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The biggest wealth leak for entrepreneurs isn’t bad investing—it’s overpaying taxes.
In this episode, Dave Wolcott sits down with CPA, entrepreneur, and tax strategist Mike Jesowshek to uncover why proactive tax planning is one of the highest-return investments any business owner can make. While most entrepreneurs focus on increasing investment returns, Mike explains why reducing taxes can often generate an even greater compounding effect over time. Together, they break down the critical difference between tax preparation and tax planning, why most CPAs aren’t actually providing strategic tax advice, and how business owners can begin building a more tax-efficient wealth strategy.
In This Episode
- The difference between tax preparation and proactive tax planning
- The foundational tax strategies every entrepreneur should implement before pursuing advanced strategies
- How sophisticated investors combine tax efficiency with long-term wealth creation
Mike Jesowshek is a CPA, entrepreneur, bestselling author, founder of TaxElm, and host of the Small Business Tax Savings Podcast. With more than 15 years of experience, Mike specializes in proactive tax planning, helping thousands of entrepreneurs legally reduce taxes while building stronger long-term wealth strategies.
Most entrepreneurs focus on growing revenue but overlook one of the fastest ways to accelerate wealth: keeping more of what they already earn.
A well-designed tax strategy doesn’t simply reduce today’s tax bill—it creates additional capital that can be reinvested into cash-flowing assets, alternative investments, and long-term compounding opportunities. By combining proactive planning with thoughtful investment decisions, business owners can increase liquidity, reduce unnecessary tax exposure, and create a more resilient wealth-building system.
This episode covers tax planning, tax strategy, business tax savings, wealth strategy, CPA advice, proactive tax planning, S corporations, entity structure, alternative investments, oil and gas investing, cost segregation, short-term rentals, passive income, family office investing, accredited investors, entrepreneurship, and generational wealth.
Everybody’s picture looks differently because everyone has different risk standpoints. Everybody has different time commitments. Everyone has different— everything’s different. So we’re taking these concepts and then we’re trying to pick, put them into the puzzle of saying what makes sense in your picture, in your situation based on what you have going on and, and, and where you’re standing right now today.
How’s it going everyone? And welcome to another episode on Wealth Strategy Secrets of the Ultra Wealthy. One of the biggest mistakes entrepreneurs make isn’t earning too little, it’s paying far more in taxes than they legally have to. And that’s why I’m excited to welcome Mike Jesowshek to the show. Mike is a CPA, entrepreneur, bestselling author, founder of Tax Elm, and host of the Small Business Tax Savings Podcast, where he’s helped thousands of business owners uncover practical strategies that can save them tens of thousands or even hundreds of thousands of dollars. With more than 15 years of experience, Mike focuses on proactive tax planning, rather than simply preparing tax returns, helping entrepreneurs keep more of what they earn through legal strategic tax planning.
Dave, thanks for having me.
It’s real estate, private assets, whatever they be. Am I getting an 8% return, a 12% return? Can I get a 20% return? You know, whatever that is to actually build their wealth. But I really like to look at the lens of looking at tax optimization to say, If you’re paying 37% in taxes right now, can we reduce those to 10% or 5%, right? And now you unlock that return, right? On top of the optimized yield from, you know, having a great portfolio. And then you can compound that as well for the next, you know, 10, 20 years, right? And it’s absolutely massive to growing your wealth. So appreciate having you on today. And really looking forward to having you kind of, you know, dispel some of the rumors around, you know, tax planning and help shed some light on this great opportunity that most people, you know, haven’t taken advantage of yet.
Yeah, I think that’s such an important topic. And, you know, I would love to see someone especially like you guys kind of run those numbers because I think sometimes people think, well, I’m just saving this amount in taxes, but they don’t see the power behind what that unlocks, as you kind of mentioned. And, you know, it can be extremely extremely beneficial for business owners and, you know, high net worth individuals in general. But it is such an area that people don’t necessarily understand or don’t have the right people on their team to do it. And that’s why I love what you guys are doing. You know, this is so important for, for these people to understand.
Yeah, great. So, tell us a little bit about your journey and how you got into actually tax planning. And also, I’d like you to explain to the audience, because this was a really big learning lesson for me that frankly, I wish I learned back when I was in college. It should have been almost a college course, right? You know, financial management, right? Tax preparation, right? But there’s a difference between tax preparation and tax planning. So, you can ask anyone on the street, do you have a CPA? Well, yeah, I have a CPA.
Right.
Right? So, people are using CPAs, but they really don’t understand what is the difference between tax preparation and tax planning. So, I’d like you to help really explain and articulate that to the audience so that they’re clear who they have on their team and what is the difference.
Yeah. No, I think that’s really good. And we can talk about— I have an interesting career path. But regarding the tax preparation, tax planning piece, I think this is so misunderstood. And the thing that I always tell people is to say not every CPA is a tax planner, just like not every CPA is a tax preparer. Not every CPA works in tax in general. And I think that that’s a common misconception because people that are working with their CPA just assume that, hey, I’m paying someone to prepare my tax return. That means that they’re also going to be saving me on taxes.
They’re going to do everything they can to ensure that I’m paying the least amount in taxes. And that’s simply not true. Now, the problem that I find is that CPAs generally are not very good at either explaining that, you know, not saying that, hey, this is a tax prep fee and this is not a tax planning fee. And CPAs also are, are not very good at selling things. And so when I come to that conclusion, one thing that I know when we look at the planning piece is that CPAs know how to do planning, but they know that planning takes time, planning takes effort, planning takes a lot of work, and they’re afraid to charge for it because the assumption on the end user is that it’s just included. If I have a $750 personal tax return, tax planning is included in that. Unfortunately, CPAs can’t include tax planning in a cost like that, but there’s a disconnect in the communication of that. That’s why I always say there are really good CPAs out there that just don’t do tax planning or are not good at tax planning.
That doesn’t mean that they’re a bad CPA or that you should move your CPAs. It just means that maybe you need another tool in your belt. You have your really good CPA that you have a great relationship, but maybe you need a tax strategist or a financial advisor that’s tax-heavy. Maybe you just need that extra person in there to help along with that journey.
Tax preparation reports the past. Tax planning shapes the future.
Yeah.
When I look at tax prep versus tax planning, I always say tax planning or tax preparation is important. It’s required by law, but it’s just taking numbers and sending it to the government. It’s saying, hey government, here’s what I did throughout the year. Here’s my income. Here’s my expenses. Here’s all the different credits that I have. Here’s what I did throughout the year. And you’re just reporting it to them.
Required by law, important. But tax preparation doesn’t save anything. Tax planning is what you do throughout the year before the year’s over, what you’re doing between January and December to ensure that you are doing everything possible to pay the least amount in taxes as legally possible. And then when you you do that tax prep, you’re just reporting those type— that those tax saving strategies that you’ve implemented. So it is a very, um, big difference that people need to understand is tax prep and tax planning don’t always come in the same package. Sometimes they do, and a lot of times they do, but they don’t always do that. And so I always encourage people that if you think that your CPA is doing tax planning for you and they’re not, ask them. Ask them, what would it entail? What can I do to save on taxes? Because there might be a potential option for them, or there might be a service that they just haven’t talked to you about.
But don’t assume that, that $750 or $2,000 personal tax return prep fee includes planning involved in it. That’s really just the cost of preparing and filing your tax return.
So, how did you get into tax planning?
Yeah. So, I’ve been an entrepreneur since a very young age. Started at the age of 14 selling things on like eBay and doing affiliate-type work. And so, started my journey in the online marketing area and went to school really just as a— to go for accounting as really a backup plan because I was already in a business running an online marketing firm. I had 7 partners at the time. And I said, well, if this all falls apart, because you know, that typical entrepreneur mindset is, hey, everything can fall apart tomorrow, even though that never ever happens. But there’s that fear sometimes in entrepreneurs that things can fall apart. And so my backup plan was to become an accountant.
And so went to school for accounting, took the CPA, and was still running this marketing firm and got to a point in our firm where we had 7 different partners, all really good at different areas of the industry. And we were just trying to pull one company into 7 different directions. And at that time, we decided to break off and really do what we specialize in. And because I was on the finance side of that business, it’s kind of a unique industry. I started an accounting firm, a cloud-based accounting firm. And so this was back in 2013, where cloud-based accounting firms, very common now. Back in 2013, they really weren’t. But the industry that I was in was really young generation.
They were used to working remotely. And so it was very easy for me to do that, especially focused on an industry that I had a good reputation in. But I wasn’t doing any tax. I was mainly just a finance financial accountant doing bookkeeping, accounting work, those types of things. And I would refer out all that tax work. And as I was referring this out, I had really good CPAs that did really good prep work, but I consistently had, uh, clients come to me that said, Mike, I can’t get any tax planning from them. I, you know, I ask them questions and I get this, it depends, and I kind of push down the road. So they’re like, I’m just paying so much in tax, I just feel like that’s my only option.
And I was getting really frustrated with that, not to mention I myself was having the same problem. And so I started to do research and started to dig into this the tax planning piece, started doing tax prep in our firm, then got into the tax planning side and just found an area that was so, so underutilized by small business owners, especially in the focus that we were. So really started deep dive into tax planning about 8 years ago, started a podcast with the main focus of saying, how can I get these, these ideas, these concepts out to business owners to help them understand that of course everyone’s situation is different and it does depend, but 90% of the strategy is the same for everybody. I look at an example of, let’s say it’s as simple as hiring your kids. The concept of hiring your kids, what you need to do to do it correctly, how you do it, that’s the same for everybody. Now, there’s that last 10%. If you’re a plumber, hiring your kids is going to look different than if you’re a financial advisor. Or if you have an 8-year-old, it’s going to look different than if you have a 16-year-old.
So that’s the part that we got to tweak. But my concept is if I can get people 90% of the way there, hopefully when they go to their accountant, it’s not, hey, I want to hire my kids. Can you help me do that? It’s like, no, I got little Susie or little Johnny. what they’re going to do. Here’s an hourly rate that I work. Here’s how many hours they’re going to work. Can you help me just button this up and finalize that? So started a podcast about 8 years ago and just really fell in love with kind of that teaching it to the masses piece and bringing this idea of helping small business owners understand tax strategies. Eventually sold my accounting firm in 2021, the majority stake in my accounting firm in 2021.
And now my focus is 100% on the podcast, helping bring this concept to business owners as well as a software that we launched too. So Kind of a weird journey where I started as a marketing firm, ended up into my backup plan, which was a CPA, and then kind of gone deep into that area and now in, in the planning phase.
Yeah, that’s great. So tell us how someone is supposed to most efficiently work with their tax planner, right? Because I find that, you know, your financial IQ is directly proportional to your net worth. So, if you don’t fully understand the opportunities available from advanced tax planning strategies, how can you ask your CPA all of the right questions, right? Now, if they’re good, obviously, they’re going to be making suggestions. They’re going to be talking to you about your business, your life, like what opportunities are available. But I also find that there’s this gap, right, where the more educated you can be, around what options you have, then you can kind of work synergistically with your planner to be asking the right questions, to be designing things in the right way.
Yeah, I think, you know, when I first talk to somebody, I always break tax planning into 2 pieces. We have what I call core tax strategies, and then we have advanced tax strategies. And so, what I always talk to business owners is, first, before we ever get to the advanced side, I want to make sure that you’re taking advantage of everything that you can on the core tax strategy side. And So those are things like home office, S corporation, hiring your kids, retirement planning, making sure you got that buttoned up, all of those types of things. And I think so many people skip that and go straight to advanced planning because it’s big numbers, it’s big, it’s big stuff. And that’s great. But the problem is, is that they don’t have that foundational foundation for their business, that initial concept of tax planning. And so they’re jumping into these crazy, these, these, these more advanced options, which can be super, super powerful, but they don’t have a foundational knowledge.
And so that’s why I always start with these core strategies and say, let’s, let’s implement these core strategies to their fullest extent. Once we have done that, then let’s start to look into the advanced strategy piece. And this is— and I mean, this is what you guys do every day. This can be an area that I think is so important for people to find a relationship with, find that person that they can know, like, and trust. Because advanced planning— I don’t know about you, Dave, but for me, I get hit up probably 5 times a week by somebody with this new crazy, this new great idea, this new strategy. And business owners are seeing that same thing. And so what I specialize in on the advanced strategy side, just like you guys, is helping to understand some of these concepts out there, helping to do some due diligence on them, helping to understand, hey, what is the right way to do this? Is this a good strategy? Is this not a good strategy? And then I can bring them to clients so that they’re not coming in with all these people are hitting them up on LinkedIn and different social media about these strategies. They’re talking to someone that’s already looked at them, already vetted them.
And not to say that, hey, it’s getting a stamp of approval, but we’ve done a really good deep due diligence on it because I’m not going to bring a strategy to somebody that I don’t know anything about, or not something that I have at least reviewed from that standpoint. So I think that’s where having a relationship with somebody, or at least having somebody that you can bounce ideas off of, uh, during that journey is so important so that you know that, hey, there’s some stuff out there and there’s some really good salespeople out there, but how do we dig through all that noise and find the stuff that’s that’s actually relevant to us and something that we can actually defend and, and go to fight for.
Yeah, that’s exactly what we do inside of our virtual family office is there might be a great tax strategy, right, that the planner is proposing to someone. But when you start to look at it from that more family office type lens, like a 360-degree viewpoint, you know, it may actually bring unnecessary risk to that individual and therefore kind of pierce their risk management profile, right? That they’re not necessarily thinking through. Or it may create incongruence with their legacy plan, right? It works today. It’s a good tax strategy today, but not necessarily for the future. And I feel that a lot of people make the mistake of just making one-dimensional decisions about an investment, about a particular strategy without making this entire 360-degree lens to really ensure, you know, is your estate planning covered? Is your risk management covered? Right. Does it align with your cash flow goals? Does it align with your growth goals? Right. All of these things, you know, that typically are expressed inside of an investment policy statement, you know, where you have a clear blueprint, right, of your overall strategy, philosophy, and all those things that you want to implement.
Your tax strategy should align with your legacy plan, your risk management, and your long-term growth.
I think that’s so important because so many people will see a big number— here’s how much we can save in taxes— but they don’t look at the underlying investment. I always say, whenever we’re looking at a tax strategy, it should be investment-focused first. Is this a good investment? Let that tax benefit be the cherry on top. Don’t let the tax benefit drive the investment. If we look at something like oil and gas, as an example, we need to make sure that what we’re investing in is a solid investment. Is this operator the operator that we want to be with? We could go invest $100,000 into oil and gas, but if something blows up, we saved $40,000 in taxes, but we just paid $100,000 and it’s lost. On the flip side, there are so many good oil and gas options out there, so many good oil and gas investments that you could put $100,000 in, turn it into $200,000, turn it into $250,000, plus save that $40,000 on the front end. That’s super powerful.
So I always, you know, want to stress and talk about this concept of let your investment drive the decision and then let the tax savings be the cherry on top, not vice versa, because you can start to get into some trouble the other way. And it’s hard, you know, as a, just an everyday high net worth individual, it’s hard sometimes to switch that flip or flip that switch. But it is something that people need to have in the back of their mind as they’re evaluating kind of what options do they have for tax optimization. Yeah.
Couldn’t agree more. And one of the things we like about oil and gas as well, and why it’s part of our thesis is, yes, outside of the tax benefits, it’s a phenomenal way to get into an uncorrelated asset. It’s non-correlated to the stock market. And if you look at the supply-demand curve and the macroeconomic fundamentals of energy right now, I mean, that is the place, number one place to invest is energy and infrastructure right now. Because AI is the boom and the technology is one of the biggest opportunities we have right now. But investing in the plumbing and the infrastructure to support that is huge. So, I really agree with you there that adding on the tax benefit on top is really the cherry on top versus the other way around.
Yeah. And that’s the thing. So much of this is alternative investments. So, people understand S&P. I got my money in my 401, and they just see that tax 10% to 15% or less returns that are coming in. And that’s easy to understand because it’s mainstream. Everyone’s doing that. And also, you introduce an alternative investment and it just takes a different approach to how you’re evaluating that from an investment standpoint because some of these people have never experienced something like that before.
They are just institutional-type stuff and we just need to change that focus a little bit to say, OK, here is a different investment idea, by also keeping them grounded on the idea of investment first.
Right.
Tax strategy, let that be the cherry on top.
Yeah. Excellent. So, we now have covered really philosophy around strategic tax planning. Can you just break down for folks, number one, you talked about the core infrastructure and core things that you could really do from a tax planning standpoint. So, can you just cover really maybe like the top 5 things that you would look at for someone there so that it’s very clear?
The first thing is looking at their entity structure. How is their business organized? Do they have partners? Do they have multiple businesses? What’s their income looking like? So many people will dive into an advanced strategy because they see the tax savings opportunity, but they have a foundation that’s just kind of broken. It’s not set up correctly. That’s why we always say start with the foundation. That’s the entity structure. Whether we’re looking at an LLC or a corporation you have set up, What is that entity structure and does it play well with everything that you have going on? So the first thing we always look at is, you know, an S corporation could be a super powerful tool to help minimize self-employment taxes. But we— if we have 5 different businesses and a lot of entrepreneurs are multiple different things going on, we don’t want to have 5 different S corporations in that. So we talk about, hey, if you have multiple businesses, let’s have a parent company.
Let’s have that parent company own your ownership in whatever businesses that you’re associated with. So if you own 100% of this business, 50% of this, that’s fine. Have your ownership ownership in those businesses be that parent company. And that parent company is where you can do the planning on personally from a business aspect. Same thing comes if you have partners. We def— we usually do not want to see a partnership with an S corporation. We would rather see a partnership with the owners having their own S corporations because that allows them to do planning inside of their S corporations that doesn’t affect the other partners. And so that entity structure combined with potentially an S corporation is, is one area we look at.
The next thing is hiring your kids. I think that every business owner that has kids over the age of 7 should be hiring their kids in some capacity in their business. Now, we might not be paying them $15,000 a year when they’re an 8-year-old, but I think they should be hiring their kids at some capacity. Not only from the tax breaks— you get a tax benefit, you get a tax expense in your business, and your kids are likely paying no income taxes on that— but I love to combo that with a Roth IRA. So we’re hiring our kids now. Now that they have earned income, we can fund a Roth IRA. And the big problem with Roth IRAs is you get no tax deduction when you’re going into it. But if you’re an 8-year-old making $5,000 you don’t have any taxable income, so you don’t need a tax deduction going into it.
But imagine the compounding and the growth that can happen with a Roth IRA if you’re funding it $5,000 at the age of 8 and 9 and 10 and 11. Imagine where that’s going to grow as an opportunity for them as they continue to grow older. And the cool thing about a Roth is that if they get into college or if they get into a point in their life where they are in a money pinch and they do need some cash, they can pull the principal out of a Roth tax-free, no penalties, no questions asked. So I love to take not only just higher our kids, but then how do we combo it with another strategy that we can add on top of that? I think from there you’re looking at how do we take advantage of, of some of the laws that are out there. So, you know, home office— everybody should be utilizing a home office again to some extent. Automobile, uh, travel expenses— we always look at travel and say, you know, how do we turn everyday travel that you want to do into business expenses? And, you know, I always kind of go through an example. Uh, you know, my wife and I, we wanted to— before we had kids, we wanted to go to Washington, DC. We’ve never been there before.
And so instead of just saying, hey, let’s go to Washington, DC and this trap. We said, hey, is there a business reason that we could go out there? And so, you know, there were some clients out there, there was a conference that we were attending, and so we planned a business travel around a place that we wanted to go anyways. And we got our business hours in, you know, from 8 to 1 in the afternoon, we were working at this conference or visiting clients or doing whatever we’re doing. But after that, the IRS doesn’t care what we’re doing. The majority of the day was a business day. You know, we go explore, we go to the monuments, all those different things. Those are all just items that the IRS doesn’t care about. That’s considered a business day.
And so it’s organizing your life in that area. Now, I always say we don’t want We don’t want to take advantage. We don’t want to abuse these types of things. So, you know, if every vacation you take is a business trip, there might start to be some red flags there, but it’s just being strategic, a little bit more strategic about some of the things that you’re, you’re doing anyways. And then obviously you come to retirement planning and, and various different retirement plans. If you want to set up that, what retirement plan are we doing? How are we structuring it? Is there a different option for you, especially if you’re a higher income earner that might produce better results? We start to kind of evaluate where, where that looks. And so from our core tax strategy side, those are a lot of the things we’re doing. core strategies, I say these are for business owners of all sizes.
If you’re making $50,000 a year or $5 million a year, much of the core strategies are going to be available to you. They’re easy to implement. They’re easy to understand. There’s generally no underlying cost, uh, per se to, to implement them. Uh, and so that’s why I love going through those core strategies. And then once we say, okay, we’ve done everything we can in the core strategies, but we still have this big tax bill, now what can we do? And that’s kind of when we start to dive into, um, that advanced planning Great.
So, can you now uncover some of your top strategies on the advanced planning side? And if you could please break that down between active income, because we have a lot of W-2s out there, high-income W-2s, as well as for business owners.
Yeah. So, when we talk about advanced strategies, I like to break them into buckets. So, the first bucket is going to be asset purchases. So, these are things like if you’re looking at a short-term rental, how do we organize that? short-term rental obviously would be available for active business owners as long as they meet qualifications required for that, or long-term rentals and just asset purchases in general, where we’re utilizing maybe leverage, maybe depreciation to get big year 1 upsides. Now there’s risks and there’s things we need to consider for all those because, hey, if we’re, if we’re doing a short-term rental and we’re taking a large depreciation deduction year 1, eventually we’re going to have to pay the loan back on that leverage, especially if we’re using a loan for it. And there’s going to be some what I call phantom income. And so with every one of these buckets, there’s things that we need to consider potentially on the back end where it’s a tax savings today. And, and you alluded to this, Dave, earlier in the conversation.
There might be tax savings today, but what does 5 years look like down the road? What does 10 years look like down the road? And do we have a plan, or at least a proposed plan for that? So asset purchases, asset donation type strategies, oil and gas investments. We also talk about risk management. So these would be in the form of like a captive type insurance company or a company like that. That’s mainly for business owners at a higher income level. We do advanced retirement planning, so looking at different advanced retirement strategies, whether it’s a defined benefit plan, if that makes sense. We’ll start to go down that route. And then the 6th category is what I call the other category. Mainly, this is for those that are looking to sell a highly appreciated asset.
For those that are looking to sell, maybe it’s crypto, maybe it’s a business, maybe it’s a stock position, anything that has a high appreciation that it’s going to be a large capital Again, there’s various different kind of strategies that we’ll look at from that route. So we start with those buckets and say, let’s look at the overall concept of asset purchases, asset donation, oil and gas, or alternative investments, uh, captive insurance. Let’s look at those overall buckets, and then we can start to drill down. And with inside of all of those, there might be many different kind of routes that we can go down as far as what we’re actually going to be doing, but the overall concept is very similar with a lot of those.
Are there any strategies that you would advise clients not to look at right now? Because let’s say they’re more in the gray area, such as let’s say land easements, or I’ll even ask you that for captives right now.
Yeah. So, you know, if we look at easements as an example, obviously a couple years ago, conservation easements, at least the way that we, that we knew them, gone away. So the ability, you can still utilize them, but the true value that you would get out of them has gone away and they’re highly attached. Attacked by the IRS. Um, and so I think that, you know, is there strategies that we would push away from? Absolutely. You know, and I think that’s, that’s part of that due diligence process where a lot of different opportunities coming through. As long as in, in that due diligence process we look at captive— captive is something that gets attacked by the IRS. Why? Because there’s a lot of abuse to it, or there has been abuse to it.
But does that mean that captive is not legal? Absolutely not. There are major companies companies, large— every large company you can imagine has a captive insurance company. So they are not illegal, but do they need to be done correctly? Is there different things to dot your i’s, cross your t’s to make sure it’s done correctly? Yes. And so, you know, that’s what we talk about in all these different things is knowing a strategy and implementing a strategy is one thing, but correct implementation is the key. You know, you could take the home office deduction, black and white legal in the tax code, and implement it incorrectly and make it illegal and lose that deduction. That doesn’t mean that home offices are illegal. It just means that you need to to correctly implement it. And so especially when we’re looking at advanced type strategies, I think it’s so important because there are so many nuances inside of them that you also have to, you know, build that trust with whatever provider you work with.
There’s people that did conservation easements that are winning in tax court cases. There’s people that did conservation easements that are losing badly in tax court cases. And so those are same, same strategy, same concept, just 2 different ends of the spectrum of how that implementation is done. So, you know, oftentimes, yes, we’ll, we’ll kind of gear down and say, hey, you know, this is a highly risk standpoint, we at least like to show options out there, uh, and then talk about the risks. And then if there is questions, let’s find a provider that if they say, hey, I’m willing to take that risk, I love captives even though they might be, might be looked at, uh, or even though the IRS might be attacking them, I love the concept of it. How do I do it correctly? How do I know that if it does get attacked, I don’t have anything to worry about? And that’s that documentation, that implementation piece that we talk about all the way down from a core strategy all the way up to advanced strategy, is having that key documentation in there so that, hey, if you get a knock on the door, you’re not worried because you know you’ve done it correctly. And I’d like to, Dave, I’d like to give this example. I had a good friend of mine that was getting audited.
If you’ve ever wondered how the wealthy use energy investments to reduce their tax bill while generating cash flow, we just answer to every question on camera. Go to pantheoninvest.com/energy to find out.
And he sent me the audit letter. and was super concerned. He’s like, hey, you know, I’m super nervous. What’s this look like? And I said, well, send the letter over. I’ll get the documentation ready. We’ll put through. We’ve done everything correctly. We dot our i’s, cross our t’s.
We have the documentation together. So got this audit letter, compiled all this tons and tons of pages of documentation that they needed within 3 days. And of course, I can’t share a Google file with the IRS. So I put it on a zip file, put it out in the mail. Within 3 3 days, there was a— there was an item in the mail that had every piece of documentation that they had regarding this audit. And I got on the phone with the IRS auditor. It was a 4-hour meeting. Within 35 minutes, she says, you know what, I’m putting this up to my supervisor.
You guys are good to go. Everything looks solid here. Why is that? It’s because we had clean, correct documentation. And that’s why when people get those audit letters— when my client got this audit letter, my friend got this audit letter— I said, don’t worry about it because we do everything correctly. There are some red flags here, and I understand why it got audited based on the business that in, there was an indication that would raise a red flag, but we have justification for that and it’s very easy to prove. And so that’s just the key thing. I think that, you know, not only implementing these strategies but correctly implementing them. And if you are working with a provider, if you’re looking at an advanced strategy, typically you’re going to have a vendor that you’re working with, making sure that they’re doing things and you feel comfortable with the way that they’re doing things.
What would be your guidance to business owners out there who are really trying to balance tax strategy with creating wealth. So let’s just say specifically, you’ve done all those core strategies, right? And maybe that takes away a couple hundred K of income, right? And now you need to start looking at the advanced strategies. And the more successful your business grows, right? The more profit that you have, whether you take that out or not, right? You have that corresponding proportional amount of, you know, tax obligation, right, that, that, that you have to pay. So how should business owners be thinking about, okay, if I leave capital in the business, right, to continue growing the business, right, but at the same time, it comes at a cost because we have to, you know, pay taxes on that, you know, capital that we have. You know, what are your thoughts there?
Yeah, you know, I think it’s so important to think, you know, when I talk to business owners, obviously, we have, we have 2 issues here. We have active income, that’s going to be your W-2 income, the business that you’re operating, active income. And then we have passive income. These are going to be things that you’re not necessarily involved with, real estate, different items like that. Passive income is generally going to be a lot easier to offset and plan around and make strategic investments in than active income. Now, it doesn’t mean that active income has no availability for that. You and I both know that there’s a lot of opportunities there, but that is when we talk about wealth building is consistently thinking you have this income-generating item, whether that’s a W-2, your career, whether that’s a business. But let’s also start to grow this passive bucket, because as this passive bucket continues to grow, it might start to offset it or outweigh it.
But you allow that growth to be exploded a lot quicker because you can do planning inside of it. You know, I always kind of look at it— think of it as if you have a brokerage account or a retirement account. If you have $500,000 in a brokerage account and you make $100,000 in your investments in a year, well, you’re paying tax taxes, generally stating, you know, this is a very general statement, but you’re paying taxes on $100,000. Where in, in, in, so let’s say your tax rate’s 40%, you take 40% off of that. Now instead of having $600,000, you have, uh, $560,000. If you have it sitting into a retirement account, it’s tax-deferred or potentially no tax depending on the type of retirement account. But you have that $500,000 that grows to $600,000. There is no tax reduction of that.
So now you still have money growing at $600,000 instead of in a brokerage account, it might be growing at $560,000. And you take the compounding effect of that and it can be super powerful. So when we look at that tax planning piece, that’s the impact that we can make. You’re not just looking at, hey, what are we saving in taxes today? But it’s what is the future impact that’s going to come from that and the future growth that can come from that? And so I think it really opens up the door and in concept to so much more. And we do a lot of planning on that too, where even we look at oil and gas and, and with the SALT limitation being increased to, uh, $40,000, but it out at $500,000. Let’s say we have somebody that’s making $750,000 a year. They’re making $750,000 a year, they’re missing out on that SALT deduction if they have state and local income taxes into that $40,000 range. But could we invest in oil and gas, bring them below that limit, save the taxes from that investment, but also open up the door to this SALT cap that they were missing out on before? Not only are you now having an investment that can potentially provide gain down the road, not only are you saving taxes on that investment, but now you’re getting even additional tax break that you weren’t even thinking about that opens up the door for those.
And so it’s, it’s organizing that planning around all of those kind of moving levers that, that happen within income ranges and all those different items.
Do you have any examples of how business owners could convert active income into passive You know, that’s a good question.
I think that it really depends on where you’re at in your business. And so, you know, if your main income generator is your active business, you’re daily involved into it, I think that there is little potential for that. But what I always tell people, and this goes for people that are looking at a potential sale as they’re getting deeper into their businesses, is when we’re growing our business, our focus should be, how do I remove myself from being that business Remove myself from operating that business. Because not only is that going to ease up your lifestyle, but it’s also going to produce a business that’s worth a lot more. And so the example I give is, let’s say you have a business that are doing the exact same amount of revenue. It’s like $200 million in profit in a year, both same businesses. One, the owner is putting in 70, 80 hours of work with the face of the business. All their clients work directly with the owner.
The The other one, the owner doesn’t work at all or doesn’t work as much. They’re on the backend. They have an operations team. They have a CEO. They have people that are running the business and they’re just kind of there for handling, making big decisions, but they’re not involved in the day-to-day. If you look at those 2 businesses, which one’s going to sell for more? It’s going to be that business that the owner isn’t part of the daily operations of. It’s going to be that business that can survive and already is thriving without the need for the owner to be in the, in the business to thrive. And that starts to go down that route as you get further and further down that path.
Now, this is not something you do in a year. This is not something you do in 5 years. But you slowly start to get closer and closer to that concept. And as you get closer and closer to that concept, your business starts to move definitely from active, something you’re active in, into something that’s a little bit more passive. So, you know, those are some of the, you know, concepts I talk about, not just from a tax planning perspective of active versus passive, but also more of, uh, you know, increasing the value, uh, of your business as Yeah, that’s a good, good trajectory.
Can you also give us any potential ideas or examples of how we can get, you know, more than a 1-to-1 on tax savings for active income?
Yeah. So, you know, typically when we’re looking at active income, and let’s just say it’s a W-2 worker— so active income could be W-2 business, W-2 worker, or, uh, an active business owner— but when we look at strategies to be able to say a W-2 worker, we start to look at asset purchases, We start to look at oil and gas. We start to look at asset donation type strategies. And so, you know, let’s look at an asset purchase as an example. Let’s use a short-term rental as something that a lot of people are aware of. Uh, if we get into a short-term rental, let’s say it costs, uh, a $500,000 short-term rental, and we’re going to put 20% down. So $500,000, we’re putting $100,000 into that deal. That’s cash Out of pocket today.
But if we take that $500,000 short-term rental and we do a cost segregation study, we inflate the depreciation, get the heavy depreciation in year 1 via cost segregation study, we might get a, you know, 30 to 35% of that $500,000 in a deduction in year 1, which could produce, you know, even though we’re getting a bigger deduction than we actually had a cash outflow for it. So that’s how we can then take that loss from that big depreciation in year 1 to offset other W-2 income that we have. That concept sounds good. That all sounds great. We’re saving taxes today. But the thing that we need to think about in all these different strategies is also, what does it mean when we talk about 5 years, 10 years, 15 years down the road? Is there going to be some phantom income in that strategy? Yes. Might we do a strategy that’s similar down the road that we’re going to offset that? Yeah. There’s potential behind that.
There’s equipment leasing-type plays that are in the similar realm where you put X% down, You get a loan for the rest and there’s a big upfront depreciation. But again, phantom income comes into play because if you have a loan associated with it, at some point in time you have to pay that loan off and you’re going to be receiving income from whatever income-producing asset you have, whether it’s short-term rental, whether it’s a piece of equipment, you’re going to be receiving income for that. But those funds are going to be going out the door to pay off that loan. So you receive income coming in, funds going out.
Right.
But that income is producing a taxable event. And so then you have to plan around that down the road. And so whenever we look into these types of strategies, like you kind of mentioned, is let’s not just look at today. That’s important, you know, how do we save taxes today? But let’s also think about what it looks like down the road and modeling out that strategy into its completion so that we kind of know, okay, where are we going to need to do planning down the road? And there’s different planning that we can do based on the type of that we’re involved in on the exit piece. But we just need to understand that that’s going to happen and we need to start planning for that. Now, we don’t know where tax laws are going to be 5 years from now. We don’t know where tax laws are going to be 10 years from now. So we can’t necessarily make a complete plan, but at least we know it’s going to happen and then we can start to plan as we get closer to that.
Yeah, that’s a great example. My only, you know, thought on this one to people, and this is why, you know, we like to think about things, like I said, from a 360-degree perspective. So, you know, phenomenal depreciation with short-term rental. But you really have to ask yourself, you know, first, you know, is this something I want to do? Because a short-term rental, even though you can get a property manager to do it, it’s going to involve some time. And I believe, what are the requirements, 120 hours, right? Yeah, you technically be managing that.
Yeah, anytime you have a depreciation-type strategy, an asset purchase-type strategy that you’re looking to utilize depreciation or upfront bonus depreciation to offset W-2 income or business income, you have to be an active participant in that business. And so you have to materially participate, which is generally going to be the 100-hour rule. Now, 100 hours is the minimum. It’s got to be 100 hours plus more than anybody else in that business. So in your example, if you have a property manager that’s putting in 120 hours, well, you’d have to put in more hours than they’re putting in. So you need to track what other people are doing there. But I usually don’t say let’s stop at 100 hours. That’s the minimum.
But let’s maybe do do 120, 150 in your example, because guess what? The IRS comes back and says, oh, this hour doesn’t count, or that hour doesn’t count. We want to make sure that we have some play there where we at least have, you know, enough there where if we’re doing 101 hours and the IRS comes back and says, hey, these 2 hours, they don’t qualify for material participation, well, now we’re below 100 and the, the whole strategy blows up as far as what we’re getting that year 1 deduction. Again, we’re still looking at an investment piece. Don’t get into a short-term rental for the tax purposes. Get into the short-term rental because you like the investment piece to it and let that tax piece be the cherry on cap. If you go into it the other way and the IRS comes back and you’re at 101 hours, they take 2 off, you’re at 99, you lose that deduction. Well, if you just looked at it from a tax perspective and it was a bad investment, it’s a really bad investment now. But if it was a good investment, it’s not much loss.
Sure, sure, you lost some tax deduction on the upfront, but you still have a good investment that you’re dealing with, right?
Right. Yeah. And really, time is your greatest asset. And when you’re thinking about building wealth, it’s all about scale, right? So, how can you scale your time? And I think investors really need to think through whether it makes sense to be actively managing some of these things, right? Does it really align with you, with your vision, where you’re headed? And for some people, 100%, right? They actually love it and they want to scale that type of business. But for others, they already have a full-time, more than a full-time business and family and everything else. So there’s other important considerations to make as well.
Yeah, and, you know, 100%. And this again goes down to the idea of doing this the right way, dotting your i’s, crossing your t’s, doing correct implementation. Because, you know, a business owner that’s, that’s in a high net worth area, they usually don’t have a ton of time on their hands. They, they’re, they got family, they got their business, they’re busy people. And so when you say, well, you, you have to put 100 hours into the strategy in order to make it really work, 100 hours might not sound like a lot, but if you think about it from a time period, that is And, you know, the thing is, is that if you work with some people, you might get hit up by someone that says, hey, let’s do this asset purchase strategy. And yeah, you have to get 100 hours and they just kind of blow that off. That’s a red flag to me, you know, because that is the piece of that implementation piece. If you are going to go down this route, we have to do it correctly.
We have to make sure we’re dotting our i’s and crossing our t’s. So we can’t just blow off and say, oh yeah, I’m going to do 100 hours in quotations. No, that, that requirement is there and you have to be able to commit to that. And if you don’t want to commit to that, That’s fine. Let’s look down— let’s look at it on a different path as an investment opportunity as well as a tax savings opportunity. Not every strategy is the perfect fit for every single person. I think that’s the beauty behind tax planning is that it’s not just blanket instructions of saying, okay, here’s what we do in step 1, here’s what you implement in step 2, here’s what you implement. Everybody’s picture looks differently because everyone has different risk standpoints.
Everybody has different time commitments. Everyone has different— everything’s different. So we’re taking these concepts and then we’re We’re trying to put them into the puzzle and say, what makes sense in your picture, in your situation, based on what you have going on and where you’re standing right now today?
Mike, if you could give just one piece of advice about how investors could accelerate their wealth trajectory using tax planning, what would it be?
The biggest thing I always say is just start. So many people just assume that their accountant’s taking care of it. Take action. Be proactive in these types of things. Don’t assume that someone’s taking care of it. for you, reach out to the people around you and start to learn these concepts. You know, the last thing that I ever want somebody to do is to say, well, my accountant said this, so I just did it. I don’t really know what it is.
I don’t really know what I did, but I just did it. My accountant told me, go hire your kids. And they told me, just write a check for $15,000 and then we’ll move on the next year. And those are the things that start to scare me because the people that are implementing the strategy is the business owner. The person that’s responsible for that strategy is ultimately going to be the business owner. And so it’s important for them to at least understand it. Now, they don’t have to be tax experts. They don’t have to know these things back to front.
That’s what they have a professional for. But they need to understand the concept and they need to understand what’s happening to make sure they’re doing it right. And all that starts with that learning phase. Start to learn about tax strategies, dig into books, dig into podcasts, dig into things that are talking about these tax strategies. But then don’t stop there because learning is great. But guess what? Learning saves zero taxes. You can listen to every single podcast episode you do, Dave, every single podcast I do, and you’re not going to save anything by simply listening to that podcast episode. So next is that implementation piece, and not just implementation, but correct implementation.
And so what I always tell people is, as you’re doing this learning, have a note sheet, have some note app on your phone where you’re reading, where you’re knocking down what are the things we want to do. Oh, I heard about hiring my kids. I’m going to write that down. And then once a month, revisit that note sheet and say, okay, put it on your calendar, schedule it in, schedule 4 hours once a month, Hey, these are the 2 things that I want to focus on here. I have 10 on my list of tax strategies I want to dive deep into. Here are 2 that I’m going to knock off today. So that’s taking that learning phase and actually putting it into practice, which produces the end result.
Mike, this has really been helpful. I really appreciate all of the insights and wisdom that you’ve provided today. If people want to connect with you, where’s the best place?
Yeah, 3 main places. One is TaxSavingsPodcast.com. You can learn all about our podcast. podcast. Our software is Tax Elm. That’s taxelm.com. And then we have a book. I wrote a book, too, as well. It covers a lot of the core strategies and concepts, and that is taxsavingsbook.com.
Awesome! We’ll make sure to get that in the show notes. Thanks again for your time, Mike!
Thanks for having me, Dave!
You bet!
Thanks for listening to this episode of Wealth Strategy Secrets. If you’d like to get a free copy of the book, go to holisticwealthstrategy.com/book. That’s holisticwealthstrategy.com. If you’d like to learn more about upcoming opportunities at Pantheon, please visit pantheoninvest.com. That’s pantheoninvest.com.