Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast is Diane Gardner. She is a certified tax coach who says active planning approaches give you a leg up on Uncle Sam. She says that she can save small business clients between 5,000 and 50,000 dollars in as little as 60 minutes and she’s licensed enrolled agent and certified tax coach who prepares returns and helps tax payers nationwide maximizing profits and minimizing taxes. Diane is also the co-author of multiple best-selling books Stand Apart with Dan Kennedy, Why Didn’t My CPA Tell Me That. She’s also authored 10 other books including Stop Overpaying Your Taxes: 11 Ways Entrepreneurs Overpay and How to Stop It Now. Diane, welcome to Wealth Formula Podcast.
Diane: Buck thank you so much for having me on your program.
Buck: You bet. Well you know it’s just after tax season and we’ve been we’ve been talking about taxes a lot and you know we have our own group within that we kind of go back and it’s always good to get a different perspective. You and I have not spoken before so I don’t know sort of all your strategies and and things like that but it’s always good to get a fresh set of eyes on things so tell us a little bit about yourself and how you got interested in taxes.
Diane: I got interested in taxes back when I was in college. I thought, ooh I’ll take a tax class that might be fun and I loved it and that kind of dumped me into the tax world. U nfortunately I spent the first part of my career just preparing tax returns and got very burned out on that side of it decided there had to be a better way to make this all work and found the world of tax planning and from that point forward life has been so much better because I get to be a little more creative, I get to meet some of the most amazing people all over the country and it allows me to develop some deeper relationships than just somebody who just sits there and prepares income tax returns during tax season and then does something else the rest of the year.
Buck: So just for clarity you know there’s a lot of terminology these days and there’s coaches and there’s preparers and things like that. Can you kind of distinguish sort of the difference between, as I understand it you are you are not a CPA you are a tax coach and preparer can you tell us sort of the differences as you see it between some of these titles and what their roles are?
Diane: You bet. Actually I’m licensed by the IRS so I’m an enrolled agent which means that I can work on tax returns, I can represent people in all 50 states where most CPAs are licensed by a state or two and so it kind of limits what they can and can’t do as far as in front of the IRS and the term CPA is route is a great three letters to have behind your name but just because you see the CPA doesn’t mean somebody specializes in tax. They could specialize in operations or they could specialize in business valuations or they could specialize in something else when anytime you see the letters EA behind somebody’s name you know they specialize in tax and then to go even deeper I got my certification as a tax coach several years ago and that has really helped me increase my understanding of all the different loopholes and the things the IRS has out there in the tax code just asking us to use them.
Buck: Got it. So in your role as you said an EA?
Diane: Enrolled Agent yes.
Buck: Can you defend audits and things too?
Diane: I can. I generally don’t when it states out quite a ways I will defer it to one of my colleagues in that state because they’ll have a better understanding of what’s going on in that particular state.
Buck: Got it okay it’s always good to know you know these are these are terms that people run into it’s kind of good enough good idea just to delineate between who’s who and what’s what etc. Let’s uh let’s shift over and start talking a little bit about you know what you specifically talked about with your clients. You talk about a seven-figure business tax planning strategies that people might not know can you can you just talk about a few of those strategies for example to get an idea and flavor types of things you work on?
Diane: You bet. Depending on the type of business that we’re working with a lot of times we’re going to go in and start with an entity analysis because in certain kinds of businesses we may want the main part of the business and one type of entity and maybe there’s a site area that should be spun off and pulled off into a completely different type of entity so we can maximize a certain area in the tax code. So that’s kind of a basic starting place is let’s take a look at the various entities what’s going on who’s doing what how many partners or do we have silent investors out there all those who are the players? So that when we do as tax strategy we want to make sure we’re benefiting everybody and not benefiting you and then hurting a partner because we didn’t know something else was happening out there. So that’s kind of where we start and then depending on the type of business if they’re into real estate investing or any of that type of thing then there’s some wonderful tax strategies that go along when it’s time to sell the property where people get hit with a pretty high capital gains bill from time to time or most of the time sometimes there are some great strategies there that we can work with them and help them put about 95% of the money at the sale of closing of escrow back in their pocket is that giving it to Uncle Sam or their state.
Buck: So the things that we have been talking about on this show, I mean the one that everyone knows is a 1031 exchange for real estate we’ve recently talked about ways of doing that through trust and Delaware special trust. There are other mechanisms specifically in real estate that you’re aware of that we were not hitting?
Diane: There are yes. There’s a wonderful tax strategy that’s completely blessed by the IRS where we’re able to take an installment sale which most people are familiar with that terminology and hook it with a monetized loan and using a third-party intermediary we’re able to basically put those loan proceeds in your hands so now you have a loan instead of a sale deferred that tax out there for 30 years and free up your cash so that you can turn around invested in the next property or multiple properties and keep that cash working for you. Unlike a 1031 where we have to find a property identify it make it all happen with a certain amount of time and sometimes that’s really hard for that to make that happen.
Buck: And that sort of what is that called again I know you’re talking about it’s a something tax can you tell me what that’s called?
Diane: It’s a section 53 but it doesn’t have a nice pretty name like everybody talks about 1031 which is the section 1031.
Buck: No I know what you’re talking about I’ve looked into it and specifically in that situation one of the challenges that I think that you have with a monetized tax referral like that over 30 years is that they usually are you know most properties that people own at least in our group and the way we do things are heavily leveraged at least you know seventy percent LTV etc and so the problem with those kinds of things when it comes to real estate is that basically you know when you sell an asset it’s the asset price that’s deferred so it becomes a challenge when you have a lot of leverage do you know you know what I’m talking about?
Diane: It can be, right yes. So in certain circumstances it works wonderfully and then others it doesn’t work as well.
Buck: Right, right. How about you give us another example if you would I mean I don’t want to take all your secrets but I’m trying to find out if there are some things that we haven’t kind of addressed before and talked about that maybe we can we can get into.
Diane: Well you’ve probably talked a little bit about Opportunity Zones, that’s kind of a new popping okay so we won’t worry about going in that one.
Buck: Well we only talked about it in specific but I think the challenge with Opportunity Zones in particular, if you would like to why don’t you tell us a little bit about what opportunity zones are and we can kind of talk a little bit more about that.
Diane: They are a way for you to save money through not having to pay tax on your capital gains. The IRS allows you to reduce the amount of tax you would owe based on owning certain properties in certain parts of the US. What they’re basically trying to do is get you to invest money in areas that maybe are a little more rundown or need clean up that type of thing so they can get them up and going and get them producing again. So they’re going to reward you for doing that and so you end up holding the asset usually between five and ten years to get full maximum output from the opportunity zone.
Buck: Right. I think you actually has to be a full ten years in order to get this. The challenge with that I’ve found is that you know these funds they’re relatively new. Second as you mentioned that they have to be in areas that are quote unquote rundown so if the challenge becomes well you know you’re gonna take say you know significant capital gains that you’ve done presumably through some wise investing and then potentially invest that into areas that we would consider maybe a d-class area right now set it in there and for ten years and hope for the best and that’s an area that I have found to be challenging. Although I’m not saying it’s not worth looking at it’s you know there’s the theoretical part of tax planning which is if you could do this there’s a lot of that does this and then there’s the practical aspect which is well that’s great opportunity zones in theory sound fantastic but how do you find something that you know you’re willing to put in significant capital gains and lockup for ten years in an area that’s rundown. Right let’s talk about some of the big changes I mean you talk about opportunities zones but specifically in the Trump tax laws there was a lot of significant improvements at least for investors or business owners specifically I can’t say that there was probably a lot of improvement for high wage earners it was probably harmful to them but what are some of the changes in the tax law recently that business owners might not be aware of that previously were not possible?
Diane: One of the changes that they may or may not have seen when they had their tax returns prepared or if they extended and they will see them when they’re prepared is that new qualified business income deduction. Previously we did not think it was going to work on investment type properties rental properties those types of things and at the last minute we got some clarification that yes it is gonna work and so if you pass certain tests then you’re able to take the quote profit from your type investments and go ahead and take that new qualified business income deduction on it. So I’ll back up a little bit the qualified business income deduction to kind of oversimplify it you basically took the net profit from a business or from a rental activity multiplied it times twenty percent in you got a new deduction on your income tax return. And so the fact that that was rescued for investment type properties rental type properties was a major score for a lot of my clients this last tax season.
Buck: Right, right interesting. So what are some of the other qualified businesses in that category I mean a real estate I’m actually I’ll say that I did I was not aware that real estate is that relatively new?
Diane: Certain types of real estate will qualify you have to show that it was it was an active business or trade.
Buck: Got it so not and passive multifamily right?
Diane: Yeah those types of things probably wouldn’t work but if you own the apartment complex yourself or you were the majority owner in it we could show that you were actively involved. So there’s a little checklist of things you have to go down and be able to meet certain criteria and if you met it then it worked. And so some of my clients were pleasantly surprised that we were able to pass the criteria for them and they got they were able to take advantage of that new deduction that they weren’t planning on.
Buck: I’m sorry could you go over the criteria that actually go into that? Because that’s an interesting area that I have always found somewhat ambiguous, you know because there’s a you know which businesses get the advantages which ones don’t and then there’s a cap can you kind of outline that?
Diane: Right and so from the rental side of things there is a they put in a safe harbor that says on a regular basis did the taxpayer consult with advisors, negotiate and execute leases, did they consult with or act as a property manager or personally maintain manage or supervise the rental activity of the above property. And then the next one is did the activity continue throughout the year and then does the taxpayer spend at least 250 hours annually dealing with the advisors the managers or tenants or repairs or maintenance companies or other on-site issues. So we have a time element there. And then do they maintain contemporaneous written calendar time records to prove the above regular continuous activity. So if we could meet this safe-harbor criteria then we were able to take the deduction on rental properties.
Buck: Got it. But more broadly speaking in terms of businesses I mean the nice thing about at least in terms of the types of multifamily that we can involve with is it significantly tax sheltered income in the first place because we’re losing leverage and we have depreciation etc. But let’s just you know for example we have a number of physicians and dentists and private practice service providers who’s qualified for that deduction who’s not as a general rule.
Diane: As a general rule all businesses qualify until we hit a certain threshold of income. Once we hit that threshold then our specified service businesses stop qualifying or they start phasing out okay and that specified service businesses are your physicians, it is your accountants, it’s your attorneys, it’s your business coaches, it’s any business where it’s your personal knowledge you’re selling your knowledge and you are the main knowledge base in that business.
Buck: Got it got and so those people phase they phase out at what point?
Diane: They phase out a married couple starts phasing out in a three hundred thousand range and by about four fifteen they’re totally phased out.
Buck: And if you’re not one of those then you can you can you know take that twenty percent deduction there’s no cap?
Diane: Correct right okay.
Buck: So one of the so one of the strategies and that could be potentially that you restructure entities in such a manner that you are trying to minimize the revenue on the side of where you know you’re capped and there may be another part of the business that for business reasons could make another entity.
Diane: Right yes and that is something that you would really want to look at let’s take the case of some sort of a physician that say when I have an eye doctor as a client we’ll take him was a good example is he offers his optometric services but then there’s also a section of this business where they sell eyeglasses now could we could we peel that piece off because that’s not medical that is selling a product and could we make that as a standalone business? And so looking at those kind of things and then but if we have that overall incomes over four hundred and fifteen thousand then even if we could carve it off and make it a separate business we’re still not going to get the deduction.
Buck: Okay got it so you’re not going to get the deduction if the overall that flows through is over four hundred fifteen thousand?
Diane: If they are a specified service business and even if we can carve off part of it because they’re already tainted because you specified service it’s gonna be pretty much impossible to carve that piece off in the case of my eye doctor clients and be able to make that deductible for him. And a lot of it has to do is who owns what so if we have a couple people that own it and maybe the doctor stays over on his part and the other somebody else takes over the other piece now we’re not were not related and we might be able to pull some things in that way. So there’s a lot of planning opportunities.
Buck: How about with husbands and wives in general is there ever a situation where you might want to file separately?
Diane: You might depending on the state that you live in yes.
Buck: What kind of scenario would that be?
Diane: I would say this QBI would be a perfect scenario for that.
Buck: That’s kind of what I was getting at just from what you said I wondered if that was one approach that you could have I mean obviously there are costs associated with running a business that sometimes you can.
Diane: There’s good reason to you know have business kind of separated off and have overall income money turn reduced yeah where they might potentially hang up is if you use in the same facility the same employees and then it starts getting harder to say they’re two separate businesses so we have to you have to kind of take it on a case-by-case example and go in and take a look is there it away we could make that work.
Buck: Got it. So on this show there’s also a lot of high paid wage earners, are they pretty much screwed? Or what do you have any suggestions for them?
Diane: One of my suggestions for them is if they are charitable minded at all to really beef up those charitable contributions get up and over that new $24,000 standard deduction which usually isn’t too hard because they tend to have larger mortgages even if they’re capped at the $10,000 for the property taxes and income tax and sales tax and that type of thing beefed up the charitable contributions and take it out through there that’s a good thing for them make sure they’re maxing out any retirement programs if they have the ability to participate in but there’s not as many things for high wage earners as there are for those who own a business of some sort.
Buck: Give us an example where you really kind of show how you’ve saved somebody a lot of money that’s a lot of creative sort of maneuverings?
Diane: One of my very first tax plans that I ever did when I first got brave enough to say okay I’m gonna start doing tax planning services was for a client who came to me for a sales tax audit problem we took care of the sales tax audit problem and in the process looked at his entity type and lease the amount of tax that he was paying and said I can fix that problem. And so we sat down we did an entity analysis he had definitely outgrown the Institute that he was currently in changed his entity type implemented a retirement plan it had a couple of different phases to it and things like that and as a result today about six years I mean it’s not probably six years ago we did this he now owns the building that he’s in with his business instead of renting as he was doing before, it’s been completely paid for with his tax savings so that’s kinda nice when you drive by and you look over that building is that I got to do that I got to help him pay for that building courtesy of no longer giving the IRS a large tip that he didn’t need to give them every year.
Buck: Got it. So let’s let’s talk a little bit about the process that you take clients through how does it work?
Diane: Well let’s see you had heard me on a podcast or you would come to a conference where I was speaking or something along those lines and you reached out to me I would have you send over your last two years tax returns personal and businesses and so we could get my head wrapped around what all you’re doing and what you’re involved in and that type of thing from there we would hop on a zoom call and we usually spend an hour sometimes maybe an hour and a half depending on the complexity what the person has and we would just talk through here’s what I see here’s where I think there’s some missed opportunities or maybe even mistakes sometimes we’re able to go back and amend prior year returns and put some cash back in your pocket immediately other times I just see missed opportunities and then from there we decide if we want to go ahead and work together going forward and if so we put together a plan and let you know what the fee’s gonna be and then from there which we like to say make us a long-term relationship and so we go into what we call 10 more like a maintenance mode and then depending on where you would like my assistance in we’ll work out a package that meets all those needs and then that way we’re able to stay in contact and meet several times a year and go over your information and your numbers and making sure that the plan that we laid out for you is working and you’re staying with it you haven’t just kind of forgotten about it and headed off down the road and making sure you reap those tax savings each and every year.
Buck: Got it. So Diane, if we want to learn more about you and what you do where can we find out?
Diane: Well the best place would be to go to www.taxcoach4you.com/taxwealthformula where we are giving away our tax planning guide it’s all kinds of great strategies and some great information in there that I think a lot of people would really enjoy looking at.
Buck: Got it so we will put that in the show notes as well. Diane I want to thank you so much for being on Wealth Formula Podcast today.
Diane: Oh thank you for having me on the show I really enjoyed getting to visit with you and hopefully share some information with your listeners.
Buck: Thanks. We’ll be right back.