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Bonus Episode: Tom Wheelwright on Important New Changes in the Tax Code!

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Tom: I appreciate it. Thanks Buck. Always good to be with Buck and his group so thank you all for joining us. It’s really terrific. There have been some amazing tax law changes and opportunity so just a little bit of background for those of you that don’t know me. As some of you know, I grew up in Salt Lake City, Utah and as such grew up as a Mormon boy and when I turned 19, they sent me on a mission and they sent me to Paris, France where I learned very quickly how to accept rejection with class and honor and not fighting back which thankfully the Costco employees have figured out as well. So from there I started at the University of Utah you know where I got my undergraduate in accounting and then went to the University of Texas where I received my master’s of professional accounting with an emphasis in tax. I spent seven years with Ernst & Young including three years in there national tax office back in the mid 80s when we had a major tax reform during the Ronald Reagan years and most years and then I spent after coming to Phoenix and I was running the real estate tax practice in the Phoenix office averse and young then I went to a fortune 1000 company to run their real estate development company from a tax standpoint and then left there after a few years and decided to open up my own CPA firm and since then I’ve built bought, sold multiple CPA firms the last 10 to 15 years. I spent a lot of time on the road with Robert Kiyosaki as Buck alluded to. I also spent 14 years as an adjunct professor at Arizona State University creating and teaching a course on multi-state taxation which actually has a major impact under the crisis that’s going on right now and then finally sold my big CPA firm a few years ago and instead decided and actually a lot at Bucks urging and thank you Buck for that. We were only handling the most high-end people and so what Buck suggests is, is there a way we could hire, could handle people who are just starting out just starting to invest and what we did was we created a network of accounting and CPA firms and we now have just in the last year and a half, we now have a network of about 40 accounting the CPA firms around the country and we range everywhere from handling people who are just starting out like consultants all the way up to very, very successful high-end people like Buck Joffrey for example and we serve several of Buck’s clients and I do have my own CPA firm but it’s a very small firm most of the clients that Buck refers to us we match them up with the right CPA firm. Okay so that’s kind of our goal in life is to match people up with the right CPA firm who’s well trained. What’s really interesting is when you know when I talked to people and people say well this is really in for me great information only it’s really aggressive or you can’t do that here something like that. Well under the Cares Act that’s our most recent tax law and then under this new Heroes Act so we’re the Democrats are trying to outdo the Republicans are always interesting. There are a lot of major tax changes particularly for real estate and I wanted to kind of walk through some of those but if I could let me just start with a little bit of context. Many of you seen this. This is Robert Kiyosaki’s, used with permission, Robert Kiyosaki’s Cashflow Quadrant and for those of you have seen this before you’ll remember this from his book Cashflow Quadrant which came out about soon after Rich Dad Poor Dad and basically showing the four different ways people make money. And the reason this is essential for what we’re talking about is we’re gonna be talking about the Cares Act and how the tax law has changed and who exchanged for, okay so typically if you think of an employee. An employee typically is gonna pay about 40% tax. Self-employed like a doctor for example I know we have doctors watching this and you know you’re paying the highest tax of anybody and then you have big business owners like Warren Buffett and then you have professional investors like Donald Trump okay and so they end up paying a lot less than these people. It’s why Warren Buffett pays less tax than his secretary, lower tax rate not less tax, just lower tax rate and the reason is because of what I explained in my book Tax-free Wealth which if you’ve read Tax-free Wealth if you just typing yes I would really appreciate that just to see if there’s a some of you on this call who actually read this book. Thank you very much, good to see that some people have read it and good to see that there are potential customers out there. So in this book, what I explained is this, is how to build massive wealth by permanently lowering your taxes but what I explained is that the tax law is fundamentally a series of incentives and the question and that’s how it works okay and I’m not here to debate policy. I’m happy to do that in another situation, but the policy of the United States and in most countries has been to reward people who do what the government wants them to do. So what we’re looking at under the Cares Act was, what does the government want us to do and what we saw Cares Act is primarily an act for employees, it was really fundamentally about employees. And so what we saw under the Cares Act was that if you didn’t have a job then you’re going to be rewarded given some compensation because the government shut you down, you didn’t lose your job because you were a bad employee you lost your job because the government shut down your restaurant or shut down your hospital or shut down you know your factory or whatever and so the government’s saying look we shut you down all right so we’re going to compensate you for that that’s what that $600 a week extra unemployment compensation was for and then to keep people working to encourage businesses to continue paying their people. I’m not just laying them off, they created the PPP the Paycheck Protection Program which basically said that we’re going to take and fund two months of your business from an employment standpoint. So again if you’re an employer, an employer which is over here right then and a little bit over here right so these people can get with these people have they just have to behave differently right so this is all about if you’re going to have the these lower tax these tax benefits you basically have to behave like like these people so the the PPP was literally only for these people right the investors didn’t get anything under the PPP because it was for employees and professional investment is more about you know assets hard assets than it is about employees. So if you are here or here then you got a tax benefit but the benefit was intended and you really only got that I’m sorry you got a financial benefit you got this reward for high keeping your employees hired and keeping them at their pace standard right at their standard payroll. So you you get this reward but you have to actually spend the money okay so you can borrow the money and you borrow it for two years and you don’t have to spend it but if you do spend it on employees do what the government tells you to do it’s forgiven now the curious thing about the PPP from a tax standpoint is that in the TAT in the law in the Cares Act the government says that PPP loan when it’s forgiven is not taxable. Well here’s what we know is that Congress giveth and the IRS taketh away and that’s exactly what happened here so on the PPP Congress said no tax the IRS came in they said wait a minute if it’s not taxable then the payroll is not deductible well it’s a payrolls not deductible that has the same effect as making it taxable so we have to wait to see if in this negotiation with the Democrats in the House over the Heroes Act whether we’re going to get this corrected. I think we will because I think there will be some kind of a bill. I don’t think it’s going to be this massive three trillion dollar legislation that the house wants and what they passed I think it’s gonna be something smaller but we do need more money put into the economy. I think every economist pretty much believes that and so I do think that that is an opportunity, it’ll probably be the last big legislation it may be in June it may not be frankly until September October you know when the next wave of the virus hits so we’ll have to see on that but for right now according to the IRS while it’s non-taxable the expenses are non deductible. So that’s the first thing to know. Now what most people don’t realize is that while the PPP addressed these people a lot of the tax benefits addressed these people okay so the professional investors did not get a lot out of the PPP loan but they got a huge amount out of the tax benefit and that’s what I want to go to next and then well and then once I go through that we’ll take questions. So there are or outside of the PPP taxable non-taxable. There are four primary tax provisions of the Cares Act and the first one is what we call qualified improvement property and another way to think about this if you’re a real estate investor or you’re a business owner what you’re probably going to think of it as tenant improvements okay because that’s the biggest category. There are some other things like restaurants and films and so forth but the biggest category is tenant improvements. What happened was in the 2017 Tax Act they made a mistake and they admitted that they made a mistake, Congress made a mistake. They were in a hurry to pass the bill and they left out qualified improvement property from the bonus depreciation rules meaning that while previously it had been subject to bonus depreciation under the new law it was no longer subject to bonus depreciation and we had to depreciate it over 39 years commercial property so instead of a hundred percent first year depreciation we got two and a half percent first year depreciation well that was a big, big a big deal and so what they did was, and this is fantastic, is they made this retroactive. So you could have had qualified improvements TI’s in 2018 19 for 20 and they are now you can actually go back to 2018 I meant 2018 excuse me 2018 tax return and take bonus depreciation okay or you can pick it up in 2019 or you pick it up in 2020. So it gives you some flexibility frankly but this is something if you either a business owner and you rented a space or you’re an investor and you had a space rented so that you went and put in some TI’s make sure you go back and talk to your tax advisor about this and see how it was treated because there may be some real opportunity there. The next issue that was interesting that came up was in the law was the $500,000 rule and what this rule said was that if you had business losses like real estate okay so Real Estate’s business loss so let’s say that you had income, let’s say you hadn’t come over have big losses over here okay and it offset your income here but there was some some dividends interest and other things it couldn’t offset okay now could offset this income it could offset this income but frankly it couldn’t offset this income okay so it couldn’t offset your dividends it could offset it here and here but it cannot offset there except for $500,000 so there were people not a lot but there were some people who had big real estate losses or there are people who this creates a big real estate loss where now you know under the $500,000 rule they were limited on how much loss they could take and not because they were passive not because of anything else just because we had a $500,000 rule that was eliminated under the Cares Act it’s not $500,000 rule goes away for 20 18 19 and 20 all right so the third one the third one is huge the third one is the net operating loss carry-back what we under 2017 act you can only carry losses forward. So if you had more losses than you had income not even counting this you had more losses than you had income you could only carry those losses forward. Now this one it’s important. You act right now don’t wait till tomorrow to call your tax advisor and here’s why this carry back is five years. So you could for example have a 2018 net operating loss that you can carry back to 2013 the reason this is critical that you act now is because the Democrats in Congress want to reduce this already they say it’s too generous, it’s too generous so we’re gonna reduce that in a well and you know they’re negotiating is it two thousand eighteen nineteen twenty they’re saying you know well you shouldn’t be able to carry this back we’re gonna we’re gonna limit the net operating loss carry-back. Well why was this mitt up and less carry back important well the whole point the whole challenge with the shutdown of the economy is that it pulled so much money out of the economy right it pulled so much money out of the economy and so economists are saying look we need to put money in the economy. You hear the Fed chairman Powell saying we need to put money in the economy, we need to do this right now because otherwise we’re in risk of a depression. Remember that money is all a function and economy is all a function of confidence and if we take money out of the economy which we do when we shut businesses down right there that money’s not moving. So we’re taking money out of the economy we need to put money back into the economy well that was the whole idea between behind the net operating loss carry-back the $500,000 rule as well as the as well as one of the reasons for qualified improvement property is okay let’s get cash in your pocket and we all know the fastest way to get cash in your pocket is reduce your taxes and wouldn’t it be great if we just could get a refund from prior years so we paid this money in prior years how do we get money back into the pockets and who are trying to get money back from the pockets of these people okay because these people got the PPP loan these people now okay how do they function well they’re gonna get tax benefits and that’s how we’re gonna do it see the tax law is a very efficient way to put money into people’s pockets. And so if you had losses and you’re going wait a minute my business is struggling or my real estate is struggling because my tenants aren’t paying their rent right and I don’t get to you know I get pushed maybe my mortgage for a couple of months but I’m still struggling here because I have to now bring in all of this at all the exact these extra contractors to spray everything down and make sure everything’s taken care of and make sure that we have you know a low risk environment in our multifamily housing or commercial property. Well we need to provide that Congress goes we need to provide some benefit here and we need them to have some cash so that they can operate so they can withstand the several months which could turn into several years of a downturn in the economy which by the way it’s not their fault necessarily okay it’s just because we shut things down as a government to protect the health of our nation so that’s number three. Number four is actually one that’s not being talked about and I’m surprised because it’s the one that affects the most people the fourth tax benefit is qualified retirement plans. Okay commonly known as the 401k or IRA or pension plan private sharing plan self-employed pension plan these are all qualify plans okay and what the government said and the Cares Act is that if you’re having financial difficulty because of the government shutdown the shutdown of the economy the virus whatever it is okay which is basically everybody right except for Amazon right. So basically everybody else then you can withdraw $100,000 from one of these plans and you have three years to pay it back and if you pay it back within the three years its non-taxable if you don’t pay it back in the three years then you get a different benefit it’s spread over three years so if you borrow ninety thousand dollars thirty thousand dollars is taxed in 2020 2030 thousand is taxed in 2021 and thirty thousand tax in 2022. Why is this so important on this particular webinar? Well the reason is because one of the worst things we can do is invest in leveraged real estate through a qualified plan. Why is that? Well first of all in many cases if you’re doing your own property you’re probably losing some of the leverage that you get but in any property you’re losing the tax benefit you’re losing the tax benefit of the real estate the way I look at it when I remember in grade school I remember learning this equation negative one times negative one equals positive one. From a tax standpoint what happens is we have real estate which is a tax shelter so it’s a negative from a tax standpoint we put it into a qualified plan which is also a tax shelter and what we end up with is tax so if we put real estate into a qualify plan we are actually creating tax liability. So it’s a bad idea to do that because what happens is you’ve got a non-taxable real estate because of depreciation because of 1031 exchanges because of Opportunity Zones you have you should never be paying tax you put it into a qualified plan now when you pull it out it’s taxable so all those earnings are taxable. So you want backwards so this makes no sense to do this in most cases this allows you to pull it out with no penalty. So no penalty you could leave it out for three years and pay it back or you can leave it out permanently and just pay tax on it over three years but still no penalty. All right now one last thing, other one of the big differences besides tax rates here between this side and this side is this side is very focused on these three words: Do It Yourself and these people over here have a team. So when I talk about these tax benefits okay please don’t do it by yourself okay you’ll completely mess it up. Don’t do it myself, don’t go to your typical tax advisor who’s never even read the law okay. Most tax advisor advisors haven’t read the law they haven’t gotten training on the law they don’t know how to analyze the law make sure you find somebody okay and hopefully it’s your current CPA if not find a CPA who actually can analyze this and walk you through it so that you get these tax benefits okay because they’re not simple and of course some of them like the net operating loss we need to do this right now. All right Buck I think that’s a good stopping point for now and in summary of where we are so do we have any questions?

Buck: Yeah if people would want to start typing in questions I’m keeping my video off but let me why don’t you go ahead and start writing questions in the Q&A section and then Tom in the meantime what people are writing let me ask you a couple things myself. One is you know it’s always nice to kind of get some real-world examples of you know some of these how some of these rules that you’ve talked about affect people like us maybe we’re you know there’s maybe there’s people most of us are you know maybe we’ve got another high paying job and then we have the investment some of them are real estate etc so when you look at something like the you know $500,000 loss rule like can you give us an example of how maybe that’s affected a client? I mean for example one idea that I had was I think what you’re talking about is so we have a number of people in our group where we have a know high paid professional spouse and then we have a real estate professional spouse and together they’re able to take advantage of that real estate professionals you know status to basically write off some of those losses against active income the previously it was limited by the five hundred thousand dollar loss rule on how much could be taken and now it’s not is that one example.

Ken: It’s not actually thank you for bringing that up though because that would be a logical thing to think right but no, employment income is considered business income for this purpose. So where this really comes into account is you have a lot of people who they might be new to real estate but they still have a lot of money in the stock market so they’re still getting a lot of interest and they’re getting a lot of dividends and they might also have some retirement income okay, so we might also have retirement incoming. But any of these incomes these are not business income okay so these don’t get to be offset beyond five hundred thousand. So you’re right I mean you’re thinking wait a minute who has that but there are we have a client I have a client that absolutely ran into this because high net worth he’s makes he what what he did was he was starting a new aspect of his business and ended up putting a lot of money into a property a commercial property. And so he had huge losses. So he was limited by this $500,000 rule and then he had to carry the rest of it forward anyway okay, but here’s the thing he’d also made tenant improvements. So this is a real life example somebody this really happened to we we just we basically just filed the carry-back claim and it’s a huge number because what happened was he had qualified improvement property of about four hundred thousand dollars okay so this is these are leasehold improvements that he wasn’t able to write off under bonus depreciation okay, wasn’t able to write them off otherwise because they were considered qualified improvement property and so that four hundred thousand and then he was limited okay he had a five hundred thousand dollar limit so that got freed up and then on top of that he had a net operating loss anyway of a million two. Okay so here’s what we are able to do: we’re able to take the total of these which is 2.1 million dollars and we world care back to 2013. Well I had a big year in 2013 and we had high tax rates and tax rates in 2013 so basically he got this at let’s say a 40% rate so what he’s getting back he has over $800,000. I think at eight hundred and eight hundred forty thousand dollars right so he’s getting eight hundred forty thousand dollars back into his pocket because of the Cares Act.

Buck: Got it and maybe similarly just more maybe to something in terms of the carry-back losses do you haven’t maybe another example for us on that one that might relate to some of our you know more of our typical listeners?

Tom: Yeah so let’s say that let’s say you bought a property in 2019. So in 2019 you buy property and you do as Buck you and I talk about all the time what’s called a cost segregation. And a cost segregation simply breaks down the property between four components land building land improvements okay and land improvements by the way there’s a lot more than you think there are it includes landscaping includes covered parking includes fencing includes outdoor lighting so all sorts of things going here and contents and the contents includes a lot more than you think it includes some wiring includes some plumbing and this is why you have to have a professional do this you have to have an engineer actually the IRS requires an engineer you having an engineer to do this. But basically on land of course you get zero percent depreciation on building it’s somewhere between 2.5 to 3.6 percent right but under the 2017 act you get a hundred percent on these two land improvements and contents because they’re subject to bonus depreciation that’s bonus so this is 100 percent bonus. Ok so let’s say let’s think it really let’s take a small property, ok let’s say you buy a million-dollar property right and let’s say that land and building together are 70% of the value, well what does that mean? Well that means that the improvements and the contents are 30%. Let’s say you put 20% down on that building so you put in your down payment was $200,000 but the bank doesn’t get a write-off you get the write-off because you owed the money so you put a down payment of 200,000 you get a deduction of 30% of the million, three hundred thousand. This is literally the only place that you can get a deduction for more money than you spent you can get any deduction for more money than you spend only place in the US tax code that allows this. So you’re getting a deduction for a full three hundred thousand even though you’ll be putting two hundred thousand and you’re expecting property to go up in value. So this is one of those things. And at 30 at three hundred thousand dollars let’s say that you’re in a forty percent tax bracket, so that’s one hundred twenty thousand. So that’s like you put in eighty thousand because you’re getting a hundred twenty back so you put an eighty the and the government puts in hundred twenty that’s a pretty good deal okay or you could say well look I got this property for eighty thousand dollars. Now one of the challenges but that you and I run into all the time is people say yes but I’m a passive investor. I’m a full-time physician and I’m a full-time doctor lawyer accountant whatever, like myself okay I’m not a real estate professional my wife’s also full-time in her business so she’s not a real estate professional so how do we get these losses? And the reality is it’s just not that hard because you pass the yes this is a passive loss but being a passive loss doesn’t mean it’s non-deductible, it just means that it’s only deductible against passive come. So now you have to make create or convert active income like your business in the passive income and that’s a function of getting with your tax advisor we don’t really have time to go through that here but getting with through with your tax advisor and say look how do I turn my here’s the question asking the question is never is it deductible the question is how do I make it deductible? So how do I make this $300,000 currently deductible well and I’m not a real estate professional that’s the question I would have you ask your tax advisor and if they go huh you can’t do that then maybe that would be when you’d want to get a new tax advisor. If this created a loss by the way if that create a loss for you let’s say you only had a hundred thousand dollars of income that year you can carry back now that two hundred thousand dollars against in this case if this to 2019 against 2014 taxes so you’re gonna get to use it no matter what now if that loss was incurred in 20 18 19 or 20 but you’ve got to do it now before the change that because they could change that law so please take care of this right now.

Buck: Thanks let me get to some of these questions now Roberts asking if you had a business that failed already maybe close three years ago can you go back and use carry back losses do carry laws apply in that case?

Tom: Yes so the carry back remember it all changed in 2017. So let’s say you lost your business in 2018 you had this big loss in 2018 you can carry that back to 2013 so you have a five year carry back of that loss. So that’s a big deal because you easily you know might have been very successful five years earlier but you know then it failed that happens and so now you’re carrying back that loss so yeah absolutely carry back that loss that’s what this is all about carrying back the law so you can get the money back that you paid in back in 2013 14 15 and 16.

Buck: Again Robert I mean I think you got to ask your CPA and if they look at you confused and it’s probably time to call Wealthability at that point. Nikolas well let’s see he’s saying are you advising taking advantage now to invest in real estate today I don’t think Tom’s advising anything he’s telling you kind of what your potential options are right Tom?

Tom: Well right so I did a class last week with Sutton who’s an asset protection attorney and I was telling everybody you know my job is not to tell you what to do at all. I’m not going to tell you to go take this deduction or make this investment. Everything here’s what I want to do: I want to give you a choice. That’s my job my job is give you a choice and you can’t you don’t have a choice if you don’t have the education so when I look at this now if if you asked me if she came to me and he said look I have a bunch of money in my qualified retirement plan I’d really like to invest in real estate then I would say look let’s look at is there a way we can get you to take advantage of your losses from real estate we need to make sure we can do that 98% of the time we can but we have to walk through that okay if you’re gonna change your tax you have to change your facts that’s what I’m always saying and so I’m gonna tell you what facts you need to change but if you have that money stuck in there and you go okay my choice is I can pull this out and pay tax over three years or I can reinvest within my qualify plan. So I’m not telling you to invest or not invest in real estate I’m telling you that if you are going to invest in real estate why would you do it inside a mechanism that you’re gonna end up paying tax on the income and the gain from that real estate ice tarnished and why you would do that when you have a choice now right again. Now you have a choice before you know you know you’re thinking oh I’m gonna have a 10% penalty and and tax on top of that but now you have a choice because you get spreaded over three years and there’s no penalty now you have a choice. So that’s my job I actually have somebody in our conference in well wait a minute it’s important to pay taxes, I said you can take that whatever tax you want in fact you pay extra tax Warren Buffett you know he complains about rich people not paying tax I’m going Warren you can you can send a check to the to the Treasury anytime you want and they will take it it is a legitimate charity okay it’s a qualified charity the federal government it’s qualified charity so you can pay any tax that you can donate to the federal government if you choose to do so you have a choice. My job is to make sure you have a choice.

Buck: Similarly Chris is saying I assume there are no new benefits to Roth, Roth IRA 401k since taxes were already paid. Well I guess there the benefit there would be as if you took it out then you could invest.

Tom: So you know people ask me all the time Buck is would I invest through a raw into real estate through Roth on I still have this issue.

Buck: Well if that’s the only money you got then you got to look at you know what best in you know best views and best returns are.

Tom: Right well yeah but well you’re not creating the tax liability you’re not getting the tax shelter okay so no you eliminate this piece of it the tax piece but you’re not getting the benefit that you would get from say, you can never get this benefit you lose this benefit right here okay if you do it in a Roth and granted it is a timing issue but it’s a forever timing issue because I can keep investing real estate my whole life and when I die that deferred tax goes away it’s a completely eliminated so it’s one things we call we say borrow buy borrowed die, right? Buy your real estate, borrow against it, it’s not taxable and you borrow against it when you die, the tax goes away. So I’m just going you know if you have a choice why not do that and now you and you have a choice so no penalties nothing like that so it’s just an opportunity that we haven’t had before.

Buck: It’s something to consider another thinker so just say if you know if you borrowed $100,000 out of a Roth and you’re right you already paid taxes on it but if you invested in something and then you got bonus depreciation on that for the current tax year you might you know he’s you know in Sedona Ranch I think you were in that we got 106 percent depreciation for passive investors doing that so you would so effectively yeah you would be getting the tax benefit by simply pulling it out. By the way Tom one quick question on the buy borrowed die thing you know we have a lot of limited partners what about limited partners do they get limited

Tom: This is a great oh my thanks for asking that Buck. So you know we when we think of buy borrowed die were typically I draw like this right people start out buying a little greenhouses and then they go buy you know a couple of you know bigger apartment buildings right you know that’s they buy more doors right that’s typically what they and eventually they end up buying a big box like a Walmart or Walgreens but let’s say that what you do is let’s say you don’t do this and this is a syndication. Okay now syndications typically don’t do 1031 exchanges so you can’t do this tax-free however check out these numbers: let’s say you got a million dollar real piece of real estate right and let’s say you took $300,000 depreciation. So now your basis this is your tax basis $700,000 and let’s say this appreciates and it’s now and five years down the road it’s now worth a million five five years down the road okay and you sell it so you sell it you have it let’s say that you then pay down the loan so you have an $800,000 loan on this right so you have a down payment of 200 and and a loan of 800 right you sell it for a million five right and a million five you pay off your $800,000 long and you have seven hundred thousand and then you go buy another project and you pay 2.8 million and I use that just so it’s 75 percent loan to value on the bigger project you’re not gonna get quite as much money right so this is four times this right four times typical 75 percent loan to value on the commercial property well now here’s what’s gonna happen you have $800,000 of game taxed and a maximum rate of 25% well let’s say that this is let’s say a quarter of this or 700,000 a bonus depreciation at forty percent okay so seven or thousand dollars and you’re gonna want to watch this video this video over again obviously but let’s just do those numbers real quick. Eight hundred twenty five percent it’s two hundred thousand dollars of tax okay but you’re getting a deduction because you’re still making money and your regular you know in your regular business right you get a deduction of seven hundred thousand and you’re getting that up forty percent right so that’s two hundred eighty thousand so you’re still net better off 80k into your right into your pocket here you’ve gotten an extra eighty thousand dollars of tax been attacked savings that you would have had to pay to the government now it’s going into your pocket so I know that the numbers are fast tonight I went through that quickly but you don’t have to do a 1031 exchange right now because of bonus depreciation that’s my point.

Buck: Yeah I mean we’ve been calling that the hamster wheel to like you take the profits you take the profits from one and you know you’ve got capital gains on that yeah but if you invest that into something else and also you over 100 percent depreciation on that as well it’s you’ve got some mitigation on the capital gain.

Tom: You don’t just have mitigation you actually end up in a better place right you’re not better off let me know if I can Buck real quick just put this all into context for people especially those of you have read Rich Dad Poor Dad which everybody should read. So here’s your basic financial statement income expense asset liability. So we all know that if we bring money in and we spend it we pay tax and we also know that if we bring the money in and put it back into the business we get a deduction for it do we pay no tax okay that’s been the rules for ages. Here’s what changed in 2017 but now has been compounded in 2020 with the Cares Act. If you bring money in and you buy an asset now there’s no tax. So even if you sell the asset buy another asset there’s no tax. So what’s really happened with the tax law in the US the tax in the US is now a tax on consumption only so as long as you reinvest the money you’re not taxed the minute you spend it it’s taxed spend it outside of your business or investing it’s taxed as long as you keep it within your investing, so the more the more assets you build the less tax you pay more assets you build less tax pay.

Buck: And that’s the moral of the story. I got one other question regarding oil and gas. So we are there pros and cons when deciding to invest actively versus passively in an oil and gas?

Tom: Oh My heavens yes. You would never invest passively. So here’s the rule with the wheel okay so you put in a hundred thousand dollars and let’s say you do it towards the end of the year okay there are two tax benefits from oil if you’re not a limited partner you have to be a general partner if you’re not a limited partner the first is intangible drilling costs even though they’re not spending the money until the next year, you get to deduct eighty thousand dollars this year. The other thing though is is that when they spend the money the next year on equipment, you get $20,000 of bonus depreciation on the equipment. So within two years you deducted the entire thing if you use a limited partnership you have passive loss rules and you have to then go back to what you would have to do in the real estate investor but oil and gas has has the singular advantage that if you put that hundred thousand dollars in you can be completely passive as long as you are a general partner, you can be passive and still take it currently still take those deductions currently, so please please please don’t invest as a limited partner just make sure that they have plenty of insurance.

Buck: Most of these oil and gas funds that we’re talking about or their you know their plan for this kind of stuff.

Tom: They are but if let’s say for example you invest through your limited liability company you’ve just eliminated you just changed your tax benefit so don’t invest through a limited liability company.

Buck: So if you invest through your LLC but it’s a pass-through and can you lose the benefit?

Tom: You lose the benefit because your liability is limited this benefit is dependent on your liability.

Buck: Interesting. Okay all right let’s see I think that’s all we have for questions and we’re coming up on the hour. So first of all Tom I want to thank you for coming on here and we’re gonna get for answering these questions on the Cares Act. I want to remind everybody this is this is really critical stuff I mean I think I know a number of people on this recording and those who are going to get it as a replay make a lot of money and you know there’s always this question of okay well do I need a you know do I need a good CPA well maybe it costs a little bit more money and stuff like that, I can tell you from personal experience that you know if you talk about investments and return on investments my you know my involvement with you know Tom and his organization over the years has probably been one of my highest return on investments and so I do highly encourage you at least to check out what they’re doing over there at Wealthability and Tom it’s wealthability.com right?

Tom: It’s very simple I’ll write it up here.

Buck: Well and as Tom mentioned one of the things that we kind of worked through over the last couple of years is that okay I know some of you are have more complicated business and some people have less complicated things but are starting to build you know vis a vis some of the things that we’re doing an Investor Club Wealth Formula and that kind of thing and so there’s different you know there’s different types of accountants one thing I think is helpful if you do contact Wealthability let them know that you are you know Wealth Formula listener because they do we do tend to prefer you know we not that there’s any really bad firms.

Tom: We put you to the friend the line let’s put it that way yeah we do I mean we do we do put you to the front of the line you know Buck has been very good to us over the years and in referring really good clients to us I mean there are good and bad clients we very much appreciate that you know. And here’s what makes a really good client is somebody that wants the education because this is a partnership right this is a team that we’re working with you. This isn’t something where if you want to go to a CPA and say you take care of it we are not the right place I’m being I want to be really clear we are not the right place for that and that’s why we like Buck’s people because everybody he sends us they want the education and you know it’s like I can’t reduce your taxes but I can tell you how to reduce your taxes and that’s my job, my job is to give you a choice you can do this and pay this amount of tax to do this and pay this amount of tax you choose but I’m gonna give you the choice let me tell you how to do it but still it’s something that you have to do so this is a team effort and that’s why we appreciate everybody that’s on this call because you’re here for financial education in the first place so we know you’re not somebody who’s just going to say well I don’t want to know anything.

Buck: Yeah and and the other thing you know we talk about some of these principles all the time on the Wealth Formula Podcast make sure you read Tom’s book I mean if there was required reading for our podcast Tom’s book would probably be on the top, you know Tax Free Wealth because we it’s all about you know tax efficiency. We spend so much time looking at our top-line right like how much money are we making but how much do we keep is what really counts and that’s why business people think all the time in terms of revenue and expenses for individual expenses is almost always the biggest expenses taxes and the idea that you know there’s very little that you can do well it’s just not true it’s just not true and I’ve had accountants when I started out telling me that and it’s just not true and so I can tell you from personal experience experience with a lot of people check them out read the book and go to wealthability.com. Tom thanks again for your time today.

Tom: Hey thank you and we’re seriously we’re very happy to help any way we can just so you know when you come to us, we will match you up ok. So like I said we won’t match you by location I want to be very clear on that we’re not going to match you by location we’re gonna match you by what your situation is what your needs are and who’s the best member for us to put you with and then what they’re gonna do is they’re gonna walk through our system for reducing taxes so we actually have members that say that they’ll have people come to to them and they’ll go oh this is great you know you know you know Tom but the training is one thing but what’s more important than the training is the system. So there’s a system that we will a proprietary system for reducing taxes and it’s when you come to us what we do is we put our members in fact I was just reviewing somebody this morning you don’t get to join our as a member and then automatically you get to take on clients don’t work that way we have to know that you understand how the system works and you have to follow the system because if you don’t follow the system even if you have somebody who’s trained you won’t get the results. It’s like you can have you know the the best flour in the world and the best eggs in the world and the best vanilla in the world but if you don’t know how to put them together and bake the cake because you don’t have the recipe it’s not going to turn out very well so that’s it’s critical that you follow the recipe, work with us on that if you will because we we actually do have a process that we want to take to everybody’s different and at the same time the system works for every single person we have found over the years that if we go that system we’re gonna reduce an entrepreneur’s taxes by 10 to 40% within 3 months. So it’s some pretty serious money we’re talking about 10 to 40% of your tax liability but only if you walk through the system so that’s why you know we’re very careful about who we take on as a client and we’re very careful about who we assign you to and how they work with you. I just want to be clear on that too with the process.

Buck: Thanks again Tom and thanks for everybody for joining us

Ken: Thanks everyone.

Buck: Have a good day.