16 Minutes of Brutally Honest Tax Advice

Summary

In this no-nonsense video, a seasoned CPA and tax advisor debunks common tax myths and misconceptions that often mislead business owners and influencers. From clarifying that LLCs don’t automatically save taxes to exposing the realities of S Corps, C Corps, and state tax planning, the speaker offers expert advice on effective tax strategies. Key points include the importance of making smart investments, the dangers of chasing tax breaks, and how side hustles can unlock valuable tax savings. With a focus on ethical, practical solutions, the speaker encourages business owners to seek knowledgeable tax advisors and provides resources for those looking to level up their tax planning skills.

Takeaways

• 😀 LLCs don't automatically save taxes. They provide structure but do not change tax deductions unless there are legitimate business expenses.
• 😀 Tax strategies cannot turn bad deals into good ones. Focus on making smart investments with solid ROI first, and then apply tax strategies where appropriate.
• 😀 Cost segregation can help depreciate properties faster, but it only works if you qualify—don't get sold on this strategy if it’s not applicable to you.
• 😀 Business owners should be strategic about their S corporation salary, aiming for a reasonable comp level to avoid overpaying FICA taxes.
• 😀 C corporations are not ideal for small businesses. They often result in double taxation and complicated financial issues.
• 😀 Setting up an entity in a different state doesn’t exempt you from taxes in your home state. Don’t fall for the myth of tax-free state planning.
• 😀 Cryptocurrency transactions are taxable. Don't believe anyone who tells you the IRS won't tax crypto—transactions are tracked on the blockchain.
• 😀 Not all CPAs are created equal. It’s important to find a qualified tax advisor who understands the myths and realities of tax planning.
• 😀 Self-directed IRAs allow you to invest in what you know—like real estate or small businesses—giving you more control over your retirement funds.
• 😀 Side hustles and small businesses provide opportunities for tax deductions. A side gig can help reduce your overall taxable income if structured correctly.

Q & A

What is a common misconception about LLCs and their impact on taxes?

A common misconception is that forming an LLC automatically saves taxes. In reality, an LLC does not provide tax savings on its own. The tax deductions available depend on the legitimacy of business expenses, not the LLC structure itself. The LLC can help with growth and structure, but it doesn't directly affect tax savings.

Can tax strategies turn a bad deal into a good one?

No, tax strategies cannot turn a bad investment into a profitable one. It's essential to first evaluate the quality of the deal based on return on investment (ROI). Tax benefits should be a secondary consideration after ensuring the investment is solid.

What is cost segregation and when is it effective?

Cost segregation is a strategy to accelerate depreciation on rental properties by creating a detailed report to allocate costs of assets. It's effective for real estate investors who qualify for depreciation benefits. However, it’s not useful if you don't meet certain qualifications, such as being a real estate professional or meeting material participation requirements.

What is the issue with business owners overpaying themselves in an S Corporation?

Overpaying a reasonable salary in an S Corporation can lead to unnecessary payroll taxes, such as FICA. Business owners should aim to set their salary at a reasonable compensation level to avoid paying excessive payroll taxes while staying in compliance with the IRS.

What are the risks of setting up a C Corporation for small businesses?

C Corporations are generally more suitable for larger businesses that want to sell stock or go public. Small business owners who choose a C Corporation may end up paying double tax (once at the corporate level and again on dividends) or face difficulties when withdrawing profits, often resulting in unexpected tax liabilities.

Can setting up a business entity in a different state reduce personal state taxes?

No, setting up a business entity in a state with lower taxes (like Nevada or Florida) will not exempt you from taxes in your home state. States have mechanisms in place to track and tax residents based on where they actually live, not where their entity is registered.

How should crypto transactions be handled for tax purposes?

Cryptocurrency transactions are taxable, and the IRS is aware of these activities through the blockchain. Crypto gains, including from trading, mining, staking, or dealing with NFTs, are subject to taxes. Failing to report these transactions can lead to penalties or fraud charges.

What is the misconception about 401(k)s and Wall Street investments?

Many people believe that 401(k)s are limited to Wall Street investments, such as stocks and bonds. However, you can self-direct your 401(k) investments into assets you are more familiar with, like real estate, small businesses, or even crypto, without incurring penalties, through a process called self-directing.

What advice is given to people who only have W-2 income when seeking tax savings?

If all you have is W-2 income, there may be limited opportunities to save on taxes. However, creating a side hustle, rental property, or other business income can provide deductions to reduce taxable income. A small side business or gig can open up more tax-saving opportunities.

What should business owners look for when choosing a tax adviser?

Business owners should seek a tax adviser who is knowledgeable, proactive, and can offer personalized strategies. It's crucial to work with someone who understands tax myths, is willing to collaborate, and can help you optimize your tax situation, rather than simply following standard procedures.