Two Tax Categories Every Business Owner and Real Estate Investor Should Know – Episode 683

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[00:01] Welcome to the Prosperity Podcast. Prosperity thinkers, welcome to the podcast. We previously had been talking about taxes and the difference between W2 and self-employed and things that we can do to have control over our capital and things that we can do to protect ourselves. No loopholes following the tax code, we didn’t cover two of the big categories. So, Kem, take it away. What are those two pieces right now? Well, the first is a business and you can think about this in tiny forms like a sole proprietor or which would be Schedule C, not the best, or an LLC and potentially even upgrading into the corporation realm and of course LLCs can be taxed as S-corps and C-corps and such and if you can generate 1099 income in any form that is so valuable for your family just

[01:00] for home office deductions and that kind of thing but even going further actually having a business and my husband and I have had businesses for so long I don’t know what we would do if we didn’t have them so it’s hard for me to even think in those terms sometimes yet I know that within a business we get to earn income and pay expenses and then pay tax on what is left over and so that is very valuable and it’s very black and white and they’re very clear again road map like we talked about in our last time together very clear road maps for how to do that within a business then I also want to address the real estate realm because sometimes for people especially the other w2 that’s the easier space to get into if a

[01:48] business doesn’t fit them so having investment real estate and you know just starting with something simple another single family home and airbnb that kind of thing and then having a management company for it etc enables such good deductions and I’m not going to get into detail I’m not a CPA but learn about things like bonus depreciation which is back and available again and all of the cost segregation things that you can do with real estate so those two things in particular are worth learning about and this is the best part if you don’t have investment real estate yet and even if you do learning can essentially happen for free so get tom will writes book get on your favorite ai get on youtube if you prefer

[02:39] to learn via video and learn about bonus depreciation and cost segregation both of those items should absolutely have help once you get to the point where you’re actually utilizing them you want to have a CPA that knows about this space and is doing the work with you nevertheless the learning is free and so if you feel like oh I have this already and I’m not taking advantage of it dig into the learning if you feel like I don’t have it and I want to take advantage of it dig into the learning because while you’re creating the down payment money that you need or whatever it is you can always work on the mindset which learning and adding to our own capabilities mentally is a part of that and so so valuable

[03:26] and helpful so again on the business side 1099 income on the real estate side bonus depreciation and cost segregation and then I want to add one more and that is for those accredited investors out there the oil and gas space or the energy space it’s sometimes talked about as and it’s a space to be very careful because there’s a lot of easy ways to lose money in it nevertheless it is one of the very valuable tax deductions that can happen legitimately black and white following a road map because the government incentivizes us Americans to invest in that type of environment Tom Willwright’s actually got seven investments that he talks about in one of his more recent books and that’s a big one and

[04:16] Spencer you may know some others especially for accredited investors that might be fun to chat about briefly absolutely you know there’s a variety of things for accredited investors that we can do you know it it can get obscure so I’ll go into the obscure just because it’s helpful but like for example for the motion picture industry there are tax credits that you can get there there’s tax credits that you can purchase from Native American tribes there’s tax credits that can be for growing trees because it’s a tree that produces carbon offset solar etc so there’s a variety of things out there you touched on something that was really interesting and I want to circle back to it which is this so Tom Willwright and we talked

[05:04] about in the previous episode I remember one simple thing that he did that has stuck out in my head Tom built a casita behind his house why did he do that Kim so that he would have a separate building whereby he had a commute to go from house to office for his work whether it was podcasting video work or just actual CPA strategy work that he does and so that commute is very important and again if that’s not something that you’re familiar with and you want to learn a little bit about it that makes some additional home office business deductions more valid and even more black and white and crystal clear to take and be completely legitimate about it yeah I love it so that is a deduction that can happen there’s other things that we can

[06:03] do and again we’re covering a lot of stuff in this episode if you have specific questions go to hello at prosperity thinkers.com now regarding real estate if you own a business your business has to have an annual meeting well you can go to a destination or you can do something where maybe you want to get a further deduction it’s called the augusta rule so you can go and get a deduction by renting one of your properties to your corporation we’ve talked about you know owning airbnbs or properties like that have you seen a lot of people that you’ve worked with maybe their spouse gets a real estate license so they become a professional to get that did I talk to us about that yeah that’s interesting

[06:49] space and actually you can be a real estate professional without having the real estate license as they work to refine that maybe it’s collapsed but that is 750 hours which is about 15 hours a week so it’s not a small amount of time and it’s important that you don’t have a w-2 which is why you mentioned spouse this is ideal for a stay-at-home parent to then do the specific real estate things that are necessary as a real estate professional in order to deduct real estate investment income against other earned income like your spouse’s w-2 income now it is interesting because it also lets you get into the arena of deducting losses which I always find kind of funny because again tax tail wagging the financial dog

[07:45] we don’t want to be taking on real estate investment property that is creating a loss and yet a lot of people do thinking that somehow that’s going to benefit them from a tax standpoint and maybe it does nevertheless be conscious of that and I want to add that sentence too to all the fun super cool unusual tax plays that you mentioned earlier like the Augusta roll like some of the other things around the solar and you know the more unusual spaces because those can be again very valuable but they can really be tricky and holy cow have I seen a lot of money lost and a 100 deduction is not what you’re seeking so make sure that your emergency opportunity fund are very solid make sure that if you choose to invest in those

[08:36] realms that it truly is money that you can lose same with oil right it’s literally a hole in the ground sometimes and yet they’re fun to talk about they’re super effective some of the time and they can be very detrimental because not only are you losing money occasionally it really affects people’s psyche when money like that gets lost and it’s hard and so I think sometimes I’m more than cautious because I have seen so much money lost in those special types of programs you know it reminds me back in I want to say the 70s when all the golf pros were starting to make their millions and they were doing LLCs at the time that were no sorry they were doing limited partnerships at the time that were the hottest

[09:26] tax play and many of them have said afterwards we would have been better paying our 90 percent tax bill because at least we would have kept 10 percent that’s so true that’s so good you know I think it’s just as humans what happens is we want to go for the awesome sexy thing and the complex thing often because it’s it looks cool like that’s why we drive that’s why some of us drive exotic cars you know the honda the toyota is what gets from point a to point b so here’s the piece that I think about often we have the simple real estate that you’ve mentioned owning an airbnb and while that I think the large window of opportunity of that has closed for the most part not saying it’s closed but it’s trunk in

[10:16] many cities yeah but there are opportunities one you mentioned at the beginning of the episode like we have to get educated we have to learn and for w2 people it may be easier or better to invest in a re like a real estate trust or it may be better to be in something that’s not as complex instead of taking on the entire rental property or an undervalued complex have you also noticed that some people tend to get in over their heads when they start to do this and what’s the kind of counsel you would give to say hey watch out yes it’s a great question so absolutely I’ve seen people in over their heads and I’ve also seen people working the deal the best that they could and they’re earning four or five or six

[11:11] percent which to me is not worth the risk in the time and so I would encourage people to find a deal that’s double digits or don’t do it because it’s frankly very safe and certain to earn four or five percent on money you can do that at a bank you can do that without tax in a life insurance company and that is just writing a check and letting it happen you don’t have to do a thing and in fact if you do the life insurance that’s guaranteed to go up every year and then dividends on top are what equal that four to five percent without tax and though we have to say that dividends are not guaranteed to be paid they’ve paid the dividends for well over 100 years all of these mutual life insurance companies like guardian new york life

[12:03] mass mutual penn mutual lafayette probably some others I can’t think of right now so very simple to do that plus once the dividend gets paid it becomes part of the guaranteed cash value guaranteed to go up again so even though the dividend is not guaranteed to be paid once it gets paid it becomes part of that guaranteed cash value and so it’s just a very easy space again to earn the four or five percent without tax and that’s in today’s realm which there have been other years when it’s higher than that and so I just really caution people to go slow start small make sure you have an emergency fund then make sure you have an opportunity fund then do some pretty normal investments you know an index fund or

[12:52] something simple in the real estate realm or business if you’re headed that way and then pursue some of these fancier things that we’ve talked about today absolutely what is the business entry like we’ve talked about real estate what some of the entry points are from your perspective what are some of the business entry points if we’re talking w2 or let’s say someone in their late teens or 20s yeah well for sure you can do a very simple schedule c sole proprietor get some 1099 income and prove the concept fairly quickly you’re going to want to upgrade your legal entity to an LLC a limited liability company so again if you’re not familiar with that go do some learning then if you have the capacity to

[13:43] purchase a business and it fits your colby profile k-o-l-b-e if you’re not familiar with that then a franchise is a really good way to go however if it does not fit your colby profile please don’t purchase a franchise you will be miserable for example kim probably spencer should never purchase franchises because we don’t want somebody else telling us how to run things and yet that’s a very valuable aspect of franchising so those are the first steps that i would take and then something else that i heard recently which i think is so helpful and that is if you want to pursue a business i’ve got a client doing this right now with some fairly large dollar figures you know he wants to buy a quarter million a

[14:28] million dollar type business in that space make sure you follow your talents so a lot of people say follow your passion and that’s great that’s certainly one perspective but if you follow your talents you know that you will enjoy the very hard work that is necessary for a business passion is kind of a come and go thing and it can shift talents god-given installed the day that you were born gonna be there the day that you die this is why i like the colby analysis around talents it’s so helpful gives us english language to describe them and if we follow our talents technically we’ll never work a day in our lives if you view work as a four-letter word which i don’t personally but i know a lot of people do so that is my

[15:17] perspective on the purchase of business and to finish out the story real quick my client that’s looking in that larger space looked seriously heavily he had consultants helping him and in the end he decided to stay with his quite high paying w2 job because it did fit his talents and frankly darn was it easy when you compare it to owning a business so for everybody that’s true i think a lot of people they get infatuated with the idea of owning a business and what they end up doing is they start owning another job and you’ve seen this as you’ve set across the screen or the table from meeting with people for decades and decades you’ve been able to help guide based on principles not based on where the wind is pushing at the moment and that that is

[16:23] something that’s really cool you have those relationships with tom you have the relationships that you’ve built and been able to see what is going to work not just for today but for decades in the future so kim amazing wisdom today really appreciate it for any of you listeners what kim is saying is get educated as much as possible and the podcast if you’re subscribed is one of those tools the plenty the library of books that you’ve written is amazing and then if you have a specific question hello at prosperity thinkers.com thanks kim thank you for listening to the prosperity podcast to take control of your money and have it work for you visit prosperity thinkers.com