Craig Cody: Well, as you know, I was a former New York City police officer, I had a great run for 17 years, I retired, I went to work for an accounting firm that did a lot of international work; I slowly built up my own firm, and now I’ve been on my own for a number of years now. I have a staff of ten, three other CPA’s, and we’re focused on tax planning for business owners and real estate investors.
Joe Fairless: Alright, well that’s what we are – we are business owners and real estate investors, so we’re in the right place. Your latest book, Ten Biggest Tax Mistakes That Cost Business Owners Thousands – what are some mistakes that are made?
Craig Cody: The biggest one is failing to plan. People don’t communicate with their CPA, their CPA doesn’t communicate with them; most accountants are really good, they put the right numbers in the right boxes, but it kind of stops there. There’s not enough communication back and forth, and it takes two to tango; it’s not just their fault. But people spend more time researching a call than they do structuring their real estate, how to depreciate that real estate, where if they took some time, they’d probably save themselves a lot of money.
Joe Fairless: So now that we’ve heard that, what do we need to do in order to plan? How should we approach this?
Craig Cody: You need to work with your team of advisors, who should be a CPA, an attorney and whoever you work with in the real estate field, and get the information that they’re experts on; get that information from them and share it, and make your decision based on that information versus just flying by the seat of your pants and not using your resources.
Joe Fairless: So drilling down a little bit more specifically, I want to make sure — so a CPA is a team member, an attorney is a team member… What did you mean when you said “whoever you work with in the real estate field”?
Craig Cody: That could be the broker that finds you your deals, it could be your finance person that finds you the money… Whomever you have that’s part of your team and helps you do your transactions.
Joe Fairless: Got it. And why are they involved in this?
Craig Cody: Well, everybody has their own area of expertise, and isn’t it better if everybody talks together? I may say “I think you should do it this way, because you need to accomplish this” and the attorney can say “Yes, that’s a great idea, but if we do it this way, it’ll accomplish what you want, plus it will accomplish what I want”, and why not get the best use of that information?
Joe Fairless: Let’s just say it’s a broker, for example – why do they need to be involved in tax planning?
Craig Cody: Well, I guess when it comes down to the broker, if that’s the person that’s finding you your properties, you could probably make the point that “He knows how much I can spend, so he should be involved in that or he should know that I’m qualified.” I would say the broker might not be the tip of the iceberg, but all these people that are part of your team, whoever you use regularly to find your investments, purchase your investments, they should be involved in some level. I don’t see a lot of downside there.
Joe Fairless: Yeah, I’m just trying to identify what the purpose of them being there is, but if just more to know where you’re coming from, so they can — I don’t know. I’m not sure, actually…
Craig Cody: If you could get some value out of it, why not?
Joe Fairless: Got it.
Craig Cody: If you don’t think you’re going to get any value out of it, then…
Joe Fairless: Okay. Alright, so we’ve got the team – CPA, attorney and maybe someone who helps us get transactions or maybe not, depending on our situation. As far as failing to plan – I’ve rounded my team up, we’re sitting down; what do I say?
Craig Cody: Okay, let’s start with “What type of entity are we going to purchase this asset in?” If it’s real estate, it’s probably going to be an LLC; not always, but probably. You’d be surprised how many pieces of real estate I’ve come across that are in C corporations or owned individually. I’m not an attorney, but what’s the bad thing about owning that thing personally and what’s the bad thing about having that piece of real estate in a C corporation? Let’s talk and let’s figure out a way to do it that’s going to accomplish what everybody’s expertise is and get it involved in there.
Joe Fairless: Okay. After we identify what type of entity we’re buying it in, what other questions or topics need to be addressed?
Craig Cody: Okay. Well, let’s say we got it into an entity; how are we going to depreciate this? Are we going to do a cost segregation study? Is it a residential rental property? What’s the value of the building versus the value of the land? Am I going to save money? Is it cashflow positive? Am I going to save money if I do a cost segregation study? What is a cost segregation study?
Joe Fairless: For anyone who’s not familiar, then you just google “cost segregation Joe Fairless.” I’ve had a couple guests on the show talk about it.
Craig Cody: That’s something in the accounting world, but that is something that will help you keep more of what you’re making.
So you have your team together and you’ve chosen your entity, you’ve looked at depreciation… Now we look at “Okay, what other benefits can I get in the tax world? What can we do?” Can you hire your family? Do you need a home office? Do you use a home office? What can a home office do for you? How do I write off my car expenses? What other things can I be doing that I’m not doing that will generate tax deductions for me that are legitimate? Have those conversations. But if you don’t plan, you can’t have those conversations.
Joe Fairless: So number one is gathering the team, asking these questions, and thanks for giving us some questions to ask.
What’s another tax mistake that business owners are doing?
Craig Cody: I’m trying to keep them in real estate, so let’s talk about a home office. Are you managing your property yourself or are you using a management company? If you’re managing it yourself, where are you conducting your business? Are you doing it out of a home office? Are you taking advantage of everything that’s allowed inside that home office? Are you deducting a percentage of your utilities? Do you have an on-premise athletic facility?
The code says if you’re having an on-premise athletic facility, with a home office you can deduct the cost of that. That could be a pool, it could be a gym in your basement.
Are you taking advantage of medical expense reimbursement plans? Most real estate, if it’s not owned individually, it’s typically inside of an LLC, and an LLC allows you to have a section 105 medical expense reimbursement plan that lets you deduct the out of pocket cost that you have for medical expenses.
We see that with a lot of older clients, where maybe they’re doing a little bit of remodeling in the teeth area, and with the younger clients it’s braces and stuff like that, that are typically $6,000-$7,000 a pop, so they get to deduct that, which fortunately most people don’t get to deduct their medical expenses on schedule A, because they would have to be so large that it would have to be something very bad.
Once you have a home office, now you can write off your mileage from your home office to your different properties. It just opens up a whole lot of areas.
Joe Fairless: When you work with someone – and this can be a real estate investor or a business owner, because as real estate investors we are business owners, so if you need to think more broadly about this, that’s fine… What are the first steps that you do when you sit down with a person?
Craig Cody: The first steps we do is we get copies of their last two years’ tax returns. If they’re using some type of accounting software, we’ll get a portable file from them, and we’ll do an analysis. We’ll go through our analysis and we’ll basically uncover missed opportunities missed deductions.
We’ll present those via a WebEx or a Zoom call, and we’ll basically say “Okay, we see X amount of dollars in missed opportunities in deductions. That’s going to save you $20,000 a year. Over five years, that’s going to save you $100,000. If you want to do a plan with us, we’ll do a plan for you.
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