JF1055: Using ALL LEGAL Deductions to Save on Taxes!!! #SkillSetSunday With Diane Gardner
Taxes are most investors and entrepreneurs biggest expense. Diane is dropping some tax saving knowledge on us today! From hiring family to an installment sale coupled with a monetization loan, so many great tips in this episode. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Diane Gardner Background:
-Owner of TaxCoach4You, a public accounting firm and certified tax coach
-Best-selling author of Stop Over Paying Your Taxes Leads “Business Breakthrough Mastermind Group” and offers coaching services to other entrepreneurs
-A Quilly Award recipient
-Based in Rathdrum, Idaho
-Say hi to her at www.taxcoach4you.com
Click here for a summary of Diane’s Best Ever advice: Four Strategies to Reduce Your Largest Business Expense – TAXES
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today – Diane Gardner. How are you doing, Diane?
Diane Gardner: I’m doing fantastic, Joe. How are you?
Joe Fairless: I’m doing fantastic, nice to have you on the show. Best Ever listeners, I hope you’re having a best ever weekend – I forgot to mention that. Because it is Sunday, we’re doing a special segment called Skillset Sunday, where we’re gonna talk about a specific skill that will help you either hone the current skill that you have now, or introduce a new skill. Today we’re talking about the number one expense we all have, which is taxes. Diane is gonna talk us through how to stop overpaying on our taxes.
A little bit about Diane – she is the owner of Tax Coach For You, which is a public accounting firm, and she is a certified tax coach. She has written a book titled “Stop Overpaying Your Taxes.” She’s based in Rathdrum, Idaho. Did I pronounce that right?
Diane Gardner: Pretty much…
Joe Fairless: [laughs] More or less, right?
Diane Gardner: More or less. [laughs]
Joe Fairless: How do we pronounce the town you’re in?
Diane Gardner: Rathdrum.
Joe Fairless: Rathdrum. Alright, cool. Diane, with that being said, do you wanna give the Best Ever listeners a little bit more about your background and your focus, and then we’ll dive into the topic?
Diane Gardner: You bet. Well, Joe, several years ago, as we were working our way through that recession, my clients were pretty much dying on the vine. I had an awful lot of them that were connected to the construction and real estate market, and it was just causing havoc in my office, because all of a sudden we were working with clients who couldn’t afford to pay us… So I knew at that point I had to change my focus, I had to shift to a different type of client to go after.
Part of that shift, I realized that even during the recession there were people out there making a ton of money, and those people were paying a lot of tax. As I got more into this little niche that I started working in, I realized that they were paying money that they didn’t really need to give to the government. They were giving this huge chip over and above the taxes they really needed to pay. So we started changing our market and started working with successful entrepreneurs, real estate professionals, business owners – the people who were out there paying too much tax and helping them to see all the various areas and strategies within the IRS code that allows them to save money, and most of the time they weren’t even aware that they could take advantage of these various deductions and tax strategies.
Joe Fairless: Well, you’ve piqued my curiosity, that’s for sure… What are some various strategies within the tax code that we can use to save money?
Diane Gardner: Well, Joe, I’m gonna start out with some of the smaller ones that anybody can take advantage of, whether they just own a couple of properties or they have a whole bunch. That’s things like making sure you’re in the right entity type. Often I see real estate professionals holding entities in their own personal name, and leaving themselves wide open for liability, problems down the road, leaving themselves wide open for paying too much tax.
By being able to move them over possibly into a different type of entity, whether it be an LLC, an S corp, a C corp or something along those lines, they were able to do some tax planning with that, because we have more to work with at that point. We can look into setting up a management company and hiring maybe a spouse to work in that company, and then being able to write off potentially 100% of all your out of pocket medical costs. So there’s some nice strategies once we start looking at the entities type side of the business.
Joe Fairless: It makes sense.
Diane Gardner: Then, as we’re moving on up the line, making sure that they’re taking advantage of all their auto deductions, whether they’re taking standard mileage or they’re actually tracking actual costs… Because there’s another area that they’re not necessarily paying attention to that type of stuff, because they may not be thinking of themselves in a traditional type of business… So making sure that we’re taking advantage of that; that’s very much an overlooked area in this industry.
The meals and entertainment – another huge one. How many times are they meeting with potential investors, potential sellers, buyers, whatever it might be, and making sure that they’re taking full advantage of that write-off as well.
Moving on up the line, looking at hiring family to work in your business. How many times do we have older parents that we’re helping to support? They’re needing that extra little bit of help because maybe they’ve been trying to live off of just social security, or social security and a small amount of pension, or something… But what if you could put them to work in your business somewhere? Their dignity remains intact, because now they’re feeling worthwhile and like they’re important again, and you’re using them in your business and being able to take that as a write-off. All along, you’re helping them. You’re meeting those financial needs in their home. I do that strategy with my own mom. She was needing that extra little bit of help.
Joe Fairless: Can you give details on that? Because I have heard and talked to people who do that with their kids, but I don’t have any kids, so it doesn’t apply to me… Maybe with my parents — can you tell me how that works?
Diane Gardner: You bet! I’ll use my own mom as an example – she needs just that extra little bit each month to make ends meet, so I have hired her to work in my business. She fills out a time sheet, just like all my other staff do. She gets paid an hourly rate. We have her do various things around the office, and in the end I would be helping her whether it came out of my personal pocket or it came out of my business pocket. But by hiring her to work in my business, I’m able to write off that many, versus if I just cut her a check out of my personal account, that’s not a write-off for me.
She has been a great write-off over the years, and that way she doesn’t feel like she’s taking a handout, or something along those lines… She’s actually earning it. In my case, she puts together our newsletter for us. She folds it, assembles it and does all that type of stuff, as well as some other items around the office. I would have to hire somebody else to help with that end of the newsletter anyhow, so it might as well be my mom.
Joe Fairless: Are there any restrictions or guidelines for the amount you can compensate your parents, based on the work that they do? For example, if they’re doing that newsletter, but you compensate them 100k/year – is that a red flag?
Diane Gardner: Yeah, I think so. It has to be the same amount that you would pay anybody else to do that job, so you have to be careful… The same rule applies with your children if you’re hiring them. You can’t pay them more than you would pay somebody else to do the same job or the same work or the same task, and you do wanna have a job description and you wanna have and keep a time sheet, and you actually have to set them up on payroll. You can’t just give them money and then at the end of the year to do a journal entry and drop this into my books so I can take it on my taxes… You actually have to pay them payroll and withhold the appropriate taxes, and just really make the point that they are a bonified employee, and that you are paying them a reasonable salary or a reasonable hourly wage, whatever it is.
But there is so much we can have our parents do if we just kind of just stop and think about it. I know I’m not the only one in that situation who’s parents need just an extra little bit of help.
Joe Fairless: Okay, good stuff.
Diane Gardner: Yeah, that was one of my favorites, because people’s eyes light up… It’s like, “Well yeah, I’ve been helping my parents for years”, so that one kind of applies to a lot of us.
Moving on up the ladder even more, for those who are involved in the larger properties and are potentially looking at selling maybe a large piece of property, something that’s gonna sell for more than about 600k-700k and they have a lot of gains sitting in that property… Maybe they’ve had it for quite a few years, or they got a really screaming deal back there in the recession time, and now they’re thinking about turning it – there are some really nice tax strategies that allow you to save hundreds of thousands of dollars in tax on the sale of that property.
We call that a monetized installment sale agreement, where you’re able to defer that tax off for 30 years, and there’s money that is invested that allows you to be able to pay that tax at the end of the 30 years, and you’re able to just save a ton of tax. I’m amazed every time we get to do one of these for one of my real estate professionals, how much tax they’re able to save and walk away with so much more cash at closing than they would have had otherwise… Because normally on a large deal like that, by the time they capital gains tax, federal income tax, potentially state income tax (depending on what state they live in), they can give the government at least 50% of the gains, and who wants to do that? Those are some really cool strategies.
Joe Fairless: It is a really cool strategy… I’m gonna even turn the table, because what’s important for us to learn is why someone would do the installment sale agreement, because that could help us as real estate investors who want to acquire a property from someone who this makes sense, but we put a little bit less — it’s a creative way of acquiring, so we go into acquisition with a little bit less money into it, because we’re paying it off over a long period of time… So how is that structured? Can you educate us on how the installment sale would be structured?
Diane Gardner: This is completely different than just a traditional installment sale. This has a traditional close at escrow whatever your financing options are (type of thing), but this works for the seller. It’s a really complicated formula, Joe, to kind of speak it out to the listeners, but I’m just gonna say it is one of those wow-type tax strategies that people aren’t even aware is out there… If anybody’s interested in more information on it, I’d be happy to have that conversation offline, just because it can become very dull and dry very quickly.
Joe Fairless: Okay. And it’s called a monetized installment sale agreement?
Diane Gardner: Right.
Joe Fairless: So for someone who’s buying it, it’s the same thing? It’s just a sale?
Diane Gardner: You bet, yeah. You’re just buying a piece of property. Where this works is for somebody who has owned this property… An example – I have my own clientele, I have a client who inherited a piece of property from her mom and dad when they passed away. This property is sitting in a C corp; it has been sitting in a C corp since the 1960s, and the kids are now deciding to get rid of it. Their gain on this property is going to be somewhere around $800,000. Well, with it sitting in the C corp, like it has been all these years, they not only are gonna pay tax at the corporate level when they sell the property, but then they’re also gonna end up paying that at the personal level, because they’re gonna have to take it out as a dividend.
When we worked out the numbers on that, the corporate level was gonna be about 50%, and then we’re gonna throw another 20% or so over on the personal side… They were gonna be giving up 60%, 70%, 80% depending what state they’re living in, just for the tax rate. We’re in the process of putting together one of these for them right now, where they’ll be able to save about close to 300k-400k in tax, just by structuring this in a little bit different way, before we head into the escrow process.
Joe Fairless: I like it. Not as much as they like it, but I like it… [laughs] I like it a lot. Well, you’ve mentioned five strategies already… Are there are any other strategies that come to mind that you wanna mention during our conversation?
Diane Gardner: Well, it’s always good to look into the retirement planning side of things, for those who are at that section of like who maybe haven’t put away enough towards retirement. As long as you’re running your real estate profession in some sort of an entity, then we like to look at things like whether it might be a simple plan or a set plan, or moving all the way up into a solo 401k, to where we can put some money away towards retirement. It comes out pre-tax, so that’s another great way of saving some money and being able to pull it out later down the line, and lower that tax bill as you’re going throughout the year.
Joe Fairless: Diane, where can the Best Ever listeners get in touch with you?
Diane Gardner: The best way is to go out to my website, which is www. TaxCoach4You.com. If they’ll click on the tab that says Books and come down the page a little bit, they will see a book called The Ten Most Expensive Tax Mistakes That Cost Real Estate Professionals Thousands. We love to give that book away. All we ask is that listeners pay shipping and handling on it. They can definitely just click on that link and we will get their book right out in the mail to them.
Joe Fairless: What’s one of the most expensive mistakes that you haven’t mentioned during our conversation today?
Diane Gardner: I’m gonna say probably the top number one is failing to plan. Not realizing that you can plan your way to a lower tax liability. So many people think that just however it comes out is how it comes out at the end of the year when it’s time to do that tax return, not realizing that with some planning and some foresight we can drastically change the outcome on a tax return.
Joe Fairless: During that planning side, what’s one tactic within the plan that is important?
Diane Gardner: Finding an accounting professional who is a good fit for you, somebody who understands the type of industry that you’re in, somebody who is going to proactively put together a plan that will last you for the next 3, 4, 5 years, that will take into account what your goals are, where you plan to be with your business, and being able to implement the appropriate strategies, which is why I highly recommend somebody who’s got the letters CTC behind their name, which stands for Certified Tax Coach.
Joe Fairless: Alright, Diane, thank you for being on the show, sharing various strategies to save money on taxes. You’ve given us more than five, but I’m gonna mention five:
1) Making sure we’re in the right entity type
2) Automobile deductions, tracking the costs, tracking the mileage
3) Meals and entertainment
4) Hiring family in our business. You’ve hired your mom, and we’ve talked through that specific example
5) Monetized installment sale agreements, which you talked through a little bit.
Thanks so much for being on the show, Diane. I hope you have a best ever weekend, and we’ll talk to you soon.
Diane Gardner: Joe, thank you for having me on your program.
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