspection process is a great way for her to garner hours and for her to find issues with the property that she can come back to the property and spend more time to qualify for real estate professional status. So she's both a system.

SPEAKER_01 39:47

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SPEAKER_00 40:55

Yeah, he's a real, he's he's running a billion-dollar real estate fund. And he's he's the general partner on the real estate fund, which means you are active by definition. IRS definition, you have to be active if you're on the GP side of this. So he's already taken the stance of everything I do in the real estate space is active. It's not passive. Not to mention he's raising capital. He is the spokesperson for his business, card owned ventures. And so by default, he qualifies as a real estate professional. Now, he had to probably make himself less active in his other operational businesses because if I'm the IRS and I'm auditing him, I see here that you got all these businesses. Real estate's just one of them. Sure. Is it right? Have a big balance sheet, absolutely, but prove to me that you're a real estate professional. And so he probably had to remove himself as being an active owner underneath his other operational businesses. You can become what's called a passive owner underneath your businesses.

SPEAKER_01 41:42

That's what I was saying.

SPEAKER_00 41:42

Which subjects you to capital gains tax rates, more favorable tax rates, or you flow through income comes on a K1. Um, and then he was subject to um, sorry, then he was uh able to qualify as a real estate professional through card own ventures.

SPEAKER_01 41:54

Yeah, and that's because he has the 750 hours. And I think what most people miss, because I've seen some business owners try to do this strategy, and it's like, I'm like, I think you're doing it the wrong way. This sounds pretty shady. Is they're like, well, I'm doing the 750 hours, but I'm like, yeah, dude, you're also like the CEO of a $50 million year company. Yes. You know, but I think the key with him is is he actually spends the majority of his time, which makes sense. It's a it's a massive company doing the real estate, which is why he qualifies. Is that correct?

SPEAKER_00 42:20

And I would argue that everything that he's been doing lately has been pushing real estate.

SPEAKER_01 42:24

I mean, no, exactly. In his content, his marketing, he's talking about money, he's talking about interest rates, he's talking about policy.

SPEAKER_00 42:30

Everything comes back to real estate.

SPEAKER_01 42:31

I would say that he passes.

SPEAKER_00 42:33

Even when he's doing his business boot camps, he's pitching card on you in the back. You know what I mean? Or card or card owned uh ventures in the back. He's telling people like, hey, yeah, get into the capital. Card owned capital. Sorry, he's pitching card-owned capital in the back of the room. You can do all this business stuff, but what are you doing with your money? Are you taking it and you're investing it? Because if you're not, what are you doing? You're just living off of earned income. So he really wants people to get over into passive income and eventually be able to live off their passive income. Card owned, card owned capital gives him the opportunity to be able to get those investors in there.

SPEAKER_01 43:03

And so tell me about like the self, I think it's called the self-rental strategy, but essentially what I'm kind of going for here is this is a nice podcast studio, right? Yeah. Let's say I had one of these in Arizona. Is there a way for me to own the building and get the depreciation or have some sort of tax benefit through, let's say, these assets that I would own?

SPEAKER_00 43:21

Yeah, it's called the self-rental strategy. And what the self-rental strategy allows for you to do is it allows for you to bypass qualifying as a real estate professional or running a short-term rental because you are considered active already in your operational business. And the property that you wish to purchase, if you own 100% interest in that property and lease it back to your operational entity, by default, it's already an active business that you're leasing it back to. So what we do as tax uh professionals is we make what's called a grouping election on your tax return. It's called a 469 4 grouping election. And we group your active business. Maybe you have an S Corporation medical practice with your LLC that owns. The medical practice commercial building, and we group this business, which would be normally considered passive, to this business, which is 100% active. And by default, your participation in your medical practice, your surgery center, your content studio automatically deems you to allow for cost segregation cost segregation study, accelerated depreciation on that building. You're self-renting it to your own business. And so the IRS allows for you to take accelerated depreciation without having to qualify as a real estate professional.

SPEAKER_01 44:29

One of the most wild things I've seen that's kind of similar to this. Do you know who Tommy Mello is? He's like the king of the home service industry. And so one of the things I think he did, I might mess it up, is you know, obviously he's a massive, he has uh a garage door company in all these different locations. And they're always bringing on new technicians that go out, do the garage doors, et cetera, do the sales. And so he brought, he basically in Phoenix, because they're they have so many different locations, he bought like two massive commercial buildings. And then so when they do orientation and they actually train the techs, they all fly out and train in those buildings. But the thing is, is you get all the cost eggs bonus depreciation, all of that stuff. And you really have an appreciating asset on your balance sheet. And it's probably better to train your in-person techs in person, opposed to, you know, trying to do a virtual or what have you.

SPEAKER_00 45:18

This is where the tax code meets a business opportunity. It's great for him to be able to have all of his texts fly in and for him to do training because the speed at which he can get people trained up equates to how much revenue he can make. The tax code came in and said, Well, hold on a second, we'll give you this incentive. If you rent it back to your business that's already an active business, we'll allow for you to defer the taxes by taking accelerated depreciation. Because that's essentially what it is. You're deferring taxes because once he sells that building, he's gonna pay depreciation recapture on all the accelerated depreciation. He's just choosing to take a front load of his depreciation up front right now. Yeah. Government says, okay, we'll get our cheese later.

SPEAKER_01 45:51

Yeah. So I want to do that with like, I could have a media studio, but then when we hire new sales reps, you gotta come train with me for a week. Easy be able to break that off on taxes. That's right. What's your thoughts on moving to Puerto Rico? Should people move to Puerto Rico? No, absolutely not. Well, you should have I should have known you when I moved to Puerto Rico. Yeah, you listen. I lasted 45 days.

SPEAKER_00 46:08

Bro, I see I've ran into so many taxpayers. They're like, Carlton, me and my family, we went down to Puerto Rico. We love it. And the beaches, everything, the people are so friendly. Then they leave, go move to Puerto Rico. Next thing you know, they get hit with a uh a medical situation. They're at the hospital complaining. It's taking us forever. This hospital is not doing. We're flying back to America. It's it every single client that I've had leave Puerto Rico to come back to the United States has been one or two things. One, it was not worth it, the money. And then two, medical reasons. Always medical reasons. Hurricane got hit uh into Puerto Rico. We needed to get to the hospital, hospital shut down, hospitals overran, couldn't get a nurse for four hours. It's always something on the medicine side with Puerto Rico.

SPEAKER_01 46:51

But you know, I never got sick. I was down there for 40 days. I'd never get sick. I've been sick one time in the past six years. And I go into this uh, you know, urgent care or whatever it was, and I had the flu. And the guy doesn't speak English. Nobody speaks English. Yeah. And I'm like, I have flu. I don't know. I'm like trying to like maybe type it on my phone, show them in Spanish, flu. Yeah, you know? And so they just go in there and nobody's talking. I have no idea what's going on. Some guy just comes in and then just injects something into my butt. Right. Just literally just gives me a shot right in the butt. And he's like, You're good. And I was like, okay. The next seven days, I was like fucked up. Like I my nervous system, like I think I had like, I was maybe having a reaction or something. I was like almost having like panic attacks. And that's what led me to essentially just leave. And there were other reasons too. Like I got down there. I was trying to get down there before the tax deadline because it was my first major tax bill. And then I essentially got down there. The lease I had signed online, it looked nothing like it did through the online picture. So I broke the lease in the first day. Then I stayed at the Vanderbilt Hotel for 45 days. I think I had freaking mold. I was trying to operate my company during the fastest growth we ever had out of a hotel, eating the most shitty food with people like all over vacation in the I'm like in the lobby trying to work. There's people out, you know, whoa, going crazy on vacation. It was just, it was not it for me. And then somebody was like, you know, you can, I can probably get your tax rate down to like a 20%-ish effective tax rate or whatever. I was like, playing. I was like, I just got jabbed in the butt with something. I was like, I'm out.

SPEAKER_00 48:27

You know, I am out of it. 17% sounds a lot better than this jab.

SPEAKER_01 48:31

I'll be a real estate professional. Whatever you're gonna do, you just tell me what to do. Okay.

SPEAKER_00 48:35

I tell people all the time, you know, as much as Puerto Rico's a destination that you can find yourself falling in love with because it looks like a real vacation place is almost very similar to Miami. It almost never ends up working out for a lot of these corporations because they don't end up staying the allotted period that they need to stay in order to fully break that tie from the US. And then something normally ends up happening that they can't control. Weather conditions can get a little bit crazy down there in the tropics, and then health-related reasons can bring somebody back.

SPEAKER_01 49:02

You know, the only people I know that do it and they say they like it are people who do the whole thing, you only have to stay there four months if you spend the majority of your time basically in Europe. Yeah. And so they essentially kind of like air, they're they're more nomadic by nature. They Airbnb around Europe. That's what they were already doing before. Yes. And they're like, well, I just might as well do four months in Dorado and then just do what I was doing, anyways. But that's like a that's a very specific lifestyle.

SPEAKER_00 49:27

Yeah, my buddy Chris, his name is Chris Williams, he's a very big trader, and he does that lifestyle, what you just said. He's set up in Puerto Rico. He was debating on whether or not he wanted to come back to California. He's from LA, and then ended up getting a place in Dubai. And because of his lifestyle and him being a trader, he has his family now, they balance between Europe or sorry, between UAE, DuPai, and then in Puerto Rico. And that seems to be a perfect balance for him.

SPEAKER_01 49:50

So let's say now you're making 10 million net, right? So you're making the big books. Knowing what you know now, now what are some of the more advanced tax strategies we might start to implement? Obviously, some stuff like real estate, rep strategy, et cetera, is already going to be there. And I know you could probably just write off your whole entire bill through the rep strategy, but let's just say you weren't doing that. Yeah. What would you be looking into then?

SPEAKER_00 50:11

Yeah. So one of the strategies I like for entrepreneurs that are crossing 10 million in profit is looking at their advertising expense and looking at their marketing expense and determining does this expense need to be ran through the same operational company? Or can I set up a separate corporation whose sole job is to be the media company, the marketing arm, the events arm? For my business, we run three large-scale events a year. We spend millions of dollars on these events. So we set up a separate entity that operates on a different fiscal year end. The reason why this is so important is because when we get to high profit during tax planning season, we don't have that much runway time to be able to spend the money before we have a tax bill come the following year. We make a lot of our tax planning money in October, November, and December. Right. So we use our C corporation that operates on a different fiscal year end and we write a check from our S Corp to our C Corp. I mean, on a $10 million profit, you write a check for $2 million, you're wiping away about $700,000 in taxes at a 37% tax bracket. That's pretty awesome. And then now that money that's in the C corporation has more time before it files its tax returns, typically about nine months. We like to set up coal, we like to set up C corporations with like a September 15th year end. So that way when it ends its year in the following year, we don't have to file the return into four months and 15 days after the C corp ends its year. So it pushes the tax return from October, November, December, January 30th, 2027, essentially, that taxpayer would then have to file that tax return for that C corporation. So all we're doing in this situation is we're shifting income. It's an income shifting strategy. If you're gonna pay taxes on $10 million, what would it be like to pay taxes on $8 million? Would you like that? Would you like a $2 million haircut right now? Are you gonna spend that $2 million on advertising? Oh, yeah, I'm gonna rip that $2 million in the first quarter. Beautiful. Let's move that over into a company that's sole job is for advertising on a different fiscal year end with a bona fide contract between your operational co and your new management co or your new uh advertising co. So that is uh the off-year C corporation strategy. We love that one a lot. Another strategy that I see a lot of taxpayers that get to this level will start to incorporate into their retirement planning is called the defined benefit plan. I'll be completely honest with you, a 401k is only $24,000. You're gonna save maybe six grand at a 37% tax rate. But you can layer a 401k with a DB plan, a defined benefit plan. We like the cash balance plan version of the defined benefit plan. What you're essentially doing is you're saying, okay, I want to tell, I want to establish a pension plan right now because I already know how much money I want to retire off of. I want to retire off of $10 million. And in order to get there, by the time I'm 50, dude, I have to make way larger contributions. So based off of your age, the history of your business can determine how much larger of a contribution you can define and then contribute a benefit every single year to that defined benefit plan. Last year we had a 45-year-old uh taxpayer, he put $212,000 into his defined benefit plan on top of the $24,000. Right. The cool thing about the defined benefit plan is he can self-direct it. So then he self-directed the defined benefit plan and then rolled over half of it into NVIDIA stock. You could do that with a DB plan. You're not doing that at $1 million net profit rolling to $300,000 into a retirement plan. You're gonna be like, dude, why would I lock up $300,000 in retirement plan if I only made a million dollars net? That's taking 30% of my money and locking it up until I'm 59 and a half. When you're 10 million in profit, $300,000 is a lot different for you, right?

SPEAKER_02 53:50

Yeah.

SPEAKER_00 53:51

So that is why somebody might look into setting up a divine benefit plan or a cash balance plan is to make a large contribution to the retirement plan to prepare for retirement while also being able to capture a huge tax deduction.

SPEAKER_01 54:03

And that goes in tax-free or comes out tax-free?

SPEAKER_00 54:05

It does not go in. Uh sorry. You get a tax deduction when the money goes in, you pay taxes when the money comes out. Right. Right.

SPEAKER_01 54:11

Okay, great.

SPEAKER_00 54:12

Yeah, great deal.

SPEAKER_01 54:13

What about PPLI?

SPEAKER_00 54:14

Private placement life insurance? Do you like private placement life insurance?

SPEAKER_01 54:17

Well, I was pitched on it and I didn't do it, but I know that's a strategy. Like they told me it would only make sense if I wanted to put in 5 million, 2.5, and then two like 2.5 at the end of the year, 2.5 right at the beginning of the next year.

SPEAKER_00 54:29

What did they tell you?

SPEAKER_01 54:30

Uh, I mean, this was a several years ago. I ended up not doing it, but from what I understand, it's a strategy that's basically an insurance wrapper. It's kind of self-directed, essentially, where you can do alternative investments, you can do whatever you need to, and it grows tax-free. Your limit of what you can access through there is is relatively limited. Yes. But you can take loans from it, et cetera. For me, it was just too big of a portion of my net worth.

SPEAKER_00 54:52

Yep, and the fees involved on it. You get ripped on the fees from money managers, the access that you have is limited. You know what actually gives people more access that's almost in a similar structure? Have you heard of a uh captive insurance corporation? Yeah. Now you have to be kind of careful with which types of captives you're setting up. There's like different levels of captives. But essentially what you're doing is you're establishing a corporation whose sole job is to provide insurance over all your operational codes. Rather than paying out, paying outside insurance, geico, all these different insurance companies. What if you decided to establish your own insurance company and your businesses are writing checks over to that business every single year? The beautiful part about that captive insurance uh business is the money can be invested into low-cost index funds, and that money can grow. And when needed, you're drawing from an account that was bigger than what it was when you originally made your contribution. So at least the money is within your control.

SPEAKER_01 55:43

Right. But how do you do a captive the right way? Because I'm pretty sure 99% of people don't do it the right way.

SPEAKER_00 55:48

You cannot self-deal inside of a captive. Self-dealing means, okay, I've wired the money over to my C corporation, but hey, Carlton, I see the money sitting inside my Chase account. I want to go run an ad campaign next month. Can I just go wire back $100,000? Absolutely not. That is not what that corporation was set up for. But the issue is, is you normally get that phone call after someone already did it. So now they've already self-dealt to themselves. They've abused the structure. And now we're trying to move the money back, make it right on the books. You get audited with these with these captive insurance structures, and they see that you've self-dealed, they'll unwind the entire structure, eliminate it, you'll pay taxes on what you should have paid had you had never made the contribution.

SPEAKER_01 56:29

Exactly. But isn't there something in the tax code, dirty dozen or whatever, to where a lot of these will just automatically trigger an audit no matter what?

SPEAKER_00 56:37

The the IRS has uh the what's called their dirty dozen list. And the reason why they release this list is twofold. One, the IRS tracks which strategies or deductions are the most audited, period, across all deductions and strategies in the tax code. And then two, they're trying to influence behavior. So the IRS will release this list saying, hey, here are all of the structures that have been abused that we have been catching on to. We've been catching on to this weird um historical charitable structure where you're you're putting money into this historical landmark site. Yeah. We're we're auditing this captive insurance uh structure. So they put out all of this different information. One of the ones that they put out was captive insurance 831B. There's captive 831A, there's captive 831B. So a particular part of a captive insurance is on the dirty dozen list. Right.

SPEAKER_01 57:27

The way I do it, and it's a it's a little bit different, but I know it doesn't classify in that way that triggers an audit.

SPEAKER_00 57:33

Correct. And that's the difference classification between an 831A versus an 831B.

SPEAKER_01 57:37

And to be clear, like, I mean, we've never selfed out. I wouldn't even think of that. And we've actually had one or two, three times where we did actually use the cash value inside of the insurance company for a claim. I mean, I run a real company, right? So, you know, why not? It's an actual business use, it's in the tax code. Yes.

SPEAKER_00 57:54

You did exactly what the code was written to do, Nicole. So easy though, for someone to abuse it, as I'm sure you can imagine. Yep. Conservation easements. Hate them. Absolutely not. Do not touch them. IRS Dory doesn't list favorite one right there. I I just don't like them. I don't like the idea of you're evaluating this land and then you're taking leverage on it, and then you get this big multiple, and then it's getting reassessed later. I'm not a big fan of the whole land conservation easement. Every taxpayer that has ever come over to my office told me I was audited because of this. It was like 100 out of 100%. Oh man. I don't think I've ever seen anyone not get audited with land conservation easement. I've never set one up for anybody. I've never recommended anyone for anyone to go into a land conservation easement. The only ones I've ever dealt with ever seen on tax return were for people who had already did it and then came over to my firm. Yeah. Not a big fan of them whatsoever.

SPEAKER_01 58:46

Have you heard of like I've heard that, you know, the land ones are particularly can be problemsome. I've heard of one recently. I got pitches two weeks ago. Yeah. It's it's not donating land, but it's donating like software licenses or something like that. Like you do it in a different asset class and it doesn't trigger the tax code in the same way, and there's more legitimacy to it. Have you ever heard of that?

SPEAKER_00 59:09

No, but I did hear of uh there are historical, at least from what I'm hearing, Cole, there are historical uh there's historical land that you now can make a deduction into and you're taking on leverage and it's a charitable deduction and it's five to one. And you're you're buying historical land that is being reassessed at a higher value, which is why you're able to take this leverage on it, but then it ends up being this gigantic charitable deduction. This is the one I'm doing a lot of research on right now. But anything with the land conservation easement stuff, I try to stay far away from that, at least for my clients.

SPEAKER_01 59:47

Yeah. Well, and the other issue too is it's really just a matter of what the valuation ends up being. And so from what I understand the IRS, they're just like, we're just gonna re-underwrite this lower because they have every incentive to do so to collect more tax money. It's just subjective. It is, you know, so I think that's part of the problem as well.

SPEAKER_00 1:00:02

If anytime I hear somebody saying, like, well, we're gonna set aside a certain amount of money for each investor for the audit just in the event, that's just a red flag for me. Like, what wait, what do you mean? Like, I've heard that before. Like, okay, we're all gonna do this, but we collect 10% from each investor to satisfy the audit for when it comes, because normally they like to audit these things. We're already prepared for it. Here are CPA letters. Maybe just stay away. I don't think so, bro. Like, yeah, that's that's bypassing my risk tolerance. Oil and gas. I love oil and gas, partly because of the active participation that you're able to benefit from. You can deduct the IDCs, the intangible drilling costs, um, all the things that you cannot touch that go into oil and gas creation, and then the tangible drilling costs, the oil wells, the oil rigs, the trucks involved, uh it creates a very powerful paper loss. The average that I'm seeing right now in oil and gas is around 80 to 85 percent of your investment costs. It leads to a year one uh tax deduction, and that's an active deduction. And then the following year you can turn around and make the oil and gas investment passive and just claim royalties.

SPEAKER_01 1:01:01

Yeah, what's crazy is I've been doing oil and gas since 2022. And so I have a lot, I mean, I have a pretty significant sleeve of just oil and gas. And since the war, which I'm opposed to this war, I don't really like the Iran war, but uh obviously oil prices went up. And dude, my distributions on a monthly basis, I would give them all back just to not have the war, just to be clear. But um, they're ridiculous. I mean, like the distributions I get from that are like a top 1% wage income.

SPEAKER_00 1:01:30

When I'm starting to see these distributions on a monthly, these distributions I'm starting to see from my clients from oil and gas don't even look right. They're making so much money relative to their investments, it was as if they were sold a lie. Like they were told 10% a year. Yeah, the percentage returns, and I I know this is different for everybody, our oil and gas clients are receiving like 30% on their investment, bro, a year on some of their investments. That's insane. It is that is absolutely insane.

SPEAKER_01 1:01:57

Now, how, because I think it's really important somebody knows this, because if they're here and they're like, I should get into oil and gas, how do they actually get in to something that's legit? Because a lot of funds in the that that space, the ONG space, are kind of scams. They're not good. So I think the obvious answer is I would recommend working with somebody like you or a professional to be able to do it. But like, how does your team go about finding who is the legit operators in that space versus like who to actually stay away from?

SPEAKER_00 1:02:23

I think our unfair advantage, and just being completely honest, is the fact that we get the tax returns. I just think there's no way around it. There's no bullshitting somebody who said, Oh, I went and did this oil and gas deal with sunrise. Okay, well, I can look at your K1s and or look at your uh your Schedule C or your K1s and see your distributions relative to your contribution amount. That should tell me a lot about whether or not this investment's even performing for you. Then I go look at the operators. Who are the operators of these companies? How long have they been in business? Uh, what is their fund size? Um, how long have they held the fund? Is it a closed fund? Is it an open fund? I start doing a little bit of due diligence there. Do they offer GP status? Is it only LP status? How many GPs are a part of the fund? You kind of start building up your due diligence and your buy box um over time. But most people first need to one, make sure that they're an accredited investor and then try to go get yourself into communities. Just like with real estate, you can find really great real estate deals by being surrounded by other people that are shopping real estate deals and seeing what they do or don't do. Same thing in the oil and gas space. There's tons of oil and gas communities. I know for a fact our community is pretty big on oil and gas. You can put yourself in one of these communities and see what is performing well, who are the operators of this, um, what has worked well for other investors. And that helps you make a more educated decision because it is a decision that you have to make alone.

SPEAKER_01 1:03:38

What about film?

SPEAKER_00 1:03:39

Oh, film is a strategy that we leverage pretty heavily in our office because we have access to movie production companies that will sell or finance ownership of the movie film to my clients. Under Code Section 181, um, movie producers can produce movie films that are 20 million in production costs and less and write off the full value of production cost in year one. So instead of funding a movie that entirely themselves, they'll go raise debt and will sell or finance ownership of the production cost or the production rights to investors. So for my clients, it's a leveraged strategy. It's four to one. So for every $1 they put in, they take on three dollars of recourse debt uh for to be whole on a total of $4. So if you put in $100,000 into a movie film, you can claim a $400,000 deduction. Material participation is involved in the movie film. So you need to actively watch other movie films. You need to be reviewing the screenplays, uh, you need to be reviewing the contracts, the documents that go into the movie film. But if you're able to show 100 hours of material participation in the year, no one else participates more than you, amongst everybody else that's a part of this movie film, which obviously the operators are in charge of that from an accounting perspective, uh you receive your K1 as an active deduction. Beautiful part about movie films is you don't have to worry about the taxes until the movie comes out. So a lot of these movies get delayed until 2027, um, some might even come out in 2028, but you're experiencing the deduction right now, and you don't have to pay taxes until the movie starts making profit, and then the profit goes back to pay your recourse debt. And then when it whatever is excesses your cash flow.

SPEAKER_01 1:05:10

If you're a business owner who has appointment setters or an outbound sales team, you're gonna want to hear what I have to say for a second. So a multiple eight-figure business owner texted me the other day, and when he started using $.io for the first time, his pickup rates went from 9% to 20%. So imagine doubling your pickup rates and ultimately the throughput of what your outbound salespeople and centers are gonna get, how does that impact your business? The answer is a lot. So if you want to check out dollar.io for a phone sales outbound system, just click the link in the description or just go to dollar.io. Now back to the podcast. What about QSBS? You know, it's like for the C Corp strategy. If let's say I have a software company, it's a C Corp. I can, I don't know what it is. Like the first 10 million is tax free if you leverage 15.

SPEAKER_00 1:05:51

How does that work? So, as a part of the one the one big beautiful act uh that went into law July 4th, 2025, the government made some updates to the QSBS, which allowed For C corporation owners who held stock for a minimum of five years to be able to exclude up to $15 million in capital gains. $15 million is a very big number. I don't want anybody to overlook that because if you're an S corporation owner and you started off running your own, your own software business and you're like, dude, I'm getting all this deductions because I'm in an S-corp. Yeah, it might be cool that you're getting all the deductions because you're in an S-corp, you don't have double taxation. But when it comes time for you to sell that business, you would have wished you were in a C corporation. And so one of the most important things that we like to do in tax planning is always think with the end in mind. What are you planning on doing with this business? Do you plan on raising capital or eventually exiting this business? Because how you choose to answer that question might be how we choose to restructure your entity. And the C corporation allows for you to be able to issue yourself stock as long as you hold on to your own class of shares, minimum five years, 15, uh, 15 million. Now, they did create some um levers in there as well to where now, if you've only held it for three years, you get to activate some of that 15 million. I believe it's, I think it's 10 million at three years. I would have to double check see your seven and a half or 10 million. But what I'm saying is that the longer you hold on to it, the better the benefit is. But at least if you hold on to it for three years now, you'll be able to receive some of the benefit of the exclusion.

SPEAKER_01 1:07:09

Have you heard of this like thing with stacking truss with that or something? I it it's it's relative. I'm not even sure if it's a real thing. But I've heard that you can somehow stack it to keep increasing it or maybe have it. Oh, oh, okay.

SPEAKER_00 1:07:23

So uh I don't know if it's about stacking trust, but I think it's about your there's a calculation that could allow for you to escalate the 15 million up to 75 million.

SPEAKER_01 1:07:34

Yes, yes.

SPEAKER_00 1:07:35

There's specific qualifications. I'd have to give you uh information on that, Cole. I don't have that information and I don't want to I don't want to say it wrong. Um, but it has something to do with your earnings. Um, but yeah, I would I wouldn't be able to explicitly state that, but there are writers that can allow for you to extend past the 50 million up to 75 million. I would need to pull the exact verbiage. Yeah, yeah.

SPEAKER_01 1:07:57

There's interesting things you can do. So we covered a lot. Um if your assets, let's say, are north of 100 million, right? And we've covered a lot of stuff we would already do real estate, PPLI, uh, buy, borrow, die, private foundation, all of that stuff. Yeah. Is there any uniquely bigger things these higher net worth people do that we haven't covered that will be worth covering?

SPEAKER_00 1:08:18

You know, we did cover a lot. I would say if your assets are over 100 million, you you switch from tax mitigation strategies to wealth preservation strategies, period. You're outside of the how do I avoid taxes game, and you're now how do I avoid estate taxes and how do I spend charitably. You're choosing to focus on how do I actually get money out of my estate or out of a taxable event for my heirs? And how do I actually run these charitable foundations? I'll be honest with you, Cole. There are maybe about one to two clients that my family office has access to right now that are at that level. And those families, we're not really doing a whole lot of tax planning as we are sheltering income for the next kind of 10, 15 years, really. Um, does it involve multiple trust structures, possibly a spousal lifetime access trust, which is called a SLAT grantor trust? These, these wealthier individuals might have more than just your one or two trusts. They might establish multiple different trusts. They may have an islet, an individual life insurance trust. They just want to have that life insurance trust just to be able to cover the estate taxes, right? Because they want to keep certain things in the revocable living trust that they're not going to move over to the irrevocable trust. But they established the islet to allow for the islet to be able to pay out the taxes on the estate. Brother, all wealth preservation strategies, right? Not things that may impact them in the day-to-day, but things that can impact them 10, 15, 20 years down the road that are absolutely meaningful to work on today.

SPEAKER_01 1:09:42

When you think of your clients at 100 million or a billion, et cetera, super high net worth, what are the smartest things you've seen to keep them from the money passing down and ruining their kids?

SPEAKER_00 1:09:54

That's a really great question, actually. One of the biggest things that I love about these super ultra high net worth people is the trust that they put in their professionals. It is like ultimate keys given to the person that they've assigned to that role. Yeah. Their controller is really a controller, like controlling everything. Like, holy shit, this person really has the keys to the whole operation. Um, their assistants are truly in their entire lives. They're not like their business assistants, they're like their life assistants. Their assistants will make up their bed if they want them to. Like they really have integrated family offices, bro. And these family offices have full discretion over the family's finances, the company's finances, what makes things go, and where the children need to be at in the stages of the life that they're in. What I mean by that is you may have built up your wealth, but have you created a plan for what happens in the event something happens to you tomorrow? God forbid something happens to you tomorrow, Cole, and you have a seven-year-old daughter. When does your daughter get access to your assets? Is it at 21 years old? How much of your assets at 21 years old versus 30 years old? What do you want her to have access to at 30 years old? What about 35 years old? So they're creating different strategies around things that could potentially happen, whether they end up passing away, whether their children never end up going to college, whether their children never end up becoming business owners or becoming a part of their business and only just receive ownership of things. They're essentially creating scenarios. And I love that because if you can look past this year, look past 2026 and your taxes for this year or what Trump might do for next year, and you just kind of step back. You're so wealthy that you could really just kind of step back, you're really just playing Tetris around different opportunities that can happen. If my daughter becomes this, okay, great. If I die tomorrow, okay, great. If I don't die tomorrow, okay, great. And they're willing to get radically transparent playing that game every single week, every single day.

SPEAKER_01 1:11:53

It's like every single contingency strategies on contingency on contingency on contingency.

SPEAKER_00 1:11:57

Yes.

SPEAKER_01 1:11:57

Yeah.

SPEAKER_00 1:11:57

And they love it. They love forecasting and playing this strategy game because it gives them peace of mind to be more present.

SPEAKER_01 1:12:04

Yeah. Have you studied at all Rockefeller and how he set up his foundation? Because he was one of the most successful families in terms in terms of the wealth passing over generations, opposed to let's say the Vanderbilts, which I think it got squandered. I could be wrong on that, but most of them do get squandered, I think, on the third generation. Yeah. On average. But his has gone really long. And it's I just actually finished his book. And a lot of people.

SPEAKER_00 1:12:25

Well, what the Rockefellers do? That book?

SPEAKER_01 1:12:27

Yeah. Well, uh, Titan was the book I read. Oh, Titan. But then I did a lot anytime I read a biography of somebody, I just I basically switched the entire uh information diet that I've been consuming, podcasts. Uh, I'll be looking stuff up with Claude, everything. I'll just focus it all on that one person or that one book that I'm reading because it's like learning is kind of like time under tension. So it's not necessarily like, oh, I completed the book. It's actually the amount of time you spend thinking about the concepts. Yes. Right. So I just went through that and it's interesting. Like the whole bill, you know, what's the most famous foundation right now? Probably the Bill and Melinda Gates Foundation. I don't know. Well, they're not together anymore. I don't know if it's called Below and Belinda Gates, but whatever. Bill Gates' foundation. That's literally a replica, if you read it, of Rockefeller's Foundation in terms of the strategies, going after causes, not symptoms, and basically how it all operates and how it's made uh skews mainly towards educational, skews mainly towards science. It's just very interesting.

SPEAKER_00 1:13:23

But something that I will read that book, The Titan. I will read that book. And on our next podcast, I'll have a lot of feedback for you. We'll do some notes, we'll exchange some notes. Absolutely.

SPEAKER_01 1:13:31

What are the easiest things people do that just easily trigger an audit?

SPEAKER_00 1:13:35

Uh yeah, this is a good one right here. Uh people will miscategorize their expenses when they file their own tax returns. I don't know why anybody would have ever filed their own tax returns. They use these two categories I hate, called other expenses and miscellaneous. Other expenses and miscellaneous were set up as traps for the single member LLC owner because when you're a single member LLC owner, you file your tax returns inside your individual tax returns on what's called a Schedule C. Partnership returns, S corporation owners, they do not have to show this much exposure of their business and what each expense is and how much they spend on car and truck and on meals and travel. But a single member LLC owner has to show everything on that tax return. And then when they don't know how to categorize something, you have these two categories at the bottom called other expenses and miscellaneous. Cole, to this day, still don't know what a miscellaneous expense is. And other expenses is set up as a trap because you literally have to line item out exactly what that expense is and put the dollar amount next to it. I've seen the craziest things inside of that other expense category. Um, you know, uh private mentorship, uh, you know, exclusive um AirPods for all my team members, like just the craziest things that you would see on these expense items. So a lot of taxpayers will get audited for that. The next thing is omissions. You leaving something off of your tax returns. If you left income off of your tax returns because you're self-employed and you received 1099s, you might have reported $120,000. The IRS received $130,000 because there was a $1099 that you forgot to include that didn't get reported inside of your income. And now you're reporting something different than what the IRS has physically logged on you. That triggers an automatic audit. Why? Because the system flags you. It received $130,000 of $1099 from people who issued it. You reported $120,000 of income. There's an issue there, right? So that part is probably one of the biggest reasons is mistakes and omissions on tax returns.

SPEAKER_01 1:15:22

I've heard if you extend, if you do an extension on your taxes, you're less likely to get an audit.

SPEAKER_00 1:15:28

Is that true? I would agree so. I would say most of the taxpayers that I see get into audits actually do file on time. Whereas most taxpayers who are actually not really receiving audits, and if they do later, they're mainly filing on extension. And a big part of that is because when you think about who's filing on extension, it's normally somebody that's an investor or a business owner. An investor or business owner typically has a K1 form. And when you think about a K1 form, it's very vague. It doesn't tell you a whole lot. Normally a K1 form gets into your personal return and it only reports one number positive business income or negative business loss. So if I'm looking at your individual tax return and I'm an IRS auditor, and all I see is like one number from a couple of K1s, I would need some probable cost to bounce from your individual return to then go look at some partnership return with some random EIN number. Like I really need to know what I am going there for?

SPEAKER_02 1:16:19

Yeah.

SPEAKER_00 1:16:19

I can't see truck meals, travel, I can't see anything from this one number. So if this number is extremely big, maybe I'll go I'll go request the tax returns. But it's just hard for me to link this to something. So a lot of partnerships and S corporation owners typically will file on extension because they're working through bookkeeping or waiting on their K1s, and they're flooding in with the massive amounts of other business owners and investors and uh fund operators who have K1s that are going onto those tax returns as well.

SPEAKER_01 1:16:48

And do you also think part of it might be because isn't there like a three three-year look back window or not three year? How long is a look back window? So they have less time to complete the audit because the audits on average take nine months.

SPEAKER_00 1:16:59

Yeah. So the IRS has three years to go backwards when it pertains to um you getting assessed and then they can go back, they can look at your returns up to seven years. Okay. Yeah, they can look up to your returns up to seven years. You have the ability to refile your tax returns up to three years in order to receive a refund, too. So many taxpayers aren't aware of this, but when they jump into our office for the very first time, rather than just immediately making recommendations, we'll kind of look at their tax returns from the past. We'll point out some things that we feel like we're left off and we'll give them the cost-benefit analysis. Hey, refiling this tax return is $5,000. We're looking at about $17,000 in a refund. I don't know if it's worth it. Actually, it's gonna cost you $5,000 to file this tax return all over again. There's $288,000 that we're gonna get in a refund that's gonna get released from the IRS within a 14-day, 14 business day. We're refiling this tax return. And we're also gonna write a letter when we refile this tax return. Because in case the IRS thinks they're gonna audit us, we are prepared for this. We're just gonna tell them exactly why we're refiling this return, what was left off of the return, why it was left off the return. Here's documentation and substantiation. That is what the IRS wants to see when you're going back to get a refund from them. What are you taking?

SPEAKER_01 1:18:10

Yeah. Yeah. You know, I got audited once, and it's funny, everybody's always scared of an audit. Like I basically shit my pants when I got this audit. It's not that bad. No, it's not. They're just doing their job. It's not that bad. And actually, it could turn out well for you, as you're gonna see. So, similar to what you were saying, what happened is I had an I basically was using a CPA for a long time who wasn't very good. And he was fine when I was doing a million bucks or two million bucks or whatever. But as the company grew, I just kind of stuck with them because it's just what I was doing. Like so many people do. And the complexity outgrew this person. They filed the return wrong. And I knew right away because I was like, oh, there's no way that's right. And then they double checked it. Oh, no, it's not right, but it was right at the deadline. So we had to like sign the return, the next day, amend the return, triggered an audit. But what so going off what you said, what was so key is that I had all the companies in in different places in terms of income. So the only company they oper uh they audited was my real estate company, which I was doing the SDR strategy. So they were like, Interesting, let's see the time logs, let's see this. And yes, we documented everything. And what ended up happening was not only did the amendment go through, but we also found, because I just ended up switching CPAs as soon as I got audited. Yeah, of course. So what they also found was he had made some other errors, and I ended up, they ended up being like, okay, you got to pay 30 extra grand, but they had to give me, I think it was like 300. So I ended up getting a check for 270,000 at the end of my audit. That's good. Everybody who's thinking about getting audited, sometimes it can government blessing. Sometimes it works out for you.

SPEAKER_00 1:19:42

You know, sometimes it's a good thing. It's it could be a good thing. Your audit taught you two things, though. One, the person that you hire that you think is supposed to know everything and do everything, he made a mistake, right? Which means there becomes a point in time where you have to possibly even upgrade your professional or is you even audit your professionals. And two, the IRS isn't as smart as they think they are all the time, right? They're sending me this letter thinking that I did something wrong. The truth of the matter is we found three other things that they actually owe me money. A big part of me loving audit so much is like learning from the audit. Well, like really learning from what the IRS sees.

SPEAKER_01 1:20:14

I think, you know, obviously your firm's probably not like this, but I think a lot of firms, they're doing so much volume. Yeah. And then they do, when you get audited, it forces them to spend a lot longer time looking at your returns. And then sometimes they find stuff that they, you know, they're like, okay, we kind of screwed this up, but then you end up getting a refund back for it. Yes. And so what was also, you know, the way I thought about it too is this person's just trying to do their job. And you know what? Like, it is kind of sketchy that we filed this thing and amended the next day. Yep. You know, which is on us, and they're just trying to do their job. I'm curious how the way they handled it is they told me when we had the call with the auditor that I was had to catch a flight. Essentially, like the call was at 10:30. I had to board at 11. So I was gonna hop on, introduce myself, say, Hey, I say some nice things. Hey, he's gotta go. We're gonna handle all the questions from here. Is that like the general strategy that people usually do?

SPEAKER_00 1:21:09

Yeah, with with with the audits, you don't have to say anything actually when you have representation. We can we can do all the communication.

SPEAKER_01 1:21:15

They were telling me, like, it's better if you just say nothing.

SPEAKER_00 1:21:17

Yeah. We got it.

SPEAKER_01 1:21:18

Because you're most people don't get this.

SPEAKER_00 1:21:20

You're guilty until proven innocent with the IRS. You are not innocent until proven guilty. It's like the one department that's like, no, no, no, no, no. Why is that though? Uh they're bill collectors, bro. You owe us. We're the government agency dictating how this is gonna go. And until we verify everything, you're in this status, until you un, we can uncheck this box. You're just gonna remain in this status. This is literally how the IRS works. They don't like losing. Everything about the IRS is around winning. So they're gonna put things in their favor first, which is you did something wrong. You did something, it's not us. You did something wrong. You reported something, you you didn't report something right. We have questions over this because you did something wrong. That's where it all starts. They want you scared. And then from then in there, you have to decide: am I the person that's gonna handle this or am I gonna go hire somebody? The biggest issue you can make is calling the IRS and try to handle it yourself. Why? Because the IRS have been trained to talk to you. They know to become friendly with you. They know if you feel like they're a neighbor down the street, that you're gonna be more susceptible to sharing information with them. And the issue that normally happens is you end up oversharing too much. The IRS was only looking at this one thing. But you got on the phone, you told them your business has three different revenue streams, that you guys normally do this corporate event that you log every single year, and that you're that you're proud of the fact that you guys take this corporate trip that you log every single year. You just told them like seven, ten different things. We're gonna have to look into that. That all it was asking was, why you had one rental property over here? You went and shared with them everything else over here. Exactly. Yeah. That's how the audits continue to progress. You'll see, like, it feels like we're making progress, and all of a sudden they just send you this email and they're like, hey, we're requesting additional data. Da, da, da, da, da. Then the IRS audit gets expanded another three months.

SPEAKER_01 1:23:04

Yeah. Right. You know, I the day I got audited, I happen and I happened to have a meeting with Patrick Bed David. Oh, nice. And so I just was like, PBD. Hey, um, have you ever been audit? I probably didn't say it like that. I was like, I'm being audited. You know, do you have any advice? And he was like, calm the fuck down. He's probably not scared. He was like, calm the fuck down. He's like, I get audited every year. It's part of life, it's part of doing business. Like, if you're gonna operate at this level, expect it. Welcome to the game. And he kind of just that was it. He just brushed it up. We're not even gonna talk about it anymore. And I was like, it actually calmed me. It was like the it was like the big bull like calming me down a little bit. I was like, okay, I guess it's fine. Yeah. Yeah, he's just like, this is what you do when you get to a certain level. It's okay. Yeah.

SPEAKER_00 1:23:43

Yeah. I mean, I as you know, I'm in zenith and like dude, Dean talks about it all the time. He's like, I get audited all the time. He's like, this is what is what happens when you're at that level.

SPEAKER_01 1:23:52

Like take it from me. It can be a good thing, actually. Yeah. What's the most amount of money you save somebody on taxes?

SPEAKER_00 1:23:57

Uh, the most amount of money I save somebody on taxes was $9.7 million in one year. And they, it was a doctor who had sold his practice. And what I was able to do was use a combination of solar strategies and depreciation-related strategies and partial QSBS to get him to reduce a big sizable um uh capital gains tax that he had from exiting out of his uh surgery or his uh dental practice. He's here in Orange County, actually. Oh, okay. Yeah, his dental practice.

SPEAKER_01 1:24:28

Interesting. If you think about what is a really common piece of tax advice, maybe on social media or whatever, that you look at and you're like, that is just not right. Like that is completely false.

SPEAKER_00 1:24:39

Telling somebody to set up a business and just report losses on the business like it's legit, like that's uh that's tax fraud. If you are trying to reduce your tax bill and your CPA or anyone in your network tells you, bro, just open up a business, just write shit off. That is a that's a that's a hobby business by IRS definition, and it can get disallowed, and you'll have a target on your back typically for forever when you do things like that, because the IRS hates when people set up fake businesses and claim expenses that are typically personal related expenses, their cell phone, their car, their their uh car expenses, their dogs, dog food. They just try to write all this stuff off underneath this coaching business or this online e-commerce business that never took off. And and let me be honest with you, can you possibly get get by on year one? Yeah, maybe even extend it to year two. Yeah. But the moment you hit year three and you haven't shown an economic gain, there's no money flowing through that business, you're still reporting expenses. The IRS is is on the playing field now. And they can audit you and say, hold on a second, this year it doesn't look like you made money, this year it doesn't look like you made money, this year it doesn't look like you made money. So I'm gonna disallow all three years. And now I'm gonna treat your business as a hobby. We'll remove all these expenses, refile your 2024, 2025, and your 2026 tax return. And we're gonna re-record everything as if you didn't have a business. So you owe me penalties, fees, interest fees, plus the tax on the amount of money you should have paid me. So that's how a lot of people end up getting themselves in trouble. All right. Best of pod.

SPEAKER_01 1:26:05

If you enjoyed this podcast, you're also probably gonna like this podcast I also did recently that you can check out by clicking the screen right here.