025 | Tax Credits and Deductions – Opportunities to Pursue and Pitfalls to Avoid

00:06 – Patrick (Host)
Welcome back to another episode of the Vital Strategies podcast. I’m your host, patrick Lonergan, and today we’re diving headfirst into the world of specialty tax strategy, utilizing tax credits and deductions. Joining us is Matthew Geltz. He is a driving force behind KBKG’s specialty tax services. Today, we’ll uncover the secrets to maximizing tax credits and deductions. We’re going to see how to transform overlooked opportunities into substantial savings. We’re going to dig into the credits and deductions available to us surrounding energy efficiency initiatives like 179D and 45L. Also stay to the end, where we talk about how a number of business owners might have fallen into a trap with the employee retention tax credits, also known as ERTC, and the pop-up firms that were helping business owners obtain those credits. We have a lot to unpack today, so let’s welcome Matthew Geltz.

00:56 – Matthew Geltz (Host)
Yeah, thanks, patrick, for having me on. I really appreciate the opportunity to talk with you about these things and share the knowledge that I’ve accumulated. I always kind of start with of the way that I’ve approached my career is being able to be attached to some really smart people and learning from them, and so KBKG has been around for 25 years. We have offices around the country. I’m in the DFW office, which has been open for over 10 years now, and we have two leaders here in that office around R&D and cost segregation, and the principals of our firm have dedicated their careers to their specific specialities of R&D, cost segregation, green building, and so I’ve been fortunate enough to set up phone calls and listen and consult with businesses and listen to the experts that have spent 30 years doing it talk about these topics, and so, yeah, I’ve been able to accumulate knowledge and have have able to pass it along to business owners.

01:46
So, yeah, we’re a 25-year-old firm and this is what we do. We only specialize. We don’t file taxes. There’s a lot of folks here that are CPAs, but they’re not practicing, so that’s a little bit about us. Our focus is to make sure that we partner with professionals, cpas, financial advisors and ultimately see if there’s benefits of us doing specialty studies for their clients.

Yeah, no, that’s fantastic, and I look at KBKG as sort of a key planning partner for our firm. We’ve got clients all over the United States and when we have issues like you talked about and I’m looking forward to getting into those today everything from some cost seg and real estate opportunities to research and development, I think we just sent you some R&D stuff for a client we’re working on yesterday. So we think you guys add a ton of value to what we do very much on the what I’ll call the strategic side of things like hey, let’s look at this situation and figure out how to optimize these opportunities and I’m also interested in getting into this discussion about. So just a quick overview we have four levels of tax planning we like to discuss. So level one is the IRS gives us guidance, but it doesn’t take any investment. So this is like the QBI deduction and that type of thing, and I would say a lot of the strategies that you help us employ are level one type strategies. You know, like R&D credits the work’s already done, let’s just get the administration done properly and make sure that we’re getting those credits there. Then we move on to level two. The IRS gives us guidance, but it takes investment Standard example, 401k plan, iras, that type of thing.

03:12
Level three we’re taking sections of the tax code and creating some efficiencies. Some examples there might be a captive insurance company. I own the insurance company, it’s pooled risk, it reinsures some of my risks out there and it’s it has to be done. Well, it’s on the dirty dozen list with the IRS and like again all the I’s dotted, t’s, crossed type of thing. And then there’s level four, which we call tax fraud, and the reason we bring it up is there’s people out there pitching strategies as legitimate that aren’t and I think at the end of our conversation we’re going to get into some of that today, just to talk a little bit about how to stay out of trouble and if you get into trouble, what do you do to fix it.

03:47
So, yeah, I think we’re going to have a bunch of different topics that we can talk about. I do appreciate you spending the time sharing some of your wisdom with us. So, if it’s okay, can we just hop into cost segregation study? This week I just sent a client of ours to the KBKG residential cost segregation tool Fantastic tool and then can we talk about that and then move into when we need a full-blown study and that type of thing. Can you just talk through what cost seg is and we can go from there?

Yeah, absolutely.

04:16
Cost segregation is one of my favorite things to talk about because it’s so straightforward. If you’re going to buy a property that’s depreciable, then you can do the simple strategy, which is to straight line depreciate it over 27 and a half for residential or 39 years for commercial and just recover those costs over those time periods. Or you can choose to have a study done. Now, do you always have to have a study done? Is it always the right thing? There are questions, there’s things. Well, are you planning on holding the ability? Are you going to be subject to recapture? If, obviously, you do this and you sell it? There’s different things that need to be talked about, but a long story short is that cost segregation can be summed up in the idea that an extra dollar of depreciation you can take today is worth more to you because the time value of money than taking that same dollar five years from now or 39 years from now. So if I can segregate the building portions down and assign them different tax lives and buckets, bonus depreciation can be available and we can find you more deductions. Now and this is where the conversation with your tax advisor comes into play Can you utilize these extra deductions? You’re not going to lose them, but does it make sense?

05:23
So KBKG, always the process and this is with any of our business lines, anything that I come across we do an initial analysis phase. I want to try to figure out what’s the benefit, what are the pros and cons, and get all that out there on the table so that the client can ultimately, with their tax strategist, go and determine if this is a good idea. And, more importantly, I’m a credits and deductions firm. I’m only really looking to find credits or deductions to save taxes, and those are only as useful as the utilization of those. So it all goes into play with a larger tax strategy. But yeah, cost segregation is super straightforward. Your depreciable basis is really what determines what ultimately the extra deductions or the additional deductions could be If you’re talking about a commercial building. Just for simplicity, a good rule of thumb is that if you have approximately a million dollars of depreciable basis, then it’s worth looking into. Sure.

And can we just define a couple of things real quick. So let’s say I buy a building for a million three. Just to keep the numbers simple. And when you say depreciable basis, what we mean there is like, let’s say, the land without any building on it is worth 300,000. Okay, and then we put a million dollar structure on it. That’s our depreciable basis. Right, that million dollar structure, that? Because sometimes people think oh, I spent a million three on this. Like let’s straight line, depreciate that over a period of time. It’s like nope, we’ve got to take the land out of the equation because it doesn’t sort of lose value, it sort of maintains it. But the government says this building I’m in over a long enough period of time it will be worth zero, which is relatively true if I don’t maintain it. But it’s kind of nice. I feel like it’s a financial incentive for people to go out and buy and improve property.

So that would be the definition of our yeah, and a couple of things to add on there. Oftentimes when I’m talking with real estate folks, they think in real estate terms. So they’re thinking in value. They’re thinking in triple net, lease and return on investment of the real estate transaction. But it’s important for cost segregation, to put on your tax hat and to step into the tax world, and this is a snapshot in time. So the depreciation schedule is so that you can recover your cost right.

07:28
So, yes, land is a non-depreciable asset and I always say that the IRS has a book that’s about that thick. That’s called the maker’s book and they assign tax lives to everything. So an HVAC system, they say it has a 39-year depreciable life. Well, in reality, is your air conditioner going to last for 39 years? Not in Texas, it won’t. So you have to put yourself into the IRS’s world and say this is the tax code. So when you purchase a building, your outlay of investment land and then structure or land and then construction costs that’s your depreciable basis is going to be the building value and that is as of what you purchase. So it doesn’t matter if you refinance it. It’s what have you spent out of pocket or loaned or borrowed?

to buy that property. That’s fantastic. And I think one comment you’re talking about the utilization and working with your CPA or tax strategist and I think a big thing we see there is we get clients that will come to us that are working full-time in their business. Their wife is a school teacher and they’re like hey, I read something about this cost segregation study is a fantastic way to offset some of my active income in the business and it’s like that might be true If you had somebody that could be a full-time real estate professional. We have to have that real estate professional status, which is 750 hours in the real estate activity and it’s your primary activity. So I can’t have 2000 hour job over here and 750 in real estate and qualify. So I think that distinction really matters because it’s like cost segregation study is a fantastic tool but it’s not that great if we go get one done but we can’t utilize it.

Yeah, you have to think about utilization. If it’s a business and you’re like a dentist that owns dental practice and then also has maybe like a separate real estate LLC and they’re renting it to themselves, essentially, then talking to the CPA, if they can do a grouping election to basically take the depreciation that’s coming off of the real estate LLC and apply it to business income, and that’s just a conversation that has to be done with the CPA or the tax professional.

And I can maybe see a scenario where if somebody buys a property, gets a great deal on it and market rent and their owner occupying it right, the business is leasing from the owner that owns the building as well. There’s a separate entity there. If there’s a justification where we can get a market rent that is very healthy, then we could do a cost segregation study that we could pay rent to this other entity and offset a lot of that. That’s right.

Kind of juice up the rent, knowing that the depreciation per the cost seg is so high that you can offset that Absolutely.

Good, Fantastic. So I interrupted your million dollar commercial property on 39 year schedule. So can we talk a little bit more about I would love to take dollars at the end of that and start moving them up into today. So can we just walk through a little bit about how that works? We were talking about HVAC. There’s different components to the building that have different schedules, right?

Yeah, so you think about the book, right? We have a tax life for any item that we’re going to find. So the way I explain this to my clients or prospective clients is to say, stand inside of the doorway of the building you just bought and, in your mind’s eye, what do you see? You might see a waiting room, you might see carpets, a desk, ceiling fan, window dressings, millwork things that are removable or are personal property items, and the IRS classifies a lot of those things as either personal property or special purpose property, and that has a five-year tax life. So my job is if you strip all of that out and you’ve just got foundation and walls and a roof and HVAC, that’s your real property, your 39-year property. And then everything, a lot of the things that go into finishing that space out and making it a restaurant or a dental office or whatever the case may be, that’s going to be your short-life, five-year property. And so then turn around and, in your mind’s eye, look into the parking lot. What do you see If you took away all of the land improvements?

11:22
No parking lot, landscaping, light poles, drainage, ditches, anything that was done to improve the land to where it brought it from raw land to usable. That’s going to be 15-year land improvements and so our job as a cost segregation firm is to go in, build up the system or build up the property and then measure and assign values and find out qualities and essentially assign cost to all of the different components of the property. And then we assign the tax lives and then, generally speaking, anything that’s 20 year life or shorter is going to be eligible for bonus depreciation right now, so it gives you more deductions in year one. But ultimately what we’re doing is we’re trying to segregate or break down the property into those different tax life buckets to create a tax advantage depreciation schedule for you.

I love that, and so just to touch base a little bit on the bonus depreciation because I think that’s an important factor. So again, I look at the bonus depreciation as economic incentive to buy and develop real estate. It takes this depreciation that’s on a longer schedule, so tax cuts and job act. We had a period of time where we had 100% bonus depreciation. So anything I believe and correct me if I’m wrong here anything 15 years shorter, we got to take all in year one. Is that correct?

I believe 9-27 of 2017 is when it went into effect and then 100% bonus depreciation ended in the end of 2022. And now we’re on a tiered schedule. So 2023, it was 80%, 2024, it’s 60%, and I think it’s important. There’s been periods in history where bonus depreciation has been there and then there’s periods where it hasn’t at all. It’s just been normal.

12:56
There’s still advantages of doing a cost segregation study, even if we reach a 0% bonus environment, because, remember, we have the five-year, the seven-year, the 15-year bucket of short-life property and you are depreciating those over those shorter time periods.

13:11
So you’re really going, as opposed to with bonus depreciation, what you saw is we get this really big pop of depreciation in year one, but since you’re stealing that depreciation from future years, then big pop and then you have a fairly good drop off in year two, and so all that’s happening with bonus is that it’s spreading out that benefit over five years or seven years or 15 years. So there’s still a lot that’s there and cost segregation in general it’s not considered a risky strategy. I mean, one could argue that you’re just following the rules, because they have the rules of what these components cost or what these components lives are, and so you’re just scheduling it in an advantaged way to where you can actually write it off. And then a secondary thing is future retirement dispositions. If you know what your HVAC costs, if you have to replace that HVAC unit in five years, well, you already documented what the depreciable value of that was, so that you have a remaining life to basically write off and then you can put your new one into schedule.

You’re talking about a very important topic, and I think this underscores the benefit of using a firm like KBKG. We had a client that came to us that had bought a property. They did a cost segregation study, saved some money using some low budget firm and they replaced a $100,000 HVAC unit that didn’t have a schedule and it was like we could have got some economic value out of that if we would have had a cost seg that had that included. But that piece for some reason wasn’t segregated out and so we could not. When we disposed of it, we couldn’t take a deduction for that, and it’s like we saved a little bit of money on the front end. The client saved a little bit of money on the front end, and it cost them a lot of money on the back end from a tax perspective. I just appreciate how thorough you guys are. When we engage with you to do a cost seg, we get really good outcomes. So you teed that example up perfectly for us, so thank you. Yeah, you bet Great.

15:06
So I wanted to jump in and say I can go back. We’ve been in the real estate game for 20 some years and cost seg was a tremendous tool well before the tax cut and job act showed up and so it just, I’ll say, got a little better during that timeframe. But you’re right, I sort of liked this nice path of depreciation that could offset some of our active income, versus like one huge chunk that might create this NOL that I have to, you know, net operating loss that I sort of carry forward and can soak up over time. I like to smooth out my tax bracket. I don’t like to get below the 24% bracket just because if I use up the 10 and 12 and then have to turn around and pay 37% like that’s no good. I’d rather smooth out the 24 for a longer period of time. I don’t wanna get too far down that rabbit trail.

No, but you can elect out of bonus. So I think you can talk to your CPA about that. You can choose to elect out of bonus if you’d like. And so, absolutely as a part of your long-term strategy and honestly, whenever I get that question quite often well, what are the drawbacks of this? And I always say, well, if you’re considering selling the property in the short term, you’re going to be subject to recapture. So that’s something to consider.

16:10
But also there’s always that risk that there’s a different tax bracket, maybe personal income tax bracket rises, and so it’s not 37% max. What if it’s 45%? Well, that’s going to change the math because all we can do is just use what we know now and project it out into the future to predict your ROI. But things can change. And if you suck a lot of the depreciation out of the building now and you’re in a higher percentage tax bracket later, well then that’s the deduction. The dollar of deduction is only worth the percent of your tax bracket, right, 37 cents on the dollar, 24 cents on the dollar. So I bring that up all the time as just a consideration, because you all have to kind of look at your own personal financial situations and decide what’s the best that you can operate off of now?

That’s fantastic. We’ve got a number of things to cover today. Is there anything else on a cost segregation study we should talk about before we move on to our next topic?

You know I would say that you’d mentioned our tool. The residential cost aggregator Depreciable basis has largely been the main factor on whether or not a cost segregation study is warranted, because there’s a fee and then is it, how many deductions or extra deductions are you going to get? So that’s why we created the tool and it is a self-service CPA tool or self-service tool that you can do yourself and it generates a new segregation or a new depreciation schedule right there. We’ll back up the tool under audit, our results. You as the taxpayer or as the CPA are responsible for the inputs. So put good info in, get good info out. And you asked me a question earlier about kind of what’s the difference between KBKG and others? And I use this. This is a template. The RCS tool is a template. It is a residential cost segregation tool.

17:52
Think about what a normal residence is. They all have the same components. They have yards and driveways and fencing and decks and awnings and living rooms, kitchens all the same thing, right. But then you start looking at commercial real estate and you have restaurants and retail and big box stores and dental offices and surgery centers. There’s all sorts of different kinds.

18:15
So when you look at a cost segregation provider. Their fee that they’re providing you or they’re quoting you is a representation of the time they’re going to spend on it. They’re not going to spend 20 hours on a study and charge you $2,000. There’s no way for them to make that economically viable. So if you spend $10 million on a property and then you go to a provider and they quote you four grand, they’re not going to spend any time on it.

18:42
So that’s what I always say is like no, I’m not the lowest provider, but at the same time I’m going to actually spend engineering time. So I contrast those two things to say there’s template versions and then there is engineering versions and your engineering is going to be a representation of professional service time. Yeah, just keep that in mind. And the larger your depreciable basis, the timing matters because we can find additional deductions if we actually have the time to dig into it and if I can make a 1%, if I can buy detail and breaking down the electric system, for instance, to include special purpose electric, maybe I can find you 1% more. That’s $100,000 on a $10 million basis property, which might mean $37,000 of tax savings. So don’t go with a super low quote because you want to incentivize a firm to spend the engineering time that they need in order to find all the components.

And I think my guess is most of our listeners out there don’t buy the cheapest car, right, that’s right. We buy a car that’s going to deliver value to us, and so it’s like I spend more money on my car because it’s comfortable and it goes fast when I want it to. So the value piece is where we’re at and again, most of our listeners have gotten to the point where they’re starting to understand that, right, like I pay for expert legal help, expert tax help, and it pays off. It’s an ounce of prevention that creates a ton of cure on the back end. So worth a ton of cure on the back end. Good, and I think this is an important thing that I want to touch on too before we leave. Cost segregation study. I’m listening to this discussion between us. I bought a property three years ago. Did I miss my opportunity to do cost seg?

No, it’s not required that you amend your return. You can always do a look back study. The further you get away from your placed in service state, let’s say that the value diminishes, but it’s very slightly over a year. So it’s always worth it to look back. And again, it all starts with a basic analysis. Let’s get a benefit estimate created, let’s get a fixed dollar fee quote to you, tell you how much it’s going to cost to do it. And then the only thing is that instead of an amended return, you file form 3-1-1-5 or 3-1-15. And so think of your original depreciation schedule as your starting point and then the cost segregated depreciation schedule as the end point. Form 3-1-1-5 is the bridge between those two points. And so you file form 315 and your new depreciation schedule. You’re just telling the IRS I’m making a change of accounting method and you catch up on your depreciation in that tax year. So on your next filed return.

Great, all right, anything else before we move on to the next topic.

I think we covered it. Cost seg is a great topic. I love talking about it. But yeah, we can move on covered it Cost.

Seg is a great topic. I love talking about it, but, yeah, we can move on. Yeah, all right. So now I’d like to get into some of the credits around energy efficiency and I know there’s been some changes in this. I don’t know if I want to call it legislation, but we used to have the 45L that we had some clients take advantage of and it was tremendous. And they’ve made some changes there and we’ll get into that, I think, in some more detail. It seems like the 179D has maybe replaced the 45L, as the maybe the opportunity to look at right now. So can we get into 179D and what the heck that is?

and you know how it can be an opportunity. Yeah, absolutely so. 45l and 179D they’ve been somewhat connected because they’re green building credits and 179D is a deduction. So we’ve got one that’s a credit and one that’s a deduction, so it’s different. Specifically, 45l we’ll talk about in a moment, that’s still around. It’s just changed to the point where it’s difficult, let’s say it’s more difficult to get the credit, and so, yeah, I’ll talk to you about that.

22:17
179d has garnered a lot of attention because they basically increased the benefit of the deduction. They took it from $1.88 a square foot to $5.36 a square foot, so like a 270% increase. Both of these programs got tied to paying prevailing wages on the construction of the project. So I think it’s best to start in the beginning. And what is 17090? So 2005,. The Energy Policy Act it was created because the largest consumer of energy in the nation is commercial buildings. How can we incentivize building owners to build green buildings? And they came up with the 179D deduction which, ironically for a building owner, operates a lot like cost segregation. It was a per square foot deduction that essentially reduces your 39-year basis and puts it into year one, so it’s like bonus depreciation. Now the thing is is that during this era of bonus depreciation for cost seg, it hasn’t made a ton of sense to do them both because A the dollar per square foot was so low. Them both because A the dollar per square foot was so low. And then, if you’re comparing that to a bonus depreciation with a cost segregation, your deductions and value are going to be way higher with cost segregation. So that’s your order of operations essentially is cost segregation first and then 179 deeds. So from a building owner’s perspective, that’s the way it goes.

23:41
So 2008 came around, kind of going back through the history, and, of course, the financial crisis happened. 20% of architects are out of work and the largest entity or entities that’s putting buildings in service is the government. They’re buying, you know, 50% of the buildings that are going up. And so in 2008, it was the special notice 2008-40 that basically said that the governmental entities can then allocate their deduction to their designer. A government does not pay taxes, they don’t need a deduction or they don’t need depreciation expense, so they were able to then allocate it to their designer, and so it created this great opportunity for architects and building engineers that are designing government buildings. This was on extenders for 12 years or so 2020, they finally made the 179D program permanent, so now it’s a permanent part of the tax code.

24:40
And then in 2022, with the Inflation Reduction Act that impacted both 17090 and 45L, which we’ll talk about they raised the dollar amount again from $1.88 to $5.36. And they also extended the entities that can take advantage of this to nonprofit entities. So you’re talking about your private schools, your religious organizations. If they’re putting buildings in service, they have the ability to now allocate their deduction to their designer as well. So it’s becoming a lot more common with architects now that it’s permanent. Over the last four years, architects and engineering firms that are doing work for governmental and nonprofit entities they’re building that into their tax strategy and working on procuring the allocation letters, and KBKG does have a teeth to tell process to help building owners or, you know, even nonprofits now that aren’t aware of this work with their architects and engineers to basically figure out how this can benefit everyone.

Great. So can I put some numbers to this, just to make sure I understand, because I could be way out in left field. So let’s say an architect is helping a nonprofit that has a 10,000 square foot building. They’re going to build Okay, and they apply the energy efficiency standards and there’s prevailing wages, all the boxes being checked, so we’ve got $5 and 36 cents. Do we get to apply that to the 10,000 square feet? So does that give me basically $53,000 of deduction?

as an architect.

Yes, all right, wow, so that’s a fantastic opportunity. Like I could almost do that work pro bono and I think we’ve talked about this previously like I could almost do that work pro bono, and the tax benefit it creates for me is enough to pay me to do that type of work, is that?

Yeah, absolutely, and that’s with. So, with the dollar amount going up so dramatically, that’s the kind of conversations that are taking place. You’re not necessarily going to do that a lot of times with, like the government right, because there’s no. Maybe they can negotiate design rebates and that’s totally fine, but that’s absolutely a tool in their tool belt to win the business, to win the bid. To talk about, especially now that we’re talking about charities and religious organizations, tax-deductible contributions to the entity, lowering their design fee. Again, it’s all on the table because the ASHRAE standard is very attainable. So if you’re building a building or designing a building that’s up to local codes, it is the federal ASHRAE standard, but there’s a great chance that the building is going to qualify for the full deduction. And there’s a safe harbor period. So we mentioned prevailing wages, so we should probably bring that up right. I mean, obviously it’s really heavily connected to labor unions and Davis-Bacon requirements. There’s apprenticeship requirements as well. For 179D, there’s a safe harbor, so there’s an opportunity right now. If you’re building, started construction before 129 of 2023, or if there was an initial outlay of over 5% of the cost of construction before 129, 2023, you’re in safe harbor, so you are exempt from the prevailing wage requirements for 179D. So for both programs they basically tied this prevailing wage as a 5X multiplier. So if you’re using prevailing wages it’s not a dollar a square foot, it’s $5 a square foot and so the economic viability of a study goes way up and especially what really happens is that the building size comes way down.

28:13
So if you’re talking about, you are required to use a third-party engineering firm for this. So that is in the regs. So you have to use a firm like KBKG to do this. You can’t just go out and do it on your own. Your CPA can’t do it on their own. They have to have a professional engineer is probably the minimum 100,000-square-foot at the top marginal rate that most architects or engineers are paying with their K-1s that are coming down. $37,000 is the tangible benefit of that deduction. But if it’s $20,000, $20,000? Then you’re talking about 20,000 square feet, $1, it’s a $20,000 deduction. There’s just not enough economic benefit to get a professional engineer involved and to go after that deduction. So it’s all kind of a part of the calculus that has to be done and it’s gotten to the point where it’s so complicated people can’t keep straight in whether their building is a good candidate or a bad candidate. So I would advise you to just you’re welcome to call me or call a trusted professional to say is this worth pursuing?

That’s fantastic, because I think there’s enough nuance in how this is applied that if you assume it’s going to work out okay and then it doesn’t, you’ve got yourself a problem there, and I think it’s interesting, just thinking through a few different things, how competitive some of these government projects are. It’s a bid process, and so this can give you a real advantage. If your competitors aren’t taking advantage of it, you know that.

29:50
I think is there, and then we think about government projects as well. They’re probably paying prevailing wage, typically good sized buildings, so it’s like we can start applying these things and go all right, cool, if an architect’s listening or a CPA tax professional’s listening and they have an architect client that does this type of work, they should absolutely be in touch with you to figure out what good projects look like that they can take advantage of.

Yeah, and always, always, always starts with a conversation and upfront analysis. Let’s see if this is worth the time. Are there projects that are good candidates? Right, and because it’s such a long process of you have to build up the building in environmental software that’s Department of Energy approved. You have to. Obviously, if the allocation letter for that deduction hasn’t been procured, you have to go and procure that so our government relations team can help with that. And then, once the building is built up, passes the environmental software, then you go into field testing and make sure that the building was properly built and then the deduction certified. So, generally speaking, in the industry you’re always going to find a success-based fee to where the client is not going to have to be out the money if they’re not going to get the deduction, and that’s how KBKG operates on these projects.

Great. So I’ve got two questions there. The first one is you mentioned like it starts with a conversation what do you charge to like have this conversation to figure out if this is viable or not?

So that all the upfront work, pre-engagement, is gratis. We’re going to talk about employee retention credits later. I cannot tell you hundreds and hundreds of clients or prospective clients that I talked with that it just requires gathering data, gathering tax information, sometimes having those prelim conversations with CPAs. Hey, we’ll sign an NDA and basically have you securely upload the last couple of tax returns and we’ll look through those and say, like, is utilization? Here Again, talking with the CPA setting up that coordination call to say, hey, is this worthwhile Looking at? We have access to different construction. They’re all public projects and the stamp drawings are certified. We have access to those, a national list, so we can see. You know, we can go in and put an architecture firm name and say how many projects did they work on? What were the square footages? Do these look like good candidates? And we can find pretty much straight away whether or not there’s going to be good candidate projects with some pretty simple conversation.

32:15
And then it comes down to utilization. I mean, with this increase of benefit, some of these I’ve got architects that are designing airports. They’re a million plus two million square feet. Okay, that’s going to generate a $10 million deduction. Maybe that wipes out most of their taxable income for this year or next. Maybe they don’t need any other projects for that, you know, for that particular year.

32:37
So you have to find a consultant that’s willing to actually be a consultant and that is going to engage you with your needs in mind, taking into consideration your tax strategy, so that ultimately I’m not going out and certifying, let’s say, $50 million worth of deductions that you’re going to have to pay for because it’s a sex-based fee, but it’s going to put you in NOLs for the next 20 years. So you’re not going to see the actual financial benefit, you in NOLs for the next 20 years, so you’re not gonna see the actual financial benefit of those deductions for maybe years and years. So that’s like I said you just have to have a team that’s willing to engage with you on what makes sense. And that’s where KBKG comes into play and it’s all free, so to speak, gratis conversations before engagement.

And I knew the answer to that, because we are constantly hitting you up with here’s a question we’ve got, is there an opportunity here? And we’re sometimes getting you less than ideal information and you’re like, well, if you give me this, this and this, I can give you more. So I do appreciate we get to consider you one of our members of the team and it doesn’t cost us anything, so appreciate that very much. So let me just there’s sort of two things that I wanted to go back to. First off, I think we just need to underscore the value, like there’s zero downside except for maybe 30 minutes of your time to figure out if you’ve got a fantastic tax opportunity, have your CPA reach out, or reach out to us or you and we’ll get your contact information at the end and make sure it’s in the show notes. But to just figure out if these opportunities are something that are available because it’s there’s so many tax dollars left on the table. It’s just awfully frustrating.

34:09
And before we really got into our discussion, we were talking about how sometimes CPAs are really good at the compliance side getting the right figures in the right boxes but they’re not great at the what I’ll call the tax strategy side of things, and so we love the tax strategy. We we’re not CPAs. We work with our clients CPAs. But I don’t know, and I think that’s somewhat of a challenge. You see, it’s like some CPAs you talk to they’re not interested. They’ve been doing it for this way for 40 years. And then other CPAs are very much interested in learning more about these opportunities. So I appreciate your willingness to just go out there into the marketplace and try to educate folks on this.

Yeah, it all starts with raising awareness that these things exist and then they’re really powerful. I mean the 179D one could argue right now for architects and engineers. It’s complete value-add. It’s zero risk and complete value-add because, again, remember the deductions are with a non-taxpaying entity. They made this permanent. They want to incentivize governments and nonprofits to put green buildings into service. So if you’re an engineer or you’re an architect that’s working with non-taxpaying entities, there is a huge lever here that you can pull and it’s not like this is something that is risky, or is you have to have that third party engineer certify this deduction? It’s absolutely worth a conversation and with the nuance of it, the opportunity is all over the place, just depending upon when the building was placed in service, what the tax law was at the time. That’s what we’re here to kind of help you scope out and understand whether it’s a good opportunity or not.

Good. And then the last thing I wanted to touch on was prevailing wage we talked a little bit about. That involves unions, apprenticeship programs, that type of thing, and, from what I understand as well, the contractor has to have, I believe, what it’s called is a certified payroll. Is that correct? They have to make sure there’s some rules around the prevailing wage that they just need to be able to verify that they were paying it.

That’s right. Yeah, your contractor, I mean obviously there’s market rate and then there’s prevailing wage and there’s a minimum dollar per hour, which in a lot of areas they’re going to be hitting that minimum dollar per hour. But then under prevailing wage there’s also apprenticeship requirements and like percentage of labor done by apprenticeships. So generally speaking, your contractor should be able to tell you whether or not they meet the prevailing wage requirements. Just offhand. There is generally what I’ve seen is that there’s going to be two prices. So again, going back to like government projects, a lot of times you’re going to have prevailing wage. That’s how they bid it, so they’re using prevailing wage. But if it’s just being done market rate, they’re not certifying that payroll and so if they were going to do that, maybe your construction cost goes from a million to a million. Two because of the extra administrative duty and then also the apprenticeship requirements and whatnot that has to go into the quote. So if you don’t have to use prevailing wage, I don’t know that this is for the building owner at least okay Don’t know that this deduction is powerful enough to overcome the delta between a market rate and prevailing wage. But it also depends upon where you’re at. Maybe the local requirements require you to do prevailing wage, require you to do prevailing wage. Down in Texas that’s not as common, but I’m sure as you go into the Northeast you’re going to have more of that prevailing wage. Just be common.

37:28
But actually it’s a great segue to talk about 45L, because that’s what happened with 45L. There is no safe harbor for 45L credit. So 45L is a residential energy credit and if you think pre-inflation reduction act and back, it was just a $2,000 per door. Cherry on top benefit you build your apartment building, you build your single family houses and then you come to a provider like KPKG and say, hey, let’s find out how many certified units I had, and we do all the calculations again environmental software and okay, 325 of your 350 apartment buildings were eligible. Congratulations. Here’s a $650,000 tax credit you weren’t expecting.

Yeah, let’s talk about tax credits versus deductions. When I get a dollar of deduction and let’s say I’m at the top rate that pulls it off, I save 37 cents because I don’t have to pay tax on that dollar. That’s right. So in the example you just gave us, there was 325 units out of an apartment building that qualified for the $2,000 a door tax credit, right. So if I have a million dollar tax bill, tax credit wipes out $650,000 of the tax bill. So when I have a dollar of credit, it’s a dollar, I don’t have to send the IRS. It’s not a 37 cent deduction.

That’s right. Yeah, so the technical way of saying it would be a deduction is a reduction of your taxable income, so you have to pay tax on less income. But a tax credit is a reduction of tax liability. So if you owe the government, you are a dollar for dollar chipping away at what you know. You don’t have to pay that dollar to the government. They are general business credits, so that means that they’re not refundable business credits. There’s a difference. You know you can wipe out the tax bill owed to zero. But if you owe 200 grand and you have a $250,000 credit, you go to zero and then you roll forward 50,000 of credit to the next tax year to offset future tax liability. You don’t get a $50,000 refund check because it’s a non-refundable credit. So that’s just interesting. You need to make sure that as you’re thinking about these things, it’s like what’s a refundable credit, what’s a non-refundable credit? And, yeah, dollar for dollar reduction of tax liability.

Yep, I love it. Well, I’m just glad that the credit doesn’t go away right Like I. Just it moves to the next year like a use it or lose it scenario, so good. So if we look back in time, right, we got 2020, we’ve got this opportunity for the 45L Is there any? And it’s sort of been. We’ve lost out on that. It’s not near as sweet. The credit amount has gone down dramatically. Can you just walk us through how it’s changed and then maybe, if there’s an opportunity to go back in time and get some of that, if we’ve done some of these strategies?

Absolutely. So you’re going to think about it in two different ways. Right, you’re going to think 2022 placed in service state backwards, and then 2023 placed in service state forward. The Inflation Reduction Act is the fulcrum point. That said, hey, this program’s changing For 2023 forward, it’s tied it to prevailing wage, and we’ll go through that in a moment. It did increase the potential for the credit, but it did just make it much more difficult to get. But 2022 backwards, it was up to $2,000, no prevailing wage requirement.

40:50
Right now, there is an opportunity for businesses or for, let’s say, for developers, for residential developers, for is residential developers that are developing single family homes or multifamily units. Right, and again, you can go back. Right now, 2020 credits are going to be expiring, so you can go back up to three open tax years. So, if you were a timely filer in 2021, you would have filed on 3-15 of 2021, your 2020 federal taxes. On 3-15 of 2024, just whatever. Last month, right, 34 days ago, those 2020 credits expired because you’re three years past your filing date. So if you’re an extended return filer, maybe you extended to 9-15 of 2021 to file your 2020 taxes. Well, that means you have from today, april 19th, to 9-15 of 2024 left for that 2020 tax year.

41:56
It does require an amendment. So if you were to get these credits, you go back and you amend your tax returns, your corporate returns, which then means that that’s going to flow through to your K-1s. So that’s another consideration Do you have three partners that are getting K-1s or do you have a hundred partners that are getting K-1s? Because you’re going to have to go back and amend the personal taxes as well. So there’s always that. That’s why it always starts with a conversation. I’ve had this conversation a lot of times with general partners and the general partners got 1% ownership. So they’re kind of trying to say, are we making this move? But they’ve got a ton of LPs and it’s like this would be a nightmare to try to go back in and get this credit. So if it wasn’t done timely, then it can be a challenge sometimes. But I do know that there’s plenty of projects out there where they never claim the credit. It’s easy to do a look back. We just need the building plans and then you get $2,000 a door for any unit that’s certified.

We talked about developers. How about if I buy a building and I rehab it and I put in new windows, HVAC, I make the thing energy efficient? Is there opportunity there for 45L?

There is absolutely opportunity there. It needs to be a substantial rehabilitation right, so it can’t just be lipstick on the property, paint and stuff. If you’re working on the envelope, new insulation again, windows, ac units yes, a substantial rehabilitation can work as well.

Because the reason I bring it up is KBKG helped us with a client that rehabbed 250 houses that did massive work to all of them. It might have been $225 out of the $250 that we got the $2,000 tax credit. The client was over the moon so excited because all of that rehab it’s short term, it’s ordinary income. He was just getting killed on taxes and the fact that we could go back and wipe out a big chunk of that tax bill was really exciting to him. So that’s good. So I think the main takeaway here is like there is a fantastic opportunity if you’re still inside of that window, but you should probably make a phone call today to get that process going, see if there’s opportunity there.

Absolutely yeah. So it’s a great program that could generate a lot of credits for businesses, for developers. And then in 2023, they changed it and it’s not that it’s going away, it’s just changed and it’s more difficult. So because they tied the credit to prevailing wages and that five times multiplier, most residential developers are not going to choose to pay prevailing wages, they’re going to pay market rate. So what it really benefited, the program really got tweaked to benefit high-rise developments in major metropolitan areas that would basically be under union labor prevailing wage. It used to be in 2022, the maximum was three stories above grade, but now that was removed and now it’s, so it can be for high rise development and then also for, let’s say, big, wide scale home builders. They also tied as opposed to the environmental software route where you test each unit they tied it to Energy Star, so most multifamily that’s going into service now they’re not following Energy Star guidelines.

45:10
So there are very specific, dynamic calculations that are up to Energy Star requirement. If you’re thinking about your large home builders and pick one of the big names, a lot of times they’re following Energy Star right. That’s on their branding. Essentially is that we do Energy Star rated homes and so Raiders Energy Star Raiders would be able to essentially say whether this unit was eligible for the credit or not and then, of course, depending upon the company, if they’re using prevailing wage, it’s either 500 bucks a unit or 2,500 bucks a unit. If it’s a zero energy ready home, it would go from $1,000 to $5,000.

45:47
For 2023, moving forward, a lot of the people that had benefited from this program the developers, a lot of the independent multifamily developers that are out there building up the apartment complexes in the areas that everybody needs they’re not following Energy Star, they’re not paying prevailing wage. So what was a cherry on top? Lucrative $2,000 per unit has gone to $500 a unit if they follow Energy Star guidelines, and that’s something that’s going to require multiple inspections before the drywall goes up. Multiple inspections before the drywall goes up. A lot of times you need to have a firm like KBKG involved in the design phase so that you can go ahead and build in those Energy Star requirements to your designs so you’re not having to make change orders or change your process. So it just made it a lot more onerous, especially for the independent multifamily developer, to A, get the credit at all and then B, even if you do follow those guidelines. Unless you’re using prevailing wage, it’s 500 bucks a unit, so it’s just generally not going to be worth it Great.

Fantastic, I appreciate you talking through sort of the shift from 45L to 179D and how those opportunities have developed. So anything else on sort of the energy efficiency side we need to discuss before we move on to the next thing.

I don’t think so. Yeah, Contact your tax professional. Contact Patrick, contact me. Happy to chat with you about it and see if it makes sense for you. The worst thing that can happen is that it’s not a good opportunity.

Yeah. So the next thing I want to talk through is KBKG helps. All over the place between deductions and credits you’re not filing tax returns. One of the credits that we’ve seen is the employee retention tax credit, and if you’re a business owner, you’ve probably gotten emails, seen it on your social feeds. It’s amazing. They’re like bombarding everybody with hey, take advantage of these ERTC program that the government’s put out. So can you walk us through what the ERTC is, how you qualify, and then really let’s start to unpack, because this was the level four tax planning I was talking about. If we don’t qualify and we take advantage of a deduction or a credit, we can get ourselves into trouble, and oftentimes it’s not the firm that put the strategy in place, it’s the taxpayer that is ultimately responsible. So let’s get into ERTC and what it is and how it works.

Yeah. So KBKG we’ve mentioned before. We’ve been around for 25 years and we have these other business lines research and development, cost segregation, green building, transfer, pricing, others. Just like every other credit and deduction firm. We had to decide are we going to offer services around employee retention credits?

48:27
And we decided that we had the internal expertise and time to build out the team and a process to do that the problem was is that every other firm just decided to do it as well, even a lot of people that shouldn’t have been, that didn’t have the expertise or the time or the quality that’s there or the pedigree to do it. And what I’ve found is in the history of this is really where the rubber meets the road, patrick. If you think back to the beginning stages of COVID, we had the CARES Act. That happened PPP and ERTC were really rolled out at the same time and ERTC were really rolled out at the same time. 99 plus percent of businesses went the PPP route because that was the more lucrative option at the time. It was an application process. You were either approved or denied right. Ertc just sort of fell by the wayside.

49:16
I remember making calls in 2020 to CPA saying, hey, are you aware of the ERTC program, even though we didn’t even have a business line open on it yet. Just, hey, just FYI, are you aware of this? And they would say, matt, I think I have one business that didn’t take PPP, so, and they didn’t qualify, so no problem, okay. So it was up to $5,000 a person, 50% of wages, capped at 10 grand. It was for 100 person. Employee Companies are less super difficult to qualify 50% gross revenue drop or direct government shutdown. So it just, even if you took your PPP, now you’re also eligible to amend for or file for ERTC credits. And they lowered the requirements. It was only a 20% drop in 2021. They raised the dollar amounts from $5,000 a year to $7,000 per employee per quarter, so the money went up almost by a factor of seven. And oh hey, so all of these businesses always explain it that the pool initially was super small and focused and then those changes they made in that consolidation act blew it up and so we decided at that point to open up an ERTC business. But again, everybody else did too. So that’s why you heard about every podcast, every radio show, every time you turned on anything. Have you taken your ERTC credit right?

50:50
The reason I start there is to say that the change there, what happened? They conflated the normal business owner, taxpayer, conflated the two programs. Ppp was an application process and through some, I think, the moral hazard of the way that ERC is claimed. They basically used that co-opted, that language and says apply for your ERTC credits today or we’re going to see if you qualify right. And so it’s this kind of key difference there’s no application process on PPP. You’re amending tax returns to claim employee retention credit. So you, of a fear of missing out Business owners talk.

51:53
My buddy that has a very similar business got a $400,000 check in the mail. Why shouldn’t I be doing this? This? I retained my employees during COVID. I’m eligible for it and the facts of the matter are is that there’s very specific eligibility criteria that needed to be discussed and a lot of business owners were taken advantage of, which is why we’ve gone through the moratorium. The IRS finally just said we’re shutting off processing right now voluntary withdrawal program, just because of the deceptive tactic of basically just saying we’re going to see if you qualify, all the while knowing that they were going to find a way to make them qualify. So I’ll pause there.

There’s different pieces of this we should discuss, so let’s talk about how a lot of these firms got paid right. It was based on a success fee, right, like we have already talked about. Like, hey, if you get the credit, we take a percentage of that, and so these firms have every incentive to shove this through, because they’re the ones that end up with dollars in their pockets, whether you were technically eligible or not.

52:59
And like you said, there’s no application process, right, like, if I submit the paperwork, I’m going to get a check back from the IRS, right? So let’s talk about that.

Yeah, and I mean what the real issue is on this is that when you have a firm that pops up, that’s employee retention creditscom, their entire business model, marketing apparatus, work is going into one program. That’s a temporary program and the IRS can audit these things for years. It’s kind of it’s deceptive in the sense that, well, we’re going to do this work for you and then if and it’s a success-based fee, which is fine in general for consultancy practices but what if you get audited? Well, we have audit protection for you. And so my question to all of my prospective clients was if I have employee retention credit in my name and those checks stop coming in, why will I back this up under audit later? If I have no revenue because the money stopped flowing, then why should I trust that they’re going to be around to defend their work later?

Right, and ERTCcom isn’t going to exist anymore. They’re shutting down that business. You can make the phone call saying, hey, defend me in this audit. And now the number is disconnected, right Like there’s.

Yeah, audit support, audit defense is only as good as the people that are backing it up. And for context and clarity, I probably told 19 businesses out of 20 that they weren’t eligible through this initial analysis process Looking at their gross revenue. We can talk about the eligibility requirements here in a minute, just to make sure we’re clear on that. But if I found out that you weren’t eligible, I wouldn’t offer to engage you. I’ve got again the five other business lines. I’ve got a going concern business. I know that this is going to be audited, so I’ve got to build that into my pricing because I actually anticipate defending this. But if I’m an ERTC business, I just know I can close my door and then maybe there’s legal stuff later. But at the end of the day, if that entity is closed, there’s really no recourse.

55:00
And that’s again the main shift that I want everyone to make sure they connect in their minds is that this wasn’t an application process. When you signed that tax form, they transferred all of the liability to you as the taxpayer, because you’re the one signing that tax form, mailing it in, attesting that you’re owed these credits. You’re the one signing that tax form, mailing it in, attesting that you’re owed these credits. Now you may have been deceptively told that you are due these credits, but at the end of the day you signed it. So you’re going to be the one responsible and make sure that you’re prepared to answer those questions. So I’ll share a story at the end of a friend of mine where we’re at in that process, but it’s really created a mess for a lot of people.

Yeah, my concern is there’s people that are sitting on a problem and they have no clue. The IRS is going to show up someday and go, hey, we need to talk about this ERTC. They’re going to be like, yeah, let’s talk about it. And they’re going to go you didn’t qualify and now we’ve got a tax due.

We’ve got penalty you know all of the stuff that comes along with it. So let’s talk about qualification and that’s a great segue, right? There’s three years of consideration here. You’ve got 2019 as your pre-COVID base period of revenue, 2020 and 2021. And, in general, the way I’ve explained this is there’s a qualitative and a quantitative way of eligibility here. Quantitative, numbers-based IRS thinks in numbers and they don’t really love stories, right. Quantitative way, you can determine 100% black and white whether you’re eligible for credits.

56:27
Okay, it’s based upon gross revenue and we look at your top line gross revenue quarter by quarter for 2019. And then we put 2020 over that looking for drops, and then 2021 over that looking for drops, and you’re either eligible or you’re not. There’s something called the subsequent quarter rule. So if you’re eligible for one quarter, you’re automatically eligible for the next, even if that second quarter didn’t have a drop. So even if you had, let’s say, overall incomes that were higher on an annual basis, there’s always the possibility that you had a quarter that dropped to the appropriate amount and then maybe you made it back up the next quarter.

57:02
So there is quantitative reasons why you’re eligible and so, to start the conversation right now with anybody that’s done this, I would go back and look at your quarterly gross receipts. If you need to know how to calculate it, call me. I’ve done it thousands of times now. It’s super simple. It’s basic math. There are some nuances, like everything else. Did you own other revenue producing entities? Yeah, it all has to be taken into the calculus, but at the end of the day, you should be able to find out in pretty short order whether or not you had a quantitative case for taking credits. Shifting over to the subjective realm, unless you have a question, no, no, that’s fantastic, Because I like the black and white.

I like to know did we qualify or did we not qualify? So I think that’s pretty straightforward. Now we’re moving on to subjective.

Yep. So here’s where we have issues in language. And well, what’s your take? How do you interpret this? Government shutdowns? Okay, was your business impacted by COVID? Well, yes, every business was impacted by COVID.

58:07
Just because your business was impacted by COVID does not mean that the government shut you down. And this is where, in the subjective, qualitative realm, where most all of the fraud happens and is happening. It’s not you ask any business owner was your business impacted by COVID? And they’re going to say, absolutely Okay, well, we should take a look and see if you’re eligible for credits then and then find a way to engineer a story behind the scenes that makes and I’ve seen things like did you have to put out hand sanitizer or make your employees wear masks? Yes, we did. Well, that was a CDC guideline. So that’s the government in effect, shutting down your business because you couldn’t get masks for those few months of COVID right Now. That was a CDC guideline. For those few months of COVID, right Now, that was a CDC guideline. It was not. I mean and I know there’s obviously the impacts of social policy, of government policy how we all and most business owners reacted to COVID and followed the CDC guidelines and did what they thought was the right thing, and you can have your opinion on whether or not you think that was right or wrong or what we did from a public policy perspective.

59:16
But really, distilling down the qualitative case here is did you have a government order that shut down your business or partially shut down your business? Now, for instance, in Texas restaurants let’s take a restaurant Maybe you do a to-go business and you have a dining room. Texas, governor, they shut down dining rooms. You could not eat in Texas for several months. Easy case to be made that was a government shutdown. Then they started a tiered opening 50% restaurant capacity, take out 50% of your tables. Right, okay, again, partial shutdown.

59:56
If you had a fully to-go business and your business boomed and you were, let’s say, a sandwich shop that had two tables out front, your tables did not. Your in-person dining did not represent a substantial portion, a nominal portion of your business. You were a to-go business and your business probably thrived, so you didn’t have a reduction in revenue and you also didn’t have the government shut down a nominal portion of your business, which is 10% of your business or more. So you shouldn’t have taken the credit. But that’s where again, but you make these cases and also supply chain. We couldn’t get our normal parts. It’s like, well, could you get them from somewhere else? Well, they were more expensive. You have to prove to the IRS that you couldn’t source your materials from another place, and so a lot of it was international. And so then it was like, oh well, our parts got caught up in the Port of Los Angeles or something like that. The government never shut down the Port of Los Angeles.

01:00:53
Supply chain difficulties were not mandated by the government. Even if there were externalities that did kind of impact the supply chain due to government policy, your business needed to be shut down by the government directly, and so most all supply I’m not saying all, but most all supply chain arguments are going to get thrown out. If your business was deemed essential and you kept running and they told you that you were impacted by COVID and you’re probably going to get that argument thrown out if it gets audited how can you argue that the government shut down your business when you were deemed essential? That’s contradictory. And so then, if that’s the way that you claimed, your entire ERTC claim is hinging on this company’s word that they’re A going to be around to defend it and, b that it’s going to be a successful argument to tell the IRS agent why you claimed employee retention credits when your revenues didn’t drop or went up and the government deemed you essential. That’s going to be a really tough argument to win.

01:01:57
And so, again, I turned away 19 out of 20 deals because we could have made so much more money if we would have taken those positions. But we would have put our reputation at risk. We wrote a clawback provision into all of our contracts saying if we get a portion or all of these credits overturned, we’ll give back our fee. I didn’t see that, that anybody else did that and said hey, we’re putting our name, we’re not signing the tax form, but we’re at least putting skin in the game with these taxpayers, because they’re the ones that’s taking on the liability. And so we got to do this the right way, yeah.

01:02:30 – Patrick (Host)
And I think an important thing here is just because we get away with it doesn’t mean I didn’t apply it properly. It doesn’t mean it wasn’t misapplied.

01:02:38
So there’s people that could get away with this and unfortunately, we’ve seen some clients come to us that have played fast and loose. They’ve got away with some things for a while and it’s like we need to button this up. The way we look at this is there are so many opportunities in the tax code to take advantage of. We don’t have to cheat the code, right, that’s right. So let’s find opportunities, and I think this is even an opportunity because you talked about. You mentioned it. I want to dig into it. I’m going to screw up the term. You can voluntarily withdraw. Is that correct?

01:03:08 – Matthew Geltz (Host)
I believe that ended on March 24th though.

Okay.

So they closed down that voluntary withdrawal window. But that’s how serious it was and how serious they are and I think honestly that’s like a harbinger of something not good. If the IRS is opening a window for you to voluntarily withdraw and also they were saying we’ll actually just cut you. We’ll cut you some slack. You only have to send in 80% of the money we gave you. We’re going to let you have 20% because you paid some random firm. So we’re going to let you have 20% because you paid some random firm. So we’re going to let you back this back out. But even though you did it wrong, we’re going to go ahead and give you 20% of what you filed for. That window closed. So I think that’s kind of like the. That should probably send a tingle down the spine of most anybody that took the credit to say, did I do this right? Because if you didn’t withdraw and you have a shaky case, there may still be opportunity for you to figure out with your tax advisor how to back it back out, how to refile your 941Xs and kind of try to give the money back.

01:04:13
But another key issue, patrick, was that these firms didn’t tell folks that they needed to reduce their wage expenditure by the credit amounts. So if they’ve gotten that check, they’ve already gone back and amended 2021 taxes. If you get a $500,000 credit for 2021, you had $2 million in payroll. They filed $2 million of wage deduction. When you get that $500,000 check from the IRS, you need to go back and amend your 2021 taxes, reduce your wage expenditure down to $1.5 million, which means you’re probably paying 37% on $500,000. So there was always going to be a net effect of here’s the gross credit minus the deduction, minus the fee, and most of the time I was seeing people were coming away with between $0.40 and $0.60 on the dollar as far as the credit goes. So if you don’t look into this now, you’ve amended your taxes, you’ve paid this tax bill, you’ve paid this firm that 25% that you don’t know is going to be around and if the IRS comes calling in two years, they’re going to say we want our 500 grand back, plus interest and penalties.

01:05:28
I don’t know that it’s clear as of this point whether or not they’re going to allow you to go back and recapture that wage deduction again. The money to the firm is gone. So you only netted out 50 cents on the dollar. You got a $250,000 check in the mail, which is great at the time. That money’s probably long gone. So my appeal to people that were kind of disagreeing with me throughout the process that no, I think I’m eligible. I’m like okay, well, you need to make sure that. I would just say, if the IRS asked for this money back in 2026,.

01:06:01
let’s say that you are owed this 500 grand. Is it going to be feasible for you to come up with 600 or $650,000 if you’re only going to net 250 out of this to begin with? Yeah, that’s really the risk here.

So I think there’s a couple things. One it might I wish clients would come to us for legitimate tax strategy, right. That’s sort of step one. Step two it could create opportunity, right. Like if somebody has a massive tax problem, they might need to come to us and go hey, let’s look at all the legitimate opportunities I have right now because I owe the IRS a huge tax bill. I need to work on reducing my current income down as low as I can to help me offset some of this. So I hate cleaning up messes, but could be an opportunity.

You would be much better served to bring up the challenges or the issues or the mistakes that are made to the IRS than having the IRS find that mistake and come to you.

Yeah, that’s good. We might have to do a whole another episode just on how to clean up ERTC mess, because I think we could probably continue down this road for quite a while. Yeah, good, so can you give us the? You mentioned a friend of yours that was looking at this. Can you just walk us through that story?

Yeah, absolutely, process is still ongoing. But basically I’m talking with a friend. I don’t like to market to my friends and family. So you know, in every I’m sure Patrick, you say this like what do you do? Well, I work in taxes and finance, and immediately that glaze comes over their eyes. They’re like, well, that’s too complicated, I can’t understand it, which is why I do like explaining things and trying to make it simple and helping to just raise understanding about it. But I’m having this conversation in the hallway with a friend and he has a small business it’s about 10 employees and I said something about employee retention credits as far as the work that we do, and he said I did that program. I was like, john, why didn’t we talk about this, you know, two years ago? I said, well, you never asked me. So anyway, come to find out. He did go with a large, let’s say the largest advertiser for this, and I won’t say any names, but it was one of the, let’s say, aggressive firms. So I start to tell him the same story that we just talked about and he is mortified.

01:08:02
My revenues went up, matt. I didn’t lose any money during COVID. I was deemed essential. Well, how many periods did you apply for? Or you say I just co-opted the same language. How many periods did you amend? And he said all six periods did you amend? And he said all six Q2 through Q4 of 2020, q1, 2, and 3 of 21,. All six periods. And I said you didn’t have any drops in revenue? No, well, I had him go print office 941s and his quarterly gross receipts and I did find a quarter, one quarter out of six that was eligible per gross receipts.

01:08:39
And the cool thing would have been is if that company would have just stopped there, he was eligible for Q1 and Q2 of 2021. It’s $150,000 of the credits for him If they would have just stopped there. Legitimate credit, nothing to worry about, no lost sleep. But what did they do? They pushed it and they took it all, and he’s an essential construction-related business that I asked him did you shut down? He said no, my trucks kept running. We didn’t take a week off, so he didn’t understand that.

01:09:17
They made the quantitative case for two quarters, which, in fact, he did get one check, the Q1 check and we were just worried. Which check did he get? He got the Q1 check. He doesn’t have to worry about sending that back. He knows he’s eligible for Q1 of 2021. He’s still expecting, or should expect, q2 of 2021., but Q3 of 21 and the three quarters in 2020, we know that that case holds no water and that he should work with his CPA to back that back out. The voluntary withdrawal program is gone, so reamend the taxes, taxes, and so it’s just one of those things where they overall found him $400,000 of credits when he was only truly eligible for about 156 grand. So now he can go down the process of trying to figure out how to get this changed, how to reamend or to get the check and then send it back or get the money back to them voluntarily, as opposed to cashing all these checks and then send it back or get the money back to them voluntarily, as opposed to cashing all these checks and then having them show up two years from now.

01:10:23
It was a random conversation and it just made me realize and reinvigorated my passion for telling people that, hey, just because you got the check in the mail doesn’t mean that you should have gotten the check in the mail. And if you haven’t had your CPA, a lot of people your CPA may have told you you’re not eligible and then you quote, unquote proved them wrong Whenever you got these checks in the mail. You’re not out of the woods yet. You need to go back and check your eligibility. You need to go back to your providers that did this work and demand the work product. They’ve never sent the narrative report. They’ve never sent the backup behind it. They gave the calculation numbers and said, hey, file these and take our word for it that this is going to hold water with the IRS If you haven’t gotten your work papers, if you haven’t reviewed or had a professional that you trust re-review to make sure that you’re eligible you should do that Absolutely.

This is good stuff, matt. I appreciate all of the insight. We’ve sort of covered the gamut. We’ve talked about opportunities that are regularly missed and where clients are leaving money on the table, and then we’ve talked about opportunities that are being exploited and clients are, I don’t know, being misled and taking dollars that they shouldn’t take, and so I think this is fantastic. I think there’s a real opportunity for CPAs and tax professionals to reach out to you and your firm. If somebody wants to get ahold of you, what is the best way to do that?

Yeah, matthew Geltz at kbkgcom, g-e-l-t-z and KBKG is kid boy, kid girl. It’s the only thing I’ve come up with that makes sense.

Very good. We’ll make sure we have your email address in the show notes, along with some of those fantastic tools that KBKG puts out. Love the cost segregation piece, both on the residential side, and also we use it regularly to estimate what kind of tax savings are out there for clients so they can go. Yeah, this opportunity looks great. Let’s engage with KBKG and get it going. So this has been a lot of fun. Yeah, I’m sure we’ll be sending you more opportunities to look at for deductions and credits for our clients and we’ll look forward to connecting with you again soon.

Patrick, thanks.

It’s been a lot of fun and appreciate you having me on, thank you. Thank you for tuning into today’s episode of the Vital Strategies podcast. We hope you found the discussion with Matthew Geltz insightful into the world of specialized tax credits and deductions. Be sure to check out the show notes for resources and links mentioned in today’s episode. And if you’re ready to capitalize on tax opportunities and build more wealth, visit vitalstrategiescom forward slash client to learn how our team at Vital Wealth can help you. Again, visit vitalstrategiescom forward slash client to take action today to start paying less tax so you can build more wealth. We look forward to having you back next week when we talk with Amanda Acy and discuss how important it is to have optimal mental health to be able to run a great business and live a great life.

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