Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast of course is no one new to the show. He is well known. His name is Tom Wheelwright. He’s my CPA. He’s the author of Tax-Free Wealth and is a guy who we really probably want to talk to right about now given our new tax situation that we have and the new government. So Tom, welcome back to Wealth Formula Podcast.
Tom: Hey thanks for having me Buck, always good to be with you guys.
Buck: Well listen I want to make sure we get right into it because this is a show that I’ve been wanting to do as soon as the election happened particularly the senate election and so let’s get into it right away. I mean we have now obviously a democratic president we have both the house and the senate going to the democrats. So what does this all mean? Like what happens now?
Tom: Interesting question because we have to remember that we actually have two branches really two branches of government that are in that impact severely taxes one is the legislative branch which is the one we always think of you know that’s congress, that’s the senate in the house. We’re going well in congress. How much can they do when they have a 50 50 split? The answer is we don’t know. Probably not much. They can only do one reconciliation bill a year with regards to taxes so they get one bite at the apple this year that’s it from a legislative standpoint.
Buck: Explain what that means Tom. What is a reconciliation?
Tom: So what that means is normally they have to have 60 votes to pass a bill okay in a tax bill but in reconciliation, they can do it with 50 plus one so they can do it without any republicans as long as they got a hundred percent of the democrats. The challenge that they have of course in the democratic party is that they have three or four very conservative fiscally very conservative democratic senators and to get all of them and then if they don’t get all of them you know I don’t think McConnell has proven a very strong leader for his caucus so I think it’s unlikely that McConnell’s gonna, I think he can marshal his resource and say no new taxes. Okay so I don’t think the republicans are going to vote for anything significant from a tax increase so the democrats are going to have to get all their ducks in a row and the question is can they now they only get one shot at it meaning that they only get one shot where a 50 plus one because we include Vice President Harris right so 50 plus one gets them a tax bill they only get one shot at that a year so they really are going to have to look at what are they willing to do and what can they do and get and can they get all their democratic senators on board we know that Nancy Pelosi can get the house democrats together, we don’t know whether Chuck Schumer can get the senate democrats together.
Buck: You know one of the questions there too is like do they want to do something, that would be that aggressive right now given the economy as well I mean that that’s got to be part of the question.
Tom: Well it’s an interesting question logic would say no but we’ve already heard from Janet Yellen who’s tagged to be the new treasury secretary and her statement was we’re going to raise taxes on the wealthy and we’re going to soon we’re going to do it significantly and that’s the other side of that coin right because if she’s treasury secretary remember a lot of what president trump was able to do was through regulations right he withdrew regulations he rewrote regulations there is actually a lot you can do. I mean for example we’ve seen what commissioner Reddick has done the IRS commissioner with regards to conservation easements and captive insurance companies and he’s gone after them aggressively right and he’s taking positions that I think are probably not what the law was intended to do but he’s been aggressive. I think that’s actually I think that’s going to be ramped up. Janet Yellen has indicated that she wants to tax the rich. Okay so I don’t know if that’s because she doesn’t make enough money I don’t understand that but that she came out very aggressive right from the start so what that means what that says to me Buck is that I think it’s gonna I think they’re gonna be more aggressive than maybe people thought they would be.
Buck: So what are the if you had to guess for this year though what do you think what can we expect? I mean if you had to guess I know it’s a tricky thing but do you think that we’re going to see dramatic changes of any kind for high-paid professionals into 2021 or some of the things that are just sun setting and will kind of come back online in 2022?
Tom: Well I think but that we’re gonna see the democrats certainly try okay and they’re certainly but there are certain things that are easier than others one of the things that I think would be easy for them is to raise the top rate back to 39.6 percent that’s actually a hard one to argue against frankly from a policy perspective is it going to hurt the economy probably not okay is it largely symbolic, yes but that’s one of the things they want to do right is is a symbolic increase we’re taxing more of the rich we’re not taxing over what they won’t do so this is key you know George H.W Bush lost his election his re-election bid with the words read my lips no new taxes and then he voted for he went ahead and signed a tax increase Joe Biden has said read basically read my lips no increase in taxes over 400 000. Okay, so I think we can be comfortable that they’re not going to be any at least overt attempts to tax people who are making less than four hundred thousand dollars a year in taxable income would be my guess. Okay so that’s something probably not gonna that’s probably we’re probably pretty safe there I think that the raising the top rate is perhaps likely in my opinion is more likely than most things interestingly enough what I think is going to be back on the table is he’ll be happy about this in California Buck is the deduction for state income taxes the democrats have been pushing hard on that Pelosi has pushed onto that course Schumer’s from the east coast Pelosi’s from the west coast they want that tax deduction back so we may see some kind of a bill that increases taxes on the rich one place but then gives back the state tax deduction.
Buck: Well I would be happy about that one personally since he’s paying more state taxes than federal these days you know I do want to spend you know it’s a little specific but you know it’s such a major part of our investor group strategy you know the concept of bonus depreciation Tom and you know you’ve been advocating for years now since especially since the Trump laws have changed and you know we’ve been using it your clients have been using it we’ve been using it to best we can in real estate in combination with cost segregation analysis and bonus depreciation can you maybe if you could you talk a little bit about what you think is gonna happen there? Obviously, that has been a huge you know benefit to many real estate investors maybe if you could start with sort of the context of what it used to be I mean what because it’s not that bonus depreciation never existed it was just something different than it was it became something different and perhaps it’ll go back to what it was
Tom: Well we’ve had bonus depreciation for many many years on new equipment okay it was never unused right we actually used section 179 for used equipment and then bonus depreciation applied only to new and then we also had it you know it’s been up and down from 50 to 100 percent right on new equipment we are but by the way we’re one of the few countries in the world that doesn’t that doesn’t hasn’t always allowed 100 deduction for equipment new equipment okay that’s very common throughout the world a deduction for new equipment what what we’re unique in is allowing a bonus depreciation for used real estate that’s a unique position in fact most countries don’t even allow any depreciation for used real estate and we’re allowing bonus depreciation so what we used to have is we used to have basically four rates for depreciation we had a a basically a three percent rate approximately somewhere between two and a half to three percent for the building we had a zero percent rate of course for the land we had a five to ten percent rate for the land improvements like landscaping and driveways and so forth and then we had a 20 rate for the contents of the building like ceiling fans and you know connect washer dryer that kind of stuff so that’s historical so I’ve always been a fan of cost segregation as you know they’re still that’s never going away right we’re always going to be able to do that I think I do think that they’re going to be hard-pressed to remove bonus depreciation for real estate without severe impact on the market I mean think about it right now we’ve got so much pressure on landlords because of the eviction restrictions right and if they were to then say well you don’t get bonus depreciation who’s I think that’s I think that would be devastating to the economy I think that would be devastating. So I know Biden’s talked about it so we’ll see if they’re aggressive. I’m not sure that they’ll be able to get their 50 plus one votes on that one.
Buck: Yeah and so in that regard, we may have the rest of the year because that one so that one naturally that expires at the end of this year anyway doesn’t it?
Tom: Well no what happens is at the end of 2022 so we have two years oh okay the end of 2022 it starts decreasing every year okay so we go back to where it was at 2025 but it’s actually around for quite some time now still.
Buck: Let me ask you a logistical question here that I get I feel like it’s come up a number of times because you know at any point you know any of these reconciliations or you know new laws can be you know taken up into congress and at what point do they count in other words say for example we have a real estate opportunity and we close on it in the next 60 days and do we you know the law still says we can take bonus depreciation is there a reason to think that we wouldn’t be able to take the bonus depreciation in 21 because of a law change you know two months later?
Tom: So that’s a great great question what we’re looking at is the effective date what’s the effective date of the law so what we normally see is we don’t normally see an effective date prior to when the legislation was first proposed okay so it hasn’t been proposed yet right let me give you an example so in 2017 right we got that bill the end of 2017 December of 2017. but remember the bonus depreciation was retroactive to September 27th of 2017. why is why September 27th because that’s the day they announced they were looking at this new law okay it’s really bad tax policy to take it back to the beginning of the year you know Biden and the democrat President Biden the democrats are very much after taxing the rich that this is a big policy for them and if they see bonus depreciation in real estate as a way to tax the rich which they may okay then they might try to make a retract to the beginning of the year I just don’t think they I just don’t think there’s the I don’t think they can get the 50 plus one votes I think that would be really tough to think they could and to get people in Congress to vote to make it retroactive it’s such horrible tax policy I’d be very surprised to see that happen
Buck: Yeah so at least for now I think if you’re you know just trying to plan your way through this year it would seem to me that the smart thing would be to try to you know try to weigh as much early on as possible I mean just as a strategy trying to if you’re sort of a betting person you try to get you’ve got to get your bonus degree.
Tom: You make a good point Buck because you know normally like last year we’re going does it matter if I invest from a tax standpoint does it matter if I invest in January do I need to mess in January can I wait till December and the answer is well with bonus depreciation doesn’t matter yeah so we could absolutely wait and kind of wait and see and see what happens but right now you’re absolutely right that you know investments that are done in January are unlikely to be pulled back if there is legislation undoing bonus depreciation you make a really good point.
Buck: Yeah and that’s probably something that people ought to be thinking about I know I mean I certainly am and we had to start thinking about trying to wait heavily you know if we’re going to invest anyway I mean just know that you have a better chance of some savings if we do it early. What do you think you know there’s obviously some things that have always been they’ve been controversial for years you know some of the conservation easement type things and obviously various types of self-insurance do you think that these things at some point what do you think happens to somebody I mean you take something like easements and I know it’s not something that talks about too much but you look at something like that it there has been such this like you know a question of you know it’s not illegal it’s hated by the IRS but now there’s an element of it that also involves conservation which is something that the Democrats seem to be into how do you see some of these things playing out I mean do you at the very least do you think we get some definitions and some true you know some true guidelines as opposed to just guessing you know what the risk is?
Tom: Well I think what we could see is again regulations that would limit how they’re used okay I don’t think the law is going to change because like you say that that both the democrats and the republicans like conservation easements right they both like them because from the democrats it’s a conservation from republicans it’s okay this is you know this is this is a charitable contribution this is a you know there’s economic benefits here so they both like them and the challenge of course is that there has been abuse there’s no question there’s been abuse right I mean I’ve seen like 20 to 1 valuations 25-1 valuation they’re going these are ridiculous valuations unfortunately the the place they really should be dealt with is in the courts yeah right they shouldn’t be dealt with by the IRS and they shouldn’t be dealt with by congress really they should probably dealt with in the courts as to that just the valuation side of it I think though that what we’re more likely to see than legislation in the conservation easement area is we’re more likely to see restrictions from a regulation from a regulatory standpoint that’s when again where Jan Yellen could say look we’re going to write regulations we’re going to let those regulations go to court maybe in the meantime congress will pass past something but we’re going to do what we can do to restrict them from a regulatory standpoint and I think from you know that the captive insurance the self-insurance has the same issues because remember the original the word the origination of captive insurance is for farming farmers right farmers and ranchers because they have so much risk that they cannot otherwise insure and and it’s interesting because it was senator grassley who’s been going after conservation easements and captives and yet he’s the one that got them in the law in the first place so it it’s a little you know it’s a little difficult to understand where they’re going I think though again what they’re trying to do is to prevent abuse and I think that that again will come through regulation
Buck: Well what’s interesting too on the I’ll say on the captive insurance side is we even though we have a democratic president and congress now we actually have a conservative supreme court and there are some cases that revolve that are involved in the supreme court specifically with capped with captive insurance isn’t there?
Tom: There is a case right now that we’re waiting for a decision from the supreme court it’s been heard by the supreme court we’re waiting for a decision any day now from the supreme court and that really relates to if you are if you’re in a captive if you have a captive do you have to file a form 8886 that’s really what that revolves around did the IRS go through the proper mechanism to make that a requirement and if not then that means that they have a hard time tracing it right so it makes enforcement that much tougher but yeah I mean it’s we’re waiting on that court case on that decision any day now.
Buck: I want to shift a little bit I think just sort of on these specific things we’ve been talking about because I think that you know overall there’s always a little bit of a doom and gloom from the financial perspective certainly when you have everything shifting towards the democratic government but you know the other perspective on this that I’ve certainly thought about and I’m curious about is you know this is a government this is an administration that wants to do some big things too specifically as it relates to you know probably the environment the green new deal the infrastructure and all of that and it would seem to me that along that lines we have probably some things to look forward to as well and I’m just wondering if you could talk a little bit sort of you know on a historical perspective on what your view is you know with these kinds of movements and how ultimately you know do they end up benefiting us as taxpayers well.
Tom: So that you’re the first one the conservation is in the climate is really I think one of his number one things after after after coronavirus I think that’s his number one issue and that’s good actually I think that’s actually good news yeah for investors because one thing we know for sure is that no politician is ever going to give up any power they have and the tax law as an a way to incentivize something is very powerful and so I would see that there’s going to be there we we know that he sees president Biden’s already talked about this talked about on the campaign trail that he wants to incentivize green energy and he wants to incentivize renewable energy wants to incentivize electric cars he wants to bring back full credits for solar for example and going back to the 30 percent and so I think we’re going to see that I actually think that’s an to me that’s where I’m looking from a real estate standpoint okay is that the real estate opportunities are really going to be in housing and in energy okay that’s where the real estate’s going to be I think commercial is in going to be in terrible I mean commercial real estate I mean office etc we know because of the virus that people have been going the office and so I think the office commercial office space is going to be challenging that segment of real estate but I think that the segment from for multifamily I think we might see more in the low-income housing yeah area we might see more in we certainly will see more in solar and other renewable energy areas so I do think we’re going to see some incentives going that way and that might be it might be those incentives offset the increase in the taxes to the wealthy and they might come in at the same time and that’s how they might convince people to to vote for that bill.
Buck: Yeah I mean and at the end of the day I think this thematically goes back to our whole philosophy here which is ultimately yeah I mean you’re going to get hurt in this economy if you’re you know unfortunately if you’re a high w2 wage earner you get nothing else going on right but you know if you can make yourself a little bit more sophisticated financially you have enough opportunity here potentially to win and I think that’s an ongoing theme don’t you think that’s true?
Tom: Oh I don’t think there’s any question there’s I was listening to our friend Robert Kiyosaki right he’s doing his radio show and he was talking about green energy and his guest said American Tucson was his guest and he said look the socialists are going to pay for the green energy and the capitalists are going to profit from it the entrepreneurs are going to profit from it so there’s going to be there’s always huge opportunity and certainly when there’s a shift is an opportunity from an investment standpoint but you’re absolutely right Buck I think that the high-income earners are going to get hit harder and harder and harder the deeper we go into this administration.
Buck: Right Tom I want to thank you again for being on Wealth Formula Podcast I think you know overall I don’t think it’s the end of the world I think we’re gonna be fine but I do appreciate your perspective and obviously love having you on all the time.
Tom: Oh I appreciate that hey can I mention one other thing that came out in this last stimulus bill, of course, you may not have paid attention to yes please we now for the next two years have a hundred percent deduction for meals for business meals so right this is another example Buck where if you’re an employee you get hammered and if you’re in a business owner you reap the rewards no boy can ever deduct their meals but a business owner now instead of just deducting 50 even carryout Buck gets to be at 100 as long as you have the business purpose and meet all the other tests so so again another reason to be a business owner be an investor and one more deduction that’s been given to us for the next two years.
Buck: Well I’ll drink to that and just one reminder too for everybody, of course, Tom has you know everybody needs good CPA help and I highly recommend you go to check out Tom’s network it’s WealthAbility and wealthbility.com right Tom?
Tom: That’s right. Thanks so much Buck I can really appreciate all your support over the years because I know that you’re most interested in helping your listeners and your investors build wealth and you do a great job of that.
Buck: Absolutely and you know a big part of that is all about you know planning and keeping your money. It’s not just what you make. So anyway Tom again thanks again for being on Wealth Formula Podcast and we’ll see you next time.
Tom: Thanks very much, Buck.