Course 3: Tax

Transcript:

Hello, and welcome to another edition of Wealthy and Wise, I'm your host Cort Christie. Today we're going to be talking about year-end tax strategies. What should you be focused on to minimize the amount of taxes that you are paying to the IRS, to the state tax agency, and maybe to the counties and cities that you're paying right now. So I want to help you, and in order to reduce your taxes, I brought in an expert on this, we have Adam Kintigh. Adam has been consulting with supporting NCH clients for almost 20 years, a very long time. And Adam is one of our specialists in so many areas, but he knows taxes like nobody knows taxes. So, Adam, thanks for coming to the program today.

Thanks for having me.

Awesome. Well, let's just talk broadly, what should our clients be looking at? Here we are, we're coming into the end of the year, and this is an opportunity to reduce our taxes. You know, if you haven't been thinking about taxes, you should have been thinking about taxes, but it's never too late.

Absolutely. So the the first thing that we have to look at is what have you been tracking CPAs are only as good as the records you keep. So the goal is we want to make sure that we have if you've not yet started, a simple monthly expense report, documenting the date, dollar amount, who you paid a brief description of what it was for, and always keep your itemized receipts.

So the big question we get is, okay, well, what should I be tracking? It really depends on the size and scope of your business. There are a lot of variables, but my rule is, that I would rather you keep track of too much than not enough, it is the CPA's job to make sure we back out of anything if we're being too aggressive. But the main thing is we're looking at, if you have a home office, making sure you document that if your home office is 10% of the square footage of your home, your company owes you 10% of the monthly payment, and 10% of the utilities electric gas, water sewer. If you have cell phones, cable TV or satellite internet access, and travel costs, you should be tracking your mileage 58 and a half cents a mile that we get this year, the company owes you 58 and a half cents a mile or the company might need to just buy you a new car in which the company is going to pay the monthly payment insurance, gas maintenance and registration. If you go out d by yourself, you cannot write that off, have breakfast, lunch, or dinner with anybody else, make sure you keep those receipts. As long as it's a business meeting, then you can write off 100% of your meals, I think this is the last year that we get to write off 100% of meals.

Okay, so that was one thing that came into play here in the last couple of years. So you're saying writing off all your meals is going away next year,

It is going to 50%.

So back to 50% where it originally was. So this is the time to write off any meals that you've got any business dinners or whatever you have, this is the year for that.

Absolutely. Now, one of the big changes this year is that this is the last year we get bonus depreciation on vehicles. So you'll see I'm from the Midwest, and every year we get around October, November, so when the farmers start buying the new trucks when they need them. So we look at how much money you've made, then we're going to look at the amount of tax write-off you get. And if you buy a vehicle that is 6000 pounds or more as the gross Gross Vehicle curb weight, then you get to write off 100% of that vehicle. So they've got this really nice Porsche that I've been eyeing. It's a $300,000 that meets those requirements. And the great thing about this deduction is you get if you buy the car, even if you finance it, you get to write off $300,000 against your expense immediately this year, that is going to start phasing out I think next year it goes from 100% down to 70%. And it starts waning, is that as that deduction runs out.

So do you have to justify the vehicle type? So for instance, what if somebody wanted a very expensive car, like you're saying, maybe it's a Porsche SUV? Or I've seen these very expensive Lamborghini and crazy cars and their SUVs, and they're very heavy. Does it have to be a truck of your contractor? Or could it be a really nice SUV?

It's the IRS rules are ordinary reasonable expenses, or necessary expenses for your business? And if you're a contractor, does it make sense to have a Lamborghini? Well, it depends on what type of contractor you are, because that might need a Lamborghini to attract a certain type of clientele. So there is always that justification, but this is why we hire and pay CPAs that's why right now is the time that you should be strategizing with your CPA, depending on your situation. What is it that fits your business, and what can we get out? With and what can we not get away with, because at the end of the day, we're all going to pay taxes. The amount we pay is really dependent on how well you and your CPA doing in planning out and seeing what we can and can't expense out for the year.

So everyone last year to write off 100% of a vehicle, a brand new truck, a brand new SUV, maybe a brand new luxury car that you want, and news for your business. What a great opportunity. Take advantage. What’s next?

Well, what's next is we start looking at now's the time. Especially for those people that are first year in business, we have to take a reasonable salary from your company. And when we say reasonable is typically no less than 30% of your net profit. So what does that mean for you as a business owner, the salary is the W-2 paycheck that you have to take from your company.

We have our wonderful partner ADP, which always recommends ADP, they do a great job making it easy to set up your payroll, they do all of the 940s and 941s at your state and federal withholdings. So they do those things. But we have to have that W-2 done before the end of the year. So when you start looking at okay, for 2022, how much money have I made as my net profit after my expenses, and we've got to take that reasonable salary. If not, you're going to end up having to give yourself a 1099. And we're missing out on these huge self-employment tax savings by not doing the W-2 before the end of the year. Don't wait until December, and then start scrambling to figure this out right now is the time you got to start planning these things.

Awesome. So important, these are the opportunities that you have towards the end of the year here to take advantage and keep looking for ways of minimizing your taxes, as Adam has had to say here. So Adam, how about on the retirement planning side? What can we do with that?

That's another great thing. So one of my favorite products is a solo 401k. So for many business owners, you're an independent contractor or real estate agent, you flip some houses you have active income coming in, this isn't for people who own rental properties and typically be of active income, you're taking that reasonable salary, and with a solo 401k, we can contribute 100% of your salary up to $20,500 as an employee contribution. If you are under age 50, over age 50 $6,500 Catch up, we're up to $27,000 that you can contribute to the 401K plan, that's you, your company can do a match equal to 25% of your salary up to 40,500 that the company can put in. So between your employee contribution and the company's employer contribution that's between 61 and $67,000 a year, you can contribute into this solo 401K plan, which is huge.

That's massive. That's a lot of money that you paid zero tax on today. I think that's the important point because a solo K is just a hybrid 401k product or program. All of us are familiar with 401K plans, but we're not as familiar with what a solo 401 K. But in this case, it's a one-person solo 401K plan. But to put away, you said 61 to 67,000, depending on your age of money away into the retirement plan, right before the end of the year, what a great way to minimize taxes in your business, otherwise, you're going to pay tax on it to the IRS. Obviously, we've got to have enough money to live on, right pay our bills, we're gonna take what we need to out to pay our bills. But beyond that, it's like what do we do to minimize the taxes that we're going to pay on the profit that we have in our business? That's fantastic.

So the interesting piece is, again, we talked about the W-2 has to be taken before the end of the year. If you're making contributions to a 401 K plan, the employee contribution has to be made before the end of the year and has to be documented on your W-2 pay stub you get. And again ADP. They're great at doing that and showing you how to do it.

The other side of it is the employer contribution, that 40,500 match that can go in that has to be made before you file your corporate return. Corporate returns are due March 15, one month before your personal if you file an extension that gives you until September 15 of 2023 to determine how much of an employer match you want to do, but it gets based on your salary. So those are things you need to be planning. Now, when you put the money in right now, we have to do that this year as the employee, but for the employer portion, we can wait and put that contribution in later on.

Remember, it's a write off too. So you have to have the profit in the business, or else you'll have a loss even if you kick the can and don't make the employer contribution till later. That's not how you want to leave your enterprise. So it's something to think about out, especially as you're talking to your tax professional, it's kind of like, what are my projections for my income this year? How much profit am I going to make in my business? And what am I going to do to pay as little tax as possible? Sitting down with a professional is so important in this process to make sure that you communicate, look at how things are going to be basically coming together at the end of the year, and then ultimately, what you're going to do to minimize your taxes. So what else do you have for us today, Adam?

So another great one is the real estate professional status. So over the years, we've worked with so many clients that they have started off part-time in real estate, and then up going full-time in real estate, whether it's owning the rental properties, managing rental properties, doing flips, they’re full-time in real estate, and one of the greatest tax advantages becoming a real estate professional. But it is so important that there's a high likelihood of audits, it’s one of the highest audit risks is marking yourself as a real estate professional.

So make sure that you document the hours that you're spending, and make sure you document the right hours. A lot of people think well I was online, and I was watching YouTube videos for at least two hours a day on this at the other end, that really doesn't qualify, that's not the education piece an hour is spent, get the material to participate in whatever real estate you're gonna write off as a real estate professional. So it doesn't have to be you, has to be either you or your spouse spinning 750 hours or more in real estate, our spending in real estate has to be greater than that of other sources of income. So if you are managing your properties, typically, there are some little loopholes here and there. But if you're managing your properties, and you are spending more time in real estate, and you can document that, then you can qualify as a real estate professional.

But again, so important to talk to your CPA now, because that tax professional might look at your documentation and say, listen, based on the information that you have documented so far, you might be a fool to try and take that this year. Because if you get audited, we really don't have an appropriate log to show or prove those hours.

You see if combined between you and your spouse, 700 hours?

750 hours, one of you has to qualify for the 750 hours by yourself. The material participation can include hours from your spouse. So there's a again, different rules behind that. We'll save that for another day. Okay, but all those things have to be documented properly, and your CPA might look at your documentation. So based on what you do, I'm okay with what you have, yes, we're going to take that professional designation, which is the only way to sidestep these passive loss limitations as you build out rental portfolios. So we got to start documenting things, making sure we're tracking the right things. And again, right now is the time to do that planning, because it could save you 1000s of dollars.

You mentioned watching YouTube videos, it's just kind of learning about real estate a little bit differently. But what if I'm researching in my marketplace, going through commercial platforms like Loopnet, or Zillow, and looking at pricing and comparing comps in different parts of that area? Is that all considered part of your work?

Yeah, so researching the actual properties than your market that you're looking at, that counts toward the hours that you're doing. It's the education pieces, I went to a conference this past week and went to Louisiana and I left Friday morning at seven o'clock, and I got home Sunday at 630. And I calculated over the course of that four-day period, I ended up spending x number of hours, which does not count the travel to and from that city, the hours that I spent in a conference, don't count toward my hours that I gonna meet with my 750-hour rule

Makes sense. But it's certainly something you want to look at and take advantage of because those passive losses can grow and grow and grow. And then you got to figure out when am I going to be able to take these losses and offset them at some point in time. These are fantastic ideas. Another one that I love, and I know you have a whole bunch of ideas, but we have limited time today. It's just taking advantage of travel with your business entity. And we always talk about it in terms of every year if you want to live the corporate lifestyle, you're gonna write off travel for your business, and it could be traveled to your favorite location could be travel, that is to Hawaii, let's say but as long as there's business activity or you're having your annual meeting for your business, you can write it off.

But what about Adam at the end of the year? What goes on? Well, we have a bunch of holidays, right? There's Thanksgiving, many people travel, and there's Christmas. Many people travel, there's Hanukkah many people travel, well, where are you going to be traveling in the next couple of months? Could that travel tie into a business purpose? So you could tie in the holidays with having your annual meeting somewhere really cool that maybe you bring your family to, or maybe you're in the real estate world, right? You could be certainly you could be looking at real estate in different markets.

Many of our clients have properties all around the United States. Well, as you go on your travels, you also could be looking at real estate in those areas. As long as you've documented things properly, gone out and kicked some tires and looked at what was happening, maybe met with a real estate professional in that area, took the business cards with you made notations of this, you're able to write off a large percentage of that travel. And so these are all things you want to talk to a professional about. But these are great ways of minimizing the amount of taxes because you're going to pay for this travel anyway, why not have the business pay for your travel way better, and more cost-effective, because the money that you use, every dollar in your wallet is after-tax money. But every dollar in our businesses is pre-tax money. So just something for you to be thinking about. I'd rather use pre-tax money than after-tax money all day long.

Absolutely. One last thing, a cool reminder for everybody is that make sure you get the W-9. So, anybody that you have paid from your business $600 or more, must make sure you get a W-9 because by January 31, we must send out the 1090 nines in order to 1099. Someone that's letting the IRS know who you paid and how much we have to make sure we have the W nine to produce that 1099 your CPA is going to ask for it your tax professional and say, Okay, where is this information for Joe Smith, the plumber, or whoever you might have hired, there was $600 or more. So don't forget those W-9s get those now, because Sure enough holidays start happening. Tracking down the contractor or prison you paid could become challenging. And you're gonna need that to complete your taxes accurately and follow the right rules.

And yes, there's work to do when it comes to taxes, planning paperwork, and documentation. But trust me, it's worth it. Taxes are the single largest cash outlay that we all pay each and every year, when you start adding up all the taxes federal state, county city all the way down, we pay a ton of taxes. And that does include sales tax, gas tax, and all the other things that we pay in addition to that, so a little bit of planning goes a long way to minimizing your taxes.

Adam, thanks for sharing such great ideas for all of us for this year in tax planning episode. I appreciate you being on the program today. And if somebody has questions, Adam, about taxes, and they want to get a professional, can they call you and get set up?

Please, call NCH talk to an expert. Let's make sure you're you're getting everything planned out now and get you set up with the right professionals.

So one of the things many people don't realize is NCH has an incredible tax team. These folks understand small business owners, they understand real estate and investors they understand our clients really well. And the difference between working with one of our professionals versus someone that maybe you've used in the past or somebody in some strip mall somewhere is they don't understand business owners really well. Our tax professionals know business owners inside and out and they're gonna prompt you they're going to ask you a lot of questions, and they're gonna find tax strategies and tax minimization things that you can be doing right now, just in the course of asking you and talking to you about what your business is and how do you operate your business. They have great advice and great strategies. So use a business tax professional, not just a tax professional when it comes to your business needs.

All right, Adam, thanks so much for being on today. Thank you each and every one of you for tuning in to another episode of Wealthy and Wise, I'm your host Cort Christie. Have a great day.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.