RPF0391-Craig_Cody_Interview
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00:00:29.880 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:33.440 | skills, insight and encouragement you need to live a rich and meaningful life now while
00:00:39.520 | building a plan for financial freedom in 10 years or less. One of the core aspects of
00:00:44.080 | good financial planning is to lower expenses. And for most of us, taxes comprise perhaps
00:00:49.500 | the largest percentage of our budget. Now, of course, there are many forms of taxes,
00:00:54.120 | but they, when taken in aggregate, add up to a tremendous amount of money. So today
00:00:59.080 | I've invited Craig Cody, who's a tax planner on the show. Craig, welcome to Radical Personal
00:01:03.400 | Finance.
00:01:04.400 | Thank you very much for having me.
00:01:06.640 | So I'm excited to have you on and I want to talk with you. I love to talk with accountants
00:01:11.160 | and tax planners about specific ideas and strategies for how my listeners can reduce
00:01:17.960 | their taxes. Now, obviously, this is a difficult subject to capture in something like an interview,
00:01:23.960 | given that there are so many types of taxes and there's so many plans and so many strategies
00:01:28.120 | depending on a specific situation. But what I want to focus on is running through some
00:01:32.920 | ideas and some strategy of how my listeners can begin to approach the subject. But in
00:01:38.960 | order to engage their interest, you've contributed to a book called Secrets of a Tax-Free Life,
00:01:44.160 | surprising write-off strategies most business owners miss, which is quite the title. And
00:01:50.320 | your chapter contribution is called this, How to Deduct Your Kids' Soccer Cleats.
00:01:55.200 | Hint, give them a seat at the boardroom table. So here's what I want to know. How do I deduct
00:02:00.880 | my kids' soccer cleats?
00:02:03.320 | Okay. Let's just say you're a self-employed individual. We'll say you're a real estate
00:02:08.400 | agent. And you want to prospect for homes in your area that are actually maybe new listings
00:02:15.680 | or old listings. So you hire your kid to go out there every Saturday morning for about
00:02:20.520 | three hours on his bicycle and come back to you for, with a list of addresses of homes
00:02:26.520 | that are for sale that you could do some further research on. Okay. And you decide, okay, I'm
00:02:31.680 | going to pay you $125 a day and it has to be reasonable compensation. All right. And
00:02:37.800 | then your business now deducts that money and pays your child. Okay. Let's just say
00:02:42.960 | your child is going to private school or your child is on a hockey team and it's expensive.
00:02:49.320 | He's on a travel team. So you pay your child, you get a tax deduction for the payments to
00:02:55.040 | your child. Your child, who's probably going to make less than $4,000 a year is then going
00:03:00.200 | to have no taxable income at the end of the year. And he's going to use that money to
00:03:05.080 | pay for whether it's his private school, his cleats, his hockey lessons, his piano lessons.
00:03:10.880 | So basically you're taking something that's a non-deductible expense and you're making
00:03:15.180 | it a deductible expense because you're paying somebody to perform a service for your business.
00:03:20.080 | Are there any limitations on the types of things that I could hire my kids to do for
00:03:24.200 | me? Well, it has to be reasonable. Okay. So, you know, if your, your child's not a brain
00:03:30.120 | surgeon, you know, you can't pay him, you know, a million dollars a year to go around
00:03:35.440 | and check on properties. So it has to be reasonable compensation. And you could do that kind of
00:03:40.640 | research online to see what reasonable compensation is. And typically with a child, we like to
00:03:45.160 | make it to be, you know, less than $6,000 a year because of, you know, the reporting
00:03:50.880 | requirements, et cetera. But $6,000 a year to somebody that's in, let's just say the
00:03:56.080 | 25% tax bracket's $1,500. If you have three kids, that's $4,500 a year in savings. Explain
00:04:02.840 | more of what you mean as far as what's the difference. Why $4,000 a year? Why $6,000
00:04:07.360 | a year? Why are you looking out for these numbers? Because at a certain point, your
00:04:12.480 | child has to file a tax return. Okay. And you don't want the tax that he winds up paying
00:04:18.880 | to be equal to the tax that you have to pay. And basically we want to make it so your child
00:04:24.560 | has to pay no tax. So that's why we use that $4,000 to $6,000 number. Have you hired your
00:04:31.080 | kids? Do you have kids and have you hired them in your business? Yes. I've hired my
00:04:34.440 | kids. I, my kids have gone to a Catholic school and that's how they paid for their Catholic
00:04:39.800 | school. They worked for me. The money went into their bank account and the school deducted
00:04:45.120 | that money every month and paid the tuition and they did a job and we kept good records.
00:04:50.360 | How old are your kids now? My youngest is 21. Did they ever feel frustrated with you
00:04:56.400 | or angry that you forced them to work to do this thing? Tell me about their relationship
00:05:02.360 | dynamics. No, it was, you know, my kids live a good life. Okay. And they're good kids and
00:05:08.440 | they understood what was going on. And, um, you know, it's, it, it is still is a very
00:05:13.600 | good work ethic and I'm lucky I have a 21 year old that's a senior in college as an
00:05:18.400 | accountant. I have a 24 year old that's a law school student and I have a 25 year old
00:05:23.080 | that's a New York City police officer. So how, what type of records did you keep for
00:05:29.360 | your kids? Well, every, every Saturday when they work, they'd have to sign in in the morning.
00:05:34.120 | Okay. And then they'd have to sign in at the end of the day. We kept those records and
00:05:39.240 | we kept them in a file. We pay them. We, you have to make sure you pay them and it went
00:05:43.880 | into their bank account. Okay. And then every month the school drafted the bank account
00:05:49.520 | and pay the tuition. Did you do any strategies such as, I know one that parents are often
00:05:56.720 | think about is doing something like making up your own parental match of money and then
00:06:02.560 | contributing it into a Roth IRA. Did you do any of that kind of thing with your kids?
00:06:06.560 | No, we didn't do that. But that's another thing that people will do is they'll, they'll
00:06:10.120 | pay the child so that child can put money into an IRA. So by the time they're 18, you
00:06:14.640 | know, they could have substantial money in there. You know, another thing we do is with,
00:06:18.560 | we have a lot of real estate agents and, uh, realtors tend to have children and children
00:06:23.800 | tend to need braces. So for a real estate agent, we'll set up what's called a one Oh
00:06:28.680 | five, a section one Oh five plan, which is basically a medical expense reimbursement
00:06:32.680 | plan. So typically when we have our medical expenses on our personal tax return, we deduct
00:06:38.560 | them on schedule a, if they don't exceed 10% of our adjusted gross income, we really don't
00:06:42.920 | get a deduction for it. So instead our realtors will set up a section one Oh five plan, which
00:06:48.640 | is fairly simple to set up. Okay. Um, and then they will be able to deduct the cost
00:06:54.840 | of certain medical expenses, most of their medical expenses and get a dollar for dollar
00:06:59.400 | deduction.
00:07:00.400 | So I want to come back to that in a second, but let me just real quick explain the Roth
00:07:04.280 | IRA thing for kids, for my listeners who may not be familiar with it. Um, in order to make
00:07:09.800 | contributions to any type of a retirement account, like a traditional IRA or a Roth
00:07:14.560 | IRA, the contributor needs to have earned income. So in this case, a child needs to
00:07:19.080 | have earned income. So if you've arranged a situation where your child can work each
00:07:23.480 | Saturday and earn as, uh, as Craig said, $4,000 per year, perhaps that $4,000 per year counts
00:07:30.040 | as earned income. And they can contribute all of that up to either the yearly maximum
00:07:34.360 | or up to the maximum of their earned income into a retirement account. So what many parents
00:07:39.160 | can choose to do is they will help arrange employment for their child so that they have
00:07:44.800 | $4,000 of earned income. And then they'll also make a bonus gift to their child of something
00:07:51.540 | like $4,000 and then $4,000 will go into the Roth IRA, uh, which is the child's earned
00:07:57.440 | income. And then they'll go ahead and contribute or gift to the child $4,000, which they can
00:08:01.720 | then use for living expenses. So it's a way of the parents, uh, giving money to the child,
00:08:07.240 | but giving it in such a way that it can be put into a Roth IRA, which can be, uh, which
00:08:10.920 | can grow tax free, uh, forever. And one of the major benefits of that is because the
00:08:15.540 | child is earning a very low amount of income and they're paying taxes on that $4,000 of
00:08:20.200 | income, they're paying taxes at either a zero or a 10% rate depending on, on the bracket.
00:08:25.520 | And it's a very, very low, uh, effective tax rate. So it's a very useful way for essentially
00:08:30.560 | a parent to, to help a child fund a Roth IRA from an early year. And if you start that
00:08:35.720 | or you can help them get employment at a very early age, you get a tremendous growth of
00:08:39.920 | compounding over time. Is that, that about accurate, Craig? Did I miss anything important?
00:08:44.080 | Did not miss anything. What's the earliest age that you've seen a client be able to justify
00:08:49.360 | hiring their children? Okay. Well, I believe the tax court says seven. Uh, we typically
00:08:54.920 | would not use anyone less than 11 years old and it really depends on what they're doing,
00:09:00.360 | but I'm more comfortable with somebody 11 years old and older. Okay. Back to the section
00:09:04.840 | 105 plan. So, uh, how would I, if I, you know, I have a business, radical personal finance,
00:09:11.440 | uh, and I could hire my kids in that, how would I go about setting up such a thing?
00:09:16.840 | If I know my kids are coming up with braces and I want to set up such a plan, how mechanically
00:09:20.720 | do I research that and do it? It's a, it's a relatively easy, um, setup. It's a simple,
00:09:27.520 | you know, couple of page document. What you basically do is you, you, you hire, let's
00:09:32.200 | just say your spouse. Okay. And the section 105 plan says that, you know, for her reasonable
00:09:38.240 | compensation, she is basically, um, able to pay her certain medical expenses. Okay. Up
00:09:46.160 | to whatever would be reasonable compensation for the job she's performing. And then those
00:09:52.000 | medical expenses are for her family. So that would cover her children and her spouse. So
00:09:56.880 | she's not actually getting a W2. Her compensation is in the form of a section 105 plan. And
00:10:04.520 | it could, so could I make all of her compensation under that section 105 plan? Well, I mean,
00:10:11.200 | it has to be reasonable compensation. So if it is reasonable compensation, yes, all of
00:10:15.040 | the compensation could be under that section 105 plan. And the benefit of that, a couple
00:10:19.800 | of other things, for example, um, if my, if my wife and I are both working in the same
00:10:24.840 | business, then if we go on something like business travel, if we're both employees of
00:10:29.400 | the same company, uh, we may be able to deduct the full cost of those expenses instead of
00:10:33.560 | me simply deducting the cost of my expenses. Uh, and that would be much easier to do if
00:10:38.560 | we were both employees of the company. Uh, it's much easier to deduct other personal
00:10:43.040 | expenses, whether that's cell phone costs and similar things. Am I accurate in those
00:10:46.800 | statements? Well, uh, you know, if it's a business expense, we can deduct it. If it's
00:10:50.960 | personal, we can't deduct it. So you want to make sure that it is actual business. So,
00:10:55.000 | you know, um, you know, the wording is important. Correct. Uh, that's in my studying of this
00:11:03.840 | subject. If you want to answer any tax question, uh, I have a lot of beefs with the IRS. I
00:11:08.680 | have a lot of beefs with the tax code, but, uh, when I study it, generally I find that
00:11:12.760 | there's a pretty consistent theme throughout it that if this is a business expense and
00:11:17.160 | it's legitimate business expense is deductible and you can do, uh, you can deduct it. If
00:11:21.360 | it's not, it's not. And that's a doctrine that continues through in every area. Uh,
00:11:26.040 | I'd love to hear some other stories. I mean, you've been doing tax planning for, uh, I
00:11:30.360 | think you said six, 16 years, 16 years. We've been focusing on it for probably on a business
00:11:35.880 | owner for about six or seven years. Um, there's the, there's, there's another thing we, we
00:11:41.520 | call it the Augusta rule. Okay. Augusta, Georgia, where they have the, uh, what is it? The US
00:11:46.320 | open the PGA tour, uh, every year. Um, and I guess there's not a lot of hotels for people
00:11:52.520 | to stay at. So the government basically wanted people to rent out their homes. Okay. So basically
00:11:59.420 | if you rent your home to your business for less than 14 days a year or 14 or less per
00:12:04.200 | year, your business gets a deduction and the homeowner does not have to pick up the income,
00:12:10.560 | uh, on the tax return. So basically if you have a fence at your home for your staff,
00:12:17.760 | okay, you could rent your home to your business. Your business pays you personally and your
00:12:23.520 | business gets a deduction and you don't pick up the income. So how, let me think how I
00:12:29.480 | do that. You're thinking of things like a company party or like a planning meeting or
00:12:32.520 | a board or corporate corporate meeting, something like that. Any type of a board meeting, staff
00:12:38.280 | meeting, you know, it has to be, you have to see what they would charge if you went
00:12:41.680 | to a restaurant and said, you know what, I'd like to rent your room, but I'm not going
00:12:44.960 | to buy food for you. How much are you going to charge me? Okay. So once again, you have
00:12:48.800 | to make sure that your numbers are correct. Right. And this would be another example where,
00:12:53.520 | uh, in my study and I'll just tell the idea and then you correct me if you're wrong, but
00:12:57.320 | uh, you have different, um, meals and expenses. So generally meals and expense meals and entertainment
00:13:01.920 | are deductible at 50% of the cost, but there are a section of 100% deductible meals and
00:13:06.600 | entertainment expenses. And one example of that would be something like a company party,
00:13:11.680 | a five year anniversary party or a sales party or something for the launch of a new product.
00:13:16.200 | So there's no reason if the event is for a legitimate business purpose and you would
00:13:21.240 | want to have good documentation, good pictures of it showing that yes, this is a five year
00:13:26.080 | celebration of the company, not a Joshua's birthday party. You'd want to have that. This
00:13:30.720 | is a launch of a new product, et cetera, appropriate business purpose. But if there's an appropriate
00:13:34.680 | business purpose for an event, there's no reason why you can't hold a large business
00:13:38.360 | function in your home. Uh, there's no reason why you can't have your business pay you a
00:13:43.640 | rental expense for that. And there's no reason why you can't pay for all of those party expenses,
00:13:50.200 | the food, the catering, the entertainment, et cetera, out of the business checkbook and
00:13:54.280 | have that be a completely deductible expense. Is that accurate, Craig?
00:13:58.800 | Well, it's pretty accurate. You just have to make sure because the travel and entertainment
00:14:04.200 | rules are very onerous. But in this case, it has to be for employees, staff and the
00:14:12.360 | board of directors. If it's for clients, it doesn't meet the rule. Okay. And it's not
00:14:17.640 | a hundred percent deductible.
00:14:19.440 | So for any clients, even if it is for a business purpose?
00:14:22.400 | Correct.
00:14:23.400 | Okay. So that's good. So I was wrong in my impression of that. Uh, what about, so I guess
00:14:27.480 | then a better opportunity would be something like you said, a company staff meeting or
00:14:30.720 | board meeting, or how about something like a company Christmas party? Would that be a
00:14:34.640 | workable, a workable solution?
00:14:36.800 | Correct. For the staff. Correct.
00:14:38.840 | Interesting. Where do you go as a lay person to try to figure this stuff out and learn
00:14:42.600 | about it?
00:14:43.600 | I guess you could go to the tax code. I go to seminars throughout the country a number
00:14:48.120 | of times of year. They're typically hosted by, you know, uh, CPAs that do, um, training
00:14:55.160 | for other CPAs, uh, where a lay person would go. I, you know, I would say, I guess they
00:15:01.720 | could search the internet and hope they get it right. Um, you know, it's, you know, it's
00:15:07.400 | kind of like, you know what, you could go to the store and buy a bone saw, but would
00:15:10.840 | you want to amputate your own leg?
00:15:12.800 | Not so much. So tell me some other stories. What are some other, the interesting ones
00:15:18.000 | that you look at that, that, that people love to hear, uh, hear about when it comes to the
00:15:21.600 | world of tax deductions?
00:15:22.840 | Well, they, they love the, you know, the medical expense reimbursement plan. They love the
00:15:28.200 | self rental. Okay. Um, let's see. Um, you know, real estate, um, if people that own
00:15:40.440 | real estate, there's something called cost segregation, which basically is, it's almost
00:15:44.680 | like an accelerated depreciation. So, um, I have a client that has five rental properties.
00:15:50.680 | Okay. And he's depreciating these properties over 27 and a half years. And now he's going
00:15:57.480 | to sell one of them. Okay. And he's going to have a big gain. And we talked to him about
00:16:03.400 | doing a, what's called a cost segregation study. And it basically, you accelerate some
00:16:07.840 | of that depreciation. So instead of writing everything off over 27 and a half years, you
00:16:12.400 | get to write some things over five years, seven years, 10 years, and 15 years. So in
00:16:17.280 | the early years, you pick up more depreciation. In the later years, you pick up less depreciation.
00:16:22.560 | Okay. Um, you do a cost segregation study, you fill out a certain form of 3115 for the
00:16:29.400 | IRS and you pick up all that missed depreciation over the last five or seven years in one year
00:16:35.560 | and you get to offset some of the costs of the gain.
00:16:39.240 | So my understanding of this cost segregation strategy, the reason this works is because
00:16:43.640 | instead of having the entire value of the home counted as real estate, which would be
00:16:48.680 | depreciated over that 27 and a half year period, you're recognizing that there's a certain
00:16:53.880 | value of plant and equipment or appliances, things like that. And some of those are able
00:16:59.460 | to be used more quickly. And so thus, if you go ahead and figure out that of this million
00:17:04.920 | dollars of value in these properties, $50,000 of value is, is a plant and equipment that
00:17:10.760 | can be depreciated more quickly. That's why you get that depreciation. Is that accurate?
00:17:16.080 | Yes, it is.
00:17:17.080 | Okay. So this is definitely useful because I've spoken with a number of real estate investors
00:17:20.440 | here in my local area. And especially, I mean, Craig, my impression is this as much, if you
00:17:24.920 | have larger commercial property, this is probably very much something you should pursue if you
00:17:30.240 | haven't. I don't have the impression that it's so applicable if just somebody has one
00:17:35.080 | or two rentals. Am I wrong in that impression?
00:17:37.440 | Yes, you are.
00:17:38.440 | Okay. Tell me, tell me more. How does it apply in a individual residential property?
00:17:42.360 | Well, depending on how much you paid for that property, how much you allocate towards the
00:17:45.560 | land and how much you allocate towards the building, it can make a, it can make a difference
00:17:49.560 | of $20,000 a year in depreciation.
00:17:53.360 | That's well worth investigating. So you do this thing, you do this tax planning thing
00:17:58.360 | for a living. And I'd love for you just to talk about, let's pretend I or one of my listeners
00:18:03.320 | walks into your office. Now, obviously you can't teach somebody everything that you do
00:18:07.880 | in the course of a short podcast interview, but where do you start? What do you actually,
00:18:14.000 | when you're looking at a client situation, where do you start and what do you look for
00:18:17.280 | to try to figure out where they can save money in tax?
00:18:21.080 | Well, first thing we look at, you know, okay, did they pay any tax? Okay. Because if they
00:18:25.600 | didn't pay any tax, there's probably nothing we can help them with.
00:18:28.280 | So what do you mean by any tax?
00:18:30.840 | Any income tax or any self-employment tax. Okay. Then we look at the entity structure.
00:18:36.440 | Okay. A lot of times people set up their business and they basically go to the attorney and
00:18:42.000 | they say, I want to start a business. And he says, okay, set up an LLC or set up a corporation,
00:18:46.520 | whatever he's typically more familiar with. Okay. There's no planning that goes into that.
00:18:51.280 | All right. So, um, we look at that and we, a lot of times just changing the structure
00:18:57.200 | of your entity can save you a lot of money.
00:18:59.760 | So explain why, uh, the different entities and the different advantages and disadvantages
00:19:03.540 | for each type of taxation.
00:19:06.020 | So we'll, we'll compare an LLC and an S corporation. An LLC, all of your net income is taxed as
00:19:13.880 | income and it's also taxed for self-employment tax. Okay. So that means basically on the
00:19:19.000 | first $120,000 of profit, you're paying 15% self-employment tax plus regular income tax.
00:19:25.680 | Whereas if you were set up as a corporation in this case as S corporation and you took
00:19:30.800 | a reasonable salary, you might be able to cut your self-employment tax in half.
00:19:37.460 | Can you not do that? Can you not do that just simply by electing to be taxed as an S corporation
00:19:42.140 | while maintaining your LLC?
00:19:43.920 | Yes. But, um, that's, I would say that's rare that I come across that.
00:19:49.000 | Why? Why is it rare? I mean, yes, I imagine it's probably rare, but is it, is there any
00:19:53.560 | technical advantage from the taxation perspective to my choosing to maintain an S corporation
00:19:59.600 | instead of an LLC taxed as an S corporation?
00:20:02.960 | No, no. And like I said, we rarely see somebody come into us that is an LLC and they're taxed
00:20:09.360 | as an S as a corporation or an S corporation. Um, a lot of times that's one of the things
00:20:14.240 | that we'll recommend if they are an LLC, we'll recommend that, okay, you don't need to change
00:20:18.400 | your entity. Okay. Probably from a legal perspective, it's better to be an LLC. Okay. So now we
00:20:24.040 | could, you know, take advantage of the tax code and elect to be taxed as an S corporation.
00:20:28.840 | Do most people with LLCs come in, are they being taxed as a C corporation or they're
00:20:32.680 | being taxed as a sole proprietorship?
00:20:35.920 | Most LLCs we see are either taxed as a sole proprietorship or they're taxed as a partnership.
00:20:40.960 | Okay. I don't believe I've ever had somebody come into my office that was an LLC being
00:20:45.480 | taxed as a corporation or an S corporation.
00:20:47.680 | Interesting. Sorry. I meant to say partnership is what I meant. Okay. So what else, what
00:20:52.320 | else do you look for?
00:20:53.720 | Um, so, so we'll start there. We'll start to look at their compensation to see if their
00:20:58.600 | compensation is reasonable. Um, a lot of times we'll see a regular C corporation where
00:21:03.480 | the owner is taking all his compensation out in wages. Uh, that could be a trigger for
00:21:09.240 | the IRS and we'll figure out ways to deal with that.
00:21:13.240 | Um, how do you define reasonable? I know this is a big question that people say, you need
00:21:18.120 | to have reasonable compensation. How do you figure out what is defined as reasonable?
00:21:22.720 | Well, you, you can hire a company to do a compensation study for you. Okay. And, uh,
00:21:28.440 | for, you know, less than a thousand dollars, they'll do a compensation study and they'll
00:21:31.920 | tell you what reasonable compensation should be based on what you're doing. Okay. So you
00:21:37.040 | want to separate out, separate out what your job functions are, how much of it is management,
00:21:41.760 | how much of it is employee type work. Um, you can go online and you can go to the IRS,
00:21:49.080 | you know, website, download schedule C information for that type of business. See how many schedule
00:21:55.520 | C's there are and what the average compensation is. There's a lot of different things you
00:22:00.640 | can do, but you know, depending on what the dollar amount is, you know, you may want to
00:22:04.960 | go and get a real compensation study. What else, what other ideas do you have and
00:22:10.520 | how else would you approach a planning situation? You know, here's another one, you know, home
00:22:15.560 | office, you know, we always hear, Oh, home office, it's a red flag. It's not an IRS red
00:22:20.160 | flag. You just have to make sure the, the space inside of your office, okay. Um, you
00:22:26.280 | accurately accurately documented, it's only used for business purposes. And then you get
00:22:30.740 | to write off a portion of your, you know, your real estate taxes, your mortgage interests,
00:22:36.440 | your maintenance, your utilities. And then some people will say to me, well, why should
00:22:40.320 | I write off my real estate taxes and my home interest on my home office? I get to get them
00:22:45.880 | on schedule a, okay. Well, part of the reason is depending on how much money you are making,
00:22:51.160 | if you're subject to alternative minimum tax in the Northeast, at least, you know, our
00:22:55.680 | real estate taxes are generally high, so they get added back. Okay. And you lose the deduction
00:23:01.660 | basically for that. Whereas if you're taking it as part of your home office deduction,
00:23:05.200 | you're not going to lose that deduction. Um, another thing you're allowed to do is if you
00:23:09.920 | have a home offices, you're allowed to have a, um, a deductible home athletic facility
00:23:15.000 | for the employees that work in your home office. Okay. So if you have a home office and maybe
00:23:20.600 | you have a gym in your basement or pool, okay, you can make a lot of those expenses deductible
00:23:25.720 | if they're for your employees.
00:23:27.640 | Yes. Interesting. So in, when I've looked into this in the past, when I looked into
00:23:36.880 | the athletic facilities and the, and the opportunities there, I found that one had a lot of hurdles
00:23:41.320 | and I came to the, to the understanding myself that that one really wasn't worth pursuing.
00:23:46.440 | So I'm interested in your, uh, and I, it wasn't worth pursuing cause it had so many hurdles.
00:23:50.240 | Uh, before we get to like a home office, is it possible to do something where you're doing
00:23:55.120 | things like gym memberships or athletic club memberships? Is that, is there any way to
00:23:58.800 | deduct those expenses? No, there are not. So the home office, excuse me, the home gym,
00:24:04.320 | are there rules on its accessibility and availability to other members of the family or is it, is
00:24:10.040 | it able to be available to them and it's just gotta be, uh, in the home for the employees?
00:24:15.560 | Correct. Correct. So if it's for the employees and their families.
00:24:20.520 | Interesting. I could see that being effective for somebody who wants to set up something
00:24:24.440 | like a, I don't know, a pool or, or an exercise pool or, or something like that for physical
00:24:29.560 | therapy. Uh, as when you get into bigger expenses, it probably would be well worth looking into.
00:24:34.520 | Yeah. I mean, listen, they all add up. Yeah. That's the challenge with tax plan. People
00:24:39.320 | want one, one big thing and it's always, uh, it seems to be many, many little things. I'd
00:24:44.320 | love for you to talk a little bit about your perspective and how you advise people when
00:24:47.840 | it comes to vehicles, uh, and the various deductions for vehicles and then the various
00:24:54.400 | um, ways that somebody can own and operate vehicles. Share with us a little bit about
00:24:58.080 | your advice on, on, um, business, business vehicle deductions.
00:25:02.480 | Well, typically, I mean, if I was to generalize, I would say that you're going to get a bigger
00:25:07.680 | deduction from a vehicle lease than you are going to be get when you purchase a vehicle.
00:25:13.680 | Okay. And let's not talk about big trucks where they get to write off the whole truck
00:25:18.000 | in the year they purchase it. But let's just talk about your standard car. Okay. Um, that
00:25:23.760 | you use maybe 80% of the time for business. So if you have a lease and you write off 80%
00:25:27.920 | of your lease, okay. Um, let's just say you're driving a BMW for $500 a month. So you get
00:25:35.400 | to write off, you know, 40% of the, I mean, 80% which is $400 a month of that lease. Now
00:25:41.720 | the IRS uses an inclusion table. Okay. Basically an amount that you have to add back to income.
00:25:49.440 | And that number is such a tiny number. It's almost ridiculous to even have it. All right.
00:25:55.160 | Um, but most clients will get a bigger bang on a vehicle lease assuming they're not doing,
00:26:01.680 | you know, 30,000 miles a year and stuff like that. Why? And this is because the reason
00:26:06.920 | I ask is this is a, you hear all kinds of pieces of advice on this. So why would, why
00:26:11.720 | would I get a bigger, um, bang for my buck, better deduction leasing a car versus buying?
00:26:18.440 | Because when you purchase a vehicle, just like any other asset, you have to depreciate
00:26:21.960 | it. Okay. And typically vehicles, unless they're over like 6,000 pounds, you can't take a section
00:26:29.040 | 179 deduction, which means you write it off in the year that you purchase it. Okay. So
00:26:34.280 | you have to depreciate it over time. And I believe the first year's depreciation on a
00:26:38.600 | vehicle, if you're using it, a hundred percent is about $2,600. So if you're using it 80%,
00:26:44.240 | that's, you know, let's just say it's $2,000. All right. Versus the lease that's costing
00:26:51.200 | you $500 a month and you're using it 80%, you're getting about a 4,000, $5,000 deduction
00:26:56.360 | for it. So you're doubling your deduction.
00:26:59.760 | So that that's assuming however, that I'm using an actual cost, uh, expense reporting
00:27:05.760 | methodology rather than a mileage expense reporting methodology. And that's assuming
00:27:09.720 | that, uh, the actual, that the actual cost is less than, than the mileage. Is that right?
00:27:15.520 | Exactly. Exactly. Right. Cause when I've, I mean, I'll be, I've always driven cheap cars
00:27:20.080 | in my businesses and always been able to use cars to create, uh, I guess, I don't know
00:27:26.280 | what the right term for it is. I call it a phantom tax, a phantom tax loss, meaning that
00:27:30.880 | the vehicle probably costs me because the car is so cheap. Um, I can't remember when
00:27:36.640 | I've calculated, but let's just say it costs me 30 or 40 cents a mile to run. And the actual
00:27:41.360 | expense allowance that the IRS permits is what is it? 57 cents, something like that
00:27:45.880 | now. Uh, so I wind up for every mile I drive, I wind up picking up, let's just say a 30
00:27:51.480 | to 40 cent per mile, um, tax loss. Uh, and that's been, that's always been something
00:27:56.280 | that's beneficial to me, but it assumes however, that I'm driving an older, uh, inexpensive
00:28:00.960 | to operate vehicle. Yeah, most definitely. I mean, you really have to look at, you have
00:28:05.800 | to look at, you know, all the different, you know, instances and figure out what works
00:28:11.200 | best for you. But typically what we get is we get the client that's saying, listen, I'm,
00:28:15.080 | I'm going to buy a new car. Should I buy it or should I lease it? Okay. They're not interested
00:28:19.880 | in driving the 1980 Chevy citation. You know, they're ready to buy a new car. They don't
00:28:25.360 | want to deal with the headaches of, you know, operating an older vehicle. So it really comes
00:28:29.160 | down to preference. And then once you know what your preference is, then we figure out
00:28:32.240 | what's the best way to go. You see a lot of people talk about the 6,000 pound heavy vehicle
00:28:37.360 | thing. Uh, and do you see the people buying big SUVs, et cetera. Can I buy a Range Rover
00:28:42.840 | and get extra tax benefits because I chose to buy a Range Rover instead of a BMW sedan?
00:28:48.640 | Yes, you, you, you basically, you can, you know, assuming it meets the qualifications
00:28:55.080 | for section one 79, which a Range Rover would. Okay. But it's kind of like, are you buying
00:28:59.920 | it because you want the Range Rover or are you buying it for the tax deduction? Okay.
00:29:04.080 | Um, if you're buying it for the tax deduction, you're kind of going down the wrong path.
00:29:08.640 | You still have to spend the money. Generally, I find that when people want to spend lots
00:29:13.520 | of money, they say I'm doing it because I get a tax deduction when in reality they spend
00:29:17.800 | more money on it than they save on taxes. I usually find that tax deductions are a good
00:29:22.200 | excuse for people buying fancy stuff for them and paying more money. Exactly. Because let's
00:29:27.600 | just say you're in, you're in the, you know, 30% tax bracket, 25% bracket. You're only
00:29:31.760 | getting, you know, 25 cents, 30 cents on a dollar. Okay. So you still have to pay for
00:29:37.120 | that vehicle. Right, right. And you get the same problem that you're going to get the
00:29:40.360 | biggest tax deduction if you buy the newest vehicle. But the newest vehicle is where you
00:29:44.040 | have the highest appreciation and so you have the biggest expense. So sometimes you can
00:29:47.800 | come out better if you, uh, if you choose to buy something different, something older.
00:29:51.740 | As you said, you've got to decide what you're trying to do and what you're trying to accomplish.
00:29:55.120 | Right. I would, I would never, you know, advise somebody to go out and buy a vehicle or lease
00:30:00.580 | a vehicle so they could get a tax deduction. It's typically, listen, this is what I'm looking
00:30:04.720 | to do. We need to buy a new vehicle for the business. Okay. Which way should we go? Okay.
00:30:09.720 | And we do the analysis and that's what we come up with. It's never the other way around.
00:30:13.520 | Do you have any other ideas for the kinds of things that people can deduct? Uh, that,
00:30:19.520 | you know, the, again, the sexy stuff, the toys and things like that. Oh, let's see.
00:30:26.920 | You know, what about stuff like boats and airplanes? Uh, well, you know, we don't get
00:30:33.040 | too many people coming to us. There are rules with airplanes. Okay. Um, I believe that you
00:30:38.320 | get accelerated depreciation. I've honestly never had somebody come to me, you know, they
00:30:43.160 | were going to buy an airplane. Um, but there are special rules for airplanes, um, that
00:30:48.080 | we do a little bit of research for. I mean, you know, your 401k plan, your, you know,
00:30:53.560 | depending on where you are operating, there are, um, different types of defined benefit
00:31:00.160 | plans, how much free cashflow you have. You know, there's a lot of things that go into
00:31:04.280 | it, uh, other than just say, I want a deduction. Okay. Can you afford the deduction? You know,
00:31:09.320 | can you put all this money away for your retirement? You know, can I use this money to do something
00:31:14.320 | else? Um, but typically the sexy ones are your self rental, your medical expense reimbursement
00:31:21.800 | plan, you know, your typical 401k, um, the vehicles. All right. Um, making sure they're
00:31:31.120 | taking, if they're using a home office, they are taking advantage of all the home office
00:31:35.320 | deductions they can. Uh, those go into it and the right entity, the right entity classification.
00:31:41.280 | You know, we, we had one client that we saved, uh, the wrong entity classification was costing
00:31:46.440 | them $450,000 a year. Okay. So, um, it was a pretty simple fix. Pretty simple. You, you
00:31:54.360 | earned your fee on that one. Craig, let me ask you a question. And, and my listeners
00:31:58.640 | know that this one's a, uh, an area of special interest for me. You live in Massachusetts,
00:32:03.880 | is that right? No, New York, New York. You live in New York. Okay. Uh, have you ever
00:32:09.560 | thought about moving and do you just recommend that your clients move, um, to save on state
00:32:15.280 | income taxes? It's a discussion we have with the client, depending on, you know, what,
00:32:21.640 | you know, it depends on their business, where their business is located, or are they a consultant,
00:32:25.560 | you know, how, how are they working? Can they work any way they want? You know, I mean,
00:32:30.040 | luckily today they're, it's very easy to work remotely, but you know, if you're a brick
00:32:34.840 | and mortar, you can't really do that. Um, so it's a discussion we have depending on
00:32:39.720 | what type of business the person is in. Yes. But you could move from New York to Texas
00:32:44.200 | or Florida that has no state income tax and, you know, save a lot of money. Or even in
00:32:47.920 | New Hampshire if you want to stay in the Northeast. And, uh, I think New Hampshire taxes dividends,
00:32:52.520 | uh, and investment income, but they don't tax earned income. Uh, is that, I think that's
00:32:56.800 | right. Um, have you ever considered moving yourself? No, no. Why not? I'm, I'm, I'm New
00:33:02.440 | York, uh, grown and raised and I'm not going anywhere. I love them 15 miles, 20 miles to
00:33:09.480 | Midtown Manhattan. You know, um, I love it here. You know, um, I'm not going anywhere.
00:33:17.040 | They got you. They got their hooks into you. That's right. And they'll soak you for all
00:33:21.560 | the money. That's, that's, you know, it's the cost of doing business. Well, it is, it
00:33:25.960 | is always interesting to me because when I run the calculations and you go through and
00:33:29.640 | you figure out, okay, how much can I save on my tax return by setting up a home gym
00:33:33.460 | and a home office? And you know, these are for many people, these are hundreds or perhaps
00:33:38.100 | up to a couple thousand dollars of actual tax savings where on the mean time you have
00:33:43.040 | a state income tax bill of five, 10, 15, 20 grand, uh, even in a just comfortable middle
00:33:48.640 | income, uh, six figure salary people, uh, let alone, uh, the Uber wealthy, uh, and how
00:33:54.160 | big those bills wind up being. Craig, tell us about your business. Tell us about your
00:33:57.200 | tax practice and let us know any, uh, action step that you'd like my audience to take to
00:34:02.100 | follow up with you after this interview, if they'd like to work with you. Great. Well,
00:34:05.880 | they could reach us, um, at www.craigcodyandcompany.com and if they go to that website, uh, forward
00:34:14.200 | slash, uh, R's in radical P's and personal F's in finance, they could, um, request a
00:34:20.960 | free copy of our book. All right. Um, our office number is 516-869-4051. We do a free
00:34:29.700 | analysis of your tax returns and our typical savings is close to $20,000 a year. You work
00:34:36.560 | with people all across the country or just New York? We, I have clients from Oregon to
00:34:41.320 | South Florida to obviously New York. Um, we have a team of eight, four CPAs here. Um,
00:34:48.720 | we specialize in tax planning. That's where we start and we go from there to your typical
00:34:53.480 | tax and accounting work. Um, we have a little niche in, um, international clients that come
00:34:59.240 | to New York to do business. They're doing business in Europe or Coke. They want to do
00:35:02.360 | business in the US with Coke. And then we have, um, uh, the outsourced CFO business,
00:35:08.240 | whereas you're, you're a little bit bigger company and maybe you have a CFO and he's
00:35:12.240 | doing low level to high level work and you know, maybe it's not working out. He's not
00:35:17.600 | satisfied because he doesn't want to do low level work and they'll hire us and we'll have
00:35:22.920 | a bookkeeper and a CPA assigned to you. And then I'll do the top down, you know, heavy
00:35:28.720 | lifting and we have a nice, um, diverse client group with that.
00:35:33.040 | Great. I'll put those links in the blog post for today's show. Craig, thanks for coming
00:35:36.880 | on.
00:35:37.880 | Thank you very much for having me and, um, I will look forward to listening to the episode.
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