Mark Perlberg: How’s it going, all my real estate investor audience and also all of my fellow CPAs and EAs listening to our material? We have an interesting conversation and presentation that I thought I would add to our podcasts and webinars. This is one for the first time of me talking to a group of high school students. My sister is actually a high school teacher, and she asked me to be a guest volunteer on the topic of what does a CPA do and also what to think about with taxes and why taxation matters. We also talk about some of the things that I do with my clients and how the tax code is structured to incentivize different activities. You might find this interesting and engaging. You may want to send this to someone else in that demographic of high school students or college students interested in understanding some of the basic concepts. It was interesting and it was fun talking to some of the students. I had a good time.
Now, for some of you watching the YouTube version of this, I’m not sure how the overall format is going to look like, but we may eliminate all of the visuals because we do not want to reveal any of the identities of the students. But I hope you guys enjoy this. It’s going to be fun and interesting conversation on some of the basic concepts. Stay tuned. We have more stuff coming your way.
If you’re interested in being a client, email info@markperlbergcpa.com. If you know any bright accountants looking for an exciting position, send them our way as well. Have a great day.
Hey, you guys doing. My name is Mark Perlberg. I am a CPA and I’m going to talk about what I do and also how tax may matter to you and just some things to think about and I’m just going to jump into it. What we’ll cover is what I do as a CPA, why tax matters and why tax incentives exist for business owners and real estate investors, and some stories and strategies that I implement. And then, we’ll talk about the benefits of business ownership and then you can ask me some of your questions on how tax may be impacting you right now or in the future.
A little bit about me. I am a CPA, that stands for Certified Public Accountant. That means I can sign off on audited statements in front of the SEC, Securities Exchange Commission. It also provides a level of prestige that we have taken four very hard professional certification exams and it demonstrates our expertise over our understanding of tax and financial concepts. Some other things, Masters in accounting and Bachelor’s from Ohio State University, and some other certifications that you don’t need to go over. I’m a native New Yorker like my sister Janet.
Now, I want to ask the class something. What do you think of when you hear the word tax? Can I get some hands raised or let’s put something in the chat. Chat what words come to mind when you hear the word taxes?Word association, tax. Portion of your earning. Extra payments. Very good. Anything else? I’m going to give you guys about five more seconds. What words come to mind or what do you think about when you hear this word taxes? Government. Right. The government taking my money. Absolutely. Very good.
Taxes are the money that the government’s taking out of your income or your salaries or you’re paying for your properties, that is going to the government to pay for all sorts of government services and infrastructure like the schools and hospitals and universities and roads and all that infrastructure is paid for with taxes out of your pocket. Maybe not yet, but you will. Pretty soon taxes are going to play a much bigger role for you as you enter the real world.
What is tax? Most of you guys are going to get salaries and, when you have a salary, a portion of that salary is going to be paid to the government in the form of taxes. Imagine this, you’re going to be making $50,000 a year. You’re super excited to be making $1000 a week, but when you get that paycheck, you’re going to find that only maybe $6,500 or $7,000, $7,500 is going to actually be distributed to you. How are you going to feel when you see your first paycheck and you are only going to get maybe 60 to 75% of what your salary is in your paycheck? How’s that going to make you guys feel? Disappointed. It’s going to make you feel scammed. These are good ones. You’re going to be a little bit pissed off.
Some of the other things that are taxed are our income. If you are a business owner and your income is your revenue, so your revenue is the money that’s coming in. Let’s say you would run a lemonade stand, the money that they pay you for the lemonade is your revenue minus your expenses. Your expenses are the expenses you incur for your business. The cost of the lemons and the sugar or the table, that would be your expenses for your lemonade stand. Let’s say you make 20 bucks and you have $10 of expenses, your income is $10, and that’s what you pay taxes on as a business owner.
Other things that you’re paying taxes on. Not only is money coming out of your paycheck, but if you own property, you’re paying property taxes to the county, and you’re also going to be paying sales tax. Whenever you see something fancy at the store and it says, oh, it’s only going to be $100, and you take it up to the store, you ring up the item, it’s actually $108 because of that sales tax that you’re paying on those items. You’re paying sales tax on food and groceries, so many items here.
Taxes is probably going to be your greatest expense or one of your greatest expenses throughout your whole life. More money is going to your taxes than almost anything else, so it’s important. Some of the forms of taxes. You’re going to be paying the federal government taxes. You’re going to be paying the state government, and you’re going to be paying New York City. You’re going to be paying a New York City tax if you live in or work in New York City. You’re also going to be paying taxes for social security. You may have learned what social security is, so you can retire, and Medicare expenses as well on top of your federal and state taxes. That’s a lot of money coming out of your paychecks or your income, going to Uncle Sam.
Obviously, taxes is a big thing. What I do, go back a little bit. My mission is to help real estate investors and business owners reduce their taxes to free up capital. When I say capital a lot, I’m just talking about cash that can be put back into your business. We reduce your taxes and that allows you to have more money in your pockets and you use that money to put back into your business, buy more of those lemonade stands or rental properties. And then, when you save money on your taxes, you free up that cash and you can build your business much faster and reach your goals. My goal is to help all my clients obtain financial freedom. When I say financial freedom, it’s getting to the point where you have enough income from your real estate investments or maybe from your business activities that you do, you longer have to work, but you work because you want to and you’re doing what you like with your day-to-day and now you have more time to focus on your passions and spend time with your family.
How do I do this? Well, first, we want to think about what are some incentive that exist for investors and business owners. All my clients are real estate investors and/or business owners, and we can reduce your taxes significantly if you have one of those two roles. Tax incentives exist. You can reduce your taxes if you are a business owner or real estate investor. The reason why is Uncle Sam, the federal government and state government, want to encourage business development. They want to encourage businesses to grow and thrive.
Remember when Amazon was thinking about going to New York City, they were thinking about all these tax incentives to help them save money on taxes to encourage growth of the business and to create more jobs. We want to encourage jobs with tax incentives. When we reduce the taxes for these businesses, that gives them more cash to free up to hire more people and to grow and invest and produce new products, and vaccines and patents. All sorts of innovations are more possible when you have more cash to invest.
Also, real estate, when we encourage real estate investors to purchase properties and invest, that increases property values and the values of these properties. We’re beautifying these buildings and that allows the government to pull more taxes out when they tax us on our properties. Also, to provide quality housing, it makes the neighborhoods more appealing. It makes the neighborhoods more desirable. It encourages development and employment and just overall wellbeing of these communities when we encourage real estate investors to come in, fix up houses, or flip and develop or whatever we’re doing to improve the quality of housing in the neighborhood.
I work with these clients and we take advantage of these tax incentives to reduce their taxes and use this cash to reinvest in their businesses. When they reinvest, they create more tax savings and that creates more cash to put into more assets or, when I say assets, that could be real estate or maybe buying machinery or equipment, anything that can help you build your business and succeed and thrive and generate more income. I take advantage of these strategies and I walk my clients through them to help them with reducing their taxes and growing their wealth.
You may have learned about the effect of compounding interest and compounding, we kind of see a snowball compounding effect where the clients are saving more and more taxes. They’re investing into more and more resources, whether that be assets or employees or whatever, and that creates more tax write offs and we see a snowball effect that allows for continual growth.
First off, when I work with any new business owner is we maximize their write offs. We make sure that they understand what they can write off. When I say write off, I mean what can we treat as a business expense. Remember, we were talking about writing off those lemons, so we want to maximize our expenses or write off so this income is lower and we’re paying less taxes on this overall net income of revenue minus expenses.
Speaker 2: Hey, Mark. Just so you know, when you turn right, it’s hard to hear you.
Mark Perlberg: Oh, okay. Sorry about that.
Speaker 2: No problem.
Mark Perlberg: I’ll put my screen a little closer. I’m just going to move my eyes instead of my head. Now, I look weird, cross eyed. What we want to do is we want to make sure we understand all these expenses that we record and write off when we file our taxes so we’re not overpaying on our taxes. Now, most business owners have not had the opportunity to learn what a write off is, what’s an expense, because they don’t teach this in high schools and colleges.
When you start a business and you’re finally on the way, I sit down with my clients and we make sure we understand what are all these expenses that’ll reduce our net income and reduce our overall taxes. Some of the things that we can do is just general expenses. What is our cost of good sales? Make sure we’re writing off that lemon. Or we also have some advanced strategies that involve finding business purposes in our day-to-day expenditures. Now, ordinary expenditures now become tax deductions and we can further drive down that taxable income and create tax savings.
One of the strategies I’ve done with my clients is finding business purposes for vacation. I had a client who does some modeling. He has a modeling agency, and I said, “Hey, why don’t we take advantage of writing off some vacations. Next time you go to Hawaii, do a photo shoot.” He’s going to Hawaii, he’s writing off the whole trip, the flight. He’s writing off the Uber to and from the hotel, the hotel stay, and some of the meals because now we have business purpose because he’s doing a photo shoot in Hawaii.
Some of the other things that we talk about here are a very popular strategy is what we call income shifting. Basically, we can shift our income to other people or to other times and events and moving around where this income is reported and that’s going to result in a reduction in your taxes. That might sound a little bit gray, so let me explain this by giving you an example of income shifting. As you make more money and your salary increases, your tax rate goes up. The highest tax rate now is 37%. The highest it’s ever been, I believe is in the 90s. There used to be a time where 90% or more of your income was going to taxes, around the time of World War II, to raise funds for the war. You were just getting hit in the head. Any dollar you made, the majority of it was going to the government. Talking about being pissed. There were times where an insane amount of money was being taxed.
Right now, the rates are a little lower, but you’re still paying more taxes when you make more money. If I have a client that’s paying a 37% federal tax rate and maybe an 8% state tax rate, and then that self-employment, we’re talking about close to 50% of that income going to taxes. But the client’s children make less money and, therefore, they pay less in taxes. What does that mean? What do we do? We want to maximize those write offs and expenses by putting the children in the business. That’s one strategy.
What we do here is we will hire the kids and pay them to work in the business. Whether that be helping out with some financial analysis. A popular strategy for teenagers is we get the kids to take over the social media marketing of the business and that will be an expense to the owner. And then, the kids are going to be recognizing this income on their taxes and reporting it. But because the children are maybe full-time students and not making as much money, they’re going to pay little or nothing in taxes.
Now, we get the write off, bringing down the taxes at the parents’ level, and then the kids are going to be paying no taxes on their income. The net effect is significant. Let’s say you’re paying a net 50% in taxes and you pay your kid $12,500. That reduces your taxes by roughly, can someone tell me how much that’s going to be? $6,250. I think. Someone test my math on that. Roughly $6,000 reduction in your taxes and we don’t increase the taxes because your kid isn’t paying taxes on that income. That’s just one of many examples where the net effect is a reduction in taxes.
And then, there’s some more advanced strategies where we put that money into a retirement account and that retirement account grows tax free and could be used for college. Still other things that we can do is shifting the timing of these expenses to create additional tax savings. One of the things, which is called bonus depreciation, it allows us to write off all of a vehicle in year one instead of writing it off over time. I had a client who purchased a Land Rover when she learned about it, and I told her about how to take advantage of something called bonus depreciation, which is depreciation is just to account for the wear and tear of an item. Basically, instead of writing this vehicle off over the course of five years, because we put this vehicle in her business and the vehicle had certain attributes, we were allowed to write off all the vehicle in year one.
Now, I got a call from the client and the client says, “Hey, you told my wife about bonus depreciation, she was excited by this new Land Rover, is there a limit on how much we can use for this for vehicles?” I said, “No, you can write off the whole thing.” The client said, “I was hoping you’d say that there was because I really don’t want to buy a $110,000 Land Rover.” Anyways, we wrote off the whole Land Rover. I estimate that created about 40 to $50,000 of tax savings by writing off the Land Rover. We planned appropriately to make sure that Land Rover was 100% business use so it could qualify for all of these write offs to be treated as a business expense.
Another thing that I do that is very popular called cost segregation. At a very high level, this allows you to shift your expenses on the purchase of a building into the very first year that you own it so you can write off more expenses in the very first year that you own the property. Basically, what that means is you buy this building, a lot of times we’re financing these buildings so we’re not even paying for the whole building. What we do is with the cost segregation study, it allows us to write off a greater portion of it in the first year and that allows us, again, to reduce our taxes to free up additional cash to purchase more property.
I had a client whose prior accountant didn’t know what cost segregation was, and I was able to implement cost segregation on four rental properties and we amended the return and created $90,000 of tax savings for that client. The client was very happy, obviously, for the results of this amended tax return. The strategy is we take that $90,000 of tax savings that we create and we use that to buy more and more real estate and, again, we get this snowball compounding effect of the tax savings creating additional cash to put more and more money back into our businesses.
At a high level, what we’re doing here is we are understanding and navigating the tax code in order to minimize your taxes to free up cash to put back in your business, when you’re a business owner. That’s why being a business owner has its perks. I’m a business owner. I run my own practice and it’s very fulfilling and I just want to talk to you about some of the benefits of being a business owner.
Some of the benefits are having more freedom and you’ll see a picture here I took. This is me on an ATV, those four wheeler quads. I took a trip around the mountains of Guatemala and I lived in Guatemala for two months of the winter, because I run my own virtual practice. I don’t have a real office and that allows me to work out wherever I want and I didn’t feel like dealing with winter so I was in Guatemala for two months and it was pretty cool. Also, you have the freedom over what you do and who you serve and the type of products you deliver and having that creative freedom can be very gratifying. You have greater earnings potential when you’re a business owner. There’s no limit on how much you can make. Instead of waiting for a raise and waiting for a salary, when you are in your control of your own destiny and in the driver’s seat as a business owner, there’s a lot more money that you can make.
Just look at the richest people in the world. One of the things they all have in common is they all own businesses. When you own a business and you have a good strategy in place to reduce your taxes, you are going to pay less taxes than you would if you made that same kind of money as an employee. Some of the downsides of being a business owner is more risk. You might have to work longer hours. You might get sued. You’re responsible for everything. You can’t quit as easily. I can’t just walk away from my clients, they already paid me. There are challenges. It is hard, but it can also be fulfilling and you have the opportunity to really pursue your passions and carve out your own path and really choose your own destiny here.
Before I open up to questions, if there are any questions, if you’re interested, you can shoot me an email Mark@markperlbergcpa.com. Anyone who emails me is invited to my live webinars and those are also recorded on my YouTube site, which you can subscribe to if you’re interested in learning more. Just, this is going to be great for anyone who is thinking about ever starting a business and considering that path. You have a lot to learn about who you are and what you like. I would like it if you just consider the possibility of being a business owner and taxes is going to be a major factor on the development of that business. Even if you are not a business owner, taxes is still going to play a crucial part in your life.
Before we get into Q&A, just some other thoughts on understanding your finances and financial literacy. I was talking to Janet in the prior class about some of my advice to young people, and one of the most important things to think about is be very wary of these credit cards and credit card debt. The interest rates are insane and you meet so many people where they have so much credit card debt that the interest grows. Usually, it’s between 20 and 25% growing and compounding annually, and the interest rate is going to grow faster than you can pay it off a lot of times, and it’s just not the best way to go if you want to get a headstart on building wealth and achieving your goals of wealth or financial freedom or whatever you’re looking to do.
Also, being smart about your finances and monitoring your student loan debt and then also start working. Even if you hate whatever job is available, it gives you the opportunity to explore different areas and learn about what you like. Also, sometimes, you got to learn about what you don’t like to really figure out what’s best for you with your career path. If you could find anything as you’re entering university or even working at a restaurant’s a great experience, just find something and get to work and you’ll start learning about taxes when Uncle Sam is taking a chunk out of your paycheck. That might cause you to start thinking a little bit more strategically about your taxes.