Danny Johnson: I’ve told listeners out there that you are an ex-NYC cop, certified public accountant. What I wanted to start with was just a little bit of your background. So speak to being a cop and then making the transition and then helping out to real estate investors, if you would real quick.
Sure. So before I became a police officer I was actually an economics major in college. I left, I followed my dad’s footsteps into police department. I thought I was going to become a chief. That was kind of my goal when I first started out but things change, you grow up a little bit and it’s civil service so you have to wait for tests etc. etc. So at some point I went back to my school for my accounting degree and I kind of fell in love with taxes. Then over time it kind of evolved into what we do now at my firm is we’re a full-service firm but we really specialize in small business and real estate investors. The first thing we do with every client is tax planning and that’s basically showing them ways to keep more of what they make.
And we all want to do that.
Exactly. Whereas most CPAs and accountants do a good job, they put the right numbers in the right boxes but it kind of ends there. They’re like looking in the rearview mirror, we’re looking at it forward.
Right. So what’s the background? How long were you a cop?
I was a police officer for 17 years. I retired as a lieutenant. It was interesting when I first started in the accounting field. I was working part-time during the day for a CPA firm and I was the new guy. I was making copies and that stuff. And I’d go into work in the city and I’d be in charge of 75 people out on patrol. So it was interesting because by day I was just a copy guy and by night I had all this responsibility. So, I did that for 17 years. I retired, went right to work for a CPA firm that did about a third of their business in St. Thomas and right away I knew I wanted to have my own business. So I did that for about 5 years and then I started to develop my own business. I left, I worked a little per diem for them which was a good thing for both of us. Then I was out of there fully and then 2007-2008 came around and got crushed, and I had to start all over again. That’s when I figured, “All right, I need to start something different,” and that’s where we started focusing on tax planning as the cornerstone of everything that we do. And here we are today. We have 10 people, three other CPAs here and we have clients from Oregon to South Florida.
Oh, nice. Let’s just get right into this because I know I myself I’ve got other people sort of handling this for me and kind of trust that it’s being done correctly and who knows. It’s one area that I know that I need to focus on a little bit more. That’s why I’m glad to have you on the show because probably the majority of investors out there that are busy running their business and don’t take the time to figure this stuff out. So did you want to talk about the three proactive tax planning strategies that you give most of your clients?
Sure. I just wanted to say when you had that question, you trust that it’s being done right. It’s probably being done right. They’re probably putting the right numbers in the right boxes. But the thing is, does it end there? So I would say most times the work is done right, it’s just not all the other things that they can be doing.
So the three biggest things that we see are: Number one, failing to plan. People, they go out and they buy a car and they spend all this time researching the car. People aren’t looking for ways that the tax code says you can do things differently and save money. I mean, Trump, Buffet, all these people with all this money, they have teams of people scouring a code to see how they could do things differently to save money. And the average guy out there is not really doing any of that. So that’s failing to plan.
The wrong business entity. Even in real estate if you’re an investor, are you holding your real estate in your own name? Are you holding it in a corporation? Typically, not always but typically real estate is best held inside of an LLC, but not always. So you need to speak with your attorney and your CPA. That can be costly. It may not cost you dollars today. It could cost you dollars, God forbid something happens to you and you die and it’s inside of a corporation, the asset itself doesn’t get a step up in bases. The company does. So if you go to sell it, your heirs wind up paying tax on basically the difference between what you purchased it for or the depreciated bases and the value today versus if it was in an LLC, they sell the next day, conceivably they’re going to have no tax. So that’s really important and we see that a lot.
Then there’s a lot of different things you can do with real estate where you could take advantage of different things such as if you have a couple of properties or one property, you can hire your kids and let your kids if their local properties go by and check on the properties. Cut the lawn and do that kind of stuff and by paying the kids, you reduce your income and they typically don’t pay any tax on it. We use that strategy a lot. The tax code says you can hire your kid is – actually in tax court was 7 years old. I like 11 and 12 years.
So is there a limit on the amount that you can pay them?
Well, it’s not a limit but 6,000 is kind of where now all of a sudden they start paying taxes. It may not make as much sense but it has to be reasonable compensation. One way to look at it is like this. If your kid is going to private school or maybe he’s going to a sports camp and let’s say it’s costing you $5,000 and you’re paying that with your own money after tax. So that might be 9,000 in gross before you net that 5,000. Whereas if you paid your child that money, it goes into his bank account, he’s making under this let’s just say $6,000 limit, he pays no tax and then when it’s time to pay the camp, they just draft his account so you just turn them to tax-deductible expense. That just takes a little time to do a little bit of planning. UPDATE AS PART OF THE NEW TAX LAWS PASSED IN DECEMBER 2017 THE NON TAXABLE AMOUNT IS NOW $12,000. YOU SHOULD REVIEW THIS UPDATA AND THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.
Get your copy of my book the 10 Biggest Tax Mistakes That Cost Business Owners Thousands here.
Listen to the full podcast episode here.