Shauna the Tax Goddess on Legally Avoiding Taxes
Automated Voice 1: Welcome to the REI Diamonds Show with Dan Breslin, your source for real estate investment jewels of wisdom.
Dan Breslin: Shauna the Tax Goddess, welcome to the REI Diamonds Show. How are you doing today?
Shauna: I am doing fantastic. Thank you so much for asking, and how are you, Dan?
Dan: I am also fantastic. I was excited. I was excited when I saw the booking agents get us on the show. I said, look at this tax strategy. Itโs one of these topics that Iโve spent a good chunk of time reading over the 15 years Iโve been in business or so. Iโve had to learn so much of it myself. Thereโs people that I run into who are like, โI donโt really have anyone. I kind of need the right person.โ So I was like, all right, great. Weโre going to do this episode here and weโre going to talk a few scenarios. Maybe you are that type of person for people whoโve had that issue. So the big problem that I want to highlight before we get into the show is anyone whoโs read The Snowball, Warren Buffettโs biography. One of the big lessons for me in that book was tax efficiency. When youโre not knowledgeable and intelligently structuring your business affairs year over year over year aware of the taxes, the taxes are chopping your gains down so that at the end of 15, 20, 25, 30 years, you may end up with a lot less than your efforts probably should have afforded you. So thatโs the big problem that weโre really going to talk about a few of the solutions. I think everybody has a custom scenario here whoโs probably listening into the show. So weโll touch on a few of those. But before we get started there, would you mind giving the audience an overview of the tax goddess?
Shauna: I would love to. Thank you. So, Shauna the Tax Goddess, own a firm, tax goddess. At this point, weโve got a little over 105 people in 17 different countries in the world, all focused, all trained on U.S. taxation. Now, really, I think the biggest thing and where people kind of get a little confused is, โListen, Shauna, youโre a CPA. Iโm a CPA, masterโs in tax. Iโve got a bunch of letters after my name. Whatโs really the difference between a standard CPA and a tax strategist?โ If you look at it from the statistics, according to Google, there are 665,000 CPAs in the U.S. CPAs do all sorts of things. They file taxes, but theyโre also auditors, controllers, CFOs, bankers. I mean, they do all sorts of things. As you start to go up the chain specializing in tax strategy, there becomes fewer and fewer and fewer of us that really work on tax mitigation, minimizing that tax burden for business owners, for investors, for anybody involved. So when you start to look at these levels, the 665,000 CPAs, thereโs only 60,000 that have masterโs in tax. There are 607 that are considered certified tax coaches. As you go further up that chain, thereโs only 15, one, five, that are what are called certified tax strategists. So we are the top of the top of the top of the food chain. So when somebody says, what do you do thatโs different than other CPAs? Generally, a CPAโs job is to keep you out of jail. File the forms, check all the right boxes, keep you out of jail. It is not their job to deep dive, dig into every strategy, create a customized plan for you. Because as you said, you could be married with kids. Iโm single. Iโve got dogs. You have cats. Every piece on the chessboard changes the customized view of a custom tax plan for that individual. Because there are no two sets of facts and circumstances that are identical that just doesnโt exist. So when you want to save the big bucks on taxes, you start looking for a tax strategist versus just your day-to-day CPA.
Dan: Thatโs interesting because I mean, Iโve literally said this on like four or five of the last episodes. Iโm like pleading to the audience to take responsibility for your own tax plan. You have to learn these strategies, bring them to your CPA, et cetera. One of my business partners was asking, โI need like a good accountant to handle my stuff.โ All the accountants said that, we know Iโll file the taxes and we bring our strategy. I bring my strategy to them. I donโt know about this. They go read the law and then theyโre okay with it and we get it done. I think in an ideal world, as a business owner, I would want the CPA to bring ideas to me.
Shauna: Amazing how that would work. You nailed it because people donโt know what they donโt know. Again, CPAs arenโtโฆ letโs back up. The benefits of me having a team of 105 people, all I do is read court cases, read strategies, go hunt down new stuff so that I can bring that to our clients. But Iโve got CPAs on my staff too. They donโt have time for that. Theyโre in the middle of tax fighting season. Theyโre trying to gather documents. Theyโre preparing tax returns. Theyโre doing your books. Theyโre doing the day-to-day kind of stuff and we need those people. Whoโs going to file your return if we donโt have the CPAs and the bookkeepers? We need those team members. But I think thatโs the big piece here is that when people think about their financial team, the one person is, Iโve got a CPA. Thereโs more on your financial team than just your CPA and especially real estate investors. You guys know this. You have to have a good broker, banker, real estate mortgage broker. Youโve got to have a great insurance guy. What if thereโs a claim on the property? Youโve got to have a good legal person on the team. The tax strategist, the CPA, the bookkeeper, these are three additional financial people that should be a part of your overall team and they all work together. If youโve had your CPA for 20 years, great. Keep them. As long as they do what you said, because we donโt often hear that. Iโm going to bring a strategy and they go, โYes, let me read that. Letโs see how I feel about that.โ As long as theyโre willing to have their eyes open and theyโre willing to read the code or whatever the court case, whatever it is, thumbs up from the tax goddess, 100%. Because we normally, in about 70% of cases, we run into the other kind of CPA. I havenโt done that in 20 years and Iโm not doing it. Time to find a new CPA. Things change. Literally, I think every day from the IRS, I get three updates, three. In each of those updates, thereโs at least 15 court cases a day. Literally every day the code is changing. Only a few people have time to keep up on all that.
Dan: Yes, and like, maybe one of the big problems, at least for myself, I remember thinking I had a CPA. So Iโm probably like eight years into this relationship and the guyโs doing my taxes and they ask for the CPA letter when I go to get a mortgage. We need your CPA to sign this thing. My guys like, โIโm not signing that because Iโm not a CPA.โ Iโm like, โWhat the hell do you mean youโre not a CPA?โ Here CPA is this certified public accountant. Itโs like another certification.
Shauna: Itโs a thing, yes.
Dan: So you said 65,000 of those exist in the US. Whatโs the number for people who are like accountants and tax preparers? I mean, thatโs got to be several hundred thousand.
Shauna: Yes, and let me back up. CPAs is six hundred and sixty-five thousand. So almost 73,000 CPAs. So if youโre adding. Bastards in tax have about 60. Like thatโs where you start to specialize. If youโre adding the unenrolled preparers, the EAs, just, you know, Uncle Bob that does taxes out of his house down the corner. I donโt even know. I mean, weโre easily talking a million easily.
Dan: Yes. Even more. Iโm liking this too. I think a good analogy for us would be the medical industry. I think people relate to that. I go to the general practitioner and I have this issue with my foot and they refer me to the podiatrist or Iโm having, heart issues and the test came back and now Iโm going to see the cardiologist. So youโre being sent to the specialist, but there is no general practitioner and nobodyโs pointing the way toward the strategist in the accounting world.
Shauna: A hundred percent. Well, then even most CPAs, even most tax preparers donโt really even realize that there is such a specialty. They know that they donโt do it. I mean, the most common situation that we hear. We call it the low hanging fruit. A good CPA is going to tell you, โDo you need a new car? Letโs go buy one, thatโs more than 6,000. Are your kids on payroll? Letโs go do that. Are you writing off your home office? Letโs make sure you have the proper documentation.โ Thatโs your low hanging fruit. All good. What we consider a good CPA is going to tell you those things. Those are basic. Theyโre baseline. If you have a business, you should be doing this stuff. Where you start getting into tax strategy. You and I mentioned it a little bit earlier before we got on Cost Seg. Now, if you were a real estate professional and I, Iโm sure you guys have heard this 30 billion times. If youโre a real estate professional and you go to your CPA and you say, โCan you just kind of give me an overview? What does Cost Segregation mean?โ You see the blank stare and you were hearing crickets in the background. You run away. You go find a CPA that at a minimum deal with real estate. Because cost said, if the CPA says theyโre a real estate CPA, thatโs your low hanging fruit. Thatโs the baby basics that you should be doing, but you know, as a taxpayer, as a client, you donโt know what you should and should not know and who should and should not know these things. So I love the fact that youโre like, I read, I research, I ask questions even for us, read the wall street journal. They bring stack tax strategies, read, go look. There are newsletters that are tax strategies that even though theyโre considered baby basic strategies, itโs a great place to start because as a taxpayer, your job is to go out and make money. Our job as a strategist is to keep it free. So we got to work together.
Dan: That makes sense. So we kind of have like tax preparation and planning 101 or 1.0, we could call it tax planning. 1.0 is your CPA is writing off your 6,000-pound vehicle. I can remember back in 2006 when I first found out about it and hurt maybe it was seven. I ran out, bought a Yukon Denali and it is 6,000 pounds. I thought Iโd found likeโฆ
Shauna: [inaudible] absolutely.
Dan: So that, thatโs 1.0. Youโre writing off your gas because youโre driving everywhere. Youโre tracking your mileage because of the automobile expense, your kids are on the payroll. Youโre writing your cell phone off and all these kinds of things. Thatโs a tax planning 1.0, then tax planning 2.0 would be something like the Cost Seg. Maybe thereโs a tax planning 3.0 or maybe itโs just 2.0, but what.
Shauna: A four and a five and a six brother, depending on where you want to go.
Dan: Weโre only going to three on todayโs show.
Shauna: Weโll do a part two at level eight. I love it.
Dan: Maybe you could fill in a couple of holes. So Cost Seg, Iโm calling 2.0. Are there a few other examples youโd plug in 2.0 and then maybe weโll switch gears and give me a few examples of 3.0, which might be like a little more advanced. Maybe if you have them because we have a real estate audience, maybe in the real estate space might make sense.
Shauna: Love it. So letโs go with 2.0. So if Cost Seg is a 2.0, the next one thatโs 2.0 is if you bring your dog with you or you have any business purpose for your dog. And Iโm seeing the big smile on Danโs face. Now let me back up, Dan. I have five dogs, five. I have a Connie Corso, two German shepherds and two boxers. Now big ones. Theyโre, theyโre all big. Very fair point. Chihuahuas are not going to work for this right off. Like itโs got to be a good size puppy. So you have two different ways that writing off dogs can work. One of them is security. So we see a lot of single female or females that are going out and doing their job on their own. So youโre going to fix the plumbing. Youโre going to meet the construction guy at the site, like whatever it is. If your dog comes with you, you now have a security with you. If the dog, the basic, thereโs three requirements. The dog shoulder must be taller than the height of your knee. So again, Chihuahua not going to work. The dog has to have basic training sit, stay calm. The dog has to have a business purpose. If youโre going out to a construction site at six oโclock to meet the plumber, you maybe donโt know that plumber. I mean the dog Scott, thatโs a business purpose, your security and your ability to make money is because you have to transact with other people. So now weโve got the dogs written off. Weโve got the Cost Seg written off. One of the other big ones that a lot of people donโt realize is that depending on how youโre selling the business. Like, are you selling, are you fixing flipping homes every month? Whatโs going on there? Or are you doing this more? You buy the house, you move into it, you live there for two years, you get the nice little home exclusion on the flip and you do that every two years. Depending on which way you go, there are specific strategies for selling the property. So if you buy and hold, if youโre a long-term buy and hold, you can use installment sale trusts. Thereโs different ways to kind of put a median in between you and another, the buyer. So installment sale trust, you could do 1031s. If youโre kind of maybe getting older and you want to get out of the real estate, the physicality of the real estate, but you still really like real estate as a general area of investment, you could switch, do a 721 to go from real estate property to a REIT. So thereโs a lot of strategies on the sales side. Then I suppose day to day, level two kind of day to day. The other big one that I think gets missed is actually using the masterโs exemption. Now a lot of the real estate and sometimes itโs called the Augusta rule. Sometimes itโs called the masterโs exemption.
A lot of real estate professionals will look at this from the standpoint of, Iโve got a property in Scottsdale, Arizona. Every year when the Rose bowl comes in, I can rent it out for two weeks out of the year and make a hundred thousand dollars and not have to rent the property out for the rest of the year. Completely tax free. Like this, this is great. You can also look at it the other way, which says Iโm renting out the property for 365 minus 14. So 351 days a year, itโs a rental property and I get two weeks of free vacation in Maui, Bali, wherever this property is. So using the assets that you have to make sure that not only are you getting the best tax deductions, but things that are personal expenses like your two-week vacation are actually a tax deduction instead of having to be paid out of your personal pocket.
Dan: The last one there would be like a strategy for buying your vacation home then. That would have been the tax plan is, you love Phoenix, Arizona and look at it this way. That would probably have the short term rental attached to it. That kind of thing.
Shauna: Absolutely. You can use it either way, which I love. Even your primary home.
Dan: Iโm assuming on our security dog and the right off and the whole thing. I donโt know if anyone else listening has a dog, but you know the wrong year with dogs and the vet vet, we got the surgery. I mean, youโre nine, $10,000 a dog in a tough year and itโs not an easy year either because the dog is not a chipper and tail wagging. So itโs stressful, but to be able to take the right off as an interesting concept. So Iโm assuming you mustโve read the, there mustโve been court cases that you read.
Shauna: Thatโs where you canโt use the chihuahua. Super interesting. I mean, the shoulder thing came from the court case. Itโs got to be, the shoulder has to be taller than the height. Thereโs only, there are some breed allowances. So for example, if you have a pit bull, often theyโre shorter and more squat. They qualify because of the breed. Like they will absolutely protect the family or protect the person or pretty. So there are some breed allowances, but yeah, these, these are the types of things that the CPA thatโs filing your tax return, they donโt have time to read all the court cases. Like thatโs why you ask for a strategist. Thatโs our job is to know those details.
Dan: I mean, who would have thought to go see their CPA tax strategist before they selected their dog breed or adopted their dog?
Shauna: Exactly, and there are so many, I think thatโs one of the things that I just absolutely love about tax strategy from that standpoint, when you decide what you want, you tell us and we tell you how to get there. Do you want to buy a yacht? Do you have serious medical expenses? We can write off all your family medical expenses as a business expense. All of them, mom, grandma, dad, surgery, teeth, vision. Those arenโt cheap either. So one of the things, when we talk to clients, one of the most important, thereโs really two important things we need to know. The first one is where are you currently spending money that you are not already deducting it. The vacation home, the medical, the dog, your Starbucks addiction. We had a client spending $36,000 a year in Starbucks. How do we make that business? Legally above board. Like we have to do all the things cross the Tโs dot the eyes. How do we do that? We need to know what youโre spending. Thatโs step number one. Step number two, we need to understand your aggression level. Because thereโs a scale zero to 10 zero meaning the IRS never calls you never, ever except for a random audit and 10 mean weโre all going to jail. Like, so where do you sit on that scale? If youโre a 10, my job is to pull you back from the edge. Like orange, red, you know, do not look good together. Iโm not going to jail. Youโre not going to jail. Itโs not happening. A nine is Al Capone doing some shady stuff, hoping you donโt get caught. Eight is basically the furthest, any qualified good CPA tax strategist is going to go because I donโt mind getting a call from the IRS. We will handle that call on your behalf. Weโll do those things. Weโll work with you, but you have to have all the documentation crossing those Tโs dot those Iโs to be able to, to do that level of strategy.
Dan: If I was going to kind of put a real situation to a 10 out of 10, being the aggressive, the two aggressive tax strategy, we would say the pizza shop owner whoโs collecting cash and not claiming that cash over the counter or the landlord whoโs collecting cash rents. Heโs calling his unit vacant. That would be a 10 out of 10. Thereโs no defense for that activity. What would be an example of something? I mean, is the dog an eight out of a 10?
Shauna: Letโs talk about it. So you own a property where unfortunately thereโs now crime around the property. You bought a property in an area. You thought it was going to go good. The property area did not go good. Would writing off your dog to go visit that property be considered an eight, nine or 10? No, itโs probably like a four. Now, if youโre living in Beverly Hills and youโre trying to white off the Chihuahua. Maybe not. I know the ankle biter can be vicious, but yes.
Dan: So youโre kind of like put future pace in yourself. This might be where the strategy and someone who read all the case law comes into play because you canโt just listen to this podcast and everyoneโs writing off their Pitbullโs.
Shauna: Do not [Inaudible].
Dan: I think your mic mightโve gone a little off. I donโt know. It got a little low.
Shauna: I got all excited. Sorry.
Dan: I think this is working now. Because you would have to put yourself in the future and youโre sitting in a room. Iโve been audited before and youโre explaining this. Or your CPA is explaining this. They might ask for things like that. Whatโs the address of the property where the security was needed? Wait a minute. This is a 10 out of 10 school system. Did you really actually need it here? Now weโre going to take that one away. Do you have some, uh, emails about the repairs that you had to actually go and do where you brought the dog? Was there a calendar invite. They literally do ask for things toโฆ
Shauna: Absolutely. Itโs kind of going back to the Augusta rule and the masterโs exemption. One of the ways where people try to kind of like cheat the system a little bit here is, I held an event at my home for business purposes. So whereโs the invite, whereโs the agenda, whereโs the sign in book, whereโs the selfie of you with 15 people at your living room table doing your mastermind event. You better have proof. Cause the IRS will come ask questions. I mean, at the moment, what was it about a year ago, about a year and a half ago? They funded the IRS with like an extra $23 billion. Then they pulled back 75% of the funding. So the IRS, had publicly said, weโre going to go hire 87,000 agents. They have no money. So youโre also playing a game here. Thatโs seven, eight, nine, 10. Am I going to be the lucky one thatโs drawn for the random audit or not? So itโs a two-sided coin as far as how aggressive you want to go, which is why that aggression question is so important to know.
Dan: Interesting. What have we not discussed as a strategy or mentioned that might be a seven or eight on that scale?
Shauna: So moving to that 3.0 kind of arena, if your business makes a million dollars or more a year, so letโs start there. Thatโs revenue. Thatโs flips that sales, like whatever it is. So if youโre in real estate, you can flip two homes and be at a million. One of my favorite strategies is something called captive insurance. Now, if you think about it from the standpoint, I always like to use COVID as the perfect example for this. During COVID, we had a lot of renters that were not paying their rents. Governmentโs handing out cash. I donโt have to pay. Weโre getting waivers on paying rents in the firstโฆ. Youโre laughing because you know, exactly talking about.
Dan: It happened.
Shauna: Now nobody wants something like that to happen. No. Nobody wants COVID. Nobody wants those kinds of deals, but life happens. Things happen. This is why we have insurance. So normally you would go to your insurance carrier, state farm farmers, like whoeverโs your insurance carrier. You would say, โThere was an act of God pain. I have been paying you premiums for 20 years to cover things like this flat out across the board.โ The insurance company said, โActive God, weโre not paying anybody, nothing, absolutely zero. Nobodyโs getting any cash.โ So our landlords are repair guys or construction guys. Everybody was out of money. Iโm not getting money from any sides. I donโt get it from my insurance company. I donโt get it anywhere. One of the things that I love about having your own captive. Is that you can buy insurance policies for yourself on anything that is not covered by regular insurance. So the act of God with COVID, we perfect example. We had a client actually in the food industry. Does catering for the major league baseball teams. He bought his food on February 15th. He lost $600,000 of food spoilage. His insurance company said, nope, doesnโt matter. Youโve been paying us for 20 years, zero cash. So, having your own captive insurance company, not only allows you to put away your own money, your business would write typically somewhere between five and 15% of your gross revenue. So letโs just go with 10 to make it easy. If youโre making a million dollars, 10% of your gross revenue is a hundred thousand.
That hundred thousand goes into your own captive. Itโs a full deduction for you and your operating business. It is never taxable. Never, ever, never, ever again inside the captive. So every single year. Now, of course, if you have an insurance call, if COVID happens, you have a pile of money that youโve saved to protect yourself for that. But if COVID never happens again, you now have a pile of money that never got taxed. Itโs good stuff.
Dan: If COVID happens, so is this like a captive account? Itโs sort of your account that you set up special.
Shauna: Your insurance company. This is level three guys. Like this strategy and documents. I mean, this is much more complex, but yeah, itโs, itโs your money. Itโs your captive. Often they do whatโs called pooled risk. So itโs you and 500,000 other people that have also set up their own captives. So that if, for example, a typhoon hits Florida, your one property in Florida can be offset by all the people paying in Texas that arenโt having any problems. So theyโll also pool the risk. So there are some really cool, bigger picture strategies, especially as you start to make larger gross dollar amounts that can really save you five, 10, 20, 25% off of your total gross revenue.
Dan: So what if you have 10 years, a hundred thousand a year, youโve put a million in this account, had no losses. Is there ever any way to get that money back? Take a tax hit. What happens to the money? If itโs not used, you retire, you sell your business, et cetera.
Shauna: All the things, thereโs really, three separate options. You got to be all excited. Because I love this option. So the first one is, youโve shut down your business. Youโre no longer operating. You still own the captive. I mean, itโs your business. Itโs your money. Itโs your premiums. So you still own the captive. You can take the money out. Youโre going to pay a 20% tax. So if you got a 37% tax deduction and you get to pay 20% tax, you get to benefit of the difference. So 17%, whatever the difference between your then tax rate and your 20%, you pay tax. So thatโs one option. Second option is you can use the funds inside the captive to go and invest in something else. So if youโre at the point of retiring, you can use those funds to buy stocks, to put it into life insurance, to a side note, buy more real estate. If you want to still be in real estate. You can use those funds to buy other things, other investments. The third one is you could just shut down the company completely wipe everything out every once in a while. Itโs only happened once in the past 17 years, but it does come up. The government will give C corporations because the captive is a secret. Itโll give C corporations a 0% on dividends. So you could wait for one of those years and pull out all the money for that year. So there are options. You can take loans. I mean, there are things you can do, but again, guys, please donโt take advice from podcasts. This is a much more complicated strategy than Iโm making it sound on air here.
Dan: Iโve never heard of that one. Maybe Iโve heard it captive insurance. That sounds interesting. In case you get kidnapped, maybe, I donโt know.
Shauna: You actually have [inaudible] insurance in there so you can do that too, if thatโs a worry for you.
Dan: So you make a claim, I guess the millions there, you have a claim. I donโt know what it is. Itโs the 600,000 in spoiled. Youโd make your claim, and then you get your 600 is to 600 tax free. If it were coming out as a claim?
Shauna: Tax-free because itโs insurance payout, insurance payouts, arenโt taxable.
Dan: Then I guess youโre proving a loss. Do you have to write in the scenarios for the loss?
Shauna: Yes. So itโs just like any other insurance from that standpoint. So post COVID, a lot of our clients that went with captive, active God, I want coverage. Because so many people just lost so much money on that. I mean, who would have predicted that. Like, I mean, active God, but we also see things like, for example, business interruption. Letโs say youโve got a property manager that you absolutely adore, and theyโre running all of your properties. Like itโs not you, youโve hired them. Theyโre doing the job or like an admin assistant whoโs running all your backend. All of a sudden they get sick or they quit, or you get into an argument with them. You can have a staff replacement. You can have a warranties. So for example, you as a landlord are warrantying one year on this plumbing job that you did. Something breaks. You can have warranties. So thereโs a million different ways and a million different types of policies that you can have really depends on your business. Whatโs reasonable for your business. The place where the IRS gets really upset about this best case example. The court case that you read about when you read these ones there was a cattle rancher. He had all of his cattle on top of a Mesa and a Mesa is like a very large mountain. Thatโs flat on top. He bought flood insurance. You donโt have a flood unless itโs biblical level, Noah. You donโt have a flood on top of a Mesa. It doesnโt happen. So he got into serious trouble with the IRS because he was paying all these insurance premiums for something that wasnโt a real risk. Like there was, there was no way it was going to flood. So youโve got to use things that are real risks for your business. So thatโs why when you mentioned ransom politicians will get these policies for ransom specifically.
Dan: I mean, the cattle guy, I donโt know what his thinking was. I mean, he could have put like, heโs in the herd.
Shauna: Anything reasonable.
Dan: Yes, a meteor, I meanโฆ. Put him in the Mesa. Howโs it going?
Shauna: Incinerated beef. Whatever you do, I think thatโs one of the biggest pieces here with IRS. Any deduction youโre looking at of any kind really needs to meet three categories, ordinary, necessary and reasonable. So he lost on reasonable because thereโs no flood. He lost on necessary, thereโs no flood. He lost on ordinary because nobody else that had cattle on top of Mesa had flood insurance. So he lost on all three categories, ordinary, necessary and reasonable. So we go back to writing off the dogs. Is security for your person in a dangerous neighborhood, ordinary, necessary and reasonable? Like, youโre good. So when you look at things youโre writing off, those are probably the three main categories that you have to be able to explain to the IRS agent in a very clear, very concise, ordinary, necessary and reasonable. If youโve got those three, youโre probably pretty good.
Dan: How can the listener buy a boat in a tax advantage matter? You said something about a yacht. I canโt remember if it was pre-recorded or after, but you were looking for that.
Shauna: Absolutely. So letโs talk about yachts, boats, pontoons, whatever kind of boat you want. Letโs go back to ordinary, necessary and reasonable. Iโm going to give you two examples here. Oneโs the boat and oneโs the Rolex. Because these are the two big things that we get asked about all the time. The boat and the Rolex. So in order to have a boat, whatโs ordinary, necessary and reasonable? Do you have a business where the boat is ordinary, necessary and reasonable, whether itโs a yacht or not? So the client that had come to us, the specific case, when he first called us, the very first call, picks up the phone, doesnโt even introduce his name and says, โI want to buy a $1 million yacht. It has been my dream since I was five-year-old. Do you know how to make this happen?โ Yes, we do. Then he told me his name. So that was the beginning of the relationship. I love it. So what he ended up doing was he actually bought the boat, created a chartering company, chartered the boat. He was a sales guru, like people would pay him to learn how to do sales from him. He would host events on his boat. It was a part of the event that it was being held on this million-dollar yacht. So for that business, him being on the yacht allowed him to sell tickets instead of $5,000 at $50,000 a ticket, because it was an experience and it was a thing. So for that business, ordinary, necessary and reasonable. That was good. The second one was the Rolex. The guys were always saying, listen, the women get the hair and the nails and the clothes and the jewelry and the purses. Like I want the Rolex and the cars. I want to write off the cars we have. More than 6,000 pounds. Youโre good. Weโve got a thing. The Rolex. He loved collecting Rolexes, the old ones. Like the really pretty, the 1920s, like very designer style, all these kinds of things. How do we write off the Rolex? I want you to open a business that buys and sell Rolexes. Now you have to have some sales, so you canโt buy it and just sit on it forever. Like youโve got to actually sell some. He opened up at the time, it was eBay. He opened up an eBay store. He would buy Rolexes. He would wear them around town. He got to show them off. Because to him, this is now Iโm showing off my business property. Would you like to buy this? Itโs advertising. So he got to wear all the Rolexes that he ever wanted to wear and then he would sell them. Side note, he made a pretty good profit because Rolex prices went through the roof when COVID hit. Itโs all about ordinary, necessary and reasonable for a business purpose. So what is the business purpose of what it is you want to do?
Dan: So if you bought the Rolex, I mean, how is it accounted? Wouldnโt that just be inventory? Like how do they get an exact write-off there?
Shauna: Great question. Love it. So the question of inventory absolutely depends on how frequently youโre selling. What the purchase price is of the original item. Okay. So generally when you have a business that does less than, I think they just changed the rules a few years ago, less than $25 million worth of sales of gross revenue, youโre allowed to write off the purchase price right away. So you donโt have to capitalize or effectively capitalize for inventory. Now real estate has some very specific rules. So again, please take everything. Real estate has some very specific rules to it. Again, it depends on how often are you flipping if your business. So letโs switch to real estate. If your business is buying and selling real estate, youโre flipping in, out, in, out, in, out. Youโre doing typically about seven to 10 deals a year, like in, out, in, out, in, out. You can actually look at real estate as inventory. So itโs not an immediate write-off. So really thatโs where the question, what am I trying to say? The question is there, how many are you flipping? What has been your method of sales over the years? If youโre doing that many, it becomes inventory, more like a car. So it really depends. Thereโs kind of these breakeven points. How many are you selling? What is the gross revenue of what youโre selling? What industry youโre in. These kinds of pieces.
Dan: So with the Rolex, I mean, what is that? Is that, if he does more than five watches in a year, like where- Less than $5,000 per watch.
Shauna: Is specifically for the Rolex end. So a lot of the Rolexes he was buying because they were much older, some of them were classics, absolutely. I mean, I remember there was one, I think he bought it for 87,000 and sold for 200. I mean, that one went to inventory. So it really kind of depends on do you have audited financials, non-audited financials, how large your purchase price is, less than $5,000, more than $5,000. So real estate, generally, youโre not buying a house for less than $5,000. So generally thatโs going to go to inventory.
Dan: Weโve done it, but yeah, thatโs definitely a rare instance.
Shauna: Thereโs the one that you can have to have inventory.
Dan: You needed the guard dog to go to that house.
Shauna: No doubt in my mind.
Dan: Thatโs right. So letโs touch on an example. Weโre on that house flipping conversation. Letโs say a client comes to you and says, โShauna, I want to get a tax plan done. What ideas do you have for me? Iโm making $500,000 a year in active income. I flip 10 houses a year, make about 50,000 on each one. So at any time I probably own five projects, maybe six. Again, I got that half million, what would be the creative plan that we already know what 1.0 is. Someoneโs built a half million dollar a year business, more than likely figured out the average write-offs.
Shauna: Weโre already doing kids. Weโre already doing the cars. Weโre already doing all the baseline stuff. So youโre saying the net profit above those is still around 500,000.
Dan: The taxable income on the tax return form will be 500,000. So they did 11, really it was like 585 they made.
Shauna: So then you go to the next level. So what is the other spouse doing? So weโre paying the kids. Are we paying the spouse? If we donโt have the spouse on the business. Get the spouse on the business. What are we doing for medical expenses? Maybe thatโs only 5,000 a year. Maybe thatโs 50,000 a year with kids or it was breaking arms or braces or something. So who knows how much medical expenses are.
Dan: Could you pull on the medical expense thread just to kind of say how thatโs done Because I think usually the CPAs are like, no.
Shauna: Schedule A itemized deduction. So this is where we start to look at entity structuring and strategy from the actual entity type. So if youโre a sole proprietorship, should you be an S-corp, a C-corp or a partnership? If youโre an S-corp, should you be an S-corp? We run into problems. Maybe you need to go the other way and go back to sole proprietorship. So when we talk about medical expenses specifically, the most common area we see this is someone who is a sole proprietorship. So maybe an LLC or maybe no entity at all, which always kind of scares me. We need to get the attorneys involved, but letโs say an LLC taxed as a sole proprietorship. As a sole proprietorship, you are allowed to hire your spouse, which is why Iโm bringing the spouse into the picture. Your spouse can cover their spouse, which is you and any of their children, which means that now any of the employees of the company, typically itโs going to be a husband, wife, two kids. Any of the employees of the company, their medical expenses now become a business expense for the company.
Dan: Literally the medical expenses.
Shauna: Literally the medical expenses become. Now there is one caveat here. This is if you have outside employees. Generally, in the real estate field, we donโt see a lot of actual W-2 employees. Typically, we only see the wife and the kids, husband, wife, kids, whatever. And itโs for this reason, because generally in the real estate end, we see a lot more contractors. Youโve got your plumber, youโve got your electrician. Theyโre not W-2 employed by your company. That is a very important distinction because anyone else that is a W-2 employee, whatever you do for you and your family, you have to do for them. So this is where you start to get into, well, what do you have and what boxes have been checked. That we have to kind of work around here. Are there other W-2s or not? Now Iโm going into the assumption at 500,000, itโs probably you, your spouse and two kids or whatever that weโve got on payroll, no other employees. The next thing to be looking at is, how much cash do we have to put aside and how much cash do we actually need to be able to buy the next property, go from a fourplex to a small apartment complex? How much cash needs do we have? Because for example, letโs say out of that 500,000 of cash that you earned, youโve got 100,000 of cash left and you need that 100,000 to go buy the next property, the next two buildings youโre going to go buy.
Dan: But I mean, they would have been counting on paying about 160,000 in tax already.
Shauna: Nailed it.
Dan: Now they need 100. So go ahead, maybe you were getting there.
Shauna: Weโre getting the same thing. I love it. So step one is, do we or can we use life insurance as an option where I can take the cash, fund the life insurance, borrow the money back out of my life insurance so that Iโm getting a double dip on my money? Because money inside the life insurance grows, guaranteed, typically. I can borrow my own money back out again and go buy real estate property with it. So that now gives me a double dip. One on the insurance side and one on the property side. If I want to triple dip the money, I can put the money into the life insurance, borrow the money out, put it into a defined benefit, cash balance, some sort of retirement program that I can also take a loan out of, take the loan out of that and now go buy the property. You can see how the web starts to form. This is where itโs very specific on what you have, what you donโt have.
Dan: That would be the 100 we were going to have no matter what. So thatโs like 100,000 that we were thinking of as after-tax dollars. We run it into one, two, or three places.
Shauna: Levels of whatever, exactly. If you really want to go to level four, and this is where we need to have your broker, your mortgage person, whoever your lender is that weโre working with, buy the property, get it fixed up, go refi, get your cash back out and do it again. So cash flow and cash plays are one of the most important things, but you got to do it in order. If you put it in the property first, now we can only get it out once. So things have to be done in the right order, in the right steps to be able to really maximize the use of the single dollar.
Dan: So what else could be done to reduce, if anything, ideas that $167,000 tax bill that personโs going to have?
Shauna: So weโve got the car. Weโve got the kids on payroll. Weโve got the dog on payroll, effectively. Weโve done the medical plan. Weโve done the 14 events of the masterโs exemption, the Augusta rule. Depending on where you live in the country, the rates for that can be anywhere. The smallest Iโve ever seen, which was way out in the middle of Iowa, was about $500 a day. The largest Iโve ever seen was downtown Manhattan at 19,800 per day. So right. Big span. That can be really big dollar amounts. Of course, we kind of talked about the captive. So we could always, depending on, you said gross income was only 500,000. So weโre not ready for the captive yet. Weโve got to be at a million. Got to be at a million. What else would I look at right off the bat? Normally, we wipe everything out using those. We talked about defined benefit, cash balanceโฆ
Dan: You probably have gotten it pretty low because you pay the spouse what?
Shauna: A hundred thousand, 120.
Dan: Then they would pay a little bit of payroll tax and so would you on that, right?
Shauna: Yes. Kids, if theyโre under 18, thereโs no payroll tax. So depending on their job theyโre up to, I think, 110 or 112, thereโs no payroll tax.
Dan: A hundred and twelve thousand?
Shauna: Big chunks. I mean, it depends on how old the kid is. At seven, if you want to get into kids, we can talk about the details on kids. At seven, maybe you want to use them for modeling. Have the kid on the lawn in front of the property when youโre taking the pictures and you can pay them $5,000 to $7,000 per, this is the deal. Youโre right. For a modeling shoot. If theyโre actually sweeping the floors and helping with plumbing, maybe itโs 20 bucks an hour, 30 bucks an hour. Now we do have, and I think this is one of my favorite parts about little ones these days, is that you are allowed to pay children whatever fair market value is for whatever profession it is theyโre doing. So if you think about somebody that specializes in Airbnb listings or social media posts to get your properties out, filming the cool YouTube videos where the cameraโs flipping and getting you viral on TikTok, that kind of thing. Whoโs the best person in your family to do that? Probably your little ones. Your children, because they know a heck of a lot more about TikTok, Instagram, all those things than most of us do as adults. The current rate for that, at least in Arizona, where I am, is $130 an hour. So if youโve got kids that are in college and youโre trying to pay their way through college. Youโre trying to pay those bills and not have it just come out of your pocket, put them on the payroll, have them run your social media accounts, $130 an hour, youโve effectively paid for their college through your business. So depending on their age, weโve got lots of options.
Dan: Even if you are, I donโt know, youโre giving them, itโs a part-time thing, youโre paying $35,000 to them. Theyโre going to pay some taxes out of there, but their tax rateโฆ
Shauna: At 10%, 12%, whatever their tax rate is.
Dan: Itโs a much lower hurdle than the flipper whoโs making the $500,000. What is the company side of the payroll tax? Another 2% or 3% or something like that?
Shauna: Yes. Payroll tax is about 15.3% over the age of 18. So itโs a chunk, but itโs not anywhere near the total. Side note, depending on how big of an empire you want to build for your family, you can also force your kids to put their money into the 401k plan or the cash balance plan to start building them up with Roth 401ks so that they can get into real estate, start flipping and selling things inside a Roth, build up their wealth. I mean, thereโs a million ways to spend it depending on what youโre trying to do.
Dan: My head is spinning.
Shauna: But I think thatโs really the biggest thing. If I wanted anybody to take anything out of this, tax strategy is not, it worked for Bob, my neighbor, so itโs going to work for me. It just isnโt. Every time we look at somebody, a specific case study with tax strategy, we look at about 1,500 strategies just across the board. Not all 1,500 apply to everybody. You may not have kids, maybe I do, but it completely changes the tax strategy. So when we look at somebody in that $500,000 taxable range, okay, out of the 1,500, maybe we need to apply 17 total. This one layered on this one, layered on this one, layered on this one, within six or seven, weโve gotten you down to a 10%. How much fight do you want to do? Because the other side of this, I realized that Iโm called the tax goddess. Everybody wants me to wave the magic goddess wand and poof, no taxes. You got to put in the work. You got to have the documentation. You got to get the kids on payroll, which means you need a payroll company. These things have to be done and they have to be done right. Iโll be honest, if youโre not going to do that, tax strategy may not be where you want to go. Hire an assistant who can do all that for you. Because if youโre not ready to put in the work, the savings will come, but the IRS will too. So itโs got to be done right.
Dan: Nothing is worse than the audit. Sometimes I just pay the freaking tax.
Shauna: Exactly, and people do that.
Dan: Iโll be a two, a two out of 10 on the scale.
Shauna: Thatโs okay, Dan. We get calls from people who say, listen, Iโm a zero out of 10. I want something more than what my CPA is doing, but I donโt want anywhere near a seven. Thatโs okay. As strategists, we just need to know. Whatever you want to be, thatโs fine. We just need to know.
Dan: So as we talk about the tax goddess, youโre very expansive team here. I do see the Forbes cover and you had the entrepreneur, which we canโt see. Would you want a little mention of that for the audience whoโs watching on video?
Shauna: You are so sweet. Thank you. Yes. The benefits of being a goddess, I suppose, nobody wants to overpay their tax. Not a single person, Iโm pretty sure, wants to overpay their tax. So weโve been a feature on Forbes, entrepreneurs, CNN money. I think weโve been on every major public TV station. Weโve been on tons of podcasts. I think weโve done a little over a thousand interviews, whatever, everywhere. Iโve got two authored books. The biggest one that I think this one actually beat out thinking, grow rich on Amazon. So if youโre interested, this one covers seven legal loopholes. So guys, if youโre interested in learning more details on some of the tax strategies, the book also goes over it. So itโs called the 6% life. The book also goes over the pitfalls, the steps, like what you need to do to really like crosses, heโs got those eyes and yeah, itโs available on Amazon. That by the way, is the average tax rate for our clients, 6.92%. So itโs pretty cool. Itโs one of my favorite things to do is deliver tax savings. Weโre a little over 1.57 billion to date for our clients.
Dan: So who will be the ideal client in terms of maybe the level of income they hit a certain threshold. Now itโs like, maybe I should start to really think about the tax strategy.
Shauna: Absolutely. I would say thereโs really three key factors. First one, if youโre paying tax of 100,000 or more. If your gross income is at least a million and the third one, sorry to say it, but somebody that actually is willing to put in the work is that that really, really is a very strong key to your success. Honestly.
Dan: Youโre right. Is there a fee structure? Do you guys have a yearly kind of thing? Is it like a monthly commitment? Would you care to discuss that at all?
Shauna: Sure. Happy to give you some ranges. Because itโs so custom, these things vary all over the place. The average for a tax plan. So tax plans are typically a one-time thing. Itโs a one-time fee once every five, seven, 10 years, just depending on how much changes you have in your life, how frequently youโre changing what youโre doing, what youโre looking at. Average ranges somewhere between $60,000 and $80,000 for the one-time fee. Largest plan weโve ever written was 186,500, but we saved them 112.4 million in a single transaction. So it really can vary all over the place. We do offer monthly. So you can, if you want, you can pay that on monthly. Most people pick us up on the monthly if theyโre also not so thrilled with their CPA and they want somebody whoโs going to integrate both the CPA and the strategy, because then youโve got us on hand every month. We have a meeting. What do we need? Whatโs going on? Itโs much more integrative versus the tax plans. You give us a snapshot. We give you a plan. We work with you typically for about two to three years after the plan is written. Because by that point, most people have integrated the strategies. They know what theyโre doing. Their CPA is on board. Everybodyโs good.
Dan: Is there any kind of long-term email drip follow-up where people are sort of gettingโฆ Because the tax code changes. The cost segregation is 60% this year. Itโll be 40% next. I have friends who are raising $5, $10, $15 million for deals, and they werenโt even aware of the adjustment in the cost. Iโm like, you canโt have conversations. This is what the investors want. You donโt even know thatโs happening. I mean, this was sometime last year when it was at 80%, but Iโm like, this is a heartbreakingโฆ
Shauna: Yes, absolutely. Sorry. Is it stillโฆ?
Dan: There you go.
Shauna: I get myself all excited and I start covering up the microphone. Iโm so sorry, Dan. Iโm heartbroken. That always kills me. To answer your question. Yes. We send out at a minimum once a year. Because everything changes at least once a year, minimum. But if something major happens. This is a really good year to talk about this. We have a political thing happening this year. Weโre going to end up with a new president. We have no idea who that is and which way thatโs going to go. But no matter which president is new, thereโs always changes in the tax law every time we get a new president. One way or the other. So when something major happens, when it impacts a big segment of people, we also track every strategy per client. So out of those 1500, weโve built our own software for this. If a specific strategy changes, we know exactly who we told that strategy to and we send an update. So really just very much, again, custom depends on the person and what you have and what you need.
Dan: Very high level service. So as we close, we had mentioned the 6% life. Are there any other book recommendations maybe that are relevant or maybe you just found impactful in your life?
Shauna: Impactful in my life, always. I love my main man, Mr. Tim Ferriss. Four-hour work week. Printed version, not the digital version. Thatโs been my big impact. Youโre going to kill me. Thereโs one that is specific about using life insurance to build empires. I think itโs called The Power of Zero or something along those lines. I will get it for you so that you can get it to the audience. Iโm a big fan. Now, I donโt sell life insurance, just to say that right up front. Life insurance is a tool like everything else. It breaks my heart when I hear people say, life insurance. Iโm like, no, honey. Tax-free for generation after generation after generation. Itโs one of the most powerful tools you can use if youโre trying to build the Roman Empire for you and your family. If thatโs your goal, thatโs what you got to be looking at. Otherwise, I think the biggest thing is what your audience is already doing. Listen to the world. Go do your own research. Listen to the podcast. Listen to the TikTok. Listen to the YouTubes. Go listen and educate yourself. And then go find somebody who actually knows the details so that you donโt misstep trying to do it yourself.
Dan: I have one more question after this, but would you like to give a plug? Where should listeners go to get more of the Tax Goddess?
Shauna: Iโm fine. If you search Tax Goddess, itโll be taxgoddess.com. Of course, you can find us on YouTube, Instagram, TikTok, all the places. But taxgoddess.com if you need any help, have any questions, want to talk to the team, anything like that.
Dan: What is the kindest thing anyone has ever done for you?
Shauna: Best question ever. Iโm going to go with my goddess who is my mama, my mother. When I went out into business, Tax Goddess is turning 20 years old this year. When I went out to business, one of the best things, kindest thing she ever told me, itโs not going to sound kind, but itโs absolutely kind to me. โTough it up, buttercup. Life is hard. So have a good cry. Then pull up your pants and get on with it.โ Having that mentality in the back of your mind as a business owner, probably one of the best things you can do for yourself because life is tough and it will throw at you COVID and broken pipes and you name it, itโll throw it at you. But if you can pull yourself up, you will be able to do it for the rest of your life and you will absolutely be successful.
Dan: I love it. I have several pages of notes. My head is still spinning. Iโm impressed and I appreciate you coming on the show.
Shauna: Thank you so much for having me. It was nothing but absolutely enjoyable.
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