Creative Tax Strategies You SHOULDN’T Use | 687

 

We always hear about tax strategies to save us money. But are there strategies that certain groups are teaching about that you should avoid?

Chris Miles addresses two specific tax strategies that will create more problems than tax savings, and potentially create a painful IRS audit.

Disclaimer: The host is not a CPA and you should consult a tax professional.

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Creative Tax Strategies You SHOULDN’T Use

Welcome to our show. It’s for you, those that work so hard for your money and you watch your money, start working harder for you now. You want that freedom of cashflow now. Not 30 or 40 years from now but now, so you can live that life that you love with those that you love. Most importantly, folks, it’s not just by getting rich about living a rich life because as you are blessed financially, you have a greater capacity to bless the lives of others.

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All right, folks, I want to discuss tax strategies you shouldn’t do. There are lots of tech strategies that you should do or that are often you could be taking advantage of. If you’re a business owner, there are so many that you can be using and they’re legitimate tax strategies. The thing that drives me nuts sometimes is when you get accountants who don’t know the tax laws and if they’ve never heard of it before, they automatically say, “This is bad.”

I’m not going to do that here now. I’m going to talk about the ones that are legitimately blacklisted. In fact, I would even share with you that if you’re going to ever look these things up, you can always go to the IRS website. They have what’s called abusive and listed transactions. Ones that they recognize and not even the ones they don’t recognize.

We’re going to talk about these two strategies. One’s listed here, the other one’s not. It was before, but because it’s legitimate if done properly, it’s not technically listed here but there are some pretty bad things here, for sure. Anyways, I want to share with you these two tax strategies that I’ve heard many people ask me about.

I’m going to give you some warnings of when they could be good and when they’re not, and the ones that you probably should not worry about. We do have previous episodes before. We had one last year with John Briggs. You can look it up. That was great for some of the tax benefits you can have as a business owner, but I’m going to talk about these two. One’s about conservation easement, then the other one is about captive.

Conservation easement. Many of you have heard of this. Many people haven’t, but what it is, how it was set up was that people could have a property that they own. It might be land. It could be a building. Maybe a building of historical significance or something like that, but the government, the IRS, allowed people to donate this to write it off on their taxes. Now they can write off more than what the property is worth.

If you basically do it as a conservation easement, you’re trying to conserve the property. It could be land that ends up being conservation land or something like that. You give back to the government and they can decide what to do with it. It could be the federal government, state or local government. They can decide what to do with it.

What’s happened, though, is that there are many people that said, “We could take advantage of this. Let’s pull our money together and buy some land or buy this particular property. Solely, we’re only buying it so they can turn around and donate it back. We’re going to ask for 10 times or 15 times what the value of the property is.” They get some valuations and they make these drastic claims.

You’ll see on the list of transactions there, they’ll say, “Anybody who’s trying to pull money together,” essentially do like a syndicated type of conservation easement, then they turn around and they try to claim more than 2.5 times. Now my experience has been that they’re still okay with even about five times in under. They’re going to be okay with that as long as they think the valuations are correct but know this, you will be audited. You will be audited or the property, and the people that are involved in that deal will be audited.

It will be looked at by the IRS because it is an enlisted transaction. It’s something that they’re going to look at to make sure you cross all your T’s and dot all your I’s. My warning is this, even though it’s a legitimate strategy, make sure you’re using people that do a good job of this or know what they’re doing. They know how to cross their T’s and dot their I’s. They’re not just trying to make a quick buck or getting super excited and greedy.

 

I’ll tell you that the contact that we’ve had for some of our clients in the past has done these and done a great job and has passed those audits. Even though he has seen lately because of the tax code, some of it’s still up in the air. He’s even stopped trying to do this. He even said, “Until some of these things get figured out on the tax code side of things, I’m not even doing a single deal now.” Be aware those that are looking at this are saying, “Maybe not.”

There is another alternative to the conservation easement, which is called fee simple. There are less boxes of checkoff or the IRS to be able to qualify as being a good deal. That one was one he was using as well but know that if you’re looking to get four times or more or a write-off of this money. If you put $50,000 into this property, you donate it, and you get that four times the write-off. That means you get a $200,000 tax deduction off your actual ordinary income.

Now that’s only good if your tax rate is above that 25%. Otherwise, it doesn’t make sense because that $50,000 is gone. You’re essentially doing that $50,000 because you’re hoping that the $200,000 you pay taxes on, say that with a federal tax or state tax, let’s say you have a third of it going to taxes. That means about $67,000 of that money would go to the IRS anyways.

If you do this strategy, that means you’re only paying $50,000, saving you $17,000 in taxes. Makes sense? Again, your tax bracket has to be higher than that. This is typically a strategy that usually people, if they have incomes of at least, I’d say, $400,000 or more per year, then this might make sense. That’s that one. That’s the conservation easement.

The other tax strategy I hear a lot of people talk about, especially if I’ve seen some financial folks out there talking about it as Captive Insurance or the 831(b) Captive Insurance. Why do they do this? First, let me explain what it is. All you’re doing is creating an insurance company that’s a separate entity from your business.

You’re not creating inside of your business. You’re just having your business and also will own a separate entity, which is this insurance company. Instead of you paying premiums to any third-party insurance provider, whether it’s for health insurance, liability insurance or whatever it might be. You pay these premiums to yourself or to this parent company. Your parent company will pay the premiums to your insurance company, this captive insurance.

This is typically only good if you have profits of at least $1 million per year in your business. It doesn’t usually make sense if it’s less, but here’s what people have been saying. Even if you don’t have that, a lot of times people out there preach this saying it’s amazing. They’ll say, “Set it up. It’s amazing. It’s incredible because all those premiums you pay in, you’re paying this cash into this captive insurance company that you don’t have to spend. The cash is accumulating and growing inside of there.” That’s all a write-off of your taxes, so you get a write off all those premiums, all that money you’re putting into that insurance company.

If you decide to pull out later, if you’ve got some profits or whatever it is. You pay capital gains tax, so you’ll pay less tax on the backend. An amazing strategy to use. You’ll save yourself 50% in taxes. Half your money in taxes is what they’ll claim. First and foremost, IRS does have a legitimate strategy. It does work for companies that this makes sense. You can look that up and see what it is.

There are people that set these up that do a good job. Unfortunately, there are a lot of people out there teaching that this is a strategy to use. I remember I was in a real estate mastermind meeting where a lot of business owners are making into the millions with their businesses. This one guy says, “I learned about this cool strategy.” He was going to present to the group. He’s like, “It’s called captive insurance and here’s how it works.”

He’s talking about how it’s all working. Mid conversation or mid in his presentation, a guy stops him. It’s another friend of mine whose business does about $100 million a year. He said, “Hold on, stop right there. I set up a captive insurance company for my business and it was a nightmare. Horrible nightmare. We got audited, lost and paid a ton of money in taxes. It was not worth it at all.” He’s like, “That strategy’s been overused and overdone. IRS is onto it and it’s not worth the pain and torture.”

He took the wind of that guy’s sales. He was so excited and then done. He was done with. Even another guy piped in that was leading that facilitation. He’s like, “I know about this as well. Not as good as you think it is.” There are so many little ifs, thens and butts that go along with it. Both of these strategies are legitimate tax strategies. You can use these but understand this is that they got to be using the proper context, set up the right way and I would say 99%-plus of you don’t even worry about it. Don’t even worry about this at all.

This is not worth it. It’s not worth doing those things. There are much easier ways to get tax deductions. There are much better ways to do it that are legitimate and are not going to get you pretty much given these listed transactions where you’re going to have to deal with IRS. You don’t need all that pain and torture.

Those distractions can cost you more money. Let’s talk about a few strategies. I’m just going to throw this in after all because we’ve got a little bit of time here. Let’s talk about some of the strategies that do work. Now, if you’re a W-2 employee, you’re already saying, “Chris, I don’t have a business. What do I do?” Number one, you can get a side hustle. You can get a side business. You can set something up that can allow you to be able to write things off.

Here’s the one big question you got to ask yourself is, “Can I be using any of these expenses as a business expense? How about my phone? How about my utilities? How about my office space? I’m in my home now. We’re using this setup for that very reason. Can we be using that to be able to write off?” Looking at those things. Looking at in-depth of what’s an actual legitimate business write-off. What am I using for business?

How about your car? What about mileage and things like that? How about paying your children? Do you realize you can pay your children $12,000 a year? They pay zero taxes. If you’re already paying for, possibly thousands of dollars for clothing, extracurricular activities like sports or hobbies and things like that, why not pay them this way and indirectly, you’re able to get a tax right off on those activities.

You don’t write off those activities. That’s not cool. That’s not legit, but you are paying them to then have them pay for their own things. That saves you cash and allows you to be able to grow your money faster. There are things, for example, where I can lease the space. I’ve brought camera crews in here and we’re able to lease the space. I’ll pay. I’ll have Money Ripples pay Chris Miles for the space of it, but I will exceed beyond about 12 or 13 days out of the year where I do that.

Why? It’s because there’s a rule. The Augusta rule says, “If you can rent out your place for fourteen days or less and pay zero tax on that.” Zero passive income tax on that money. If you go beyond fourteen days a year, you get paid normal rental passive income tax. That’s still better than ordinary income tax, but you can say, “I can pay for one day’s use of this property and be able to write that off.” I can save myself thousands a year in taxes because of that.

There are so many legitimate ways. If you’re a W-2 employee and you don’t want to have a side hustle or side business, another option, which is still suddenly a side business, is becoming a real estate professional. Now if you already have real estate properties, maybe you personally manage them even better. You got Airbnb’s. Maybe you got some short-term rentals, great. If your hours can exceed at least $750 hours a year and that’s also more than whatever you’re working on the side. That’s important.

Now, if you have a W-2 job, you’re working 40 hours a week or roughly 2,000 hours per year. You’re going to have to work 2,001 hours as a real estate professional to be able to become a real estate professional. If you’re working full-time, this is usually not a good option, but if you have a partner or a spouse working part-time or maybe not working at all. Maybe they’re a stay-at-home parent, great. What if we can get them all those hours, get them in charge of your real estate business, then those losses that you get from your properties, which you can take a lot more losses because it’s like a business expense.

Now you’re able to use that to your advantage and offset the active income that you’re getting from yours. That’s another way you can do it. Again, many great legitimate strategies you can use. You don’t have to go for these super sexy ones like captive insurance or conservation easements, especially if it doesn’t apply to your situation. You want to make sure it applies to you and it’s done the correct way.

Folks, this is my general advice, do not let taxes be the reason why you do or do not do anything. Don’t let that be the sole reason. There have to be other reasons for it. There’s no reason to spend a dollar to save $0.30 or $0.40. It doesn’t make sense. You’re not supposed to try spending everything and by the way, don’t do it.

Folks, do not let taxes be the reason why you do or do not do anything. Click To Tweet

One of one friend of mine has done where he’s saying, “I can write off all my underwear. I write off everything. I pay everything out of pocket.” IRS will call bull on that and you will get audited at some point. Don’t do those things. If anything, this episode is for the IRS to say, “Thank you, Chris. This was awesome.”

I also want this to be for you that there are legitimate tax strategies that are there. Whether your accountant knows it or not, they’re there. Now I do tell you as this final advice, seek your accountant, seek a professional in this arena. I’m not an accountant. I’m not a CPA. I just happen to know some great strategies that have worked for myself and many of our other clients.

Some things that save people sometimes, in some cases, tens of thousands a year in taxes just because they know what to do. Even by setting up the right corporation can sometimes be enough to build and make it work for you. My advice to you is to seek advice. Seek that counsel, a good CPA or an accountant that understands these things and can help you proactively plan and do that.

If you have a passive accountant, I would probably recommend firing them and finding a new one. You want to have a good CPA. Our clients already know that they’ve got a variety of CPAs they can use that already understand these strategies. They don’t have to teach it to them. They already know it. They just have to figure out how to implement it.

Anyways, folks, if you have any questions for us, if you’re looking to save more taxes in your own situation, especially if you’re a business owner. There might be some major ways we can help save you some money and help you create passive income. Reach out to us at MoneyRipples.com. Make it a wonderful day.