This week, Dr. Bryant interviews Seth Peabody, a very knowledgeable CPA with lots to say about the new tax code. For the month of January, our exclusive Members Only content will be available to the public. Listen now!

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FB:Welcome to the High Speed podcast. This is your host Dr. Forrest Bryant and I’m excited to have our local in-house CPA Seth Peabody on the call today. Seth, how are you doing today buddy?

SP: Doing pretty good how is it going?

FB: We’ve just been sitting here talking about taxes for probably 15 or 20 minutes before we even turned on the recording because this was just so much fun, right?

SP: That’s right. Well, it excites me. Most people it doesn’t excite. I know it’s probably breaking news the new tax bill that has come into play and there’s thousands of questions.

FB: Yeah, absolutely. Groundbreaking, paradigm shifting tax changes. So we’re trying to make sense of it. In order to filter it down to our members and listeners and try to figure out some ways where you can decrease your taxes and you can build long term wealth. So, that’s really what we’re here to do and that’s the reason we’re doing this so we can share this with our listeners. So Seth, why don’t we just kind of give a little bit of intro. Tell our listeners a little bit about yourself.

SP: So for the past 17 years I’ve had the pleasure of serving small, medium and large size businesses for tax planning and tax preparation, and ensuring compliance with our friends at the IRS and your local state authorities. I have a wife, 2 kids, and was born and raised in Atlanta.

FB: Alright, you’ve been my personal accountant for probably 5 or 6 years, I guess. It’s been awhile.

SP: Good times!

FB: Yeah, time does fly. I appreciate all the help that you’ve given me. And I know you are working with some of our High Speed Alliance members and I appreciate that on their behalf. So you know we’ve got a short period of time here. We’ll try to be pretty focused. The majority of our listeners are physicians and dentists and small business owners and so there are some really specific things that are going to affect those people. So, we’ll try to keep it therel. Seth, I tried to get prepared for this and I pulled up the tax bill and it’s over a thousand pages with references here and there. And I thought, “Oh my goodness there’s no way I’m going to be able to read this entire thing.” So you and I have talked about these things. And I’ve read some of the summaries and you know I’ve tried to read a good bit on it. But there’s no way we can do just in a very short podcast. Let’s just kind of talk basics. You know, let’s start on corporations here. Let’s talk about what are the corporate changes. I tell you what, before we do that just give us the big picture of something like the really big changes that happened with this tax bill.

SP: So the big changes if you are a small corporation, the new tax flat rate is 21% so for most of the audience that are dentists, doctors and in the service based industry. If they were a small service business, they were known as a personal service corporation (PSC) and they had a flat tax rate which was 35%. So that 35% is cut down to 21% and there it doesn’t have to be any limitation yet on facing out and be at a higher tax rate. And that’s a huge advantage to small business owners. Now, in the SCorp, LLC-sole proprietor side there’s still a bunch of questions the IRS is going to have to define what the house to do by creating a new 20% business income deduction. And so, all of the CPAs are still kind of confused on what it means as well. And we’ll wait for the IRS to come up with the definitions and rules for us to kind of fall on behind and figure out what everybody meant and report it. But thankfully, we have 365 days to figure it out.

FB: So a lot of these changes. There’s some things that were permanent but a lot of these changes I mean there’s a timeline on this which seems to be 2025 but most of these changes that are made are only for this time period, is that correct?

SP: Correct. All these roll out at the end of 2025 which is 7 years from now. So that would be at the end of the current administration if they had a 2nd term. So, I think that was on purpose they just couldn’t get it all in as automatic full changes. There’s a sunset on most of these.

FB: So you mentioned and we talked. And let’s dig in a little bit deeper on the corporate. I think the majority of our small medical and dental businesses are SCorps and so it’s unknown really right now how that’s going to affect. So, you and I were talking earlier there’s a possibility that you know we’ve always just assumed that this small medical, dental practices were going to be escrows but now with these new changes you’ve got a lot of work to do to figure out if that’s still the best organization versus starting to see more people go back to C Corps to take advantage of the new tax laws right?

SP: Right. So it’s going to be we may see a lot of entity changes coming in the next year and accounted it depends on how the IRS rules on this new 20% deductions. So LLCs Scorps may start electing to become C Corps when in the last 30 years everybody was running away from C Corps. So it might have completely reversed it. So we’ll see what happens SCorps can go back and forth now but LLC likes to be a C Corp and I’m not sure if you can go back to be an LLC. And when this sunsets you know is that the right decision. Should you stay in LLC for the next 7 years maybe pay a little bit higher tax but who know what tax rates you’re going to be 10 years from now? Tax planning are going to be fun this year we’re on the CPA side since we’re a bunch of bean counters I think we’re going to be pretty excited.

FB: Yeah definitely a lot of things to talk about. And I guess for our talking bout businesses on the high end. The section 179 change was a big one. Do you want to talk about that a little bit?

SP: Yeah, there’s section 179 was that a half a million limitation it went up to a million limitation and the big thing in that is it allowed for some property improvements and some real property improvements to fall under 179 which in the past it didn’t really fall on 179. Plus the bonus depreciation which will going to be phase out over the next few years went from 50% to 100%. So there’s different rules which associated with section 179 which is a depreciation rule. And there’s bonus depreciation which is a whole another set of rules. And there’s a regular depreciation. So you kind of have to start planning out in that regard to. If you going to take 179 or you going to take bonus. There’s probably no point to take 179 unless you’re over half of it. So there’s tax planning this year is going to be very important obviously and probably over the next 7 years based on this new rules. You know what’s best for you individually specific to your situation as a business owner and you are going to have to sit down with your CPA and pencil it out can be pretty important.

FB: Yeah absolutely. Probably more important this year than it has been in previous years. Reduction in taxes is always a big one. But this is a year probably like we haven’t had in the near history we just really have to think this year. So we thought about real estate a little bit so there’s some changes that are going to affect real estate on the investment and on the corporation side there’s a lot of different things you want to talk about that a little bit.

SP: So this 20% tax primary income deduction or whatever they are going to end up calling it for sure they are going to abbreviate it. But that it wasn’t available obviously to real estate companies or real estate investors and now there’s an opportunity you can take 20% deduction on the past primary income for your real estate property. And also with the new 179 rules and you do a proforma cost segregation study on your property. There’s a new 179 rules and bonus rules fall in those categories fall into those rules. There maybe some big big deductions to be able to take especially if you’re a doctor or a dentist and you’re self-occupied self-rental property there’s some major deductions that you’ll be able to take.

FB: And that section 19 and that’s going to be applicable to I mean not just dentist or doctors in their own practice and also for commercial buildings.

SP: Right, it wasn’t necessarily available until now. So this tax law. So it’s really a tax law for distribution, retail, manufacturing companies but for service based industry I’m not sure if this is going to turn out so well for now that’s why the tax planning is going to be pretty important because if you are just W2 employee and you’re a doctor working for a hospital your tax return is going to be completely different than your buddy who has a practice down the street with the small business S Corp. So it’s turned around a bit upside down. So you’re going to see a lot of people moving try to moving out from W2 and seeing people move more into W2 compensation. So it depends on where you sit. The other important things are the state and local tax limitations up to $10,000 now and the limitation on mortgage interests. But the good thing is if you don’t refi your loan is grandfathered in up to a million dollar limitation and now it’s down to $750,000 for new debt. So if you don’t refi your loan then you’re okay. But I don’t know how many people are going to refinance their loan with interest rates as low as they are because it just keeps going up.

FB: Right. So, let’s take that one a little bit deeper there. If we have a member who is purchasing a new home. If they were purchasing a home that was under $750,000 then they get a full interest deduction that they will be able to take up to that point. But if they bought a house that was a million or 1.25 then they’re limited on the up to the 750 right?

SP: Yes and no, Because they also limited the deduction for the home equity line. So you know if you’re over the 450,415, 425 jumble loan most people get the home equity line. So now, the home equity line interest is blown out you can’t deduct that.

FB: We used to deduct that but not anymore right?

SP: Right. So that’s out. So you probably see fixed larger fixed rate mortgages or the 80-20 fixed rate mortgages I think. But you’re right. So if they bought a new home as 1.25 they’re going to be phase out at a certain period after $750,000. And they may not be able to deduct as much as mortgage interest. So if you’re buying a $1.2M home and you think you are going to good to deduct 60 and 70 an interest and all of a sudden you deduct $30,000 an interest so that’s where another tax planning comes in the flesh.

FB: And that could just be one simple tax law and could affect home sales and home valuations above that 750. I think we probably going to see that in some of the higher priced markets. That’s probably going to affect things in California and New York and some of those places too right?

SP: Yeah so we’ll see if that changes the home prices see if they come down or go up but I’m sure the mortgage industry can find a way around this and be able to help taxpayers deduct mortgage interest because that’s a big thing to people.

FB: Definitely, you know let’s we kind of talk about how it doesn’t really favor service industries. So let’s back up a little bit. And just the economy in general. And we kind of talked about manufacturing and you know this is called the tax cuts and jobs acts. So we’re trying to create some jobs just on a high level. What industries do you think are going to benefit the most from the tax laws and where do you think a lot of those jobs are going to go?

SP: I think if they’re going to reinvest it’s going to be on the manufacturing, retail, distribution side but you know. They say this is going to create jobs and we are going to sit back and wait to see if this is going to create jobs. With the economy already growing does this help the economy? Does this hurt the economy? I mean obviously we’ve seen you know good reports of the market, how the market feels about it. And so the larger C Corps the major companies I think they’re happy about this law. The lobby is pushed pretty well about for the C Corps. But you know what made this country great is small,medium size businesses and they’re more those and they employ more employees. It could be interesting to see over the net decade how this increases the unemployment rate.

FB: Definitely, let’s talk about capital gains treatment. We had some minor tweaks there. You want to address that. We always want to get capital gains whenever we can.

SP: Exactly, that’s what planning is about. It’s moving your dollar from ordinary income tax to capital gains income tax. The capital gains income tax wasn’t really touched. But we still have the 0,15,20 percent federal tax on capital gains and then whatever your state applicable rate is going to be. So that’s the good thing that they didn’t really touch the capital gain rates too much or affect those the limitations to it that they have pass in previous years.

FB: So now we do have one thing this may get. I was going to say for kind of the backend for our members only but this may get a little deep. But just as far as it relate to syndications there’s a big one on the holding period on the carried interest. Like explain that for our listeners.

SP: Exactly, so now you have to hold the assets now for 3 years. I don’t know if that 3 calendar years or 36 months. They’re going to come back and define that. But the holding period there wasn’t a holding period for carried interest. So now, you’ve got to hold that asset for 3 years before you can qualify for carried interest which is tax and capital gain rates. So that will be an interesting thing to see because you know most people that are in carried interest industries. They’re are going to flip the asset as quickly as possible. So you know some they going to make a decision to go ahead and take the hit on ordinary income or your holding period now improvement. Now your carrying costs so your carrying costs now triple so to speak if you going to hold it for 3 years. How does that play on their return of investment? And how that effects the standard on the return on investment. So anyway it’s interesting to see how people hold on to assets and don’t hold on to assets.

FB: So yeah that’s a little bonus for our listeners if you’re a syndicator or an investor and a syndicator in a syndication in order to get the longer term capital gains treatment you have to hold it for 3 years. And I think a lot of our syndications are longer terms some of them are 5-7 years before we anticipate a capital event but there instances where sometimes it would make sense to sell if the 24 month mark and so now our general partners in those syndications we going to have talk with their members and figure out does it makes sense to pay that higher tax rate or to hold beyond the 3 years period so that’s a big easy plus to syndications.

SP: It going to be about. If i can add in.

FB: Yup.

SP: If I can add in it’s going to be a 10% increase in tax between the ordinary taxation and capital gain rates and on the average just looking at U.S. plus state rate. So I mean you’re losing 10% of your money of the cut that’s a pretty good amount of money.

FB: It’s got to have a good sale to make it up right?

SP: Exactly.

FB: Alright Seth. So let’s see I know I’m sure you’ve seen tons of tons of mistakes, in planning and accounting you what are some of the biggest mistakes you’ve seen and I’m sure you’ve seen some big ones and sure you were able to fix some of them but there’s probably some that are not fixable.

SP: You know it surprises me just cross the country I had clients from 40+ different states. So obviously, I’ve seen a lot of returns from large firms all the way to small firms. And there’s not really need CPA common mistakes that I can think of just by looking at returns. But CPAs aren’t by nature proactive. They don’t reach out to client and say hey let’s do tax planning. What’s your tax going to be this year? Well, I don’t know I’m just going to figure it out this April. You know that’s a wrong time to get a call and to let you know that you owe 50 grand.
So normally what I do to clients is to do a planning session in July and August and a planning session October, November, December implement whatever tax strategies we can, reduced what tax we can and then plan for the tax right? Because you know it’s easier to know that you owe tax in December than you owe the tax the day before you have to pay it. So that’s the biggest mistake. I guess Number 2 is accountants not being proactive they’re reactive they’re not bringing tax strategies to the table. And part of that is most CPAs get sued over tax issues rather than any other type of issue. But you know if you’ve come to the table with tax strategies and you’re saving clients money that’s you know. And you explain it and they understand it I don’t see what the issue is. I think being reactive and not planning not bringing strategies to the table is a problem in our industry.

FB: Well this is probably as a good a time as any to give a plug but if you’re listening out there this is a year where it makes a lot of sense to touch base with you accountant early and often. So if you don’t have a good one we’ll tell you how to get in touch with Seth. But if you do have a good one, make sure that you are in touch with them early and often because this is going to be a really important year with a lot of tax changes and need to probably look at it closer than you ever have this year right?

SP: Yeah exactly. I recommend some time obviously we’re going to go to tax deeds pretty soon and try to finish as many tax returns as we can for 17 between now and April 15. But sometime in May contact your CPA to contact me I’ll be happy you know in a phone call or email to just plan it out or figure what 18 is going to look like for you. And then just continue that planning. Typically we’ll run 4-5 different scenarios each time we do a planning sessions and what it is is a basically just a box returns so we actually prepare returns says hey if we file a return right now this is what it look like and then you know what it is and then you can plan from there. And the biggest mistakes that I see clients make and we were talking about mistakes that CPAs make but the biggest mistake clients make is they close a transaction so they purchase a practice or they sell a practice or an asset or investment before actually talking to their CPA and planning it out and asking their advice and many times we can change some words and change the way things are sold where we can save 10 of thousands of dollars of tax but after that fact we can’t go back and change what has been done.

FB: Yeah exactly, excellent point I know I lived that as well when I was looking at selling my business there’s a tremendous number of ways that it can be done and inorder to do it right you have to work very closely with your accountant in order to make sure that you get the most advantageous tax treatment so definitely don’t do anything, don’t make any moves without consulting in getting everything done. That would be a huge mistake.
SP: Right, right. So if you ask your CPA and they dont give you a long answer go ask another CPA.
FB: Alright Seth, one thing that we’re talking about was how some of he deductions are going to affect the individual tax returns and the tax rates for the renters markets. So the change to those people is going to affect as landlords and as owners of the rental properties. So explain that a little bit for our listeners how those dominos lined up.

SP: So the standard deduction has doubled so its gone from 12,000 to 24,000. I guess the question is what’s the psychology of a low income earners who wants to buy a house and who they use that mortgage interest really to reduce their tax to get a refund to pay for food and their rent payment or their mortgage payment how about affects it. So now, if your standard deduction is doubled it goes up the above 20,000 does this interest them to buy a house or want them to rent. They might want to rent more instead of buying a house because use that interest deduction. They can’t use the interest deduction. They can’t the real estate tax deduction, right? Does that increase, does that help the residential market? I think it probably will. We’ll have to see.

FB: Yeah I agree. The renters market looks great for the foreseeable future and that could be one extra little thing that keeps it and keeps it looking that way and that’s certainly better for real estate investors who are looking to own real estate properties.

SP: Right. You got a lot of things affecting the residential rental market you got millennials that want to rent longer than own. You got this new standard deduction that’s doubled that this should definitely motivate people that want to go own a house to get the mortgage interest. And then on the investors side your interest rates are so low. So you know it’ll be interesting on how this market place now this tax bill creates jobs and you know reduces taxes for folks and it affects in general on the real estate market.

FB: Seth, do you have a favorite quote or a favorite book?

SP: One of my favorite quotes and I’ll probably put you is I’m a CPA in “If you’re the smartest guy guy in the room, you’re in the wrong room.” I like to surround myself with folks that are smarter than me so I can learn from them in any industry. So folks that are very tax law attorney that are looking for different tax strategies that produce ordinary income tax rate and other folks in different industries and be able to use that and their lessons and apply it to our industry. And I don’t think a lot of CPAs got and look for ways to grow. I don’t know if they know to even apply learning things from other industry and applying it to their industry.

FB: I love that quote as well. And I believe in that one as well. So what your definition of freedom Seth? What’s that mean to you?

SP: Freedom, freedom. Be able to make a financial decision or just family decision without negative influences being consumer debt, payroll,vendors, income taxes known all that taken care of or you have a plan for it so it’s not muddying the water when you try to make a decision on your life moving forward. If you’re worried about the money you’ve got to spend to pay on mortgage debt or consumer debt or payroll or taxes. You may not be making a clear financial decision and you know opportunity may arise and you think and you don’t know what your ordinary income tax is and you’ve got to make that investment and then you find out that your ordinary income tax is higher than were. And you start worrying about that investment and hoping that that investment is going to pay off so it’s going to pay your tax. There’s things like that so you know just being wise having most of your debt paid off and knowing you’re in a good financial position- oh it helps in making a clear decision.

FB: Wise advice. Very good. Seth, do want to give a phone number? We are going to put it on the show notes but phone number or email where listeners can get in touch with you?

SP: Yeah, the best best way is email which is seth.peabody@itxre.com is the best way to get hold of me.

FB: Okay, we’ll put that on the show notes too so they can shoot you an email. And we’ll have our full disclaimer on here but let me just throw out a little of many one in here. Seth is an accountant and I’m not but the advice and things that we’re talking about in today is impersonal so don’t make any changes without checking in with your own accountant. Make sure that you do check in with your accountant to see what’s applicable to your personal situation.
So you’ve been listening to the High Speed Podcast. We’re going to go to our members only section here. And we’ve got a lot more to talk about. We hadn’t talk about state taxes will do that. I know we’re going to talk about private lending and how to reduce taxes on that. Maybe try to get that over into add that ordinary income tax. Of course, they just change the rules on us so we’re going to have a look at that a little bit and we may even talk about conservation and some other things on the backend for our members only section. So thank you for listening to the High Speed podcast. We’d love to-If you’d like to learn more, if you’d like to come to one of our meetings please check our website at highspeedalliance.com or highspeedpodcast.com to find out when our next meeting is. And Seth, it’s been a pleasure, love talking taxes with you. Thanks for being here.

SP: Thanks for having me. I look forward to the next one. The 2.0 once we’ve finally figure out what these laws actually mean.

FB: Yeah, thanks for mentioning that. We’ll definitely there’s so much we didn’t even hardly put a den to anything today. We just barely hit a couple little topics but we’ll definitely have you back and we’ll do another podcast. Maybe a couple of months down the road maybe after April 15th and you’ll know more a lot about it then than you do now unless we all will. So you will definitely come back and circle around and do another one. Thanks Seth, thanks for being here and thanks for listening.

Hi, this is Dr. Forrest Bryant and I want to thank you for listening to the High Speed podcast. We want to remind you that the information that we share in this show is impersonal and only our opinion. You should not take impersonal advice and apply it to your own situation without discussing this information with us or with another licensed professional that’s familiar with your situation. Our opinions are just that and this show is for education only. This is in no way of solicitation or offer to sell any securities or other types of investments. So thank you and have a great day!
You’ve been listening to the High Speed podcast to read our blog and to learn more visit our website at www.highspeedpodcast.com

FB: Alright thank you for listening to the High Speed podcast this is Dr. Forrest Bryant I’ve got Seth Peabody. How are you doing, Seth? We’re on the Members Only on the backend here.

SP: Great. Hello, Members.

FB: Alright. We get kind of crazy back here. We can talk about anything we want to, this isn’t going out to the general public. So we’re going to dive in a little deeper on some things and talk about some things that maybe are more applicable or more fine tuned of what we’re doing. Let’s see, Seth. We kind of hit some high points on the front end. Let’s go a huge change and I save this for the backend because you know obviously everybody that’s listening. You always want to have an estate problem because that’s means you’ve got. It used to mean that you had $11M when you died but they just change that definition didn’t they?

SP: They did. They changed the what they called the exemption rate up to per spouses or for individuals that’s 11 for spouses is north of 20 is about 22 now. It was a 10 for a couple and it was only 5 for a single person. So that’s big that’s I mean there’s it’s going to wipe out huge population of people that had you know networth taxes, state tax planning issues. I mean I’m working on a state return right now for a client whose husband passed away last year who’s right at cost of $5M but we’ll still going to file the state tax return as married in 18. You don’t get to pick when you get called home so.

FB: I’ll tell you maybe some of the attorneys may be upset because they are state planning attorneys they just lost a big population that needed there services.

SP: Right. That 10,12,15 million you know. But if you’re grown between 10-12 you probably I would encourage you to talk to the state attorney anyway because very likely you could have an estate tax problem.

FB: Not to get too detailed but that one, is that one permanent or is that finished up on 2025?

SP: It’s never permanent.

FB: Nothing is permanent right.

SP: It’s supposed to be permanent but you know if the democrats should get in and have the majority rule. They can overturn it. They can overturn all of this in the next 4 years from now if they want. None of it is ever permanent.

FB: Well if you like the tax laws not to get political here. But if you like the new tax laws and if you want to keep them that way, vote that way. So, you know I think everybody that’s listening hopes to have an estate problem and hopes to be in that 20 million range or much higher. But definitely good point if you’re nearing retirement ad you know and you’re in that 10-15 range definitely you still need to be having consultations with your state planning attorneys and making sure that you got everything planned out. There some huge catastrophic mistakes it can be made by not doing good planning.

SP: There’s been entire estate wiped out or sold off you know just to pay for the tax. You know they set up the estate to pass it down to their grandchildren and all of a sudden it passed by they didn’t have a plan in place and the tax is so much that they have to sell the family farm basically or you know the thousand acres that everybody used to have thanksgiving on. Yeah that’s where that thing you know you can’t put a price on is suddenly wiped out forever.

FB: Well, we’re big believers in legacy and planning for that. And having a big purpose and a big why. And that’s a big part of what we do or what we believe in and so we’ve got to make sure that we understand the legislation around that. And along that that applies to the gift tax exemption as well that’s lump in to the estate after that 20M right?

SP: Correct. So you got your estate total and the total gifting so you can gift up to I think it’s right at 14,000, 13,000 tax free where you don’t have to file a gift tax return but anything you’d give to one person annually more than that amount you have to you should file a gift tax return. And you have a certain exemption and it reduces that exemption that’s over and above the 13,000. So yes you have a much higher gifting exemptions. So before you passed if you want to gift certain things to your kids and grandchildren or to other people you know there a benefit to that. You have more mobility to gift.

FB: Perfect. Let’s talk a little bit about. You know alot of our listeners. In the highest tax bracket which just lowered from 39.6 to 37 so congratulations there maybe we’ll see. But land conservation taxes have been a big topic for years for tax payers in the highest brackets. You just want to give us an overview of that and then also what changes might be applicable with the new tax law change.

SP: Right. There some really good changes actually. It’s real positive in the tax law change. But you know if you’re looking at conservation ease first you need to consult your CPA for the conservation proprietary managers I would have how many properties they’ve done in the past?, how many times that they have been audited by the IRS?, what was the success rates of those audits? And who their attorneys are? Because you know there are specific attorneys in the marketplace is that all they do in the conservation field. Same with the managers and same with the CPA firms. The larger CPA firms that are doing the tax returns for the conservation sector and they have their palm in the pulse of the IRS for the tax changes. For those of you that aren’t familiar with the conservation sector what is it and that’s a quick nut shell. You are able to divide deductions for quarters on a dollar. So for every deduction it would cost you a quarter but a conservationism for a dollar you need a $4 deduction. So what’s that mean to you when you’re on a 40% tax bracket so if you bought a conservationism for a dollar and you got a $4 near to 40% tax bracket. 40% x $4 is $1.60 so you spend a dollar to save a dollar sixty so you’ve made 60 cents. So it’s about 60% return on investment. So what does that mean big dollars I guess. Let’s just make 500,000 but charitable contribution limitation which got increase from 50 to 60 now. So the maximum you can deduct for charitable deductions is 60% of your income. So if you used 500,000 per example 5000,000 x 60% is 300,000. So that’s the maximum charitable deductions you can take in that one year. So if you take 300,000 and assume you have no other charitable deductions and divide it by 4 that’s 75,000. So that you would invest 75,000 to get a 3000,000 deduction. Okay well that’s great. What’s that mean to me and my pocket? So if you did that then you multiply the 300,000 deduction x your 40% tax rates and that gives you what about 120,000. It is reduced your tax the money you’re going donate to the IRS. Kind of telling them cheat. But the money you’re going to pay to the IRS by a $120,000 but you invested $75,000 so thats a $45,000 gain or return back in your pocket which is 60%. But if you look at it this way what’s $45,000 to $500,000 that’s 10% so if you just got your money back from all your gross earnings from just the conservation easements. The easements have been attack by the IRS obviously if you’re making half a million you were supposed to pay the IRS 300,000 and now you’re paying them a 120,000 less they get a little upset about it. But it’s rules created by them and we’re going to have some real favorable tax laws and court cases coming back for tax payers to continue to invest in the conservation sector and reduced that ordinary income tax. Sorry to get a little technical but.

FB: Yeah, It’s good.

SP: But we have to do a little math for everybody to show them how it works.

FB: You may have lost some of them there but I apologize. So and also and the charitable contribution that bumping it from 50 to 60 that’s also carried forward now if you do over the 60 you can carry. You can do that before could you?

SP: Now, you can carry it forward 5 years so if you over invested in conservation or over invested into charitable contributions then whatever was over that limit it just rolls in to next year. It extends your investment to more of a long term investment than a short term investment.

FB: If you’re listening and that’s sounds like something that you need to know about you know Seth has some connections there. I have some connections there. There are I said some of those the auditing has come down on those so some of them are very very aggressive. A lot of times there no stand out through audit so you got to make sure that you know who you’re dealing with.

SP: To speak to that the IRS id getting aggressive. So the folks in DC the senate in the house defunded the group that goes after the conservation corps in the IRS. Just to say hey, they quit going after taxpayers just because they found or they’re using there rules to play against you. We’re going to defund your group so they don’t have resources now to go after anyone.

FB: That could be a good thing for that industry right?

SP: Yup. That’s a very good thing.

FB: Yeah, that’s a fantastic advice especially for high tax bracket. So you know one question I get all the time. Everybody loves private lending if you do it in a Roth IRA or a health savings account, self-directed Roth or health savings account you can make a tremendous amount of interest that goes in there and there’s on Roth obviously there’s no tax where on HSA or IRA it’s tax deferred. But we have a lot of people do private lending with cash and that’s typically taxed at ordinary income rates. You and I have talked about that and we’ve kind of talked about there are some ways where that can be changed around to try to take advantage of the capital gains treatment. And this is a little bit I guess it’s hypothetical I guess we’ve been working on. You want to address that a little bit?

SP: Yeah, what kind of throws the sticks in the spokes and what we’ve talking about is the carried interest. Who does that play a role because now the carried interest carrying period is 3 years. And most people want you know your flipping and you wanted to get out of your deal.

FB: If that applies that’s going to knock out the majority of the private lending that’s in the short and medium term. Majority of them.

SP: It’s going to knock it out completely. Because I don’t know who’s airing you know the carrying cost of a property for 36 months right? I mean that’s enormous. That it’s right into the money that you could turn right over and make a bigger profit. So we got to see the IRS interprets what the house and congress has passed and see how that plays in a role. But Forrest and I been talking about is how you structure the deal at the beginning. And doing an equity cash infusion versus a debt cash infusion. And how that can play a role in moving that income off the debt into capital gain income versus ordinary income. So there’s a way to structure the deal however the first you’re giving the cash to that wants the interest deductions may not be able to get such a big interest deduction because they will be paying interest through distributions and access to funds and then not necessarily going to be able to deduct that interest at the beginning but they’ll be able to deduct that interest at the end at capital gain rates. But if they have a capital gain lost you know, oh we can only roll that forward forever but you can only deduct 3,000 a year. So both parties need to sit down together talk to a CPA and plan out the most advantageous structure to the deal of the private lending. I mean obviously it just easy just to lend the money and bring in the interest income and the you could potentially used some other tax strategies to reduce your ordinary income and decrease it there. But you know it always you make your money up on the frontend of the deal not the backend of the deal normally.

FB: Well, just for our listeners stay tune that’s one we’re working on and I know we get that comment a lot about taxation on that outside of your qualified account. So we are working on that. So you know Seth with the new tax changes what kind. Does that change your personal investment philosophy or where do you see new opportunity showing up?

SP: I think the new opportunity is with real estate I mean with this new primary deduction. If you’re managing that real estate I don’t know how to interpret the passive income side yet. I haven’t seen anybody act on that so far the IRS hasn’t either. I think they’re still trying to suggest what they’ve just been handed. But how did that passed through deduction now affects real estate investors is going to be huge. I think that’s going to be a great great tool for them to figure out and plan on how to use that deduction against their income.

FB: Talked about . You know we talked about this I guess our last big talk. We talked about passive income and passive activity losses and kind of pairing those up and in addition to especially when it comes to syndication type of investment when you have that coming in and being able to pair like passive activity losses with that in order to decrease that tax due.

SP: We’re going to get it’s very technical but there’s a section in the tax code and the tax code numbered it’s called section 469 where you can group assets activities to be able to use passive losses against passive gains. You can even use 469 to use turn real estate in the non-passive to use it against W2 incomes or a pass through income from your practice. So the very technical part and it’s very intensive tax planning for each person you got to look at each individual specific tax payer. But I would ask your CPA about section 469 in grouping it’s called a grouping election. You can google it there’s plenty out there you can read on. You can ask your CPA okay if I want to group these to match losses against gains. How does that work specific to me?

FB: Cool. Any other comments on the self-directed IRA or self-directed accounts versus traditional accounts as far as tax changes?

SP: There was a new tax change on the recharacterization of the IRA to Roth. So if you roll. You used to be able to roll an IRA into a Roth and then let’s say you were in September in the following year and your investment went down you can recharacterized that or change that back to an IRA. And say you didn’t have to pay the tax. So you roll an IRA into a Roth you have a tax consequence generally speaking. You can recharacterized it back to IRA because your investment went down and it didn’t make sense to actually roll it forward. And then there no arm (cant understand) tax. Well now,you have to recharacterized back to 1231 if it all. So you can’t wait til the next year. Recharacterization are pretty much gone for investors. Now you still can roll your IRA into a Roth IRA or 401k to IRA or Roth IRA you can still do that and paying your tax upfront. So if you have, most people do that when you have a huge lost one year and you have an IRA account has large balance and you want to roll and go ahead pay the tax on the IRA. You can go ahead match the income against the lost. And then you don’t have to pay tax on it going forward. But yeah recharacterization rules are no more. They got rid of it. I don’t understand that but that just the way it is they didn’t ask me for my vote.

FB: That just that could indicate poor planning and I guess typically if you are in the real estate realm it’s less likely that you are going to have very common to have tremendous stock losses and to decrease the value of your account but if your making prudent real estate investments unlikely you are going to have that type on volatility in there that lead to recharacterization.

SP: Right, right.

FB: I’ve got one other question. One of the question on our R & Ds for the self-directed accounts. If it was a traditional IRA self-directed and there were properties in there say it was different types of real assets. ANd you get to the point where you got to start taking R&Ds. So how does that happened? What are the accounting things to look out for when starting to distribute when you have items not distributable.

SP: Right, right it’s kind of a forced transaction. So if you are required. You could look at the penalty for not paying the R&D but the force sale of those real estate investments within the portfolio of the IRA is what you got to be looking at. So when you get to tha point you need to be aware. When your cash is running out, when mutual funds and stocks and highly liquid investments are going to be fully distributed and then you start moving to real estate. So you got to be aware if it’s all real estate you may have to start selling properties. And what properties to sell you got to figure that out. You got to look at that you know what’s going to be bring most cash to your pocket.

FB That’s going to require some forethought and planning. Can you lump like say you had 5 IRAs and you had to take. Is the R&D is that specific to each IRA or is it cumulative?

SP: No it’s specific to the total IRA retirement balance. Yeah, you got sum it all together and then pull out of those and pull them out of the account.

FB: And I guess the question would be say you had accounts and you had a property in one that was a very valuable property. If you sold that and brought it out with that in excess of the total R&D would that suffice the rule for all of the IRAs or is it specific to each one?

SP: Yes they will get it as a whole say if you have 1 IRA account or a hundred IRA accounts what you want to look at. Let’s just say you R&D is 100,000 which account to have a $100,000 that you can pull out easily? And then you kind of order it that way. They are not necessarily concern with what account it comes from specifically. From my understanding that you took the R&D. Not how you took it or where you took it as long as you took it.

FB: That’s a very likely scenario. That’s a good point. definitely if you’re listening that requires some forethought and some planning and thinking ahead. So make sure you’re working with your professionals real closely on that. We’re kind of getting to the end here Seth any final comments. Any kind of high level points that as far as the tax cut and the jobs act that we need to make sure our members know about?

SP: Especially, the member that are in professional services doctors, dentist, CPAs, financial advisers really look at getting with a CPA and start planning because depending on what type on entity you’re under or in the ownership or how you get paid either it’s just strictly W2 or through and SCorp or through a C Corp I mean it’s all different now. So sitting down and penciling it out and figuring out a game plan for yourself. So you’re not surprise with your income tax from April 2019. Is the best thing you can do.

FB: Very good. Seth Thank you so much. I think this has been real informative. I hope our listeners appreciate it. Thanks for all your help. We’ll definitely come back and do a 2.0 to the podcast. As we probably after tax seasons this things is kind of settle down. But thank you Seth.

SP: Thank you for having me. I appreciate it. And everybody Happy New Year!

FB: Check the website for our next event and thank for listening and we hope to see you soon.

Hi, this is Dr. Forrest Bryant and I want to thank you for listening to the High Speed podcast. We want to remind you that the information that we share in this show is impersonal and only our opinion. You should not take impersonal advice and apply it to your own situation without discussing this information with us or with another licensed professional that’s familiar with your situation. Our opinions are just that and this show is for education only. This is in no way of solicitation or offer to sell any securities or other types of investments. So thank you and have a great day!
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