003 | Level Up You Tax Planning: In-Depth with Level 1 Tax Expert Walt Dallas

Are you maximizing the potential of business development corporations, retirement plans, and stock ownership in your financial strategy?

In this episode, we take a look at how these can help you build a solid financial foundation.

Joining us for the discussion is Level 1 tax expert, Walt Dallas. Walt’s areas of expertise span income tax planning, estate tax planning, business succession planning, trust administration, estates, probate, estate planning, corporations, partnerships, limited liability companies, asset protection, and tax litigation.

Tune in to empower your tax planning and embark on a journey towards financial empowerment. 

Key takeaways: 

• Business development corporations 
• Retirement plans and stock ownership 
• Audit defense 

Resources: 

Read the Transcript

Submit questions to the podcast

Credits:

Sponsored by Vital Wealth

Music by Cephas

Produced by BrightBell Creative

Research and copywriting by Victoria O’Brien

 

Episode 003 | Level Up your Tax Planning: In-Depth with Level 1 Tax Expert Walt Dallas

Patrick Lonergan: Welcome back to the Vital Strategies Podcast, where entrepreneurs learn how to pay less tax, build wealth, and live a great life. Our guest today is a true authority when it comes to navigating the intricate world of taxes and energy structure. I’m thrilled to introduce you to Walt Dallas. Walt is a leading expert in developing entrepreneur tax strategies and helping business owners make the most of their financial opportunities.
In today’s interview, we’re diving deep into the realm of taxes, deductions, and business growth. We’ll be picking Walt’s brain about legitimate business deductions that can save you money while staying firmly within the bounds of the law. But that’s not all. We’ll also be delving into the world of audit defense.
We all know audits can be nerve wracking. But fear not, as Walt is here to share his insights. On how to be well prepared if the IRS were to come audit your return. And if that’s not enough, Walt will walk us through innovative ways to utilize a business development corporation to your advantage. The ideal profile for utilizing his strategy while maintaining a strong ethical footing.
So, whether you’re a business owner looking to optimize your tax strategy, an aspiring entrepreneur seeking the right corporate structure, or simply someone who’s intrigued to learn more about the world of paying less tax, you’re in for a fantastic conversation. I’m your host, Patrick Lonergan. And without further ado, let’s dive in with Walt Dallas.
Walt, I appreciate you joining us today. I’m excited to get into how business owners can use a business development corporation to I’ll say, run their operation more efficiently, save on some tax and really take advantage of just using some of the strategies that you’ve got to, uh, save more money, have more free time, that type of thing.
So, while if it’s okay, I’m just going to outline we’ve worked together on some clients. It’s been, it’s been good, but can you give us a little bit of your background in regards to why you’re qualified to talk on these topics?
Walt: Sure can Patrick. I’ve enjoyed working with your group. Your guys are very pro proactional. You get ahead of things and you can have problems before they, they start. So, you guys have been a pleasure to work with. I have an accounting degree from Mississippi State University. And then after that, I went to law school at Ole Miss. And as you know. Ole Miss and state are bitter rivals. And so I was able to go to Ole Miss and survive and get a law degree.
And then after that, I went to Southern Methodist University for my master’s of tax. Then I worked for a big eight accounting firm back then, when, then when there were eight of them, uh, two straws and I worked in Dallas, Texas and loved being there, but wanted to come back home. So I came home to Mississippi and, uh, started practicing out of Mississippi.
In the last 10 years or so developed a national practice where we have clients all over the country from, uh, East coast to West coast, just about every state hadn’t been to a Hawaii yet on a client, but that may happen someday. Back to good old days, we used to actually go see the clients and we’d go shake their hands and things like that. But now with all the zoom, the video, it’s become online. It’s become very efficient. However, for clients and they’re getting a better deal for the money they’re spending, and it’s a lot more efficient for everybody.
I did a very large estate plans. That was my forte for many, many years in the estate planning arena. And then, we were doing the family limited partnerships way back when it was exciting to do, and it was new and we had discounts were unknowns and we didn’t know if the discount was going to be 0 or 50% and so that that industry is matured. But the point is every family limited partnership we did back then, because we didn’t believe it or not, we didn’t have LLC.
So we did family limited partnerships and they always had to have a general partner and the general partner was a hundred percent liable for all the liabilities of the partnership. So we would make a corporation, the general partner and the way the structure worked, it needed to be a C corporation because many times charities would be owning a part of that C corporation.
And thus, it couldn’t be an S, it could be, could not be an S corporation, of course. And so, uh, with that, we developed, uh, some strategies, uh, out of a group. I don’t actually have Dallas, Texas. And one of the guys came up with the idea and said, we’ve got a C corporation and C corporations can take deductions that other flow through deductions, the flow through entities can’t take. Why don’t we do some things over there?
And so the 1st thing we did, we did a little, uh, section 105 medical expense plan for the family members. We had to go through the affiliated service group rules and the control group rules and make sure we complied with that. And we had some, some. Really good templates to do that, and we’ve developed a specific template that meets those parameters every time.
And we’ve had people go through audit. We’ve never had a problem with the affiliate and service group rules or the affiliate service group rules or the control group rules. So those kind of things we did over there will, um, of course, the medical expense plan has been very popular. And in that old scenario, the partnership would end up paying a marketing fee over to the business development company and take an induction.
Back then we had to worry about does what’s the, um, sometimes the operating company was just marketable security. So we had problems such as was that a valid business? What’s the deduction going to be valid. But of course, in most of our scenarios, now the operating company is a living, breathing, working S corpo ration.
And that’s usually the way that works. And so once the funds, we get a deduction when the funds get over there, this, now this last year was really exciting, but we had a lot of people form their C corporations at the end of the year and make some prepayments into it. We had a very large prepayments. I think one guy was $600k, one guy was $200k and that created a big, big deduction for 2022 and, of course, the funds are going to be needing to be utilized in 2023 and through the end of November, because that was a normal fiscal year end that we would use.
Patrick: Yeah, no, that’s fantastic because I think we work together on one of those clients that made the deduction before year end.
Can I back up for a second? Cause I think this is a, is a important distinction. You talked about control group and affiliated services group, I believe. And so, I think those two things matter because like what I can’t do is own my business and go fire up a new C corp and just do all this stuff you’re talking about, right? Can you just give us a little insight into what those, those two terms mean and why we have to work around that?
Walt: Sure can Patrick, the affiliated service group rules are mostly in the context of qualified retirement plans, and they say that if you’ve got a one organization providing services to another organization, both of the entities will be combined together as one organization and the retirement benefits and the qualified plans are going to be halved.
To be available for the employees of both entities, the drafters of that didn’t want someone just forming a little corporation over here and doing services for another corporation to be able to do their own qualified retirement plan. Mostly it sprung up in the medical services. You can believe the doctors were doing that when they would work for a clinic and then they would, the doctors would want to form their own little corporation and provide services.
And then of course, the only employees of that service providing corporation was the doctor. So the doctor got all the benefits and didn’t have to benefit the rank and file employees. So that was, that’s where that is most popular. It also comes into play when you talk about employee benefit plans and what you can do for employees of one company versus another, if you’re providing services to one company to another, you can’t do certain plans, employee benefit plans for just one company.
And then the, so that’s mostly based on services, the services analysis. Interestingly, the affiliate service group rules ultimately come back to stock ownership too, which is the main ingredient for the control group rules. The control group rules look at the stock ownership and determine if you have too much common stock ownership, then those entities are going to be aggregated together.
Generally, a person’s ancestors and descendants and, and, um, Are going to be aggregated and treated as in spouse are going to be treated as that person owned all that stock and aggregated together. And then you determine whether generally the test is going to be does one person have over 50% of the stock of 2 companies.
And if so, it’ll be aggregated together. It’s more complicated than that. But that’s the general rule where you start every time.
Patrick: Sure, very good. Thank you. Because I think that matters. What I want to be careful of is, you know, listeners hearing this and going, oh, cool. I’m going to go start my own business development corp and then not know what they’re doing, and they end up in trouble to some level.
So, another thing you mentioned that I want to touch base on is just doing things by the book and. Not having any issues with audit. Can you talk through if it’s okay, what a, what a legitimate business deduction is, how that’s sort of defined and yeah, we’ll, we’ll just take it from there. Is that okay?
Walt: Yeah. Yeah. Patrick, that’s good because our documentation is extremely good. We’ve never been through an audit where the IRS looked at our documentation and said, it is insufficient. Our employee benefit plans inside the business development company are, are drafted on, in accordance. With the code in this, the treasure rigs and things like that.
And so, um, those are, are, are well done where we, where we have issues would be when the operating company pays over the marketing fee to the business development company. Is that a reasonable amount? And you kind of back into that because you look at the activities of the employees of the business development company, and you look at the amount of time and effort that they’re putting in the business development company. And those have to be aggregated and then determine if those are justifiable.
One of the projects we worked on last year together was, uh, there were a company with a large amount of, um, uh, fees for advertising fees. And so. We move those from the operating company over to the business development company for a number of business purposes, such as it’s easier to manage. You know, it’s you can tell what marketing expenses are being paid out of the business development company, as opposed to a operating company with a gross income of $25 million bucks. It’s a lot easier to do that. You’re also segregating your liabilities into. Business development company, so there are a number of other reasons to use that C corporation because you can’t just do a company without a valid business purpose.
That was codified a number of years and you need a valid business purpose and it needs to be done differently. Afterwards as a contrasted to before. And so we, we have those written into our, our plans. So our companies always have a valid business purpose. And if there’s not a valid business purpose, we don’t participate in those.
Yeah. We’re just not going do those. So, um, and the fee over into the business development company has to be, uh, a section 1-62 deduction, meaning it has to be ordinary, necessary. Ordinary means it has to be for, has to be for fair market value necessary. Uh, needs to be, it needs to be helpful. That’s what the Supreme court told us that standard is.
So it’s a fairly low standard of deductibility in the, the main issue would be a reasonable, is that a reasonable fee going into the business development company and many, and on all of our plans, we’ll get an independent determination of what. Are those reasonable expenses, uh, for business development company to take those on, take on those activities.
Patrick: Yeah, no, that’s, that’s fantastic. And I don’t know if you could have a minute to talk about like audit defense. I know that’s a piece of what you do. And when we think about the tax planning we do for clients and. How important that is when you, you start looking at putting these strategies together, because we’ve seen big firms like the Alliant Group have, you know, the FBI shows up and starts rating firms and you’re like, wow, okay, this is, this is different.
You know, does that mean something for me as a, as a client of one of those big firms, if they start looking closely at these strategies? So can you, can you talk a little bit about audit defense and how that works?
Walt: Yeah, sure can, a lot of clients like to do a tax planning, uh, but they want it to be within reasonable bounds and defensible.
And they also are worried about, um, there’s a no-win situation. No win scenario that comes up. They get a letter and so they’re go well, okay, if I’m doing everything right, I’ve got to pay an accounting tax attorney to represent me in this audit. And even if I win, I’m going to be out $20 grand.
Okay, you know, and so is it worth, you know, rolling the dice and even if I’m right and everything I’m doing is correct and I still have to pay those fees. And so we developed a plan that will, uh, review their activities do it. Do a meeting at the beginning of the year and the meeting at the end of the year, and we’ll make sure that the client’s following those rules to make sure we’re in compliance. Because if we’re comfortable that the client’s in compliance, we’re comfortable defending the lawsuit if the client’s kind of cowboying it, it just kind of saying, well, you know, I’ll just deduct and I’ll take a shot. And they’re not going to meet with us and we won’t do that because we want to make sure everything’s in place.
We’ve actually engaged a firm recently for, up the substantiation even more. Uh, and that’s been a really good experience. And we’re requiring that on all of our new clients going for it. Very inexpensive, but, and he does, um, tax returns and things like that. And he’s been doing it for about 15 years. So, we’ve got someone that really, really does a good job in that area because the documentation has always been the hard part, you know, how do you keep the appropriate records?
And so, it’s funny, we were, we were talking to that use my favorite whipping boys and CPAs. And we were talking with them and they said, well, we like what you’re doing and we explained what we’re doing. And then they said, but the clients will never keep these records. And then we said, yeah, that’s, that’s a problem.
And how are your clients keeping the records? They did terrible jobs. They just do lousy that we have to get them all the time. And we said, well, have you ever provided them a system for keeping the records? And they, and they were about six of them around the table. And they all kind of, all I had kind of went down, they said, no, we have it. So, we developed a system over the years to create the record keeping and every year got a little bit better and better and better. And finally, this new group that I brought in, I think, does better than anybody else. So, the documentation is where the clients get hung up because I can read the code. I could be in compliance with code all day. But if we don’t keep the records, Patrick, we just did.
Patrick: Yeah. And that’s so true. And we see that across the board, you know, if a client’s books are very clean, they’ve been doing everything by the book. It just makes an audit so much easier when the IRS is looking at things and you can just hand them a nice package of information and they go, okay, this, this person’s got it together versus no books, a box full of receipts that are partially there, you know, it gets really messy, really quick when it’s, when it’s not organized. So, we are a hundred percent on board with getting everybody because it just helps clients run the business more effectively too. When they’ve gotten good records, they can make good decisions versus being, you know, trying to get it done 12 months after the fact, to get their tax return file that just, just doesn’t work. So that’s good to hear.
All right, so, well, we touched a little bit before I sort of backed you up on, uh, you were talking about some of the strategies that we can use inside of the business development corp. Can you walk us through some of the most common strategies you have in there? What the benefits are from a both personal perspective and tax benefit? Can we outline that for the listeners?
Walt: Yeah, sure. Can, um, one of the things that we noticed is that, um, a lot of people like to do the tax plans for the income tax benefits, but as I mentioned, we have to have a proper business purpose for the business development company and the C Corporation, you know, which is our C Corp operation to exist.
And so, we noticed that we’ve been, well, we’ve been harping in marketing for years and years. You know, clients need to be marketing. They need to be spending money on marketing. You know, there’s, there’s some categories like anesthesia. It’s really have a hard time spending money on marketing because they have, they’re captured by, you know, hospitals and patients and places like that.
And so, as we harped on that, we started getting into some, imagine that a lawyer started getting into marketing. Uh, we’re one of the worst ones at it. Our plans brethren are good at it. I’m going to decline to spend $600 grand a year on marketing. That’s why he’s making so much money, but we, um, have seen the people that spend money on marketing their top line grows, grows and grows and grows year after year, as we do our annual reviews.
Well, we’ll go back and look at a pattern of, hey, what are your spending for marketing and what are your top lines, what’s your top line doing? And we found that the top line, uh, was going up. And so, we had a challenge from an honor to the IRS, for a particular case. And, we said, this business development company has helped this guy make more money.
And the guy just said, nah. And they said, well, we can show you, we can show you his, for the last five years, his advertising expenses has gone up and up and up, this is the pattern. And look at his top line. Sure enough, top line followed the bottom line and the gals making more money, even, you know, of course, on a gross method.
And then as they make that extra dollar, you know, the expenses of overhead related to that extra dollar or nothing. So, the net goes way up to. So that’s been a really cool thing to see. And that’s just not one that is one client in that particular audit. But, it happens more and more, you know, for, for particular clients that really believe in the marketing and, run their business development company correctly. It’s, it’s been a great benefit. You mentioned the ownership of the stock and we, of course, we use outside shareholders to make sure we comply with the control group rules and the guys that utilize the outside shareholders and really take advantage of those guys for their marketing ideas, there’s a lot of benefit for that too.
Patrick: One thing that the Supreme court has said. Is that it is no problem to utilize the tax code to your benefit and pay the least amount of tax possible. So, do you find a lot of clients are doing things before they engage with you that they could be taking tax deduction for that, that they’re not?
Walt: Just about every client I’ve ever looked at is not taking advantage of the tax deductions that they could have. I think, you know, I’ve been doing this a long time and I’ve had one or two. Clients that have come in that they’re doing everything that we have on our lists. Kudos to them, but it’s a, it’s a rare deal. One of the hard things is, is fitting the tax plans into a business. And so it works together. So, it actually, the structure works and that’s one of the things that we do real well.
And so, we’ll just go through and, uh, we, I mean, our process is pretty simple. We’ll take a look at the tax returns, and then we have a questionnaire. We’ll send the clients, and they’ll kind of tell us what they’re spending on those various categories. And then we’ll figure out what sort of items fit them.
And sometimes we, we look at the information, we get it back. It’s like, you don’t fit it in our shoe box, you know, our box of sand. And it just, we can’t help you. You know, you can go do other things with us. That is a bit rare too, but it’s, I’d say one out of 10 clients. Potential clients to come through, we’ll say, sorry, we can’t help. You just don’t fit what we do.
One of the categories that don’t fit our W2 employees, you know, they’re really just out of luck. They can’t, they can’t get deductions. It’s the, the single business owner that are great clients for us because the single business owner can make it happen and control the way he gets paid. And also if he’s got a family, we can utilize a family for some additional benefits on that.
Patrick: You’re touching on a great point. Who’s an ideal client for your strategy? What, what, what do they look like from a net income through the business? And, and you already mentioned, you know, a single owner, is it sort of disqualify somebody? If there’s two partners in a business, could we set up two business development companies? Is that an option? Yeah. Can you, can you just talk through a few of those, those things for us?
Walt: Right, generally, it’s a one owner business has repeatable income stream makes about $400k of net income of taxable income or up. And, that that’s really a great client. We have, some plaintiff’s attorneys in our database in our client base. But sometimes their income just kind of goes way up and way down. And they, that gets to be problematic. It’s in, in, they come in right after they’ve had the big hit and we try to fix it with, you know, with, with something because it’s going to happen or they’re going bankrupt, um, someday.
But usually, um, um, a lot of, uh, we had a lot of dentists, a lot of ophthalmologists, uh, periodontist, uh, people like that, they make really good income in, in their overheads, fairly modest, um, a lot of ODs for a while, some of the ODs don’t quite make the $400,000, but there are some. Turning to your question about partners.
If we can set everything up from scratch, the tax plan will work. We normally will set up everything. Branding company as a partnership and everybody, every individual. Old doctor will have his or her own S corporation, and we’ve done that successfully. We have one group that’s probably 25 doctors now, and some can elect to participate and some elect not to participate, so they don’t affect anybody.
Where we run into trouble is if we have an S corporation owned more than one person. Uh, sometimes the, the, uh, owners are close and they get along well, and, and you can work with that. But once you get above about two S corporation owners, it gets to be rather difficult because it’s hard to make everything fair and yet conform to the tax law because you are limited with an S corporation because you got to pay out all the profits based upon the stock ownership.
Patrick: Yeah, that’s great. So one of the things that you were talking about was a control group. And a lot of times that applies to retirement plans. So can you talk through. What kind of retirement plans fit well into the business development corp?
Walt: Yeah, many times when, when a client comes into our office, they’ve got an S corporation, client has an S corporation, they have employees, they’ll have a retirement plan over in the S corporation and the client’s happy with that.
And it gives the employees an opportunity to participate. Sometimes they’re not happy with it because they don’t like spending all that money on their employees. I’d rather spend it on themselves. And there’s two ways to do that. The most popular way has been using the non-qualified deferred compensation plan, uh, inside the business development company.
And, and the reason that works, attractively is the client can do it just for the client. The client doesn’t have to do it for anybody else. There are no annual filings required with IRS. It’s simply included as a part of the business development company, Low their $500 bucks a year. So it’s real simple, really expensive client will understand it.
The thing that some clients don’t like is that the, the best vehicle to use inside the business development companies, the third comp plan will be a life insurance policy. And we rely upon you guys, Patrick, to design those. So, the death benefit is low in the, the cash value portion is very high. And of course, life insurance policies have a lot of good investment options.
Now, some of them have that. Um, you know, the, the net zero, uh, you can’t ever go below. So, you can’t lose money on them. Right. And that’s, that’s been very popular with the market going crazy in the last year or two. Yeah, but that’s it. I did a, a nice talk on the value of using the 21% bracket in the business development company versus the 37% bracket that most of our clients are in.
And there, for every a $100,000 in there, that rate differential is about $8,000, for the first 50,000 in the next 50 is eight or 60, 000 for, for a hundred. Um, if they can have that intentionally taxed at the business development company, that’s going to give a tax benefit of 16, 000 every year for every hundred grand that goes in there.
But the big, I mean, there’s a nice benefit for that, but the big home run is long term. We’re going to take it out all income tax free because we have a rollout method that we can actually do that. And I did some numbers on that for a desk book recently. And I just assume putting in a $100,000 over a period of 10 years and of course, the business development company does have to pay that 21% tax before it funds the non-qualified for a corp.
Patrick: So, I think the important thing to, and you said this, but to come back to it. Most of our clients are in the top tax bracket at 37% so if they can pay tax at 21% and then never pay tax on those dollars again, I think that’s a pretty incredible strategy. So yeah, I wanted to stop and pause on that because that’s that really matters.
And then one other point on the life insurance like we are not life insurance salesman. We see life insurance as a tool. And every time we design it, it has high cash value early. So if you’re putting the money in, you can get your money out. The designs that don’t have high cash value early, usually pay huge commissions to the people selling them. So we generally stay away from this.
Walt: Yeah, that’s a great point because, um, you have, um, also private insurance policies that might be you. Useful to that because you can design those about any way you want and actually pay very little commission on those. And especially for the guys, like you guys, you’re, you’re be based and heck, you know, you can cut whatever deal the client wants to cut.
And the, the, the money’s going to be there, but they take the money out at the end, tax free is really, really a benefit. And so, now I did my analysis was I compared the, I assume that the money. Outside, you know, if you pay a tax on it, you invest the money, you’re going to make a percentage and I assume the same thing inside the non-qualified deferred comp plan.
If you use your typical life insurance policy, those numbers may be different. The rates of return, you know, rates of return on a policy might insurance policy might be 5% whereas you might could get. 8% in the stock market, of course, you do have the challenge of when you do the stock market, you’re going to pay even paying capital gains in the stock market.
You’re going to incur some taxes, but the non-qualified deferred cop, if you’re under those parameters and not paying the high commissions, it comes out substantially ahead of just. Invest your money after tax. It’s almost double compared to it.
Patrick: And you made a point too, that I want to touch on. We are a fee based firm and we offset our client’s fees by any commissions we make. So it’s, it’s not like we’re getting paid more money for selling life insurance. So it’s, from our perspective, we think that’s the fairest way to, to do that. So we don’t care at the end of the day, if the client. Takes life insurance or not. We just see it as a, as a tool that’s effective for doing exactly what you talked about tax free income at the end of the day.
Walt: So, yeah, that’s great. So, let me continue what the other, the plan that’s also not as popular, but it’s got a great power a punch to it. If you’ve got someone with an operating company with a whole bunch of employees and a very high gross income coming into the operating company, and you can justify a marketing fee over to the business development company.
Forgive me. I know that’s a lot of yes, but I am an attorney. So, if, if, if. Then if you got the right situation, you can do a big benefit plan, a qualified plan inside the business development company, a defined benefit plan, or some, some plan like that, your cash balance plans. And I’m not an ERISA attorney.
I just like to use good ERISA attorneys and turn over them for that piece. But still, if you’ve got a business development company, you’ve got the ownership, uh, structured correctly as we do, you can do this sort of qualified plans inside the business development company and stock away a whole lot of cash inside those just.
For the benefit of the family. And those are, they’re not as popular cause they’re more complicated to put together. And a lot of people like the non-qualified deferred comp, uh, cause it’s just a lot easier.
Patrick: Yep. Yeah. And we’ve done a lot of cash balance plans. I love the idea of doing it in the business development corp. Because a lot of times we’ll, we’ll have a 401k plan. They’re contributing to the employees, they’ve got a nice match all those other things, but they like, I don’t I don’t need to give my employees any additional benefit. And so, moving it outside into the business development corp, where just the family can participate because we’ve gotten out of that control group situation is, tremendous benefit, and it allows them to do a plan that they wouldn’t have otherwise considered if it was all just in the operating company. So that’s I think that’s a fantastic opportunity to just to, especially if somebody’s got, you know, because we’ve seen clients fund, 4 or 5, $600,000 tax deferred into a cash balance plan when they’re designed.
And they, again, we get actuaries involved and there’s age and compensation and all these pieces that need to go into it. But it can be a tremendous tool to defer tax, so you made an interesting point on, you know, like, we, we can’t just decide to shove an extra $400,000 into the business development entity to, to take the cash balance plan. Early on you talked about, like, it has to be justifiable. Is that typically done on like a cost plus basis or is there. Some other formula. How do you go about, like, again, the importance of being able to defend these strategies? How do you defend that to the IRS? Like, Hey, this is this is how we came up with that number.
Walt: Yeah, mine’s pretty old fashioned because I find the best and most supportable and most acceptable is having keep a time record of the client’s activities and the time record and I’m not talking about the ones you’ve got to. You know, so be so detailed, but generally you can come up with a good, a good situation that’s defensible and you figure out the amount of time that the client and client’s family spends in the business development company, because when you look at a lot of profitable companies, a lot of what they’re doing is marketing because if you don’t tell anybody you’re the greatest, they may not know that Patrick is the greatest he’s got to be telling him.
So, that’s part of the, you’d have to kind of pick apart what they’re doing for the company. So sometimes in the business development company, it looks like they’re doing the same old thing. They’ve been doing for the operating company for years. And that’s right.
We just segregated that into the business development company and found a way to quantify that for them. Uh, and I found that now some industries have a way to make certain items quantifiable that are kind of rules of thumb in their industry. But I tend to, I, I’ve kind of a detailed person, uh, more of the accounting type, even though I am a tax attorney, I do like having the numbers and be able to put it on my spreadsheet, add it up, you know, take some reasonable assumptions and be able to justify it in that manner.
Patrick: I know there’s a lot of strategies we can utilize inside of the, the business development corp. Are there any low hanging fruit that you see that are like. This is this is 1 that makes a lot of sense that has real tangible benefit that we could talk about.
Walt: What’s interesting, I listened to a webinar on the Inflation Reduction Act, and I thought it was interesting that the smart tax attorneys that were talking about that all they spent all their time on solar and energy credits.
They didn’t say a lick about lowering inflation for some reason. And so my point being is that there’s a lot of credits and energy credits are going to be available. And there may be some deals out there that, and a lot of these have been around for years and years because, uh, the, uh, these credits have been around, but there, there will be some investment for people looking for tax shelter or quite quote tax shelters, which I’ve kind of shot away from in the last 10 years or so.
Because, you know, they, it just kind of game can be hard. It was hard to justify some of these, especially when the rates went down a little bit, but I think that is going to be an option that some people can look at that they hadn’t looked at it before. It takes a lot of effort on people like us figure, which deals a good deal and we’re still in, but that will be a unique opportunity coming forth out of that legislation.
Low hanging fruit?
It would. Of course, the rental of the dwelling unit to the business is always good if you, uh, can support that justified Yeah. And follow the rules. Do bona fide meetings Yeah. And that sort of thing. And, and you, and it helps to have, um, a corporation with employees because that’s the most, um, defensible meeting you can get to.
And then have a justification for the price, the rental price. Yeah. And that’s up to 14 days a year. And if you can get an appraisal that justifies a nice amount, and of course we don’t do it. Unless they, they, they agree to get an appraisal, which is paid for in our, we believe in it some more. It’s paid for in our projects. Automatically. We don’t do one without it. So that’s low hanging fruit.
Medical expenses. We had a client that came in, as you know, had some really high medical expenses every year for one of the children, one of the four children. And that was just an easy one because he’s, he’s paying. About 30 grand out of his pocket every year.
And so he’s able to do that. I kind of like the disability insurance. We can, we have a way to make that deductible and that’s something that my particular type client really needs because if that client goes down and that company is depending upon that person, which is more likely than not, the business is just going to fall apart. And so that disability insurance is really, really a nice thing.
And some things that some fit and some don’t we can look at educational expenses for the children. Of course, if they don’t have children or they don’t pay any education expenses, that’s not going to do him any good. So those are some. There’s some meal plans that we can deduct.
Well, there’s some leniency there. Of course, the deductions for meals have been, uh, slashed back to 50%. Once, once again, good old president Trump had that deal where he gave it 100% to restaurants, which was a nice, but we don’t have that anymore, but still we’re doing so we have about three, three particular meal plans.
People like the meal plans because they, they think they’re getting something for nothing in the sense that, Hey, I’m eating food and I’m getting a deducted. This is great.
Patrick: Yeah, absolutely. Absolutely. That is, that is good. And I think the, you know, one of the distinctions about the C corporations is we get to do, we get to deduct some medical expenses through there that we don’t normally get to deduct through maybe our regular operating entity if it’s a S corporate or LLC. So, that’s great. You talked about family members. Does it make sense to put family members on the payroll in the business development court?
Walt: It does for a couple of reasons. One, it shows that there are bona fide employees of the business development company and entitled to receive employee benefits just like any other employee.
And so, whenever you have them. Receive a salary we’ve never seen on audit where they we’ve denied that they weren’t employees or even argue that they weren’t employees. We had some older cases where we used to not have the clients pay salaries and we did have that argument come up from time to time.
Never lost on it. We just, we just had to get through a couple extra hoops to get it. There isn’t some, uh, if you’re in a 37% tax bracket and, um, in the, in the child is in basically is. No tax bracket for the first $6,000 to $8,000 bucks. Now, that makes sense. You just got to worry about the FICA tax. You’ve got to factor that in because the child is going to pay the FICA tax. The 12.3% extra tax on that money in the, um. Or the Medicare tax too because they’re not going to be above the limitations. But you those, but you do come out better by doing those. Um, there are some ways if they’ve got a rental property that they can actually be paid and not have to pay FICA tax on that.
So that’s one of the things we’ll look forward to. One of my favorite things is having the children receive a paycheck and fund that into a Roth. All of a sudden, it’s, you’re putting the money into the Roth is not deductible, but there’s no income tax on the children because they’re, it’s all sheltered by their deductions.
So, the money is going to grow tax free forever and ever and ever. And, you know, if you’ve got a two year old forever is a long time, you know, the child’s probably going to live to a hundred years old. And so, man, that you do your calculations on that. We’ve, we’ve done them. It’s there. It’s, it’s a popping on that.
And, uh, some people just I love doing it because it creates an economic base for the children long term that’s always going to be there.
Patrick: I think Einstein has a quote about one of the strongest forces in nature is compound interest. And when we think about starting early on with our kids and that compound interest, you know, that, that curve is just incredible when we get later in life. So,
Walt: That’s one of my favorite quotes of Einstein. Another great quote is simple and not simpler. Yes, meaning that, you know, keep it simple, stupid. So, everybody can so you can understand it, you know, and don’t get too complex.
Patrick: I love it. I love it. Well, I think in summary, we can recap our conversation by saying your strategy around the business development Corp gives us all sorts of opportunities to have legitimate business expenses, to create some tax deduction and allows it to just have more money. You know, I’m, I’m okay paying my, my fair share of tax, but I don’t want to pay any more than that. So, I think you designed a system that does a great job of minimizing that tax liability, but also. I don’t know anybody that does it better in regards to, like, all the I’s dotted T’s crossed with making sure the strategies justified and verifiable if the IRS comes looking.
So is there any additional points on business development corp we should talk about before we wrap up?
Walt: Well, I think we’ve covered the waterfront. Um, the overall comment would be, is the business development company is kind of like a Swiss army knife. It does a lot of different things that sometimes that I don’t even think about it doing unless a client has a specific situation that all of a sudden, Hey, this fits right now. We can use this thing because we need to make this money go from this tax year to this tax year. It just gives you a lot of options that are not. There we utilize the business development company to with that 199A 20% deduction to bunch income in one year and not bunch income in another year because I got them below the level.
They could, in fact, take that 199A deduction. So they say clients like 50, [00:39:00] 000 bucks. Yeah, it’s just a nice little, little tool to have.
Patrick: Yeah. So can you talk a little bit about how the business development. Do we need a different fiscal year end to be able to shift money from one tax year to the next?
Can you talk about that just a little bit?
Walt: Right? You don’t have to use it too, but why not? Why not put it in there and have a fiscal year in the CPAs love it because it’s anything but a calendar year. They’re going to love. But, uh, we usually use November 30th because that gives you the maximum deferral.
So, if in 2022, you make a contribution into your business development company, that’s going to be deferred all the way until 2023 in November. You have all that, that almost 11 months to spend the money. It’s almost 12 months because you can make the payment in December 31st. So you really have, well, you have 11 months to utilize the funds and spend it, spend it down.
Patrick: Got it. Very good. Yeah. Cause you, you mentioned that and I wanted to just go back on that topic. Cause it, uh, I think that’s a tremendous tool. I don’t like, I don’t love prepaying year after year, cause that can create it. A snowball, especially if a business is growing, that can be problematic in the future because we have to continue to find more expenses.
But, I think if we’re looking to utilize all of our tax strategies, prepay can fit nicely in there. So that’s, uh, that’s a good.
Walt: I do you get a comment, it’s like, I’ll. We’ll be I’ll be talking to this and about time when the guys at the table crosses arms and like he used to, you know, do some accounting work and they said, I will never use a C Corporation.
I said, okay, why? Well, you’re going to pay double tax on it. Didn’t you listen to anything I’ve been talking about? You don’t pay dividends to the shareholders except for a small amount. All the money comes out tax free.
Patrick: Right. And I think that’s an important distinction too.
We don’t want get too much money in the C-corp. Right? Like we, we need all of, we need business expenses throughout the year, so at the end of the year, we’re not sitting on a pile of cash that we’d have to pay the 21% on. Is that, is that a fair assessment?
Walt: Oh, absolutely. So you want be careful and not accumulate too much money. One of our, um, uh, the guys talking about actually does tax returns on a, on a, um, an accrual basis, uh, which is nice. I mean, uh, because you don’t have to worry about that problem as much because if, uh, it alleviates that problem, but most of our clients on cash basis. So, we do have to pay attention to that.
I’ve never been successful in explaining the difference between cash and accrual to a client. That’s one of the detriments of using an accrual basis is that client are never going to understand it. I’ve had, I think. Two C corporations that they’ve been on a cruel, which I like, but the clients are like, tell me about this accrual thing again. So like simple, not simpler. Yeah. You know, sometimes that’s just not worth it. Very good.
Patrick: Anything else, Walt, we should talk about on, on business development court before we wrap up. I think we’ve covered the, uh, the items we need to cover today. Yeah. Very good. I appreciate all of your insight today.
I’m sure we’ll be bringing more clients your direction in the future and you have a great day. Okay.
Walt: All right. Thanks, Patrick. I enjoyed the visit. Thank you for listening to the vital strategies podcast.
Patrick: If you enjoyed today’s episode, be sure to subscribe to the podcast and help us spread the word by leaving a review with how this information helped you pay less tax and grow your wealth.
See the show notes to access the resources mentioned in the episode. The vital strategies podcast is produced by BrightBell Creative. The music is done by my friend Cephas. You can download his music on Spotify or wherever you like to stream. Research and copywriting by Victoria O’Brien. If you have any questions, topic suggestions, or if you’d like more information on how we can help you grow your wealth and achieve long term financial success, visit VitalStrategies.com.

Consulting Clients Have An Average Tax Savings Of $280,000

Access Now
  • Google Podcast
  • Apple Podcast
  • Spotify Podcast

Take Your Tax Game to the Next Level! Listen Now on Your Favorite Platform!